Bilibili: Game support, user return, is the small station looking to recover?

On May 20th, Beijing time, after the Hong Kong stock market closed, $Bilibili(BILI.US) released its Q1 2025 financial report, with actual performance slightly exceeding expectations, mainly surprising in profits and user metrics. Specifically:

1. Earnings continue to improve slightly: Thanks to better-than-expected game revenue and slightly restrained operating expenses, Bilibili managed to withstand the seasonal fluctuations brought by advertising and maintained positive profitability.

2. User growth returns to former glory: Since the management emphasized the importance of DAU metrics, market expectations for Bilibili's traffic expansion have diminished. Therefore, a net increase of 28 million users in one quarter indeed feels like a return to former glory.

However, Dolphin Research speculates that user growth should be attributed to the short-term effects of the Spring Festival Gala broadcast collaboration, including the establishment of an official account for the gala and the contribution of broadcasting highlights from previous years. Whether users can be retained in the long term still needs to be observed, as Q1 stickiness has slightly declined.

Combining QM data from April, traffic has temporarily stabilized, with total duration showing year-on-year growth for two consecutive months.

2. Games may have the largest expectation gap: Channel monitoring indicated that "Three Kingdoms" has performed poorly since the beginning of the year, leading to conservative market expectations for game revenue before the financial report, along with increased concerns about the pressure from high baselines ahead.

But the expectation gap is here. In fact, game revenue in Q1 was not bad, with a year-on-year growth rate of 76%, similar to the growth rate of the previous quarter. At least from a seasonal trend perspective, the revenue of "Three Kingdoms" may not have deteriorated as much as the market anticipated.

3. Advertising growth barely meets expectations: Q1 advertising growth met the guidance of 20%, but Dolphin Research feels this performance is quite average. Considering the unexpected growth in traffic and the potential for industries like gaming and AI that align well with Bilibili, the actual growth rate should have been higher in the favorable conditions of Q1. Either the company controlled the release of loading rates, or the conversion effects are still inferior compared to peers.

5. Value-added services continue to warm up: Live streaming and premium membership subscription revenue accelerated growth by 11% in Q1. A simple breakdown estimate suggests that premium memberships, live streaming, and other value-added services (such as batteries, captains, paid videos, etc.) all show a marginal warming trend to some extent.

The ability of live streaming to maintain a growth trend under a high baseline is somewhat beyond Dolphin Research's expectations.

6. IP e-commerce stabilizes: Benefiting from the popularity of the "Guzi Economy" at the end of last year, the self-operated e-commerce business, which had been sluggish after actively shrinking its operations, did not decline in Q1, a non-shopping season, and stabilized faster than expected.

7. Cash flow steadily improves: Both gaming and advertising are cash-generating businesses. In Q1, Bilibili's cash, deposits, and short-term investments on the balance sheet, after deducting short-term debts, resulted in net cash of 15.6 billion yuan, an increase of 600 million compared to Q4 8. Performance Indicators Overview

Dolphin Research Perspective

This performance can strictly be said to slightly exceed expectations (games and users exceeded expectations, while advertising was somewhat average). In other words, thanks to the company's expectation management, the market is largely aware of the current high growth in games and the fundamental doubts about the sustainability of future growth.

There may be some positive feedback regarding user numbers and the expectation that games will continue to exceed expectations. However, we believe that, as in the past, the market's true feedback will still rely on the company's guidance for Q2 outlook.

However, considering the valuation, Dolphin Research believes that Bilibili has different short-term and long-term investment logic:

1. From a short-term perspective, Bilibili still has a dividend period, and investment sentiment does not need to be overly conservative:

The main point of contention that may create a discrepancy in expectations comes from games, specifically: 1) How will "Three Strategies" perform overseas? How can it become a game that management describes as evergreen for ten years? 2) The clear release dates for new games (such as "Jujutsu Kaisen") and whether these niche small-quality games can perform beyond expectations.

These still require management to provide more specific and clear answers to guide market expectations. From the short-term revenue and user metrics of "Three Strategies," its performance has generally remained stable between seasons. Although it hasn't surged against the trend, the slowdown has been slower than expected. In the absence of operational accidents or direct competitors launching, the sustainability of revenue can be viewed with less pessimism.

With the new season and anniversary celebration approaching in early June, what specific innovations and enrichments does the team have? Current market expectations are low, so this could be an area for exceeding expectations.

Additionally, not mentioning advertising does not mean it is unimportant. It is just that, in the short term, Bilibili's advertising scale is small, the loading rate of public domain placements is low (excluding private domain content marketing), and there is a gap compared to peers. Coupled with the platform's uniqueness (especially for games, 3C, and cutting-edge technology), and the significant marginal improvement in ROI from AI for its own advertising, this is the key reason we believe it can achieve a 20% growth guidance in the short term.

The short-term dividend will allow Bilibili's valuation to be suppressed to a certain extent, but it will not lack funds for speculative rebounds, especially since Bilibili has the label of a barometer for Chinese concept stocks. With every positive change in Chinese concept assets, the stock price rebound will be relatively considerable.

2. From a long-term perspective, Bilibili's growth and profitability remain unclear:

For future medium to long-term growth, the company has not provided clear guidance, and the market is overly reliant on a single business or even one product due to Bilibili's current high growth, making it difficult to establish a relatively confident growth expectation.

Regarding profitability, the company provided a long-term profit margin target last quarter—gross margin of 40%-45% and adjusted net profit margin of 10%-15%. However, to achieve this target, it ultimately relies on games and advertising, expanding monetization (to meet gross margin targets) while also streamlining its organizational structure to improve operational efficiency (to meet operating profit margin targets) The monetization issue goes back to the aforementioned growth problem, which is also the aspect that the market has criticized Bilibili the most. However, there is still room for improvement in operational efficiency, such as the potential optimization of basic R&D costs through AI. Other expenses require strict discipline at the organizational level, similar to the internal anti-corruption measures of Tencent and NetEase.

For investors, a good company is not just about having good products; it also needs a good team to manage and operate it to realize value. Therefore, we still believe that Bilibili is not suitable for relatively safe long-term holding. If the issues of monetization and efficiency are not resolved, doubts about the profitability targets will persist, and it will be necessary to closely monitor valuation and marginal performance changes for trading opportunities.

The following is a detailed analysis

1. Unprecedented traffic growth of 28 million

User growth in the first quarter was impressive, with a net increase of 28 million quarter-on-quarter, which is a very remarkable single-quarter increase in the past two years. Although the driving factors behind this growth were not mentioned, we speculate that it should be related to the collaboration on the Spring Festival Gala broadcast, including the establishment of an official account for the gala and the contribution of broadcasting highlights from previous years. However, the market may not have high expectations, considering that competing platforms like Xiaohongshu also have similar collaborations.

When user growth is too rapid, user stickiness can easily lag behind. In the first quarter, the DAU/MAU ratio fell to 29%, while user duration continued to increase to 108 minutes. Compared to itself, Bilibili's user metrics in the first quarter were good, but when compared horizontally with peers, especially with the already "internationalized" Xiaohongshu, it appears somewhat dim.

Specific user data:

In the first quarter, Bilibili's overall monthly active users (App, PC, TV, etc.) reached 368 million, a year-on-year increase of 7.8%, with a net increase of 28 million in the peak season.

User stickiness is barely stable. In the first quarter, DAU reached 106.7 million, with a DAU/MAU ratio of 29%. The average daily user duration was 108 minutes, an increase of 3 minutes year-on-year. In addition, the average interaction volume (likes/comments/collections) and the average daily video views increased by 2% and 20%, respectively.

Looking at the industry, according to Sensor Tower data, Xiaohongshu has seen high domestic growth, unexpectedly benefiting from "TikTok refugees" going international, with traffic continuing to surge until April. Although Bilibili's duration also saw a slight recovery in March and April, Xiaohongshu's advantages continue to expand.

II. Advertising "Meets" Guidance

In the first quarter, Bilibili's advertising revenue reached nearly 2 billion yuan, a year-on-year increase of 20%, which is exactly in line with guidance and market expectations. Based on the proportion of user duration, we speculate that it is mainly driven by games, ACG (Anime, Comic, and Games), AI, and continuous investment in e-commerce under national subsidies. Additionally, the launch of fully managed tools last year also contributed to growth in the first quarter.

However, Dolphin Research believes that although it meets guidance, considering that traffic and per capita duration have exceeded expectations, the advertising growth rate has not followed suit, making this advertising monetization capability somewhat unsatisfactory.

Of course, it can also be said that Bilibili is intentionally controlling commercialization (controlling the release of loading rates), but it may also be due to a lack of advantages in advertising conversion rates, making monetization challenging.

Future growth will rely on increasing inventory on one hand, and on the other hand, we may look forward to whether AI can enhance Bilibili's advertising ROI.

III. Games Slightly Exceed Expectations, Key is Sustainability

In the first quarter, game revenue achieved a high growth rate of 76%. It goes without saying that "Three Strategies" remains the main growth driver. The market had low expectations for Bilibili's game performance due to the rapid decline in external channel monitoring revenue, coupled with the upcoming high base in the second quarter.

Actual revenue exceeded expectations, with calculated revenue showing 1.78 billion yuan in the first quarter, a year-on-year increase of 75%, and the trend looks good.

However, this year we still need to pay attention to management's updates on the future game pipeline. Even if "Three Strategies" aims to be a long-lasting game, we should see if there are significant content updates and operational activities during the June anniversary celebration, which may ensure growth in the second quarter. But relying solely on the international version of "Three Strategies" and the domestic version of "Jujutsu Kaisen" for growth in the second half of the year will be quite challenging.

4. Value-added Payment: Long Videos and Live Streaming are Both Recovering

The VAS (Value-Added Services) revenue, mainly from live streaming and premium subscriptions, grew by 11% year-on-year in the first quarter, showing a trend of accelerated recovery.

In the first quarter, the number of premium members increased to 23.5 million, with a net increase of 800,000 quarter-on-quarter. Dolphin Research made a simple split estimate, indicating that the premium members, live streaming, as well as props and content payments in value-added payments all seem to be performing well at least from a trend perspective.

Compared to traditional long video platforms, Bilibili's growth in the first quarter was even quite impressive. In the first quarter and April, among the four major long video platforms, except for Mango TV which barely relied on variety shows and Youku which depended on short-term new dramas, both iQIYI and Tencent Video saw their total viewing time decline in double digits.

Bilibili's long videos mainly include unique ACG (Anime, Comic, and Games) cultural content, such as high-quality domestic and international animations. Coupled with the bullet screen culture, it has introduced a considerable amount of content coverage in two potentially lower copyright cost segments: high-quality overseas series and classic domestic historical dramas. Therefore, in terms of economic calculations, the burden of losses is not as heavy as that of iQIYI, Youku, and Tencent.

5. Under Profitability Goals, Monetization and Cost Control Cannot Be Lacking

After passing the high growth stage, profitability is the most important indicator for the market, in addition to short-term revenue growth.

Before the financial report, the market originally expected a loss due to seasonal fluctuations (Q1 advertising is generally weaker than the shopping season in Q4), but in reality, it was driven by better-than-expected game performance (optimizing gross margins) and slightly restrained operating expenses, maintaining positive profits.

The "lackluster" financial report from the previous quarter surged, driven by management's announcement of medium to long-term profit margin targets. However, regarding this target—gross margin reaching 40%-45%, Non-GAAP operating profit margin of 15%-20%—there is still considerable skepticism from the market, at least there is no urgency to meet expectations.

This may also be where Bilibili can continue to create expectation differences in the future; conversely, if monetization and efficiency improvements are not resolved, market concerns will fluctuate with the ups and downs of market capitalization.

1. Gross Margin Improvement Driven by Changes in Business Structure

The improvement in gross margin mainly relies on the sustained high growth of high-margin games and advertising.

In terms of specific costs, revenue sharing costs account for a large portion. In the first quarter, revenue sharing costs continued to grow to 2.67 billion, a year-on-year increase of 19%. Revenue sharing costs are mainly related to games, live streaming, and Huohua advertising

2. Operating profit exceeded expectations, driven by slight cost control

In terms of operating expenses, apart from marketing expenses related to customer acquisition through the Spring Festival Gala and game operations, which continue to maintain high growth (the "Three Strategies" season has been shortened to 45 days, reducing the seasonal characteristics of promotional expenses), management and R&D expenses continue to decline year-on-year.

From the perspective of the traffic monetization/cost relationship that Dolphin Research has been observing, overall in the first quarter, the direct revenue generated from monetizing a single user's traffic can cover more content and operational costs, indicating that monetization efficiency continues to improve slightly.