Bilibili: After the 'Three Strategies for a Pleasant Game', where is the next stop?

After the Hong Kong stock market closed on August 21, Beijing time, $Bilibili(BILI.US) released its Q2 2025 financial report. Due to recent comprehensive communication with investors, overall revenue was in line with guidance, but recent positive expectations were high, leading to some disappointment in gaming performance, while profits were decent. Specifically:

1. Profit Exceeded Expectations: The highlight this time was again on the profit side, significantly exceeding market expectations, mainly due to lower marketing expenses. Although there were no new games in Q2, which should have meant fewer marketing expenses, the anniversary event for "Three Strategies" and several seasonal updates at the beginning of the year were not insignificant, so some additional marketing was still needed. However, marketing expenses actually decreased quarter-on-quarter and remained flat year-on-year.

2. User Ecosystem is Healthy: Last quarter saw a rare net increase of 30 million users, but despite the Q2 off-season, the net loss rate was not high, decreasing by 5 million quarter-on-quarter, similar to the seasonal changes between Q1 and Q2 last year, but last year's Q1 only saw an increase of 5.5 million.

Additionally, the DAU/MAU and average daily user time indicators also show an improvement in user stickiness on Bilibili. In Q2, DAU/MAU remained at 30%, and the average daily time was 105 minutes, an increase of 6 minutes compared to the same period last year.

3. Gaming May Fall Short of Optimistic Capital Expectations: Q2 was still in the base period benefit of "Three Strategies," so the growth rate was 60%, in line with the company's previous guidance. However, the Q2 seasonal version update and anniversary celebration overlap may have led some optimistic capital to expect much higher results.

Looking at deferred revenue, Q2 was 4.24 billion, a 10% increase quarter-on-quarter. Although the growth was not as high as when "Three Strategies" was first launched last year, it was slightly better than the seasonal fluctuations in previous years without blockbuster new games. On the pipeline, there are two exclusive agency games, one self-developed game, and the overseas version of "Three Strategies" in the second half of the year, with no obvious blockbuster new games, so there is pressure from the high base.

4. Advertising Met Expectations: Q2 advertising growth was 20%, also basically in line with company guidance, mainly driven by performance advertising. At the previous investor day communication, the company emphasized the empowerment and optimization of its advertising recommendation system by AI (AI-driven advertising grew 140% year-on-year). In addition, Dolphin Research believes it should also be related to the release of its own inventory.

5. Value-Added Services Continue to Recover: Q2 growth was 11%, with estimated growth mainly driven by live streaming and other value-added services (battery, captain, etc. fan economy), with premium members at 23.7 million, only a 6% year-on-year increase.

6. IP E-commerce Below Expectations: The e-commerce that was still strong last quarter was returned to its original form this quarter, with a 15% year-on-year decline. It is expected to continue to fluctuate in the future, affected by current new products or themed marketing.

7. Cash Flow Continues to Improve: Gaming and advertising are both cash-generating businesses, so when these two businesses are leading, cash flow will not be poor. However, in May, Bilibili issued a convertible bond worth $690 million, with a 0.625% interest rate, maturing in 2030, and a conversion price of HKD 185.63 or USD 23.65 per share, with a dilution ratio of 6.9%. The earliest conversion period is June 1, 2028, barring major changes. Bilibili also repurchased about 5.6 million shares (HKD 783 million), accounting for about 1.3% of the issued shares.

In Q2, Bilibili's net cash, after deducting short-term debt, was 20.6 billion yuan, an increase of 5 billion compared to Q1. Dolphin Research simply calculated that if the impact of the above issuance is excluded, the cash flow from main business operations also increased by 500 million to 1 billion quarter-on-quarter.

8. Performance Indicators Overview

Dolphin Research's View

Q2 performance was not disappointing, but with the positive release from the investor day (strong Q2 advertising, H2 game pipeline), and the stabilization of "Three Strategies" seasonal revenue, coupled with the grand opening of Bilibili World (the largest in history), the market's attitude towards Bilibili shifted from overly pessimistic about a single hit in Q1 to a more optimistic outlook beyond guidance, purely boosting valuation. Therefore, when a revenue-side performance disclosure meets guidance, some positive funds are naturally relatively disappointed.

However, for Dolphin Research, the user ecosystem recovery and internal operational efficiency improvement reflected in this financial report are better than we expected. Therefore, before management provides more incremental guidance on revenue, Dolphin Research's judgment on Bilibili remains based on valuation space.

Previously, we calculated based on 2026 performance, assuming a 10% growth, 33 billion revenue, and a 12% profit margin (we are more positive about profit margin improvement compared to the revenue side, slightly higher than previous assumptions), 20x P/E corresponds to 8.3 billion to 11 billion USD (slightly higher than Dolphin Research's previous expectation of 8 to 10.5 billion USD)

Yesterday's closing market value was 10.5 billion, for the central area of the above range, if disappointed funds exit due to this financial report, you can pay attention to short-term opportunities during the adjustment period based on your own risk preference.

Detailed Analysis Below

I. User Ecosystem Maintains Good Recovery from Early Year

In the Q2 off-season, users decreased by 5 million quarter-on-quarter, but considering the 28 million increase last quarter, this loss rate has already decreased significantly compared to last year. At the same time, looking at stickiness indicators, DAU/MAU increased to 30% (feeling like a long-term problem level), and user time was 105 minutes, a 6-minute increase year-on-year.

Specific User Data:

1. In Q2, Bilibili's overall monthly active users (App, PC, TV, etc.) were 363 million, an 8% year-on-year increase, with a 5 million decrease quarter-on-quarter during the off-season.

2. User stickiness is barely stable. In Q2, DAU reached 109.4 million, DAU/MAU reached 30%. Average daily user time was 105 minutes, a 6-minute increase year-on-year.

Looking at the social platform industry, according to Sensor Tower data, besides Xiaohongshu and Douyin's high growth, only WeChat can maintain stable positive growth. But since the beginning of this year, Bilibili has become the second social platform to achieve positive growth.

II. Advertising Meets Expectations, Growth Has Room

In Q2, Bilibili's advertising revenue exceeded 2.4 billion, a 20% year-on-year increase, completely in line with guidance and market expectations. Based on the main proportion of user time, we speculate it should mainly be driven by games, ACG, AI, and continuous e-commerce traffic from state subsidies. Additionally, the full hosting tool launched in the middle of last year also had growth dividends in Q2.

However, Dolphin Research believes that although it meets guidance, considering the rebound in traffic and per capita time growth trends, advertising has not accelerated in sync, so monetization capability still needs improvement. Of course, it can also be said that Bilibili is intentionally controlling commercialization (controlling the release of loading rates), but it may also be because the advertising conversion rate is not advantageous, making monetization difficult. Management mentioned at the investor day that AI optimizes the advertising recommendation algorithm, so we believe that from a marginal perspective, Bilibili should relatively benefit.

III. Gaming May Not Meet Optimistic Capital Expectations

Q2 gaming revenue achieved 60% high growth, also in line with last quarter's guidance. However, the Q2 seasonal version update and anniversary celebration performed well, but the final growth did not exceed guidance, combined with the recent strong stock price, this may disappoint many optimistic funds.

However, the only consolation is that Q2 deferred revenue was 4.24 billion, a 10% increase quarter-on-quarter, although the growth was not as high as when "Three Strategies" was first launched last year, it was slightly better than the seasonal fluctuations in previous years without blockbuster new games.

After the anniversary celebration in Q2, "Three Strategies" national server's monthly revenue has basically stabilized (the downward trend has slowed). Regarding the future pipeline, the main plan is the overseas release of "Three Strategies" (Hong Kong, Macau, and Taiwan are expected by the end of the year, Japan and South Korea are expected in Q2 next year), the exclusive agency PC game "Escape from Tarkov," the ACG mobile game "Trick RE: VIVE" (global release in the second half of the year), and a casual card mobile game (release by the end of the year).

IV. Value-Added Payment: Growth Driven by Live Streaming and Fan Gifts

VAS value-added service revenue, mainly from live streaming and premium membership subscriptions, grew nearly 11% year-on-year in Q2, with a flat quarter-on-quarter growth rate.

In Q2, the premium membership scale increased to 23.7 million, with only a net increase of 200,000 quarter-on-quarter. Dolphin Research estimated through simple decomposition that the growth was mainly driven by live streaming and other value-added services (battery, captain, etc. fan economy), with premium members at 23.7 million, only a 6% year-on-year increase.

Although it does not have an advantage in time on social platforms, compared to traditional long video platforms, Bilibili still outperforms. In Q2, besides Bilibili, all long video platforms were in "deep water" decline, with significant contributions from content creators. From the number of subscription users, only Bilibili can maintain a continuous net increase.

V. Efficiency Improvement Faster Than Expected

In Q2, Bilibili's profit continued to expand. From the core main business operating profit perspective (= gross profit - operating expenses), it achieved 260 million, significantly exceeding market expectations. The expectation difference mainly still exists in sales expenses.

1. Gross Margin Improvement Driven by Business Structure Changes

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

In terms of specific cost structure, revenue-sharing costs account for the majority. In Q2, revenue-sharing costs continued to grow to 2.97 billion, a 19.5% year-on-year increase, with sustained growth. Revenue-sharing costs are mainly related to games, live streaming, and Huohuo advertising.

2. Marketing Expenses Controlled

In terms of operating expenses, there were no new games in the period, but "Three Strategies" anniversary also required some promotion. However, Q2 marketing expenses continued to decrease quarter-on-quarter and remained flat year-on-year, spending less than market expectations.

From the "traffic monetization/cost relationship" that Dolphin Research has been observing, overall in Q2, the direct revenue brought by monetizing a single user traffic can cover more content and operation costs, indicating a slight improvement in monetization efficiency.