Robert Way
Elevator pitch
I have a pending rating Bilibili Inc. (Nasdaq:Last) (9626:HK) stocks.
My previous Article for January 22, 2024 Bilibili’s healthy user metrics and modest share buybacks have drawn attention. In this article, we review Bilibili’s latest quarterly financial results.
I continue to have a neutral view on BILI. On the one hand, BILI’s mobile gaming business posted weaker than expected revenue in the most recent quarter. On the other hand, the company appears to be on track to achieve its positive normalized operating profit target for Q3 2024.
Bilibili’s mobile gaming business falls short of expectations in Q1
Bilibili is the company’s Result announcement Before trading hours on May 23, 2024, BILI’s share price in the first quarter of this year -12.4% The company announced its financial results at the end of trading on the same day.
BILI’s first quarter 2024 sales miss expectations The company didn’t announce any positive surprises and its mobile gaming business reported weaker than expected revenue in the latest quarter, which is likely why the stock price dropped so much after the company’s first-quarter results were released.
The company’s total revenue grew 11.7% year-over-year, from RMB 5,069.6 million in Q1 2023 to RMB 5,664.6 million in the most recent quarter. More importantly, Bilibili’s Q1 2024 sales were only slightly ahead of sell-side analysts’ sales estimates of RMB 5,632.7 million, or just +0.6% above. S&P Capital IQ data.
Additionally, Bilibili’s “whispered numbers,” i.e., buy-side institutional investors’ revenue forecasts, may have been higher than the sell-side consensus top-line estimates. Because Bilibili’s stock price rose 31% between January 2, 2024 and May 22, 2024, investors may have had high expectations for the company’s financial performance leading up to its first quarter earnings release. As such, Bilibili’s actual total revenue for Q1 2024 may have been lower than what the buy-side had previously anticipated.
It is also worth noting that Bilibili’s mobile games business did not perform well in the most recent quarter. Revenue from the company’s mobile games business in the first quarter of this year fell 13.1% year-on-year and 2.4% quarter-on-quarter to RMB 982.8 million. In contrast, the consensus top-line forecast from sell-side analysts for Bilibili’s mobile games business was a relatively high RMB 1.011 billion (source: S&P Capital IQIn other words, the company’s latest quarterly revenue from its mobile gaming business turned out to be 2.8% below analysts’ consensus estimate.
The mobile gaming business, which accounted for 17.4% of BILI’s total revenue in the first quarter of 2024, is likely an area of concern for investors.
at first 2023 Q3 Earnings Briefing Bilibili acknowledged in late November last year that the gaming industry in mainland China was “becoming a more saturated market,” suggesting that its gaming business was operating in a “highly competitive environment.” The company also revealed in its third-quarter analyst briefing in November 2023 that it had “further streamlined our in-house development team and discontinued projects that did not meet our standards.”
As mentioned above, the company’s mobile gaming business posted lower than expected revenue in the most recent quarter, so it’s natural to be concerned about the outlook for the mobile gaming business.
In summary, Bilibili failed to meet expectations in revenue in the first quarter, and its mobile gaming business also fell short of expectations in the most recent quarter.
However, BILI is targeting positive normalized operating profit in the third quarter.
Although BILI’s first-quarter mobile gaming revenue fell short of expectations, there is reason to be optimistic about the company’s revenue outlook.
Bilibili is the company’s 2024 Q1 Financial Results Announcement “We expect non-GAAP operating profit to be positive in the third quarter of 2024,” it said. By comparison, BILI’s actual normalized operating loss in the first quarter of 2024 was RMB -512.2 million.
BILI’s latest quarterly financial results gave positive indications about the company’s revenue outlook.
First, Bilibili’s revenue mix is likely to remain strong due to strong growth in its advertising business: The company generated 29.5% of its revenue from the advertising segment in the first quarter of 2024.
In an update on January 22, 2024, management commented that the company’s advertising division is a “high-margin business.” In the first quarter of 2024, BILI’s advertising business revenue increased 31.2% year-on-year to RMB 1.6686 billion, also beating the sell-side consensus estimate of RMB 1.618 billion (source: S&P Capital IQ) increased by +3.1%. In its Q1 2024 earnings briefing, Bilibili emphasized that “our ad volume is still low and has room to expand significantly compared to other platforms.” This suggests that the revenue contribution from Bilibili’s “high-margin” advertising business is likely to continue to grow.
Second, BILI’s gross margins are expected to increase further going forward.
The company’s gross profit margin expanded significantly in the first quarter of 2024, up 6.5 percentage points year-on-year to 28.3%. This marks the seventh consecutive quarter that Bilibili has achieved a year-on-year increase in gross profit margin. Going forward, Bilibili aims to increase its gross profit margin to 30.0% in the third quarter of this year.
Third, Bilibili manages its operating costs well.
Bilibili’s operating expenses decreased 18.2% quarter-on-quarter to RMB2.424 billion in 1Q24. Bilibili’s operating expenses to revenue ratio improved to 42.8% in 1Q24 from 48.9% in 1Q23 and 46.7% in 4Q23.
In short, I am confident that BILI will achieve positive normalized operating profit in the third quarter of this year, as targeted, given the positive elements from its performance.
Final thoughts
Bilibili’s outlook is mixed, given weaker than expected revenue from its gaming business and the company’s expected improvement in its operating margins.
I also believe Bilibili’s valuation is fair and in line with the company’s financial outlook. The market currently values Bilibili at a seemingly undemanding consensus of 1.2x FY2025 enterprise value sales. However, Bilibili’s revenue growth expectations are modest, at +12%, given that the consensus FY2023-FY2026 revenue CAGR is much lower than the +20% that indicates a fast-growing internet business. Also, analysts only see Bilibili achieving positive normalized net profit for the full year next year (FY2025), despite the Q3 2024 operating profit target. These metrics are S&P Capital IQ data.
