To The Moon

$Bilibili Inc.(BILI)$ (BILI, BUY) - San Guo Fuels 3Q Outperformance; Gaming and Advertising Poised to Drive 2025 Growth; Maintain BUY and Increase PT to $25

$BILI solid beat across the big three. All time highs in users. Buyback announced.

Current price as of November 14th 2024

We are maintaining our BUY rating and increasing PT to $25 (was $18) after BILI reported above-consensus 3Q results with non-GAAP profitability for the first time in the company’s history. 3Q DAU grew 4% y/y to 107.3M (vs. +6% in 2Q). MAU grew 2% y/y to 348.0M (vs. +4% in 2Q), with the DAU/MAU ratio largely stable at 31%. Engagement metrics remained healthy: average daily time was 106 minutes in 3Q, +6% y/y; average total daily video views grew 23% to 5.8B (vs. +17% in 2Q); average monthly interactions increased 14% y/y to 19.3B.

Driven by the success of San Guo, Mobile Game revenue grew 84% y/y in 3Q (vs. +13% in 2Q). BILI believesSan Guo will have a long lifecycle of over five years and will focus on its operation in 2025.

Advertising revenue grew +28% y/y in 3Q, decelerating 2pt from 2Q and was in line with Tiger/Street. VAS grew 9% y/y, decelerating from +11% in 2Q, with gross margin continuing to improve. Overall margins also improved, with overall gross margin up 988bps y/y and 495bps q/q, driven by revenue mix shift, San Guo, and efficiency improvement.  Despite 26% revenue growth, total Opex only grew 2% y/y, largely on operating leverage.  As a result, non-GAAP operating margin up 17pts y/y and 9pts q/q to 4%, achieving non-GAAP EBIT profitability for the first time in the company’s history.

For 4Q, the company expects total revenue to maintain relatively fast growth, primarily driven by San Guo and advertising. As revenue mix continue to shift to higher-margin businesses like gaming and advertising, gross margin is expected to further increase to 36%, or up 1pt q/q. As a result, margins will likely expand again and might achieve GAAP profitability.

For the first time, BILI announced a share repurchase program to repurchase up to US$200M (~2.6% of current diluted market cap) of shares for the next 24 months.

3Q total revenue 4%/2% above Tiger/Street. By segment, mobile games revenue grew 84% y/y (vs. +13% in 2Q), 18%/6% above Tiger/Street. VAS revenue grew 9% y/y (vs. +11% in 2Q) to RMB 2.82B, 1% below Tiger/Street. Advertising revenue grew 28% y/y to RMB 2.09B (vs. +30% in 2Q), in line with Tiger/Street. IP derivatives and others revenue decreased 2% y/y to RMB 567M, 10% above Tiger/Street.

Non-GAAP operating income 50%/42% above Tiger/Street, with margin 114bps/105bps higher. Revenue-sharing cost was RMB 2.91B, or 40% of total revenue, down 3pt y/y and 1pt q/q. Cost of revenue ratio was 65.1%, down 988bps y/y and 495bps q/q. Total Opex was 1% above Tiger.

4Q outlook. Total revenue is expected to grow roughly 20%. By segment, mobile game should maintain rapid growth of +70% to +80%; advertising is expected to grow low- to mid-20s; VAS is expected to grow roughly 5%, with a focus on gross margin expansion; and IP Derivatives and Others is expected to decline 15% y/y. 4Q gross margin is expected to improve 1pt q/q to 36% (the highest in company history). And non-GAAP Opex is expected to increase by RMB 50M to 60M q/q. Combined, non-GAAP EBIT should increase by about RMB 100M q/q.

Estimate revisions. Increasing 4Q revenue estimate by 2%, gross income by 7%, with margin 150bps higher, yielding RMB 44M higher non-GAAP operating income. Increasing '25 revenue estimate by 3%, gross income by 10% on 255bps higher margin, and increasing non-GAAP operating income by RMB 724M.