Bilibili is hitting its profitability target, but faces big questions about its staying power

Bilibili, the platform synonymous with Gen Z and anime fans in China, has finally reached a financial milestone. The company posted an adjusted net profit of RMB 240 million ($33.6 million) in the third quarter, a dramatic turnaround from the RMB 863 million ($120.8 million) loss it suffered a year ago year. But behind the celebratory headlines, the achievement raises as many questions as it answers.

Revenue came from four pillars: value-added services (38%), advertising (29%), gaming (25%) and IP derivatives and other businesses (8%). Two segments stood out: gaming, up 84% year-over-year, and advertising, which maintained a solid 27.8% growth. These factors have helped tip the balance toward profitability, but their sustainability remains uncertain.

CEO Chen Rui has long pledged to break even by the end of 2023. While Q3 results delivered on that promise, much of the credit goes to the phenomenal success of Three Kingdoms: Conquer the Worlda new version that generated gaming revenue. Without him, the picture might have looked a lot bleaker as older games continued their decline. This heavy reliance on a single stock made investors nervous, reflected in a 12% drop in Bilibili’s share price after earnings.

The question now is simple: Can Bilibili keep this momentum alive?

Advertising has emerged as a resilient lifeline for Bilibili, being the company’s second largest and fastest growing revenue stream. Even during a weak quarter for the industry and against the backdrop of unfavorable macroeconomic conditions, Bilibili’s ad revenue grew steadily, thanks to specific innovations.

COO Li Ni highlighted three key factors during the Q3 earnings call:

1. Multiscreen and Multiscenario Expansion: Using news feeds, search bars and desktop and tablet interfaces to open up new ad placements.
2. Integration of its Huahuo and Qifei systems: Smarter mobile ad placements contributed to a sevenfold increase in advertisers.
3. Using generative artificial intelligence: Generative AI tools have helped lower the barriers and costs of ad creation, attracting more ad spend.

Li shared interesting insights into changing advertising trends. Performance-based ads, which deliver measurable results, grew nearly 50% year-over-year, significantly outperforming traditional brand advertising. Sponsored orders through the Huahuo platform now account for nearly 60% of deals, solidifying performance-based ads as the dominant format.

This transformation was propelled by the integration of Huahuo and Qifei, called “Huafei” in industrial circles. Advertisers typically allocate 70% of their budgets to Huahuo for creator-created ads and 30% to Qifei for more extensive cross-platform promotions. Historically, Huahuo’s 5% commission has been considered favorable to the industry, but its limited revenue potential has been offset by the introduction of Qifei, allowing Bilibili to increase ad revenue without alienating content creators.

Looking ahead, Q4 is set for a boost on Singles Day, the annual shopping extravaganza. Li revealed that Bilibili’s gross merchandise value (GMV) increased by more than 150% during the event, with advertising revenue increasing by nearly 50% year-on-year. In particular, the number of content creators participating as hosts increased by nearly 80%, and categories such as electronics, home goods and beauty saw more than half of their customers come from first-time buyers.

For once, Bilibili’s gaming division didn’t hurt the company’s performance. Instead, it provided a rare climax, with Three Kingdoms: Conquer the World dominating the scene. The strategy game generated estimated gross revenue of RMB 1.5 billion ($210 million) in Q3, with RMB 1 billion ($140 million) recognized for the quarter. Without this success, gaming revenue would likely have continued to decline.

But the future of Bilibili’s success in gaming depends on two critical questions: How long can it last? Three Kingdoms to maintain momentum? And when will the next hit come out?

Chen addressed the first point, stressing the importance of longevity: “We trained the team to prioritize Three Kingdoms: Conquer the World as a long-term project. Our goal is a five-year life cycle.”

The game’s fourth season, released in mid-November, introduced new maps, characters and stories, while plans for an international release with a traditional Chinese version are set for late 2024. Chen called the title “one of the most critical pillars for the next year.”

As for the new blockbusters, Chen has hinted at exploring a genre of games outside of Bilibili’s usual focus on the anime and strategy genres, though details remain scarce. For now, hope remains Jujutsu Kaisena recently released anime-inspired title that topped the download charts in over 70 countries.

Deferred income from Three Kingdoms suggests a stable Q4, but its ability to take Bilibili’s gaming division beyond 2024 remains uncertain. Without a clear successor, the pipeline seems thin.

Bilibili’s Q3 profit is a commendable achievement, but sustainability is the real test. While advertising innovations and game hits like Three Kingdoms have propelled the company forward, the cracks remain visible. Gaming revenue is heavily dependent on a single title, and the next big hit is nowhere to be seen. Meanwhile, the advertising business, while robust, faces the perennial challenge of balancing innovation with profitability.

For investors, the big question remains: Can Bilibili deliver consistent earnings, or is this quarter’s profit just a fleeting moment of triumph?

KrASIA Connection offers translated and adapted content that was originally published by 36Kr. This article was written by Wang Yuchan for 36Kr.