Bilibili Inc. (BILI) Earnings Call Transcript & Summary

Good day, and welcome to the Bilibili 2022 First Quarter Financial Results and Business Update Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Juliet Yang, Executive Director of Investor Relations. Please go ahead.

Thank you, operator. During this call, we'll discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially from those mentioned in today's news release and in this discussion due to a number of risks and uncertainties, including those mentioned in our most recent filing with SEC and Hong Kong Stock Exchange. The non-GAAP financial measures we provide are for comparison purpose only. Definition of these measures and a reconciliation table are available in the news release we issued earlier today. As a reminder, this conference is being recorded. In addition, an investor presentation and a webcast replay of this conference call will be available on the Bilibili IR website at ir.bilibili.com. Joining us today from Bilibili senior management are Mr. Rui Chen, Chairman of the Board and Chief Executive Officer; Ms. Carly Li, Vice Chairwoman of the Board and Chief Operating Officer; and Mr. Sam Fan, Chief Financial Officer. And I'll now turn the call over to Mr. Fan, who will read the prepared remarks on behalf of Mr. Chen.

Thank you, Juliet, and thank you, everyone, for participating in our 2022 first quarter results conference call. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. In the first quarter, the unexpected outbreak of COVID-19 struck China nationwide, impacting people's everyday lives. Shanghai, where our headquarters are based, were particularly impacted by the strict lockdowns. During this challenging time, our top priority is to the health and the safety of our employees. Over 8,000 of our staff members have been working from home since mid-March, and we arranged essentials to be delivered to our employees in Shanghai where it was the most difficult to get supplies. In addition, we opened our documentary library to the public free of charge during the May holidays and donated 2 million premium Bilibili memberships to Shanghai citizens. We are glad to see that the lockdown just ended last week and hope everyone's life and our daily business can return to normal order soon. Confronting the challenges, our business foundation remains strong and resilient. In the first quarter, our vibrant community continued to grow at a fast pace. Total MAUs grew by 31% year-over-year to 294 million, and the DAUs grew even faster at 32% year-over-year, reaching 79 million. Total user traffic, which we calculate as DAUs multiplied by daily time spent per user, grew 52% year-over-year. During this period, each user spent an average of 95 minutes on Bilibili per day, the longest we have seen in our operating history. These strong user metrics represent our solid business fundamentals, and we are seeing the momentum continue as we move through the second quarter. Despite the short-term impact from the COVID lockdowns, our total net revenue for the first quarter came in at RMB 5.05 billion, up 30% year-over-year. In the first quarter, both our paying ratio and MPUs reached a record high of 9.3% and 27.2 million, respectively. Live broadcasting was a major driver during the period with paying user numbers growing 60% year-over-year. Despite softer industry demand, we continue to gain market share in advertising and grow our ad revenue by 46% year-on-year in Q1. Improving our ads efficiency and exploring new products such as ads in Story Mode are a few of the initiative we expected to leverage as we work our way through the challenging macro environment in the coming quarters. User growth, effective spending control and improving our operating efficiency, our top goals. We have made some progress on each of these fronts in Q1. Sales and marketing expenses decreased by 29% quarter-over-quarter, accounting for 25% of total revenue, down from 31% in the previous quarter. Server and bandwidth cost decreased by 2% quarter-over-quarter, which is no small feat given our daily video views increased by 36% sequentially. We continue to invest in R&D in Q1, which we believe is essential for long-term and sustainable growth. Regardless of the pandemic impact to our short-term financial metrics, we remain committed to our mid- and long-term growth of narrowing our loss ratio and reaching breakeven. Moving forward, we will further strengthen our commercialization capabilities, control costs and improve human capital efficiency. With that overview, I'd like to go through some details of our first quarter operations across our content, community and commercialization. Bilibili's unique content and community offerings provide our users an irreplaceable experience in the online video space. Since 2021, we have successfully expanded to a multi-scenario video community by launching our Story Mode and the Smart TV app. These have effectively brought our rich content to users in more formats that resonate with them across different viewing preferences. User response to our short-form video Story Mode has been very inspiring. This short form video with Bilibili features provides a unique watching experience to satisfy users' on-the-go entertainment needs. Story Mode brought an incremental increase in total video consumption, contributing more than 20% of our total video views in the first quarter, and these numbers have continued to grow in Q2. In addition to more views and creating deeper community bonds, Story Mode has also opened up a new avenue for commercialization opportunities with advertisers as well as our live broadcasting services. During the period, user primarily engaged with content in the lifestyles, games, entertainment, ACG and knowledge categories. Across these top verticals and others, content creation remained robust. Monthly average content submissions was 12.6 million, increasing by 63% compared with the same period last year. Monthly active creators during the quarter was 3.8 million, up 75% year-over-year. The deep value we place on our creators is one of the reasons we are able to maintain our robust content and healthy community. The key to motivate their continuous creation is to help them gain recognition and provide monetary rewards. We are providing them with both. Content creators with more than 10,000 followers increased by 44% in the first quarter. Beyond our cash incentive program, content creators are encouraged to realize their commercial value more fully through multiple avenues, including live broadcasting, our Sparkle ad platform, creator-recommended ads and direct tips from users. In the first quarter, a total of 1.1 million content creators had received monetary compensation for their work, up 90% year-over-year. As for our community, we continue to foster an active environment for our users to get closer to the content and interact with creators and each other. We can see this not only with the record average daily time spent on our platform of 95 minutes in the first quarter, but also in the increased average daily video views, which grew by impressive 84% year-over-year to nearly 3 billion. The number of monthly interactions in Q1 reached 12.3 billion, up an impressive 87% year-over-year. The bond between our users and community have continued to grow. By the end of March, we had 158 million official members, up 41% with a stable 12-month retention rate of 83%. Both our Story Mode and the Smart TV have played positive roles in driving engagement levels. Now let's take a look at our commercialization efforts. Accelerating our commercialization efforts is our most important target this year. Despite the macro headwinds, our business is resilient. With advertising and e-commerce business have and will be particularly impacted in the near term, we are paying more attention to the quality of our revenue growth, particularly the margin contribution of each business segment. For our game business, in the first quarter, net revenues from our game business increased 16% year-over-year to RMB 1.36 billion. We continue to invest in in-house game development by acquiring a new studio in the first quarter. At the same time, we're closely monitoring our existing projects and conducting agile testing to keep our pipeline ahead of the fast-evolving industry. We're also working to improve our industrialized development capabilities, which is equally important in landing an idea that works. Turning to our pipeline, three games have already been approved and some others are in the late approval stage. And for our game operation in the overseas market, we have 3 titles slated for launch in the second quarter. More for the second half of this year. Turning to our VAS business, net revenues for VAS were RMB 2.05 billion, an increase of 37% year-over-year, beyond the pandemic, with a lot of monetization opportunity in this segment, particularly in live broadcasting and other innovative community-related value-added services. Our powerful PUGV video library and a pool of talented creators give us a unique advantage to leverage and reinforce our live broadcasting business. In the first quarter, the number of active live broadcasters on Bilibili increased by 88% year-over-year. We continue to roll out more tools and function to let creators showcase their talent and introduce new forms of interactive virtual gifting programs. Meanwhile, the popularity of Story Mode opened a new gateway for users to discover interesting live broadcasting content. With these initiatives, a seamless and natural conversion to a paid user arises. In the first quarter, MPUs in live broadcasting increased by 60% year-over-year. As for our premium memberships, by the end of the first quarter we had 20.1 million premium members, a 25% increase year-over-year. Nearly 80% of these were annual or auto-renew package subscribers, representing their strong trust in us. In 2022, we will continue to add exciting content to attract members, including a series of Bilibili-produced Chinese anime, variety shows and documentaries. Looking at our advertising services, revenues from this segment were RMB 1.0 billion, an increase of 46% year-over-year. In the first quarter, our top 5 advertising industry verticals were games, skincare and cosmetics, 3C products, automobiles and food and beverage. In March, the unexpected COVID lockdown caused travel restrictions and logistics difficulties in major cities in China. Some advertising dollars were delayed or placed on hold. Confronting the headwinds, we are pressing forward to expand our advertising scenarios with more innovative ad products and increase our ad efficiency with a better conversion tool kit. We launched our Story Mode ads in April, and the initial feedback is encouraging. Compared with text or picture-based ads, ads in the Story Mode has higher ROI to add customers and bring an incremental increase to our ad inventory as well as our eCPM. We plan to allocate more resources to improve its performance, including algorithms and product abilities. E-commerce is another area deeply impacted by the logistics disruption caused by the pandemic. As we believe our customer trust is our most valuable asset, we offered our customers our free delivery delay services and automated refund option. As recovery begins, our main GMV sales were again on the rise. Going forward, we will continue to explore new innovative models to maximize our IP value and achieve synergy with our leading content verticals. Confronting the macro challenges, our action plan is clear for the rest of the year. First, we aim to take all necessary steps to resume normal business operations. Second, we will be focusing on the quality of our users and our revenue growth, particularly DAU metrics and our business segment margins. Lastly, we will take essential action to further control our costs and expenses. This concludes Mr. Chen's remarks. I will now provide a brief overview of our financial results for the first quarter of 2022 and the outlook of -- for the second quarter of 2022. Total net revenue for the first quarter was RMB 5.05 billion, up 30% from the same period of 2021. Cost of revenues increased by 43% year-over-year to RMB 4.2 billion. Server and bandwidth cost as part of the related fixed cost component decreased 2% quarter-over-quarter. Server and bandwidth cost per video views decreased 27% quarter-over-quarter, showing our ongoing efforts and progress in cost savings. Our gross profit in the first quarter was RMB 807.2 million and gross margin was 16%. Total operating expenses was RMB 2.8 billion, up 42% from the same period in 2021, which represents a 9% quarter-over-quarter decrease from Q4 2021. Sales and marketing expenses were RMB 1.3 billion, representing a 25% increase year-over-year and RMB 507.7 million decrease quarter-over-quarter. Sales and marketing expenses as a percentage of total revenue was 25%, down from 30% in previous quarter. G&A expenses were RMB 535.3 million, representing a 38% increase year-over-year and keeping flattish quarter-over-quarter. R&D expenses was RMB 1.0 billion, representing a 74% increase year-over-year. The increase was primarily due to increased head count in research and development and share-based compensation expenses. We will closely monitor the progress and ROIs of our investments and make ongoing adjustment when necessary. Net loss was RMB 2.3 billion for the first quarter of 2022 compared with a net loss of RMB 904.9 million in the same period of 2021. Adjusted net loss, which is a non-GAAP measure, was RMB 1.65 billion compared with RMB 891.0 million in the same period of 2021. Basic and diluted net loss per share for the first quarter was RMB 5.80 compared with RMB 2.54 in the same period of 2021. Adjusted basic diluted net loss per share was RMB 4.20 compared with RMB 2.50 in Q1 2021. Turning to our capital allocation and liability management, we announced our USD 500 million share repurchase program in early March. As of March 31, 2022, approximately 1.4 million ADS have been purchased under this program for a total cost of USD 30 million. We are also optimizing our liability level. In Q1, the company repurchased and canceled an aggregate principal amount of USD 204 million of convertible senior notes with a total cash consideration of USD 147.9 million and recorded cash saving of RMB 338.8 million. As of March 31, 2022, we had cash and cash equivalents, term deposits and short-term investment of RMB 24.7 billion. As for our intent to convert to dual-primary listing on The Main Board of Hong Kong Stock Exchange and the NASDAQ, the Hong Kong Exchange has acknowledged our application, setting October 3, 2022, as the proposed effective date for our conversion to primary listing. It will expand our access to a wider investor base while we expect to maintain our listing status on NASDAQ. With that in mind, we are currently projecting net revenues for the second quarter of 2022 to be between RMB 4.85 billion and RMB 4.95 billion. Thank you for your attention. We would like now to open the call to your questions. Operator, please go ahead.

[Operator Instructions] Our first question comes from Lei Zhang with Bank of America.

[Foreign Language] My question is mainly about the COVID lockdown impact to our business in first half. And then how should we look at our second half user trend and overall business outlook post the lockdowns?

[Foreign Language]

[Interpreted] Well, I believe the pandemic is one of the question that most people cared about for the first half of this year. And it indeed has bought severe impact to macro economy and people's everyday life, especially in Shanghai, as one of the cities was particularly impacted. Taking Bilibili, for example, over 8,000 of our Shanghai employee have been working from home since 14th of March, and we are just now starting to gradually returning back to office this week. Until 13th of June, all the employees will be fully back to work. This is a total 3 full months. You can imagine how it does to every day -- people's everyday life in Shanghai. And how do we see this impact -- COVID impact to Bilibili? Indeed, it has brought short-term impact to our business, particularly for advertising and e-commerce. However, we do not think -- we don't think there's any impact to Bilibili's long-term growth. For example, for our advertising business, there are some short-term impact. For example, in many cities in China in the first half of this year, people are in some sort of lockdown or stay-in-home mode, making a lot of the advertisers -- putting their advertising plan on hold or delaying their advertising dollars. And that's the facts. As for Bilibili's e-commerce business, because starting from March, especially in April and May, a lot of logistics disruption due to the lockdowns or staying at home measures across different cities in Shanghai -- in China, and that's impacting people's willingness to purchase as well as the deliver services. So we do expect this impact will continue in second quarter. And all this impact to our ad business and e-commerce business, we do think it's temporary. Especially after June, when we reached certain milestone to combating the COVID situation, a lot of the impact is starting to mitigate and disappear. As for Bilibili's fundamental, we don't think there's any impact brought by the pandemic. For example, the videolization is an unstoppable trend. And we see the young generations, their need towards entertainment and cultural products, is still very, very strong, and their consumption towards cultural-related products has become even stronger. So that's why we do not -- we do think that there's no impact to our fundamentals. And looking at the specific user metrics, for example, in Q1, our MAU grew 31% year-on-year, DAU grew 32% year-on-year. Both of the metrics are accelerating compared to Q1 last year. As for the quality of our user growth for this quarter, our DAU's growth rate outpaced the MAU growth rate. And for our paying user growth rate outpaced the DAU's growth rate. And we achieved a record-high paying ratio of 9.3%. So we have not only experienced a very fast user growth rate, the quality of those user is also very strong. And this is all done under the scenario that we have not increased any of our sales and marketing budget. Bilibili has the business model of a typical platform -- Internet platform business model. Whether it's DAU or paying ratio or this record-high time spent of 95 minutes, and the engagement level grew 87% year-on-year, all those metrics can be translated to commercialization. And that's why we think the COVID, for Bilibili, has no long-term impact. As for the outlook for the second half of this year, for Q2, there's still impact lingering and perhaps the impact to Q2 is even greater than Q1. But since June this year, we can see there's a sudden change of the environment. Different cities in the country starting to recover from the lockdowns. And that's why we do think, for the second half of this year, things will start to recover. As for the user growth, we have delivered step-by-step of our user growth target. At the same time, we're playing more -- we're paying more attention to the quality of the user. At the same time, closely monitor the expense we spend on sales and marketing. As for the business side, as I mentioned, June is the month we're starting to walk out of the COVID impact. And we also believe this is the time we're starting to pick up our growth rate for each of our business lines.

Our next question comes from even Yiwen Zhang with China Renaissance.

[Foreign Language] So my question is regarding Story Mode. So can management share more color on its latest update such as what role it plays in our broader content ecosystem? And what's the progress on the commercialization ratio around that?

[Foreign Language]

[Interpreted] Indeed, since we released earnings, a lot of people are asking about the progress of Story Mode because the Story Mode's total video views has now contributed more than 20% of our total video views. This is a very tangible new format of content that's playing a bigger role. First of all -- I have 3 points I wanted to emphasize on Story Mode. First of all, it is pure incremental traffic for Bilibili. It's not like the Story Mode traffic is replacing some of the old PUGV traffic. But while users are watching more PUGVs, they are watching even more Story Mode. And from a statistic perspective, our video views has grown 84% year-on-year and Story Mode is contributing over 20% of the total traffic. And if we are excluding the Story Mode contribution, the PUGV growth rate is still around 50% to 60%, which is the similar rate we have kept in the past. That means the Story Mode is a pure incremental addition to our Bilibili ecosystem. As for the Story Mode, the vertical short form -- short video format, this is not something new. As a matter of fact, we have this type of content starting from 2 to 3 years ago. And to our daily operation, the most important thing is to make sure, for this type of content, is adding an incremental traffic instead of replacing old traffic. And from the results, we have done a very good job. Why we can build an incremental user traffic growth from Story Mode? Because we have viewed the Story Mode a very Bilibili unique flavor type of content. If we look at the Story Mode's video creator, many of those are our content creator. And for the consumer of the Story Mode are Bilibili existing users. But those users are consuming this type of content during their fragmented time on a more light scenario. So we believe, for the Story Mode, actually, it is comprehensive as a whole product, supplement to our original PUGV content. And it's actually expanding a new consumption scenario for our users. And for our content creator who's very good at making long-form videos, it's actually very easy for them to create a short vertical format of content. It's like asking you watch a post at Weibo, but it's very difficult to ask a Weibo user to write a long article. And asking our content creator to make more shorter vertical format of content actually help us to increase the video submission and also is helping our user to expand their video consumption scenario, making them more -- become more active and engaged on our platform. It's a win-win situation for us. And thirdly, I want to emphasize, for Bilibili, we are not a tool type of product. It's very easy for people to see some of the Internet platform or product as a tool. This particular product is for player for long-form video. This is a product for a short video player. This is a platform for live broadcasting. But for Bilibili, we have it all. Because instead of being a tool, Bilibili is actually a content, a community platform that gathers people. For the industry player, we are used to separate users by the product names. However, from a user perspective, they choose product by the content verticals, not by their industry categories. For example, a game lover will not only watch the PUGV -- game PUGV, they will watch the game-related live broadcasting. He or she might also play Bilibili produced or licensed games. As for knowledge sector users, he or she might both consume the knowledge-related PUGV and also watch the documentary on Bilibili. And so as for story, there are massive content supply on story, is related to lifestyle, foodie, pet. And those content category are actually mirroring the PUGV categories on Bilibili. Many years ago, when Bilibili started to do live broadcasting business, people would ask if we want to compete with certain live broadcasting platform. The answer has been no. Because this is expanding our users' needs and expanding our content offerings. And so as for Story Mode, we're not competing with the short-form video platforms out there. We're actually satisfying our users' existing need and expand their content consumption scenario, giving what they need. Lastly, on commercialization, the beauty of the short-form videos are its model has been very, very mature. And there are so many very successful precedents in the industry. It has been proven to be -- have very high efficiency of ad conversion rate, and its conversion for live broadcasting is also very good. And from our practice, it's also being proven this model works. And this will bring incremental commercialization opportunity to Bilibili. We're starting to make a lot of trial runs with Story Mode product. Until now, so far, the progress has met with our expectations. And we'll continue to allocate more resource to develop Story Mode. And we believe it will bring incremental traffic to our Bilibili ecosystem. Essentially, it could be even bigger than the incremental PUGV traffic that bring -- has brought to Bilibili. And rest assured, the launch of Story Mode will not change how the Bilibili ecosystem works. It will actually become a new highlight of the Bilibili ecosystem. As like many years ago, we started to do live broadcasting, and some of the user expressed concern whether we're going to change to a live broadcasting platform. As a matter of fact, now live broadcasting has become an essential element embedded within our ecosystem. I believe the same thing will happen with the Story Mode. Bilibili will not become a short video platform. However, this will be part of our ecosystem, serving users' different needs and expanding our content offerings, bringing incremental traffic. We believe, in the near future, we'll have more and more high-quality mid- to longer-form video being born on Bilibili. There will be even more high-quality short-form video born and spread on Bilibili. That concludes Mr. Chen's answer. Next question, please?

Our next question comes from Alex Yao with JPMorgan.

[Foreign Language] I would like to ask some questions on advertising. Fundamentally, we agree with Mr. Chen Rui that the long-term determinator to advertising monetization includes: number one, the total platform usage; number two, user demographic; and number three, the ad tech, none of which has anything to do with the short-term COVID impact. But we, as the investment community, follows the company and track the company on a quarterly basis. So we would like to understand the near-term trends of our advertising. For example, what are the advertiser categories that are more vulnerable to the COVID impact? And what are the categories who are more resilient? Similarly, what are the advertising formats that are more resilient? And what are the more vulnerable advertising format? Now that the Shanghai has reopened, how do we see the advertising revenue growth rate into the next couple of quarters?

[Foreign Language]

[Interpreted] Thank you, Alex. I think you mastered the very essential advantage of Bilibili's advertising business. Like you said, due to macro economy slowdown and the pandemic impact, many advertisers' budget were delayed or placed on hold in the first half. At the same time, this is also making the advertising market reflecting the various reasons to invest for advertising. We believe the platform that we have is -- the platform has high user value and the ability to influence users' mindset. And we've also continued to invest in technology that improve our conversion rate. We believe, in the longer term, Bilibili will be more favored by advertisers. The average age of Bilibili user is 23.5 years old, and 86% of our user are below 35 years old. More than half of our users are from first- and second-tier city. All of which metric represents the main cohort that's driving all kinds of consumption in China. By mastering this population, we have become the platform that all the advertisers crave. And if you look at past 2 to 3 years, our ad load has stayed 5%. We haven't increased any of our ad load. Our advertising has maintained relatively higher growth rate throughout the last 2 to 3 years. And this is an evidence that the advertiser really values Bilibili's user as well as the Bilibili brand. Even though that the ad dollar in the market might reduce in the short term, but we remain optimistic about Bilibili's advertising long-term growth. As for the industry vertical that's especially resilient in the first quarter, game, 3C, food and beverage, skincare and cosmetics, has been pretty strong and resilient, especially for games and automotive. In first quarter, without any game approval being issued, we have delivered a better-than-expected game advertising dollar increase. As for automotive, because Bilibili's user is growing with the platform, their consumption power is also growing. This has been captured by a lot of the automotive advertisers. They are willing to spend more advertising dollars to attract and influence Bilibili users. Confronting the macro uncertainties and short-term fluctuations, we will be focusing on doing the right things -- the right thing that serves for long term. We will be focusing on developing more standardized and industrialized integrating marketing ability. This will be our long-term growth engine. And relying on the rapid iteration of our product capabilities and data capabilities will continue to strengthen the construction of our middle platform for commercialization. And among the ad customers who invested in Q1, 74% of them bought across different products -- across different ad products. Ad customer who bought integrated marketing campaigns, namely brand performance and native ads, also grew significantly year-over-year. On top of what we are good at, the area, we're also expanding our ad scenario, integrate multiple products and multiple scenario, including PC, mobile apps, iPads, Smart TV as well as PUGV, OGV, live broadcasting and moment pages, making sure whenever the users are our advertiser can reach them. And for the Smart TV devices in Q1 the total MAU has reached over 50 million. And for those TV user, it serves a nice addition to our existing user base. It's a supplement to our existing user cohort. A lot of them are from third- and fourth-tier city and their time spend has been very good. And we'll continue to invest in those Smart TV and help us to convert more living room and family scenarios. And we aim to further enhance this multiterminal integration to optimize our marketing solutions. On top of all that, we will further expand and invest in the Story Mode commercialization initiatives. And from our initial data for the Story Mode, advertising at eCPM has been quite significantly higher compared to our traditional advertising scenarios, and its conversion rate is also improving. So, on top of that, we will first do what we are good at and add more scenarios and continue to invest in the Story Mode commercialization. And further leveraging our content creators' creativity, we'll launch more ad products that fits with Bilibili ecosystem. Now more than 24,000 content creator and more than 6,500 advertisers has joined our Sparkle ad platform. We believe this number will double this year. And for Sparkle ad platform is, one of the advantageous Bilibili advertising has, it essentially is a reservoir for advertisers. Content creators' creative ideas will help us to retain advertisers to stay in our ecosystem. For the second half of this year, we will aim to expedite the process of connecting native ads with more standardized ad products. For example, in the first quarter, more than 40% of our ad customer purchased other standardized ad products to pair with their Sparkle orders. Lastly, we aim to combine the industry trends with our ecosystem advantages. Riding on the waves of videolization trend and leveraging the power of our content ecosystem, we have achieved healthy and quality growth of users. And we've also discovered the video-based ads has much better conversion rate than the traditional ads. Over 65% of our performance ads revenue came from video-based ads. And our eCPM has grown significantly year-over-year in the quarter. And the Story Mode, on the other hand, also serves a very incremental traffic and revenue growth for advertising business. So for the -- as we look for the second half of the year, we'll continue to do the right thing and to invest for the future, and the results will speak for itself.

Our next question comes from Alex Poon with Morgan Stanley.

[Foreign Language] My question is related to live streaming business. Regarding the recent new regulation, can management share with us the impact of this regulation? And what's our expectation for the development of this in future?

[Foreign Language]

[Interpreted] So for the recent regulation update, it actually has no impact to Bilibili's live broadcasting business. And the full year target for our live broadcasting business remains unchanged. We've always mentioned that live broadcasting serves a very important part of our ecosystem. It's a natural extension of our live -- of our video platform. Our growth will not be relying on attracting outside live broadcasters to the platform, attracting outside user to Bilibili's live broadcasting. As a matter of fact, there's a very strong overlap between the live broadcasters and content creators, a lot of the overlap with the video users and live broadcasting users. So my confidence in live broadcasting long term and sustainable growth remain unchanged.

Our next question comes from Xueqing Zhang with CICC.

[Foreign Language] I would like to ask questions related to gross margin and cost control and the ongoing COVID-19 pandemic. Firstly, with the latest strategic focus, will you place higher priority on gross margin improvement and cost control? And we proposed a target to achieve a breakeven point on a non-GAAP basis by 2024 in last quarter's earnings call. Is there any change? And how do you balance the target with user growth? And last, what's the gross margin trend for the second quarter and the second half of the year? Appreciate a lot if you could share more color on the segment gross margin trend.

[Foreign Language]

[Interpreted] So the target of achieving non-GAAP operating breakeven by 2024 remain unchanged. As I mentioned, the COVID impact for Bilibili is short term and temporary. It doesn't hurt our fundamentals or -- nor our long-term target. The margin pressure you see in the first quarter is mainly due to COVID that resulted in slowdown of our revenue growth. And if you look at the expense side, we're actually not spending more money. And you asked about the relationship between user growth and expense control. As a matter of fact, Bilibili's user growth model was never purely driven by the sales and marketing expense. It's actually driven by our content ecosystem, by this -- in -- made in major, broad good content. Those good content is essentially attracting user growth. And expense we spend on sales and marketing is only helping people to quickly realize there's a very good platform called Bilibili. So it's never about just spending sales and marketing to drive user growth. As a matter of fact, our users' engagement level and retention level has remained a very healthy nature. And in the future, we'll be paying more attention on the sales and marketing ROI. And -- but for this effort, it will not impact our user growth trend as well as the retention rate. As the question whether we're going to put expense control on top of everything else, like I mentioned in last earnings call, starting from 2022, there's a lot of macro changes domestically and internationally, even though there's, in addition, COVID impact. But a lot of the difficulties we're facing are not just brought because of the COVID. And in nature, to control costs and improve efficiency, is the most important job for Bilibili and also for the industry as well. And for the specific action points, we wanted to be very, very focused strategically, to go deep with our business, not go broad. And yes, this is -- this has come to a stage for Bilibili as well as the industry player to be all focused on cost control and efficiency improvement. As for the gross margin, the margin pressure that we're facing in the first quarter is mainly because the COVID impact resulted in the revenue growth slowdown. As I mentioned, as the COVID is starting to ease in the second half of this year, our revenue growth rate will return to a normal trajectory. And also, the gross margin level will come along with it.

Yes. I just want to add some points. First of all, when we were talking about the breakeven, everyone prioritized the cost control, efficiency improvement. But we think, for Bilibili, as mentioned by Mr. Chen, it's equally important to expand our top line. So first of all, we still believe there's still room for us to improve our monetization efficiency. So we are aiming to improve our paying ratio and expand our ad market share to improve our segment margin throughout the second half of this year. Even in the first quarter, we still saw the gross profit margin for live broadcasting and our ad business improved quarter-over-quarter. So that trend will continue in the remaining of this year. And for the cost control side, we also made some progress in the first quarter. But even in the second quarter, there are some pandemic. So the result of the cost control action will be more reflected in the second half of this year. And we -- there are some highlights to the numbers. First of all, you saw the sale and marketing expenses decrease by 29% quarter-over-quarter. Now it's just flat to 25% of total revenues. Last quarter was 30%. And for the server and bandwidth cost, it's down like 2% quarter-over-quarter while our total user traffic grow like 28% quarter-over-quarter. And for R&D expenses, we primarily invest in game development, data, ad efficiency and product-related abilities. We still believe it's essential to improve our productivity and to improve our monetization efficiency. But we thought it's also important to invest in the future and also look at the ROI of those investment. So this year, we plan to continue and selectively invest in this area, but we will very close monitor the progress of each product -- project and make adjustment, if necessary, and to improve our total capital efficiency. So we expect the sale and marketing, G&A and R&D as a percentage of total revenue will be gradually decline from Q3 as our top line expand, and the loss margin will be naturally narrow. For Q2, yes, the overall spending will be flat quarter-over-quarter. So that will be the outlook for the margin side. Yes, that's all.

And that concludes the question-and-answer session. I would like to turn the conference call back over to management for additional or closing comments.

Well, thank you once again for joining us today. If you have further questions, please contact me, Juliet Yang, Bilibili's Executive IR Director, or TPG Investor Relations. Our contact information for IR in both China and U.S. can be found on today's press release. Have a great day. Bye-bye.

This concludes the program. You may now disconnect.