Bilibili’s (BILI) Ad Engine And Margins Outrun Its Slumping Game Unit

Bilibili, the Chinese video-sharing platform, reported a strong quarter with its advertising revenue surging 28% year-over-year, marking the 14th consecutive quarter of at least 20% growth in this segment. GAAP net profit rose 55% year-over-year, while total revenue grew modestly by 8% to RMB 7.94 billion. The advertising engine, powered by AI, is Bilibili's clear strength, with AI advertising revenue doubling and click-through and conversion rates improving by 19%.

Newer verticals such as home decoration, footwear, apparel, and automotive advertising each grew more than 60% year-over-year. This revenue strength is translating into real operating leverage, with gross margin expanding to 37.2% from 36.5% a year earlier. Non-GAAP adjusted net profit climbed 25% year-over-year to RMB 703.6 million, pushing the adjusted net profit margin to 8.9%.

The company is returning cash to shareholders through share repurchases and a new buyback program. However, mobile games revenue fell 14% year-over-year to RMB 1.39 billion, attributed to a difficult comparison against a strong prior-year performance and expected to rebound in the fourth quarter with new releases. Engagement metrics are climbing, with 116.5 million average daily active users and a 7% year-over-year increase.

The advertising environment in China could get tougher as advertisers prioritize higher conversion efficiency. Hedge fund interest in Bilibili has cooled, and short interest sits at 7.5% of the float. Bilibili's advertising business and expanding margins are currently carrying the company, while games revenue is working through a tough year-over-year comparison.