Q3 2023 Bilibili Inc Earnings Call
Participants
Juliet Yang; Executive Director of IR; Bilibili Inc.
Ni Li; Vice Chairman of the Board of Directors & COO; Bilibili Inc.
Rui Chen; Chairman of the Board & CEO; Bilibili Inc.
Xin Fan; CFO; Bilibili Inc.
Felix Liu; Research Analyst & Graduate Trainee; UBS Investment Bank, Research Division
Lei Zhang; VP in Equity Research & Research Analyst; BofA Securities, Research Division
Wei Fang; VP of Research; Mizuho Securities USA LLC, Research Division
Xueqing Zhang; Analyst; China International Capital Corporation Limited, Research Division
Presentation
Operator
Good day, and welcome to the Bilibili Third Quarter 2023 Financial Results and Business Update Conference Call. Today's conference call is being recorded. At this time, I would like to turn the conference over to Juliet Yang, Executive Director of Investor Relations. Thank you. Please go ahead.
Juliet Yang
Thank you, operator. During this call, we'll discuss 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 filings with the 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 will now turn the call over to Mr. Fan, who will read the prepared remarks on behalf of Mr. Chen.
Xin Fan
Thank you, Juliet, and thank you, everyone, for participating in our 2023 third quarter conference call to discuss our financial and operating results. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen.
The record-high community growth we achieved in the third quarter is a testament to the power of our self-driven content ecosystem. It is continuously drawing in more users and keeping them highly engaged. Notably, our DAUs increased by 14% year-over-year, surpassing the 100 million milestone and landing at 103 million in the third quarter.
MAUs also grew to a record high of 341 million. And the DAU-to-MAU ratio in this quarter improved to 30.2%. Meanwhile, our users' daily time spent also reached a historical high of 100 minutes with total user time spent increasing by 19% year-over-year. We are encouraged by the strong user growth momentum and the direct correlation with our monetization efforts.
Improving margins, narrowing losses and maintaining growth have been our key objectives this year. In the third quarter, we leveraged our expanding traffic more efficiently, integrating commercialization scenarios and products into our content ecosystem to drive quality top line growth.
This is evident in our advertising and VAS business, which grew by 21% and 17% year-over-year, respectively. Furthermore, our gross profit increased by 38% year-over-year and our gross profit margin rose to 25%, up from 18% in the same period last year, marking the fifth consecutive quarter of gross margin improvement.
Our tight expense control measures reduced our total operating expenses by 12%, including a 19% decrease in sales and marketing expenses and 8% decrease in G&A expenses and a 6% decrease in R&D expenses, all on a year-over-year basis.
As a result, our adjusted operating loss and adjusted net loss both narrowed by 51% year-over-year in the third quarter. Notably, we achieved an important milestone of generating positive operating cash flow in the third quarter, demonstrating our business operations have entered a positive cycle and marking a step forward in our profitability goals.
2023 has been a year with continued changes across industries and markets. To adapt to the new paradigm, we are increasing our focus on our core business, trimming expenses in areas yielding lower returns. In the fourth quarter, we have further streamlined our organization and expect our total headcount to be around 9,100 by end of 2023 compared with 11,000 at the end of 2022. Additionally, future project plans will continue to be ROI-focused.
With these measures, we will become nimbler as an organization to better align ourselves with the new environment, setting the stage for Bilibili's long-term success. With that overview, let's look at our core pillars of content, community and commercialization in more detail.
Beginning with content and community. The key metrics that represent the quality of our community continue to rise. The number of daily active content creators on our platform increased by 21% in the third quarter and the monthly new content submissions were 21 million, up 37% both year-over-year. More content creators earned more wider fan base during the third quarter.
The number of content creators with over 10,000 followers grew by 36% year-over-year. Total daily video views increased by 26% year-over-year to 4.7 billion, among which Story Mode video views grew by 45% year-over-year. As I mentioned, users are spending more time with us than ever before with users' daily time spent reaching an all-time high of 100 minutes.
Meanwhile, monthly interactions among our users also increased by 18% year-over-year, reaching 17 billion. By the end of the third quarter, we had 224 million official members who have taken and passed our community exam, a 23% increase year-over-year. And their 12-month retention rate remained strong at around 80%.
Our content categories continue to expand, attracting more users and bringing new commercial opportunities for both content creators and the platform. Inevitably, our users and content creators enter new life stages and new categories emerge, such as home decoration, relationships, baby and maternity and automotive.
For example, new content submissions in home decoration and appliances genre grew by nearly 90% year-over-year in the third quarter. In parallel, content creators in this category and their earnings as well as advertising revenues generated from the same category have all meaningfully improved.
Meanwhile, we have created more direct monetization opportunities for our content creators. A total of 1.68 million content creators generated income on Bilibili in the third quarter, up 34% from the same period last year. The adoption of video and live commerce has also brought additional channels for more creators to realize their commercial value. The number of content creators who earned money through video and live commerce in the third quarter grew by over 160% year-over-year.
Additionally, this summer, our two signature offline events, BilibiliWorld and Bilibili Macro Link, attracted a gathering of over 200,000 young people in Shanghai to experience our unique community culture. The remarkable attendance underscores Bilibili's influence among the young generation and brought us more brand advertisers with incremental budget allocation.
Lastly, I'd like to talk about commercialization. Total revenue for the third quarter was RMB 5.8 billion, flat year-over-year. Advertising revenues and VAS revenues increased by 21% and 17% year-over-year while offset by 33% year-over-year decrease in game revenues.
We are encouraged by the progress in our ads and VAS business, where the revenue growth potential has a direct correlation with DAU growth. Meanwhile, we have taken a closer look at our game business and made certain adjustments to better align ourselves with the new industry landscape.
Looking at this in more detail. Our growing and engaging community is the foundation of commercialization. As people spend more time and engage in more community activities, they are more willing to pay for Bilibili content and services.
Looking at our VAS business. VAS revenue for the increased by 17% year-over-year to RMB 2.6 billion, mainly led by our live broadcasting business. The ongoing interaction of live broadcasting into our video universe continues to yield results.
More content creators are stepping into live broadcasting as hosts, further enriching our live broadcasting offerings and enabling them to earn income. By the end of September, our premium members grew to 21.1 million with over 80% on annual subscription or auto-renewal packages, underscoring the trust and the loyalty we have built with our brand.
In the third quarter, we launched the highly anticipated self-produced anime, Link Click Season 2, Shiguang Dailiren Di Er Ji, which was well received by many new and old fans. In September, we announced 68 new Chinese anime titles at our sixth Made by Bilibili Chinese Anime press event. Most of these titles will be released in the next few years, ensuring a continuous stream of beloved content for our premium members.
Turning to our advertising business. As we further integrate sales conversion tools within our ad products across scenarios, we are now more effectively converting our high-quality traffic into substantial ad revenue growth.
In the third quarter, total advertising revenues grew by 21% year-over-year, reaching RMB 1.6 billion, mainly led by performance-based ads, which grew by over 40% year-over-year. Notably, our strong ad revenue growth contributed to meaningful gross profit growth with higher revenue contribution from our performance-based ads.
For the third quarter, our top 5 ad verticals were games, digital products and home appliances, e-commerce, food and beverage and automotive. Despite the third quarter traditionally being an off-peak season for e-commerce advertising, our strengthened advertising solutions enabled us to secure a greater share of advertising budgets in this competitive industry.
During the Double 11 shopping festival in the fourth quarter, we further strengthened our data collaboration with e-commerce platforms and upgraded our video and live commerce ad products. The total GMV from our video and live commerce products increased by over 250% year-over-year for the Double 11 shopping season.
Turning to our game business. Total revenues was RMB 992 million, representing an increase of 11% quarter-over-quarter and a decrease of 33% year-over-year. The reason for the year-over-year decrease was due to a high base from the 2022 summer release of Space Hunter 3 as well as weaker-than-expected new game performance in the third quarter this year.
Our legacy games, Azur Lane and FGO, remained stable during the period. On August 30, 2023, we launched our exclusively licensed ACG title, Pretty Derby. On September 8, 2023, the game was temporarily removed from the App Store for content refinement, and we are working diligently to resume download access as soon as possible.
The game industry has changed dramatically in the past 2 years. At the beginning of the fourth quarter, we closely reviewed our in-house game development projects. We further streamlined our in-house development team and discontinued projects that did not meet our standards. Consolidating these operations will help reduce our future R&D expenses.
That said, as a video community for the young generation, we possess natural advantages in the game industry. We aim to further leverage our growing advertising capabilities to strengthen our game distribution power as well as selectively invest in our in-house development to bring high-quality games to our users and create value for our business partners.
In summary, we are dedicated to reach our financial goal of gross profit improvement and loss reduction this year. We have delivered on this goal with a 38% increase in gross profit and a 51% reduction of both adjusted operating loss and adjusted net loss in the third quarter. And we will continue on this path.
At the same time, we strongly believe in the power of good content and community. 100 million DAUs is just another beginning for us to build on. We will stay true to our mission and continue to enrich the everyday lives of the young generation in China. This concludes Mr. Chen's remarks. I will now provide a brief overview of our financial results for the third quarter of 2023.
As mentioned in Mr. Chen's remarks, our financial profile has significantly improved. We continue to gain operating leverage while building our community and video ecosystem. We have increased our gross profit margin and narrowed our adjusted net loss for 5 consecutive quarters.
Total net revenues for the third quarter were RMB 5.8 billion, on par with the same period last year. Our total net revenues, breaking down by revenue stream, were approximately: 45% VAS; 28% advertising; 17% mobile games; and 10% from our IP derivatives and other business.
Our cost of revenues decreased by 8% year-over-year to RMB 4.4 billion, driving our gross profit to RMB 1.5 billion, up 38% year-over-year. Our gross profit margin reached 25%, up from 18% in the same period last year. We expect our gross profit margin to continue to improve in the fourth quarter.
Our total operating expenses were down 12% year-over-year to RMB 2.6 billion. In the third quarter, we cut our sales and marketing expenses by 19% year-over-year to RMB 992 million while our DAUs reached a record high. Sales and marketing expenses were 17% of total revenue compared with 21% in the same period last year. G&A expenses were RMB 499 million, down 8% year-over-year. R&D expenses were RMB 1.1 billion, down 6% year-over-year.
As a result, we narrowed our adjusted operating loss and adjusted net loss both by 51% year-over-year in the third quarter. Our adjusted net loss ratio in the third quarter was 15%, improving from 30% for the same period a year ago. Notably, we generated positive operating cash flow in the third quarter, demonstrating our business operation has entered into a positive cycle.
As of September 30, 2023, we had cash and cash equivalents, time deposits and short-term investments of RMB 14.5 billion, or USD 2.0 billion. In the third quarter, we repurchased an aggregate principal amount of USD 14.5 million December 2026 notes with an aggregate cash consideration of USD 13 million.
As of September 30, 2023, the aggregate outstanding principal amount of April 2026 notes, 2027 notes and the December 2026 notes was USD 862 million. We believe our cash position is sufficient to cover all of our remaining convertible bonds. Due to lower-than-expected game revenues, we now expect our 2023 full year revenues to be at the lower end of RMB 22.5 billion to RMB 23.5 billion.
Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.
Question and Answer Session
Operator
(Operator Instructions) For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. The company will provide consecutive interpretation for management's statements during the Q&A session. Please note that English interpretation is for convenience purposes only. In the case of any discrepancy, management's statements in their original language will prevail. (Operator Instructions)
Our first question comes from the line of Zhang Xueqing from CICC.
Xueqing Zhang
(foreign language) And congrats on the third quarter. My question is about user growth. As the DAUs passed the milestone of 100 million for the first time in the third quarter and users' time spent reached a historical high as well, so what's your views on user growth potential? And recently, the media reported that actually your company has internally proposed a grow-up, doubling DAU. So could management share your path and timetable for achieving this goal that it should currently increase the expense in user acquisition?
Rui Chen
(foreign language)
Juliet Yang
[Interpreted] I think in the big movement of the utilization, it's a very natural process for a good video product to grow bigger and bigger by itself. That's why when we are talking about user growth strategy internally, we have been emphasizing on improving the content quality, improving the user experience, not mainly through the user acquisitions.
Rui Chen
(foreign language)
Juliet Yang
[Interpreted] That's why starting from second quarter of last year, we have been emphasizing on the ROIs of our user acquisition strategy. As we are spending less in sales and marketing, we are actually growing more and more DAUs.
Rui Chen
(foreign language)
Juliet Yang
[Interpreted] And that is why we have been focusing on improving the operating efficiency, improving our product capability and pursue simultaneous commercialization as well as the user growth virtuous cycle.
Rui Chen
(foreign language)
Juliet Yang
[Interpreted] In the third quarter, our DAU has surpassed 100 million milestone. We also reached a record high of MAU numbers. And this is a strong evidence that we have succeeded in our user growth strategy in the past year. And this is just a new beginning for us.
Rui Chen
(foreign language)
Juliet Yang
[Interpreted] The reason why we have been focusing on user growth is, I think, for all the Internet product, the user base will be one of the key competitive strengths. The larger user base we get, the more content creator as well as the commercialization will come with it.
Rui Chen
(foreign language)
Juliet Yang
[Interpreted] And for Internet product, user base is also the foundation for our commercialization. As you can see from Bilibili's commercialization model, advertising and live broadcasting has -- its revenue growth has direct correlation with DAU growth.
Rui Chen
(foreign language)
Juliet Yang
[Interpreted] In the third quarter, our ad revenue and VAS revenue grew by 21% and 17%, respectively, year-on-year. And as you can see, we have already come to a strategy or formed a virtuous cycle between our traffic growth and our revenue growth in advertising and VAS, specifically live broadcasting. At the same time, the revenue that grew from these two sectors has also converted to -- a certain part of that also converted to our content creators' income and also will generate more content creation on our platform. So from a content ecosystem perspective, it has also been very positive to our overall content ecosystem.
Rui Chen
(foreign language)
Juliet Yang
[Interpreted] At this point, we still see great growth potential for our user scale. When I do the user research, I discover that for Bilibili users, there's a great word-of-mouth effect. People who feel good about the product will naturally spread words and introduce new users. And if you look at the past year's data, not only we have achieved very strong user growth, we have also exceeded in many metrics in terms of community growth, video views and content creators' numbers. That means that we have achieved a virtuous cycle in between the content, user as well as the community.
Rui Chen
(foreign language)
Juliet Yang
[Interpreted] I believe our content ecosystem continues to prosper, Bilibili should be able to attract more and more users because it's -- we think it's a very natural desire for all human beings to find good content and find brands who share the same interest.
Rui Chen
(foreign language)
Juliet Yang
[Interpreted] Going forward, we will still largely rely on the product improvement, content expansion to drive our user growth and pair with ROI-focused sales and marketing and only invest in user acquisition when the ROI makes sense. That means only to acquire users who are making money by investing in that user acquisition strategy. That is the mid- to long-term user growth strategy for us.
Rui Chen
(foreign language)
Juliet Yang
[Interpreted] End of last year, I have raised the three key objectives for the company, which is in margin improvement, loss narrowing and maintain growth. We want to achieve these three targets at the same time, not by sacrificing the first two targets to achieve the last one.
Operator
The next question comes from the line of Fang Wei from Mizuho.
Wei Fang
(foreign language) So can management help elaborate on the key drivers for the ad business, especially ERS in the quarter and how's the performance during the Double 11 promotional campaign? In addition, can you update us on your progress on live streaming e-commerce and short video e-commerce? And lastly, how should we expect segment growth for 2024?
Ni Li
(foreign language)
Juliet Yang
[Interpreted] In the third quarter, our advertising revenue grew by 21% year-over-year. Ad revenue as a percentage of total revenue has grown from 23% in the same period last year to 28% in the third quarter of this year. And also, it has drove the gross margin -- gross profit improvement on the company level.
Ni Li
(foreign language)
Juliet Yang
[Interpreted] So we've introduced our key strategy and the driving force of our ad business in the past 2 quarters comprehensively, which has been the one horizontal industry solutions as well as the middle platform power improvement.
Ni Li
(foreign language)
Juliet Yang
[Interpreted] So from an industry vertical perspective, game and e-commerce has been very strong. Despite Q3 being a traditional slow season, ad revenue from e-commerce still grew by 90% year-on-year. Additionally, we have been actively exploring other integrated solutions with other industries. For example, we've seen positive performance from automotive and health care industry, which also grew by 20% quarter-over-quarter. Going forward, we will continue to strengthen on those industries' performance.
Ni Li
(foreign language)
Juliet Yang
[Interpreted] We have also improved our ad efficiency on a platform level, unleashing more commercial value across different scenarios. And particularly, performance-based ads grew by 40% year-over-year in the third quarter, which has become the main growth driver of our ads business.
Ni Li
(foreign language)
Juliet Yang
[Interpreted] In terms of the Double 11 shopping festival performances, we think the overall experience -- overall performance has exceeded our expectations. Ad revenue from the main e-commerce platforms grew by over 80% year-over-year. We'll continue to adhere into the open-loop strategy and continue to deepen our data collaboration with the top e-commerce platforms.
For example, ad revenue generated by the Alibaba Xinghuo project grew over 160% compared with the June 18th shopping festival this year. We've worked with more than 70 brand advertisers to bring new users to the advertisers. Over 50% of the traffic converted to Alibaba were new users to those brand owners. And this ratio even reached 89% for baby and maternity verticals.
Ni Li
(foreign language)
Juliet Yang
[Interpreted] The incremental ad budget brought by Alibaba's Xinghuo project has actually proven the conversion value of Bilibili's performance ads. That's why in addition to Alibaba's Xinghuo project, we launched Jinghuo project, a collaboration program with Jingdong recently.
Ni Li
(foreign language)
Juliet Yang
[Interpreted] During the Double 11 shopping festival, the GMV generated from our video and live e-commerce increased more than 250% year-over-year. And we have gradually built up our consumption and trading atmosphere within our content community. During the shopping season, the number of e-commerce-related video increased by over 230% and the number of live e-commerce sessions has also grew by 100%.
Bilibili's content creator, @MrMiDeng, his live e-commerce GMV has reached RMB 1.68 billion, which increased by over 400%. From the trading atmosphere as well as the ad revenue growth, we're confident we can continue to build on this momentum and continue to grow our e-commerce-related advertising revenue.
Ni Li
(foreign language)
Juliet Yang
[Interpreted] As for the fourth quarter and 2024's advertising revenue growth trajectory, we remain confident. Here are some ways we are hoping to continue to enhance and improve. First of all is that we all know Bilibili's content can deeply influence users' mindset and brand perception. We will be very focused and continue to build our brand ad capability. The Sparkle Platform will be the lever and performance-based ads that will be our growth accelerator.
Ni Li
(foreign language)
Juliet Yang
[Interpreted] And secondly is we will continue to upgrade our advertising model. We have been emphasizing that the integrated marketing solutions will be Bilibili's strong advantage. The reason why is that we can reach user from multiple media scenario and achieve multiple ad revenue growth. And in 2024, we'll continue to upgrade and help our ad clients to build their brand equity within Bilibili's content community and help them to build a sustainable and measurable growth model.
Ni Li
(foreign language)
Juliet Yang
[Interpreted] Thirdly is to improve the effectiveness and efficiency of our traditional ad scenarios and find new scenarios that's simple for different advertising strategy. Going forward, we'll continue to find a way to better collaborate between natural traffic and commercial traffic to improve our overall ad efficiency.
Ni Li
(foreign language)
Juliet Yang
[Interpreted] Lastly is that we'll pay close attention to the four key needs of our brand -- of our ad customers: number one, new product launch; number two, fear of staging; number three, transaction-based ad needs; lastly is the seasonal marketing campaigns. We will build on these four key needs and to continue to build a very effective advertising solution. That's why I'm still very confident of our advertising revenue growth in the fourth quarter. And the year forward, we aim to continue to expand our market share going forward.
Operator
Our next question comes from the line of Felix Liu from UBS.
Felix Liu
(foreign language) Let me translate myself. So we noticed that -- my question is on the game business. We noticed that the game competitive landscape remain -- continue to be in Tencent. One of our peer recently exited their game business. So your thoughts on your own in-house game R&D progress, how you think of the game business from here? And any update on our game, Pretty Derby?
Rui Chen
(foreign language)
Juliet Yang
[Interpreted] So firstly, I'll talk about the Pretty Derby. We really value this game. And at the same time, we value user experience. So that's why we will conduct minor content refinement and technical upgrade as soon as possible and bring the game back to the App Store.
Rui Chen
(foreign language)
Juliet Yang
[Interpreted] And one thing I want to add is that for users who already download the game, their feedback and experience, the feedback has been very positive.
Rui Chen
(foreign language)
Juliet Yang
[Interpreted] As you mentioned, there has been a very competitive landscape in the game market this year. I think it's more than that. We think that the overall game business or game industry has entered into a new phase, where it's very hard to gain new users and it has become a more saturated market.
Rui Chen
(foreign language)
Juliet Yang
[Interpreted] In the past year, where we still see incremental growth of gamers in the market, the secret to success is to bring a good quality game. But in the market where it's a saturated market, only quality is not enough, unless you have the top of the top game quality and the right timing.
Rui Chen
(foreign language)
Juliet Yang
[Interpreted] As come to end of this year, we've noticed that we find that most of the new games launched this year have not met their original expectation. But the quality of those games have been good. The reason why is that the game was set up 3 years -- probably 3 years ago, where there was still incremental gamer growth. Their target is to build a good game, not necessarily have to be the top game or the most unique game. And 3 years later, the time has changed.
Rui Chen
(foreign language)
Juliet Yang
[Interpreted] From the user perspective, they would notice that for this year, there's a lot of new games. But they all look kind of the same, probably with different artistic designs. And for those game developers, they have turned into a rat race of the minor details. Those rat race wouldn't necessarily means new users and new income and new profits for users. They don't necessarily have to try out this new game who looks the same with others because they already have a game they've been devoted in.
Rui Chen
(foreign language)
Juliet Yang
[Interpreted] So that means not necessarily the game market is shrinking or less active. On the contrary, we still see the gamer has been very active. From Bilibili's data perspective, the viewers in our game content verticals, the DAU and their time spent are actually increasing a lot. They also pay close attention to new games. But the new games, which can convert real new users, need to be very unique, very different from what the market is already offering.
Rui Chen
(foreign language)
Juliet Yang
[Interpreted] Having said that, we think the time has changed. The standards to invest in new games has changed. Now we think there are three key criteria for a new game to succeed. One is long-term operations. Second is to be the top of a niche market or be a super top title in the market. And lastly is focus on the ROI. And in the past, the copycat type of project setup or the rat race type of R&D investment does not work anymore.
Rui Chen
(foreign language)
Juliet Yang
[Interpreted] That's exactly the why we have been reviewing and adjusting our in-house development projects. Because some of the projects were established based on the old standards. And based on the new market and new standards, those projects is very likely to be loss-making when the game came online. That's why we are doing those adjustments and streamline our projects.
Rui Chen
(foreign language)
Juliet Yang
[Interpreted] After this adjustment of our in-house development game, we still have a few titles that we think will remain competitive in the current market. We will be very -- paying close attention to the money invested in and focus our limited resource on the very selective titles who can meet those new standards.
Rui Chen
(foreign language)
Juliet Yang
[Interpreted] We think the things that we're doing with our project adjustment is correct. This movement is not only being done by Bilibili, and it's actually across the industry. And it's not necessarily a bad thing. We have returned to the fundamental of game developing, which for this industry, the key competitiveness is innovation. And who can really succeed in this industry is the one with the most brilliant idea or the one with the most innovative game-making can prevail and succeed.
Rui Chen
(foreign language)
Juliet Yang
[Interpreted] Lastly, I want to emphasize that on Bilibili platform, there are large amounts of young users. We have young gamers who have been very, very active on our platform. And Bilibili is still the most popular game video content platform in China with very high condensity of young generations. And also, for our game development teams, they also have the sense and understanding of Chinese gamers. What we need to do is realize those advantage and translate that into game developing.
Operator
Next question comes from the line of Zhang Lei from Bank of America.
Lei Zhang
(foreign language) And questions routinely regarding margin. So we noticed that we have a pretty distant improvement in gross margin. And can you give us some outlook for Q4? And how should we look at your full year loss control target you made previously? And any change to our break-even target in 2024?
Xin Fan
Okay, this is Sam. I will take this question. In Q3, our gross profit grew by 38% year-over-year and our GPM improved 5 consecutive quarters to 25%. We expect our gross profit margin can continue to improve sequentially in the Q4 as there is more revenue contribution from ad revenue. At the same time, we narrowed our non-GAAP operating loss by 51% in Q3. And we expect we can narrow our non-GAAP operating loss even more in Q4 compared with Q3.
That will help us to achieve our initial financial target that to reduce our non-GAAP operating loss by RMB 3 billion in 2023. So we do keep our initial financial goal in check. Notably, our operating cash flow has turned positive in Q3 and indicating the business operation has entered into a positive cycle. We expect we can continue to generate positive operating cash flow in Q4.
Looking to 2024, we will continue our path of gross profit improvement and loss narrowing. On one hand, we have confidence in the growth of our high-margin business, like ad revenue, which will continue to contribute to gross profit growth. And that will be the main driver to narrow the loss. On the other hand, with some recent structural adjustments, we expect operating expenses, including R&D expenses, to further decline in 2024. Together, I think we will continue to work towards the goal of breakeven. Thank you.
Operator
And that concludes the question-and-answer session. Thank you once again for joining Bilibili's Third Quarter 2023 Financial Results and Business Update Conference Call today. If you have any further questions, please contact Juliet Yang, Bilibili's Executive IR Director, or Piacante Financial Communications. Contact information for IR in both China and the U.S. can be found on today's press release. Thank you, and have a great day.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
