The 2022 perspective that startups should cut their losses and chart a clearer path to profitability does not only apply to upstart tech companies. After a multiyear spending binge, larger technology companies are also pulling back on costs.
For some major tech concerns, the cuts have come in the form of explicit layoffs and staffing reductions created by not backfilling departing employees, while other tech shops are cutting costs, including perks and related employment-enticement efforts. But while some major technology companies are trimming spending to bolster profitability, others remain miles away from making money.
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Such is the case of Bilibili, a Chinese online video service with a social component. Today, shares of Bilibili are performing strongly, up sharply after the company reported better-than-anticipated Q3 earnings results. Naturally on the hunt for some good news amid a year of bearish headlines, compressing multiples and chaos, we took a look.
What we found was a business farther from profitability than we expected. The Chinese company, worth around $5 billion today per financial databases including Yahoo Finance, has done a fantastic job capturing a growing audience in its home market and keeping those netizens engaged. But when it comes to building a more profitable company — its stated goal, as we’ll examine shortly — it has much work ahead of it.
That shares of Bilibili are up more than 20% today is good news, albeit in a limited sense. The company’s shares trading on U.S. exchanges crested the $150 per-share threshold in booming 2021. They closed yesterday at $12.59 per share, before today’s uptick of nearly $3 per share.
The work ahead of Bilibili to reach profitability — measured in GAAP terms, mind — reminds us of other tech companies that saw their values skyrocket and losses stick during the 2021 era. Some of those concerns, like Twilio, are still growing quickly, and at scale, but their losses appear to have set a weight around their shoulders, compressing their total value.
Put more simply, Bilibili’s unprofitability tells us that unwinding 2021’s excesses will take years, in some cases. For already-public tech companies, this can mean a painful march to the black. For startups, it serves more as a warning about what happens when growth fails to generate sufficient operating leverage.
Let’s chat about Bilibili and Twilio today to get a numerical check for what we’re talking about.
The profitability gap
Bilibili went public back in 2018. At the time, I wrote that it had “quickly expanding revenues (nearly 5x in its last full year), and comparatively small losses ($28.2 million, before more ‘Accretions to preferred shares redemption value.’)” So what did Bilibili turn in recently, years down the line as a public company?
Here’s a digest of its Q3 2022 performance:
- Usage: Bilibili reported 90 million daily active users in Q3, up 25% from 72 million in the year-ago period, and up from 84 million in the second quarter of this year; monthly active users also grew 25% year on year to 333 million. Average daily use time reached a record high in the quarter of 96 minutes.
- Revenue: $814.5 million, up 11% on a year-over-year basis.
- Profitability: Gross profit in the quarter of $148.2 million, up 4% compared to its year-ago result. In Q3 2022, Bilibili recorded operating losses of $259.9 million and a net loss of $241.2 million. Bilibili’s operating loss was a 5% improvement, while the net loss figure was down 37% from year-ago results.
You can see the issue above by tracking just three numbers: 25%, 11%, 4%. Usage scaled more rapidly than revenue, which in turn grew more quickly in percentage terms than profitability. With a cost basis (operating costs of $408.1 million) representing a multiple of its gross profit in Q3, it’s not hard to see why the company currently loses money.
Still, Bilibili is being clear with investors about its goals. Per its CEO in its earnings release, it “took steps to shore-up [its] business foundation and narrow [its] losses” in the third quarter, as it puts “profitability first.” What is the plan there? To take “additional initiatives to accelerate [its] monetization and implement cost containment measures including rationalizing headcount planning and cutting sales and marketing expenses, with [its] goal set to improve [its] margins and narrow [its] losses,” the company said.
Bilibili is not alone in its quest. Spinning the globe, swapping consumers for business customers and video sharing for backend software APIs, there are some similarities between the Chinese company and Twilio that have us chewing our cud.
Twilio, recall, became known for selling its software service on an on-demand basis via an API, filling a Salesforce-like place for its business model as the CRM giant once did for SaaS. It’s a big, important tech company, in other words.
Despite reaching a share price above the $435 mark back in early 2021 (sound familiar?), Twilio was worth around $47 per share this morning. Let’s repeat our earnings digest with Twilio and then chat through our thoughts before Twilio’s PR team rings us up annoyed that we mentioned them in an article with a company from a different technology subsector:
- Usage: 280,000 active customer accounts, up from 250,000 in the year-ago period.
- Revenue: $983.0 million, up 33% compared to the year-ago period; the company reported Q2 2022 revenue of $943.4 million for reference. (Organic growth was a bit slower.)
- Profitability: Gross profit of $462.1 million, up 26.7% compared to year-ago results, an operating loss of $457.0 million (nearly double its year-ago operating loss), and a net loss of $482.3 million (more than double its year-ago net loss).
Now Twilio would argue that we’re not being entirely fair and that its adjusted, non-GAAP operating income is the better way to go about calculating things. This is a metric that strips out a bit more than the usual non-GAAP operating profit metrics that we see, including some Twilio-specific figures. What shakes out is that if you want to let Twilio yank a host of expenses and hew to its “non-GAAP loss from operations excluding the noncash accrual for the adoption of a new sabbatical program,” it still lost $6 million in the quarter.
Twilio has a host of incredibly attractive metrics to its name, including a 122% net retention figure that, at scale, is impressive. The company has been a business model pioneer, and a huge success when it comes to growing its product mix. It’s even managed to convert acquisitions into faster growth. Yet it’s worth a sliver of its former value.
Why? I think, similar to Bilibili, it is just too unprofitable for the present investing climate. That’s the profitability gap that formed during the go-go final years of the zero interest rate policy (ZIRP, as the cool kids say) period that wrapped up in late 2021. It’s the same chasm that startups in the later stages of their private life are facing.
All that work now allow us to ask a question: If hugely popular consumer (Bilibili) and rapidly scaling enterprise (Twilio) tech companies are enduring a headache or two as investors molt from growth-oriented to more profit-focused beasts, how much harder will it be for startups to manage a similar evolution toward efficient operation? I think rather a lot.
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