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Bilibili Inc. (NASDAQ:BILI)
Q2 2018 Earnings Conference Call
August 27, 2018, 9:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Bilibili 2018 second quarter earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Juliet Yang, Senior Director of Investor Relations. Please go ahead.

Juliet Yang -- Senior Director of Investor Relations 

Thank you, Operator. Please note the discussion today will contain forward-looking statements relating to future performances of the company and are intended to qualify for safe harbor from liability, as established by the US Private Security Litigation Reform Act. Such statements are not guarantees of future performances and are subject to certain risks and uncertainties, assumptions, and other factors. Some of those risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release and this discussion.

A general discussion of the risk factors that could affect Bilibili's business and financial results is included in certain filings of the company with the Securities and Exchange Commission. The company does not undertake any obligation to update this forward-looking information, except as required by law.

During today's call, management will also discuss certain non-GAAP financial measures for comparison purpose only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the 2018 second quarter financial results news release 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 Bilibili Investor Relations' website at ir.bilibili.com.

Joining us today on the call from Bilibili's senior management are Mr. Rui Chen, Chairman of the Board and Chief Executive Officer, Miss Ni Li, Vice Chairwoman of the Board and Chief Operating Officer, and Mr. Xin Fan, Chief Financial Officer.

And now, I will turn the call over to Mr. Fan, who will lead the prepared remarks on behalf of Mr. Chen.

Xin Fan -- Chief Financial Officer

Thank you, Juliet. Thank you, everyone, for participating in today's second quarter earnings call. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. We are proud to announce another solid quarter with strong topline growth and continued user expansion.

Total revenues for the second quarter reached ¥1 billion, representing an increase of 76% year over year. Each of our co-businesses contributed to those gains, with growth across our games, advertising, and live broadcasting and the value-added services segments.

The key to our success is active growth of our community. Our average monthly active users grow by 30% year over year, or 7.6 million quarter over quarter, reaching 85 million in the second quarter. Mobile MAUs grow even faster, increasing 39% year over year to 71 million. The strong growth momentum trend in the second quarter continued as we entered the summer, where we achieved record-high MAU of 98 million in July, beyond our expectations.

While we do expect to see some [inaudible] impact to our new user acquisitions in August based on our app downloads being temporarily suspended from certain app stores in China from July 26th to August 25th, our overall user engagement and user retention rates remained high. We are in the process of implementing better content monitoring, including a solo self-inspection and increasing the number of our content audit personnel.

We will continue to work closely with relevant government authorities on an ongoing basis to improve the management and operations of our business. With our app being fully restored in all app stores on August 25th, we are actively exploring ways to attract new users and we are confident in our ability to resume our user growth and momentum going forward.

Content remains the cornerstone of our business. We continue to attract and engage users with a variety of content in a broad area of categories -- entertainment, lifestyle, games, anime, and technology were the top five most popular content categories during the second quarter. Our users on average spend 75 minutes daily on Bilibili, excluding time spent on Bilibili mobile games.

Our vast pool of talented content creators continue to be the driving force in video content creation. During the second quarter, 89% of our viewed videos came from professional user-generated video or PUGV. Beginning this year, we initiated a number of programs to provide better, more layered support for our content creators.

That typically is totaling cash incentives and [inaudible] services to new, mid, and top content creators. This initiative is designed to further expand our cycle of highly skilled content creators, while simultaneously supporting our content pool operators. It encourages them to stretch the boundary of their imaginations.

Furthermore, to better serve mobile users, which account for 84% of our total MAU, we introduced new mobile-friendly functions, such as mobile content submission as well as full adoption for content, not just in a vertical form. These efforts yielded a number of year over year gains in the second quarter, including a 91% increase in the number of average monthly active content creators, a 131% increase in their content submissions, and a 117% increase in the number of content creators with over 10,000 fans.

In addition to PUGV, we are strengthening our content offerings by bringing high-quality licensed content to our community, primarily in anime and in documentary. Our business model enables us to not be solely reliant on licensed content to attract users, but rather to use it as an addition to enhance our content ecosystem and monetization capabilities. Notably, our self-produced food documentary series, [inaudible], was an instant success after its release in June, generating over 36 million views.

Other licensed content, such as anime and drama are also being well-received by our users and have become the primary driving force of our premium membership program. As of the end of June, we had over 2 million subscribers to our premium membership services. This model is working. We will look to bring a number of other high-quality content to our community in the coming quarter.

We are also expanding our [inaudible] in the e-sports area. As the third-most popular content vertical on our platform, high-quality gaming content, particularly e-sports related content is attracting more and more users. At the end of 2017, we formed our own e-sports club called Bilibili Gaming, our BLG, along with our first team, which holds one of the 14 spots in Tencent's League of Legends Pro League, or LPL. We also own the own the livestreaming rights to all LPL matches.

In the first half of 2018, we had accumulated over 800 million page views for all LPL-related livestreaming. We have also formed a PlayerUnknown's Battlegrounds team and a [inaudible] team with the goal of providing more streaming games to our users and reinforcing our leading position as the principal game content creator in China.

Turning to the second pillar of our business, community, over the years, we have encouraged and engaged community involvement. This is one of our most distinguishing attributes, setting us apart from other video platforms. We continue to see a growing trend of engagement and stable retention rates as we improve our AI and big data-powered recommendation efficiency. Social functions such as Bilibili Moments enable users to engage and interact with their friends and favorite content creators in a much easier and dramatic way.

In the second quarter, our users on average generated over 310 million daily video views and 640 million monthly interactions, such as comments, likes, Bilibili moment posts. The number of official members who pass our [inaudible] continues to grow, reaching 38 million in the second quarter, representing a 44% increase year over year. We see an 80% 12-month retention rate.

Our official members are even more loyal and engaged than our non-official members, leveraging our strategic initiative engaging content and vibrant community. We are confident in our ability to attract and to retain more users.

With that overview, I would like to take a few moments to review operations within each of our co-businesses. Revenues for our mobile games grew 31% year over year to ¥791 million, led primarily by the rampant popularity of Fate/Grand Order or FGO and Azura Lane. FGO's growth continues to be stable and we are excited to celebrate the game's second anniversary this September, followed by major content updates planned for November. We have also successfully renewed the exclusive license agreement for FGO with Aniplex so that we can continue to provide more exciting content to all of our players.

Turning to our pipeline of new games, on the exclusive licensed game front, besides some of the games we have previously discussed, such as BanG Dream, A3!, and [inaudible], we are delighted to announce that we are bringing two more highly rated app games to our users, Princess Connect Re:Dive, a [inaudible] RPG, and Magia Record, an exciting RPG based on the well-known IP. Given each of these games' success in Japan, we are confident they will have winning performance in China as well.

In addition, we will exclusively publish the [inaudible], a high-quality domestic mobile game based on a popular anime and jointly publish The Legend of Heroes: Trails of Steel, a classic IP-based RPG. On the jointly operated game front, we look forward to bring a number of highly anticipated app games to market, including [inaudible]. We are also pleased to announce we will soon be rolling out [inaudible], a domestic [inaudible] in coming months.

Looking at our advertising revenues, these increased by 132% to ¥96 million or USD $50 million year over year, supported by our attractive platform of immersive content, user interaction, and our highly coveted Generation Z user demographics. We expect to see continued growth in brand advertising as well as our [inaudible]. We are just starting to show early progress as we ramp up the number of clients and add low ratio.

In the second quarter, revenue from performance-based advertising contributed over one-third of our overall advertising revenue. We believe our advertising business is still in the relatively early stages of monetization and has great growth potential. Our live broadcasting and VAS revenues increased by 186% to ¥119 million or USD $18 million year over year, representing 12% of the total revenue. These offerings are paramount to support continued increase in the number of paying users.

As I mentioned before, during the second quarter, our growth focus on our primary membership program, our average monthly paying users reached 3 million, a 177% increase year over year. This positive trend continued to be encouraging, demonstrating our hidden monetization potential. As the year progresses, we plan to roll out more premium content and further improve the user experience for our growing number of paying users.

Quality and community remains at our core. Diversification will be among our chief initiatives to further grow our content and reach as many users as possible with a variety of interests. It is in these ways we believe we can further strengthen our monetization capacities while continuing to grow our business and add value to our robust community of users, content creators, partners, and investors.

This concludes Mr. Chen's comments. I will now provide a brief overview of our second quarter 2018 financial results.

During the second quarter, we continued to see robust growth in all three of our premium business lines. Our total net revenue increased by 76% to ¥1 billion or USD $155 million year over year. As we ramp up our monetization efforts, we are delighted to see more diversified revenue contribution for advertising and live broadcasting as value-added services, which account for 21% of our total revenue in the second quarter of 2018, compared with 14% from the same period of last year.

Total revenues increased by 74% to ¥767 million or USD $170 million from the same period of last year. Revenue sharing cost, a primary component of total revenues was ¥470 million or USD $63 million, representing an 84% increase year over year. Gross profit increased by 82% to ¥251 million or USD $338 million from the same period of last year. Total operating expenses increased by 88% to ¥348 million or USD $54 million from the same period of last year.

It's important to note that second and third quarters are our peak user acquisition times. This seasonalities include increased spending on selling and marketing. With that in mind, selling and marketing expenses were ¥128 million or USD $19 million, representing a 146% increase year over year. This increase was primarily attributable to the increased channel and marketing expense associated with our app, promotional expense for our mobile games, and then increase in selling and marketing personnel.

G&A expenses were ¥98 million or USD $15 million, representing a 30% increase year over year. R&D expenses were ¥132 million or USD $20 million, representing a 108% increase year over year. This increase was primarily due to increased headcount in engineers, reflecting our continuous investment in improving our production efficiency.

Loss from operations was ¥107 million or USD $16 million, compared with a loss of ¥43 million in the same period of last year. Income tax expense was flat year over year at ¥2 million or USD $400,000. Net loss totaled ¥70 million or USD $11 million for the second quarter of 2018, compared with ¥50 million in the same period of last year.

Adjusted net loss was mainly exclusive share-based compensation expenses and amortization expense related to intangible assets acquired through business acquisition was ¥20 million or USD $3 million for ¥40 million in the prior year period. Basic and diluted loss per share was ¥0.26. Non-GAAP basic and diluted loss per share was ¥0.07. As of the end of second quarter, we had cash and cash equivalents as well as time deposits of ¥3.6 billion or USD $548 million, compared with ¥755 million as of December 31, 2017.

As we look forward, our financial goals are to continue improving our monetization efficiency while further growing our business. We are currently projecting net revenues for the third quarter to be between ¥1 billion and ¥1.04 billion.

Thank you for your attention. We would like to now open the call to your questions. Operator, please go ahead.

Questions and Answers:

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press *1 on your telephone and wait for your name to be announced. If you wish to cancel the request, please press the # key. For the benefit of all participants on today's call, if you wish to ask a question to management in Chinese, please immediately repeat your question in English.

Our first question comes from the line of Mr. Alex Yao from JP Morgan. Your line is open.

Alex Yao -- J.P. Morgan -- Analyst

So, I have two questions. Number one is how to think about the user growth outlook for second half, considering you guys did a pretty good job in terms of user growth in July, but then also there is a recent suspension for app downloads in domestic and Android app store.

Then the second question is about the new game launch time table. You talked about a lot of new game developments in the prepared remarks. How do you think about the time table for new game launches, given the new game monetization approval has been suspended in China for five months already? Thank you.

Rui Chen -- Chairman of the Board and Chief Executive Officer

 [Through translator] Okay. Let me just translate the first part. Mr. Chen says that in his view, in the second half, the user growth trend looks very positive. That can be reflected in our Q2 MAU result, as well as our July performance, where we achieved 98 million MAUs in July. That is driven by our improved content quality and our user experience and a strong demand from our users.

Okay. So, the temporary suspension of our app download will have a little impact on our August new user acquisition, but it won't affect the overall trend of our Q3 and the overall second half user trend. So, in July, given that we are short for five days due to the temporary suspension, we still achieved 98 million MAUs. That's a very, very good result and beyond our expectations.

So, our app download has been fully restored on August 25th in all app stores in China. We are actively exploring ways and activities to capture the last wave of the summer vacation traffic and we think it's working quite well.

Okay. We forecast the August MAU will definitely be higher than the June MAU and the overall average monthly active user in Q3 will be over 90 million.

So, from our previous data, normally Q4 will be slower than Q3, but because of the temporary suspension in the summer and other new user acquisition strategies that we're undertaking, we think our Q4 MAU should be equal or even larger than Q3 MAUs.

So, as for the licensing permit situation Alex mentioned, we believe that is an industrywide temporary problem we are facing. We believe it's just a short-term delay.

Although the temporary suspension has some certain impact to the whole industry regarding the second half game launch schedule, we believe there's still a huge pent up demand from the Chinese gamers. We are forecasting that once the issue is resolved, there will be increasing demand for new games.

So, relating to the pipeline that we discussed during the script, those pipelines are the highest quality titles that we select from over thousands of games. We choose the best performing ones. We believe all those games should perform quite well in China. It's for all of the imported and domestic games, especially for the Japanese games that we're going to license, their performance in Japan market will be a strong [inaudible] for their performance in China.

So, during the waiting period, we are actively preparing tons of solutions to provide new games. For example, we are going to bring exclusively licensed game [inaudible], an ACG game that's already being permitted in coming months to our users. Including what Alex just mentioned about the growing channel, we're also actively preparing for that.

Actually, from earlier this year, we have been preparing all of this approval process. We have four games that have already completed all the pre-approval process, just waiting for the permit. That includes BanG Dream and [inaudible].

That concludes Mr. Chen's comment.

Xin Fan -- Chief Financial Officer

Let me explain about the user acquisition cost and the sell and marketing expense trend. Overall, we will spend more in the third and fourth quarter. That's mainly because it's usually the peak time for us to acquire new users in summer. Especially in Q3, we will spend more to catch up the new user acquisition momentum after our app has been resumed in all of the app stores. We will also organize some offline anime events, such as Bilibili World and attend a lot of very hot anime events offline. We will also prepare for the second anniversary celebration of FGO this September.

We estimate that we will spend on average about 15% of our total revenues on selling and marketing in the second half of this year and more budget will be shifted into Q3 in order to make sure our strategy can work.

Another component of our sell and marketing are the [inaudible] cost for our advertising business. That kind of cost could well be increasing with our advertising. So, that will be the trend for sell and marketing for the second half of this year.

Juliet Yang -- Senior Director of Investor Relations 

Operator, next question, please.

Operator

Thank you, Ma'am. Our next question comes from the line of Marcus Yang from Macquarie. Your line is open, sir.

Marcus Yang -- Macquarie Group -- Analyst

Thanks management for taking my questions. Just a follow-up on the app removal event, can you quantify the impact from this app removal event? The revenue guidance now suggests 37% to 40% year on year growth. How should it look like without this event? And maybe also in a cost and expense perspective, I understand that you may add more staff for auditing, for instance. That's my first question.

I guess my second question is with regard to your advertising business. Last time, I recall that you are preparing to increase your ad loads in [inaudible]. Has that started to contribute from the second quarter? Any updates on that progress would be appreciated. Thank you.

Juliet Yang -- Senior Director of Investor Relations 

Marcus, do you mind translating that into Chinese?

Marcus Yang -- Macquarie Group -- Analyst

Sure. [Translates question into Chinese].

Rui Chen -- Chairman of the Board and Chief Executive Officer

 [Through translator] So, overall, there will be certain impact for the new user acquisition in August related to the temporary app removal, but we think the overall revenue growth trend, flow of user growth trend will not be impacted by this temporary removal.

During the period of suspension, we have contact through our [inaudible] process. The doubling auditing team plan was not just simply to deal with this suspension, but it's actually related to our actual business involvement. Our new content submission is increasing very rapidly and we were going to increase the headcount of our auditing team. We're just expediting this process.

Xin Fan -- Chief Financial Officer

Just to add two points. One, we will double our content auditing team members, our content audit staff. So, basically, we estimate that the impact will be around ¥5 million in the second half of this year. As we mentioned before, we will spend more on the sell and marketing in September in order to catch up to user acquisition momentum. I think Mr. Chen can add more color on the advertising business.

Rui Chen -- Chairman of the Board and Chief Executive Officer

 [Through translator] Our advertising revenue growth momentum is very positive. As has been shown on our Q2 report, the performance-based advertising, which was just launched early this year is already contributing over one-third of our advertising revenue.

So, continuing with the performance-based advertising, we have launched two large-scale new agency recruiting conference at the end of March and the beginning of June. That helps us to recruit and increase the number of advertising agencies who are representing Bilibili. Actually, in Q2, the number of advertising agencies grew over 100% quarter over quarter.

This growth is not limited to the number of growth but we're also expanding our coverage in multiple industries and that is also helping our conversion into revenue growth. We're also optimizing our [inaudible] and our strategy to improve the click through rate.

As you may know, to increase the performance-based advertising revenue, there are several matrix, the growth of number of advertising agencies and the quality of advertising agencies as well as the algorithm and recommendation policy as well as the app mode. What we are doing in improving in Q2 was mainly focused on increasing the number of advertising agency and the quality of advertising agency and improve our operation and big data capabilities, not so much on increasing of app load.

On the brand advertising front, we're also expanding our customer base and improving our brand influence in the industry. We think we have improved our overall strategic planning/marketing as well as integrated marketing capabilities for brand advertisers in the second quarter.

Operator

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

Juliet Yang -- Senior Director of Investor Relations 

Thank you, Operator. Thank you once again for joining us today. If you have further questions, please contact myself, Juliet Yang, or [inaudible]. Our contact information for IR in both China and the US can be found on today's press release. Have a great day.

Duration: 45 minutes

Call participants:

Juliet Yang -- Senior Director of Investor Relations 

Rui Chen -- Chairman of the Board and Chief Executive Officer

Ni Li -- Vice Chairwoman of the Board and Chief Operating Officer

Xin Fan -- Chief Financial Officer

Alex Yao -- J.P. Morgan -- Analyst

Marcus Yang -- Macquarie Group -- Analyst

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