Good day, and welcome to the Bilibili 2019 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.
Thank you, operator. Please note the discussion today will contain forward looking statements relating to the company's future performances and are intended to qualify to serve safe harbor from liability as established by the U. S. Private Securities 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 these 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 the certain filing 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 2019 Q2 financial results news release issued earlier today.
As a reminder, this conference call 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 Senior Management are Mr. Ray 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.
Thank you, Julia, and thank you everyone for participating in today's earnings call. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. I'm happy to report that on June 26, 2019, we celebrated Bilibili's 10 year anniversary. Over the past decade, we have grown from a small personal side to a leading online entertainment platform, where over 100,000,000 active users come together to find and share their interest.
We attribute our success to our constant focus on PUGV console system and the community environment, which formed the foundation for continued high quality growth. Looking at the next 10 years, we are charged we are accelerating this growth. We plan to achieve this in 2 ways, more proactive user growth and improved commercialization efforts. We are proud to deliver another remarkable period of growth in both our user base and top line. Importantly, our 2nd quarter results demonstrate the type of high quality user growth we are aiming to achieve.
We added 9,000,000 MAUs to our community on a substantial quarter basis. This is our highest net add since 2017, bringing our total MAUs to 110,400,000, increasing 30% year on year. We think this good. Our mobile MAUs once again grow faster than our MAUs and were up 35% year on year, reaching 96 point 2 million. High quality user growth has always been a key focus for Bilibili.
Beyond the accelerated growth, we are continuously improving the activeness and engagement for our user community. In the 2nd quarter, our total DAUs outpaced our MAU growth rate and grew by 41% year over year, reaching a record 33,200,000. Our users are also spending more time on our platform, average 78,000,000 per day, up 3,000,000 compared to the same period last year. As we move into our peak summer season, we are seeing this healthy trend continue. Therefore, we raised our MAU target from the range of $110,000,000 to $120,000,000 to the range of $120,000,000 to $130,000,000 for this year and set up a new target of reaching 220,000,000 MAUs by 2021.
The fast pace for our user growth paired with the quality of these users is fueling our top line expansion. We continue to convert more visitors to paid users by offering premium content and the unique community experience. In Q2, our average month paying users more than doubled compared with the same period last year, reaching over 6,300,000. Revenue per MAU increased by 15%, non GAAP revenue per MAU increased by 102% year over year. As a result, our revenue reached RMB1.54 billion, beating the high end of our previous guidance period at RMB1.49 billion.
What's driving this remarkable growth of both user numbers and revenue comes back to the 3 pillars of our business: content, community and commercialization. I'd like to touch on each of these areas, provide some insight into our growth strategy and then talk about the performance within these metrics for the Q2. First and foremost, content. Content is the paramount of attracting users at a rapid pace and keeping them engaged. We are strategically positioned on a less competitive track when we enjoyed growing of high quality content through our PUGV ecosystem at a relatively low cost.
Leveraging Bilibili's high traffic platform and the unique community environment, we continue to attract talented content creators and grow our content offering. During the Q2, we had an average of 854,000 active content creators uploading 2,400,000 videos monthly. This represents the year over year increase of 100 and 44% and 107%, respectively. To better support and motivate our content creators, we are continuously improving our product, tools and services to make content creation easier. Our mobile content submission function allow our content creators to create content anytime, anywhere.
Our newly launched interactive video tools creates a brand new phone way for storytelling that is very easy to use. We are also actively promoting video blog as one of the new content formats to express creative ideas. So far, this is gaining great traction with both content creators and users. In addition, our cash incentive program continues to encourage over 160,000 content creators by providing a monetary reward for their original and high quality creations. As a supplement to our vast POGV content library, we continue to expand our OGV offerings by acquiring premier content and important IP that can be monetized across the entertainment spectrum.
As an example of this, at the end of June, we acquired exclusive animation adaption rights to the award winning sci fi, the 3 body pop up, one of the most renowned Saifie IPs in China. We are thrilled to bring this exciting tale to life in a variety of entertainment forms, including animation, mobile games, comics and audio drama. Through this adoption plan, we aim to maximize the reach of the story and the return on our investment. In the self producing and the co producing department, we are delighted to see our self produced and IP owned titles gaining traction. Our signature food documentary series, The Story of Triumph, welcomed its 2nd season in July and was March hit.
Our co produced talk show, informal talk and self produced animal reality show, Animal Hospital was also well received by our users. Notably, the content verticals we choose enjoy a relatively lower production cost, while attracting a broader population of users. They can also yield considerable revenue through advertising and various commercial opportunities. Secondly, let's look at our community. As we welcome more members in our community, we continue to see deep levels of engagement and interactions among our users.
In the Q2, we have 586,000,000 daily views, up 84% year on year. On the engagement front, our users generated 1,800,000,000 interactions monthly through bullet chat, comments, likes and Bilibili Moments posts, up 180% compared with the same period last year. In addition to engagement levels, the number of official members and their retention rates are also important data points that represent the quality of our user growth. At the end of Q2, we had 54,000,000 official members who passed our 100 classroom events, up 40% year over year. Their 12 months retention rate remains at about 80%.
These official members tend to be the most active and engage with both our content and each other. They are also more willing to pay for premium content. We will continue to improve our product and content offering to convert more official members to paying users. Last but not least, commercialization. Our J and Z content user base has a much stronger willingness to pay for our entertainment services than any other generation.
According to the latest Quest Mobile report, around 60% to 80% of the paying users will pay for mobile games, live broadcasting and the online videos in China are J and V. Our business model is designed to address entertainment and the interaction needs of this important population. Beside traffic, we can monetize our user's entertainment preference through mobile games, live broadcasting, our trading and other value added services. As we ramp our monetization efforts, we believe our user growth will fuel and even higher top line growth. Now, let's first take a look at our game business.
Building our massive base of game lovers and highly engaged community, we have become one of the largest game community in China covering PC, mobile, console and indie games. We continue to add more games to our portfolio and improve our distribution efficiency. In the Q2 of 2019, revenues from our mobile games rose 16% year over year to RMB920 1,000,000, led primarily by Facebook order of FGO and the blockbuster ACGC mobile game, Arknaz, which we released in May. Being the exclusive jointly operator of Arknights on Android channels in China, we helped us attract over 3,000,000 core ACG users to the game. The success of Akknight also shown the market's increasing demand for ACG games.
More importantly, it is a strong testimony to Bilibili's robust distribution power for high quality guests. On the exclusively licensed game front, we have released a number of new titles in recent months. These include Japanese music RPG Band Dreams in May and exciting domestic RPG Final Gear in July and a highly rated female romance RPG Untouchable Pounds in August. All three titles have gained great traction among different group of gamers. Final Gear and Untouchable Pawns ranked the number 1 on top 3 games and top paid download charts on China's iOS app store shortly after their release, respectively.
Looking at our content updates and new game pipeline, we are excited to celebrating FGO's 3 year anniversary beginning at the end of August with a major company update and a company in promotion activities. We also have several titles that have acquired approvals and are scheduled to release in the coming months. This includes exclusively licensed alternative growth and jointly operated web game, The Legend of Heroes, and Tencent highly anticipated ACG mobile game, Fox Sports Matchmaker, Huya Jia Hong Yao. In addition, we look forward to expanding our game distribution outside the Mainland China. We plan to release a series of ACG titles in select Asian markets, including Furious Yama, Final Gear, GO!
Cafe Gun 2 and Dark Bone. Looking at our live broadcasting and the Leer S live, revenues increased by 175% year over year to RMB326 1,000,000 in the Q2 of 2019, with contribution from both our live broadcasting business and premium membership. Currently, games, VTuber, audio and ACG related talent shows are the top categories gaining traffic and converting visitors to paying users. We are also actively expanding our e sports related live broadcasting content offering by introducing top e sports matches, including LPL, OWL, KAZEPL, MTI. This premium esports content attracting tens of millions of viewers and converting our deep pool of game lovers to land broadcasting users.
Our premium membership program gives paying users access to advanced or exclusive content and continues to bring in new subscriptions. By the end of June, we had recorded 5,300,000 valid premium members, up 148% year on year. On advertising business, we are beginning to see positive signs despite a challenging macroeconomic environment. Revenue from advertising increased 75% year over year to RMB168 1,000,000 in the Q2 of 2019. We are also improving our hiring efficiencies, which helps increase our unit price.
The top 3 industry verticals were brand advertising in the Q2, were skincare and cosmetics, food and beverage, and e commerce. And the top 3 verticals for performance based advertising were games, education and e commerce. And finally, our e commerce and other revenue stream also continued to grow, reaching RMB124 1,000,000 in the 2nd quarter, an increase of 489 percent from the same period 2018, largely due to our expanding platform for the sales. We have made several investments to scale our business over time, expand our revenue streams. Our majority stake in Chaotian extend our reaching offline entertainment and added a new revenue stream to our commercialization efforts.
We can now capitalize Chaozhou's expertise in offline event planning, as well as talented acquisition and management. Similar to our investment in NetEase Comics and the MA RTP, we believe these investments have great synergies with our existing business and will further expand our commercialization capabilities. Our partnership with other market leaders such as Tencent and Alibaba are also progressing and adding our growth. We continue to expand domestic animation copyright and collaborate on some of the A list titles, including New Season of Chunxi Gaoshou. On the game front, we now jointly operate a number of Tencent highly rated mobile games, including Game Monsoon, Street Hunter and Ace Force Warrior.
With more games in the pipeline, we are also working closely with Tencent on the e sports front. We completed the game and owned the live broadcasting rights to Tencent's premium e sports league, LPL and KPL. On the Alibaba partnership front, we have expanded our partnership with new collaboration plans with Pmall in addition to Taobao. We are testing a number of innovative functions to better adapt for e commerce platform. We expect this integrity to continue to help to expand our operating services and grow our paying user base.
As we move forward, we are focused on continued growth. User growth is at all time high and we want to build on this momentum. Our strategy calls for more proactive user acquisition as well as improved capitalization capability. While we invest in the future, we will also focus on the quality of users by attending to retention rates and ROI of our packaging efforts. We are confident about our user growth plan and believe it will form the foundation for our sustainable growth and future success.
This will conclude Mr. Chen's remarks. I will now provide a brief overview of our financial results for the Q2 of 2019. Our total net revenue increased by 50% year over year to RMB1.5 billion. Our NANDYAN revenue accounted for 40% of total revenue in the Q2, up from 23% in the Q2 of last year.
We are pleased with the progress of our commercialization strategy and the average number of monthly paying users more than doubled year over year in the Q2 of 2019, reaching 6,300,000. Cost of revenue increased by 66% to RMB1.3 billion compared to RMB776 1,000,000 in the same period of 2018. Revenue sharing costs, a key component of cost of revenues, was RMB573 1,000,000 representing an increase of 37% from the same period in 2018. Gross profit was relatively flat at RMB252 1,000,000 for 20 19 Q2 and RMB251 1,000,000 for the comparable period. Our gross profit margin was 16.4% compared with 24.4% for the comparable period and improved from 13.8% for the Q1 this year.
This sequential margin improvement was mainly thanks to the increased revenue contribution from our high margin game business. Total operating expenses increased to RMB597 1,000,000 representing an increase of 67% for the same period of 2018. Selling and marketing expenses were RMB240 1,000,000, representing an 88% increase year over year. This increase was primarily attributable to the increased channel and marketing expenses associated with our APP and the breadth, as well as promotional expense for our mobile games and increasing headcount in sales and marketing personnel as well as the fulfillment costs for our e commerce related products. R and D expenses were RMB260 1,000,000, representing a 64% increase year over year.
The increase was primarily due to increased headcount in R and D personnel and other increased research and development expenses for online games, APP development and our virtual idol business. G and A expenses were RMB141 1,000,000, representing a 44% year over year. The increase was primarily due to increased G and A personnel related expenses and increased amortization expense related to intangible assets acquired through business acquisitions, partially offset by a decrease in share based compensation expenses. Loss from operations was RMB345 1,000,000 compared with RMB107 1,000,000 in the same period of 2018. Net loss was RMB315 1,000,000 for the Q2 of 2019, compared with RMB17 1,000,000 in the same period of 2018.
Adjusted net loss, which is a non GAAP measure that excludes share based compensation expenses and amortization expenses related to the U. S. As well to the ratio was RMB256 1,000,000 compared to RMB19 1,000,000 in the period of 20 18. Basic and diluted net loss per share were RMB0.96. Adjusted basis of diluted net loss per share were RMB0.78.
As of June 30, 2019, the company had cash and cash equivalents, time deposits, as well as short term investments of RMB8 to 6,000,000,000. In April, we completed an offering of convertible senior notes during 2026 in aggregated principal amount of $500,000,000 and concurrent offering of approximately 14,200,000 ADS and 6.5 1,000,000 ADS from certain shareholders, the company received in combination of the notes and the share offerings totaled approximately $733,900,000 in net proceeds. Looking ahead, our financial goals are to further grow our business and improve our operating efficiency. With that in mind, we are currently projecting net revenues for the Q1 of 2019 to be between RMB1.74 billion and RMB1.77 billion. Thank you for your attention.
We would now like to open the call to your questions. Operator, please go ahead.
Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Hillman Chan from Citi. Please ask your question.
Excuse me, Hillman, we can't hear you. I'm sorry. Hillman, you are breaking up.
Thank you management for taking my question. Noting that the MAU growth accelerated in the quarter, could management share more on the user growth strategy? Why are we trying to accelerate the user growth right now in this quarter? And also, where are we acquiring the users from which particular channel and addressing which particular user demographics? And how we should think about it related marketing expense and the target for MAU by the end of this year and next year?
And then my second question is on live streaming. Could management share more on the strategy as to how we convert user from video viewers to live streaming and how we step up the help the users to step up their behavior going forward? Thank you very much.
Okay. So I'll take the first question. I'll discuss why we wanted to accelerate our user growth at this stage and how we're going to do it. And Sam will explain a little bit more on the cost side. So first of all, why we're doing so, because we have made substantial growth on our content ecosystem.
We have made breakthrough on both quality and quantity of our content. So first, for example, on the content side, we have seen substantial growth on the number of content you'll be submitted daily on our platform and our video views also improved substantially. How many users have participated in the interactions and how many searches per DAU per day, they have all grown substantially over the past few years. So secondly, we have expanded to new content categories without doing massive subsidy on the content or signing massive new content creators. For example, the new content submission in the vlog session increased 81% sequentially in Q2.
And on the mobile content submission side, on average in Q2, over about 47% of the content were submitted through mobile content submission function. And this ratio were even over 50% as we move into summer. So when we look at our blockbuster hit new titles, new videos emerging on our platform, we see a lot of new content creators and new videos emerging in lifestyle, entertainment and technology. Those are the relatively more general emerging content categories that become more and more popular on our So based on the events and depth of our content, we evaluated the overall content supply on our platform now can at least supply over or can support twice as much of our existing user base. So, second of all, also based on our internal data, as our content getting more getting more massive and our users increasing faster than ever, the retention level and engagement level of our community also improved.
So for example, when we went for IPO into late 2017, the 12 month retention rate of our official members, the member who take the community exam test, were about 80%. And when we look at the data right now, in Q2 2019, the one who joined us in Q2 2018, their 12 month retention rate were even above 80%. So the long term retention rate has been essential to the longevity and activeness of our community. And from this data, it's suggesting that users' long term satisfaction rate and to our community actually improved over time. 3rd of all is we have improved our monetization capabilities.
So for example, looking at the pain ratio, the number of users who paid in the first half who are also newly registered user actually improved 60% year on year. And that absolute number of paying user actually already surpassed the number of users who paid in 2017, who are also joined on 2017. So this supports our theory that we have improved our ability to monetize new users. And on our ability to monetize through non game business, our non game revenue per MAU actually improved 102% year on year in the second quarter. And the money we spent on user acquisition actually only improved increased 70% year on year, much lesser than revenue growth.
This means we are able to make much more money on the single new user compared to the money we spend on acquiring them. And another data that we can provide is the paying ratio for user who joined in 2017. Their 2018 paying ratio actually doubled compared to 2017. That means once the user are in our community, they tend to spend more over time. So that concludes 3 points.
One is we are able to attract a lot of high quality user and we are able to retain them. And most importantly, we can better monetize those new users as our monetization progresses. And we'd like to update our MAU target. We previously guided our MAU target for this year were 110,000,000 to 120,000,000. Now, we raised that target to reach RMB120,000,000 to RMB130,000,000 by end of this year.
We also like to update our 3 year MAU target from 100 and 50,000,000 to 220,000,000 by 2021. More importantly, to achieve this target, we did not just simply wanted to increase the number of users. We also wanted to maintain the quality of the user and we can achieve that by leveraging the longevity, the power, the activeness of our content ecosystem. And on how we are able to how we achieve to that type of target is the same as we said in the and before. Bilibili's user growth are not purely just rely on buying topic or making subsidies to our content creators.
It's rely on our substantial and rich content ecosystem. We wanted to do constant optimization and upgrade on our content ecosystem, improve the engagement and active fitness of our community and improve our product design and upgrade on our branding, on our marketing efforts, also improve our channel user acquisition. I'm going to elaborate our strategy from 3 aspects. First is on the branding side. Over the past 10 years, we've barely promoted any promotion and marketing on Bilibili brand, although a lot of youngsters know Bilibili very well, but from a wider demographic age bracket or lower tier city there are still some of the users do not know Bilibili, do not know what Bilibili can do.
So in this starting from the second half of this year, we're going to upgrade our branding campaign and starting to do more branding awareness and promotions to those users who do not know Bilibili. This is one of the highest priority job in our to do
list.
2nd level is to optimize and improve on our product as well as our algorithms. In the past, we have been very focused on the long term retention of our users. And now we wanted to also focus on the retention rate of our new users. And this will definitely be very helpful on the user
growth.
And third is to improve our ability to acquire users from various channels. In the past, our investment in channel acquisitions actually is lower than industry average who are around our similar scale for the wholesale product. And in the future, we are going to improve our ability to acquire users from various online and offline channels. And above all else, we wanted to improve our conversion from our traffic to paying and increase revenue per MAU. And I think in the past, we have proven our ability to monetize our traffic.
And as our user continue to grow, we should be able to grow our top line as we expand our user base.
Okay. I will keep the answer short. As Chairman stated, we are at the right time to enter into this strategy. And there are 2 key words, all the spending will be controllable and measurable. We will have all the ROI for their spending.
Actually, as Chairman mentioned, we are not just to look at purely to acquire the new user through the marketing spending, but if we look at the marketing dollar we spend, we will make sure that that all the marketing dollar we spend will be collected through the growth of the top line. There are also 2 or 3 quarters delay. We should take time for our platform to monetize those user traffic. But based on all the metrics we mentioned during our call, as Chairman also mentioned that conversion from our visitors to the paid users are quite good and their spending behavior are exceeding our expectations. So we will take that very, very seriously.
And the second, if you look want to know some guidance about the marketing dollar spending, Actually, in Q3 last year, we spent about 18% of the total revenues for the selling marketing expenses and the 16% marketing expenses in Q4. We now guide that number in this year will be around 19% to 20% in Q3 and Q4. So, you can see that it's not significantly increase of the marketing dollar spending, but we are quite looking forward to very strong annual growth and the growth of the top line in next year.
So on your second question regarding our live broadcasting, over the past few quarters, we can see the content ecosystem of our live broadcasting is also thriving. And on the games front, we already have an edge in terms of game related video content and game related live broadcasting is actually helping us to even elevating that competitive advantage. You can see whenever we have when the market has new games that will stimulate the growth of content on our live broadcasting content platform. And also the popularity among esports is also starting to show positive effect on our platform. So new emerging content categories getting popularity on our video platform.
The narrowed live broadcasting content is also thriving. For example, lifestyle type of content, we are seeing as the law getting more and more popular, the lifestyle related live broadcasting has also gained attraction similar with the studying live broadcasting. Those are the emerging categories that we see on our live broadcasting platform. We used to say live broadcasting is a natural extension of our video platform and it's also a type of ability we have to acquire. And over the few past few quarters, we have proven that ability.
So in the past, we haven't sent big bucks to top host signing or big marketing campaigns. However, from the performance of our live broadcasting in the past few quarters, that also is a strong evidence that our live broadcasting is growing with our content ecosystem. And on the monetization front, we can also see a lot of highlights that mirrors or echoes with our video platform ecosystem. The uprising of VTuber live broadcasting is evidence to show our dominant position in the ACG industry. The number of VTuber host and number of viewers who watch VTuber content and number of users who pay for VTuber live broadcasting is increasing very fast.
And we can also see the paying ratio for VTuber is much higher compared to other regular entertainment categories. And we are confident that we are able to become the leading player in the V Tuber live broadcasting industry. So on Bilibili, there's a strong fan, host, emotional connection already established on our video platform and we can leverage the fan's connection on our live broadcasting platform. The Sa Shanghai function is actually a tool to monetize the fan economy. So to summarize, our the Bilibili live broadcasting advantages on the games front, we have equivalent or even stronger capabilities to continue to grow our game related live broadcasting content given our massive gamers' user base and game video content.
And on Bilibili, Bilibili's strongest ACT area, can also see some of the emerging new content categories and we can also monetize our emotional connections from host and fans.
Your next question comes from the line of Thomas Chong from Jefferies. Please ask your question.
Thanks management for taking my questions and congratulations on the strong user growth this quarter. I have a question about our live streaming and VAS. Given the fact that the revenue per MAU is growing very nicely, how should we think about the revenue contribution for live streaming and VAS going forward over the next couple of years? And should we consider it is more driven by revenue per MAU or paying ratio? Thank you.
Okay. Thomas, let me take your question. Currently, the live broadcasting and the VAS contribute about 20% of the total revenues. We foresee that number well going up in the short term period. But we also guided that our nongam revenues as a percentage of total revenue will ultimately contribute around 50% of the total revenues.
That includes advertising, live broadcasting and VAS and other revenues. So we're quite looking forward to that. And the growth driver for live broadcasting, again, is now mainly for their paying ratio as well as the total targeted growth of the MAU we converted through our total MAU to those LabCorp Citing business as well as our VAS business. Hope that can answer your question.
And that concludes the question and answer session. I would now like the conference back to the management for any additional or closing comments.
Thank you once again for joining us today. If you have any further questions, please contact myself, Julia Yang, Beliovis Senior IR Director or TPG Investor Relations. Our contact information for IR in both China and U. S. Can be found now in today's press release.
Have a great day.