Good day, and welcome to the Bilibili 2018 Third 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 for the safe harbor from liability as established by the U. S. Private Securities Litigation Reform Act. Such statements are not guarantees of future performance 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 in 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 take any obligation to update this forward looking statement 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 Q3 financial results news release issued earlier today.
As a reminder, this conference is being recorded. In addition, our investor presentation and a webcast replay of this conference call will be available on Bilibili Investor 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, Juliet, and thank you, everyone, for participating in today's Q3 call. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. The Q3 represents another period of healthy growth for our business. We continue to execute our strategy centered around content, community and commercialization.
Leveraging our high quality content, we are attracting a number of users to our platform. The user interaction between members help to create and solidify community, supporting a high level of user engagement and commercialization comes naturally through our understanding of each user's entertainment needs. In the 3rd quarter, our total net revenues were RMB1.08 billion, exceeding the high end of our previous guidance and representing 48% year over year growth. Meanwhile, our monthly average paying users continue to ramp reaching 3,500,000 demonstrating over 200% growth year over year. Over the quarter and in recent months, we have enhanced and expanded our content through a number of collaborations.
As announced in early October, foreign $0.10 increased equity investment totaling approximately $380,000,000 We deepened our partnership by entering a strategic collaboration. The agreement will enable us to leverage Tencent's primary content, particularly in licensing, co producing and investment in anime, as well as published Tencent's large portfolio of high quality mobile games. Going forward, we are open to forging relationship with more industry leaders to improve our content offering and monetization capabilities. Cultivating new content continue to integrate our global standard growing community in the Q3. Our average monthly active users grew by 25% year over year, reaching 93,000,000.
The number of mobile monthly active users grown even faster by 33% year over year, reached 18,000,000. Our co user group, official members who took 100 question exam once again outgrow our MAU at 45% year over year to 42,000,000. We continue to see deeper penetration in lower tier cities with a very balanced gender mix and the both general and ACG content are driving user growth. While our users are growing at a healthy pace, the amount of time spent and the level of user engagement continue to rise. Excluding time spent on mobile games, our users spend an average of 85 minutes daily on our platform in the Q3, up from 70 5 minutes in the previous quarter.
Users can enjoy hours of entertaining content covering a wide area of category of Bilibili. During the Q3, the top 5 most content verticals were entertainment, lifestyle, games, anime and the technology. Professional user generated videos or PUGVs remains the prime meaning for our video content creation. During the Q3, 89% of our viewed videos come from PUGVs. Our incentive program we initiated at the beginning of the year to support our growing pool of content creators are progressing well.
New product functions, such as mobile content submission, enable content creators to create content anywhere and anytime. During the Q3, we had on average 0.6000000 active content creators uploading 1 point 7,000,000 video monthly, represent 130% and 136% year over year growth, respectively. Besides PUGVs, our high quality licensed content further reinforce our leading content categories such as anime and documentary. Our premium licensed content not only provides users hours of high quality entertainment, but also help drive the remarkable growth for our primary membership program. For partnering with leading content creators like BBC and Discovery to producing titles like Tran and self produced documentary, What History Book Set.
Bilibili is now one of the largest producers and broadcasters of documentary in China. Additional content such as our first self produced variety show, Storyman 2, is also resonating well with many users. Being a vibrant community for young generation enable us to learn and identify what's trending for young minds, including which IP carries high potential and which entertainment forms will be the new frontier. With our investment in Zenix, we added considerable new content in virtual idol, including China's most popular virtual idol, Luo Tianyi, and we started to explore virtual YouTuber or VTuber business. We believe these initiatives will further enhance our extensive portfolio of industry leading license and the PUGV material.
Esports is another area that's gaining more of a spotlight with young generations. With our foresight into industry trends, we began investing in esports years ago. In addition to the previously announced Bilibili Gaming Esports Club and its participation in Tencent's League of Legends Pro League or LPL, we have added a permanent sport apprisers prestigious Overwatch League. Bilibili Hangzhou Spark Team will represent the city of Hangzhou during the 2019 Overwatch Championship. In addition, we are delighted to announce the launch of our 2nd mobile application, Bilibili Comic, earlier this month.
We believe this initiative will further complement our core user growing appetite for premium licensed ACG content and solidify our leading position in China ACG Industry. Technology remains the core entry for our business. We continue to increase our investment in research and development to drive product efficiency and improve our user experience. Our AI and big data power and capabilities as well as further design help connect our users' content over 35% of video views are now generated by our smart recommendation system, and over 40% of MAU visited our Bilibili Moments, a social function similar to Instagram allowing users to interact and engage with like minded friends in the community. Turning to the second pillar of our business, our dynamic community is more active and engaged than ever.
During the Q3, we saw remarkable participation levels with over 440,000,000 daily views and more than 1,100,000,000 monthly inductions through bullet charts, comments, likes, Bilibili Moments, which demonstrate increase of 120% and over 300% year over year, respectively. The high level of interaction is one of Bilibili's most distinguished features setting us apart from other video platforms and generating new content and forging strong bonds among community members. With that overview, I'd like to take a few moments to review our operations within each of our core business. Revenue from our mobile game grew 24% year over year to RMB744 1,000,000, led primarily by the contribution of FateGrand Order or FGO. FGO's performance continues to be stable, and we were delighted to celebrate the game's 2nd anniversary in September, followed by a serious contents update that we'll introduce in October.
We are also looking forward to reviewing a brand new Chapter 2 for FGO with major content update in Q1 next year. Additionally, we released a few new titles exclusively including Arc Order, a thrilling ACG themed RPG in September and some of the time in November. Our exciting ACG theme in RPG with a well known IP, which is starting to gain early momentum. On the jointly open operated game front, we published several high quality titles in the 3rd quarter. They are produced by leading game developers, including Ancient Nautja, Shangu Yexing Lu, Crossing Boy, Lingyin Daofu, all have been well received by our users.
In the Q4, we are happy to bring a number of highly anticipated games to market, including Naruto Online from Tencent and Night Falls: Survival from NetEase. In terms of new games, we have a number of additions on that in our pipeline. As we have previously discussed, some of the highly rated ACG that we are looking to bring to our users, including RPGs, Princess Connect, ReDive and Magina Record as well as Banjoins, Ace 3, all from well known Japanese game developers, such as Cygames and Annie Plaque. We also have exclusive publishing rights to the series Yama and PEN 2 jointly published The Legend of Heroes: Trail of Stars. Based on these games' successful IP or previously performance in Japan, we were optimistic that our community will receive them enthusiastically.
In addition, we are actively exploring international opportunities. And now our recent collaboration with GWE and our newly formed JV, we will not only be jointly developing mobile games, but also begin to test our international aspirations by bringing our content to Japan market. Turning to our advertising business, supported by our attractive platform of immersive content, user interactions and our user base from Tier 1 and Tier 2 cities. Advertising revenue increased by 179% year over year to RMB137 1,000,000 or 20,000,000. We are happy to see continued growth in brand advertising as well as our performance based advertising business.
Performance based advertising has grown rapidly to more than 40% of our advertising revenue in the Q3. As we wrap up the number of clients and our as well as improve algorithms, we believe there's a great growth potential for this business. Our live broadcasting and the VAS revenues increased by 2 92% year over year to RMB169 1,000,000 or $25,000,000 Beginning earlier this year, we started a number of initiatives to expand our live broadcasting content and improve product design and user experience. We also launched a premium membership program, allowing paying members to enjoy exclusively our advanced license content. These initiatives were immediately well received by our community and helped to drive continued growth for our paying users.
In the Q3, live broadcasting paying users grew 175% compared to the same period last year. Valid PrimeIn members continue to grow to over 2,500,000 by the end of September. This dynamic involving industry offers is such an opportunity. We are thrilled to be at the forefront of the online entertainment movement that is being driven by the lead generation that continue to populate our growing community. This concludes Mr.
Chen's comments. I will now provide a brief overview for our Q3 financial results. During the Q3, we continued to see growth in all three of our primary business lines. Our total net revenues increased by 48% to RMB1.1 billion or 157000000000 year over year. As we wrap up our monetization efforts, we are delighted to see more diversified revenue contribution from advertising and live broadcasting and advertising services, which account for about 28% of total revenues in the Q3 compared with 13% from the same period in 2017.
Cost of revenues increased by 60% to RMB884 1,000,000 or RMB129 1,000,000 from the same period of 2017. Revenue sharing costs, a primary component of business cost of revenues were RMB445 1,000,000 or $65,000,000, representing 68% increase year over year. Gross profit increased by 11% to RMB195 1,000,000 or $23,000,000 from the same period of 2017. Our gross profit margin declined to 18%, primarily due to increased bandwidth cost, content cost related to our user growth trend and the lower revenue contribution from our higher margin game business. Total operating game expenses increased by 120 percent to RMB454 1,000,000 or $66,000,000 from the same period of 2017.
It is important to know that Q3 is our peak user acquisition time. This seasonality includes increased spending on selling marketing and offline spend expenditures. As we continue to grow our business and further optimize our monetization structure, we expect to see better operating leverage. With that in mind, selling and marketing was RMB197 1,000,000 or $29,000,000 representing 163% increase year over year. The increase was primarily attributed to the increased channel and marketing expenses associated with our platform and APP as well as our offline events, promotional expenses for our mobile games during the summer holidays and the increased headcount in selling and marketing personnel.
General and administrative $1,000,000 or $60,000,000 represent a 93% increase year over year. The increase was primarily due to increased headcount in general and administrative personnel and increased share based compensation. Research and development expenses were RMB146 1,000,000 or 21,000,000 dollars representing 96% increase year over year. The increase was primarily due to increased headcount in R and D and increased share based compensation. Loss from operations were RMB249 1,000,000 or 38,000,000 compared with a loss of RMB33 1,000,000 in the same period of 2017.
Income tax expenses were RMB11.4 million or 1,700,000 compared to RMB2.3 million in the same period of 2017. Net loss totaled RMB246 1,000,000 or $36,000,000 for the Q3 of 2018 compared with RMB50 1,000,000 in the same period of 2017. Adjusted net loss, which mainly excludes share based compensation expenses and amortization expense related to intangible assets across the business acquisition were RMB203 1,000,000 or RMB2.9 million in the previous year period. Basic and diluted loss per share were RMB non GAAP basic and diluted loss per share was RMB0.72. As of September 30, 2018, we have cash and cash equivalents as well as time deposit RMB2.9 billion or US480 million dollars compared with RMB765 1,000,000 as of December 31, 2017.
As we look ahead, our financial goals are to further grow our business and improve our operation efficiency. With that in mind, we are currently projecting net revenues for the 4th quarter to be between RMB1.04 billion and RMB1.08 billion. Thank you for your attention. We would like now to open the call to your questions. Operator, please go ahead.
And our first question comes from the line of Alex Yao from JPMorgan. Alex, your line is now open.
Thank you. Thank you, management, for taking my question. So I have two questions. One is about the partnership with Tencent. Now that Tencent increased the shareholding in Bilibili in this quarter, what are the areas you guys will further collaborate?
Can you guys elaborate on the partnership over the next couple of quarters? And then secondly is on advertising. Can you guys give us updates in terms of the advertising progress? Any metrics such as ad load CPM will be helpful. And then also on the back of a slowing macro consumption and potentially at budget cut, how do you guys think about the advertising growth outlook in the coming quarters?
Thank you.
So Alex, thanks a lot for your question. I'll take your question. So in October, we are happy to announce we have further established a strategic collaboration with Tencent, specifically on the animation industry as well as jointly game operation. On the animation collaboration front, we are going to exchange and purchase of existing animation copyrights, jointly procure, produce and investing in animation projects as well as seek investment opportunities in the comic and animation
industry.
So Tencent and Bilibili are 2 of the major players in the animation industry. So by working with Tencent, this will intensively expand our content offering and effectively decrease our content investment in the animation copyright procurement. So on the games front, we have achieved agreement on jointly operating more Tencent's game, and we think that's very positive for our pipeline that will be able to offer more diverse, more content to our game lovers on our platform. So both of the animation and game collaboration, in some extent, it will extend our content offering on our platform further diversify our monetization capabilities. So as for your second question on the advertising business progress, we think we have delivered a solid quarter of advertising business in Q3, specifically on the performance based advertising now is contributing more than 40% of our total revenue.
That demonstrate our progress and potential of this business line. So as for the brand advertising, we also delivered a solid growth. We continue to expand the different forms of advertising based on our content ecosystem, specifically on some of the original advertising content as well as some of the brand advertising on our self produced variety shows. The number of advertisers in 3rd quarter were over 660, which grew over 1500% year on year. And we think we still have a lot of room to grow on the advertising business front.
That comes from, 1, the increase of number of advertisers to improve the algorithm and to improve the advertising efficiencies. So as for the ad load for our performance based ads, right, in Q3, it was only 5%. So we think on that front, there's still a lot of room to increase. So the outflow ratio, number of advertisers as well as the hours and efficiencies are the 3 main factors that will affect our performance based advertising revenue. We think all three factors has a lot of room to grow, leading large potential in our performance based advertising business.
Okay. I will add more color on our advertising business. Our top 5 industry for advertising business in Q3 for brand advertising that is food beverage, game, communication, digital and beauty products. And for the free SaaS, they are game, education, e commerce, information and software.
Next question please.
Thank you so much. And our next question comes from the line of Eddie Leung from the Bank of America Merrill Lynch. Eddie, your line is now open.
Hey, good morning. Two questions. The first one is about your paying memberships. Could you talk a little bit about your strategy to grow the membership program, not just in the near term, but perhaps into 2019? And then the second question is about your different revenue.
It's quite interesting to see a different revenue actually coming down in 3rd quarter. But on the other hand, the revenue guidance are actually quite stable from the second quarter. So just wondering why there is a discrepancy.
So in the Q3, we achieved a remarkable growth of our number of paying users and large that were largely driven by the increase of our premium membership. So from earlier this year in Q1, we started to monetize through our premium membership, our subscription model of our business. We see the progress for the last 3 quarters as very strong and very healthy. So for example, majority of our premium memberships are from our yearly subscribers or monthly automatically renew members. So the progress is in line with our estimation.
That is because, first of all, we have very deep user insights regarding their interest and behavior. And our users' stickiness to their stickiness and loyalty to Bilibili platform is much higher than their 2 other platforms. So as long as we provide the content they like, they will continue to spend on our platform. And this trend is likely to last a very long time. So from the 1st 3 quarters of this year, we noticed that majority of the user who pay for our membership is paying for our copyright animation and documentary content.
As for this animation and documentary content aspect, we'll continue to invest and increase our content offering. So we're confident this increase will continue. So the monetization strategy and the content offering will be tightly linked to the nature of our users and linked to the areas that we have most advantage, such as animation and documentary. We won't be splurging to crazily to other content categories. So we are confident to say that our the number of premium membership will grow like the past 3 quarters very healthily and sustainably.
Okay. I will take the second question about the balance of the deferred revenue. As you know that the major component for our deferred revenue balance, they are from our online games. We amortized our mobile game revenue, the grossing revenue over the user life cycle. So you will see in our guidance, we indicated that there will be some quarter over quarter decrease for our game revenues than a single digit decrease.
And on the content that will be offset by the increase for our advertising and the live broadcasting and the value added services. And based on our current acquisition for our grossing revenue of our game business in Q4, we estimate that the balance of our different revenue will resume increased trend in the end of this year.
Thank you.
Thank you so much. And our next question comes from the line of Alex Poon from Morgan Stanley. Alex, your line is now open.
I'll ask my questions in English. I have one question. My question is regarding your MAU target. Could you give us a reassessment of your current MAU target for 2019 2020? Given your content offering is much more diversified, you have partnerships with Tencent and other parties inside and outside of China and user behavior data is very strong and step up in sales and marketing efforts, etcetera.
Could you give us a reassess? Is there any upside to further upside to $140,000,000 the previous MAU target for 2020? Thank you very much.
So as for the user growth trend for the next 2 years, we'll be still consistent with what we have communicated. So by year of 2020, we're looking at an average MAU of $140,000,000 to $150,000,000 And by 2019, an average yearly MAU will be $110,000,000 to $120,000,000
I have a follow-up questions on the 140,000,000 to 150,000,000 MAU in 2020. Could you give us some breakdown regarding the demographics, composition of this MAU? If we can break down into students and non students and also by tier cities, it would be greatly helpful. Thank you very much.
So Mr. Chen's estimate is, as the platform grows bigger and bigger, the demographic of that platform will be closer to the demographic of the country. So take our this year's user profile, for example, we're seeing an average age of 21 years old for our platform and our new users' average age is 19.8 years old. So that is already 1 year older than the previous profile and that's closer to our to China's Internet demographic profile. So our new users that we registered this year, we see further penetration to the 3rd and 4th tier city and that percentage has increased by 2% year on year.
As for the content preferences, we also see an increase in the consumption of more general entertainment content. And that's also in line with what the general public or the general young generation's interest and behavior. So as for the whole platform, because we are a very decentralized community, People with different interests can find their own specific content. So even though we see more older demographic coming in and more general content consumption behavior as well as lower tier penetration city. But as for the old users, the absolute perception of the content quality and content diversification for them is only getting better and better.
So we are quite confident to keep the stickiness of the community. Yes. So that's why you see under in Q3, even though our user grow drastically, the number of time spent and engagement level of our community and the retention level of our community continue to stay stable and even grow even stronger. So we're not just growing our user base, but also increase the stickiness and experience a quality growth. So we are confident going forward even though that we're going to expand our user base to 110,000,000 to 120,000,000 next year, 140,000,000 to 150,000,000 in 2020.
We're still quite confident to say that we will be able to maintain intact community, a very sticky and engaged community behavior. So more importantly, I would like to highlight that in Q3, our out of the 93,000,000 MAU, 80,000,000 were from our mobile devices. That's also evidence of our high quality user component. So as everybody know, mobile devices is becoming inseparable part of young generation's life. And the high percentage of our mobile devices is evidence that the quality of our users' matrix.
Thank you so much. And our next question comes from the line of Marcus Young from Macquarie. Marcus, you may now ask your question.
Thanks very much for taking my questions. Just two questions here. First of all, can you give us a quick update on your view in terms of the regulatory issues in China? We understand that Douyuan, on streaming platforms have been banned for a while for a couple of sometimes. And so I'd like to know if you have any incremental thoughts since the Q2 earnings call on the regulation issues.
And also, we heard some game companies have been adopting like restrictions on minors. So I'd like to know your I mean, any potential impact on Bilibili and also your thoughts on this? And lastly, I think the SGOs mentioned that there have been updates in the Q1 next year. So I'd just like to know on the progress of the approval or license on this update. Thank you so much.
So as your first question, I think it's a question about content security. So this year, we have done a lot of work in terms of reinforce our content security infrastructure that includes to do a full comprehensive review of our existing content library on our platform as well as increase the headcount in the content auditor team. I think over half of our newly increased headcounts were allocated in the content auditor team and we have set up 2 additional locations for content auditors in center other than Shanghai. So we are investing a lot of manpower and time to enhance our content security infrastructure. So we will we are quite confident about our current structure of in placing a very safety content environment and we're very determined to protect the integrity of our platform that includes to continuously review the existing content and execute even tighter new content approval process.
So as for your minor questions, actually, we have always been in placing what the government required for all games, which is a real name registration system as well as
a parent
monitoring system to avoid overtime spent for minors. So we have further reinforced our parent monitoring system to help the parents and the society to control and avoid minors over spending too much time on mobile games. So in the past, we have been fully compliant with all the government requirements, so we don't see a lot of risk on that front. So on the user profile front, our average age of our platform is 21 years old. The miners who define as 14 and below is far less than 10%.
And the paying user is even less than that. So even if there will be to be a more stringent minor control, that wouldn't have much of an impact on our revenue scale. So as for the game approval status, we don't have new updates, but we have been actively preparing and exploring different alternatives for game development. So as for the games in our pipeline, 4 of them has complete all the prerequisite process for approval and 7 of them are nearly in completion. So as soon as the approval process reopens, we should be we should be able to have a number of games that's ready to launch.
So as for the approval suspension, we're because it's an industry wide phenomenon, we are just dealing with it with a Congly Heart and exploring other alternatives. So we think it's just a matter of time for the game approval to be reopened. It won't be a permanent issue. Okay. So Mr.
Chen feels like it's only a short term impact, not a long term impact. The business is still intact, that there's still a lot of demand for mobile game content. So it's just bad of
time.
Okay. We'll wait for the good news.
Thank you so much. And our last question comes from the line of Chen Hao from the TH Capital. Chen, your line is now open.
Yes, management. The question is related to the margin trends. So if I look at the margin was slightly down. So I wonder what's the reason? Is that because the live broadcasting was increased and taking more portion?
So preference was the reason? And then second one is what's the trend going forward? So that's number one question. Number 2 is about the 2 games. So I wonder so 2 games, what's the 2 major games, what's the percentage of total revenue those 2 games are taking?
And going forward, what's the portion of the total revenue is likely to come from the 2 game? That's a good question. Thank you, Sam.
Okay. I will take this question. For gross profit margin, we our current gross profit margin is 18% mainly because we have some incremental cost for Ben White cost and content cost as well as the contribution from our game business, game revenues, they are decreasing mainly because the revenue for game in Q2 and Q3, they are a bit lower than Q1. And we also talked about we saw very nice trend for the GaN grossing revenue in Q4. In Q1 next year, we'll see the resume of increase over quarter increase of our game revenues.
So as you're watching, the margin will be improved in Q1 next year. And for 2 new games, currently we just launched the game this month and we saw some early momentum.
Okay.
Yes, for FGO and Luna Line, they I think they are quite stable and FGO's performance in Q4 is and we will the chapter for FTO in Q1 that period there was a nice number of that.
Headcount. Thank you so much. And that concludes the question and answer session. I would like to turn the conference back over to the management for any additional and closing comments. Please go ahead.
Thank you once again for joining us today. If you have any further questions, please contact myself, Julie Yang, Bilibili's Senior Director or TPG, Investor Relations. Our contact information for IR in both China and the U. S. Can be found in today's press release.
Have a great day. Thank you. Bye bye.