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.
Thank you, operator. Please note that 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 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 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 2018 Q2 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. 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 now I will 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 Q2 earnings call. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. We are proud of announced another solid quarter with strong top line growth and continued user expansion.
Total revenues for the Q2 reached RMB1 1,000,000,000, representing an increase of 76% year over year. Each of our core business contributed to those games, with growth across our games, advertising and the live broadcasting and the value added services segments. The key to our success is the active growth of our community. Our average monthly active users grew by 30% year over year or 7,600,000 quarter over quarter, reaching 85,000,000 in the Q2. Mobile MAUs grow even faster, increasing 39% year over year to RMB71 1,000,000.
The strong growth momentum trend in the Q2 continued as we entered the summer, where we achieved record high MAU of RMB98 1,000,000 in July, beyond our expectations. While we do expect to see some one off impact to our new users' acquisition in August, based on our APP download being temporarily suspended from certain APP stores in China from July 26 to August 25. Our overall user engagement and user retention rate remains high. We are in the process of implementing better content monitoring, including a thorough self inspection and increasing the number of our content order 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 25, we are actively exploring ways to attract new users and we are confident in our ability to resume our user growth 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 array of categories. Entertainment, lifestyle, game, anime and the technology were the top 5 most popular content categories during the Q2. Our users, on average, spend 75 minutes daily on Bilibili, excluding time spent on Bilibili mobile games.
Our vast pool of talented content creators continued to be the driving force in video content creation. During the Q2, 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, specifically in tutoring, cash incentive and proprietary based services to new, mid and top content creators. These initiatives are designed to further expand our cycle of highly skilled content creators, while simultaneously supporting our content pool of creators, encourages them to stretch the boundary of their imaginations. Furthermore, to better serve mobile users, which accounts for 84% of our total MAU, we introduced the new mobile friendly functions, such as mobile content submission, as well as full adoption for content that is in a vertical form.
These efforts yielded a number of year over year gains in the Q2, including a 91% increase in the number of average months active content creators, a 131% increase in their content submissions and 117% increase in the number of content creators with over 10,000 fans. In addition to PUGB, we are strengthening our content offerings by bringing high quality licensed content to our community, primarily in anime and the documentary. Our business model enable us to not be solely relied on licensed content to attract users, but rather to use it as addition to enhance our content ecosystem and monetization capabilities. Notably, our self produced full documentary series, Tran, was an instant success of its release in July in June, generating over 36,000,000 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 2,000,000 subscribers to our premium membership services. This model is working, and we will look to bring a number of other high quality content to our community in the coming quarter. We are also expanding our footprint in the e sports area. As the 3rd most popular content vertical, on our platform, high quality game content, particularly esports related content is attracting more and more users. At the end of 2017, we formed our OE sports club called Bilibili Gaming or BLG, along with our first team, which holds 1 of the 14 sports in Tencent's League of Legends League or LPL.
We also own the live streaming rights to all LPL matches. In the first half of twenty eighteen, we had accumulated over 800,000,000 paid views from all LPL related live streaming. We have also formed a Players Under Battle Ground team and a QQ Speed team with a goal of providing more thrilling games to our users and reinforcing our leading position as a principal game content creator in China. Turning to the 2nd pillar of our business community. Over the years, we have natural encouraged and engaged community environment.
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 rate as we improve our AI and big data powered recommendation efficiency. Social functions, such as MakuRock, Bilibili Moments enable users to engage and interact with their friends and favorite content creators in a much easier and a dramatic way. In the Q2, our users, on average, generated over 310,000,000 daily video views and 640,000,000 monthly interactions through bullet charts, comments, likes, Bilibili Moments posts. The number of official members who passed our 100 question test continues to grow, reaching 38,000,000 in the 2nd quarter, representing a 44% increase year over year.
With an 80% 12 month retention rate, our official members are even more loyal and engaged than our non official members, leveraging our strategy initiative, engaging content and the vibrant community. We are confident in our ability to continue to attract and retain more users. With that overview, I'd like to take a few moments to review operations within each of our core businesses. Revenues from our mobile games grew 31% year over year to RMB791 million, led primarily by the rapid popularity of a fiscal order of FGO and Azulina line. FGO's growth continues to be stable, and we are excited to celebrate the game's 2nd anniversary in 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 top line of new games. On the exclusive licensed game front, besides some of the games we have previously discussed such as Brain Dream, A3 and Wu Bai Toukon de Zhangxin, we are delighted to announce that we are bringing 2 more highly related highly rated ATG games to our users. Princess Connect, Redeye, a soothing RPG and Moguia 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 Furious Yama, a high quality domestic mobile game based on popular anime and jointly published the Legend of Heroes, Trails of Stars, a classic IP based RPG. On the jointly operated game front, we look forward to bring a number of highly anticipated ATG games to market, including Shiny Nikki, Arknights, One Piece and Data Life. We are also pleased to announce we will soon be rolling out ARC order at domestic ACG themed card game in complements. Looking at our advertising revenues, these increased by 132 percent to RMB96 million or $50,000,000 year over year. Supported by our attractive platform of immersive content, user interaction and our highly converged to a Generation Z user demographic, We expect to see continuous growth in brand advertising as well as our feed ads, which is starting to show early progress as we ramp up the number of clients and add low ratio.
In the 2nd quarter, revenue from performance based advertising contributed over 1 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 RMB119 1,000,000 or US18 million dollars year over year, representing 12% of the total revenue. These offerings are primarily to support continued large increase in the number of paying users. And as I mentioned before, during the Q2, our growth focus on our primary membership program, Our average monthly paying users reached 3,000,000 or 177% increase year over year.
These positive trends continue 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 and expansion will be among our chief initiative to further grow our content and reach as many users as possible with a variety of interests. This is in this way, 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 Q2 2018 financial results. During the Q2, we continued to see robust growth in all three of our primary business lines. Our total net revenue increased by 76% to RMB1 1,000,000,000 or 155,000,000 year over year.
As we ramp up our monetization effort, we are delighted to see more diversified revenue contribution from advertising and live broadcasting and value added services, which account for 21% of our total revenue in the Q2 of 2018, compared with 14% from the same period of last year. Cost of revenues increased by 74% to RMB776 1,000,000 or $170,000,000 from the same period of last year. Revenue sharing cost, a primary component of cost of revenues, was RMB470 1,000,000 or sixty $3,000,000 representing an 84% increase year over year. Gross profit increased by 82% to RMB251 1,000,000 or $338,000,000 from the same period of last year. Total operating expenses increased by 88% to RMB348 1,000,000 or RMB54 1,000,000 from the same period of last year.
It is important to note that second and third quarters are our peak user acquisition times. These seasonalities include increased spending on selling and marketing. With that in mind, selling and marketing expenses were RMB128 1,000,000 or $90,000,000 representing a 146% increase year over year. This increase was primarily attributable to the increase of channel and the marketing expense associated with our APP, promotional expense for our mobile games and an increase in headcount in selling and marketing personnel. G and A expenses were RMB98 1,000,000 or $15,000,000 representing a 30% increase year over year.
R and D expenses were RMB132 1,000,000 or $20,000,000 representing a 108% increase year over year. This increase was primarily due to increased headcount in engineers, reflecting our continuous invest in improving our production efficiency. Loss from operations was RMB107 1,000,000 or $60,000,000 compared with a loss of RMB43 1,000,000 in the same period of last year. Income tax expense was flat year over year at RMB2 1,000,000 or 400,000. Net loss totaled RMB70 1,000,000 or 11,000,000 for the Q2 of 2018, compared with RMB50 1,000,000 in the same period of last year.
Adjusted net loss, which mainly excludes share based compensation expenses and amortization expense related to intangible assets acquired through the business acquisition were RMB20 1,000,000 or US3 million dollars from RMB14 1,000,000 in the prior year period. Basic and diluted loss per share was RMB0.26, non GAAP basic and diluted loss per share was RMB0.07 dollars As of the end of second quarter, we had cash and cash equivalents as well as time deposits of RMB3.6 billion or 548 million dollars compared with RMB765 1,000,000 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 new net revenues for the Q3 to be between RMB1 1,000,000,000 and RMB1.04 billion. Thank you for your attention.
We would like to now to open the call to our questions. Operator, please go ahead.
Thank you, sir. Ladies and gentlemen, we will now begin the question and answer Our first question comes from the line of Mr. Alex Yao from JPMorgan. Your line is open.
So I have two questions. Number 1 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 Android App Store. The second question is about the new game launch timetable. You talked about a lot of new game developments in the prepared remarks. How do you think about the timetable for a new game launch given the new game monetization approval has been suspended in China for 5 months already?
Okay. Let me just translate the first part. Mr. Chen says that in his view that the second half of the user growth trend looks very positive. That can be reflected in our Q2 result MAU result as well as our July performance where we achieved 98,000,000 MAUs in July.
And that is driven by our improved content quality and our user experience and a strong demand from our users. Okay. So the temporary 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 5 days due to the temporary suspension, we still achieved 98,000,000 MAUs. That's a very, very good result and beyond our expectation.
So our app download has been fully restored on August 25th in all app stores in China. And we are actively exploring ways and activities to capture the last trend last wave of summer vacation traffic, and we see it's working quite well. Okay. So 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 90,000,000.
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 strategy that we're undertaking, we think our Q4 MAU should be equal or even larger than Q3 MAUs.
MAUs.
So as for the licensing permit situation, Alex mentioned, we believe that is industry wide temporary problem we are facing. And we believe it's just a short term delay. So although that the temporary suspension have some certain impact to the whole industry regarding the second half game launch schedule, but we believe there is still a huge pent up demand from the Chinese gamers, we are forecasting that once the issue has is resolved, there will be an increasing demand for new games. Okay. So on our 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, and we choose the best performance one.
And we believe those all those games should perform quite well in China. And it's for all of the imported and domestic games, especially for the Japanese game that we're going to license. Their performance in Japan market will be a strong endorsement for their performance in China. Okay. So during the waiting period, we are actively preparing tons of solutions to provide new games.
For example, we're going to bring exclusively licensed game, Arc Order, ACG game that's already being permitted in coming months to our users. Including what Alex just mentioned about the green channel, we're also actively preparing for that. So actually from early this year, we have been preparing all this approval process. We have 4 games that's already complete all this pre approval process just waiting for the permit. That includes Ban Dream and That concludes Mr.
Chen's comment.
And let me explain about the user acquisition cost and the selling and marketing expense trend. Overall, we will spend more in the second in the 3rd and fourth quarter, that's mainly because usually the peak time for us to acquire new users in summer. And especially in Q3, we will spend more to catch up the new users acquisition momentum after our app has been resumed in app stores. And we will also organize some offline anime events such as Bilibili World and attend a lot of very hard anime events offline. And we will also prepare for the 2nd anniversary celebration of FGO in the September.
We estimate that we will spend on average spend about 15% of our total revenues on selling and marketing in the second half of this year and more budget will be shifted to Q3 in order to make sure our strategy can work. And another component of our selling marketing are the staff related cost for our advertising business. And that kind of cost will be increased in line with the advertising business. So that will be the trend for the selling and marketing in the second half of this year.
Operator, next question please.
Thank you, ma'am. Our next question comes from the line of Marcus Young from Macquarie. Your line is open, sir.
Thanks, management for taking my questions. I guess just a follow-up on the GAAP removal events. So can you quantify the impact from this app removal events? I mean, your revenue guidance now suggests 37% to 40% year on year growth. And how should it look like without these events?
And maybe also in a cost and expense perspective that I understand that you may add more staff for Olin, for instance. So that's my first question. And I guess my second question is with regard to your advertising business. Last time, I recall that you are planning to increase your ad loads and ECPM, etcetera. And has that started to contribute from the Q2 or any updates on that progress will be appreciated?
Thank you.
And Marcus, do you mind translating that into Chinese?
Sure.
So overall, there will be certain impact for the new user acquisition in August related to the temporary app renewal, but we think overall revenue growth trend as well as user growth trend will not be During the period of suspension, we have contact through our self rectification process. The doubling auditing team plan was not just simply to dealing 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 audited team and we're just expediting this process.
Yes. Just to add one two points. 1, we will double our accounting auditing team member, the number of our accounting audit staff. So basically, we estimate that the impact will be around RMB5 1,000,000 in the second half of this year. And as we mentioned before, we will spend more on the selling and marketing in August and September in order to catch up user acquisition momentum.
And I think Mr. Chen can add more color on the advertising business.
Our advertising revenue growth momentum is very positive as it's been showed on our Q2 earnings report. The performance based advertising, which was just launched early this year, is already contributing over onethree of our advertising revenue. So continuing with the performance based advertising, we have launched 2 large scale of new agency recruiting conference in end of March and beginning of June. And that help us to recruit and increase the number of advertising agencies who are representing Bilibili. Actually, in Q2, the number of advertising agency grew over 100% quarter over quarter.
This growth not just really not limited to the number of growth, but we're also expanding our coverage in multiple industries. And that is also helping our conversion and revenue growth. We're also optimizing our algorithm and our strategy to improve the click through rate. As you may know, to increase performance based advertising revenue, there are several metrics. The growth of number of advertising agency and the quality of advertising agency as well as the algorithm and our recommendation policy as well as the ad load.
What we are doing and improving in Q2 was mainly focused on increasing the number of advertising agency and the quality of advertising agency and improve our algorithm and big data capabilities, not so much on increasing of ad load. On the brand advertising front, we're also expanding our customer base and improving our brand influence in the industry, where we think we have improved our overall strategic planning marketing as well as integrated marketing capabilities for brand advertisers in the
Q2. Okay.
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.
Thank you, operator, and thank you once again for joining us today. If you have further questions, please contact myself, Julie Yang, the Lulu Senior Director or TPG Investor Relations. Our contact information for IR in both China and the web can be found on today's press release. Have a great day.