Good day. 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 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 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 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 senior management are Mr. Rui Chen, Chairman of the Board and Chief Executive Officer, Ms. Ni Li, Vice Chairwoman of the Board and Chief Operating Officer, and Mr. Xin Fan, Chief Financial Officer. Now, I will turn the call over to Mr. Fan, who will read the prepared remarks on behalf of Mr. Chen.
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 top-line growth and continued user expansion. Total revenues for the second quarter reached CNY 1 billion, representing an increase of 76% year-over-year. Each of our core business contributed to those gains. With growth across our games, advertising, live broadcasting, and value-added services segments. The key to our success is the 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 grows 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 one-off impact to our new user 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 rates remains high. We are in the process of implementing better content monitoring, including a thorough 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 25, we are actively exploring ways to attract new users. 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 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 initiate a number of programs to provide better, more layered support for our content creators.
Specifically in totaling cash incentive and per project basis sales 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 current pool of creators, encourages them to stretch the boundary of their imaginations. To better serve mobile users, which account for 84% of our total MAU, we introduced the new mobile-friendly functions, such as mobile content submission, as well as full adaptation for content that is 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 months 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 PUBG, we are strengthening our content offerings by bringing high-quality licensed content to our community, primarily in anime and documentary. Our business model enable us to not be solely reliant 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 food documentary series, "Chuan," 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 footprint in the e-sports area. As the third most popular content vertical our platform, high-quality game 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, or 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 live streaming rights to all LPL matches. In the first half of 2018, we had accumulated over 800 million paid views from all LPL related live streaming. We have also formed a "PlayerUnknown's Battlegrounds" team and a "PUBG" speed team with the 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 second pillar of our business community, over the years, we have nurtured, 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 rates as we improve our AI and big data-powered recommendation efficiency. Social functions such as microblog, 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 monthly interactions through bullet chats, comments, likes, Bilibili Moment posts. The number of official members who passed our 100-question test continues to grow, reaching 38 million in the second 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 strategic initiative, engaging content, and 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 grow 31% year-over-year to RMB 791 million, led primarily by the rapid popularity of "Fate/Grand Order" or FGO and "Azur Lane." FGO's growth continued to be stable, and we are excited to celebrate the game's second 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 pipeline of new games.
On the exclusive licensed game front, besides some of the game we have previously discussed, such as BanG Dream! A3! and [Foreign language], we are delighted to announce that we are bringing two more highly rated ACG games to our users. "Princess Connect! Re:Dive" a thrilling 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 Furious Yama," a high-quality domestic mobile game based on a popular anime, and jointly publish "The Legend of Heroes: Trails of Cold Steel," a classic IP-based RPG.
On the jointly operated game front, we look forward to bringing a number of highly anticipated ACG games to market, including "Shining Nikki," "Arknights," "One Piece," and "Date A Live." We are also pleased to announce we will soon be rolling out Ark Order, a domestic ACG-themed card game, in the coming months. Looking at our advertising revenues, these increased by 132% to RMB 96 million or $15 million year-over-year. Supported by our attractive platform of immersive content, user interaction, and our highly converted Generation Z user demographic, we expect to see continued growth in brand advertising as well as our feed ads, which are 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.
As I mentioned before, during the second quarter, our growth focused on our premium membership program. Our average monthly paying users reached 3 million, a 177% increase year-over-year. These positive trends continue to be encouraging, demonstrating our heightened 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 initiatives to further grow our content and reach as many users as possible with a variety of interests. It 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 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 RMB 1 billion or $155 million year-over-year.
As we ramp up our monetization effort, we're 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 second quarter of 2018, compared with 14% from the same period of last year. Cost of revenues increased by 74% to RMB 776 million or $117 million from the same period of last year. Revenue sharing costs, a primary component of cost of revenues, was RMB 470 million or $63 million, representing an 84% increase year-over-year. Gross profit increased by 82% to RMB 251 million or $38 million from the same period of last year. Total operating expenses increased by 88% to RMB 348 million or $54 million 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 RMB 128 million or US$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 an increase in headcount in selling and marketing personnel. G&A expenses were RMB 98 million or US$15 million, representing a 30% increase year-over-year. R&D expenses were RMB 132 million or US$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 RMB 107 million, or US$16 million, compared with a loss of RMB 43 million in the same period of last year. Income tax expense was flat year-over-year at RMB 2 million or US$400,000.
Net loss totaled RMB 17 million or US$11 million for the second quarter of 2018, compared with RMB 50 million in the same period of last year. Adjusted net loss, which mainly exclusive share-based compensation expenses and amortization expense related to intangible assets acquired through the business acquisition, was RMB 20 million or US$3 million, from RMB 40 million in the prior year period. Basic and diluted loss per share was RMB 0.26. Non-GAAP basic and diluted loss per share was RMB 0.07. As of the end of second quarter, we had cash and cash equivalents, as well as time deposits of RMB 3.6 billion or US$548 million, compared with RMB 765 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 new net revenues for the third quarter to be between RMB 1 billion and RMB 1.04 billion.
Thank you for your attention. We would like to now open the call to our questions. Operator, please go ahead.
Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. Our first question comes from the line of Mr. Alex Yao from J.P. Morgan. Your line is open.
Hey, 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. There is also a recent suspension for app downloads in domestic and 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 five months already? Thank you.
Let me just translate the first part. Mr. Chen says that in his view, that in the second half, the user growth trend looks very positive. That can be reflected in our Q2 MAU results, 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.
八月份的30天的APP在应用市场的下架，会影响我们的数字，但它并不会影响我们下半年，包括Q3整体快速增长的这个事实。
The temporary suspension of our app download will have a little impact on our August new user acquisition. It won't affect the overall trend of our Q3 and the overall second half user trend.
我们的7月份在少五天拉新的情况下，我们仍然达到了9800万的一个MAU，这个是历史新高，是超出我们预期的。
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 expectation.
我们现在的APP已经于8月25日在所有的应用商店都恢复上架了，而且我们也有一系列的活动，在抓最后一个暑期的高峰的时机。
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. We see it's working quite well.
我们预测八月份的MAU肯定是会比六月份高。我们也预测整个Q3的平均MAU应该是大于9000万。
OK, 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.
对，如果从以前的数据来推测，因为我们每年暑期是一个高峰，一般来说Q4有可能会比Q3要低那么一点点，但是因为今年的下架的这个因素，我们预测今年的Q4会大于等于Q3。
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.
回答第二个问题，关于下半年的新游戏。刚才Alex也提到了游戏版号，其实这个是一个行业性的问题，而且我们相信这个应该只是一个短期的延误，因为它不是一个有什么难题的问题。
As for the licensing permit situation Alex mentioned, we believe that is an industry-wide temporary problem we are facing, and we believe it's just a short-term delay.
对。我觉得版号的问题，它会对整个行业下半年的游戏发行节奏都有一定的影响。但是同时我们也知道，中国用户玩游戏的需求是非常旺盛的。所以，也是我做一个推测，第一个，我觉得一旦版号的发放恢复，用户也会有一个非常高涨的新游戏玩儿的热情。
Although the temporary suspension has certain impact to the whole industry regarding the second half game launch schedule, we believe there is still a huge pent-up demand from the Chinese gamers. We are forecasting that once the issue is resolved, there will be an increase in demand for new games.
对，其实我们手上储备的游戏，无论是国产的游戏，还是代理自日本的游戏，都是我们从上千款游戏的评测里面挑出来的质量最好的。所以我觉得一旦上线，应该是可以取得很好的成绩。而且我们代理自日本的游戏，在日本的营销的成绩也是一个背书，这几款游戏在日本的成绩确实都是挺好的，包括《BanG Dream!》、包括《魔法少女小圆外传》
Okay. 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 all those games should perform quite well in China. It is for all of the imported and domestic games, especially for the Japanese games that we are going to license. Their performance in Japan market will be a strong endorsement for their performance in China.
在等待新的版号发放期间，其实我们也是在做各种各样的积极的各种可行方案。比如说我们近期就会为玩家带来一个我们国内独家发行的一个游戏《方舟指令》。这个游戏它之前已经是有版号的一个ACG的游戏。
Okay. 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, Ark Order, an ACG game that is already been permitted in coming months to our users.
对，包括刚才Alex你说到的类似于像绿色通道啊之类的，其实像各种各样的这种积极的方案我们都在准备。
Including what Alex just mentioned about the green channel, we are also actively preparing for that.
对，其实我们几个月前就有一系列的游戏已经提交了审批的流程。目前已经有四款游戏完成了前置审批的流程，包括像刚才提到的《BanG Dream!》和《无法触碰的掌心》。
Actually from early this year, we have been preparing all this approval process. We have four games that already complete all this pre-approval process, just waiting for the permit. That includes BanG Dream! and《 无 法 触 碰 的 掌 心 》。
对，所以这个就是我回答Alex你两个问题。
That concludes Mr. Chen's comment.
Let me explain about the user acquisition cost and the selling marketing expense trend. Overall, we will spend more in the third and fourth quarter. That mainly because usually the peak time for us to acquire new users in summer, especially in Q3, we will spend more to catch up the new users acquisition momentum after our app has been resumed in 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 in 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. More budget will be shifted to Q3 in order to make sure our strategy can work.
Another component of our selling marketing are the staff-related cost for our advertising business. That kind of cost will be increased in line with the advertising of anything. That will be the trend for the selling 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 Cheung from Macquarie. Your line is open, sir.
Thanks, management, for taking my questions. Yes, just a follow-up on the app removal event. Can you quantify the impact from this app removal event? I mean, the revenue guidance now suggests a 37%-40% year-over-year growth. How should it look like without this event? Maybe also in a cost and expense perspective that 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 planning to increase your ad loads and eCPM, et cetera. Has that started to contribute from the second quarter, or any updates on that progress will be appreciated. Thank you.
Marcus, do you mind translating that into Chinese?
Sure.
如果撇除这个影响的话，它这个增长大概会是多少？那另外就是在成本和费用的部分，它这个event是不是也会造成一些影响，例如说我们增加了一些审核的人员等等。那第二个问题是关于我们广告这边的一个business。之前我们提到有计划去增加我们的ad load，所以想要了解一下，它这个是已经在第二季度开始贡献了，还是说任何相关的一个progress，这边可不可以再说明一下？谢谢。
我是回答你关于同样是这个下架的一个问题。说两点，然后Sam可以补充一下。首先第一个，下架肯定是对我们会有一些数字上的损失，但是它不会影响到我们之前的增长计划，无论是用户增长还是收入增长，因为我们整体的增长势头还是很好。虽然下架带来了一些负面的因素，但是没有对原计划造成影响。
Overall, there will be certain impact for the new user acquisition in August related to the temporary app removal, we think the overall revenue growth trend as well as user growth trend will not be impacted by this temporary removal.
对，我们在下架期间的整改过程中，确实我们在加强我们的审核团队的建设。但是加强审核团队的建设并不是为了应付整改而突然增加的。其实因为我们本身预测，审核的工作在今年会有一个大量的提升，所以本身就是做了这样的一个预算。只是因为这个整改，我们把这个预算的数字又往上调了一些而已。
During the period of suspension, we have gone through a self-rectification process. The doubling auditing team plan was not just simply to deal with this suspension, it's actually related to our actual business development. Our new content submission is increasing very rapidly, we were going to increase the headcount of our auditing team, we're just expediting this process.
Just to add two points. One was we will double our content auditing team members, the number of our content audit staff. Basically, we estimate that the impact will be around RMB 5 million in the second half of this year. As we mentioned before, we will spend more on the selling and marketing in August and September in order to catch up the user acquisition momentum. I think Mr. Chen can add more color on the advertising business.
我回答关于你第二个广告的问题。我们确实现在的广告收入的增长势头也非常的好。我们应该说是，现在有Q2超过1/3的广告的收入是来自于今年初才开始发力的效果类广告。
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 one-third of our advertising revenue.
在效果广告方面，我们3月底和6月初的招商会吸引了大量的广告代理商，二季度的广告主的环比增长超过了100%。
Continue with the performance-based advertising. We have launched two large-scale new agency recruiting conference in end of March and beginning of June, 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.
而且这些广告主不仅是数量的增加，我们也是扩大了我们的行业的覆盖，不断地去尝试对我们有好的广告效果的行业。
This growth not just limited to the number growth, we're also expanding our coverage in multiple industries, that is also helping our conversion and revenue growth.
而且我们也在不断地去优化广告的策略和算法，然后提高点击率和转化效果。
We are also optimizing our algorithm and our strategy to improve the click-through rate. As you may know, to increase performance-based advertising revenue, there's 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, 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 second quarter.
Okay.
Thank you. 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, Juliet Yang, the Bilibili senior IR director, or The Piacente Group. Our contact information for IR in both China and the West can be found on today's press release. Have a great day