Good day, and welcome to the Bilibili's 2018 First 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 today's discussion will contain forward looking statements relating to the future performance of the company 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 this discussion. A general discussion of 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 purposes only. For a definition of non GAAP financial measures and reconciliation of GAAP to non GAAP financial results, please see the 2018 Q1 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 the 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 our first earnings call as a public company. I'm pleased to deliver the opening remarks on Mr. Chen's behalf. Our successful IPO on March 28 was an exciting milestone for us. I would like to take this opportunity to thank our supporting shareholders, talented content creators, and loyal users and employees that helped make this happen.
We will continue to work tirelessly to fulfill our mission to enrich the everyday life of young generations in China. I'm very pleased to report excellent operational and financial results for the Q1 2018. With total revenues of RMB RMB868 1,000,000. This marked growth of 105% year over year, driven by all 3 of our core business categories: games, advertising and live broadcasting and value added services. Our community continues to expand with 77,000,000 monthly active users, representing a 35% increase year over year.
By providing high quality content and unique user interconnectivity, users can find In the Q1, our top 5 viewed categories were lifestyle, dance, entertainment, technology and anime, taking over 70% of total video views. Over the years, we have successfully developed a robust online entertainment ecosystem, comprising talented content creators and a highly engaged user base. In the Q1, 89% of our video views were contributed by professional user generated video, PUGV. To further encourage our content creators, we initiated a cash incentive program in February of this year. Any content creator with over 1,000 fans is eligible for a cash bonus for hate or her original content submissions, which depend on various metrics, including popularity as well as positive feedback from users.
We believe this program will bolster our content ecosystem even further, reinforcing Bilibili as one of the largest PUG platforms in China. The number of active content creators and their content submission increased by 96% and 154% year over year, respectively. In addition to PUGV, we also provide users with licensed content in a number of verticals, including anime, documentary and variety shows. Our business model enable us not to be solely reliant on licensed content to attract users, but rather to use it as an addition to enhance our content ecosystem and monetization capabilities. During the Q1, we selected several new anime series to promote our premium membership program.
Primary memberships, they are entitled to watch these series 1 week in advance, compared to non primary members. Our users responded with high enthusiasm. Over 2 many orders were placed for this program in Q1. Through this initiative, we believe we can not only offer users better building experience, but also promote other value added services, including live broadcasting as a package in the near future, with users are converted from the paying user to paying user. The earnings staff give us great confidence in our ongoing monetization efforts.
Now let's take a closer look at our core business. Revenue from our mobile games grew 97% year over year, led primarily by continued popularity of FateGrand Order, or FGO. FGO remains one of China's top grossing games, and it reached record high monthly grossing revenue in the Q1. We expect this game to continue to produce stable revenue throughout the year. We are confident that we can replicate the success of FGO to further diversify our game revenue stream.
We have a strong pipeline with several showing new games planned for launch in the second half of the year, including BanG Dream, a music low play game and the 2 romance RPGs targeted for female audience, A3 and the Wubah 2.0. Zhangxin. All of these games rose strong track record in Japan, which we believe is a good indicator for how the games will perform in China. We also have several high quality mobile games in our exclusively operated game pipeline, which are produced by well known domestic content developers. On the joint operated game front, we look forward to bringing a number of highly anticipated ACG games, including Shining Meaty, Park Nights, as well as Crossing Void to our users.
Our immersive new content, user interaction and a growing community support our advertising revenue growth of 144% year over year in the Q1. Generation Z is a golden cohost targeted for all major brands, With Bilibili's status as the leading platform for this highly valued demographic, we are the go to platform for advertisers targeting this group of active users. Our users spend considerable time on our platform, average 76,000,000 per day, generating over 267,000,000 daily video views in the Q1, an increase of 137 percent year over year. This not only provides us with a building audience for advertisers, but also provides with deep insights into our user profiles, enabling us to curate the right feed ads. As a result, we believe we have huge room to grow across various advertising solutions.
We expect continued growth in the advertising as well as our performance based advertising as we expanded our customer base and optimized the algorithm. We believe we are still in early stage of cost monetization with our Xialing business and it has great potential to grow. Notably, we experienced exceptional growth on the number of paying users in the Q1, demonstrating our heightened monetization potential. Our average monthly paying users reached 2,500,000, a 190% increase year over year. The majority of this growth was supported by our monetization progress with live broadcasting and value added services, particularly with our newly introduced host that is Bilibili's user preference and the primary membership program I mentioned earlier.
We are encouraged to learn that our users respond well with our monetization initiative, and they have high willingness to pay for quality content and services. As a result, revenue from live broadcasting and the VAS business increased by 151% year over year. As we move through 2018, we plan to continue to enrich our content offering, improve the user experience and enhance our technology and infrastructure that's through our infrastructure through our growing community of Myanmar. In April, we introduced a brand new Bilibili application for OTT platform, aiming to further expand our user reach. At the same time, we plan to strengthen our monetization capabilities by growing our user base and the number of paying users.
In these ways, that we can best support expansion of our business, while continuing to bring value to content creators, our users, our community and all of our stakeholders. This concludes Ms. Chen's comments. I will now provide a brief overview of our Q1 2018 financial results. As Mr.
Chen stated, our total net revenue increased by 105 percent to RMB868 1,000,000 or $138,000,000 year over year. With robust growth from all 3 primary business streams, our revenue further diversified. Our mobile games revenue increased by 97% to RMB688 1,000,000 or $110,000,000 year over year, representing 79% of total revenue. The increase was primarily due to the increasing popularity of mobile games such as FGO and Azulan Live. Our live broadcasting and VAS revenues increased by 151% to RMB96 million or $15,000,000 year over year, representing 11% of the total revenue, mainly attributable to our enhanced monetization efforts and the promotion of our landline forecasting and the introduction of our primary membership program.
The advertising revenue increased by 154 percent to RMB70 1,000,000 or $11,000,000 year over year, representing 8% of the total revenue. The increase was driven by the robust growth of our advertising revenue from brand advertising and the launch of performance based advertising business in December 2017. Our other revenues increased by 65% to RMB30 1,000,000 or $2,000,000 year over year, representing 2% of the total revenue, primarily attributable to an increase in the sales of products through our e commerce platform. Cost of revenues increased by 80 percent to RMB655 1,000,000 or $104,000,000 from the same period of 2017. Revenue sharing costs, a primary driver of cost of revenue, was RMB335 million or $53,000,000 representing a 120 percent increase year over year.
Gross profit increased by RMB249 1,000,000 sorry, a percentage to RMB230 1,000,000 or $34,000,000 from the same period of 2017. Total operating expenses increased by 107 percent to RMB287 1,000,000 or $46,000,000 from the same period of 2017. Sales and marketing expense were RMB79 1,000,000 or $30,000,000 representing a 93% increase year over year. The increase was primarily attributable to the increased channel and marketing expense associated with our APP as well as promotional expense for our online games. General and administrative expense was RMB103 1,000,000 or $16,000,000 representing a 140% increase year over year.
The increase was primarily due to share based compensation expenses with an IPO condition and an increase in professional service fees. Research and development expense were RMB106 1,000,000 or $17,000,000 representing a 92% increase year over year. The increase was primarily due to increased headcount in research and development. Loss from operations was RMB74 1,000,000 or $12,000,000 compared with 78,000,000 in the same period of 2017. Income tax expense was RMB3 million or US0.5 million dollars compared with RMB2 1,000,000 in the same period of 2017.
Net loss totaled RMB58 1,000,000 or $9,000,000 for the Q1 of this year, compared with 67,000,000 in the same period of last year. Adjusted net loss, which mainly excludes share based compensation expenses and money amortization expense related to intangible assets acquired through business acquisition improved by 94% or 95 percent to RMB3 1,000,000 or 0.5 million dollars from RMB60 1,000,000 in the prior period. Basic and diluted loss per share was RMB1.73 Non GAAP basis and diluted loss per share were RMB0.94. As of March 31, 2018, we had cash and cash equivalents, as well as time deposits of RMB1 1,000,000,000 or $158,000,000 compared with RMB765 1,000,000 as of December 31, 2017. Net cash provided by operating activities was RMB471 1,000,000 or $75,000,000 compared with RMB206 1,000,000 in the same period of 2018.
As we look ahead, our financial growth are to continue improving our operational efficiency, while further growing our business. With that in mind, we are currently projecting net revenue for the 2nd quarter to between RMB970 1,000,000 and RMB1 1,000,000,000. Thank you for your attention. We would like now to open the call to your questions. Operator, please go ahead.
Thank you. Your first question comes from the line of Daniel Chen from JPMorgan. Please ask your question.
Hi. I will translate myself. First question is regarding our user acquisition strategy. Our MAU actually grow very decently, sequentially and on a year over year basis this quarter. Could management provide some color on your strategy to further grow your user base in the Generation Z?
Second question is regarding our gaming revenue, including live broadcasting, advertisement and also membership. This part actually grow very strong on sequential on year over year basis. So what's management view on our revenue breakdown in the 3 to 5 years? Are we expecting that this part to account for a much bigger portion? The third question is related to our support to the content provider.
So we have a scheme to do the revenue sharing with all the content provider. So could we have some update on this front? And what's our strategy to motivate all the content creators to create the valuable user generated content on our platform? Thank you.
Thank you, Daniel.
Okay.
I will translate for Mr. Li for the first question. So as you can see, our user growth is very healthy and on a stable rate. And Mr. Chen concluded three reasons.
1 is our very healthy PUGV content creator, creating more content, attracting more users. As or creating more content, attracting more users. As we are focused on the depth of the category, we're also expanding the content category. For example, in this quarter, the entertainment verticals are expanding that much faster than our traditional ATG content category as we expanded to more content vertical that will attract more content creator to create more high quality content. So in that way, we don't actually have to spend a lot of money to stimulate the growth of users, but rather to rely on our healthy ecosystem.
That's the first point. The second point is, we also focus on a lot of the new content that attracts young minds' attention. For example, in the live streaming category, we are actively searching for new mobile games that attract a lot of users' attention. We also invested in our own esports team, which is called BLG. All of this content are also driving the growth of our MAUs.
And third point is to as you can see, we have an excellent long term and short term user retention number. At the same time, we're also expanding are also actively expanding our channel acquisitions, for example, for pre download, pre installments or downloads on app stores. Through these three areas, we are that's how we achieved the sustainable user growth. Okay. I'll translate it for Mr.
Chen. Mr. Chen gave three reasons that how we're going to help our content creator and better incentivize them. So as all of you might know that 89% of our daily BB are contributed by our PUGV. So content the way that how we incentivize our content creators remains our top priority.
So the first point is we have a very comprehensive service system to support the content creation of our content creators that we supply them with full access of our backstage data, supply them with tools to analyze how their work has been viewed by different users and what's their feedback and how many of them were from which area by number of matrix to help them to better analyze and help them to create better content. Commerce to lead them on the way of becoming top content creator. And second is that the content creator incentivized program that we launched in February this year. As you may know, the top content creator can make decent income on our platform. But what we focus more is how do we bring the content creators that just started or in the middle area to bring them to the top.
As we mentioned during the script, during the conference call, that would provide a cash incentivized program for content creators that would send out 1,000 fans. And the cash bonuses is based on the popularity as well as the positive user feedback from this video, not just directly linked with what kind of income that we can receive from this video. So the effect of this incentivized program was very clear. In the Q1, the number of active content creator and their content submission number increased significantly year over year. And going forward, we'll also supply them with a much more comprehensive incentivized program that will support them from not just on the cash basis, will also provide them with marketing tools and help them to achieve better economic benefit based on various metrics, not simply rely on the traffic income.
Okay. I will take your second question. If you take a look at revenue mix in 2017, that there were 83% of revenue from the online games, 7% from online broadcasting and 7% from advertising revenue. We are happy to see that when we achieved record high mobile game revenue in the Q1 of this year, our revenue further diversified because we have our user base have high willingness to pay for quality content and services and we have great potential for advertising business as we mentioned in our press release. Now the revenue mix, the contributions from live broadcasting, 11% and 8% on the advertising revenues.
We foresee that after 3 to 5 years, about 50% of the total revenue were from the online games and 30% from advertising and 20% from live broadcasting and value added services. That answers your question.
Thank you. That's very helpful.
Your next question today comes from the line of Alex Tung from Morgan Stanley. Please ask your question.
First question is regarding MAU and content creator growth. I would like to understand the split of this MAU and content creator growth by age and also by geographical region. And my second question is regarding the competitive landscape on the game on both the game side and the short video side. PUBG is a very ramp up very strongly in terms of DAU. Have you seen any impact from PUBG affecting your game user?
And second is for short video, the time spent and DAU growth is very strong for these platforms. Do you see any challenge from them taking your user time spent or will create pressure for your MAU growth in the future? Thank you very much.
Okay. I'll translate the first question. So as we further our business grow, we see in 2018, our daily average new user increase has actually accelerated compared to last year. And if we analyze the data, in Q1, the new users we see the portion that comes from above age 19 is increasing and we also see a clear penetration from lower tier city, a lot more users from Tier 3 and Tier 4 city are coming in. This is also in line with how the pop culture are penetrating from more developed area to less developed area.
And on their interest scope, we noticed that a lot of our new user has more extended interest and have had as compared to our old users. And we can see they have much wider habits and interests. For example, in entertainment and documentary, those verticals are growing very nicely, thanks to our new users that we've expanded interest scope. And that is also a good sign, which means we're expanding our content offering as well as our target audience. And lastly is our from the platforms, we also see the Android users are coming are increasing more than iOS users.
This is also in line with how this device is divided in China more. There's clearly more Android user in the
market.
Okay. So on the competition landscape on the game wise, clearly, there's no impact from the PUBG games with our games. It's obvious that even before PUBG, there's Honor of Kings and League of Legends and our game has been performed steadily with a very stable growth rate. The logic behind our game business is different from other regular game company. That is our business model is to find our existing massive user base interest and habit and find the right content, the right game that fits their interest and recommend it to them.
So we will obviously continue to bring new games and offer the games to our users' benefit. And there's very, very, very little impact from how the game evolves outside of our ecosystem. And on the data point, you can see our users, our active games users and income and their time spent are actually growing. This also supports our theory. Okay.
On the contrary, actually, the emerging of new POP games actually has a positive impact on our PUGV system as well as our live broadcasting. As you may know that games is our number 2 top viewed content category on our video platform. And game live broadcasting is actually number 1 terms of content category on our broadcasting vertical. So once there's a new emerging pop game that naturally will lead more content submission and more viewer viewing the live broadcasting, it actually has a much more positive impact on our business. And we'll welcome more popular games in the market.
Okay. On your third question, on the impact of short video application, whether that has impact on our business, the answer clearly is no. From the data wise, you can see the no matter if the monthly active users or time spent, our community retention rate or the engagement level on our community, All of this data are growing very healthy. And the reason we are able to do that is we are self sustaining ecosystem. All this content is not produced by several editors.
It's actually produced by our content creators. We believe there's no one understands better than our users' needs than the content creators themselves. And they follow what's most trendy and what's most interesting in the market and produce that content to attract our users. That's why we're always up to keep the most interesting and popular content on our platform. And Bilibili has 9 years operation history.
This type of new trendy application or new format of media, we've seen a dozen times and none of those have affected our business progress. Hope that answers your question.
Your next question today comes from the line of Eddie Leung from Merrill Lynch. Please ask your question.
Hey, good morning. Thank you for taking my questions. So I have two questions. The first one is a little bit about content. It seems like a lot of Internet companies, whether they are soft form or long form video companies or some of them large Internet platforms, recently talking about investment in animation and comic content.
So just wondering what's your thought in it? And then your secondly, just a small question about your game revenues. So we know that the growth has been driven by self operated games. So just wondering what's the trend of the jointly distributed games recently? Thank you.
Okay. The first I'll translate for the first question. Mr. Chen, thanks. The competition has always been there, especially from all the major video platform, including Content IT and YouTube.
There have been and will be investing in the anime or ACG area. And we don't think that will change the competition landscape as more of a indication of how this industry has great growth potential and as it's likely to continue to grow? So the reason you asked this question is probably because you've heard some of the player are extending their purchase into some of the animation licensed content. Well, Mr. Chen wanted to emphasize, the reason we are so strong in the ACG area is not because we spend a lot the most number one amount of money in terms of acquiring licensed content.
The reason is because we are this ACG lover community. We have this community first, then we decided to expand to acquire more licensed content. We believe that ACG love the best the majority of the ACG lover and ACG content creators are all based on Bilibili. They have interest community on our platform. And this market position is not something that somebody can spend a little bit money on the content, licensed content can change it.
And Eddie, to answer the second question, currently, we have about 120 7 jointly operated games, and they contribute about 11% of the total game revenues. So the growth trend for the joint operating income also very well in the Q1.
Got it. Thank you. Your next question today comes from the line of Thomas Chong from Credit Suisse. Please ask
your
question.
Maybe I'll translate my questions into English. Good morning, management. I have two questions. The first question is about our overseas strategies over the next couple of years. And my second question is about the lump of advertisers in Q1 and what are the advertising categories?
Thank you.
So thanks, Tom, for your question. Let me translate. On the overseas expansion strategy, From a long term perspective, of course, we'll definitely focus on the international market as what Bilibili is doing is focused on the pan entertainment industry that attracts young minds from all over the world as long as they have their specific interests or habits. But in the short term, our main focus will definitely remain in Mainland China as China being one of the largest single economy in the world and enjoys the highest economic growth rate. And we have been developing in Maryland for 9 years and we have already established our leading position.
In the short term, we'll definitely focus on the domestic market. And the second question will be answered by
Yes. To answer the second question, currently, we don't have much advertising customers as we just start to monetize our feed ads. And the top five or top 2 Avada customers for the brands advertising through the beverage, Internet services and comics. And for the feedback, education, e commerce, Internet services. Thank you.
Ladies and gentlemen, that concludes the question and answer session. I would now like to turn the conference back to management for any additional or closing remarks.
Thank you once again for joining us today. If you have further questions, please contact Julie Yang, the Liberty Center's IR Director or TPG Investor Relations. Our contact information in both China and the U. S. Can be found on today's press release.
Have a great day.