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 us for the safe harbor from liability as established by the U.S. Private Security 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 purpose only. For a definition of non-GAAP financial measures and reconciliation of GAAP to non-GAAP financial results, please see the 2018 first 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 the 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. [ Carli ] 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. .

games, advertising and live broadcasting and value-added services. Our community continues to expand with 77 million monthly active users, representing a 35% increase year-over-year. By providing high quality content and unit user interconnectivity, user can [ climb ] up. .

In the first quarter, our top 5 viewed categories were lifestyle, games, 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 first quarter, 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 friends is eligible for a cash bonus for his or her original content submission, which depends on various metrics, including popularity as well as positive feedback from users. We believe this program has brought our content ecosystem even further, reinforcing Bilibili as one of the largest PUGV platforms in China.

The number of active content creator 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 the variety shows. Our business model enable us not to be solely reliant on licensed content to attract users, but rather to use it in addition to enhance our content ecosystem and monetization capability.

During the first quarter, we select several new animi series to promote our premier membership program. Premier membership, they are entitled to watch these series one week in advance compared to non-premier members. Our users responded with high enthusiasm. Over 2 million orders were placed for this program in Q1.

Through this initiative, we believe we can not only offer users better viewing experience, but also promote other value-added services, including live broadcasting and a package in the near future where the user converts from nonpaying user to paying user. The early success gave us great confidence via our ongoing monetization effort..

A3! and the [ rupa that I have seen ]. All of these games boast 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 what is exclusively operated game pipeline, which are produced by well-known domestic content developers on the jointly-operated game front. We look forward to bring a number of highly anticipated ACG games, including [ shiny muchi ], Arknights as well as [ protein boy ] to our users..

Our immersive new content, user interaction and the growing community support our advertising revenue growth of 144% year-over-year in the first quarter..

Generation Z is a golden cohort targeted for all major brands with Bilibili's status as the leading platform for this highly-valued demographic who are the golden platform for advertisers targeting this group of active users.

Our users spend considerable time on our platform, average of 76 minutes per day, generating over 267 million daily video views in the first quarter, an increase of 137% year-over-year.

This not only provide us with a viewing audience for advertiser, but also provide us with deep insights into our user profile, enabling us to create the right [ theme ]ad. As a result, we believe we have huge room to grow across diverse advertising solutions.

We expect continued growth in brand advertising as well as our performance-based advertising as we expand it to our customer base and optimize the growth. We believe we are still in early stage of monetization with our advertising business, and it has great potential to grow. .

Notably, we experienced exceptional growth on a number of paying users in the first quarter, demonstrating our heightened monetization potential. Our average monthly paying users reached 2.5 million, a 190% increase year-over-year.

The majority of this growth was supported by our monetization program, with live broadcasting and value-added services, particularly with our newly-introduced [ host ] that with Bilibili's user preference and premier membership program as mentioned earlier.

We are encouraged to learn that our users respond well with our monetization initiatives and they have high willingness to pay for quality content and services. As a result, revenue from live broadcasting and VAS 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 growing community of young minds. In April, we introduced a brand-new Bilibili application for OTG 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 this way that we can back support especially of our business while continuing to bring value to content creators, our users, our community and all of our stakeholders. This concludes Mr. Chen's comments..

I will now provide a brief overview of our first quarter 2018 financial results. As Mr. Chen stated, our total net revenue increased by 105% to RMB 868 million or USD 138 million year-over-year. With robust growth from all 3 primary business streams, our revenue further diversified..

Our mobile games revenue increased by 97% to RMB 688 million or USD 110 million year-over-year, representing 79% of total revenue. The increase was primarily due to the increase in popularity of mobile games, such as FGO and Azur Lane. .

Our live broadcasting and VAS revenue increased by 151% to RMB 96 million or USD 15 million year-over-year, representing 11% of the total revenue, mainly attributable to our enhanced monetization effort and promotion of our live broadcasting and the introduction of our premier membership program..

The advertising revenue increased by 154% (sic) [ 144% ] to RMB 70 million or USD 11 million 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 revenue increased by 65% to RMB 13 million or USD 2 million 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% to RMB 655 million or USD 104 million from the same period of 2017. Revenue sharing cost, a primary driver of cost of revenue, was RMB 335 million or USD 53 million, representing a 120% increase year-over-year..

Gross profit increased by 249 million -- sorry, percentage to RMB 213 million or USD 34 million from the same period of 2017. .

Total operating expenses increased by 107% to RMB 287 million or USD 46 million from the same period of 2017. .

Sales and marketing expense were RMB 79 million or USD 13 million, 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 RMB 103 million or USD 16 million, 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 RMB 106 million or USD 17 million, representing a 92% increase year-over-year. The increase was primarily due to increased headcount in research and development. .

Loss from operations was RMB 74 million or USD 12 million compared with RMB 78 million in the same period of 2017..

Income tax expense was RMB 3 million or USD 0.5 million compared with RMB 2 million in the same period of 2017..

Net loss totaled RMB 58 million or USD 9 million for the first quarter of this year compared with RMB 67 million 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 business acquisition, improved by 94 -- 95% to RMB 3 million or USD 0.5 million from RMB 60 million in the prior period..

Basic and diluted loss per share was RMB 1.73. Non-GAAP basic and diluted loss per share were RMB 0.94. .

As of March 31, 2018, we had cash and cash equivalents as well as time deposits of RMB 1 billion or USD 168 million compared with RMB 765 million as of December 31, 2017..

Net cash provided by operating activities was RMB 471 million or USD 75 million compared with RMB 206 million in the same period of 2017..

As we look ahead, our financial growth is to continue improving our operational efficiency, while further growing our business. With that in mind, we are currently projecting net revenue for the second quarter to between RMB 970 million and RMB 1 billion..

Thank you for your attention. We would like now to open the call to your questions. Operator, please go ahead. .

[Operator Instructions] Your first question comes from the line of Daniel Chen from JPMorgan. .

[Foreign Language] I will translate myself. First, the question is really regarding our user acquisition strategy. Our MAU actually grow very decently sequentially 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 grew very strong sequentially 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 sub-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, Daniel. .

[Foreign Language].

Okay. I will translate for Mr. Chen for the first question. As you can see, our user growth is very healthy and on a stable rate, and Mr. Chen concluded 3 reasons. One is our very healthy PUGV ecosystem that we have a very positive virtual cycle that will have more PUGV content creator or creating more content, attracting more users.

As we are focused on the depth of the category, we are also expanding the content category. For example, in this quarter, the entertainment verticals are expanding not much faster than our traditional ACG content category. As we expanded to more content verticals, that will attract more content creators 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 by -- 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, as you can see, we have excellent long-term and short-term user retention number. We -- at the same time, we are also expanding -- also actively expanding our channel acquisitions, for example, for pre-download, pre-installments or downloads on app stores.

Through these 3 areas, we are -- that's how we achieved the sustainable user growth.

Chen?.

[Foreign Language].

Okay. I'll translate for Mr. Chen. Mr. Chen gives 3 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 VV are contributed by our PUGV. So content -- the way that we -- 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 metrics to help them to better analyze and help them to create better content.

And we also have a systematic training program to help to train newcomers that to lead them on the way of becoming a top content creator. And second is that content creator incentivize program that we launched in February of this year.

As you may know, the top content creator can make decent income on our platform, while what we focus more is how do we create the content creators that just started or in the middle area to bring them to the top. As we mentioned during the conference call that we provide a cash incentivized program for content creators with 10,000 -- 1,000 friends.

And the cash bonus 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 impact of the incentivized program were --- is very clear.

In 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 much more comprehensive incentivized programs 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 we take a look at revenue mix in 2017, that there were 86% of revenue from the games, 7% from the live broadcasting and 7% from advertising revenue.

We are happy to see that we -- when we achieved the record high mobile game revenue in the first quarter of this year, our revenue further diversified because we have -- our user, they have high willingness to pay for quality content and services, and we have great potential for advertising spending as we mentioned in our press release.

Now the revenue mix, the contribution from live broadcasting 11% and 8% on the advertising revenues. We foresee that after 3 to 5 years, about 50% of the total revenue have come on our games. And 30% from advertising and 20% from live broadcasting and value-added services. That answers your question. .

Your next question today comes from the line of Alex Poon from Morgan Stanley. .

[Foreign Language] I'll translate my questions. 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 landscapes on the game -- on both the game side and the short video side.

PUBG is a very ramp-up service 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 future?.

[Foreign Language].

Okay. I will 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 age above -- above age 19 is increasing.

And we also see a clear penetration from larger cities, 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 habits compared to our old users, and we can see they have much wider habits and interest, for example, in entertainment and documentary. Those verticals are growing very nicely, thanks to our new users that with -- extended interest scope.

And that is also a good sign, which means we're extending 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 is divided in China, more -- there's clearly more Android user in the market. .

[Foreign Language].

Okay. So on the competition landscape on the game-wise, clearly, there is 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 companies. That is, our business model is to find our existing massive user base interest and habits and find the right content, the right games 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 little impact from how the games evolve outside of our ecosystem. And on the data point, you can see our users -- our active game users and our income and the time spent are actually growing. This also supports our theory. .

[Foreign Language].

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 #2 top-viewed content category on our video platform and games live broadcasting is actually #1 in terms of content category on our broadcasting vertical.

So once there's a new emerging pop game that, that naturally will [ lead ] more content submission and more viewer viewing the live broadcasting, actually has a much more positive impact on our business. And we welcome more popular games in the market. .

[Foreign Language].

Okay. On your third question on the impact of short video application, whether that has impact on our business, the answer really is no from the data-wise because be that no matter the monthly active user, their 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 a 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 creator themselves.

And they follow what's most trendy and what's interesting in the market and produce that content to attract our users. That's why we're always upkeep 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 has affected our business progress. Hope that answers your question. .

[Operator Instructions] Your next question today comes from the line of Eddie Leung from Merrill Lynch. .

[Foreign Language] So I have 2 questions. The first one is a little bit about content. It seems like a lot of Internet companies, whether they are short-form or long-form video companies or soft and large Internet platforms, recently talking about enhancement in animation and comic content. So just wondering what's your thought in it.

And then 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?.

[Foreign Language].

Okay. The first -- I'll translate the first question. The [ certain ] things. The competition has always been there, especially from all the major video platforms, including Tencent, iQiyi and Youku. They have been and will be interested in the anime or ACG area.

And we don't think that will change the competition landscape as more of communication of how this industry has great growth potential and as it's likely to continue to grow. .

[Foreign Language].

Okay. So the reason you asked this question is probably because you heard some of the players are extending their purchase into some of the animation licensed content.

While instruction-wise, you would emphasize the reason we are so strong in the ACG area is not because we spend a lot -- the most -- the #1 amount of money in terms of acquiring licensed content. The reason is because we are in this ACG-lover community.

We have this community first, then we decided to spend -- to expand with acquiring more licensed content. And we believe the ACG loves the best -- the majority of ACG lovers and ACG content creators are all based on Bilibili.

Maybe 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 127 jointly-operated games and they contribute about 11% of the total game revenues. So the growth trends for the -- is good in terms of operation, also very well in the first quarter. .

Your next question today comes from the line of Thomas Chong from Crédit Suisse. .

[Foreign Language] I'll translate my questions into English. I have 2 questions. The first question is on our overseas strategies over the next couple of years.

And my second question is about the number of advertisers in Q1 and what are the advertising categories?.

[Foreign Language].

So thanks, Thomas, for the question. Let me translate. On overseas expansion strategy, from a long-term perspective, of course, we'll definitely focus on the international market as what Bilibili is doing is focus on the pan-entertainment industry that attracts young minds from all over the world as long as they have their specific interest or habits.

But in the short-term, our main focus will definitely remain in Mainland China as China being one of the -- the largest single economy in the world and enjoys the highest economic growth rate. And we have been developing in Mainland 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, maybe you can answer for me. .

Yes. To answer the second question, currently, we don't have much advertising customers as we just started to monetize our fees ads. And the top 5 -- or top 2 of the customer for the brands advertising is the food and beverage and Internet services and comics. And for the fees ads, they're education, e-commerce, Internet services. .

Ladies and gentlemen, that concludes the question-and-answer session. I will 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 Juliet Yang, Bilibili's Senior IR Director or TPG Investor Relations. IR contact information in both China and the U.S. can be found in -- on today's press release. Have a great day..