Good day, and welcome to the Bilibili 2018 Fourth Quarter and Full Year 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 the company's future performance and are intended to qualify the safe harbor from liability as established by the U.S. Private Securities and 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 the risk factors that could affect Bilibili's business and financial results is included in the 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 measures, please see the 2018 fourth quarter and full year financial results news release issued earlier today. As a reminder, this conference call is being recorded. In addition, an investor presentation and a webcast replay of this conference call will be available on Bilibili Investor Relation's 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. Carly Li, Vice Chairwoman of the Board and Chief Operating Officer; and Mr. Sam Fan, Chief Financial Officer. And I will now turn the call over to Mr. Fan, who will lead the prepared remarks on behalf of Mr. Chen.

Thank you, Juliet, and thank you, everyone, for participating in today's earnings call. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. 2018 was an exciting year for Bilibili as we made great strides across our business. In March, we successfully completed our IPO, and throughout the year, we continued to build on that success and grow each of our core divisions. We added massive amounts of new diverse content through our robust Professional User Generated Video or PUGV ecosystem as well as entered a number of new cooperation agreements. Our ever growing content supports our expanding community. By the end of the year, our MAUs grew to record level of 92.8 million. Importantly, we deepened the level of connectivity within our community and enhanced our monetization capabilities. By the end of 2018, we had increased our revenue by 67% to RMB4.1 billion, and the number of paying users contribute from 1.1 million to 4.4 million in the last 12 months. The fourth quarter was an extension of this momentum, and the total net revenues increased 57% year-over-year to RMB1.2 billion, once again surpassing our expectations and beating the high end of our guidance. During the fourth quarter, we further grew our robust compilation of high-quality content through our PUGVs. As we announced during the quarter, we entered a strategic agreement with market giants Tencent and Alibaba, which considerably strengthened our capacity in anime, in mobile games and commercialization. Our extensive and growing library of content continues to attract young people to our community, generating substantial user growth. In the fourth quarter, the number of monthly active users grew by 29% year-over-year, reaching 92.8 million. Our mobile monthly active users grow even faster by 37% year-over-year to 79.5 million in the fourth quarter. Our platform's exceptional user…

[Operator Instructions]. And our first question comes from the line of Thomas Chong from Crédit Suisse.

I have two questions. My first question is about e-commerce strategy, our cooperation with Taobao. Can management talk about more details about how we should think about this business line in 2019? And any financial implications to the top line and the bottom line? And my second question is about our user growth. Given our strong user growth this quarter, can management share our thoughts in 2019 and 2020?

[Foreign Language].

Thank you, Thomas, for your question. I will translate Mr. Chen's answer. The cooperation with Taobao we announced in December last year, the cooperation mainly include content-driven e-commerce business and commercialization of Bilibili intellectual IP assets. For example, to Bilibili content creators, we'll register and operate a number of accounts on Taobao and promote merchandise by producing content on creative and interactive format on both platforms in a way to increase their commercial values. As for the Bilibili's IP assets, we'll connect both the front and the back end of the database and to improve our commercialization of our IP assets. And Taobao will provide Bilibili with e-commerce technical support to ensure a smooth and more efficient user experience. Currently, our collaboration with Taobao with regarding the content creators are progressing very smoothly. We are actually in a process of introducing our first batch of content creator who has over 1 million followers to set up -- to be set up in Taobao. The collaboration between Bilibili and Taobao is more of a union of two ecosystems, the Bilibili's content ecosystem as well as Taobao's commercial system. As the two ecosystem united, we see a lot of synergy and commercialization opportunities. In the future, there will be multiple ways for us to work together. That includes advertising opportunity related to e-commerce and for our content creators to better monetize their traffic. So Thomas, with regarding the user expansion plan Mr. Chen has discussed in the past, in 2019, our user goal is to reach a peak MAU around 110 million to 120 million and to reach 140 million to 150 million in 2020. Currently, we are well on track to deliver that goal.

And our next question comes from the line of Alex Yao from JPMorgan.

So my first question is to follow up Thomas' question on the partnership with Alibaba. Given the Alibaba partnership, how should we think about your revenue mix change over the next 2 to 3 years? Then the second question is on the user acquisition costs to achieve our target of 2019 MAU. To be able to achieve that target, what's your user acquisition strategy? And how should we think about your sales marketing budget over the coming quarters?

[Foreign Language]

In the past, we have made revenue structure forecasts. From a 3-year horizon, we projected by then we will have about a 50-50 revenue split, 50% games and 50% nongames. Based on our current business plans, this goal is still on track. Okay. Mr. Chen added, as he mentioned earlier, that the collaboration with Taobao is beyond just on the revenue lines, is more of a union of two ecosystems. This will, for one, definitely help on our commercial advertising business which will help us to grow faster and more healthier. More importantly, they will also help us to build a stronger ecosystem with our content creators to better connect the user, the content and the merchandise. In a way, it's fundamental baseline to reinforce our powers to generate revenue more healthily. Okay. So the core competency in our commercial ability, one is to grow in the healthy way. Second is more sustainable way. It probably won't immediately show on the P&L but will help us not only not hurting our user experience but finding and providing more right content and right consumption products to our users and to help us to grow in the longer run. As for the sustainability, we think our revenue growth will be a very healthy longer-term sustainable growth. So the fourth quarter user growth as well as the full year user growth is in line with our initial projections.

[Foreign Language]

The key driving force of that user growth is mainly driven by our content, specifically in PUGV and our OGV content as well as the stickiness and engagement level of our community. At the same time, based on our experience and advantage of our content offering, we'll also actively to try to attract user from outside of our community to come to Bilibili. In 2018, our user acquisition strategy has gained a very deep experience in terms of evaluate the quality of the new user in terms of level of engagement and level of retention. So based on our internal analysis, we see the new user who come in, in 2018, their conversion to registered user and their conversion to paying user, the level is much higher compared to the same period last -- in 2017. That results prove -- is a proven -- is a proof -- strong improvement of our 2018 user acquisition strategy. Looking into 2019, we'll continue to focus on the quality of new user and focus on the key matrix such as their engagement level, their conversion to paying users and to improve our user acquisition policy. So all in all, in 2018, we'll considerably add some budget as in terms of absolute dollar amount in user acquisition.

Yes. Let me have some input for that. Actually, there were three cost component in our selling and marketing expenses. That's the promotion expenses for our online game and the quota to acquire the new users and as well as the personnel costs related to our commercial salesperson -- sales team person. So as we mentioned that there will be more games to be released in this year, and we will enlarge our investment in the user acquisition. We forecast that, overall, the selling expenses will account in around 60% of the total revenues, but the number will be -- the percent will be varied through the different kind of quarters. Like in Q1, Q3, there will be higher percentage. In Q2 and Q4, they will be a little bit lower.

And our next question comes from the line of Alex Poon from Morgan Stanley.

I'll translate my questions. My first question is regarding MAU growth. Could you give us some more color on where these new users will come from, whether they are students or nonstudents or come from higher tier cities, lower tier cities, age demographics, whether they are game streaming users or they are -- they watch to win and they don't go to win anymore or they come from Taobao because of the new partnership? My second question is regarding gross margin improvement. In the next two years, assuming fourth quarter, assuming the revenue mix is already 50-50 between games and nongame, what the gross margin would be today? And for most of the business segments, you have a quite high revenue share for games, advertising and live streaming. And in the next 2, 3 years, what are the plans to increase the gross margin of each of these businesses?

[Foreign Language]

So the driving force of our user growth is through content. We use content to attract users and use our community to retain users. We do not solely rely on pure traffic acquisition. So we have been relying on this model for the past years, and we'll be relying on this model in the future -- in the futures. That -- the key reason behind our user growth is we are a content-driven business model. As we expand our content categories and improve our content qualities, we will be attracting more and more users who are interested in those categories. And because our strong community features that our own users are -- have much higher retention level compared to other platforms, that's why we are able to continue to grow in the future. So I think, for the young generations in China, their demand for content will only grow stronger, and their demand for the quality of content is another way of consumption operate. So that's why more and more young people will become our users. So based on the second half of 2018 new user profile analysis, we see both first and second tier city as well as third and fourth tier, fifth tier city. They are both growing. The user who are coming from third tier and below are growing faster than the first and second tier city. We think this trend will continue in the next few years.

Okay, let me take the question about the gross profit margin. Actually, if you look at the revenue sharing costs that we already disclosed, in Q4, that number is around 78% of the revenues. So that means that we don't pay too much to those kind of users. For the individual business segments like games, actually, for exclusive games, the gross profit margin is quite stable, like 55% for exclusive game license. Therefore, the whole operation model, the -- we don't share any profit to third parties. So that means that the GP margin will be around 100%. And for the live broadcasting, currently, the gross profit is not that high, but actually, if you count the -- our subscription membership revenues, the overall margin is still reasonable. So we will not like to calculate gross profit margin in like just to look at 1 quarter or 2 quarter numbers. We will keep investing our Comic business so that we will incur more content cost for our comic, and we will also invest in different areas like virtual idol, Luo Tianyi, that will help us to grow our community. So in the short term, like 1 or 2 quarters, the gross profit margin may be -- have some fluctuations. You already saw that in Q3 and Q4. Also, there might be some pressure in Q1. But in the long run, I think the investment for today is to have their value to help us to achieve more stabilized sales mix. At that time, we foresee that when normalized, our gross profit margin, where we have 50% revenue from games and 30% from advertising and 20% from VAS, that means the gross profit margin will be around 40%. That's our projection.

And our last question comes from the line of Hillman Chan from Citi.

So my first question is about our content strategy. As we are getting more and more diverse in terms of the content offering, could management share more on our focuses and plans for particular content show in 2019 to attract more new users? And related to that, how should we think about the impact to Bilibili branding and the potential impact to the core ACG user loyalty? And related to the content investment budget, could management share more on that for 2019? How should we think about the time line of turning around the business? And then my second question is on the game. Could management share more on the pipeline, the time line as well as the game approval process update?

[Foreign Language]

I will divide our content on our platform into two brackets: one is the core ACG-related content, including anime, comics and games; and the second part is more general entertainment-related content. That includes lifestyle and entertainment, pop culture, celebrity related. Okay, so first of all, in the core ACG content target users, they themselves are growing bigger and bigger. That includes, for example, for the domestic animations, we have more and more viewers who will -- who are interested in domestic animations. And more and more user are starting to accept and grow fond of VTubers. And e-sports, nevertheless to say, it's become country-wide sensation. We have a core competency in terms of ACG content. In the near future, we'll continue to invest and keep our leadership position in this content category. So as for the more general entertainment content, where we actually offer a very wide array category of content, that can also be seen from the data we show to our investors, the number of video views. In terms of video views, entertainment content ranked number one. For example, there are a lot of traditional Chinese -- traditional Chinese type of music are getting more and more popularity. A lot of digital product review sessions are now available and gaining popularity as well. And we are also seeing vlog as an important content category that's attracting more and more users. So from all those content mentioned above, they have one thing in common. That is all of those fans, they follow those content based on their own interests and habits. And they love those high-quality content produced by our content creators. They also have established strong emotional bond and connection with those content creators. So in terms of different content categories within our community, we have one practice,…

[Foreign Language]

So based on what Mr. Chen has mentioned earlier, because we have a very tight community and a very high engaged city users, we'll continue to invest in our content. Based on our experience accumulated in 2018, we will invest more in the self-produced content categories. We'll focus on several verticals that has a lot of attractions from our users, for example, animation and documentaries. This will not only help us to attract and retain users. This will also help us to promote our premium membership program. More importantly, the value of those IPs from those self-produced shows. This will give us profound values of our -- of the whole Bilibili ecosystem.

Yes. And the percentage of the total amortized content cost with our total revenue, the percentage will be around 50% -- 15% in this year, do not include our investment in Comic business. That does not include the comic content costs.

And that concludes the question-and-answer session. I would like to turn the conference back over to the management for any additional or closing comments.

Thank you, once again, for joining us today. If you have any further questions, please contact myself, Juliet Yang, Bilibili's Senior IR Director, or TPG Investor Relations. Our content information for IR in both China and the U.S. can be found in today's press release. Have a great day.

And that does conclude the conference for today. Thank you for participating. You may all disconnect.