Good day, and welcome to Bilibili Second Quarter 2024 Financial Results and Business Update Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Juliet Yang, Executive Director of Investor Relations. Please go ahead.

Thank you, operator. During this call, we'll discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially from those mentioned in today's news release and in this discussion due to a number of risks and uncertainties, including those mentioned in our most recent filing with the SEC and Hong Kong Stock Exchange. The non-GAAP financial measures we provide are for comparison purposes only. The definition of these measures and a reconciliation table are available in the news release we 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 IR website at ir.bilibili.com. Joining us today 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. I will now 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 second quarter 2024 conference call to discuss our financial and operating results. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. We delivered solid second-quarter results with accelerated topline growth, improved margins and healthy community development. In the second quarter, our total revenues increased by 16% year over year to RMB 6.13 billion. Our advertising business led this growth, with ad revenue growing by 30% year over year. Revenues from our Games and Value-added services also increased by 13% and 11% year over year, respectively. The momentum across our business lines is a strong testament to our execution in increasing our commercialization efficiency and unlocking the value of our community. Increased revenues from our higher-margin advertising and games businesses boosted our gross profit by 49% year-over-year. Gross profit margin rose to 29.9% in the second quarter, up from 23.1% in the same period last year, marking the eighth consecutive quarter of margin improvement. Consequently, we significantly narrowed our adjusted operating loss and adjusted net loss by 69% and 72%, respectively, year-over-year. Moreover, we generated a record RMB1.75 billion in operating cash flow in the second quarter. Our deferred revenue balance at the end of Q2 also increased by RMB738 million from the end of Q1. With this progress, we are confident that we can achieve our non-GAAP breakeven target in the third quarter of this year and continue to improve our profitability thereafter. While we have been accelerating our financial performance, our community continued to thrive. In the second quarter, our DAUs increased by 6% year-over-year, reaching 102 million, and the MAUs grew to 336 million. Our community remains highly engaged, with users spending a daily average of 99 minutes on our platform. As we move…

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

[Foreign Language] Thank you for the opportunity to ask question. So my question is on the advertising. We have -- we see that the ad advertising growth in the second quarter was very robust, growing about 30% year-over-year, which is very strong. So, could you maybe share the key driver behind? And also how should we expect the advertising growth for the second half? Thank you.

[Foreign Language] In a challenging macro-environment, Bilibili's second-quarter advertising business achieved a 30% year-on-year growth with quarterly revenue exceeded RMB2 billion for the very first time and contributing about one-third of the company's total revenue. [Foreign Language] As you can see that our advertising revenue has growth for several consecutive quarters and the fundamental reason behind that is one that Bilibili's traffic is growing very healthily. And secondly is that, we are continuously unlocking the commercial value of our users. [Foreign Language] Bilibili’s DAU grew by 6% year-over-year in the second quarter, while our video views increased by 18% year-over-year, showing a continued growth in our commercial traffic. [Foreign Language] Over 70% of China's young generations are using Bilibili and the average age of our user has reached 25. This is a stage where their consumption needs and spending power are rapidly growing and being released. [Foreign Language] This is evident from the booming growth in our consumption-related content categories. In Q2, video views in the categories such as home decor and real estate, automotive, fashion and beauty all increased by over 30% year-over-year, while daily video views in baby maternities experienced a year-over-year growth of over 80%. [Foreign Language] On top of that fundamental reason, what we need to do is to match the demand between advertiser and users with better infrastructure and industry-based marketing solutions. [Foreign Language] And the one horizontal refers to the enhancement of platform infrastructure and the multiple verticals refers to the vertical industry-based app solutions. [Foreign Language] In the first half of this year, we implemented comprehensive upgrades to several of our advertising infrastructure modules. For example, we upgraded the placement platform on our PC and provided one-stop placement tools for KA accounts. And as such, in the first half of this year, the…

Thank you. One moment for the next question. The next question comes from Felix Liu of UBS. Please ask your question.

[Foreign Language] Let me translate myself. Thank you management for taking my question. Congratulations on the strong quarter and your successful launch of San Guo: Mou Ding Tian Xia. Could management share more drivers for the game's successful launch? And what are your expectation of the game's lifetime cycle? And looking ahead, what are the future genres that you plan to further expand or invest in the future? Thank you.

[Foreign Language] The San Mou game indeed is a blockbuster in the first half of this year. We not only attracted millions of new players, we've also accumulated very good user feedback and also have large influence among the gaming industry. [Foreign Language] The game San Mou broke several records in our game operation history. Shortly after its launch, it quickly ranked among the top three on the IOS game top-grossing chart and maintained in Top 10 for the entire month afterwards. And San Mou also became the fastest gain in Bilibili's operation history to reach RMB1 billion in revenue. [Foreign Language] Since last year, we've been emphasizing the importance of operating one game and extended time for a longer period of time. And for San Mou especially, the SLG genre is a perfect game genre for long-term operation. And starting from August 3rd, we launched the game's second season. As of now, the performance of Season 2 reflects gamer's sustained enthusiasm and good retention rate and this has given us very strong confidence to make this as an evergreen title. [Foreign Language] Many people have asked me why San Mou would work? How we picked this game? I think this is a result of our continuous effort in the strategy of making new games, reinventing games to cater into the younger generation. We actually saw this game back in 2022 and we also invested in the development team in 2022. This -- the success of the game is not by accident. It's under long period of time of thinking and strategy and decision-making. [Foreign Language] Starting from 2019, our MAU grew by over 200%. And as we expand, our gamer circle also continued to expand. They included more than ACG gamers. They are gamers. They love multiple different categories.…

Thank you. One moment for the next question. Next question comes from Thomas Chong of Jefferies. Please ask your question

[Foreign Language] Thanks management for taking my question. My question is related to the trend in our content offerings. As average age for Bili ecosystem already reached 25 years old, can management share about the development of our content strategies and our content categories outlook as well as the consumption trend going forward? Thank you.

[Foreign Language] Last quarter I've mentioned that the average age of Bilibili users have reached 25 years old, and that brought a lot of change in terms of the wealth and depth of our content offerings as the users need to evolve. We've noticed that in our community, there emerged many new content categories. And for Bilibili, we're no -- we are not only a hub for young people's interest and hobbies, but also a common place for their lifestyle consumption. [Foreign Language] This is evident in the evolve of our content consumption data as young generation enter into -- enter new stages of life, content category related to their consumptions are growing rapidly on Bilibili. For example, in the second quarter, video views in the categories such as home decor and real-estate, automotive, fashion beauty increased by 39%, 43% and 30% year-over-year respectively. [Foreign Language] As I mentioned in the advertising question, the daily video views for baby and maternity category experienced a year-over-year increase of 80%. [Foreign Language] And this is a natural outcome for other users average age to evolve into 25. The average age of 25 meaning, about half of our users are above 25. And those generations or those demographics naturally have wider interest and consumption needs and they seek out on Bilibili. [Foreign Language] And because that Bilibili has authentic and professional videos and most of our videos are in the mid-to-longer form, it makes Bilibili the go-to destination for young generations before they make big purchases. [Foreign Language] And the reason why behind or the reason behind people working to Bilibili for larger ticket items is because, first of all, the user have to trust the platform, trust the content creator in their view and professional judgment. And secondly is that you can…

The next question comes from the line of Xueqing Zhang from CICC. Please ask your question.

[Foreign Language] Thanks management for taking my question. My question regards on our financial outlook. The company delivered continued margin expansion and a robust cash flow this quarter. Could management share with us the outlook for the financials in the second half of 2024? Looking at the third quarter, we will breakeven or make a profit, and what's the mid-to-long term profitability outlook? Thank you.

This is Fan. Let me take your question. Our financial performance in the second quarter demonstrates our business model has great potential for increasing the gross profit margin. In Q2, our overall revenue grew by 16%, while gross profit increased significantly by 49% year-over-year. The gross profit margin increased nearly 7 percent points year-over-year from 23% to nearly 30%, the eighth consecutive quarter of margin improvement. This was primarily due to our ability to control costs and achieved rapid revenue growth. With the continued growth, our high-margin advertising and game business, there's still substantial room for further improvement for our gross margin. Additionally, it is worth noting that our operating cash flow for the first half of the year with RMB2.4 billion and our free cash flow reached [RMB1.5] (ph) billion. This indicate that our business has entered into a positive cycle. Looking ahead to our financial performance in Q3, we see that the deferred revenue balance increased by over RMB770 million quarter-over-quarter, laying a good foundation for the third quarter revenue growth. We expect the revenue from our games and advertising business to maintain strong growth momentum, along with a significant quarter-over-quarter growth in gross margin. At the same time, in addition to achieving our initial growth of breakeven in Q3, we now aim to achieve meaningful operating profit on a non-GAAP basis. Meanwhile, we, we are delighted to see solid growth across our core business lines. Our growth momentum, along with the prudent cost and expense management will lead us to continue expanding our revenue scale and profitability in 2025 and resulting in ongoing improvement in our operating margins.

Thank you. Next question, please.

Thank you. The next question comes from Yiwen Zhang from China Renaissance. Please go ahead.

[Foreign Language] So thanks for taking my question. My question is regarding AI application. Can management discuss about how can we apply AI here via multiple user scenario of Bilibili and is there future potential? Thank you.

[Foreign Language] It is known that Bilibili has the most extensive and highest quality AI content across the Internet. I think the reason behind that is most of our user receive higher-education background and they are based in a first and second-tier city, who are curious. [Foreign Language] And based on our internal data that for the first half of this year, on average -- on monthly average over 80 million of users are watching AI-related content on Bilibili. And for those AI-related content, not just one word or 15 second headlines, many of those content has extensive professional content, in-depth discussion in AI. [Foreign Language] That results in three, the most AI platform for Bilibili. First most is that we believe we have the most user who are general -- genuinely interested in AI content. And second most is, we have the most AI professionals active on Bilibili. Lastly is over 90% of the domestic AI companies have set up accounts and get in touch with Bilibili users on Bilibili. [Foreign Language] Because the high concentration and condensity of AI content and user give us natural advantage and explore AI application. And as a platform, generally, we see many of the user initiate their attempt in connecting AI with their content creation. Back in 2023, there was a user who used the AI tools to mimic a famous singer's voice singing songs in their -- in her original voice and that actually triggered the original singer to come out and say this, she support this type of creation and welcome user to use it. [Foreign Language] And for this year we've noticed many AI-powered music creation, AI-powered animation, AI short plays were being released on Bilibili. Our operation team has even made an AI short play competition and attracting…

Thank you. That concludes today's answering session.

Thank you. Thank you once again for joining Bilibili's second quarter 2024 financial results and business update conference call today. If you have any further questions, please contact Juliet Yang, Bilibili's Executive IR Director or Piacente Financial Communications. Contact information for IR in both China and the US can be found on today's press release. Thank you and have a great day.