SEA Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 14, 2023

There are 11 speakers on the call.

Operator

Good morning and good evening to all and welcome to the Sea Limited Third Quarter 2023 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Ms.

Operator

Minju Song to begin the conference call. Please go ahead.

Speaker 1

Thank you. Hello, everyone, and welcome to Sea's 2023 Third Quarter Earnings Conference Call. I'm Minju Song from Sea's Group Chief Corporate Officer's Office. Before we continue, I would like to remind you that we may make forward looking statements, which are inherently subject We believe these measures can enhance our investors' understanding of the actual cash flows of our major businesses when used as a complement to our GAAP disclosures. For a discussion of the use of non GAAP financial measures and reconciliation with the closest GAAP measures, Please refer to the section on non GAAP Financial Measures in our press release.

Speaker 1

I have with me Steve's Chairman and Group Chief Executive Officer, Forrest Li Group President, Chief Financial Officer, Tony Ho and Group Chief Corporate Officer, Yanjun Wang. Our management will share strategy and business updates, operating highlights and financial performance for the Q3 of 2023. This will be followed by a Q and A session in which we welcome any questions you have. With that, let me turn the call over to Forrest.

Speaker 2

Hello, everyone, and thank you for joining today's call. At our last earnings call, We shared that we would accelerate investment in e commerce. In the past, our e commerce business has made some significant shifts Before diving into the details of the 3rd quarter results, I would like to first share how the thinking behind each shift has been underpinned by our long term view of the business. Our strategy for e commerce is driven by the principle that maximizing the long term profitability of the business will generate the greatest returns to our shareholders in the long run, and maximizing long term profitability requires scale and strong market leadership. To achieve this long term objective, we look at 3 key operational factors: Growth, current profitability and market share gain, while all are important and positively correlated in the long run, near term focus on one can create trade offs for another.

Speaker 2

As business conditions change, sometimes rapidly, we need to decide which factor to prioritize for that period. During the pandemic, we focused on growth first, ramping up rapidly to meet surging demand for e commerce despite the great operational difficulties created by lockdowns. This allowed us to achieve significant scale and strong market leadership when growth was very efficient. Subsequently, capital became very expensive

Speaker 3

and

Speaker 2

the less available. So we made a rapid turn to achieve immediate profitability for Shopee as a first priority, while sustaining the platform's scale and market leadership. In both cases, we believe we made the right decisions in response to the shifting business environment. As we focus on long term profitability And adapt to changes in the business environment, some short term fluctuation in our results is inevitable. However, our demonstrated ability to adapt quickly and execute major transitions effectively is a core strength for the long term success of our business.

Speaker 2

We are now deploying these strengths to realize the next shift in our operational focus in e commerce. In this period, We will prioritize investing in the business to increase our market share and further strengthen our market leadership. We made this decision in view of 3 recent developments. 1st, Our move to self sufficiency and profitability has significantly improved both our cash reserves and operational efficiency. Our group cash position has increased by around $600,000,000 from a year ago to more than $7,900,000,000 at the end of the 3rd quarter.

Speaker 2

This puts us in a strong position to pursue more competitive and growth focused strategies, while maintaining financial discipline and a strong balance sheet over the long run. 2nd, the entrance of new players has intensified competition in our markets. Competition may accelerate market share consolidation. And when markets stabilize, each remaining player will have sustainable profitability. Investing in market share gains now will position us better with even stronger market leadership when that happens.

Speaker 2

We strive in a competitive environment. We competed aggressively and effectively in our market for years to emerge as the clear market leader from an underdog position. We now have scale, a deep understanding of our markets and a strong localized execution across diverse geographies. This gives us a wide competitive moat, and we intend to grow it further. 3rd, Live streaming has become increasingly popular among sellers, buyers and the creators in our markets.

Speaker 2

These tailwinds give us a very good opportunity to build our e commerce content ecosystem efficiently. We believe live streaming e commerce will become a sizable and profitable part of our platform and extend our long term growth potential. I want to emphasize that in making investment decisions, We are committed to maintaining a strong cash position, not relying on external funding and investing within our means at the time and the pace of our choosing. At the same time, given that e commerce penetration remains low in most of our markets, We, as the market leader, have a responsibility to help grow the whole e commerce ecosystem. Shopee will remain committed to doing so in a healthy and sustainable way and driving value creation for all stakeholders.

Speaker 2

I hope that this brief sharing on the thinking behind our decisions has been helpful. Being nimble and therefore able to do the right thing at the right time remains a core strength and a competitive advantage for our business. With that, I will invite Yanjun to discuss each business segment in more detail.

Speaker 4

Thank you, Forrest. Let me now share more details on the recent performance of each business segment, beginning with e Commerce. Just now Forrest discussed the long term objectives of our investments in e Commerce. For the immediate period, we assess the effectiveness of our investments by looking at how our market leadership as well as the scale and strength of our e commerce content ecosystem has been trending. On both fronts, we made strong progress in the past quarter.

Speaker 4

In the 3rd quarter, growth in Shopee's users, gross orders and GMV accelerated sequentially. We saw average monthly active buyers growing 11% quarter on quarter with increased order frequency and improved buyer retention. As a result, our gross orders and GMV achieved 24% and 11% sequential growth, respectively, further increasing our market share. We also saw a material improvement in NPS scores broadly across the markets quarter on quarter year on year. We believe this to be a good early indication of the effectiveness of our investments.

Speaker 4

Another key driver of our solid growth during the Q3 was the ramp up of Shopee Life. During this period, we have made a strong push into e commerce live streaming and increased collaborations with the growing ecosystem of content creators and live streaming sellers. We have also successfully acquired many new buyers and deepened our engagement with existing buyers. For example, in Indonesia, 1 out of 5 daily active users watched live streaming in October on average. With our efforts to help our sellers and creators, we saw a significant increase in their participation in Shopee Life.

Speaker 4

Our number of average daily unique streamers, total daily hours streamed and the number of daily stream sessions for October All grew by more than 3 times compared to June. Our streamers are also becoming more engaged with the average In Southeast Asia, Our average daily orders from live streaming already reached more than 10% of the total order volume for October. For our investments in live streaming, we have a targeted focus on key categories such as fashion and health and beauty. These categories tend to benefit more from this format of user engagement and tend to enjoy higher margins. This further strengthened our overall market leadership in these key marketplace categories.

Speaker 4

Moreover, we have been focused on investment efficiency and driven fast improvement in unit economics. This is well in line with our long term view that live streaming e commerce can be both a meaningful part of our platform and profitable. As shared before, we are consistently focused on reducing cost to serve for our e commerce ecosystem. We made strong progress in continuing to drive down logistics costs while improving user experience. Our platform logistics cost per order for our Asia markets decreased by 17% year on year in the 3rd quarter.

Speaker 4

Decreases in logistics costs also contributed to the year on year decline in our value added services revenue. We believe this to be an example of scale economics shared, where we drive down logistics costs with scale and pass the benefits of reduced shipping costs to our sellers and buyers. This business model also serves to strengthen the competitive moats of our platform. As we scale the Shopee platform, we also continue to expand the coverage of our logistics network across all markets to reach more sellers and buyers. This will be done through better routing for more efficient and faster delivery, further expanding our network of sorting centers and improving our last mile coverage.

Speaker 4

During the Q3, Brazil continued to enjoy strong growth. At the same time, our unit economics in Brazil improved. We will continue to invest in category expansion and user acquisition in this market, and we will take a balanced approach of investing in growth while driving improvements in operational efficiency, especially in logistics. Our results in Brazil for the quarter speak to our success on both fronts. While we believe we already achieved sufficient scale and Cost efficiency to be profitable in Brazil.

Speaker 4

Our focus remains on capturing the growth opportunity there. Looking into the Q4, we will continue to invest in the holiday shopping season, which we believe is a good time to acquire users, Moving on to Digital Entertainment. In the Q3, Garena's bookings grew sequentially, while quarterly active users and adjusted EBITDA remained stable quarter on quarter. We view these results positively as this was achieved despite schools We are happy to see that Free Fire maintains stable trends across both user and monetization metrics. Many of our initiatives around improving the user experience this year, such as reducing loading time, have shown continued success.

Speaker 4

We have also further deepened user engagement. For example, we recently revamped Free Fire's guilt system to enhance the social experience for our players. With all these efforts, we saw a higher revival of churned users and better user retention. Indeed, Free Fire was the most downloaded mobile game in the 3rd quarter globally according to Sensor Tower. We are also pleased to see healthy trends for our portfolio of published games.

Speaker 4

We added fresh exciting content and enhanced the user experience for these games. New content on Arena of Valor received very positive user feedback, resulting in a new peak of quarterly active users for the game. Another of our published games, Call of Duty Mobile, achieved its highest quarterly bookings. This was a result of both our continued efforts We will continue to assess new development and publishing opportunities for Garena. Lastly, on our Digital Financial Services business.

Speaker 4

In the Q3, SeaMoney delivered strong revenue and profit growth, mainly driven by our credit business, which grew steadily quarter on quarter. As of the end of the third quarter, we had a total credit The portfolio included Approximately $500,000,000 of principal amount of loans outstanding were from channeling arrangements, which is lending by other financial institutions on our platform. In terms of credit product type, $1,400,000,000 in the total credit portfolio were as pay later consumption loans, which are used to pay for transactions on or off the Shopee platform. The remaining balance mostly consisted of cash flows to Shopee buyers and sellers. The quality of our loan book stayed healthy.

Speaker 4

Loans past due by more than 30 days 90 days as a percentage of the gross loans receivable on our balance sheet was 5.2% and 1.6%, respectively, improving quarter on quarter. We also continue to expand the funding sources. In fact, The majority of the gross loans receivable on our balance sheet were funded by sources such as deposits in our banks and Asset Backed Lending from 3rd party Financial Institutions. We will continue to further diversify our credit and diversify risks. Our digital bank offerings have made good progress during the quarter.

Speaker 4

For example, our banks in Indonesia, the Philippines and Singapore have seen strong user adoption of the direct debit services, where buyers can make payments on Shopee directly from their accounts with our banks. The service has driven an acceleration in user acquisition for our banks and improved transactional experience on Shopee. This is also another example of our strong ecosystem synergies. To sum up, SeaMoney has become an increasingly important pillar of our core businesses. It is contributing meaningfully towards both our top line and bottom line.

Speaker 4

It has enjoyed a healthy and improving risk profile and strong ecosystem synergies. Under SeaMoney, we will continue to strive to develop more comprehensive products and services to meet the financial needs of our users across the market. With that, I will invite Tony to discuss our financials.

Speaker 3

Thank you, Yanjun, and thanks to everyone for joining the call. We have included detailed financial schedules together with the responding management analysis in today's press release. So I will focus my comments on the key metrics. For Sea overall, total GAAP revenue increased 5% year on year to $3,300,000,000 This was primarily driven by the improved monetization in our e commerce and the Digital Financial Services Businesses. Our group total adjusted EBITDA was $35,000,000 compared to an adjusted EBITDA loss of $358,000,000 in the Q3 of 2022.

Speaker 3

On e commerce, our 3rd quarter GAAP revenue of $2,200,000,000 included GAAP Marketplace revenue of $1,900,000 up 18% year on year and GAAP product revenue of $300,000,000 Within GAAP Marketplace revenue, core marketplace revenue, mainly consisting of transaction based fees and Advertising Revenues was $1,300,000,000 up 32% year on year as a result of both increases in advertisement uptake by sellers on our platform and commission rates. Value added services revenue, mainly consisting of revenues related to logistics services, was $600,000,000 down 4% year on year. E Commerce adjusted EBITDA loss was $346,000,000 the Q3 of 2023 compared to an adjusted EBITDA loss of $496,000,000 in the Q3 of 2022. For our Asia markets, we had an adjusted EBITDA loss of $306,000,000 during the quarter compared to an adjusted EBITDA loss of $217,000,000 in the Q3 of 2022. In our other markets, the adjusted EBITDA loss was $40,000,000 narrowing meaningfully from last year, when losses were $279,000,000 Contribution margin loss per order in Brazil improved by 91% year on year to reach Tencent, reflecting better monetization and higher efficiency in our ecosystem.

Speaker 3

Digital Entertainment bookings were $448,000,000 and GAAP revenue was $592,000,000 Adjusted EBITDA was $234,000,000 compared to $239,000,000 in the Q2 of 2023. Digital Financial Services GAAP revenue was up by 37% year on year to $446,000,000 Adjusted EBITDA was $166,000,000 in the Q3 of 2023 compared to an adjusted EBITDA loss of $46,000,000 in the Q3 of 2023 compared to a net non operating loss of $9,000,000 in the Q3 of 2022. The year on year improvement was mainly due to higher interest income in the Q3 of 2023. We had a net income tax expense of $62,000,000 in the Q3 of 2023 compared to a net income tax expense of $65,000,000 the Q3 of 2022. As a result, net loss was $144,000,000 in Q3 as compared to net loss of $569,000,000 in the Q3 of 2022.

Speaker 3

With that, let me turn the call to Minju.

Speaker 1

Thank you, Forrest, Yanjun and Tony. We are now ready to open the call to questions.

Operator

Ladies and gentlemen, we are now opening Our first question comes from Piyush Choudhary from HSBC. Your line is now open.

Speaker 5

Yes, hi. Good evening, management team and thanks for the opportunity. Three questions. Firstly, in e commerce, Can you discuss how long we may continue to be loss making for Shopee? And what is the specific market share level or what are the KPIs In the Digital Entertainment segment, What led to quarter on quarter softness in pay users despite of new game launch and any insights on the outlook for the pay user base?

Speaker 5

And lastly, in the DFS segment, can you talk about the outlook for the lending growth? Is there a scope for increasing Lending user penetration or will it grow in line with Shopee GMV? Thank you.

Speaker 6

Thanks, Krish. I think it's Chris here. I will take the e commerce question first. Regarding the probability of e commerce, As we have demonstrated in the past few quarters, we have the capability to turn businesses to breakeven quickly anytime If we want to, however, as far as share before, to maximize our long term profitability, we will keep our organization nimble and flexible and adjust our operation based on the dynamic the market conditions. For example, we look at both the growth of The market, we look at the profitability for the current quarters.

Speaker 6

We also look at market share dynamics in the market. In terms of investment plan, we look at both the general investment efficiencies and also the specific growth opportunities in each of the markets. For example, if we look at the general investment efficiency, we look at when we put some investment to market, do we see the returns we wanted? Do we see market share gain, for example, with the better unit economics compared to our competitors in the market? For the specific opportunity in some of the markets, one of the examples we mentioned earlier in the call was The content ecosystem building, the live stream opportunity, in particular, where we see a very good time for us to invest to grow this part of the businesses at this particular time.

Speaker 6

We target to invest Within our Ming, just to emphasize on that again, we would like to maintain a strong cash position at all times and not rely on the external fundings. It's also important to note that if we look at our investment efficiencies in the past few months, I think we have the quality number As we shared by Andrew and Tony earlier, but if you look at month to month, we do see the efficiency are improving month to month. If we look at the trend, we see a clear trend for Shopee to breakeven while achieving our market share and content's acquisition building goals. There are many KPIs to look at, right? Market share is one of the KPIs, of course, But there are many other things, for example, how is our growth of our user base, how is the growth of our time spent of our apps, Our MAU DAUs and also, of course, how much profitability that we achieved during the month.

Speaker 6

All these are important KPIs to look at rather than looking at market share only. Thank you.

Speaker 4

Regarding the question on gain And Q on Q softness in users, I think that this is actually to us some early indication of seasonality We start to see in the game performance. And when we start to see seasonality, it's also usually a very indication of stability in the game performance. That's why we do not see it as a negative sign. We also mentioned on the call that in Q3, we saw a lot of School reopening and there are also less holidays. So that does affect the user engagement.

Speaker 4

But overall, we are very happy to see Improvement in user retention and also in reengagement of changed users, as I had mentioned earlier.

Speaker 6

On the last question on the credits for DSS, in general, we do see both Possibility of lending growth on the GMV of Shopee and the penetrations of credit in Shopee. Of course, that depends on quarter on quarter, depends on the risk profile we want to achieve and the growth that we want to control. But in general, we grow on both the Shopee GMV and penetration. On top of that, just want to emphasize that our credit not only To Shopee Ecosystem, we do have good growth on the credit portfolio outside of Shopee Ecosystem. For example, the Shopify channel is offline.

Speaker 6

We do see a good penetration for credit on the Offline for Shopify channel as well, we do also have other scenario we're developing over time.

Speaker 2

Thank you.

Operator

All right. Our next question comes from Pang Viet from Goldman Sachs. Your line is now open.

Speaker 7

Hi. Good evening, management team, and thank you very much for the opportunity. Three questions from me. Number 1 for e commerce. Can you discuss where Shopee Investment went into in 3rd quarter?

Speaker 7

And whether you achieved the outcome you wanted? What are your considerations on spending and GMV growth target for 4th quarter, especially considering some of the recent regulatory That's question number 1. Question number 2, regarding gaming. Can you discuss the latest development with regards To write off first refusal agreement with Tencent that supposedly expire this month, had it automatically renew and how would that impact user That's 2. And number 3, for the FinTech segment, can you discuss about the credit quality of your loan book?

Speaker 7

We continue to see credit loss provisioning trending better every quarter. Will this be your new run rate? Or how should we think of this margin of this business in the long term?

Speaker 6

For the First question about the Q3 investment. There are 2 main areas that we're investing on. Number 1, to grow our market share, especially in the core categories like fashion and health and beauty. The second area we're investing And to capture the market opportunity to grow the content ecosystem, especially with the live stream first. As Forrest shared earlier, We always balance between the growth, profitability and market share.

Speaker 6

We believe that this is the right time to invest in terms of looking at the market share growth. We do see a great traction in our investments reflected from the market share gain even with the better unit economics compared to our regional competitors. On the content side, we believe this can be a profitable And also a very cyclical businesses to us over time. If you look at the timing, As shared in the previous answers, we do see this is a good opportunity in terms of time window of opportunity for us to capture The market has been a lot more educated by having investments from various parties in the past year. For example, the viewers who understand the concept, the sellers who have the capability to offer the content and also the EchoSense players like the MCNs, etcetera.

Speaker 6

In the past few months, since we started Invest more into the area. We have seen very good growth in terms of the adoption of our live stream services, both on the demand side and on the supply side, not only from the creators, but also from the sellers. We also see on top of that, which is also important to highlight, We see a significant improvement on the unit economics on our live streams. Of course, when we first started building the ecosystem, It takes a bit cost to build up, but we quickly see the economics improve month to month, Actually much better than we thought it before we started the program. Overall, I guess to answer your questions, We are very happy with what we have achieved.

Speaker 6

Essentially, we achieved the market share gain as we wanted with much better economics We also have seen good traction in live stream. The take rate has been faster than we thought for the live stream services. On the to your question on the Q4 outlook, We will continue to invest into the shopping season. It's a holiday business, shopping season, as we all know. Q4 in our market Generally, it's a best time of the year to acquire new users, gain market share and strengthen our content ecosystems.

Speaker 6

If we look at in the past one and half months, we have seen very good traction. For example, I think we shared Today that yesterday essentially, for our Double 11, we have achieved more than 1,000,000,000 GMV, which is a very good result from better than I will anticipate it, especially it's over the weekend as well. Yes, I think that's the question on the e commerce side.

Speaker 4

Regarding the question regarding right of first refusal with Tencent, the agreement has been auto renewed under its existing terms. As shared before, we will continue to work on strengthening our game Both with our self developed games and published games. And at the same time, we saw the strong trends in Free Fire, And we'll continue to focus on making it a strong evergreen franchise.

Speaker 6

I think for the credit quality, We do see the credit quality actually getting a bit better over the year. However, I think we stay we still stay quite vigilant In terms of how the market will evolve and think in general, we are more on the conservative side in terms of managing our credit businesses To make sure that we always protect the managed NPL wealth while we're growing the portfolios, We if you look forward, we don't anticipate there's a big fluctuation in terms of the credit quality in the short term. Of course, if you look longer terms, there are many macro conditions will impact how The credit quality and the NPLs of life, but generally, we do believe that our current level is sustainable and our Credit businesses will continue to grow well without sacrificing the qualities.

Speaker 4

In terms of long term margins For credit business, of course, this is still early stage for us. As we mentioned before, we continue to expand our credit portfolio across And we also continue to expand our funding sources to reduce the risk exposure to our own book Cash. So overall, I think it's we will strive to continue to maintain a very healthy profit level, but while also making sure that we have healthy and consistent growth in the portfolio as well as Thank you.

Operator

Our next question comes from Alicia Yap from Citigroup. Your line is now open.

Speaker 8

Hi. Thank you. Good evening, management. Thanks for taking my questions. I have two questions.

Speaker 8

First, on e commerce. I was hoping management could provide your view as we look beyond 4Q and further out, what is the long term GMV growth we could achieve? And I think management have previously shared a potential steady state of the long term EBITDA to the GMV margin guidance. Would that change given the live streaming now being an increasing part of Shopee's GMV? Second question is on your sales and marketing spend.

Speaker 8

Just wondering The time line or the inflection point that we are looking for or is there any sensitivity scenario that we will be assessed the stickiness of the user engagement and purchasing behavior as related to the subsidy spend. So any colors you could provide on the sales and marketing spend outlook would be helpful. Thank you.

Speaker 6

For the long term GMV growth, generally, we believe that we can continue to outgrow the market Giving our competitive advantage, as we see from the Q3, We still see quite a lot of new users being acquired. We also see more less active users become more active. We also see that the existing users increasing their wallet share, our platform, both shifting from other platform, of course, but also shifting The offline behaviors, in the opening, I think Forrest mentioned that the e commerce penetration in our market are still low. We are too far away from the market saturation. So we believe there are still a sizable runway to go in terms of the long term GMV Growth.

Speaker 6

The comparison many developed markets on e commerce, I think in South Asia, we are still underdeveloped. In our Latin American market, for example, in Brazil, I think the runway is even further. If you look at Intel, Brazil e commerce order is still a lot less penetrated compared to even outside the Asian market. Regarding the question on the long term profitability, There's no particular change to our previous views. I think you mentioned live stream.

Speaker 6

If you look at live stream in particular, We believe this is a profit boost over time. I think we have already seen the unit mix improvement a lot in the past few months in my As shared in the last remark, it's true that there is a higher content creation cost associated with these businesses. However, there's another aspect to this as well. Number 1, the product categories That does well on live stream tend to be high margin categories. Typically, the room of the margin still a bit better for those categories.

Speaker 6

So we have better monetization capabilities from the platform. That's one. Second one is typically live streaming is also a good tool For sellers to drive more engagement with their buyers or potential buyers, increasing conversions and also drive more sales during for particular products or testing a new product or for the leftover stores, etcetera. So generally, it's a good channel for the seller to invest themselves to market their businesses. I think all in all, if you put everything together, we do believe that the e commerce EBITDA potential that we shared before will stay.

Speaker 6

For the sales and marketing spend, In terms of the timeline inflation point and stickiness and retentions, there are many aspects we look at the spend we have. And of course, we look at the retentions, we look at the order growth, we look at When we look at the New Year's acquisition, we look at the CLVs in terms of the each new user brings. There are many aspects Regarding the timeline as shared in the prepared answers, we assess We look at the long term investment on both what's the return investment in general, But also on a particular opportunity that we would like to invest on. And we evaluate Both the growth and profitability and market share in totality rather than looking at one aspect of it.

Speaker 4

Yes. I also want to add to what Chris mentioned is that, as we shared on the call earlier, When we look at the current cohort of new buyers, we actually see very encouraging signs in terms of quality of the buyers. And overall, we see better buyer retention and a higher order frequency on our platform during this period. We have demonstrated a very strong track record previously with during the past few years as we scale the Shopee platform, When we do tend to profitability, we were able to have a very healthy profit level for our platform, while maintaining the size of the platform and maintaining the user base. That shows that we have I've built very clear and strong competitive edge and capability in managing user growth and spending efficiency.

Speaker 6

Yes. Just to add a little bit color on this. So typically, when we look at the users, each user will assess on each orders on the possibilities Of the order and also we look at each users and the totality of the profitability of the users. And we look at not only now The current behavior, but we also look at the past behavior. We also have a model to predict the future behaviors.

Speaker 6

So at the order level or the user level, We have the ability to be able to predict the potential margins we can make from this particular user and which user to drop, which user to take And all those will come together when we try to monetize our platform. This is Why? As Yanjun mentioned, last year, when we tried to drive the platform to the ability, we can do it very quickly. We know exactly What do you pull the lever? It also helps us when we try to grow the platform again, which kind of user we want to bring to the platforms from the acquisition from the early acquisition to the early adoption, which one we want to drive them to early adoption stage to the mature user stage and to the later stage.

Speaker 6

And all those were very detailed work that we put into the platform to make sure we manage Our subsidy manage our user acquisition, manage our CIMs, all these things very carefully to maximize Our efficiency of spending.

Speaker 4

Thank you.

Operator

Our next question comes from Navin Kalia from UBS. Your line is now open.

Speaker 9

Hi. Thank you for the opportunity. I actually had three questions. The first one is a bit more long term. I guess, Looking at all the new entrants across several of your markets, how would you describe Shopee's competitive advantage against them?

Speaker 9

And why do you think that advantage is sustainable in the long term? The second question I had was with regards to the comments that you made about Investments in logistics. How should we think about the quantum of those investments? I guess both as it goes into your CapEx, But presumably also, I guess, as your lease payments, so I guess cash outflow below EBITDA. And the last very quick question, The right of first refusal with Tencent, the new renewal, how long does this stay before the next renewal comes in?

Speaker 6

Let me start with the first question you mentioned. In our businesses, There's always competition. It's very hard to be the only one offering e commerce solution in the market. However, we do see the intense competition might vary across our market, varies across the times. We are able to gain market shares.

Speaker 6

The key is investment efficiencies. This is what allow us to gain market share Why having better economics, new economics than our growth competitors in our market? The key for that is our competitive advantage we have built over the past many years. I think number 1, if you think about this, would be scale. As a clear market leader, we have a bigger scale That translates to a much better monetization capabilities and also better cost efficiencies, of course.

Speaker 6

Number 2 is the local leadership and operation teams. We have a deep understanding of our market With a strong localized execution across very diverse markets in our region, our core teams Many of the local talent, mostly homegrown with us in the past many years compared to our regional competitors with Many expert leaderships in most in almost all the market. It does make a huge difference when we come into the nuanced decisions We are making to the market on the for example, in my first answers on the very detailed decision I'm making on Where to invest exactly, which user to deprioritize, which user to prioritize, which number to deprioritize, which kind of audit to deprioritize. These are all detailed decisions we have to make by our local operation team. And the quality does make a difference as time goes, which translates to a better efficiencies of the investment.

Speaker 6

The third thing is the e commerce infrastructure we have built over time In the past many years, it's not 1 year work, but been doing this for many years. I think one of this is what he mentioned on the logistics. We have seen very meaningful improvement in the cost per order in the past years on logistics, And drive the cost of serve down for our users, so we can translate the savings to our buyer and sellers. Not only that, if you look at our payment, Shopee Pay has been able to reduce the frictional payment in all our market. Besides that, Shop With Pay Later, which is a great Offerings that we offer to our buyers in the platform, this has been improving the purchase conversions quite a lot as we observed.

Speaker 6

Like for example, I met some buyers last week the week before actually that We used to have the problem of not having enough cash to pay for CODs, etcetera, or pay for the services that they want to the product they want to buy on time As Pay Later will offer them to buy things on time rather than missing it. If they're not able to use As Pay Later, they will not be able to buy it on time. And all these things help us to build a competitive advantage for long term and all the three elements are not easily built. It's something that has been done in the past almost 10 years, not only for Shopee, but for our entire C Group to help us to have a better efficiencies on the investment compared to our competitors. The on logistic investments, I think the it's not a short term, I guess, Investment we are taking, it's something I've been investing over the years for quite a long time.

Speaker 6

But the degree of investment, It's probably not as huge as most people think. I think it's a lot of this is investing the Networks of the people that we have built over time. Part of the capacity you can imagine is the hubs We've put into place, but this is a general kind of improvement of the rent that we put. We don't have we didn't buy the land. We typically rent the land, but we need to just convert it to the And this is relatively small investment in terms of CapEx.

Speaker 6

Another type of investment is the sorting centers. We do have few investments put into place to for the automatic sorting machines. So we can automate the sorting rather than do it manually. The other part of investment would be The trucks, but we rent both of trucks, so it's rather kind of like less focus on the CapEx for this.

Speaker 4

Also to clarify the model of logistics that we have is not a at this point a CapEx heavy model. We're not looking to build mega warehouses or mega machinery type of Logistics in that model, our model is more about building a large networks Small sorting centers, small hubs into many, many neighborhoods and also Build the team capability to extend our last mile coverage across the wider Network of areas covered by us. So it's more OpEx and for the past few years, We have already been consistently investing in logistics, which is one of the key reasons that Get us to the current position of continue to reduce the logistics shipping fees and also A key competitive advantage that we have.

Speaker 6

Just want to add on this a little bit. Actually compared to many other lodging providers, if you look at the 3 parallel region, our CapEx has been a lot lower if you compare. And there's a reason for that actually, because we are able to predict our volume in a lot more accurate ways. Imagine if you are a third party logistics, you have to forecast what's your volume be in the next Yes, or next 2 to 3 years in order to invest in CapEx. It's extremely hard, especially in our market.

Speaker 6

For our own logistics, we have a good way, let's say, to predict what's the demand In our market, not only for next month, not for next quarter, but in the next 2 to 3 years most likely. As a consequence of that, we're able to CapEx things, not only CapEx, actually, it started from the designing of our networks, as Yan Yu mentioned. To design our network in the very flexible way, To design our network in a very optimized way, after design network in a good way, then you can manage your CapEx In a much more efficient way and every CapEx can be put to use right after you capitalize on it rather than in some time you have to rush for it Or you have to capitalize on things, build something by your wish to be used. I think in this aspect, we have Good advantage compared to the other offerings in the market. That's also why we can manage our cost down compared to the other offerings.

Speaker 4

Regarding a question on a rollover agreement with Tencent, It is automatically renewed every year, unless terminated by either party. The agreement is also publicly available.

Operator

Our next question comes from Yong Zhao from Barclays. Your line is now open.

Speaker 10

Great. Thank you for taking my questions. I have two questions and a follow-up. The first question is, since you Pivoted for growth a few months back. It's great to see the GMV now is growing year over year.

Speaker 10

I was wondering, Could you talk about the linearity as you went through the quarter? I suspect the momentum picked up During the quarter and could you talk about sort of so far in Q4 how that GMV growth momentum has been? That's any comments on FX impact, that would be great. Second question is, I think you talked about Live streaming obviously is a key focus for growth. You mentioned 10% GMV.

Speaker 10

I wasn't sure, is that for Indonesia or is that for the whole region? My question is about your long term expectation. As you know, in countries like China, live streaming is quite a 20%, 25% of total GMV. For the industry, what do you think the number could be or should be for Southeast Asia, I don't know, in a few years and where you are currently for the region. And related to that, Since the TikTok sort of shut down in Indonesia, what have you seen, if anything, the impact for your growth, And lastly for the follow-up I had is that you mentioned a couple of times that you're Committed to investing within your means and will not raise any financing going forward.

Speaker 10

And in Q3, you did a great job. You grew your GMV, grew your revenue while making some profits For the group, I was wondering is that sort of a breakevenish or small profit is sort of the guardrail You meant by investing within your means. Thank you.

Speaker 6

Let me start first. In terms of the growth over the quarter, I think We don't have a detailed month to month breakdown number shared. But in general, if you look at the year to year growth, We do see a better year to year growth over the months. For Q4, We do see the trend continues. So far, as we are right now, We see there broadly similar trend in term of the growth levels floating from Q3 to Q4.

Speaker 6

And the R and D impact on ForEx, generally, I think The number we shared is in the U. S. Terms. But if you take the constant currencies, we actually grew better In quite many of market actually, that is a deflation against U. S.

Speaker 6

Dollars. So Operationally, if we take the constant currency, we grow better than the U. S. Dollar basis. In terms of the live stream percentage, the percentage I think mentioned in the early comments was for the region.

Speaker 6

If you look forward, I think the percentage of the penetration might be country by country. So if you put everything together, it might not be fair. Let's take a look if you take the biggest market like Indonesia, The way we look at things is we look at the content, e commerce as a whole, contents including live streaming, including videos actually, which is another part of the important part of the content. If you look at everything together, In Indonesia as a market, we do believe, let's say, somewhere Range around 20% to 30% is a reasonable range we look at. The probably still a little bit kind of lower than what you See from China, but has a reasonable sign.

Speaker 6

In the other market, maybe a slightly lower than that, but It wouldn't be too far. But again, this is a very early time We developed the market and we see how it develops. Generally, we are on the more positive side than the Negative size in terms of the potential for this businesses.

Speaker 1

For Indonesia,

Speaker 6

Of course, mathematically, after TikTok closed the shop, the market share Everybody's market share grow a little bit, of course. And we do see the good traction on The sellers and creators who joined our platform, I do believe they joined some other platform as well They are looking for the growth opportunities. So generally, it has been we have seen the behavior. In terms of the breakeven level, I think we are happy With the fact that we were given as a group, but I think as Forrest mentioned very early, We would like to balance between the gross market share and profitability and that's my we will have to make decisions based on how the market condition moves.

Operator

Due to interest in the time, we will be concluding our question and answer session. I'd now like to turn the conference back over to Ms. Minju Song for any closing remarks.

Speaker 1

Thank you all for joining today's call. We look forward to speaking to all of you again next quarter. Thank you.

Operator

The conference is now concluded. Thank you for attending today's session. You may now disconnect.

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SEA Q3 2023
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