SEA Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 12, 2024

There are 11 speakers on the call.

Operator

Good morning and good evening to all and welcome to the Sea Limited Third Quarter 20 24 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 session. And finally, I would like to advise all participants that this call is being recorded. Thank you.

Operator

I'd now like to welcome Mr. MC Call to begin the conference. Please go ahead. Hello, everyone, and welcome to Sea's 2024 Third Quarter Earnings Conference Call. I am MC, Sea's Investor Relations Director.

Operator

On this call, we may make forward looking statements, which are inherently subject to risks and uncertainties and may not be realized in the future for various reasons as stated in our press release. Also, this call includes the discussion of certain non GAAP financial measures such as adjusted EBITDA. 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. I have with me, Sea's Chairman and Chief Executive Officer, Forrest Lee President, Chris Feng and Chief Financial Officer, Tony Ho.

Operator

Our management will share strategy and business updates, operating highlights and financial performance for the Q3 of 2024. 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 1

Hello, everyone, and thank you for joining today's call. I'm happy to report that it has been another solid quarter. We are seeing high growth across all our three businesses. Shopee is on track to deliver our full year guidance of mid-twenty year on year GMV growth. The money's loan book grew by over 70% year on year this quarter, while maintaining a stable NPL ratio.

Speaker 1

And for Garena, we now expect Free Fire's full year bookings to grow over 30% year on year. I'm very proud that we also improved our profitability while getting back to high growth. This quarter, Shopee achieved positive adjusted EBITDA in both Asia and Brazil. As we continue to focus on delivering growth, we expect Shopee to remain profitable going forward. With that, let me take you through each businesses performance in more detail.

Speaker 1

Starting with e commerce, Shopee has delivered strong GMV and order volume growth this quarter, sustaining strong market leadership in our Asia markets. User growth remains strong with average monthly active buyers in the 3rd quarter growing by over 20% year on year. We have improved our monetization in both commission and advertising take rates this quarter. On commissions, further market rationalization in Southeast Asia has led to industry wide increases in commission take rate. On advertising, our ad tech improvements attracted more sellers to our paid ad features.

Speaker 1

We simplified seller onboarding, optimized the algorithm for traffic allocation and introduced a dashboard, making it easier for sellers to set their ad spend and ROI targets. This helped our sellers both see the benefits of their ad spend and achieve better returns on it, driving up adoption of our ad offerings. In the Q3, ad paying sellers increased by over 10% and ad paying revenue per seller increased by over 25% year on year. Compared to the same quarter last year, Shopee's ad take rate has improved by more than 30 basis points and we see much more upsets here. On the operations front, we remain committed to the same three priorities to deepen our competitive moats, enhancing our price competitiveness, improving our service quality and strengthening our content ecosystem.

Speaker 1

Price competitiveness continues to be a key value proposition that we bring to Shopee users. It is a strong anchor of our brand mind share among buyers. In a recent survey conducted by Portrix, Shopee received the highest score among e commerce platforms for good product prices in our Asia market and Brazil. On service quality, investing in end to end logistics integration across our logistics partners has given us a vital and a structural advantage over our peers. Our buyers are happy with the cost savings we passed on to them and the better customer service we are able to provide.

Speaker 1

Our sellers also appreciate it as we give them access to one stop logistics solutions that are both reliable and cost effective efficient. XPX Express, in particular, continues to be a key differentiating factor for us. It has become a leading logistics service provider in our market with extensive coverage, faster delivery speed and cost leadership. In the 3rd quarter, half of XPS Express order in Asia was delivered within 2 days of order placement. Cost per order also continued to improve quarter on quarter in both Asia and Brazil.

Speaker 1

We have also made significant progress on the content ecosystem front. Live streaming continues to be a popular format on both the supply and the demand side in our markets. Our decision in the second half of last year to invest in building Shopee's live streaming capability has paid off. In the Q3, our average daily unique streamers grew over 50% and daily unique live streaming buyers grew over 15% both quarter on quarter. Average basket size on live streaming has consistently increased over the past few quarters, driving improvements in its unique economics.

Speaker 1

Our content efforts have been particularly successful in Indonesia, our largest market in Asia. We have been the largest live streaming e commerce platform there by both GMV and Order Wallet since the start of 2024. And our unit economics has improved steadily since then. One recent boost to our content efforts has been a new collaboration between Shopee and YouTube in Indonesia. YouTube creators can now embed clickable buttons in their videos that allow viewers to buy items from Shopee directly.

Speaker 1

We have just brought this collaboration to Thailand and Vietnam as well and look forward to extending this strategic partnership into more markets. Looking beyond Asia, we are also seeing good results coming out of Brazil. In the Q3, average monthly active buyers grew by close to 40% year on year. We are encouraged to see that these new user cohorts are purchasing bigger basket sizes than older cohorts, giving us better returns on investments and improving our unit economics. This allowed us to breakeven in Brazil on an adjusted EBITDA basis for the first time ever.

Speaker 1

Despite only having been in the market for less than 5 years, Shopee recently received recognition as the best shopping site in the Fuya Top of Mind Award, which recognize brands with the best demand share among consumers in Brazil. We feel very excited about Shopee's further growth opportunities there. In summary, I'm very happy with the strength that Shopee continues to show in both Asia and Brazil. Many of our markets still have very low e commerce penetration rates. This puts us in a great position to continue to grow as e commerce penetration improves.

Speaker 1

Next, turning to Digital Financial Services. We continued our strong momentum this quarter, delivering double digit year on year growth in both revenue and EBITDA. Our key driver of growth continues to be credit lending, which is in high demand, but still very underserved in our market. Shopee's large user base in our market makes it highly efficient for us to acquire and serve credit users. Proprietary data from Shopee also allows us to better underwrite risk.

Speaker 1

In addition, we have diversified funding sources such as innovative asset backed lending products and our digital bank in local markets that give us access to retail deposits. All of this has led us to scale up our credit business very quickly and profitably. In the Q3, our loan book grew over 70% year on year and we added 4,000,000 first time borrowers. Our consumer and SME loan active users reached about 24,000,000 by the end of the quarter, growing more than 60% year on year. Despite high growth, our NPL 90 day ratio held stable in the 3rd quarter at 1.2%.

Speaker 1

One of our risk management practices is to gradually increase loan size and the tenure offerings to users. We typically engage first time borrowers by offering SPaylater products with small credit limits and short tenures on their Shopee purchases. If the users show a healthy repayment track record, we offer them a higher credit limit, longer tenure options and other credit products such as cash loans. This practice underpins our sustainable healthy growth. Right now, our average loans outstanding per user is less than $200 with 10 year period of just a few months.

Speaker 1

These loans are spread over a very large user base across different markets. Recently, we have been pushing offshopping loan book growth more strongly, especially in Indonesia. Offshopping loans now account for more than half of our loan book there. One recent example of an offshopping use case was to facilitate consumers' large ticket purchases of mobile mobile phones in offline retail stores. In this case, we offer select users as pay later limit extra credit products with a higher credit limit.

Speaker 1

This initiative was very well received by our users. We will continue to explore further use cases in Indonesia and bring this success to our other markets. In summary, we see plenty of growth opportunities ahead in our market. Strong synergies with Shopee gives us a unique advantage and the use cases beyond Shopee are also very compelling. We are well positioned to grow our credit business and offer more financial services to address the huge underserved demand in our markets.

Speaker 1

Finally, turning to our digital entertainment business. Garena's strong growth has continued into the 3rd quarter. Total bookings grew over 24% and adjusted EBITDA grew over 34% year on year. This good performance is driven by the strength of Free Fire, which continues to be one of the largest mobile games in the world. Free Fire consistently had over 100,000,000 daily active users in the 3rd quarter, representing an impressive 25% year on year growth.

Speaker 1

In addition to Asia and the Americas, we were happy to see meaningful growth in other regions such as North Africa over the past year. We view this region as a site for untapped opportunity and have been ramping up both in game campaigns and out of game events in this market. Recently, we held a major esports tournament in Morocco, where thousands of teams participated, attracting millions of views on social media. We believe it was the largest attended offline mobile game event ever held in North Africa. Our top priorities for Free Fire continue to be attracting, retaining and engaging our users.

Speaker 1

In the Q3, Sensor Tower once again ranked Free Fire as the number one most downloaded mobile game in the world. The number of new users who downloaded and played Free Fire in the Q3 was up 25% year on year. User engagement has also remained high. And while we always try to keep ARPU at a healthy level, we saw an increase this quarter, thanks to strong item sales during our anniversary campaign update. It is quite remarkable that the game of Free Fire's Vintage is able to grow its user base so steadily, and I believe this has a lot to do with our relentlessly user centric approach.

Speaker 1

We make sure to release new content updates and in game experiences very frequently, keeping things fresh even for seasoned gamers. Many of these updates are inspired by our local markets and social media trends. In October, Free Fire was the 1st online game in the world to collaborate with the Zoological Park Organization of Thailand to bring their hugely popular baby pygmy hippo, Moon Ding, into the game. Our users love the hippo themed virtual items that we introduced in Free Fire. They shared user generated content on social media that went viral using more than 10,000,000 views.

Speaker 1

This is just one example of how we leverage local trends to connect with users at an emotional level, making them feel that Free Fire is relevant and interesting. It also keeps Free Fire highly visible on social media, helping to join new users. Beyond Free Fire, Garena launched Meat 4 Speed mobile in Taiwan, Hong Kong and Macau at the end of October. Since its launch, it has ranked as the number one most downloaded racing game in all three markets according to Sensor Tower. We are also strengthening our partnership with Tencent to bring Delta Force, a first person tactical shooting game to PC and mobile users in several markets across Southeast Asia, MENA and Latin America.

Speaker 1

To conclude, I'm happy that we delivered a very strong quarter with all three of our businesses posting high profitable growth. We have done well and we will continue doing so. Thank you as always for your support. With that, I invite Tony to discuss our financials.

Speaker 2

Thank you, Forrest, and thank you to everyone for joining the call. For the overall, total GAAP revenue increased 31% year on year to $4,300,000,000 in the Q3 of 2024. This was primarily driven by GMV growth of our e commerce business and the growth of our digital financial services business. Our total adjusted EBITDA was $521,000,000 in the Q3 of 2024 compared to an adjusted EBITDA of CAD35 1,000,000 in the Q3 of 2023. On e commerce, Shopee's gross orders grew 24% and GMV increased by 25% year on year.

Speaker 2

Our 3rd quarter GAAP revenue of CNY3.2 billion included GAAP marketplace revenue of CAD2.8 billion, up 43% year on year and GAAP product revenue of CAD0.4 billion. Within GAAP marketplace revenue, core marketplace revenue, mainly consisting of transaction based fees and advertising revenues was CAD2 1,000,000,000 up 49% year on year. Value added services revenue, mainly consisting of revenues related to logistics services was CAD0.8 billion, up 29% year on year. E commerce adjusted EBITDA was CAD34 1,000,000 in the Q3 of 2024 compared to an adjusted EBITDA loss of CAD346 1,000,000 in the Q3 of 2023. For our Asia markets, we continued to achieve positive adjusted EBITDA following our Q2 of 2024 results, recording CAD31 1,000,000 during the quarter, compared to an adjusted EBITDA loss of CAD306 1,000,000 in the Q3 of 2023.

Speaker 2

In our other markets, we achieved positive adjusted EBITDA of CAD4 1,000,000 compared to an adjusted EBITDA loss of CAD40 1,000,000 in the Q3 of CAD2.23. Digital Financial Services GAAP revenue was up by 38% year on year to CAD616 1,000,000 Adjusted EBITDA was up by 13% year on year to CAD188 1,000,000 As of the end of September, our consumer and SME loans principal outstanding reached CAD4.6 billion, up 73% year on year. This consists of CAD3.8 billion on book and CAD0.8 billion off book loans principal outstanding. Non performing loans past due by more than 90 days as a percentage of total consumer and SME loans was 1.2% at the end of the quarter. Digital entertainment bookings were CAD557 1,000,000 up 24% year on year.

Speaker 2

GAAP revenue was CAD498 1,000,000 Adjusted EBITDA was $314,000,000 Returning to our consolidated numbers, we recognized a net non operating income of $50,000,000 in the Q3 of 2024, compared to a net non operating income of $46,000,000 in the Q3 of 2023. We had a net income tax expense of $93,000,000 in the Q3 of 2024, compared to net income tax expense of CAD62,000,000 in the Q3 of 2023. As a result, net income was CAD153,000,000 in the Q3 of 2024 as compared to a net loss of $144,000,000 in the Q3 of 2023.

Operator

Thank you, Forrest and Tony. We're now ready to open the call to questions. Operator? We will now begin the question and answer session. The first question comes from the line of Fang Bi with Goldman Sachs.

Operator

Fang, please go ahead.

Speaker 3

Hi, thank you very much for the opportunities and congratulations for the solid set of results. Two questions from me, both will be on e commerce. Number 1, could you provide us with more insight into the latest competitive landscape in the Q4 that you see currently? We noticed that your social commerce competitor has been increasing its pay grade, while we also noticed that the cross border competitor expanded its presence in the regions. So could you provide some comments around how would this impact your growth projections on both top and bottom line?

Speaker 3

And how do you think about the overall strategies? That's question number 1. Question number 2, this will be related to the advertisement. Can you provide with you noted that there's been a nice up to 30 basis points quarter on quarter in terms of that advertisement take rate. But what have you done exactly and differently that allow us to see this progress?

Speaker 3

And you also share the insight on the potential ceiling for this ad take rate and the timeline for the ramp up process?

Speaker 2

I think on the competitive landscape, as Forrest mentioned in the opening, we do see a stable competitive landscape. And in fact, if you look at our growth, our growth has been doing quite well, while we are improving our EBITDA to be profitable in both Asia and Brazil. If you look at Q4, we do see our Q4 is doing quite well still with all the competitive environment that we are in. And we're maintaining our mid-20s GMV growth guidance for this year. As we shared before, majority of our sellers are local products, selling our local market.

Speaker 2

As a consequence, the impact from cross border competitor probably relatively small to us at this stage. If we look at the ad take rate, there is a meaningful improvement of ad take rate. If you compare to the last year, same quarter, we grew about 0.3% take rate on the ad side. We have done many things actually over the past few quarters. We did a sizable revamp to our app systems from a technical perspective.

Speaker 2

Part of the take rate comes from the algorithm improvement to improve how well we can place ads to a particular user's query. By doing that, we have a better conversion rate for our ad as a consequence that we can deliver better retail investment to the sellers. We also try to improve our traffic utilization algorithm for the ad, so that we can have more flexibility in terms of when to display organic ads versus displaying ad products to the buyers. On top of that, we also improved the buyer sorry, the seller side ad product experience to make the sellers easier to utilize ad products. As a consequence, we can see that we have more and more sellers are using our ad products, which in turn increase the pool of the products that we have in the ad, which also help us in end of the day to improve our ad efficiencies because the bigger pool that we have, the easier we can match to our users' queries.

Speaker 2

We believe that the potential of the ad product improvement is going to continue in the next few quarters. The it's I think it's too early to comment on what the potential ceiling would be. I think the improvement will come in and we will see the impact in the coming quarters, while we are further improving our technology, rolling out new products to sellers and also rolling out the improvement to all markets across our countries.

Operator

Our next question comes from the line of Alicia Yap with TD Group. Alicia, please go ahead.

Speaker 4

Hi. Good evening, management. Thanks for taking my questions. Also congrats on the strong results. I have follow-up questions related to e commerce.

Speaker 4

So how should we be thinking about the Shopee growth entering 2025, especially given a lower interest rate environment and also the resilient economic growth in Southeast Asia? And then related to that is that, do you anticipate more intensified competition in Southeast Asia and also Brazil as we head into 2025? If so, how will management balance the market share growth for Shopee versus the profitability if the competition picks up, given we actually recently observed that Tmall in Vietnam has been gaining pretty good traction even though they just launched recently. So any colors would be appreciated. Thank you.

Speaker 2

I think probably a bit too early to comment on the 2025. I think we're still monitoring the trend in Q4, and we probably will provide better guidance in 2024 in the coming quarter. But in general, the way we think about this is, number 1, we would like to make sure we can grow in a profitable fashion. Number 2 is, within the profitable range, we would like to grow as much as possible. I think that's kind of probably how we think about it in term of when we come into the next few quarters.

Speaker 2

In terms of competition, as I mentioned earlier, we're seeing a relatively stable competitive environment in South Asia. In Brazil, we didn't see any particular changes in the competitive environment either. As you mentioned, we do see certain players coming to our market through a cross border business model, given that cross border has been a relatively small part of our businesses and we believe that cross border has been a small part of the overall market as well. So the impact to us will be very limited. Even you look at those cross border products that those players are offering, if you compare the pricing for those products to our product in the platform, we still see a relatively good pricing competitive advantage in our platform.

Speaker 2

So in that sense that unless there's a dramatic change on the price competitiveness from these players, we don't see that it will impact buyers' preference on how they purchase our platform too much.

Speaker 4

Thank you.

Operator

Our next question comes from the line of John Choi with Daiwa. John, please go ahead.

Speaker 5

Okay. Thank you. Good evening and thank you very much for taking my question and congratulations on a solid set of results. I have two questions here. First of all, on the first question is what is the latest percentage of our orders handled by SPX in Asia and Brazil?

Speaker 5

I think you've noticed that we have started to reduce the shipping subsidies and what is the near term key driver for reducing the logistics cost per order and what is our target going forward? And my second question is about your unit economics. I think if you look at our live streaming unit economics for live streaming versus our peers in the long term, what is our merchant feedback after Shopee raised the take rate and the timeline of our further increase in this area? Thank you.

Speaker 2

On the SPX, as we mentioned, we are increasing the SPX coverage and also how much percent that STX deliver to the Shopee platform. In general, if you look at Asia, we're probably more than 50% and in Brazil, more than 70%. And these are continue to grow, we believe, in the next few quarters. And but not only increasing the coverage, we're also working hard on both reducing the cost and increasing the quality. More than half of orders delivered within 2 days now in Asia.

Speaker 2

The key thing that we are doing to reduce the cost for SP X coming from all different part of the value chain. For example, if you look at the 1st miles, we are working hard to match the clocks between how well we can pick up the products from the sellers and how well seller can prepare for the products. And that involves part of the seller management, part of the fleet management from our side. If you look at the sorting centers, we're increasing the percent of automations on our sorting centers. And also the way that we manage the workers in our sorting center to make sure that the compensation has a closer linkage to their productivity.

Speaker 2

If you look at the line call, we're spending quite a lot of effort on improving how well we can utilize the line haul to make sure all the trucks are better utilized than it was before. Another thing, as you can imagine, the last mile is very important for our logistic management. We are innovating on different format of last mile hubs that we have. In the more remote area, we have more mobile last mile hubs than the more fixed last mile hubs that we usually have. We're also using technology to improve how many orders one rider can deliver in the last mile by helping them to sequence the package a lot more efficiently and also helping them to figure out the route a lot more efficiently based on the traffic patterns and based on the user behaviors.

Speaker 2

Yes, so again, it's probably not only one thing, there is across all the end to end value chains that we have for the logistics. In terms of the live stream unit economics, our live stream order percentage has if you look at the penetration to our platform as a percentage of orders has increased slightly quarter to quarter and our economics has been improved meaningfully quarter to quarter, actually probably across all our markets. As we shared before, we do believe that large term economics will continue to improve over the time. And in the long term, it will probably be similar to the platform economics. In term of if you come to if you compare to our competitors for live streams, we generally have a relatively good news genomics.

Speaker 2

For the take rate increase, we don't have a fixed timeline in term of the take rate increase. I think we spend a lot of effort trying to balance our seller ecosystem to make sure that whenever we increase the take rate, we are delivering more value to our ecosystem partners. So it's something we will continue to evaluate and hear the feedback from our ecosystem before we conduct any adjustment.

Operator

Our next question comes from the line of Thomas Chong with Jefferies. Thomas, please go ahead. Hi, good evening. Thanks management for taking my questions. I have two questions.

Operator

My first question is about the gaming business. Can management comment about Free Fire lifecycle and any new games to be expected coming soon? And my second question is on the e commerce side. Can management provide some updates about the logistics investment spending and its impact on EBITDA margin in coming quarters? Thank you.

Speaker 1

Sure. Like for Free Fire, we are very excited to see the growth. It's like especially after like the challenge we faced, some headwinds in terms of the like post COVID situation. I think like we have been trying very, very hard in the past 2 years to continually improve the product through the very user centric approach. And we start to see the payoff.

Speaker 1

We start to see the great results like beginning of this year and has been extending the trend for the pretty much for the whole year. And the Free Fire, in terms of the lifecycle, I mean, as we always believe, Free Fire is more like a service and it's more like a platform instead of like a product. So from that perspective, we do have the ambition and conviction to build up Free Fire as an evergreen game and as an evergreen platform. And this is we see the very encouraged sign. And if you think about Free Fire has been a 7 years old game and it's still like growing and the new users coming to the game, the new user growth is even accelerated.

Speaker 1

So and from all those, we see the better engagement and we see the better retention. So from all those metrics and it's a very, very strong sign that Free Fire is still at a very, very early stage. I think it gives us the confidence to continually grow the game and through the engagement, through the better intention and through making the game with a more friendly experience for the new users at the same time to keep always keep the content fresh, local and to have a better engagement with the existing gamers as well.

Operator

Our next question comes from the line of Prisha Dankoya with HSBC. Prisha, please go ahead. Operator, please pause for a moment. The second question has not been answered yet. Give us a moment here.

Operator

Regarding the second question

Speaker 2

regarding the question on the logistics investment, for our logistics businesses is rather more OpEx driven rather than CapEx, CapEx driven businesses. The core capital investment is centered around our sorting machines and part of the improvement to the hub and to the sorting centers. So in that sense that it's relatively smaller part of our overall spending to build our SDX businesses and it's counted as part of the overall EBITDA as well. We don't see that there will be a significant impact to the EBITDA margins from this perspective.

Operator

Right. Let's proceed for the next question. We have Rishabh Dankalia with HSBC. Rishabh, please go ahead. Rishabh, please unmute your line.

Speaker 6

Explain what's driven the 13% quarter on quarter growth in the sales and marketing expense? And if we look at it as a percentage of GMV as well, it's gone up slightly by about 10 basis points. Just if you can triangulate this with your comments on competition being stable, When do we expect these sales and marketing expenses to start coming off? And any outlook for next year on how to think about this number? And the second question is on the DFS business.

Speaker 6

I mean, the general sense that we got on the DFS business is that the growth was being a more measured approach was being taken on the growth. But in this quarter, we've seen the growth actually accelerate quite a bit. Could you talk beyond Indonesia, how the growth has really been panning out and what specific company initiatives have been taken to drive this growth? Thanks.

Speaker 2

For the first question, so typically, there are 2 things that might impact the sales and marketing growth, especially in Q3. I think one is, if you look at our revenue growth, there is a meaningful growth on the revenue side as well. So in the way that we take a bit more from the seller side on the take rate. So typically, when we see that, we will spend a bit more to make sure that we compensate some of the seller take rate increase on our sales and marketing side. I think that's one.

Speaker 2

2nd one is Q3, if you compare with Q2, Q3 is relatively more promotional season for e commerce, where Q2 this year is more a lower season if you come to date. I think that's the 2 core drivers for the sales marketing movement rather than reaction to the competition side. On the second question regarding the digital finance services businesses, we're seeing growth not only in Indonesia, but also in the other markets. For example, we see relatively good growth in Thailand, Malaysia and also we see early signs of well penetration in the Brazil market where we started very late. We see meaningful penetration on Shopee from our escalator products.

Speaker 2

So part of the driver for the growth is that we penetrate more Shopee users through various format. So we can take more users to our digital financial service side. That's one. Second one is we optimize our existing products to the users. For example, if you look at our both escalator and our cash loan products, we are doing a lot more risk based pricing.

Speaker 2

We also provide new type of products to target our more prime users. For example, we launched Term Loan in Indonesia to target our more prime users to make sure that we can address their needs as well. On top of that, we also spent quite some effort to go to build user scenarios, use cases beyond the Shopee platform. For example, in Indonesia, as we shared in the opening that we roll out the SPA letter for the offline payment through the national QR code, the same initiative we have rolled out in Philippines, in Malaysia as well. We also rolled out the SPA letter for the specific use cases offline like the cell phones, home appliance, etcetera.

Speaker 2

Some of this will continue in the next few quarters, while we are expanding to more countries for those products and expand to more user cases. All those will help us to grow the digital financial services to a broader segment of users and penetrate to more use cases for those users.

Operator

Our next question is again from Rishabh Dankoya with HSBC. Rishabh, please go ahead.

Speaker 7

Hi, am I audible? Hello?

Operator

Yes.

Speaker 7

Hello.

Operator

Yes, we can hear you.

Speaker 7

Thank you management. Thank you for the opportunity. Two questions please. What are your key priorities across each segment for 2025? And secondly, what are the initiatives undertaken in DFS segment to drive user growth and deepen penetration of various products and outlook for growth and margins in this segment in the DFS segment?

Speaker 1

For the key priorities for 2025, and so overall we feel like the entire our marketing is strong tailwind from the macroeconomic perspective. And there is a very, very strong growth potential. So and I would say without jumping to very, very specific in each business, overall, we'll still maintain a very, very strong growth mindset. And so the growth will be the focus. And we have so we have a very, very like a strong momentum at this moment.

Speaker 1

And you can see all our 3 businesses is on the very good growth trend at this moment. We hope like this trend will continue into 2025. And meanwhile, as we mentioned, so we also focus on the quality of the growth. And I think like all of our 3 business have gotten to the stage and with the strong foundation to deliver not only the high growth rate, but the very profitable growth as well. So that will be the in the very big picture process in terms of the priority for 2025.

Speaker 2

Yes. If you look at the DMS part of the businesses, as I shared just now in the previous questions, we are further penetrating to the Shop user base. We are optimizing our product to cover more users in our ecosystem and also building more use cases outside of Shopee ecosystem to serve our users better. I think that's all will contribute to the growth over next year, not only for Indonesia, but also for many other countries we have our financial services businesses in. We don't observe any particular trend in terms of the margin shift in the year in this quarter or in the next few quarters.

Operator

Our next question comes from the line of Ranjan Sharma with JPMorgan. Ranjan, please go ahead.

Speaker 8

Hi, good evening and thank you for the presentation. Two questions from my side. Firstly, on e commerce. Can you share your thoughts around how much profitable growth is left in Southeast Asia because we presume that the penetration of the major urban centers is already quite high in Southeast Asia. And the contrary to that is with you becoming less profitable in Brazil, could Shopee look at further expansion out of Asia?

Speaker 8

The second question is on your cash and investments, which are close to $10,000,000,000 now. How much capital do you need to keep on the balance sheet? Or is there a case for you to return some money back to the shareholders? Thank you.

Speaker 2

In terms of the e commerce penetration, if we look at the current e commerce penetration in our major market, we still see that it's quite a lot of rooms that we can grow if you benchmark that with more advanced e commerce market. So overall, if you look at the market in a top down way, we do believe that there's still meaningful room to grow the e commerce penetration even in the cities. Like for example, if you look at Indonesia, you look at the Jakarta area versus Java versus outside of Java. Even in the Java cities, in Jakarta around Jakarta or in other Java cities, we do see that the meaningful penetration potential will be part of that will be driven by the cost of optimization that we are doing, for example, by further reducing the cost for our SPA deliveries and part of that will come from a better experience of buying from e commerce like the service improvement that we are working on. Part of that will be driven by natural progressions of the population.

Speaker 2

Some of the younger population were getting slightly older, so they have better purchasing power and some of the other users who don't use e commerce before they will try e commerce and be more frequent purchaser over time. So all in all, we do believe that there are still meaningful rooms in terms of the penetration. For the expansion outside of Asia, our core market out of Asia is Brazil right now, which we do believe there is a huge potential there. In the near term, let's say in the next it's very hard to predict anything too long term, but in the near term, we don't have any particular plan besides what we have right now.

Speaker 1

In terms of the capital allocation, like to start with creating value and maximizing value for our shareholders is always the things on top of our mind. So we remain very open minded and actually we constantly look at all the opportunities and review all the options how to create better value, how to make this value for our shareholders. I mean, definitely, buyback is one of the ways, right? There is other options as well. I think when there's certain opportunity appears, we will come out of plan and we will communicate with the shareholders timely and accordingly.

Operator

Our next question comes from the line of Sachin Sankalkar with Bofar. Sachin, please go ahead.

Speaker 9

Hi. Thank you for the opportunity and congrats on a good set of numbers. First question is on Brazil. Clearly and congrats for achieving an EBITDA margin breakeven out here. How should we think about the margins going ahead?

Speaker 9

Should it continue to hover around these levels given the investments you are looking to make out here? Or should we see an improvement in margin going out here? Related question is, of course, is how do you look at the credit business evolving in Brazil going ahead? And second question is, when you think about incremental investments now that all your businesses are EBITDA breakeven, where do you see maximum amount of investment being made? Is it more towards logistics?

Speaker 9

Is it more towards DFS or anything else? Thank you.

Speaker 2

If you look at the Brazil market, it's our newest market and we've been very happy that we achieved EBITDA even in the market in this quarter. It's still a very dynamic market. Generally, we are hoping that we can further grow in the market with a profitable manner. Although there might be some fluctuation from time to time, but generally, I think we would like to use that as a base for thinking. If you look at the credit businesses in Brazil, as I shared in the earlier questions, we started a few quarters ago and we see very good penetrations in Shopee through our escalator.

Speaker 2

We also launched our cash loan product in Brazil, which with a very good take rate that we observed. More importantly, we're fine tuned our risk modeling in Brazil to a stage that we are a lot more comfortable with to grow further in the market. So generally, we are quite optimistic by the potentials of our digital financial services in Brazil in the coming quarters. And if you look at the investment to various businesses, we take a very prudent approach for the investment. For example, if you look at any investment to logistics, we typically have a payback period, let's say, between 9 months to 36 months, in the range.

Speaker 2

It does typically can contribute to our EBITDA quite quickly through those investments by optimizing our cost structure. If you look at the DFS side, DFS has generally been quite powerful businesses, as you can see from the numbers. The core investment for the DFS is probably on the user acquisition side to make sure we are attracting the right user to the platform. The way we look at it is we measure the profitability for each users we bring in to make sure that each user we bring in has a meaningful profit in the coming year. There are other type of investment, for example, on the e commerce side, we do invest in acquiring new users as well.

Speaker 2

For that, we also take quite prudent approach in term of measuring each user's customer lifecycle value against the cost to acquire the users. In most cases, the unit economics for those customer lifecycle value will break even in a year time in general, if you compare with the cost we spent on acquiring the users for most of the market.

Operator

Our final question comes from the line of Jiang Xiao with Barclays. Please go ahead.

Speaker 10

Thank you very much for taking my questions. Congrats on the very strong results. My first question is on the DFS business. You have made a tremendous progress in this business over the last few quarters and your growth accelerated quite a bit this quarter, both for revenue and for the loan book. I was wondering if you can impact that, just talk about what are the main drivers for the next couple of years to grow this business?

Speaker 10

Is that regional expansion, product expansion, any key things we should look out for, for the continued sort of accelerated growth for this business? And second question is on the leverage in your e commerce business model. Again, congrats for being profitable in Shopee again. And for this business,

Speaker 8

is that sort of

Speaker 10

gradual improvement in profitability or would you reach certain scale, the leverage will just play itself out and the improvement in profits could be meaningful at times? Thank you.

Speaker 2

So in terms of the digital finance service businesses, I think you're absolutely right that it's a business that we've been very happy with in terms of the growth. And if you look forward, the growth will essentially come from number 1, the user growth. We would like to convert more of our e commerce user to our digital finance service users and over time attract our non e commerce users as well to become our digital finance service user in our platform. That's number 1. Number 2 is, of course, to essentially get more users to use our products, both from existing products to optimize our offerings to different segment of users with a different risk profile and also expanding our product assortment to address more financial needs that the user might have across their life cycles.

Speaker 2

I think it's going to be both approach, the user growth plus the product optimization plus the product assortment addition for our users. In terms of the country mix for DFS, I think we start with Indonesia. As I shared earlier, we see a very good growth in some other countries over the quarters. And I would expect the trend is going to continue that the newer countries will benefit from the experience we learned from the earlier countries, so that we are able to attract user more efficiently and also roll out product more targeted sessions. On the e commerce profitability, I think it's probably both whether it's a gradual improvement or potentially that is a big jump on profitability.

Speaker 2

In a natural environment, in a more stable environment without any external shocks, you will likely see a gradual improvement on the profitability as we grow our ecosystem and as we reduce the cost to serve our customers in our upstream, downstream. And we are also able to optimize our own operating expenses to serve the customers. For example, if you look at the customer service that we have, we have been growing orders quite a lot in the last few quarters, but we have managed it with the same amount of people, even small amount of people to serve those customers from our platform perspective. So all those will contribute to a gradual improvement in profitability. But as the market become more stable over the years, there is a possibility that we see that is relatively sizable driving probabilities in future.

Speaker 2

I think, yes, to your question is that those possibilities, but the base case we're working on right now is that we're able to gradually improvement gradually improve the probabilities over the next few quarters.

Operator

This concludes our question and answer session. I will now turn the call back over to Mr. M. C. Gulf for closing remarks.

Operator

Thank you all for joining today's call. We look forward to speaking to all of you again next quarter. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
SEA Q3 2024
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