SEA Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 13, 2024

There are 13 speakers on the call.

Operator

Good morning, and good evening to all, and welcome to the Sea Limited Second 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. M. C. Koh to begin the conference. Please go ahead.

Speaker 1

Hello, everyone, and welcome to Sea's 2024 Second Quarter Earnings Conference Call. I am MC, C's Investor Relations Director. 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 a 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.

Speaker 1

For a discussion of the use of non GAAP financial measures and reconciliations to 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 Li President, Chris Feng and Chief Financial Officer, Tony Ho. Our management will share strategy and business updates, operating highlights and financial performance for the Q2 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 2

Hello, everyone, and thank you for joining today's call. I'm happy to report that it has been a solid quarter for us with our strong momentum from Q1 continuing into Q2. All three of our businesses have shown both strong growth and higher profitability. Before I dive into each business results, I wanted to share some observations of our Southeast Asia market. Generally, retail and consumer spending trends in the region have remained healthy with domestic consumption continuing to be a main driver of economic performance in many markets.

Speaker 2

This sets a very strong micro foundation for our e commerce business. We are happy with shopping market share in Southeast Asia and our sizable lead over our peers in the region. We are seeing more market share consolidation and an industry wide take rate increase. We believe this will move the industry toward profitability and sustainability, and we welcome this trend. With the strong results delivered in the first half and our outlook for the rest of the year, we expect that Shopee will become adjusted EBITDA positive from the Q3.

Speaker 2

We are also revising up our guidance for Shopee's 2024 full year GMV growth rate to the mid-20s. With that, let me take you through each business' performance in more detail. Starting with e commerce. As we have shared before, Shopee's operational priorities are to deepen our competitive moats on 3 fronts: enhancing our price competitiveness, improving service quality to customers and strengthening our content ecosystem. This strategy is paying off.

Speaker 2

Over the past 2 quarters, Shopee has been able to post healthy, sustainable growth, while also improving its profit profile. One area we are placing greater focus on is improving our ad take rate. Currently, our ad take rate is lower than the industry average we observe in more mature e commerce markets. To us, this represents a good opportunity to improve our monetization. Over the quarter, we have made it easier and more attractive for sellers to join our ad platform.

Speaker 2

We also have a dedicated tech team working on improving our ad bidding algorithms to help sellers achieve higher returns from their advertising spend. So far, the results have been encouraging. The number of sellers who pay for ads has increased by more than 20% year on year this quarter. We believe there is still plenty of upside and we will continue to push on this front. We have also launched live ads across our Asian markets, allowing streamers, including both merchants and creators to insert ads into Shopify Live.

Speaker 2

This feature has been very well received. In Indonesia in June, 1 in 4 active streamers paid for live ads. This feature helps streamers boost their sales efficiency while increasing our ad take rate, enhancing our content ecosystem and improving our live streaming unique economics. On improving our service quality to customers, our logistics capabilities continue to differentiate us. In the survey, 50% of buyers in Java Indonesia cited faster delivery as their reason for choosing Shopee.

Speaker 2

We have continued to integrate more closely with our many logistics partners to widen our coverage and deliver packages faster. XPS Express, in particular, has managed to improve delivery speed, while also reducing its costs. In the second quarter, more than 70% of XPX Express orders in Asia were delivered within 3 days of order placement, with cost per order declining 8% year on year. Another initiative to enhance customer service quality has been improving the buyer return response process, a common pain point in e commerce. Earlier this year, we launched a change of mind returns feature in our Asian markets.

Speaker 2

Lighting buyers initiate no questions asked return within 15 days. We paired this with data driven tech improvements to make the overall return refund process highly predictive and efficient. As a result, in the second quarter, more than half of our return and refund cases in Asia were resolved within one day. Making this process fuss free makes buyers more willing to complete purchase, driving up user stickiness and repurchase frequency. In Malaysia, we saw a more than 10% increase in average basket size among buyers who raised change of mind return requests compared to before the feature was launched.

Speaker 2

I share these examples to demonstrate how we consistently execute on our operational priorities every quarter. We believe this approach will strengthen our market leadership in the long term. Next, turning to Digital Financial Services. SeaMoney has continued its strong momentum in growing its loan book and profit while remaining prudent on risk management. Both revenue and adjusted EBITDA have grown very well year on year.

Speaker 2

Consumer and SME Credit Business continues to be the primary driver of SeaMoney's revenue and the profit growth. We are making good progress on deepening our credit product penetration, both on Shopee and off Shopee. Our large Shopee user base is a unique advantage. It enables us to acquire new customers very cost efficiently by promoting the right products at the right time to the right users. In the second quarter, we registered over 4,000,000 first time borrowers of our credit products, a figure that has more than doubled compared to 1 year ago.

Speaker 2

We have also expanded our off shopping credit use cases. Indonesia, we partnered with over 1,000 electronics stores to introduce customized as pay later loans for mobile phone sales. We were the 1st player in the market to provide instant credit approval for this category at scale. We will continue to explore more credit use cases in our markets. With all these efforts, we have grown our loan book size to $3,500,000,000 at the end of June, up almost 40% year on year.

Speaker 2

Notably, our non performing loans metric held steady at the end of the quarter. In fact, it improved slightly from the previous quarter. We now have 21,000,000 consumers and SME loans active users, up almost 60% year on year. Looking forward, we will continue to invest in growing our user base efficiently and effectively as our market are still under penetrated and present sizable opportunities. A large user base will be a cornerstone of future growth for SIMONI, especially as we introduce more product offerings.

Speaker 2

Finally, turning to our digital entertainment business. Garena's 2 years of hard work and taking a user centric approach are paying off. We have delivered a strong quarter with more than 20% year on year growth in bookings, mainly contributed by Free Fire. At the end of June, Free Fire released a 7th anniversary version update, our largest in game event of the year. We brought back classic weapons, made a documentary on Free Fire's history and hosted a story war where users could share their past experiences with the game.

Speaker 2

The campaign was very successful. Our players really enjoyed revisiting their fond memories of the game's early years. Free Fire's unique strength is its large, highly engaged and loyal gamer base. I'm very proud to share that every single day throughout Q2, Free Fire had more than 100,000,000 daily active players. This reinforces our conviction that Free Fire is an evergreen franchise.

Speaker 2

Free Fire also managed to keep growing, thanks to the strong word-of-mouth effect we see from our large user base. According to Sensor Tower, Free Fire was the most downloaded mobile game globally in the 2nd quarter. Free Fire's organic social pool is highly valuable. Especially in today's world, where getting users to download and try new content can be hard and costly. We are also excited about launching Need for Speed Mobile in Taiwan, Hong Kong and Macau later this year in partnership with Tencent and Electronic Arts.

Speaker 2

We are pleased to be able to bring this high quality game with a classic IP to our gamer community. To conclude, we are happy with the strong results the 3 businesses have achieved in the first half. Thank you as always for your support. Before I hand over the call, I'm pleased to announce that 2 new independent directors have joined our Board. Doctor.

Speaker 2

Silvio Savaresi is a leading expert in AI and Ms. Jessica Tan is a highly accomplished leader in financial services. I'm glad that Huvo and Jessica are willing to lend us their deep expertise and guidance on these two areas, which will be critical in shaping this future. In addition, Tony will be stepping down from our Board and will continue to serve as our CFO. With these changes, our 7 member board has the majority of independent directors.

Speaker 2

Thank you very much. With that, I invite Tony to discuss our financials.

Speaker 3

Thank you, Forrest, and thanks to everyone for joining the call. For Sea overall, total GAAP revenue increased 23% year on year to CAD3.8 billion in the Q2 of 20 24. This was primarily driven by GMV growth of our e commerce business and the growth of our digital financial service business. Our total adjusted EBITDA was CAD448 1,000,000 in the Q2 of 2024, compared to an adjusted EBITDA of CAD510 1,000,000 in the Q2 of 2023. On e commerce, Shopee's gross orders grew 40% and GMV increased by 29% year on year.

Speaker 3

Our 2nd quarter GAAP revenue of CAD2.8 billion included GAAP marketplace revenue of CAD2.5 billion, up 33% year on year and GAAP product revenue of CAD0.3 billion. Within GAAP marketplace revenue, core marketplace revenue, mainly consisting of transaction based fees and advertising revenues was CAD1.8 billion, up 41% year on year. Value added services revenue mainly consisting of revenues related to logistics services was CAD0.7 billion, up 16% year on year. E commerce adjusted EBITDA improved quarter on quarter with losses narrowing to CAD9 1,000,000 in the Q2 of 2024, compared to an adjusted EBITDA loss of CAD22 1,000,000 in the Q1 of 2024 and an adjusted EBITDA of CAD150 1,000,000 in the Q2 of 2023. For our Asia markets, we continued to achieve positive adjusted EBITDA following our Q1 of 2024 results, recording CAD4 1,000,000 during the quarter compared to an adjusted EBITDA of CAD204 1,000,000 in the Q2 of 2023.

Speaker 3

In our other markets, the adjusted EBITDA loss was CAD13 1,000,000 narrowing meaningfully from last year when losses were $54,000,000 In Brazil, unit economics continues to improve as we achieved a positive contribution margin per order of CAD0.09 for the quarter as compared to a loss of CAD0.24 in the Q2 of 2023. Digital Financial Services GAAP revenue was up by 21% year on year to CAD519 1,000,000 Adjusted EBITDA was up by 20% year on year to CAD165 1,000,000 As of the end of June, our consumer and SME loans principal outstanding reached CAD3.5 billion, up almost 40% year on year and 8% quarter on quarter. Non performing loans past due by more than 90 days as a percentage of total consumer and SME loans was 1.3% at the end of the quarter. Digital entertainment bookings were CAD537 1,000,000 up 21% year on year and 5% quarter on quarter. GAAP revenue was CAD436 1,000,000 Adjusted EBITDA was CAD303 1,000,000 Returning to our consolidated numbers.

Speaker 3

We recognized a net non operating income of CAD56 1,000,000 in the Q2 of 2024 compared to a net non operating income of CAD108 1,000,000 in the Q2 of 2023. We had a net income tax expense of CAD61 1,000,000 in the Q2 of 2024, compared to net income tax expense of CAD62 1,000,000 in the Q2 of 2023. As a result, net income was CAD80 1,000,000 in the Q2 of 2024 as compared to net income of CAD331 1,000,000 in the Q2 of 2023. With that, let me turn the call to MC.

Speaker 1

Thank you, Forrest and Tony. We're now ready to open the call to questions. Operator?

Operator

Thank you. We will now begin the question and answer session. Your first question comes from the line of Pang Bhatayam Nuekun with Goldman Sachs. Your line is open.

Speaker 4

Two questions from my side, both on e commerce. Number 1, could you please comment on the latest competitive landscape you have observed? We are seeing all players, including yourself, push for further rationalization into Q3, especially on the merchant front. How should this translate into your results and your updated guidance? In another word, what factors do you include in your revised guidance?

Speaker 4

That's question number 1. Question number 2, specifically on margins. What type of near and medium term margins can we expect Shopee to deliver? And how do you plan to achieve that? Any update on long term margin expectation as well?

Speaker 5

Yes. On the competitive landscape, I think as Forrest mentioned in the opening, we do see a more stable competitive environment in the past few months. As you mentioned, we are positive movement in terms of the take rate from various players in our market. And I think we welcome that as a signal of more stable environment for competition perspective. Our longer term view on the profitability target stay unchanged as 2% to 3% of the EBITDA as we shared before.

Speaker 5

However, we believe the market is still quite dynamic. And in the short term, we will likely number 1 focusing on the profitability of the businesses. We were as we shared in our guidance in Q3, we'll be profitable as the Shopee businesses. But at the same time, we also like to grow as there's still a good potential in the market we operate in. We would like to make sure that as a businesses, we can outgrow the market as well in the short term rather than maximizing the profit in the near term.

Speaker 5

If we look a little bit to the medium terms, we do expect the overall content landscape in our market to continue to evolve and continue to come into a more rational stage even compared to where we are right now, which will drive the overall industry probability to improve. If you look at the overall market, as we mentioned, is still rather dynamic with more stable competitive environment. But there are things we can't control, there are things we cannot control. We would rather focusing on the thing we can control. For example, the thing that we shared in the opening, we want to have better pricing, we would like to have better user experience.

Speaker 5

We would like to have a better content supply to our users. Together with the larger scale of where we are right now, our competitors, we will all those things will help us to always be better positioned to deliver better value to our consumers and ultimately have better unit economics, which will translate to the market share and over time as well. I think that's kind of like how we probably see the market in the near term, mid term and the longer terms.

Operator

Your next question comes from the line of Piyush Choudhary with HSBC. Your line is open.

Speaker 6

Yes, hi. Thanks for the opportunity and congrats to the management team on good set of results. Two questions again both on e commerce. As you mentioned earlier, you have been increasing take rates and then industry has also increased take rates during 1H. Is it possible to further increase the take rates?

Speaker 6

And are you able to reduce the shipping subsidies? That's the first question. Secondly, can you talk about the unit economics of live streaming business? Has it turned profitable now in some countries? How is the contribution margin for live streaming segment?

Speaker 6

Thank you.

Speaker 5

For the take rate, we do believe there are opportunities to further increase the take rate. I think part of that comes from commissions and fees. As you probably observed, we do increase meaningfully in the past few quarters. I think there are still opportunities to further increase that, although probably not in the magnitude that we see in the early part of the year. There's another part of take rate, which we think that is also having a sizable opportunity is on the ad side.

Speaker 5

So that as we shared in the opening, we do focus a lot on the ad side. We spent a lot of effort on building infrastructure to the ad side in the past few quarters. Like for example, we built the standard platform for our recommendation and search. We also build a standard algorithm and platform for our ad system and organic traffic allocations. All those will help us to be able to allocate traffic more agile and more flexible.

Speaker 5

And this enable us to offer better added product to the seller as well, which we are putting out in the next few quarters. We believe all those assets will help us on the uptick rate improvement in the coming quarters. On the UE poll for live stream, we do see UE improvement quarter on quarter. Actually, if you look at all markets, some markets are possible, some markets are still improving. But I think generally, we believe the trend will continue in terms of the year improvement for our live streaming businesses.

Operator

Your next question comes from the line of Marisa Putri with UBS. Your line is open. Hi, management. So I have two questions. Firstly, on e commerce.

Operator

So you've just reported your first Centimeters positive from Brazil. And I think still with ambition to kind of be number 2 in the market. How do you plan in achieving this? Should we think of the improved profitability as sustainable? And number 2 is kind of just to make sure that I'm getting your guidance correctly.

Operator

So the adjusted EBITDA positive will be just for standalone Q3 EBITDA, but not overall 9 months EBITDA positive in Q3? Thanks.

Speaker 5

For the Brazil businesses, we are very happy about the improvement on the margins in the market. As we shared in the earning, the contribution margin for the Brazil market is positive already. And we

Speaker 2

also see

Speaker 5

there is a good potential in Brazil market. The core for us in Brazil is being number 1, we are able to consistently reduce our shipping cost in the market through our own logic network. Number 2 is we're also improving the new experience in the market thankfully over the past quarters. I think in combination, it drives better user retentions and also better unit economics to our market. The other thing that's important for our Brazil market besides the user experience and the economic improvement is the ability for us to increase our penetration of the higher basket categories over time.

Speaker 5

We do believe that we have a sizable potential there to further increase our market share penetrations to those categories. Traditionally, we are not as strong as compared to some of other players in the market. So with all that, we do feel that there is a meaningful potential for us to grow further in Brazil market and we can see the levers that we have and we are working on those levers. In terms of the EBITDA guidance, I think what we refer to is the 3rd quarter EBITDA positive. I think that's the understanding is correct on that.

Operator

Your next question comes from the line of Alicia Yap with Citigroup. Your line is open.

Speaker 7

Hi, thank you. Good evening, management. Thanks for taking my questions. Two questions. First, can management share the update on the progress of acquiring on the non Shopee platform user for the DFS business and the GTV growth for the non Shopee platform.

Speaker 7

Were these more from the offline transactions like those offline retailers, the restaurant partners or she actually will be open to work with any online partners, including for example the online travel agents. So this is for the DFS question. 2nd question is related to Shopee Express. So how are we going to further optimize, the operation efficiency and also further improve the cost structure for the logistic business in the coming quarters? Thank you.

Speaker 5

On the first question, if you look at our credit loan portfolio, there are few components of that. We have Shopee Pay Data, which is very much quite connected to Shopee, the SP Pay Later as we call it. It's used as part of the Shopee transactions. Besides that, we have buy cash loan, which is the cash loan that's not related to Shopee. Anyone can take a loan from it.

Speaker 5

And on top of that, we also have the offline payment through SPA later. And the same SPA later that can be used offline can also be used online through a Shopee Pay acquiring network. Besides that, we are also developing different kind of use cases for offline usage, for example, the headphone purchase as we shared in the opening. And similar type of specialized services can be deployed in Fusion as well that we're working on. For example, the potential home appliance purchase offline, it can be online as well.

Speaker 5

For example, the other type of so I think to the question whether it's mainly offline or it's online as well, I think the answer is probably a combination of both. In fact, if you are in some of the market, I mean, Indonesia, the users can use our Shopify data, FK data solutions to pay in an online travel website already. So we do work with various both online and offline partners to enable as pay later for their transactions. And we expect the partner will grow over time for both online and offline. So it wouldn't be only offline.

Speaker 5

For the second question regarding SP X, we actually have probably to further improve the efficiency of SP X. For example, number 1 is the scale. There is still sizable rooms for us to grow our scale further, which in our space still can reduce the cost and improve efficiencies. Number 2 is more coverage and more density of the coverage. For example, more hubs, some of the hubs can be traditional hubs as you see, some of the hubs can mobile hubs through our innovative way of deploying the hubs with low cost.

Speaker 5

And if you look at Q2, we actually add about 900 hubs in Q2. And size of them are mobile hubs with low cost operations. Number 3 is we're also doing more automation through our networks. For example, in our SoCs, we are adding more automation solutions either it's for ASM, automatic sorting machines or it's a hybrid solution when there is a smaller SoCs, which will further improve our productivity. We're adding similar solution not only to SoCs, but also to some of our 1st mile and last mile hubs when the scale enable it.

Speaker 5

And number 4 is better technology supporting our businesses. For example, a better sorting for our last mile drivers, we're deploying a solution that we can also suggest the routing and sequencing. We have done in some markets for some in Brazil, but in some of Asian markets, that's not easy to do because of the complexity of the MAX. We are rolling out more and more of a solution in different countries because we need to customize our solution for different market. And the last thing just to share is the off clock, which is very important for us.

Speaker 5

The off clock starting from the picking up from the seller side to the 1st mile hub to the sorting sensors to the line haul to the last mile to delivery. And it sounds simple, but it's actually quite complex because there are so many handover along the way. And there are so many choices we have to make. Like, for example, when do you send a line haul, when do you pick up and whether you send to the hub directly or you send to a secondary sorting center. So optimizing the ops clock here will enable us to further improve our efficiencies in general.

Speaker 5

And of course, I mean, other things we're working on, but just sharing some of examples for the improvement opportunity we have on the Logistics side.

Operator

Your next question comes from the line of Ellie Jang with Macquarie. Your line is open.

Speaker 7

Good evening. Thank you, management, for taking my question. I have 2. Number 1 is a follow-up on e commerce.

Speaker 8

Just wanted to ask about the ad take rate, the management commented. We talked about the sizable opportunities ahead. But if we look in the next several years, what kind of time line do we really anticipate to ramp up this ad revenue and potentially get to a level that's similar to the mature market players? So for example, how does it take to for us to stimulate more ad spending from the merchants? Would it be more efficient marketing tools or coming from more higher ticket size item sales?

Speaker 8

And the second question is on the gaming segment. So it seems like Free Fire is really generating momentum. And according to some third party trackers, the momentum remains quite strong quarter to date. So can you comment on the visibility or the sustainability for the second half outlook? And for the potential kind of meet for speed distribution that we partner with Tencent, what kind of financial kind of contribution would that be coming from the second half as well?

Speaker 8

Thank you.

Speaker 3

On the ad take rate, I think given the foundation

Speaker 5

we have built, as I shared earlier, we do believe that we will start to gain the benefit in the next few quarters, probably wouldn't take a few years. I think some people have come back public quarters. I think the basic product there, I think it will take some time for the seller to adopt to it and also why there's different seller adopt to it, we have to optimize it for different markets. I think it comes in both in terms of the improved efficiency on how the seller use the ad product and also from our side as a platform, how we can allocate the traffic in a more efficient way, giving a seller more upside without sacrificing the overall platform conversion rate. I think that's essentially the technology we've built in the past few quarters and we're trying to roll out and optimize in next few quarters.

Speaker 2

On game side, as you mentioned, we are very happy and we are very motivated by the trend we have observed on Free Fire. This is across pretty much all the metrics in terms of the new users, in terms of the like the user the existing user retention and also such as some like monetization metrics as well like paying ratios, right, and overall the growth rate. This is kind of like this is to demonstrate what we have done in the past. It's the right decision we made and it's the right focus we have. And we will continue to do that.

Speaker 2

And so we'll be very, very focused on the content update, right? And in the past two quarters, we have some very, very successful new content release and around some of the festival campaigns and some like unique gameplay, new gameplay experience. So we'll continue to do that. There will be several big update already in the pipeline and we have a pretty kind of strong confidence on the result of those new updates. And on top of that, and we are continually seeing Free Fire as a platform and it's not just every like evergreen franchise, it's more like a platform.

Speaker 2

The way we think about it, this is as we shared like on every single day like Free Fire can reach more than 100,000,000 users globally. So that is very, very sizable. That is a very, very large scale. I think like although you may consider the game is a call is always the name is always called Free Fire, but in Free Fire, so if you log into the game and you will start to experience all different type of game experience and like a different game mode. So it's kind of like a combination of the different gameplay experience within 1 platform and 1 Free Fire umbrella.

Speaker 2

So we'll continually explore that as well. And some other like longer term initiatives we have been very, very focused on and I personally feel very excited is about how to use the AI tools, right, and both on the like a production side, the game development side, right, how to make the production more cost efficient, like how to improve the speed and the quality of the production. At the same time, we continually explore what is the type of new game experience for gamers enabled by AI. So this has been a focus of the team. And on the other end, it's related to the platform perspective we have like we are not building only building the game content and we are continually focused on building on the game creation tools within the Free Fire ecosystem, within the Free Fire universe.

Speaker 2

And gradually, we're going to work with the 3rd party content creator game developers to create a different like a various experience within the Free Fire platform to reach to like our 100,000,000 daily active user base. So this is I think that will not only make the Free Fire kind of offer a more complete gamer experience, At the same time, like this will continually help us to on the user engagement and the monetization. So we remain very, very confident for the rest of the year, the momentum. But like as we all know, like a game business, game have sometimes have the impact of the seasonality, right. This is related to the school holidays, related to the certain like festival in certain market, but look like a little bit like a longer term, right, and from the full year perspective as you asked, and we remain confident to deliver the double digit growth for Free Fire for both monetization side and also on the user growth side.

Speaker 2

And we are very excited. We work very, very closely with our partners like EA and Tencent to work on the new game in our pipeline. But I would say like it's still early to comment right on what in terms of the revenue contribution. And internally, like we have been tremendously still focused on Free Fire. And we will let the market know and the more kind of detailed update when we get the new game launched.

Speaker 2

I think when we get a user feedback and we see the stats, we'll have a better sense of how big potential those new games could be.

Operator

Your next question comes from the line of Divya Kosayo with Morgan Stanley. Your line is open.

Speaker 9

Yes, thank you very much. My first question is just on your views on the higher risk from competition from cross border e commerce in ASEAN. I mean, given the traction that Timo is seeing in recent months in Philippines and Malaysia and their recent entry in Thailand. Do you think that this could also become a credible competitor, the way TikTok kind of came to this geography? And how are we planning to respond to this, especially in relation to our positive adjusted EBITDA guidance for the Q3?

Speaker 9

And my second question is on e commerce GMV. Is the higher guidance coming more from the surprises in Brazil or is it from ASEAN? And if you can comment on the trends that you're seeing in July August given that second half is slightly tougher based than the first half And are we seeing any sort of tapering there? Thank you.

Speaker 5

For the CB players, I think you will probably refer to Tmall's businesses coming to Asia. I mean, generally, we have a lot of respect for West with Pinduoduo and Timo has achieved in the past. However, I think while our market would probably monitor, but from OAC so far, I think the impact to our business is probably about the limited from OAC, I think for two reasons. 1 is CB by nature is a smaller part of our businesses in our market. If you look at the market like Philippines, Thailand, Malaysia mentioned, majority of the e commerce transaction happened to be a domestic selling rather than cross border selling, right?

Speaker 5

There are many reasons to contribute to that, of course. But as a fact, that's how the market landscape evolved to for the better efficiency and cost structure that the domestic e commerce offers. And that's one. 2nd one is the great strength for Tmall, other cross border players entering to U. S.

Speaker 5

Or European market is their pricing. They typically carry a significant price advantage compared to the existing players. However, if you compare our pricing to their pricing in the market that you mentioned, Philippines, Thailand or Malaysia, we actually have a much better price on the vintage compared to them. It was mainly because we actually operate in a very competitive environment for quite a long time. And we have been essentially having a very competitive cellular landscape domestically for quite a while.

Speaker 5

And also, compared to a more developed market, where the operating cost is much higher compared to the operating cost in China, The operating cost for our sellers in our market domestically is probably cheaper than operating cost in China if you take a person in certain things to offer the warehouse or offer a shop, they are probably cheaper than a Chinese person. So many different reasons contribute to the fact that our pricing in our marketplace, which you can benchmark externally actually, it's very competitive compared to even the cross border players you mentioned. To your second question around the GMV guidance, I think generally we see good growth, which are better than we thought before when we give out the previous guidance in both Asia market and Brazil market. And just in the pure scale, Brazil market is compared to Asia, it's still relatively smaller as the total size as where we are. So the one market will not influence the number domestically.

Speaker 5

So when we look at better growth guidance, I think it will imply that both markets in Asia and Brazil will have a meaningful improvement from what we thought before. And as you mentioned that last year, our Q2 and Q4 does have a higher base compared to Q1, Q2. But still that I think the core thing is that there are many initiatives we've done from last year from Q3 and Q2 sorry, Q3 and Q4 on the content side improvement and also the improvement on the service qualities, improvement on the cost structures, the improvement on the pricing, all those contribute to better retention and the new user coming to our platform, which drives better growth that we're seeing so far, which leads to our rates on the guidance.

Operator

Your next question comes from the line of Sachin Salgamkar with Bank of America. Your line is open.

Speaker 10

Hi. Thank you for the opportunity and congrats on a good set of numbers. I have two questions. First one on gaming and second your bookings are up, your users are up, but your bookings are up, your users are up, but revenue is down. And we are seeing that trend for last couple of quarters where ARPU continues to go down.

Speaker 10

What happened this quarter is clearly we could see margins almost being at an all time high. So I want to understand, is this a specific trend we should look at going ahead where ARPU continues to decline and margins continue to improve or at least stay at these levels? Second question, I understand your earlier comments on competition being irrational, but just want to double click on couple of markets. 1, Taiwan, where we have a new competitor, Coupang, which is aggressive. So I would love to know your thoughts on overall competitive intensity in that market.

Speaker 10

And second in Indonesia, where one of the players had increased subsidies in the market. So any specific response from you guys to that? And how are you guys looking at the increased subsidies? Thanks.

Speaker 3

Thanks for the question. I think for the first question, you were talking about the GAAP revenue. So basically, the bookings actually improved both Q o Q and year over year. And while because of the GAAP treatment, we have to defer more revenues into the future quarters. So that's why we typically see the variations in the GAAP revenue side that is on the reverse side with the booking side.

Speaker 3

So, well, for ARPU, what we see is average revenue per user is relatively stable. While it might be factoring a little bit, but it's more coming from the market mix. We don't see very big fluctuation Q o Q for this quarter.

Speaker 5

I think for your question on the competitive landscape in Taiwan and Indonesia, Taiwan, I think Taiwan, we still enjoy a rather dominant market position in the market. We do see some new entrances and we do look at it seriously, but I think the impact to our business at this stage is relatively small. And the core thing for us, I mean, without commenting too much on specific competitors, of course, the core thing that we are doing in Taiwan is number 1, to shorten our delivery time through our own SPAC network. We're covering a lot more next day deliveries through our own next day network, which is typically done through 3PL with much more expensive delivery systems, we are able to do a next delivery with much cheaper, in many cases, probably 40% cheaper than the alternative solution in the market. That's 1.

Speaker 5

2nd one is to further increase the efficiency of the supply side to work with our sellers to fulfill their orders, not only the delivery side, but also the warehousing side, the fulfillment side to do it in a more cost effective way. Number 3 is to work with more sellers to increase their assortment for those areas that we think can be further enhanced. I think all the things will help us to maintain our competitiveness in the market, while maintaining the possibilities in the market. For Indonesia, I think they are different players doing different things in the market. And there will be seasonal fluctuations.

Speaker 5

We would pay that attention to sort of short term up and downs on the subsidies you mentioned. I think we look at sort of slightly longer term, let's say, medium term trend, at least month to month or quarter to quarter trend. We didn't see any significant changes on that if you look at slightly longer term rather than focusing on specific campaigns or specific weeks or days.

Operator

Your next question comes from the line of Thomas Chong with Jefferies. Your line is open.

Speaker 11

Hi, good evening. Thanks management for taking my question. My first question is about our DFS business. Just now I think our management comments a lot about BNPL, cash along and off Shopee Pay Later. I just want to get some color with regard to the margin trend for different categories.

Speaker 11

Any color about the margin profile would be great. And on the other hand, given the macro uncertainties ticket size and tenure, etcetera? And my second question is more about the overall business. Given our different business segments are seeing a very good growth momentum, how should we think about the longer term revenue mix profile? Should we expect DFS to become more meaningful in the long term?

Speaker 5

Thank you. On the first one on the margin trends, if you look at a particular market or a particular product in our portfolio, our margin has been relatively stable. In fact, in some market, we see a better risk profiles for our product, which will in turn better our EBITDA ultimately. But one thing I do want to share on this topic is that, given that we have many different markets and we do see that the newer market has probably a faster speed of growth. If you track our histories, we started our lending products in Indonesia first, then we expand to other markets like Philippines, Malaysia, Thailand, Vietnam in Brazil.

Speaker 5

So typically, you will see that given the smaller base, so the latest market has a slightly faster growth than the early market. I think that's the natural trend. And in fact, we are very happy with the growth we see in some of the new markets. For example, in Thailand, we see very good growth. In Brazil, we also saw quite good growth in the past quarters.

Speaker 5

On the macro uncertainties, in generally, I think there are many macro factors impacting our market. I think there was a big macro impact from the COVID time, then after COVID time. I think that since late last year, we're seeing a more stable market environment in fact for most of the market. There are 2 things that's important for us in terms of managing the marketing environment. 1 is the duration of our lending products.

Speaker 5

2nd one is the ticket size you mentioned. So in general, our duration is rather a short duration rather than a very long duration. By short duration, we are talking about just few months in average, right? And our ticket size also compared to many other lending products, ticket size is more on the smaller side. So in the combination of both, it will help us to be a lot more agile in terms of how we manage our portfolio, manage portfolio in terms of how much lending we give out, how can we do risk based pricing for different user bases and also how we do collections and how do we kind of fine tune our portfolio based on the macro environment.

Speaker 5

So in that sense, I think we're quite comfortable with where we are. And even there is unexpected market environment change, I think we are probably much better positioned than anyone else that we can see in the market with our size.

Speaker 2

The yes. For the long term revenue mix of 3 business, if you look at each of the 3 business, I think each of them some like at this moment have some tailwind, right? And for our like estimated e commerce like GMV growth, right? And that will be the driver of the potential revenue growth as well. And if we continually work on the take rate and not only on the commission side, but also on the ad take rate side, right, and that could be a driver as well.

Speaker 2

If you look at the Financial Services business as we shared and if we continually deepen the penetration on Shopee ecosystem. At the same time, the total like a loan book size will be, I think, grow nicely with the overall Shopee GMV growth as well. For game business, as we shared early, right, and we found the right formula for Golden Free Fire again, and we see a very, very strong momentum. So at this point, I think it's hard to come out with. We don't see like certain business that go up and certain go down and then this is the change to how the revenue mix look like.

Speaker 2

I would say like we'll be continually focused on grow each of businesses as much as we can. But like as Tony just mentioned, but purely from a GAAP revenue perspective, certain growth of the game business because of how the GAAP revenue works, it may be there's a certain delay how to reflect into the GAAP revenue, right? And so that's why in general, we use the booking as the like a closer proxy to benchmark in terms of the growth. If from that perspective, maybe we can like see the higher percentage of the revenue contribution from Financial Services. But again, this is purely in our view because of the GAAP revenue treatment for game business doesn't reflect we kind of our we don't have the confidence on the future growth of the game business.

Operator

Your next question comes from the line of Jiang Chao with Barclays. Your line is open.

Speaker 12

Thank you very much for taking my questions. I should have a couple of follow ups. One is back on the take rate. You talked about increasing the advertising take rate to the global comps, global benchmark in a matter of quarters, not years. In your opening remarks, you also talked about your commission take rate, I think, is below the global comps.

Speaker 12

Even it's good that you guys and your peers are raising your take rate, but your commission take rate is still quite a bit below the Amazon, the Medley, the Ebay's. I was just wondering, are there structural reasons why you think a longer term your commission take rate won't be close to the global peers and is there any timing to reach that sort of goal? The second follow-up is back to the gaming booking. I know you talked quite a bit about the strong booking growth, which was amazing, 2nd quarter in particular. Previously, you have talked about double digit booking growth for this year for Free Fire.

Speaker 12

I think the assumption was sort of low teens. But given the particular strength you have seen last couple of quarters, are there reason to expect the implied the booking growth for Free Fire for 2024 should be going higher? If not, why not? Thank you.

Speaker 5

For the take rate question, I think for the ad take rate, as I mentioned, I think we will see the potential growth in the next few quarters within the years. And of course, the base is different in different markets. So ultimately, it might be different numbers in different market. On the commissions, I think I would rather look at the totality, look at commission and add, etcetera. I don't think that is the reason they will basically below the global peers in the market that you mentioned.

Speaker 5

Yes, I think this reflects to our long term guidance on how the EBITDA will be at the 2% to 3% of the market.

Speaker 2

In terms of the game booking, Free Fire booking guidance, right, for the rest of the year. Yes, I think you are right. We do see strong momentum and continuing. And but at this moment, we want to be cautious, right? And since just have this very, very strong momentum for the past 2 quarters, and we want to continually just focus on the effort what we have done, which proved to be productive.

Speaker 2

And if we continually seeing this trend

Speaker 1

and

Speaker 2

we will update the market, we'll like update our investors timely and accordingly.

Operator

This concludes the question and answer session. I would like to turn the conference back over to Mr. M. C. Koh 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.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
SEA Q2 2024
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