SEA: No intention to fuss anymore, profitability still comes first after 23 years

1. Management Report

1. In order to improve operational efficiency and release profits, we have exited non-core market downward businesses, streamlined the development process of gaming business, and cancelled non-core projects, so that the company can concentrate management, operation, and financial resources on core businesses.

Regarding Shopee, we continue to optimize customer service, customer management, and logistics management.

Regarding Garena, we are committed to improving the playability and content quality of our core games.

Regarding SeaMoney, we will continue to leverage SeaMoney's strong synergies with other ecosystems to better meet the financial needs of residents in the market.

1. E-commerce business (Shopee): I am pleased to inform everyone that Shopee's adjusted EBITDA turned positive for the first time in Q4, mainly due to increased monetization, transaction commissions, and advertising revenue among core market revenue, and seeing more sellers investing in our platform to attract buyers.

In terms of regional performance, net revenue in Q4 after adjustment was USD 320 million in Asian markets, a significant improvement from the previous quarter (USD 217 million after adjustment loss in the previous quarter), while the adjusted EBITDA loss in other markets also decreased by more than 50% to USD 124 million.

In terms of the competitive landscape, we will strive to further strengthen our leading position and profitability in Asian markets, and we will focus on driving profitability to seize this major opportunity in the new market in Brazil.

It should also be emphasized that sustainable growth of Shopee is important. The penetration rate of e-commerce in our market is still low, and our market also enjoys the potential of giants in terms of its large and growing population.

3. In terms of operating costs, we have seen improvements in our major cost items in Q4. Due to more targeted investments such as transportation, incentive measures, and brand marketing, there has been continuous improvement in R&D expenses and general administrative expenses.

In terms of logistics management, the macro environment still has uncertainties, and consumption in the company's market still faces pressures. This year's focus will be on continuing to consolidate efficiency and optimize the cost structure of our entire market.

4. Regarding digital entertainment, despite the continued slowdown in the market, we still highly focus on maintaining our current core players. Our priority is to consider user engagement and have plans targeted at existing and returning users.

In terms of cost and efficiency, based on our principles, we have comprehensively reviewed our publishing and self-developed channels. Therefore, we have already closed certain projects and maintained selectivity for high-potential projects to allocate resources more effectively. This year, we will focus on consolidating our advantages in core gaming and community fields.

5. Regarding digital financial service business, profitability improvement is driven by strong revenue growth and optimization of sales and marketing. As of the end of Q4, our total amount of accounts receivable on the balance sheet was USD 2.1 billion after deducting credit loss reserves in the millions of dollars.SeaMoney is a highly collaborative part of our digital ecosystem. For example, the mobile wallet lowers transaction costs and provides a better shopping experience. In turn, shopping expands the user base of the mobile wallet, more effectively establishes user habits, and allows credit services to leverage a large exclusive user group.

SeaMoney is an important long-term growth engine. We will continue to prioritize the ecosystem strategy for efficiency and profitability. In short, Q4's performance is an important proof of our focus on profitability and achieving meaningful results. This demonstrates the strength and resilience of our business model and the team's execution capability.

Q&A Section

Q1: What are the main factors behind the rapid improvement in Shopee's revenue this quarter? How was it achieved?

A1: In terms of revenue, we successfully increased the conversion rate and monetization rate. In terms of cost and expense, we reduced sales & marketing expenses—Shopee's sales and marketing expenses have decreased by more than 50% annually, while GTV remained constant, with a YoY increase of about 7% on a constant-currency basis. This demonstrates the resilience of our ecosystem and our team's rapid transition execution in a few months. At the same time, R&D expenses and general administrative expenses were also saved during the quarter.

Q2: Under the circumstance of having achieved profitability, how do you plan to balance growth and profitability? How do you estimate people's confidence in economic recovery? What is your view on the current competitive environment and market share?

A2: This quarter, we have exited many markets and reduced our business scale, and differentiated our core and non-core businesses. Regarding the prospect and balance of growth and profitability, first, the long-term prospect of the market is still very strong. Population characteristics, population growth, and digital penetration all indicate huge growth potential in the market. Strengthening our market leadership in the long term is a dual goal beyond profitability.

We believe that Shopee's uniqueness lies in its market leadership in many markets in Southeast Asia. At the same time, profitability has also rapidly improved. Let us have more resources and capabilities to protect our ecosystem and overcome future competition.

Q3: What is the short-term profit outlook for different businesses?

A3: For Garena, our focus now is to continue to stabilize our user base, provide users with a better hardcore game experience, and continue to improve our profit margin.

Regarding the efficiency of digital financial services (SeaMoney), it is still in a very early stage. We have just turned losses into profits. But the business is more focused on quality and long-term sustainability, and building trust with users. At this stage, this is not a business that seeks speed over winning.

Q4: Can you discuss the GMV growth trend in local currency for Shopee? Regarding the impact of reducing promotions and transportation subsidies on customer behavior, what is your view? What drives the increase of AoV by about 22% in local currency calculations?

 A4: GMV is our output, not a key KPI. We will focus on improving efficiency, profitability, and user experience, and believe GMV will naturally stabilize.

We have also noticed weakness in online consumption in different markets, especially in some markets (such as Malaysia) which are still relatively weak in YoY terms. GMV is not our target. We will stop disclosing operational indicators such as GMV and order volume quarterly, and will annually disclose capital expenditures like our global counterparts.

Q5: Can you provide an outlook for your capital expenditures? In which areas will you invest? What kind of investments can we expect to strengthen your ecosystem in 2023?

A5: As far as 2023 capital expenditures are concerned, most of the capital expenditures will be on servers, followed by some logistics-related machinery such as sorting machines, and then office and data center leasing, etc.

As we shift our focus to efficiency, we have also drastically reduced and tightened capital expenditure investments. Therefore, you still saw some capital expenditures in Q4 and may continue to see them earlier this year. But in the near future, capital expenditures should not be a significant component of our overall expenditures.

Q6: Regarding Garena, can you comment on recent trends and prospects for gaming business?

A6: We will not discuss games that have not yet been publicly released. We have mentioned that some games are being tested and may be released this year. But the recent focus is still on core games, especially "Free Life".

Q7: Regarding Brazil, can you talk about YoY or quarterly growth in orders? What are your expectations for the profitability of Brazil?

A7: Although we haven't given any forecasts or guidance about the timing of profitability, we do believe that our Brazilian market can achieve long-term profitable growth.

Q8: Regarding take rate, my calculations show that take rate is above 10% now. Do you plan to continue improving it this year?

A8: We do believe that there is still room for expansion in take rate. With the development of our platform, as our buyers grow with us and invest more on our platform. And we also notice that the take rate in the Brazilian market is significantly higher than many other markets.

Q9: Do you see a more stable situation in gaming now?

A9: Regarding gaming, I think it is still too early to judge the development trend of games. Inflation has damaged people's disposable income, and further exacerbated the trend of loss. It is too early to predict the revenue trend.

Q10: How is the situation with the gaming team? Is there any update on the cooperation with Tencent this year? Trend of HQ cost for e-commerce business?

A10: Currently, we cannot provide guidance on the short-term trend between it and Tencent. We are focusing on resources and stripping off non-priority plans. There have been changes in personnel deployment, but overall, we have maintained a very strong R&D team, and headquarters' costs have also shown a downward trend.

Q11: Are there any severance costs involved in terms of cost and adjusted EBITDA? With the cost optimization plan you've implemented, how should we view R&D, general, and administrative expenses in 2023 and 2022?

A11: The impact of severance costs is not significant, and I believe it is comparable to the previous quarter. With regard to R&D and G&A costs this year, we will continue to focus on improving efficiency to ensure that our costs are effective relative to the platform and the scale of our business.

Q12: In terms of financial technology, the number of loans decreased in the fourth quarter. How should we view future loan book growth?

A12: As far as loan book growth is concerned, we will not make significant investments to promote rapid growth at least at this stage, but will focus more on establishing a solid business with a strong underwriting and user base. Given the current macro uncertainty and synergy with stores, loan growth is not a KPI. KPIs are more focused on loan quality and business profitability.

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