SEA: Seizing the Live Streaming Opportunity with a Focus on User Scale and Engagement

Below is the summary of the SEA Sea 2Q23 conference call. For a detailed financial report analysis, please refer to " SEA: Survival After Amputation, Counterattack Surges "

I. Management Remarks

1. Sea E-commerce:

In this quarter, we have further improved the efficiency of our logistics operations by implementing new measures such as digital scheduling and order tracking. To meet user preferences, we have introduced more delivery options. For example, we have added 600 self-pickup points to various retail stores in Singapore, in addition to the existing 1000 points. In Taiwan, we have installed 24-hour lockers in approximately 150 convenience stores and plan to promote this self-pickup option throughout the market.

This quarter, we have placed more emphasis on user engagement metrics to further solidify Sea's position as the preferred e-commerce platform. We have focused on developing live streaming features and achieved significant growth in buyer, seller, and creator engagement in the second quarter.

Through the Sea Alliance program, we have attracted more influencers and content creators, which in turn enables us to effectively attract more buyers to our platform. Over 1 million influencers have registered for this program in the second quarter.

We have now become the only e-commerce platform in Southeast Asia with a strong profit record and scale, with total orders in the second quarter growing by over 10% compared to the previous quarter. Looking ahead, as we accelerate our investments in growth, our strategic focus remains on establishing a cost leadership position and continuously improving the user experience, which are still the key to our long-term success.

2. Digital Entertainment Sea:

In the second quarter, both quarterly active users and quarterly paying users showed quarter-on-quarter growth, indicating signs of improved user retention and engagement for Free Fire. One of Sea's key competitive advantages is our ability to deliver a top-notch gaming experience to users in different markets, even on low-spec devices. We can further leverage these advantages to bring more new games to our core market users.

3. Digital Financial SeaMoney:

The digital financial services business performed strongly in the second quarter, with increasing synergies between Sea and other ecosystems. Our progress has enabled us to provide better financial services and products for underserved niche markets. In the second quarter, driven by our credit business, GAAP revenue grew by 53% year-on-year, and adjusted EBITDA continued to improve both year-on-year and quarter-on-quarter, reaching $137 million. Our non-performing loans also maintained a stable and healthy risk profile, with the proportion of loans overdue for more than 90 days remaining stable at around 2% of total receivables.

Q&A Analyst Q&A

Q: Regarding revenue, what are the comments on 2Q23 GMV? Any changes in the competitive landscape? In terms of price subsidies, transportation subsidies, or brand activities, can they provide guidance on the upper limit and target of performance guidance? Will there be negative EBITDA in the e-commerce business again?

A: In terms of e-commerce, GMV has shown growth on a quarterly basis, and order volume has also achieved double-digit growth on a quarterly basis, which is a preliminary positive signal during the accelerated investment period in Q2. Regarding commissions, advertising expenses are on the rise, thereby driving the growth of core market revenue.

However, due to increased investment in logistics funds, the VAS business has been somewhat affected, mainly because revenue is affected by GAAP accounting standards. In terms of commission rates, it is more important to focus on the commission rates of core markets and consider the accounting treatment of freight subsidies that may affect subsidies.

In the past few quarters, we have seen elasticity in local economy and consumption, as well as new opportunities in live streaming and e-commerce related to video content.

As an e-commerce platform, we have the advantage of converting buyers into more efficient, effective, and high-quality orders, thanks to our integrated logistics and payment services, as well as overall e-commerce capabilities. Social commerce has been integrated into our genes. Given our significantly expanded actual platform and achieved profitable position, we are more capable of seizing greater growth opportunities that already exist in the market. Our Sea platform in Indonesia has become the country's largest live streaming platform, and we have also started to increase investment in free delivery to capture more growth opportunities seen in the market.

In terms of revenue, the free delivery program will have accounting impact on total revenue as more sellers participate in our investment plan.

Q: In terms of gaming, what achievements have been made in re-engaging users? Is it expected that the growth of these users and orders can be sustained? In the second half of the year, how should GAAP revenue and EBITDA trends be coordinated with user metrics? In terms of e-commerce, what kind of results or achievements are expected from accelerated investment? What is the level of financial loss buffering while increasing investment?

A: From a gaming perspective, before monetization, we first focus on the active user base. Generally, when we see a positive trend in the user base, we can usually achieve better monetization in the future. In terms of finance, we remain cautious and will continue to observe several cycles. Regarding GAAP and orders, overall, I believe they tend to be consistent. Of course, sometimes there may be differences due to changes in accounting perspectives, such as recognition cycles, and so on.

Regarding key performance indicators in e-commerce, we focus on overall user engagement and the active user base, especially in the areas we are focused on, such as live streaming and core categories like fashion, health and beauty, and home living. These are high-profit categories that are expected to convert into a higher number of GMV orders. In terms of profitability, we aim to maintain sustainability. Through continuous improvement in cost efficiency, we have been able to achieve profitability quickly while maintaining a strong leadership position in the ecosystem and the market. We are now able to make growth investments, while many of our peers are still struggling with losses.

In the long-term competition, e-commerce is a business that focuses on fundamentals and aims for the lowest possible cost.

The strong market leadership of our current products and the platform that provides services at the lowest cost enable us to be the only company in Southeast Asia that is both a market leader and profitable. We will continue to strengthen this competitive advantage. From one period to another, we may make decisions and execute corresponding investments based on appropriate opportunities in the market.

Q: Regarding e-commerce, which regions within Sea Asia have better growth opportunities and where will larger-scale investments be made? What is the outlook for Sea Brazil? Can we expect increased investments in other markets by Sea, resulting in increased losses there, or do you aim to achieve EBITDA breakeven in each market first?

Regarding gaming, how has the performance of "Undawn" been after its release? And is there any update on the latest situation of "Free Fire" in India?

A: For Sea Asia, the overall market conditions are favorable, and consumer spending is elastic. Efforts are being made to seize new opportunities related to live streaming and video content-based e-commerce. As for Brazil, we remain optimistic about its prospects and will continue to invest in the region for growth. From a quarterly comparison perspective, our EBITDA loss per order has improved in Brazil. Due to the ongoing improvement in cost efficiency in logistics, we believe that the Brazil business still presents a long-term cost opportunity. Other markets are relatively smaller and do not require significant investments.

In the newly released games, our focus is primarily on user interaction, ensuring that we have a strong user base and good user engagement. In the initial stages of the games, we are not overly concerned with monetization, and the performance of the games themselves is currently meeting expectations.

Q: When you mention double-digit order growth, is it referring to MoM growth or YoY growth? Have you seen higher growth rates between Brazil and Asia? Can we expect greater volatility in commission rates in the future? What are the reasons behind this?

A: Regarding order growth, the mentioned double-digit growth refers to QoQ growth. Order growth in Brazil overall is in line with the group level. As for take rate, the take rate in core markets continues to increase. However, the overall take rate can be affected by VAS and accounting considerations. Revenue is related to logistics, and we have to deduct postage subsidies from VAS logistics revenue (at the order level), which affects our overall take rate and revenue growth. Additionally, we do see occasional increases in commission rates, but the growth may not be as rapid, and we do not expect it to have a significant impact on the take rate. Q: If we only look at the revenue from the core market, it seems to have remained stable from the first quarter to the second quarter, at around 1.2 billion US dollars. What are the reasons behind the growth in commissions, revenue, and GMV?

A: When comparing the quarterly revenue from the core market, the growth rate actually accelerated from Q2 to 7.4%, while Q1 only had a growth rate of about 2%. So I believe this reflects an improvement in both the level of the core market and the disclosed GMV. As for the disclosed GMV, we will continue to make decisions on a quarterly basis and may provide some relevant information when necessary, but no decision has been made at this time.

Q: Regarding fintech, how do you think about future strategic business models and profit trends?

A: For our fintech business, the gross profit has shown significant year-on-year growth, and we are pleased to see strong cash flow continuing on a stable risk basis. However, we are still in the early stages of the fintech industry, and at this stage, we are trying to maximize the synergies between the Sea and SeaMoney ecosystems, focusing on building a resilient and powerful platform that provides excellent services to users, ensuring that we maximize efficiency at this stage.

Risk Disclosure and Statement for this Article: Dolphin Research Disclaimer and General Disclosures