Sea: Will the good growth trend of e-commerce and gaming continue?

The following is a summary of Sea's 2024 second quarter earnings conference call. For an interpretation of the financial report, please refer to " Sea: Strength Shatters Ghost Stories, Southeast Asia's Little Tencent Still Going Strong 》

I. Review of Core Financial Information:

II. Detailed Content of the Earnings Conference Call

2.1. Key Points from Executive Statements:

1) Business Progress

① E-commerce Business

a. Shopee continues to expand its market share in the Southeast Asian market and solidifies its leading position amidst rising industry commission rates

b. Increased advertising commission rates, with the number of sellers paying for ads growing by over 20% year-on-year, further enhancing profitability

c. Introduced live advertising feature, improving live sales efficiency and increasing advertising revenue

d. Improved quality of logistics services, with over 70% of XPS Express orders delivered within 3 days and a year-on-year decrease of 8% in single order costs

e. Launched "Easy Returns" feature, making the return and refund process more efficient, increasing user stickiness and repurchase rate, with Malaysia's average shopping basket amount growing by over 10%

② DFS Digital Financial Services

a. SeaMoney's loan volume grew by nearly 40% year-on-year, reaching $3.5 billion, with active users growing by nearly 50% to 21 million

b. Over 4 million first-time borrowers of credit products were added in the second quarter, doubling from the previous year

c. In Indonesia, partnered with over 1,000 electronic product stores to introduce SPayLater loans, successfully providing large-scale instant credit approvals

③ Garena Digital Entertainment Business

a. Garena achieved over 20% year-on-year growth in pre-orders through the successful operation of "Free Fire"

b. "Free Fire" maintained over 100 million daily active players in the second quarter, becoming the most downloaded mobile game globally

c. Plans to launch "Need for Speed Mobile" later this year to further expand the game product line and player community

④ Board of Directors Changes

Two new independent directors with deep expertise in artificial intelligence and financial services have joined, while Tony will step down as a board member but continue as Chief Financial Officer

2.2. Analyst Q&A

Q: Can you comment on the latest competitive landscape, especially in the third quarter, where all participants are driving rationalization? How will this affect your company's performance and updated guidance? What factors were considered when revising guidance?

A: We have observed that the competitive environment has become more stable in the past few months, with various market participants actively adjusting their commission rates. This is a signal that the market is gradually moving towards rationality. Our view on long-term profit targets remains unchanged, with EBITDA levels expected to be between 2% and 3%. However, the market remains very dynamic, so we will continue to focus on business profitability to ensure short-term profitability while driving business growth to fully leverage market potential. We expect the market to gradually enter a more rational phase, driving industry profitability improvement.

Q: What are the profit margin expectations for Shopee in the near and medium term? How does the company plan to achieve these goals? Are there any updates on long-term profit margin expectations?

A: Shopee's short-term goal is profitability, as stated in our guidance for the third quarter. We will prioritize profitability in the short term while maintaining growth momentum, as we believe there is still significant market potential. In the medium term, we expect the market to gradually move towards rationalization, enhancing the profitability of the entire industry. We will ensure better unit economics and market share growth through improved pricing, user experience, and content supply, combined with our scale advantages.

Q: You mentioned that there has been an increase in monetization rates, with the entire industry also seeing improvements in the first quarter. Is it possible to further increase commission rates in the future? Can transportation subsidies be reduced?

A: We do see opportunities to further increase monetization rates, especially in commissions. We have achieved significant growth in the past few quarters, although the growth rate in the future may not be as high as earlier this year. Another area with considerable potential is advertising commission rates. We have invested a lot of effort in building advertising infrastructure in the past few quarters, such as recommendation and search platforms, as well as standard algorithm platforms for advertising systems and traffic distribution. These efforts will help us further increase advertising commission rates in the coming quarters.

Q: How is the unit economics of the live streaming business? Has the live streaming business become profitable in some countries now? What is the contribution profit margin of the live streaming business?

A: We have indeed seen an improvement in the unit economics of the live streaming business. In some markets, the live streaming business has already become profitable, while in others, it is still gradually improving. Overall, we expect the trend of improvement in the live streaming business to continue and contribute positively to overall profits.

Q: Regarding the e-commerce business, you recently reported the first profit from Brazil and still have ambitions to become the second largest player in the market. How does the company plan to achieve this goal? Is this improved profitability sustainable?

A: We are very pleased with the improvement in profit margins in the Brazilian market. Currently, the contribution profit margin in the Brazilian market is positive. We have continuously reduced transportation costs through our own logistics network and improved user experience, which together have driven better user retention and market economics. In addition, we are increasing the penetration rate of high-priced product categories. Although our previous market performance in these categories was not as good as some competitors, we believe there is significant growth potential in this area. We will continue to leverage these advantages to drive sustained growth in the Brazilian market

Q: Regarding the guidance, the adjusted EBITDA positive profit for the third quarter only applies to the independent EBITDA of the third quarter, not the EBITDA positive profit for the entire nine months of the third quarter, right?

A: Yes, you are correct. The EBITDA guidance we mentioned is for the independent EBITDA portion of the third quarter, not the EBITDA positive profit for the entire nine months.

Q: Could you share the progress on user acquisition outside of the Shopee platform, as well as the GTV growth on non-Shopee platforms? Will this shift from offline transactions, such as with offline retailers, restaurant partners, or will Sea actually open up to any online partners, such as online travel agents?

A: In terms of this question, if you look at our credit loan portfolio, Sea's credit loan portfolio is divided into several parts: SPayLater related to Shopee mainly used for Shopee transactions, as well as cash flow loans unrelated to Shopee, which can be used for offline and other online payment scenarios. For example, in Indonesia, users can already use SPayLater to make payments on online travel websites. In addition, Sea is also developing different offline usage scenarios, such as offline payments for mobile phones and home appliances. This indicates that Sea is not only focusing on online payment solutions but also actively expanding offline partnerships, covering retailers, restaurants, and other business partners, with the expectation that such partnerships will further expand in the future.

Q: Regarding Shopee Express, how will the company further optimize operational efficiency and improve the cost structure of the logistics business in the coming quarters?

A: Shopee Express (SPX) will further optimize operational efficiency and improve the cost structure through the following measures:

1. Scale Expansion: Expand business scale to reduce costs and improve efficiency.
2. Coverage and Density: Increase the number of distribution centers and deploy low-cost mobile distribution centers. In the second quarter, around 900 distribution centers and mobile distribution centers were added.
3. Automation: Increase more automation solutions in sorting centers and distribution centers to enhance productivity.
4. Technological Support: Optimize last-mile delivery, such as deploying technical solutions for container arrangement and sorting in certain markets.
5. Workflow Optimization: Improve the entire process from goods extraction to final delivery to enhance overall efficiency.

Q: Regarding follow-up questions on monetization rate. Management mentioned the potential for improving the monetization rate in the future. Looking ahead in the next few years, is it possible to reach similar levels of advertising revenue as mature market players? How to stimulate more merchants to spend on advertising? Will this mainly come from more efficient marketing tools or higher-priced product sales?

A: Regarding advertising monetization rate, we believe that based on the existing infrastructure, we will start to see results in the next few quarters rather than needing several years. The basic products are already in place, and what is needed next is for sellers to gradually adapt and adopt them, as well as optimizing for different markets This involves improving the efficiency of sellers using advertising products, as well as how platforms can more effectively allocate traffic to increase sellers' revenue potential without sacrificing the overall platform conversion rate. This has been the main technological build-up over the past few quarters, and will be gradually rolled out and optimized in the coming quarters.

Q: Regarding the gaming business, especially the momentum of "Free Fire". How do you view the prospects and sustainability for the second half of the year? Additionally, what financial contributions can we expect from the collaboration with Tencent on "Need for Speed" in the second half of the year?

A: We are very pleased with the current trend of "Free Fire", whether it's in terms of new user growth, existing user retention, or monetization metrics (such as payment ratio and overall growth rate), it has performed excellently. This reflects the correctness of our previous decisions. We will continue to focus on content updates. In the past two quarters, we have released some very successful new content, and there are several major updates in preparation. We are confident in the results of these updates.

Furthermore, we view "Free Fire" as a platform, not just a perennial brand. Through this platform, we attract over 100 million global users daily. Under the "Free Fire" platform, different types of gaming experiences and modes are provided, making it not just a single game but a collection of various experiences. We are also exploring the use of AI tools to improve production efficiency, accelerate development speed, and introduce novel gaming experiences. In the long term, we remain confident in the double-digit growth prospects of "Free Fire" for the whole year, including user growth and monetization. As for the new games developed in collaboration with EA and Tencent, it is too early to predict their financial contributions for the second half of the year. We will continue to monitor the performance of "Free Fire" and provide further updates to the market based on user feedback and data performance after the new game launches.

Q: With the intensification of competition in cross-border e-commerce, especially in the progress in the Philippines and Malaysia, and the impact of entering the Thai market, how does the management plan to address this? Particularly considering the positive adjusted EBITDA guidance for the third quarter, what are the management's plans?

A: Regarding cross-border e-commerce, I believe you may be referring to the impact of Tmall entering the Southeast Asian market. We believe the impact on our business may be relatively limited. Firstly, cross-border e-commerce accounts for a small proportion of our business in these markets, with e-commerce transactions in the Philippines, Thailand, and Malaysia mainly focused on domestic sales. Secondly, in terms of pricing, our prices in these markets are actually more competitive, mainly due to our long-standing operations in these competitive environments and our lower local operating costs. Therefore, we believe that our market pricing is actually more advantageous in the local market compared to cross-border players.

Q: With the increase in the e-commerce GMV guidance, is the growth mainly coming from Brazil or Southeast Asia? Considering the high base in the second half of the year, how are the trends in July and August? Are there any signs of slowdown?

A: Overall, the growth in the Asian and Brazilian markets has exceeded our expectations. Although the Brazilian market is relatively smaller compared to the Asian market, both have shown excellent growth. The challenges of high base numbers in the third and fourth quarters of last year have been alleviated through improvements in content, service quality, cost structure, and pricing, leading to better user retention and new user acquisition. Therefore, we have raised our guidance to reflect this positive trend.

Q: Regarding the gaming business, despite an increase in pre-orders and users, revenue has decreased. This quarter's situation is particularly evident as the profit margin has reached its historical high. Does this mean that we should expect ARPU (average revenue per user) to continue to decline in the future, while the profit margin continues to increase or at least remain at these levels?

A: In terms of GAAP revenue for the gaming business, there has indeed been some improvement in revenue, both sequentially and year-over-year. However, due to the treatment of GAAP revenue, we must defer more revenue to future quarters, which explains the fluctuations in GAAP revenue. As for ARPU, we have observed relatively stable average revenue per user, although there may be minor fluctuations, mostly due to changes in market mix. There were no particularly significant fluctuations this quarter.

Q: Regarding the competitive landscape, especially in the Taiwan and Indonesia markets. In the Taiwan market, the entry of a new competitor, Coupon, has intensified the market. How do you view the overall intensity of competition? In the Indonesia market, a player has increased subsidies, do you have any specific response to this?

A: In the Taiwan market, we still maintain a relatively dominant market position. Although there are indeed some new entrants, their impact on our business is relatively small. Our focus is on shortening delivery times through our own SPX network, achieving more next-day deliveries, and improving supply-side efficiency through cooperation with sellers to fulfill orders in a more cost-effective manner. In the Indonesia market, different participants may have seasonal fluctuations and adjustments in subsidy strategies, but we focus more on long-term trends rather than short-term subsidy fluctuations. We have not seen any significant changes in long-term trends, so we will continue to focus on overall market trends.

Q: Regarding the DFS (Digital Financial Services) business, management has mentioned a lot about BNPL (Buy Now Pay Later), cash loans, and offline Shopee Pay Later. Could you share the profit margin trends for these different categories? And in the current global macro uncertainty, how are you managing risks, especially in terms of ticket amounts and tenors?

A: In terms of profit margin trends, our profit margins overall remain stable across different markets and product categories. In fact, in some markets, we have observed improvements in the risk profile of products, further enhancing our EBITDA. In new markets, growth rates are usually faster, which is a natural trend. For example, we have seen very good growth momentum in Thailand and Brazil Regarding risk management, our loan products have relatively short terms, usually only a few months, and the amounts are relatively small. This combination of short terms and small amounts gives us greater flexibility in managing the loan portfolio, allowing us to better price based on risk, collect debts, and make adjustments to the portfolio based on market conditions. Therefore, even if the market environment changes, we are more prepared than other market participants.

Q: Considering the growth momentum of our different business segments, how do we view the trend of long-term income portfolios? Will DFS become more important in the long term?

A: For the trend of long-term income portfolios, we currently see some favorable factors in each business area. The growth of GMV in e-commerce, as well as the increase in commissions and advertising commission rates, are potential drivers of income growth. In the financial services business, as the Shopee ecosystem deepens, the total loan amount will increase with the growth of Shopee GMV.

In the gaming business, we have found the right strategies to drive the growth of "Free Fire" and have seen very strong momentum. Therefore, we expect all business segments to continue to grow, and the income portfolio will not undergo significant changes. Although the GAAP revenue of the gaming business may be delayed due to processing, this does not affect our confidence in its future growth. Overall, the contribution of financial services revenue may increase, but this is due to GAAP treatment and does not reflect our views on other businesses.

Q: Regarding monetization rates, you mentioned that the advertising monetization rate is expected to reach the global benchmark level in the next few quarters, not years. You also mentioned that the commission monetization rate is lower than the global benchmark level, despite you and your peers increasing commission rates, it still remains below the levels of Amazon and eBay. Are there structural reasons why the commission rate will not approach the global peer level in the long term? Is there a timeline to achieve this goal?

A: The improvement in advertising monetization rates is indeed expected to be achieved in the next few quarters, and the base and monetization rates may vary across different markets. As for the commission monetization rate, we believe that this issue needs to be viewed comprehensively. If we combine commission rates with advertising and other rates, we see no reason why we would be lower than global peers. This also aligns with our guidance for achieving EBITDA of 2% to 3% in the medium to long term.

Q: Regarding the booking growth of "Free Fire," you previously mentioned a double-digit booking growth expectation for this year, especially low double-digit growth. However, given the strong performance in the past few quarters, is there a reason to expect higher booking growth for "Free Fire" in 2024? If not, why?

A: In terms of the booking growth of "Free Fire," we have indeed seen continued strengthening momentum, but at this point, we prefer to remain cautious. The performance in the past two quarters has been very strong, and we want to continue focusing on strategies that have proven effective. If this trend continues, we will promptly update the market and investors with relevant information.

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