Sea Limited (NYSE:SE) Q1 2024 Earnings Call Transcript

Sea Limited (NYSE:SE) Q1 2024 Earnings Call Transcript May 14, 2024

Operator: Good morning, and good evening to all, and welcome to the Sea Limited First Quarter 2024 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. [Operator Instructions]. And finally, I would like to advise all participants that, this call is being recorded. Thank you. I’d now like to welcome Mr. M.C. Koh to begin the conference. Please go ahead.

Miang Chuen Koh: Hello everyone, and welcome to Sea’s 2024 first quarter earnings conference call. I’m M.C., Sea’s Investor Relations Director. On this call we may make forward-looking statements which are inherently subject to risk 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 Li; President, Chris Feng; Chief Financial Officer, Tony Hou. Our management will share strategy and business updates, operating highlights, and financial performance for the first quarter of 2024. This will be followed by a Q&A session in which we welcome any questions you have. With that, let me turn the call over to Forrest.

Forrest Li: Hello everyone and thank you for joining today’s call. I am pleased to share that we are kicking off 2024 with a strong quarter. All our three businesses have delivered solid growth with an improved profit profile. The macro-environment in the past few years has been challenging, many of you have been with us through this journey. Going through this period has made us leaner, sweeter, and savvier. While we will always face new challenges, we are now much more confident of our ability to weather headwinds well and adapt quickly to changing environment. With that, let me take you through each business performance. Starting with e-commerce, we are pleased to report that Shopee delivered strong growth this quarter, achieving its highest ever quarterly orders, GMV, and revenue.

In the first quarter, on a year-on-year basis, gross orders was up 57%, GMV was up 36%, and revenue was up 33%. Unit economics has also improved. Our overall adjusted EBITDA loss narrowed to $22 million, and our Asian markets achieved a positive adjusted EBITDA of $11 million this quarter. Shopee’s operational priorities for 2024 continue to be enhancing our price competitiveness, strengthening our content ecosystem, and improving service qualities for our buyers. We are making good progress on all these fronts. On enhancing our price competitiveness, we continue to help sellers with upstream supply chain access to sell more easily on Shopee. On strengthening our content ecosystem, Shopee has become the largest live streaming e-commerce platform in Indonesia based on average daily live streaming orders in the first quarter.

Live streaming e-commerce unit economics also continued to improve quarter-on-quarter. Our improving service quality for buyers, our integrated logistics capability has become a key differentiating factor of our service quality. We have put a lot of hard work into SPX Express, and today it is one of the fastest and the most intensive logistics operators in our market briefly enhancing our customer experience. In the first quarter, about 70% of SPX Express orders in Asia would deliver within three days of order placement. And because of the scale we have achieved in our market, we have managed to steadily reduce its cost. SPX Express’s cost for order decreased by 15% for Asia and 23% for Brazil year-on-year in the first quarter. Having SPX Express in the Shopee ecosystem also allows us to efficiently roll out new features that benefit our buyers, such as the on-time guarantee program that we launched in Southeast Asia.

This program provides a guaranteed delivery time for orders, and this certainty is well appreciated by our buyers. Another initiative we implemented is having Shopee directly manage the return and refund process. This has resulted in a 30% year-on-year increase in resolution time. In the first quarter, about 45% of cases were resolved within one day. So taken together, this effort increased operational efficiency, improved customer experience, and reinforced Shopee’s reputation as a reliable shopping destination. We will continue to push more on this operational priorities in the coming quarter and year. We expect this effort to further depreciate its Shopee from its competition and bring greater value to both our buyers and sellers. Next, turning to digital financial services.

We are pleased to report that SeaMoney has continued its strong growth momentum and the profitability into 2024 while maintaining prudent risk management. Our efforts on user acquisition have produced significant growth in both user numbers and the loan book size. In the first quarter, our digital financial services revenue grew 21% and adjusted EBITDA grew 50% year-on-year. Consumer and SME loan active users defined as loans with loans outstanding by the end of the quarter increased 42% year-on-year to more than 18 million this quarter. As of March 31, 2024, our Consumer and SME loans principal outstanding reached $3.3 billion, up 29% year-on-year, and up 5% quarter-on-quarter. Credit business is currently the primary driver of SeaMoney’s revenue and the profit growth.

Our credit business benefits from Shopee’s transaction volume and user base. In addition, we are also seeing strong growth in off-Shopee loans, which include cash loans and off-Shopee as pay later consumption loan. By the end of the first quarter, off-Shopee loans accounted for over 40% of our total Consumer and SME loans outstanding. Going forward, we see further updates to improve our off-Shopee penetration across different markets as we continue to grow. As we build up our credit business, we continue to maintain a prudent approach to risk management. We generally begin by granting low credit limits, short-tenure loans to users to build their credit history. For users with good track records, we gradually increase the credit limit, loan tenure, and the credit product offering.

As we gain more users and more data, we continuously fine-tune the risk model for each market. This allows us to grow our business while maintaining good risk control. Non-performing loans pass the deal by more than 90 days as a percentage of total Consumer and SME loans remain stable at 1.4%. We anticipate further growth for our digital financial services business throughout the year. As we healthily grow our user base, we will be able to offer a broader set of financial services to meet our user’s needs in the future. Finally, turning to our digital entertainment business. We are pleased to share that Garena is back to positive growth with bookings up 11% year-on-year. This was led by Free Fire’s strong performance across markets. In the first quarter, Free Fire’s average MAU increased 24% year-on-year.

Our operational priorities for Free Fire will remain consistent in 2024, improving user acquisition, engagement, and retention. We continue to introduce play modes, redesign features, and launch new content all at a high frequency, allowing Free Fire to sustain high player engagement with this huge user base. In January, we launched Chaos, a major version update allowing players to vote for key events in the game setting. This interactive feature has made Chaos highly successful, and in April, we launched the Mechadrake version update, allowing players to team up to combat a mechanical monster in addition to the Europe PvP gameplay. Our constant efforts to understand users’ needs to addressed key issues from a product perspective and frequently introduced fresh and exciting content are paying off.

In its seventh year, Free Fire’s are still one of the largest mobile games in the world by user scale, and remains highly effective in attracting new users. According to Sensor Tower Free Fire was the most downloaded mobile game globally in the first quarter. Giving this track record of being able to sustain and the growth requires massive global user base, we are confident of building Free Fire into an ever growing franchise. To conclude, we have a clear roadmap for profitable growth. Our results in the first quarter have given us a strong start to 2024, and we are well on track to deliver our full year guidance. With that, I will invite Tony to discuss our financials.

Tony Hou: Thank you, Forrest, and thanks to everyone for joining the call. With Sea overall total GAAP revenue increased 23% year-on-year to $3.7 billion. This was primarily driven by GMV growth of our e-commerce business and the growth of our credit business. Our total adjusted EBITDA was $401 million in the first quarter of 2024, compared to an adjusted EBITDA of $507 million in the first quarter of 2023. On e-commerce, our first quarter GAAP revenue of $2.7 billion included GAAP marketplace revenue of $2.4 billion, up 33% year-on-year, and GAAP product revenue of $0.3 billion. Within GAAP marketplace revenue, core marketplace revenue, mainly consisting of transaction based fees and advertising revenues was $1.7 billion, up 47% year-on-year.

Value added services revenue, mainly consisting of revenues related to logistic services, was $0.7 billion, up 8% year-on-year. E-commerce adjusted EBITDA loss was $22 million in the first quarter of 2024, compared to an adjusted EBITDA of $208 million in the first quarter of 2023. For our Asia markets we had an adjusted EBITDA of $11 million during the quarter, compared to an adjusted EBITDA of $276 million in the first quarter of 2023. In our other markets the adjusted EBITDA loss was $33 million, narrowing meaningfully from last year when losses were $68 million. Contribution margin loss per order in Brazil improved by nearly 88% year-on-year to reach $0.94. Digital Financial Services GAAP revenue was up by 21% year-on-year to $499 million.

Adjusted EBITDA was up by 50% year-on-year to $149 million. Digital entertainment bookings were $512 million, GAAP revenue was $458 million, adjusted EBITDA was $292 million. Returning to our consolidated numbers, we recognize a net non-operating loss of $18 million in the first quarter of 2024, compared to a net non-operating income of $23 million in the first quarter of 2023. We had a net income tax expense of $79 million in the first quarter of 2024, compared to net income tax expense of $62 million in the first quarter of 2023. As a result, net loss was $23 million in the first quarter of 2024, as compared to the net income of $87 million in the first quarter of 2023.

Miang Chuen Koh: Thank you Forrest and Tony. We are now ready to open the call to questions. Operator.

Q&A Session

Operator: Thank you. [Operator Instructions]. The first question comes from the line of Pang Vitt of Goldman Sachs. Please go ahead.

Pang Vittayaamnuaykoon: Hi. Good morning and good evening management team and congratulation for a solid set of results. Two questions for me. Number one, how do you derive confidence that you will be able to drive sustainable growth, especially once you start to lower the subsidies and move towards profitability. If your competitors decided to turn more aggressive is there a way for you to properly react towards that? That is question number one. On number two on gaming, given a very strong first quarter trends and results, how are you seeing trends toward second quarter and rest of the year, can you provide color on what exactly you have done in order to derive growth, and any thought on the run rate of margin going forward as well?

Chris Feng: It is Chris here, I will take the first question on the e-commerce side. I think for us the most important thing is to work on the long-term competitive modes for e-commerce. I think to us, as I shared in the previous call is number one, the cost to serve to make sure that we can serve the transactions to our buyers and sellers in a lower cost. Number two is the price competitiveness of the product to make sure that the price for the same product or platform is always better than the other platforms. To do that, we have to work closely with the sellers especially upper the value chains to ensure that we can offer the lower price to the buyers always. Number three is a quality of services, as far as I mentioned quite a few times that this is one of the key areas we’re focusing on to improve not only the delivery services to our consumers, but also the return services and the customer service experiences, etc.

I think all the three things will contribute to our long-term competitiveness for our e-commerce businesses. As long as we can do this well, we believe that we can deliver the better value to our buyer and sellers so we can grow better than the market that we operate in. At the same time if you look at in the past few months, we do observe the overall market is in a stable — more stable situations even regarding to the competition point that you mentioned. And if the competitor does get more aggressive, I think we have to evaluate exactly what they did and how they did it. We will look at market by market, category by category, to evaluate what’s the best response we have. But all in all, in the long-term it’s the three thing I mentioned earlier.

The long-term company mode will create value for our market, to our consumers and our sellers. And we do believe that as long as we do well on that, we should be able to grow well regardless of what competitor does in the short term. I think that will bring us to a better position in the market over the years. Of course, there might be fluctuation in the short-term, up and downs, but it shouldn’t change the long-term picture.

Forrest Li: On the gaming side, we are very happy to see what we have achieved in the Q1. So it’s a pretty strong result and a strong trend. And we see this trend continued in Q2 so far. And in general, we are pretty optimistic about the rest of the year. I think, as we shared in the last quarter, and we expected we’re going to achieve specific for Free Fire the double digit growth, for the whole year. And I think like the current, growth and the trend is a pretty much kind of a reflection of what not just what we have done in the past quarter and actually it is reflection what we have done in the past two years. And we have gone through some challenges and faced some tremendous headwind, especially after COVID. And — but I think like we always believe, okay, the ambition and our aspiration is building Free Fire into an evergreen franchise.

So with that kind of a fundamental belief, and we didn’t kind of like a rush to monetize the game way may kind of continue to go downhill until it’s completely gone. And we are very, very much focused on all the user experience and try to fine-tune the product and with a very, very much user-centric approach. I mean in the past two years we have been conducting a lot of study trip right under surveys, right under talk to the gamers, ask what they like and what they don’t like about Free Fire, why they play and why they do not play. And the tremendous development effort is also spent on continually fine-tune the game based on the feedback we’ve received. I think that is kind of what we have seen now is accumulated result through those three efforts.

And another factor I want to mention is we kind of observed the whole market has gone through the post COVID situation. Now after like almost two years of that period, we’ve been kind of like the gamers, we kind of focus on the gameplay. As we shared before, like during the case, during the COVID time like a gamer play a lot of game. And there’s not much other options for entertainment, and they kind of feel burned out. And that’s why right after COVID, there was a tremendous kind of like trends as the gamers start to focus on other entertainment. But after another two years, I think like now the whole gamer community globally, we see kind of that trend start coming back and the gamers start kind of rejoined right the gameplay basically for Free Fire.

And this is a trend that not just happen specific beyond a single market and actually happened across all the markets, and we have the game operated. So in summary, I think like based on what has happened in the market and what we have done for Free Fire is pretty much a very, very good product market feed. And I think like we make Free Fire as an ideal product for gamers at the right timing when they are kind of — have a strong appetite to enjoy the gameplay. So we will do our best to continue this trend, and hopefully to continue to grow Free Fire, the user base, and also the monetization part as well for the rest of the year.

Operator: Your next question comes from the line of Alicia Yap of Citigroup. Please go ahead.

Alicia Yap: Hi, can you hear me okay?

Forrest Li: Yes.

Alicia Yap: Hello, okay, hi, good evening management. Thanks for taking my questions. I have a question related to Shopee. Just wondered, were you willing to return to loss-making to defend your share if the competition is indeed getting more aggressive, what other levers can you further pull to allow you to defend your share while also maintaining your profitability trend, and if we look at the commission take rate, excluding the advertising, how much more room can we actually still raise the commission take rate across different countries? Thank you.

Tony Hou: On the commission take rate, generally, we still see there is a meaningful room to increase the commission take rate, although probably not aggressive — not as aggressive as last year in terms of increase. We also see there’s a meaningful room on the ad take rate that we can look at. I think I shared this in the previous call as well that we believe that our active rate is still slightly lower than the peers that we see in other markets. So there is some meaningful room there. And in terms of the competition, I think similar to the previous question that has been raised, the — for us, the most important thing to focus on the long-term core competitiveness that cost us the trade contracts, the service experience. And all those things will bring us a long-term advantage for us to outcompete the competitor in the market.

In the short term, we have observed a more stable competition environment in the past few months. And if it changes, we will study it country by country, category by category. And evaluate what is the best way to respond to that.

Operator: Your next question comes from the line of Navin Killa from UBS. Please go ahead.

Navin Killa: Hi, good evening and thank you for the opportunity. Actually I had a couple of questions. The first one was, just trying to understand the strength in the GMV for e-commerce. How much of that is attributable to seasonality given the movement that we have seen around Lebaran [ph] this year and therefore, I guess, in the context of that, I noticed that you haven’t changed your GMV guidance of high single digit — sorry, high teens growth. I’m just wondering how you think about that? And I guess the second question is on the logistics strategy. Clearly, we are starting to see some results. If you could share some numbers on the percentage of orders that are delivered on your own platform and how do you see that number evolving in the medium to long-term?

Tony Hou: For the GMV, as Forrest said in the opening, in Q1 we did see very strong GMV growth. And part of that is contributing by the seasonality. This year, we have both Lunar New Year, and also the Ramadan falls into Q1. And the Ramadan holiday bought into Q2 versus the different patterns in the past few years. But we don’t think that’s the only reason. I think that’s contributing part of reasons. Another part of the reason is that all the execution work we have done in the past few quarters start to give us benefits in terms of the top line growth and also the bottom line improvement impact is coming hand actually. The exact split, it’s probably hard to really split that for — in terms of the book. But I do emphasize on that.

It’s not only seasonality, but also the hard work we have been doing are giving us the benefit on both the top line and bottom line. For logistics, in Asia, we do deliver more than half of our orders through our own SPX Express. In Brazil, we probably have more than 70% now, and we will be looking at increasing the percentage over time. I think both will increase over time.

Operator: Your next question comes from the line of Divya Kothiyal of Morgan Stanley. Please go ahead.

Divya Kothiyal: Thank you very much. Good evening. My first question is on the e-commerce business. Could you talk about the drivers for the 23% quarter-on-quarter reduction that we’ve seen in sales and marketing expense for this segment, especially with regards to where we are in terms of unit economics for live streaming e-commerce versus marketplace and also if you can comment in which scenario do you think we can get back to the profitability levels of over 1% of GMV that we were able to achieve in the beginning of last year? My second question is on the DFS business. The marketing spends have remained elevated in this quarter. Could you talk about what parts of SeaMoney are these being allocated to and what kind of traction you’re seeing, and would it be fair to say that this segment’s top line growth may actually deviate from the e-commerce growth going forward as you build new cases? Thanks.

Tony Hou: Yes. On the e-commerce side of the questions, we do see a sizable reduction on the sales and marketing. The part of that is contributing that computing by the UE from live stream that we see from Q4 to Q1. But part of that is also contributed to just general better performance in the marketplace in general. So for live streaming, just a little bit of context on that, I think we do see our live stream volumes still growing in most of our markets. But the UE actually improved significantly for various markets. And in general, I think in the coming quarters we will see similar patterns that our UE will continue to improve for live stream. In terms of the EBITDA for GMV, I think we will eventually go to that. I think that the number you mentioned, the 1%, I think that’s a reasonable number to look at.

And in long term, I think we shared that we believe that 2% to 3% is a meaningful number to look at. I think just to add a little bit on the previous question that I make sure I don’t miss that, I think the question was on the guidance for the high-teen growth on the GMV for e-commerce. I think the number we see in Q1 has given us much stronger confidence in terms of achieving that, both the high single-digit GMV growth and even in the second half of the year. And we have been seeing a good trend in the latest markets as well. I think we will monitor the numbers. We will update the market when we see through the quarter. I think there are many factors impacting the numbers. Part of that is just seasonality, part of that is also in terms of the FOREX of the U.S. exchange rate, etcetera.

But I think we will update the market when we see more numbers. Regarding the DFS, for the DFS, we do believe that still the last part of the DFS contributed by the credit businesses, I think, as we shared in the opening. If you look at the credit businesses at this point in time, still a sizeable part of that is contributed by the Shopee PayLater, which is growing together with the Shopee, although we do see better penetration over time within Shopee for Shopee PayLater. Besides data, there’s also many other use cases like buy cash loan, we call it BCL, which is not part of the Shopee payment system. It’s a cash flow, you can take out to spend in any other places. And also, we are increasing the use cases in other scenarios, for example, the off-line Shopee PayLater.

You can — for example, in media, you can scan a QR code. And using ShopeePay to scan a QR code and pay that with SPL, similar to a credit card experience. We also have hand phone loans as well, expanding to other markets. I think all those use cases will expand our financial businesses beyond the Shopee ecosystem. In terms of the sales and marketing, I think our businesses has a fairly good margin, as you can see from the EBITDA. At the same time, our business is still in a very early stage. The penetration of Shopee is during the early stage, the cash loans during the early stage, and many other users have given early stage. So we see there is a huge potential there to grow over time. And in some quarters, we do see that there are good acquisition channels.

In some quarters, we see a new product mix change because our new products coming out, etcetera. So there is an intention to acquire more users to our digital financial service ecosystem, given the very big unit economics we have seen so far. And the actual marketing spend depends a little bit on what we see on the customer acquisition cost and the UE we saw from the new users, plus the new products we are launching in different markets. So it will fluctuate a little bit, just impacted.

Operator: Your next question comes from the line of Sachin Salgaonkar from Bank of America. Please go ahead.

Sachin Salgaonkar: Hi, congrats on a good set of numbers. I have two questions. First question is on Shopee EBITDA. You already achieved EBITDA breakeven in Shopee for Southeast Asia. So should we think this is sustainable going ahead and we could see improvement in EBITDA out here or there was some seasonality factor specifically in this quarter, i.e., should we see some volatility in EBITDA or directly, it should continue to improve? And second question is on average revenue per user in the gaming business. We saw it be lower than the historical trends, so just wanted to check anything specific happened in the quarter or is this a new trend going ahead?

Tony Hou: Thank you. On the EBITDA side, it does contribute partially by the seasonality as well. Simply because in most of the market, we are contribution margin posted. So we see a higher top line. It will help us on the EBITDA as well. Similar to the top line, we are observing the trend on how the market evolves during the quarter. I think we are about 1.5 months into the quarter. Our guidance shared previously we are pretty confident of achieving that. And whether there is any changes to that, I think we will share with the market, yes.

Forrest Li: For the game, I think that simply reflects we have a lot of new users to come to our game like specifically for Free Fire. And even like Free Fire has been in its seventh year, but we have been very, very effectively attract new users. That’s why we believe like the game can still go for a very, very long time. And when like we have the new gamers, new players come into the game and in general, I think like their kind of average spending is compared to the like more kind of like experience, the gamers who have played the game for longer time will be relatively low. And there is a — gamers will kind of play the game and the more they play, the better engagement than there is higher charge for the monetization. So I think that’s — there’s nothing specifically about the monetization, it is kind of just reflects the fact that there is a very, very strong user growth for the game in the Q1.

Operator: Your next question comes from the line of Piyush Choudhary from HSBC. Please go ahead.

Piyush Choudhary: Yeah, hi. Good evening management and congratulations for a strong set of results. Two questions; firstly, again going back to 2024 guidance, after such strong performance, why — like Shopee guidance of turning EBITDA positive in 2H has not been revised upwards. Do you expect volatility in the upcoming quarter, if you can comment on the competitive intensity in Indonesia, and across ASEAN after merger of TikTok and Tokopedia, like has there been an increase in competition and thus you’re keeping guidance unchanged, any color over there will be helpful? That is the first question. Secondly, in DFS, is it higher customer acquisition cost or even higher funding costs, which has led to margin drop and if you can talk a little bit about the outlook for the margins in DFS? Thank you.

Tony Hou: On the competition, we have seen the market has been relatively stable in terms of competition. We didn’t see any similar signs of changes to be honest. Of course, we cannot predict what the competitors are doing, but we didn’t see any particular signs of different competition. On the guidance, again, I think we are very encouraged by the number we see in Q1. We are pretty confident on achieving what we shared. And I think we are coming to one and half months in Q2. I think we will look at the market a bit more. I think in the time when we have a better sense of the numbers, we will share with the market on how we look at the forward-looking guidance. The — there’s no particular reason of that from competition or other reasons, yes.

For the DFS question, the margin fluctuations more coming from the customer — the acquisition costs rather than on the funding cost. In fact, our funding cost is actually getting better quarter-on-quarter. The — again, the acquisition cost, a lot depending on what we see from the market and how much we spend on acquiring users versus the better they will bring to us in long term. And also depends on the new product launches we have in various markets.

Operator: Your next question comes from the line of Ranjan Sharma from J.P. Morgan. Please go ahead.

Ranjan Sharma: Hi, good evening and thank you for the presentation. Two questions, please. Firstly, on the sales and marketing expense, seems to have reduced to 2.9% of GMV for the e-commerce business. Based on your comments on competition, should we expect — are you seeing the same level of spend in the second quarter as well? And the second question is on the fintech side. If you can shed some color on how much of the loan book is coming from Brazil or whether that will be our focus for the lending business given the strategy of some of your competitors in the market? Thank you.

Tony Hou: Yes, on the sales and marketing spend for e-commerce, we do see there is a reduction in Q1 by many different reasons. Part of that is due to the live streaming that the big investment done in the last — in Q3 and Q4 last year start to give us the benefits. We don’t need to expect so much, part of that is general marketplace spending optimized. In the coming quarter, I believe that we’ll continue to optimize our sales and marketing spending. And we do believe that the general trend will come down. Although, honestly, if you look at month-to-month, there will be some fluctuations even for our coming reasons of FOREX reasons, etcetera, yes. For the loan book, we do have a high expectation for Brazil. We do believe that Brazil can be a very good market for our digital financial service businesses.

Although we only start Brazil mid-last year, which gives us a very short period of time to accumulate our loan book. So right now, the Brazil loan book is still, let’s say, a relatively smaller share of our entire loan book businesses. I don’t think we just closed the country-by-country split for the loan book. But yes, it’s a small part of it, and it can be a potential good growth driver in future.

Operator: Your next question comes from the line of Jiong Shao of Barclays. Please go ahead.

Jiong Shao: Thank you for taking my questions. Congrats on the strong results. Two quick follow-ups on the e-commerce side. One is, I was wondering, could you talk about leading there in your improvement in unit economics throughout the quarter and related to that, the percentage of live streaming in terms of the orders now? And that’s — I think that’s the first question, which is why people are asking why Q2 is not a breakeven point for you. And then I had a follow-up question on the Shopee Express SPX business. You talked about over 50% orders in Asia are done through Shopee Express and 70% in Brazil. Do you have like a target number for the percentage for orders fulfilled by Shopee Express and the unit economics or contribution margin for the orders done through SPX, is that any different from your average or better or worse, any information or color or data point will be very, very appreciated? Thank you.

Tony Hou: For live streaming, in terms of the percentage of orders, it’s stable versus last quarter. I think we share the percentage of around 15% in South Asia last quarter. I think it is relatively stable. Although the bucket size increased during this quarter because we optimized some of the category mix and the UE. In terms of the driver for the UE improvement, as I shared earlier, it’s both. The live streaming part of the improvement and general marketplace improvement. Actually, on top of that, things we talked about the logistics, we also see a better logistics costs improved over time, which drives down the cost as well fundamentally. In terms of the percentage of the orders through our own logistics, I think each market might evolve slightly differently so we probably don’t have a fixed target for all the markets.

Although what we can say is largely in average, I think we’ll see a bigger part of the share of logistics will go to our own SPX. It should be more than what we have right now. But we probably wouldn’t set a very, very specific target for all the markets. In terms of the unit economics for those orders, given that our cost per order for our own SPX is lower than the cost per order for PPL in the market, essentially for every order we deliver in-house, we will be able to save a part of that cost, which essentially contributed part of the unit economic improvement that you see here. I think the degree of the UE difference slightly varies market by market. But I think the trend is pretty stable across most markets that we are able to improve this over time even further.

Operator: Your next question comes from the line of Pang Vitt from Goldman Sachs. Please go ahead.

Pang Vittayaamnuaykoon: Thank you very much. And two follow-up questions from my side. Firstly, on the logistics for Shopee Express as well, you did share that you see a greater unit economics for Shopee Express versus 3PL. Can you explain or walk us through a little bit on how you’ve done it differently and how are you able to achieve this better unit economics and efficiencies versus 3PL as well? That’s question number one. Question number two, earlier, you have mentioned that there is still room for advertisement take rate, especially versus global peers for Shopee, can you share off the current ad take rate you’ve seen currently for Shopee and what’s the long-term target on what Shopee can achieve?

Tony Hou: Yes. On the logistics front, there are a couple of reasons it drives better. I think, number one, is there’s a margin actually that the 3PL takes. So we retained our margin, as simple as that, that’s number one. Even if you take that out, I think we’re still better for a few reasons. One is we are able to better plan our CAPEX over a long period of time because we are able to forecast how our business is evolving. Not only just the total volume, but the volume split in different regions, in different routes, etcetera. So this helps us to optimize our CAPEX and our operating model for a long period of time. That’s one. Second one is given that we have a good forecast, even in the short term on our order volume upstream, for example in the next week, what our volume would be or in the next day what the volume will be.

This will help us to do a lot of operation planning better. For example, how many workers you want to come in to work today versus tomorrow and how many trucks you want to prepare for pickup tomorrow or two days later. I think this will essentially help us to improve on the day to day operating efficiency. Number three is even beyond the planning, we are able to retool quite a lot of the buyers — sorry, seller behaviors to optimize for our logistics. For example, the way that we pick up from the sellers, when the seller should pack their product, whether the seller should drop off versus pickup and all those things, we can do quite an influence on the upstream to optimize for the downstream fulfillment. And number four is as a technology company we do have a better tax capabilities in terms of how do we use technology to optimize our entire supply chain and all those tools, all those automations, and all those forecasting models we built will help us to essentially have a better efficiency through the fulfillment network.

I think number four is because we can work together with the marketplace side, we can roll out quite a lot of new services to the consumers. But when we roll out new services, we can control the cost because we can do many of the new service planning end-to-end, together with the marketplace upstream. I think one example that in the opening we gave is the on-time guarantee deliveries. To do that — I think everybody can do that theoretically, you can always give a voucher to the fact that if you deliver late. But how do you do that economically is a big question. How do you make sure that you can have a good forecast of your deliveries end-to-end from the buyer place order to the seller pack the order to the first marketer pick up the order to the sorting center and to the mid mile, to the last mile, and the entire modeling process and the entire retooling sort of the seller behavior and associated behaviors that requires a lot more joint planning across the value chain.

And because we can do it together, so we can do it more economically compared to if you work with the pure third parties. I think for all that reasons putting together, we kind of are able to achieve better economics. And not only just the cost, but also better service levels, and differentiated services we can offer to the consumers in our market.

Operator: Your next follow-up question comes from…

Tony Hou: And for the — sorry, for the ad take rate, I don’t think we disclose the ad take rate actual number. But what we can share is that if you compare with our global peers, for example, in China or in the U.S., we are kind of like still meaningfully lower than where they are. We still have a few percentage to catch up to them. So there is meaningful room for us to increase the ad take rate. I think there are a few tools that we can deploy to do that. I think one is just having more seller presentation in terms of the — to enhance the total pool of the skills they’re utilizing the ad. In order to do that, we have to develop simpler ad products for the sellers to use. Unlike many of the sellers in multiple markets, we are more familiar with the apps in our market, they have quite some sellers that left some with that.

So we have to customize our app tool for those sellers to make sure that it’s easier for them to adopt so they can — so we can have more skills into our app pool. That’s number one. Number two is to increase ad efficiencies through technology. We are spending a lot of effort on making sure that we increase the conversion rates for our ad products, so the conversion ad, so we can actually serve more ads to our users because of increased conversion rate. And number three is to find a way to balance organic and add traffic better. So by having an enhanced product to balance the organic and ad products in a common frame, we can essentially dynamic adjust and load. It depends on the conversion rate and the SKU presentation and scenarios within our app.

So by doing all the three things, we see there is a meaningful potential to increase the ad take rate over the next few quarters.

Operator: The next follow-up question comes from Navin Killa from UBS. Please go ahead.

Navin Killa: Hi, thank you for the opportunity again. I just wanted to ask a question with regards to your cash, which obviously remains strong and continues to grow. I know several of your peers have started talking about buybacks and have even announced buybacks. What’s your thinking on the use of the cash balance? Thank you.

Tony Hou: Yes, thanks for the question. We currently don’t have any sense on buybacks or any sort of thing. Our operation results are strong, and we are kind of quite confident on our outlook for each of our business lines and pretty much, we’ll be focusing on these.

Operator: The next follow-up question comes from Alicia Yap from Citigroup. Please go ahead.

Alicia Yap: Hi, good evening. Thanks for taking my follow-up questions. Two for me here. One is on the DFS. Can management share the ranking of the growth by the product or the services line and the ranking by the revenue or profitability contribution for your fintech products this quarter? And then second, I’m not sure if I missed it, but assuming if you will be relaunched in India sometime in the future, what could be the incremental upside to the user and the — if this becomes reality? Thank you.

Tony Hou: For our DFS businesses, we are a few main business — main product that we have. The SPL, Shopee PayLater, and BTL, Buy Cash Loans. And the other — the off-line product that we have, I think that at this point in time, the SPL in terms of outstanding, is still the biggest product. But if you look at the EBITDA contribution, the UE, the buy cash loan will have a higher UE than the Shopee PayLater. I think that’s kind of like a rough picture, if you will.

Forrest Li: For Free Fire relaunch in India, at this moment we are actively working with order — like stakeholders, including like the regulators, the potential local partners, and to figure out what is the best plan to relaunch Free Fire in India. And well, if that is successful, I think that will be a meaningful or potential upside in terms of the users and the bookings considering India is a very, very big market. But just to clarify, at this moment for our outlook for the rest of the year in terms of our like a double-digit growth, and this is not taking into the consideration of the relaunch of the India. So that’s basically the make it to the — basically, when we come out with guidance and outlook based on the current business, what we have seen for the existing kind of the trend of our current market for Free Fire.

Operator: This concludes our Q&A session. I would now like to turn the conference back over to Mr. M.C. Koh for any closing remarks.

Miang Chuen Koh: 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.