Sea Limited (NYSE:SE) Q3 2024 Earnings Call Transcript

Sea Limited (NYSE:SE) Q3 2024 Earnings Call Transcript November 12, 2024

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

M.C. Koh : Hello, everyone, and welcome to Sea’s 2024 Third Quarter Earnings Conference Call. I am M.C., Sea’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 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; and Chief Financial Officer, Tony Hou. Our management will share strategy and business updates, operating highlights and financial performance for the third 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’m happy to report that it has been another solid quarter. We are seeing high growth across all our 3 businesses. Shopee is on track to deliver our full year guidance of mid-20 year-on-year GMV growth. SeaMoney’s loan book grew by over 70% year-on-year this quarter while maintaining a stable NPL ratio. And for Garena, we now expect Free Fire’s full year bookings to grow over 30% year-on-year. I’m very proud that we also improved our profitability while getting back to high growth. This quarter, Shopee achieved positive adjusted EBITDA in both Asia and Brazil as we continue to focus on delivering growth we expect Shopee to remain profitable going forward. With that, let me take you through each business’ performance in more detail.

Starting with e-commerce. Shopee has delivered strong GMV and order volume growth this quarter, sustaining strong market leadership in our Asia market. User growth remains strong with average monthly active buyers in the third quarter growing by over 20% year-on-year. We have improved our monetization in both commission and advertising take rate this quarter. On commissions, further market rationalization in Southeast Asia has led to industry-wide increases in commission take rate. On advertising, our ad tech improvements attracted more sellers to our paid ad features. We simplified seller onboarding, optimize the algorithm for traffic allocation and introduced a dashboard, making it easier for sellers to set their ad spend and ROI target. This helped our sellers both see the benefits of their ad spend and achieve better returns on it, driving up adoption of our ad offerings.

In the third quarter, ad-paying sellers increased by over 10% and ad-paying revenue per seller increased by over 25% year-on-year. Compared to the same quarter last year, Shopee’s ad take rate has improved by more than 30 basis points, and we see much more upside here. On the operations front, we remain committed to the same 3 priorities to deepen our competitive mode, enhancing our price competitiveness, improving our service quality and strengthening our content ecosystem. Price competitiveness continues to be a key value proposition that we bring to Shopee users. It is a strong anchor of our brand mind share among buyers. In a recent survey conducted by Portrait, Shopee received the highest score among e-commerce platforms for good product prices in our Asia market and Brazil.

On service quality, investing in end-to-end logistics integration across our logistics partners has given us a vital and structural advantage over our peers. Our buyers are happy with the cost savings we passed on to them and the better customer service we are able to provide. Our sellers also appreciated as we give them access to one-stop logistics solutions that are both reliable and cost-effective — efficient. SPX Express in particular continues to be a key differentiating factor for us. It has become a leading logistics service provider in our market with extensive coverage, faster delivery speeds and cost leadership. In the third quarter, half of SPX Express orders in Asia were delivered within 2 days of order placements. Cost per order also continued to improve quarter-on-quarter in both Asia and Brazil.

We have also made significant progress on the content ecosystem front. Live streaming continues to be a popular format on both the supply and the demand side in our market. Our division in the second half of last year to invest in building Shopee’s live streaming capability has paid off. In the third quarter, our average daily unique streamers grew over 50% and the daily unique live streaming buyers grew over 15%, both quarter-on-quarter. Average basket size on live streaming has consistently increased over the past few quarters, driving improvements in its unit economics. Our content effort has been particularly successful in Indonesia, our largest market in Asia. We have been the largest live streaming e-commerce platform there by both GMV and order volumes since the start of 2024, and our unit economics has improved steadily since then.

One recent boost to our content efforts has been a new collaboration between Shopee and YouTube in Indonesia. YouTube creators can now embed clickable buttons in their videos that allows viewers to buy items from Shopee directly. We have just brought this collaboration to Thailand and Vietnam as well, and look forward to extending this strategic partnership into more markets. Looking beyond Asia, we are also seeing good results coming out of Brazil. In the third quarter, average monthly active buyers grew by close to 40% year-on-year. We are encouraged to see that this new user cohorts are purchasing bigger basket sizes than older cohorts, giving us better returns on investments and improving our unit economics. This allowed us to break even in Brazil on an adjusted EBITDA basis the first time ever.

Despite only having been in the market for less than 5 years, Shopee recently received recognition as the best shopping site in the Folha Top-of-Mind Award, which recognized brands with the best mind share among consumers in Brazil. We feel very excited about Shopee’s further growth opportunities there. In summary, I’m very happy with the strength that Shopee continues to show in both Asia and Brazil. Many of our markets still have very low e-commerce penetration rate. This puts us in a great position to continue to grow as e-commerce penetration improve. Next, turning to digital financial services. We continued our strong momentum this quarter, delivering double-digit year-on-year growth in both revenue and EBITDA. Our key driver of growth continues to be credit lending which is in high demand, but still very underserved in our market.

Shopee’s large user base in our market makes it highly efficient for us to acquire and serve credit users. Proprietary data from Shopee also allows us to better underwrite risk. In addition, we have diversified funding sources such as innovative asset-backed lending products and our digital banks in local markets that give us that give us access to retail deposits. All of this has led us to scale up our credit business very quickly and profitably. In the third quarter, our loan book grew over 70% year-on-year. And we added 4 million first-time borrowers. Our consumer and SME loans active users reached about 24 million by the end of the quarter, growing more than 60% year-on-year. Despite high growth, our NPL 90-day ratio held stable in the third quarter at 1.2%.

One of our risk management practices is to gradually increase loan size and tenure offerings to users. We typically engage first-time borrowers by offering SPayLater products with small credit limit and short tenure on their Shopee purchases. If the users show a healthy repayment track record, we offer them a higher credit limit, longer tenure options and other credit products, such as cash loans. This practice underpins our sustainable healthy growth. Right now, our average loans outstanding per user is less than $200 with tenure period of just a few months. These loans are spread over a very large user base across different markets. Recently, we have been pushing off-Shopee loan book growth more strongly, especially in Indonesia. Off-Shopee loans now account for more than half of our loan book there.

One recent example of an off-Shopee use case was to facilitate consumer large ticket purchases of mobile phones in offline retail stores. In this case, we offer select users SPayLater limit extra credit products with higher credit limit. This initiative was very well received by our users. We will continue to explore further use cases in Indonesia and bring this success to our other markets. In summary, we see plenty of growth opportunities ahead in our market. Strong synergies with Shopee gives us a unique advantage, and use cases beyond Shopee are also very compelling. We are well positioned to grow our credit business and offer more financial services to address the huge underserved demand in our markets. Finally, turning to our digital entertainment business.

Garena’s strong growth has continued into the third quarter. Total bookings grew over 24%, and adjusted EBITDA grew over 34% year-on-year. This good performance is driven by the strength of Free Fire, which continues to be one of the largest mobile games in the world. Free Fire consistently had over 100 million daily active users in the third quarter, representing an impressive 25% year-on-year growth. In addition to Asia and the Americas, we were happy to see meaningful growth in other regions, such as North Africa over the past year. We view this region as a sizable untapped opportunity and has been ramping up both in-game campaigns and all top game events in this market. Recently, we had a major e-sport tournament in Morocco, where thousands of teams participated, attracting millions of views on social media.

We believe it was the largest attending off-line mobile game event ever held in North Africa. Our top priorities for Free Fire continue to be attracting, retaining and engaging our users. In the third quarter, Sensor Tower once again ranked the Free Fire as the #1 most downloaded mobile game in the world. The number of new users who downloaded and played Free Fire in the third quarter was up 25% year-on-year. User engagement has also remained high. And while we always try to keep ARPU at a healthy level. We saw an increase this quarter, thanks to strong item sales during our anniversary campaign update. It is quite remarkable that a game of Free Fire vintage is able to grow its user base so steadily, and I believe this has a lot to do with our relentlessly user-centric approach.

We make sure to release new content updates and in-game experiences very frequently, keeping things fresh even for seasoned gamers. Many of these updates are inspired by our local markets and social media trends. In October, Free Fire was the first online game in the world to collaborate with the geological part organization of Thailand to bring their hugely popular baby pygmy hippo, Moo Deng, into the game. Our users love the hippo themed virtual items that we introduced in Free Fire. They shared user generated content on social media that went viral yielding more than 10 million views. This is just one example of how we leverage local trends to connect with users at an emotional level, making them feel that Free Fire is relevant and interesting.

It also keeps Free Fire highly visible on social media, helping to join new users. Beyond Free Fire, Garena launched Need for Speed Mobile in Taiwan, Hong Kong and Macau at the end of October. Since its launch, it has ranked as the #1 most downloaded racing game in all 3 markets according to Sensor Tower. We are also strengthening our partnership with Tencent to bring Delta Force, a first-person tactical shooting game, to PC and mobile users in several markets across Southeast Asia, MENA and Latin America. To conclude, I’m happy that we delivered a very strong quarter with all 3 of our businesses posting high profitable growth. We have done well, and we will continue doing so. Thank you, as always, for your support. With that, I invite Tony to discuss our financials.

Tony Hou: Thank you, Forrest, and thanks to everyone for joining the call. For Sea overall, total GAAP revenue increased 31% year-on-year to $4.3 billion in the third quarter of 2024. This was primarily driven by GMV growth of our e-commerce business and the growth of our digital financial services business. Our total adjusted EBITDA was $521 million in the third quarter of 2024 compared to an adjusted EBITDA of $35 million in the third quarter of 2023. On e-commerce, Shopee’s gross orders grew 24% and GMV increased by 25% year-on-year. Our third quarter GAAP revenue of $3.2 billion included GAAP marketplace revenue of $2.8 billion, up 43% year-on-year, and GAAP product revenue of $0.4 billion. Within GAAP marketplace revenue, core marketplace revenue, mainly consisting of transaction-based fees and advertising revenues was $2 billion, up 49% year-on-year.

Value-added services revenue, mainly consisting of revenues related to logistics services was $0.8 billion, up 29% year-on-year. E-commerce adjusted EBITDA was $34 million in the third quarter of 2024 compared to an adjusted EBITDA loss of $346 million in the third quarter of 2023. For our Asian market, we continued to achieve positive adjusted EBITDA following our second quarter of 2024 results, recording $31 million during the quarter, compared to an adjusted EBITDA loss of $306 million in the third quarter of 2023. In our other markets, we achieved positive adjusted EBITDA of $4 million compared to an adjusted EBITDA loss of $40 million in the third quarter of 2023. Digital financial services GAAP revenue was up by 38% year-on-year to $616 million.

Adjusted EBITDA was up by 13% year-on-year to $188 million. As of the end of September, our consumer and SME loans principal outstanding reached $4.6 billion, up 73% year-on-year. This consists of $3.8 billion on book and $0.8 billion off-book loans principal outstanding. Nonperforming loans past due by more than 90 days as a percentage of total consumer and SME loans was 1.2% at the end of the quarter. Digital entertainment bookings were $557 million, up 24% year-on-year. GAAP revenue was $498 million. Adjusted EBITDA was $314 million. Returning to our consolidated numbers. We recognized a net nonoperating income of $50 million in the third quarter of 2024 compared to a net nonoperating income of $46 million in the third quarter of 2023. We had a net income tax expense of $93 million in the third quarter of 2024 compared to net income tax expense of $62 million in the third quarter of 2023.

As a result, net income was $153 million in the third quarter of 2024 as compared to a net loss of $144 million in the third quarter of 2023.

M.C. Koh: Thank you, Forrest and Tony. We’re now ready to open the call to questions. Operator?

Operator: [Operator Instructions] The first question comes from the line of Pang Vitt with Goldman Sachs.

Q&A Session

Pang Vitt: Congratulations for the solid set of results. Two questions from me, both will be on e-commerce. Number one, could you provide us with more insight into the latest competitive landscape in the fourth quarter that you see currently? We noticed that your social commerce competitor has been increasing its take rate while we also noticed that the cross-border competitor expanded its presence in the regions. So could you provide some comments around how would it impact your growth projections in both top and bottom line? And how do you think about the overall strategies? That’s question #1. Question 2, it will be related to the advertisement. Can you provide — we do notice that they’ve seen a nice uptick 30 basis points quarter-on-quarter in terms of that advertisement take rate.

But what have you done exactly and differently that allow us to see this progress? Can you also share the insight on the potential ceiling for this ad take rate and the timeline for the ramp-up process?

Forrest Li: I think on the competitive landscape, as far as mentioned in the opening, we do see a stable competitive landscape. And in fact, if you look at our growth, our growth has been doing quite well, while we are improving our EBITDA to be possible in both Asia and Brazil. If you look at Q4, we do see our Q4 is doing quite well still with all the competitive environment that we are in, and we’re maintaining our mid-20s GMV growth guidance for this year. As we shared before, majority of our sellers are local products, selling our local market. As a consequence, the impact from cross-border competitor probably relatively small to us at this stage. If we look at the ads take rate, there is a meaningful improvement of ad take rate.

If you compare to the last year same quarter, we grew about 0.3% take rate on the ad side. We have done many things, actually, over the past few quarters. We did a sizable revamp to our ad systems from a technical perspective. Part of the take rate comes from the algorithm improvement to improve how well we can place ads to a particular user’s query. By doing that, we have a better conversion rate for our ad as a consequence that we can deliver better return investment to the sellers. We also tried to improve our traffic utilization algorithm for the ad so that we can have more flexibility in terms of when to display our organic ad versus displaying ad products to the buyers. On top of that, we also improved the buyer — sorry, the seller side ad product experience to make the sellers easier to utilize ad products.

As a consequence, we can see that there are more and more sellers are using our ad products, which in turn, increased the pool of their products that we have in the ad, which also help us in the end of the day to improve our ad efficiencies because the bigger pool that we have, the easier we can match to our users’ queries. We believe that the potential of the ad product improvement is going to continue in the next few quarters. I think it’s too early to comment on what the potential ceiling would be. I think the improvement will come in, and we will see the impact in the coming quarters while we are further improving our technology, rolling out new products to the sellers and also rolling out the improvement to all markets across our countries.

Operator: Our next question comes from the line of Alicia Yap with Citigroup.

Alicia Yap: Congrats on the strong results. I have follow-up questions related to e-commerce. So how should we be thinking about the Shopee growth entering 2025, especially given a lower interest rate environment and also the resilient economic growth in Southeast Asia? And then related to that is that do you anticipate more intensified competition in Southeast Asia and also Brazil as we head into 2025? If so, how would management balance the market share growth for Shopee versus the profitability? If the competition picks up, given we actually recently observed that Temu in Vietnam has been gaining pretty good tractions even though they just launched recently. So any color would be appreciated.

Forrest Li: I think it’s probably a bit too early to comment on the 2025. I think we’re still monitoring the trend in Q4, and we probably will provide better guidance in 2024 in the coming quarter. But in general, the way we think about this is, #1, we would like to make sure we can grow in a profitable fashion. Number 2 is we think the profitable range, we would like to grow as much as possible. I think that’s kind of probably how we think about it in terms of when we come into the next few quarters. In terms of competition, as I mentioned earlier, we are seeing a relatively stable competitive environment in South Asia. In Brazil, we didn’t see any particular changes in the competitive environment, either. As you mentioned, we do see certain players coming to our market through a cross-border business model, given that cross-border has been a relatively small part of our businesses, and we believe that cross-border has been a small part of the overall market as well.

So the impact to us will be relatively limited. Even you look at those cross-border products that those players are offering, if you compare the pricing for those products to our product in the platform, we still see a relatively good pricing competitive advantage in our platform. So in that sense that unless there’s a dramatic change on the price competitors from these players, we don’t see that it will impact buyer’s preference on how they purchase our platform too much.

Operator: Our next question comes from the line of John Choi with Daiwa.

John Choi: Okay. Congratulations on a solid set of results. I have 2 questions here. First of all, on the first question is, what is the latest percentage of our orders handled by SPX in Asia and Brazil? I think you’ve noticed that we have started to reduce the shipping subsidies, and what is the near-term key driver for reducing the logistics cost per order? And what is our target going forward? And my second question is about your unit economics. I think if you look at our live streaming, unit economics for live stream versus our peers in the long-term. What is the merchant feedback after Shopee raised the take rate and the timeline of a further increase in this area?

Forrest Li: On the SPX, as we mentioned, that we are increasing the SPX coverage and also how much percent that SPX deliver to Shopee platform. In general, if you look at Asia, we have probably more than 50% and in Brazil, more than 70%, and these continue to grow, we believe, in the next few quarters. And — but not only increasing the coverage, we are also working hard on both reducing the cost and increasing the quality more than half of orders delivered within 2 days now in Asia. The key thing that we are doing to reduce the cost for SPX coming from all different parts of the value chain. For example, if you look at the first miles, we are working hard to match the costs between how well we can pick up the products from the sellers and how well sellers can prepare for their products.

And that involves part of the seller management, part of the fleet management from our side. If you look at the sorting centers, we’re increasing the percentage of automations in our sorting centers and also the way that we manage the workers in our sorting center to make sure that the compensation has a closer linkage to the productivity. If you look at line haul, we’re spending quite a lot of effort on improving how well we can utilize the line haul to make sure all the trucks are better utilized than it was before. Another thing, as you can imagine, the last mile is very important for our logistics management we are innovating on different formats of last mile hubs that we have. In the more remote area, we have more mobile last mile hubs than the more fixed last mile hubs that we usually have.

We’re also using technology to improve how many orders one rider can deliver in the last mile by helping them to sequence the package a lot more efficiently and also helping them to figure out the route a lot more efficiently based on the traffic patterns and based on the user behaviors. Yes. So again, it’s probably not only one thing, it’s across all the end-to-end value chain that we have for the logistics. In terms of the live stream unit economics, the — our live stream order percentage has — if you look at the penetration to our platform as a percentage of orders has increased slightly quarter-to-quarter, and our unit economics has been improved meaningfully quarter-to-quarter, actually probably across all our markets. The — as we shared before, we do believe that live stream unit economics will continue to improve over the time.

And in the long-term, it will probably be similar to the platform economics in terms of — if you come to — if you compare to our competitors for live streams, we generally have relatively good unit economics. For the take rate increase, we don’t have a fixed timeline in terms of the take rate increase. I think we spent a lot of effort trying to balance our seller ecosystem to make sure that whenever we increase the take rate, we are delivering more value to our ecosystem partners. So it’s something we will continue to evaluate and hear the feedback from our ecosystem before we conduct any adjustment.

Operator: Our next question comes from the line of Thomas Chong with Jefferies.

Thomas Chong: I have two questions. My first question is about the payment business. Can management comment about Free Fire life cycle and any new games to be expected coming soon? And my second question is on the e-commerce side. Can management provide some updates about the logistics investment spending and this impact on EBITDA margin in coming quarters?

Forrest Li: Sure. Like for Free Fire, we are very excited to see that the growth is like, especially after like the challenge we face, some headwinds in terms of the like post-COVID situation. I think like we have been trying very, very hard in the past 2 years to continually improve the product through the very user-centric approach, and we start to see the payoff. We start to see the great results like the beginning of this year and has been extending the trend for the — pretty much for the whole year. And the Free Fire, in terms of the life cycle. I mean, as we always believe, Free Fire is more like a service and it’s more like a platform instead of like a product. So from that perspective, we do have the ambition and the conviction to build up Free Fire as a evergreen game and as an evergreen platform.

And this is — we see a very encouraged sign. And if you think about Free Fire has been a 7 years, old game, and it’s still like growing. And the new users coming into the game, the new user growth is even accelerated. So — and from all those, we see the better engagement and we see the better retention. So from all those metrics, and it’s a very, very strong sign that Free Fire is still at a very, very early stage. I think it give us the confidence to continually grow the game and through the engagement, through the better intention and through making the game, it’s a more friendly experience for the new users. At the same time, to keep — always keep the content fresh, local and to have a better engagement with the existing gamers as well.

Operator: Our next question comes from the line of Rishabh Dhancholia with HSBC.

Forrest Li: Operator, please pause for a moment. The second question has not been answered yet. Give us a moment here. Regarding the second questions, regarding the question on the logistic investment. For our logistics businesses, it’s rather more OPEC-driven rather than CapEx heavy driven businesses. The core capital investment is centered around our sorting machines and part of the improvement to the hub and to the sorting centers. So in that sense that it’s relatively a smaller part of our overall spending to build our SPX businesses and is counted as part of the overall EBITDA as well. So we don’t see that there will be a significant impact to the EBITDA margins from the — from this perspective.

Operator: Let’s proceed for the next question. We have Rishabh Dhancholia with HSBC. All right. So let’s proceed for the next question. We have Divya Kothiyal with Morgan Stanley.

Divya Kothiyal: So my first question is just on the e-commerce business. Could you explain what’s driven the 13% quarter-on-quarter growth in the sales and marketing expense? And if we look at it as a percentage of GMV as well, it’s gone up slightly by about 10 basis. Just if you can triangulate this with your comments on competition being stable. When do we expect these sales and marketing expenses to start coming off. And any outlook for next year on how to think about this number? And the second question is on the DFS business. I mean the general sense that we got on the DFS business is that the growth was being — say a more measured approach was being taken on the growth. But in this quarter, we then the growth actually accelerated quite a bit. Could you talk beyond Indonesia how the growth has really been panning out? And what specific company initiatives have been taken to drive this growth?

Forrest Li: For the first question, so typically, there are 2 things that might impact the sales and marketing growth, especially in Q3. I think one is if you look at our revenue growth, there is a meaningful growth on the revenue side as well. So in the way that we take a bit more from the seller side on the take rate. So typically, when we see that, we will spend a bit more to make sure that we compensate some of the seller take rate increase on our sales and marketing side. I think that’s one. Second one is Q3. If you compare with Q2, Q3 is relatively more promotional season for e-commerce, where Q2 this year is more a lower season if you account the date. I think that’s the 2 core drivers for the sales and marketing movement rather than a reaction to the competition side.

On the second question regarding the digital financial service businesses. We are seeing growth not only in Indonesia, but also in the other markets. For example, we see relatively good growth in Thailand, Malaysia. And also, we see early signs of well penetration in the Brazil market, where we started very late. We see meaningful penetration on Shopee from our SPayLater products. So part of the driver for the growth is that we penetrate more Shopee users through various formats. So we can take more users to our digital financial service side. That’s one. Second one is we optimize our existing products to the users. For example, if you look at our both SPayLater and our cash loan products, we are doing a lot more risk-based pricing. We also provide a new type of products to target our more prime users.

For example, we launched a term loan in Indonesia to target more prime users to make sure that we can address their needs as well. On top of that, we also spent quite some effort to go — to build user scenarios, use cases beyond the Shopee platform. For example, in Indonesia, as we shared in the opening that we rolled out the SPayLater for the off-line payment through the National QR code, the same initiative we have rollout in Philippines, in Malaysia as well. We also rolled out the SPayLater for the specific use cases offline, like the cell phones and home appliance, et cetera. Some of this will continue in the next few quarters while we are expanding to more countries for those products and expand to more user cases. All those will help us to grow the digital financial services to a broader segment of users and penetrate to more use cases for those users.

Operator: Our next question is again from Rishabh Dhancholia with HSBC.

Rishabh Dhancholia: Two questions, please. What are your key priorities across each segment for 2025? And secondly, what are the initiatives undertaken in DFS segment to drive user growth and deepen penetration of various products? And outlook for growth in margins in this segment — in the DFS segment?

Forrest Li: For the key priorities for 2025 and so in all, we feel like the entire our marketing — strong tailwind and from the macroeconomic perspective. And there is a very, very strong growth potential. So — and I would say without a jump into very, very specific in each overall, we will still maintain a very, very strong growth mindset. And so the growth will be the focus. And so we have a very, very — like a strong momentum at this moment. If you see all our 3 business is on the very good growth trend at this moment. We hope like this trend will continue into 2025. And meanwhile, as we mentioned, is we also focus on the quality of the growth. And I think like for all our 3 business have kind of got to the stage and with a strong foundation to deliver not only the high growth rate, but the very profitable growth as well. So that will be the — in the very big picture a broad sense in terms of the priority for 2025.

M.C. Koh : Yes, if you look at the CMS part of the businesses, as I shared just now in the previous questions, we are further penetrating to the Shopee user base. We are optimizing our product to cover more users in our ecosystem and also building more use cases outside of Shopee ecosystem to serve our users better. I think that all will contribute to the growth over next year, not only for Indonesia, but also for many other countries we have our financial service businesses in. We don’t observe any particular trend in terms of the margin shift in this quarter or in the next few quarters.

Operator: Our next question comes from the line of Ranjan Sharma with JPMorgan.

Ranjan Sharma: Two questions from my side. Firstly, on e-commerce. Can you share us your thoughts around how much profitable growth is left in Southeast Asia because we presume that the penetration of the major urban centers is already quite high in Southeast Asia? And the corollary to that is with you becoming like profitable in Brazil, could Shopee look at further expansion out of Asia? The second question is on your cash and investments, which are close to $10 billion now. How much capital do you need to keep on the balance sheet? Or is there a case for you to return some money back to the shareholders?

Forrest Li: In terms of the e-commerce penetration, if we look at the current e-commerce penetration in our major markets, we still see there is quite a lot of room that we can grow if you benchmark that with more advanced e-commerce market. So overall, if you look at the market in a top-down way, we do believe that there’s still meaningful room to grow the e-commerce penetration even in the cities, like, for example, if you look at Indonesia, look at the Jakarta area versus Java versus outside of Java. Even in the Java city, in Jakarta, around Jakarta or in other Java cities, we do see that meaningful penetration potential will be. Part of that will be driven by the cost of optimization that we are doing. For example, by further reducing the cost for our Spay deliveries, and part of that will come from a better experience of buying from e-commerce like the service improvement that we are working on.

Part of that will be driven by natural progressions of the population, some of the younger population were getting slightly older, so they have better purchasing power. And some of the — the other users who don’t use e-commerce before, they will try e-commerce and be more frequent purchaser over time. So in all, we do believe that there’s still meaningful room in terms of the penetration. For the expansion outside of Asia, our core market out of Asia is Brazil right now, which we do believe there is a huge potential there. In the near-term, let’s say, in the next, it’s very hard to predict anything too long-term. But in the near-term, we don’t have any particular plan besides what we have right now. In terms of the capital location, like to start with creating value and maximizing value for our shareholders is always the things on top of our mind.

So we remain very open-minded. And actually, we constantly look at all the opportunities and review all the options how to create better value, how to make value for our shareholders. I mean, definitely, buyback is one of the ways, where there is other options as well. I think when there’s certain opportunity appears, we will come out of the plan, and we will communicate with the shareholders timely and accordingly.

Operator: Our next question comes from the line of Sachin Salgaonkar with Bank of America Merrill Lynch.

Sachin Salgaonkar: Congrats on a good set of numbers. First question is on Brazil. Clearly, and congrats for achieving an EBITDA margin breakeven out here. How should we think about the margins going ahead? Should it continue to hover around these levels given the investments you’re looking to make out here? Or should we see an improvement in margin going out here? Related question is, of course, is how do you look at the credit business evolving in Brazil going ahead? And second question is when you think about incremental investments, now that all your businesses are EBITDA breakeven, where do you see maximum amount of investment being made? Is it more towards logistics? Is it more towards DFS or anything else?

Forrest Li: If you look at the Brazil market, it’s our newest market, and we’ve been very happy that we achieved EBITDA breakeven in the market in this quarter. It’s still a very dynamic market. But generally, we are hoping that we can further grow in the market with a profitable manner, although there might be some fluctuation from time to time. But generally, I think we will look to use as a base for thinking. If you look at the credit businesses in Brazil, as I shared in the earlier questions, we started a few quarters ago, and we see very good penetration in Shopee through our SPayLater. We also launched our cash loan product in Brazil with a very good take rate that we observed. More importantly, we have fine-tuned our risk modeling in Brazil to a stage that we are a lot more comfortable with to grow further in the market.

So generally, we are quite optimistic by the potentials of our digital finance service business in Brazil in the coming quarters. And if you look at the investment to various businesses, we take a very prudent approach for the investment. For example, if you look at any investment to logistics, we typically have a payback period, let’s say, between 9 months to 36 months in the range. It typically can contribute to our EBITDA quite quickly through those investments by optimizing our cost structure. If you look at the DFS side, DFS has generally been quite profitable businesses, as you can see from the numbers. The core investment for the DFS is probably on the user acquisition side to make sure we are attracting the right user to the platform.

The way we look at it is we measure the profitability for each user we bring in to make sure that each user we bring in has a meaningful profit in the coming year. The other Marqetape of investment, for example, on the e-commerce side, we do invest in acquiring new users as well. For that, we also take quite prudent approach in terms of measuring each user’s customer life cycle value against the cost to acquire the users. In most cases, the unit economics for those customer life cycle value will breakeven in a year’s time in general, if you compare with the cost we spent on acquiring the users for most of the markets.

Operator: Our final question comes from the line of Jiong Shao with Barclays.

Jiong Shao: Congrats on the very strong results. My first question is on the DFS business. You have made a tremendous progress in this business over the last few quarters, and your growth accelerated quite a bit this quarter, both for revenue and for the loan book. I was wondering if you can unpack that, just talk about what are the main drivers for the next couple of years to grow this business? Is that regional expansion, product expansion? Any key things we should look out for, for the continued sort of accelerated growth for this business? And second question is on the leverage in your e-commerce business model. Again, congrats for being profitable in Shopee again. And for this business, is that sort of a gradual improvement in profitability? Or once you reach certain scale the leverage will just play itself out and the improvement in profit could be meaningful at times?

Forrest Li: So in terms of the digital finance service business, I think you’re absolutely right that it’s a business that we’ve been very happy with in terms of the growth. And if you look forward, the growth will essentially come from, #1, the user growth. We would like to more of our e-commerce users to our digital finance service users and over time attract our non-e-commerce users as well to become our digital finance service user in our platform. That’s #1. Number 2 is, of course, to essentially get more users to use our products, both from the existing products to optimize our offerings to different segment of users with the different risk profiles and also expanding our product assortment to address more financial needs that the user might have across their life cycles.

I think it’s going to be both approach. The user growth plus the product optimization, plus the product assortment additions for our users. The — in terms of the country mix for DFS, I think we start with Indonesia. As I shared earlier, we see a very good growth in some other countries over the quarters. And I would expect the trend going to continue that the newer countries will benefit from the experience we learned from the earlier countries so that we are able to attract user more efficiently and also roll out products in a more targeted fashion. On the e-commerce profitability, I think it’s probably both, whether it’s a gradual improvement or potentially that is a big jump on profitability. In a natural environment in a more stable environment without any external shocks, you will likely see a gradual improvement on the profitability as we grow our ecosystem and as we reduce the cost to serve our customers in our upstream, downstreams.

And we are also able to optimize our own operating expenses to serve the customers. For example, if you look at the customer service that we have, we have been growing orders quite a lot in the last few quarters, but we have managed it with the same amount of people or even small amount of people to serve those customers from our platform perspective. So all those will contribute to a gradual improvement in profitability. But as the market becomes more stable over the years, there is a possibility that we see that is relatively sizable jump in profitability in future. I think, yes, to your question is that both possibilities, but the base case we’re working on right now is that we’re able to graduation gradually improve the profitabilities over the next few quarters.

Operator: This concludes our question-and-answer session. I will now turn the call back over to Mr. M.C. Koh for closing remarks.

M.C. 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.