Sea - Q2 2024

Transcript

Operator (participant)

Good morning, and good evening to all, and welcome to the Sea Limited Second Quarter 2024 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press Star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press Star one again. For operator assistance throughout the call, please press Star 0. 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.

M.C. Koh (Head of Investor Relations)

Hello, everyone, and welcome to Sea's 2024 second quarter earnings conference call. I am MC, 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 to 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 Yanjun Hou.

Our management will share strategy and business updates, operating highlights, and financial performance for the second 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 (Chairman and CEO)

Hello, everyone, and thank you for joining today's call. I'm happy to report that it has been a solid quarter for us, with our strong momentum from Q1 continuing into Q2. All three of our businesses have shown both strong growth and higher profitability. Before I dive into each business results, I wanted to share some observations of our Southeast Asia's market. Generally, retail and consumer spending trends in the region have remained healthy, with domestic consumption continuing to be a main driver of economic performance in many markets. This sets a very strong macro foundation for our e-commerce business. We are happy with Shopee's market share in Southeast Asia and our sizable lead over our peers in the region. We are seeing more market share consolidation and an industry-wide take rate increase. We believe this will move the industry toward profitability and sustainability, and we welcome this trend.

With the strong results delivered in the first half and our outlook for the rest of the year, we expect that Shopee will become Adjusted EBITDA positive from the third quarter. We are also revising up our guidance for Shopee's 2024 full year GMV growth rate to the mid-20s. With that, let me take you through each business's performance in more detail. Starting with e-commerce. As we have shared before, Shopee's operational priorities are to deepen our competitive moats on three fronts: enhancing our price competitiveness, improving service quality to customers, and strengthening our content ecosystem. This strategy is paying off. Over the past two quarters, Shopee has been able to post healthy, sustainable growth while also improving its profit profile. One area we are placing greater focus on is improving our ad take rate.

Currently, our ad take rate is lower than the industry average we observe in more mature e-commerce markets. To us, this represents a good opportunity to improve our monetization. Over the quarter, we have made it easier and more attractive for sellers to join our ad platform. We also have a dedicated tech team working on improving our ad feeding algorithms to help sellers achieve higher returns from their advertising spend. So far, the results have been encouraging. The number of sellers who pay for ads has increased by more than 20% year-on-year this quarter. We believe there is still plenty of, plenty of upside, and we will continue to push on this front. We have also launched live ads across our Asian markets, allowing streamers, including both merchants and creators, to insert ads into Shopee Live. This feature has been very well-received.

In Indonesia in June, 1 in 4 active streamers paid for Live Ads... This feature helps streamers boost their sales efficiency while increasing our ad take rate, enhancing our content ecosystem, and improving our live streaming unit economics. On improving our service quality to customers, our logistics capabilities continue to differentiate us. In the survey, 50% of buyers in Java, Indonesia, cited fast delivery as their reason for choosing Shopee. We have continued to integrate more closely with our many logistics partners to widen our coverage and deliver packages faster. SPX Express, in particular, has managed to improve delivery speed while also reducing its costs. In the second quarter, more than 70% of SPX Express orders in Asia were delivered within three days of order placement, with cost per order declining 8% year-on-year.

Another initiative to enhance customer service quality has been improving the buyer return refund process, a common pain point in e-commerce. Earlier this year, we launched a Change of Mind returns feature in our Asia markets, letting buyers initiate no-questions-asked returns within 15 days. We paired this with data-driven tech improvements to make the overall return refund process highly predictive and efficient. As a result, in the second quarter, more than half of our return and refund cases in Asia were resolved within one day. Making this process fuss-free makes buyers more willing to complete purchase, driving up user stickiness and repurchase frequency. In Malaysia, we saw a more than 10% increase in average basket size among buyers who raised change-of-mind return requests compared to before the feature was launched. I share these examples to demonstrate how we consistently execute on our operational priorities every quarter.

We believe this approach will strengthen our market leadership in the long term. Next, turning to digital financial services. SeaMoney has continued its strong momentum in growing its loan book and profit, while remaining prudent on risk management. Both revenue and Adjusted EBITDA have grown very well year-on-year. Consumer and SMB credit business continues to be the primary driver of SeaMoney's revenue and profit growth. We are making good progress on deepening our credit product penetration, both on Shopee and off Shopee. Our large Shopee user base is a unique advantage. It enables us to acquire new customers very cost-efficiently by promoting the right products at the right time to the right users. In the second quarter, we registered over 4 million first-time borrowers of our credit products, a figure that has more than doubled compared to 1 year ago.

We have also expanded our off-Shopee credit use cases. In Indonesia, we partnered with over 1,000 electronic stores to introduce customized as pay-later loans for mobile phone sales. We were the first player in the market to provide instant credit approval for this category at scale. We will continue to explore more credit use cases in our markets. With all these efforts, we have grown our loan book size to $3.5 billion at the end of June, up almost 40% year-on-year. Notably, our non-performing loans metric held steady at the end of the quarter. In fact, it improved slightly from the previous quarter. We now have 21 million consumers and SME loans active users, up almost 60% year-on-year. Looking forward, we will continue to invest in growing our user base efficiently and effectively, as our markets are still under-penetrated and present sizable opportunities.

A large user base will be a cornerstone of future growth for SeaMoney, especially as we introduce more product offerings. Finally, turning to our digital entertainment business. Garena's two years of hard work and taking a user-centric approach are paying off. We have delivered a strong quarter with more than 20% year-on-year growth in bookings, mainly contributed by Free Fire. At the end of June, Free Fire released a seventh anniversary version update, our largest in-game event of the year. We brought back classic weapons, made a documentary on Free Fire's history, and hosted a Story Wall where users could share their past experiences with the game. The campaign was very successful. Our players really enjoyed revisiting their fond memories of the game's early years. Free Fire's unique strength is its large, highly engaged, and loyal gamer base.

I'm very proud to share that every single day throughout Q2, Free Fire had more than 100 million daily active players. This reinforces our conviction that Free Fire is an evergreen franchise. Free Fire also managed to keep growing, thanks to the strong word-of-mouth effect we see from our large user base. According to Sensor Tower, Free Fire was the most downloaded mobile game globally in the second quarter. Free Fire's organic social pull is highly valuable, especially in today's world, where getting users to download and try new content can be hard and costly. We are also excited about launching Need for Speed Mobile in Taiwan, Hong Kong, and Macau later this year in partnership with Tencent and Electronic Arts. We are pleased to be able to bring this high-quality game with a classic IP to our gamer community.

To conclude, we are happy with the strong results the three businesses have achieved in the first half. Thank you, as always, for your support. Before I hand over the call, I'm pleased to announce that two new independent directors have joined our board. Dr. Silvio Savarese is a leading expert in AI, and Ms. Jessica Tan is a highly accomplished leader in financial services. I'm glad that Silvio and Jessica are willing to lend us their deep expertise and guidance on these two areas, which will be critical in shaping Sea's future. In addition, Yanjun will be stepping down from our board and will continue to serve as our CFO. With these changes, our seven-member board has a majority of independent directors. Thank you very much. With that, I invite Tony to discuss our financials.

Yanjun Hou (CFO)

Thank you, Forrest, and thanks to everyone for joining the call. For Sea overall, total GAAP revenue increased 23% year-on-year to $3.8 billion in the second quarter of 2024. This was primarily driven by GMV growth of our e-commerce business and the growth of our digital financial service business. Our total Adjusted EBITDA was $448 million in the second quarter of 2024, compared to an Adjusted EBITDA of $510 million in the second quarter of 2023. On e-commerce, Shopee's gross orders grew 40%, and GMV increased by 29% year-on-year. Our second quarter GAAP revenue of $2.8 billion included GAAP marketplace revenue of $2.5 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 $1.8 billion, up 41% year-on-year. Value-added services revenue, mainly consisting of revenues related to logistics services, was $0.7 billion, up 16% year-on-year. E-commerce Adjusted EBITDA improved quarter on quarter, with losses narrowing to $9 million in the second quarter of 2024, compared to an Adjusted EBITDA loss of $22 million in the first quarter of 2024, and an Adjusted EBITDA of $150 million in the second quarter of 2023.

For our Asia markets, we continued to achieve positive Adjusted EBITDA following our first quarter of 2024 results, recording $4 million during the quarter, compared to an Adjusted EBITDA of $204 million in the second quarter of 2023. In our other markets, the Adjusted EBITDA loss was $13 million, narrowing meaningfully from last year, when losses were $54 million. In Brazil, unit economics continued to improve as we achieved a positive contribution margin per order of $0.09 for the quarter, as compared to a loss of $0.24 in the second quarter of 2023. Digital financial services GAAP revenue was up by 21% year-on-year to $590 million. Adjusted EBITDA was up by 20% year-on-year to $165 million.

As of the end of June, our consumer and SME loans principal outstanding reached $3.5 billion, up almost 40% year-on-year and 8% quarter-on-quarter. Non-performing loans past due by more than 90 days as a percentage of total consumer and SME loans was 1.3% at the end of the quarter. Digital entertainment bookings were $537 million, up 21% year-on-year and 5% quarter-on-quarter. GAAP revenue was $436 million. Adjusted EBITDA was $303 million. Returning to our consolidated numbers, we recognized a net non-operating income of $56 million in the third quarter of 2024, compared to a net non-operating income of $108 million in the second quarter of 2023.

We had a net income tax expense of $61 million in the second quarter of 2024, compared to net income tax expense of $62 million in the second quarter of 2023. As a result, net income was $80 million in the second quarter of 2024, as compared to net income of $331 million in the second quarter of 2023. With that, let me turn the call to M.C.

M.C. Koh (Head of Investor Relations)

Thank you, Forrest and Tony. We are now ready to open the call to questions. Operator?

Operator (participant)

Thank you. We will now begin the question and answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press the star one again. In the interest of time, we will take a maximum of two questions at a time from each caller. If you wish to ask more questions, please request to join the question queue again after your first question has been addressed. At this time, we will pause momentarily to assemble our roster. Your first question comes from the line of Pang Vittayaamnuaykoon with Goldman Sachs. Your line is open.

Pang Vittayaamnuaykoon (Equity Research Analyst)

Good afternoon, management. Thank you very much for the opportunity. Two questions from my side, both on e-commerce. Number one, could you please comment on the latest competitive landscape you have observed? We are seeing all players, including yourself, push for further rationalization into third quarter, especially on the promotion fronts. How should this translate into your results and your updated guidance? In another word, what factors do you include in your revised guidance? That's question number one. Question number two, specifically on margins. What type of near and medium-term margins can we expect Shopee to deliver, and how do you plan to achieve that? Any update on long-term margin expectation as well?

Chris Feng (President)

Yes. On the competitive landscape, I think as Forrest mentioned in the opening, we do see a more stable competitive environment in the past few months. As you mentioned, there are positive movement in terms of the take rate from various players in our market, and I think we welcome that as a signal of more stable environment for competition perspective. And our longer-term view on the profitability target stay unchanged as 2%-3% of the EBITDA, as we shared before. However, we believe the market is still quite dynamic. And in the short term, we will likely, number one, focusing on the profitability of the businesses.

We will, as we shared in our guidance, in Q3, we will be profitable as the Shopee businesses. But at the same time, we also like to grow, as there's still a good potential in the market we operate in. We would like to make sure that, as businesses, we can outgrow the market as well, in the short term, rather than maximizing the profit in the near term. If we look a little bit to the medium terms, we do expect the overall competitive landscape in our market to continue to evolve and continue to coming to a more rational stage, even compared to where we are right now, which will drive the overall industry profitability to improve.

If you look at the overall market, as we mentioned, is still rather dynamic, with the more stable competitive environment. But there are things, you know, we can control, there are things we cannot control. We would rather focusing on the things we can control. For example, the things that we shared in the opening, we want to have better pricing. We would like to have better user experience. We would like to have a better content supply to our users.

Together with the larger scale of where we are right now compared to our competitors, we will all those things will help us to always be better positioned to deliver better value to our consumers, and ultimately have better unit economics, which will translate to the market share again over time as well. I think that's kind of like how we probably see the market in the near term, midterm, and the longer terms.

Operator (participant)

... Your next question comes from the line of Piyush Choudhary with HSBC. Your line is open.

Piyush Choudhary (Senior Equity Research Analyst)

Yeah. Hi. Thanks for the opportunity, and congrats to the management team on good set of results. Two questions again, both on e-commerce. As you mentioned earlier, you know, you have been increasing take rates, and the industry has also increased take rates during 1H. Is it possible to further increase the take rates, and are you able to reduce the shipping subsidies? That's the first question. Secondly, can you talk about the unit economics of live streaming business? Has it turned profitable now in some countries? How is the contribution margin for live streaming segment? Thank you.

Chris Feng (President)

For the take rate, we do believe there are opportunity to further increase the take rate. I think part of that comes from commissions and fees. As you probably observed, we do increase meaningfully in the past few quarters. I think there are still opportunity to further increase that, although probably not in the magnitude that we see in the early part of the year. There's another part of take rate, which we think that is also having a sizable opportunity is on the ad side. As we shared in the opening, we do focus a lot on the ad side. We spend quite a lot of effort on building the infrastructure to the ad side in the past few quarters.

Like, for example, we built a standard platform for our recommendation and search. We also built a standard algorithm and platform for our ad system and organic traffic allocations. All those will help us to be able to allocate traffic more agile and more flexible, and this enable us to offer better ad product to the seller side as well, which we are rolling out in the next few quarters. We believe all those efforts will help us on the ad take rate improvement in the coming quarters. On the UE front for live stream, we do see UE improvement quarter-over-quarter. Actually, if you look at all markets, some market are profitable, some market are still improving.

But I think, generally, we believe the trend will continue in terms of the UE improvement for our live stream businesses.

Operator (participant)

Your next question comes from the line of Marissa Putri with UBS. Your line is open.

Marissa Putri (Equity Research Analyst)

Hi, management. So I have two questions. Firstly, on e-commerce. So you've just reported your first CM positive from Brazil, and I think still with ambitions to kind of be number two in the market. How do you plan in achieving this? Should we think of the improved profitability as sustainable? And number two is kind of just to make sure that I'm getting your guidance correctly. So the Adjusted EBITDA positive will be just for standalone Q3 EBITDA, but not overall nine months EBITDA positive in Q3. Thanks.

Chris Feng (President)

For the Brazil businesses, we're very happy about the improvement on the margins in the market. As we share in the earnings, the contribution margin for the Brazil market is positive already. We also see there is a good potential in Brazil market. The core for us in Brazil is, I think, number one, we are able to consistently reduce our shipping cost in the market through our own logistics network. Number two is we're also improving the user experience in the market significantly over the past quarters. I think in combination, we have it drives better user retentions and also better unit economics to our market.

The other thing that's important for our Brazil market, besides the user experience and the unit economics improvements, is the ability for us to increase our penetration of the higher basket categories over time. We do believe that we have a sizable potential there to further increase our market share and penetrations to those categories. Traditionally, we are not as strong as compared to some of other players in the market. So with all that, we do feel that there's a meaningful potential for us to grow further in Brazil market, and we can see the levers that we have, and we are working on those levers.

In terms of the EBITDA guidance, I think what we refer to is the third quarter EBITDA posture. I think that's the understanding is correct on that.

Operator (participant)

Your next question comes from the line of Alicia Yap with Citigroup. Your line is open.

Alicia Yap (MD and Senior Equity Research)

Hi. Thank you. Good evening, management. Thanks for taking my questions. Two questions. First, can management share the update on the progress of, acquiring on the non-Shopee platform user, for the DFS business, and the GTV growth for the non-Shopee platform? Were this more from the offline transactions, like those, offline retailers, the restaurant partners, or, you know, Sea actually will be, open to work with, any online partners, including, for example, the online, travel agents? So this is for the DFS question. Second question is related to, Shopee Express.

... So how are we going to further optimize the operation efficiency and also further improve the cost structure for the logistic business in the coming quarters? Thank you.

Chris Feng (President)

On the first question, if you look at our credit loan portfolio, there are a few components of that. We have ShopeePay Later, which is very much quite connected to Shopee, the SPay Later, as we call it. It’s used as part of Shopee transactions. Besides that, we have Buy Cash Loan, which is a cash loan that’s not related to Shopee. Anyone can take loan from it. And on top of that, we also have the offline payment through SPay Later. And the same SPay Later that can be used offline can also be used online through a ShopeePay acquiring network. Besides that, we are also developing different kind of use cases for offline usage.

For example, the handphone purchase, as we shared in the opening. So if you—and similar type of specialized services can be deployed in future as well that we're working on. For example, the potential home appliance purchase offline. It can be online as well. For example, the other type of. So the, I think to the question of whether it's mainly offline or it's online as well, I think the answer is probably a combination of both. In fact, if you are in some of market, for example, in Indonesia, the user can use our ShopeePay Later, SPay Later solutions to pay in an online travel website already.

So we do work with various both online and offline partners to enable SPay Later for their transactions. We expect the partner will grow over time for both online and offline users, so it wouldn't be only offline. For the second question regarding SPX, we actually have quite a lever to further improve the efficiency of SPX. For example, number one is the scale. There is still sizable rooms for us to grow our scale further, which in our stage still can reduce the cost and improve efficiencies. Number two is more coverage and more density of the coverage. For example, more hubs. Some of the hubs can be traditional hubs, as you see.

Some of the hubs can be mobile hubs through our innovative way of deploying the hubs with low cost. If you look at Q2, we actually add about 900 hubs in Q2, and sizable of them are mobile hubs with a low-cost operations. Number three is we're also doing more automation through our network. For example, in our SOCs, we are adding more automation solutions. Either it's a full ASM, automatic sorting machines, or it's a hybrid solution when there is a smaller SOC, which will further improve our productivities. We're adding similar solution not only to SOCs, but also to some of our first-mile and last-mile hubs when the scale enable it.

And number four is better technology supporting our businesses. For example, a better sorting for our last-mile drivers. We're deploying a solution that we can also suggest the routing and sequencing. We've done in some markets, for example, in Brazil, but in some of Asian markets, that's not easy to do because of the complexity of the maps. We are rolling out more and more of a solution in different countries because we need to customize our solution for different markets. And the last thing just to share is the ops clock, which is very important for us.

The ops clock, starting from picking up from the seller side, to the first-mile hub, to the sorting centers, to the line haul, to the last mile to delivery. And it sounds simple, but it's actually quite complex because there are so many handovers along the way. And there are so many choices we have to make. Like, for example, when do you send line haul? When do you pick up? And whether you send to the hub directly or you send to a secondary sorting center. So optimizing the ops clock here will enable us to further improve our efficiencies in general.

Of course, there are many other things we're working on, but just sharing some of examples for the improvement opportunity we have on the logistics side.

Operator (participant)

Your next question comes from the line of Ellie Jiang with Macquarie. Your line is open.

Ellie Jiang (Equity Research Analyst)

... Ah, good evening, thank you management for taking my question. I have two. Number one is a follow-up on e-commerce. Just wanted to ask about the ad take rate the management commented. We talked about the sizable opportunities ahead, but if we look in the next several years, what kind of timeline do we really anticipate to ramp up this ad kind of revenue and potentially get to a level that's similar to the mature market players? So for example, how long does it take for us to stimulate more ad spending from the merchants? Would it be more efficient marketing tools or coming from more higher ticket size item sales? And the second question is on the gaming segment.

So it seems like Free Fire is really generating momentum, and according to some third-party trackers, the momentum remains quite strong quarter to date. So can you comment on the visibility or the sustainability for the second half outlook? And you know, for the potential kind of marketplace feed distribution that we partner with Tencent, what kind of financial contribution would that be coming from the second half as well? Thank you.

Forrest Li (Chairman and CEO)

On the ad tech rate, I think given the foundation we have built, as I shared earlier, we do believe that we will start to gain a benefit in the next few quarters. Probably wouldn't take, you know, a few years. I think we're talking about probably quarters. I think the basic product is there. I think it will take some time for the seller to adapt to it, and also a wider different seller adopt to it. We have to optimize it for different markets.

I think it comes in both in term of the improve the efficiency on how the seller use the ads product, and also from our side as a platform, how we can allocate the traffic in a more efficient way, giving a seller more upside without sacrificing the overall platform conversion rate. I, I think that's essentially the technology was built in the past few quarters, and we're trying to to roll out and optimize in next few quarters. For on game side, as you mentioned, we are very happy and we are, we are very motivated by the trend we have observed on Free Fire.

This is across pretty much all the metrics, in terms of the, the new users, in terms of the, like, the user, the existing user retention, and, also such as some like, like, monetization, metrics as well, like paying ratios, right, and the, and the-- and overall the, the growth rate. This is kind of like a-- this is to demonstrate what we have done in the past. It's a, it's a right, it's a right decision we made, and it's a right focus, we have. And we will continue to do that. And, so we'll be very, very focused on the content update, right?

In the past two quarters and we have some very, very successful new content release and around some festival campaigns and some like unique gameplay new user new play new gameplay experience. So we'll continue to do that. There will, there will be several big update already in the pipeline, and we have a pretty kind of a strong confidence on the, on the, on the result of those on those new updates. On top of that, and we are continually seeing Free Fire as a platform, and it's, it's not just a every like evergreen franchise, it's more like a a platform. So the way we think about it, this is a...

As we shared, like on every single day, like Free Fire can reach more than 100 million users globally. So that is very, very sizable. That is a very, very large scale. I think, like, although you may consider the game, it's called, it's always the name is always called Free Fire, but in Free Fire, so if you log into the game and you start to experience all different type of a game experience and like different game mode, so it's kind of like a combination of the different gameplay experience within one platform under one Free Fire umbrella. So we'll continually explore that, as well.

Some other like longer term initiatives we have been very, very focused on, and I personally feel very excited is about how to use the AI tools, right? And both on the like a production side, the game development side, right? How to make the production more cost efficient, like how to improve the speed and the quality of the production. At the same time, we continually explore what is the type of new game experience for gamers enabled by AI. So this is as being a focus of the team. And on the other end is related to the platform perspective we have.

Like, we are not building, only building the game content, and we are continually focused on building on the game creation tools within the Free Fire ecosystem, within the Free Fire universe. And gradually, we are going to, like work with the third-party content creator, game developers to create a different, like various, experience within the Free Fire platform to reach to, like, our 100 million daily active user base. So this is the... I think that will not only make the Free Fire kind of offer a more complete,

... gamer experience. At the same time, like, this will continually help us to, on the user engagement and the, and the monetization. So we remain very, very confident for the rest of the year, the momentum. But like, as, as we all know, like, game business, game have, sometime have the impact of the seasonality, right? This is related to the, the school holidays, related to the certain, like, festival in certain market. But look like a little bit like a longer term, right? And from the full year perspective, as you asked, and we remain confident to deliver the double-digit growth for Free Fire for both the, monetization side and also on the, on the user growth side. And, we are very excited.

We work very, very closely with our partners, like EA and the Tencent, to work on the new game in our pipeline. But I would say, like, it's still early to comment, right? On what in terms of the revenue-revenue contribution. And internally, like, we have been tremendously still focused on Free Fire, and we'll let the market know and give the more kind of detailed update when we get the new game launched. I think when we get the user feedback and we see the stats, we'll have a better sense of the how big potential those new games could be.

Operator (participant)

Your next question comes from the line of Divya Kothiyal with Morgan Stanley. Your line is open.

Divya Kothiyal (Equity Research Analyst)

Yep. Thank you very much. My first question is just on your views on the higher risk from competition from cross-border e-commerce in ASEAN. I mean, given the traction that Temu is seeing in recent months in Philippines and Malaysia and their recent entry in Thailand, do you think that this could also become a credible competitor the way TikTok kind of came to this geography? And how are we planning to respond to this, especially in relation to our positive Adjusted EBITDA guidance for the third quarter? And my second question is on e-commerce GMV. Is the higher guidance coming more from the surprises in Brazil, or is it from ASEAN?

If you can comment on the trends that you're seeing in July and August, given that second half is slightly tougher based than the first half, and are we seeing any sort of, you know, tapering there? Thank you.

Chris Feng (President)

For the CB players, I think you will probably refer to Temu's businesses coming to Asia. I mean, generally, we have a lot of respect for what Pinduoduo and Temu has achieved in the past years. However, I think for our market, we'll probably monitor, but from what we see so far, I think the impact to our business is probably rather limited, from what we see, I think for two reasons. One is CB, by nature, is a smaller part of our businesses in our market. If you look at the market like Philippines, Thailand, or Malaysia mentioned, majority of the e-commerce transaction happen to be a domestic selling rather than cross-border selling, right?

There are many reasons to contribute to that, of course, but as a fact, that's how the market landscape evolved to for the better efficiency and cost structure that the domestic e-commerce offers. The next one, second one is the great strength for Temu or other cross-border players entering to U.S. or European market is the pricing. They typically they carries a significant price advantage compared to the existing players. However, if you compare our pricing to their pricing in the market that you mentioned, Philippines, Thailand, or Malaysia, we actually have a much better pricing advantage compared to them.

It was mainly because we actually operate in a very competitive environment for quite a long time, and we have been essentially having a very competitive seller landscape domestically for quite a while. And also compared to a more developed market, where the operating cost is much higher compared to the operating cost in China, the operating cost for our sellers in our market domestically is probably cheaper than operating costs in China. If you take a person in the Philippines to operate the warehouse or operate a shop, they are probably cheaper than a Chinese person.

So many different reasons contribute to the fact that our pricing in our marketplace, which you can benchmark externally actually, it's very competitive compared to even the cross-border players you mentioned. To your second question around the GMV guidance, I think generally we see good growth, which are better than we thought before when we give out the previous guidance in both Asia market and Brazil market. Just in the pure scale of Brazil market, it's compared to Asia, it is still relatively smaller as a total size as where we are. So, you know, it... The one market will not influence the number dramatically.

So when we look at better growth guidance, I think it will imply that both markets in Asia and Brazil will have a meaningful improvement from what we thought before. And as you mentioned that last year our Q3 and Q4 does have a higher base compared to Q1, Q2.

But still, I think the core thing is that there are many initiatives we have done from last year, from Q3 and Q2, sorry, Q3 and Q4, on the customer side improvement, and also the improvement on the service qualities, improvement on the cost structures, the improvement on the pricing, all those contribute to better retention and the new user coming to our platform, which drives better growth that we're seeing so far, which leads to our raise on the guidance.

Operator (participant)

Your next question comes from the line of Sachin Salgaonkar with Bank of America. Your line is open.

Sachin Salgaonkar (MD and Equity Research Analyst)

Hi, thank you for the opportunity, and congrats on a good set of numbers. I have two questions. First one on gaming and second one on e-commerce. On gaming, again, when we look at your numbers, one gets a sense that your bookings are up, your users are up, but revenue is down. We are seeing that trend for last couple of quarters where ARPU continues to go down. What happened this quarter is clearly we could see margins almost being at an all-time high. So want to understand, is this a specific trend we should look at going ahead, where ARPU continues to decline and margins continue to improve or at least stay at these levels? Second question, I understand your earlier comments on competition being irrational, but just want to double-click on a couple of markets.

One, Taiwan, where we have a new competitor, Coupang, which is aggressive, so would love to know your thoughts on overall competitive intensity in that market. Second, in Indonesia, where one of the players had increased subsidies in the market. Any specific response from you guys to that, and how are you guys looking at the increased subsidies? Thanks.

Chris Feng (President)

Thanks for the question. I think for the first question, you were talking about the GAAP revenue. So, basically, the bookings actually improved both QOQ and year-over-year. And while because of the GAAP treatment, we have to defer more revenues into the fourth, future quarters. So that's why we typically see you know, the variations in the GAAP revenue side that is you know, on the reverse side, we saw with the booking side. So, well, for ARPU, what we see is average revenue per user is relatively stable. While it might be fluctuating a little bit, but it's more coming from the market mix. We don't see you know, very big fluctuation QOQ for this quarter.

I think for your question on the competitive landscape in Taiwan and Indonesia, if you look at Taiwan, I think Taiwan we still enjoy a rather dominant market position in the market. We do see some new entrants, and we do look at it seriously, but I think the impact to our business at this stage is relatively small. And the core thing for us, I mean, without commenting too much on, you know, specific competitors, of course, the core thing that we are doing in Taiwan is number one, to shorten our delivery time through our own SPX network.

We're covering a lot more next day deliveries through our own SPX network, which is typically done through a 3PL with much more expensive delivery systems. We are able to do a next delivery with much cheaper, in many cases, probably 40%-50% cheaper than the alternative solution in the market. That's one. Second one is to further increase the efficiency of the supply side to work with our sellers to fulfill their orders, not only the delivery side, but also the warehousing side, the fulfillment side to do it in a more cost-effective way.

And number three is to work with more sellers to increase their assortment for those areas that we think can be further enhanced. I think all the things will help us to maintain our competitiveness in the market while maintaining the profitability in the market. For Indonesia, I think there are, you know, different players doing different things in the market, and there will be seasonal fluctuations. We would pay less attention to sort of a short-term ups and downs on the subsidies you mentioned. I think we look at sort of a slightly longer term, or let's say, medium-term trend, at least month-to-month or quarter-to-quarter trend. We didn't see any significant changes on that.

If we look at slightly longer term, rather than focusing on specific campaigns or specific weeks or days.

Operator (participant)

Your next question comes from the line of Thomas Chong with Jefferies. Your line is open.

Thomas Chong (Senior Equity Research Analyst)

Hi, good evening. Thanks, management, for taking my question. My first question is about our DFS business. Just now, I think our management comments a lot about BNPL, cash loans, and our Shopee PayLater. I just want to get some color with regard to the margin trend for different categories. Any color about the margin profile would be great. And on the other hand, I think given the macro uncertainties we are seeing globally, how should we think about the risk management, in particular the ticket size and the tenure, et cetera? And my second question is more about the overall business.

Given our different business segments are seeing a very good growth momentum, how should we think about the longer-term revenue mix profile? Should we expect DFS to become more meaningful in the long term? Thank you.

Chris Feng (President)

On the first one, on the margin trends, if you look at a particular market or a particular product in our portfolio, our margin has been relatively stable. In fact, in some market we see a better risk profiles, therefore our product, which will in turn better our EBITDA ultimately. But one thing I do want to share on this topic is that given that we have many different markets, and we do see that, you know, the newer market has probably a faster speed of growth. If you track our history, we typically started our lending products in Indonesia first, then we expand to other market like Philippines, Malaysia, Thailand, Vietnam, and Brazil.

So typically, you will see that giving the smaller base, so the latest market has a slightly faster growth than the early market. I think that's the natural trend. And in fact, we are very happy with the growth we see in some of the new markets. For example, in Thailand, we see very good growth. In Brazil, we also saw quite a good growth in the past quarters. On the macro uncertainties, in general, I think there are many macro factors impacting our market. I think there was a big macro impact from the COVID time, the after-COVID time.

I think since late last year, we're seeing a more stable macro environment, in fact, for most of the markets. There are two things that's important for us in terms of managing the macro environment. One is the duration of our lending product. Second one is the ticket size I mentioned. So in general, our duration is rather a short duration rather than a very long duration. By short duration, we are talking about just a few months in average, right? And our ticket size also, compared to many other lending products, our ticket size is more on the smaller side. So in the combination of those, it will help us to be a lot more agile in term of how we manage our portfolio.

Manage portfolio in terms of how much lending we give out, how can we do risk-based pricing for different user bases, and also how we do collections, and how do we kind of fine-tune our portfolio based on the macro environment. So in that sense, I think we are quite comfortable with where we are. And even there is an unexpected market environment change, I think we are probably much better positioned than anyone else that we can see in the market with our size. Yeah. For the long-term revenue mix of those three businesses, if you look at each of the three businesses, I think each of them, some like at this moment, have some tailwind, right?

For our estimated e-commerce GMV growth, right? And that will be the driver of the potential revenue growth as well. And if we continually work on the take rate and not only on the commission side, but also on the ad take rate side, right? And that could be a driver as well. And if you look at the financial services business, as we shared, and if we continually deepen the penetration in the Shopee ecosystem, at the same time, the total, like, loan book size will be, I think, grow nicely with the overall Shopee GMV growth as well.

For game business, as we shared early, right, and we found the right formula for growth that Free Fire again, and we see a very, very strong momentum. So at this point, I think it's hard to come up with... We don't see, like, certain business go up and certain bit go down, and then this is change the how the revenue mix look like. I would say like, we'll be continually focused on grow each of businesses as much as we can. But like, as Tony just mentioned, but purely from a GAAP revenue perspective, certain growth of the game business because of the how the GAAP revenue works, it may be a certain delay how to react to reflect into the GAAP revenue, right?

So that's why in general, we use the booking as like a closer proxy to benchmark in terms of the growth. If from that perspective, maybe we can like see the higher percentage of the revenue contribution from financial services. But again, this is a purely in our view, because of the GAAP revenue treatment for the game business, doesn't reflect we don't have the confidence on the future growth of the game business. Yeah.

Operator (participant)

Your next question comes from the line of Jiong Shao with Barclays. Your line is open.

Jiong Shao (MD and Senior Equity Analyst)

Thank you very much for taking my questions. I actually have a couple follow-ups. One is back on the take rate. You talked about increasing the advertising take rate to the global comps, global benchmark in a matter of quarters, not years. In your reopening remarks, you also talked about your commission take rate, I think, is below the global comps. Even it's good you guys and your peers are raising your take rate, but your commission take rate is still quite a bit below, you know, the Amazons, the MELIs, the eBays. I was just wondering, are there structural reasons why you think the longer term your commission take rate won't be close to the global peers? And is there any timing to reach that sort of, sort of goal?

The second follow-up is back to the gaming booking. I know you talked quite a bit about the strong booking growth, which was amazing, second quarter in particular. Previously you have talked about double-digit booking growth for this year for Free Fire. I think the assumption was sort of low teens, but given the particular trends you have seen last couple quarters, are there reason to expect the implied booking growth for Free Fire for 2024 should be going higher? If not, why not? Thank you.

Chris Feng (President)

For the take rate question, I think for the ad take rate, as I mentioned, I think we will see the potential growth in the next few quarters within years. And you know, of course, the base is different in different markets. So ultimately, you know, it might be different numbers in different markets. On the commissions, I think I would rather look at the totality, look at commission and ad, et cetera. I don't think that is a reason they will be significantly below the global peers in the market that you mentioned.

Yeah, I think this reflects to our long-term guidance on how the EBITDA will be at the 2%-3% of the market.

Forrest Li (Chairman and CEO)

In terms of the game booking, Free Fire booking, guidance, right, for the rest of the year, yeah, I think you are right. It's we do see strong momentum and continuing. But at this moment, we want to be cautious, right? And since we just have this very, very strong momentum for the past two quarters, and we want to continually just focus on the effort, what we have done, which proved to be productive. And if we're continually seeing this trend and we will update the market, we'll like update our investors timely and accordingly.

Operator (participant)

This concludes the question and answer session. I would like to turn the conference back over to Mr. M.C. Koh for any closing remarks.

M.C. Koh (Head of Investor Relations)

Thank you all for joining today's call. We look forward to speaking to all of you again next quarter.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.