Sea Limited

Good morning and good evening. Welcome to the Sea Limited fourth quarter and full year 2021 results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Ms. Minju Song. Please go ahead.

Thank you. And hello, everyone, and welcome to SEIS 2021 Fourth Quarter and Full-Year Earnings Conference Call. I'm Minju Song from SEIS Group Chief Corporate Officer's Office. Before we continue, I would like to remind you that 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 a discussion of certain non-GAAP financial measures, such as adjusted EBITDA and net loss-excluding share-based compensation. 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 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 today's Chairman and Group Chief Executive Officer, Forrest Lee, Group Chief Financial Officer, Tony Ho, and Group Chief Corporate Officer, Andrew Wang. Our management will share strategy and business updates, operating highlights, and financial performance for the fourth quarter and for the full year of 2021. 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.

Thank you, Mingju. Hello, everyone, and thank you for joining today's call. In 2021, we continue to focus on growing and evolving our business to address the fast-changing needs of our users and communities. We have invested with vision and efficiency to capture the opportunities available to us during this period of accelerated digitalization. As a result, we have greatly deepened our engagement with consumers and small businesses, vastly expanded our total addressable market, and extended our leadership across all our business. Moreover, our growing skill, leadership, and strong cash balance means we are well-placed to leverage efficiencies across our ecosystem. As we look ahead, I would first like to take this opportunity to share with you how we plan to manage sustainable growth going forward. We believe we are now in a strong position to manage the leverage of our business to reach profitability across more markets and segments in 2022 and beyond. We currently expect Shopee to achieve positive adjusted EBITDA before HQ cost allocation in Southeast Asia and Taiwan by this year. We also expect C-Money to achieve positive cash flow by next year. As a result, we currently expect that by 2025, cash generated by Shopee and C-Money collectively will enable these two businesses to substantially self-fund their own long-term growth. By that point, we believe Shopee and C-Money will be generating meaningful cash in our existing core markets of Southeast Asia and Taiwan as strong market leaders. while Shopee will also have achieved significant scale and a strong market position in our new growth market of Brazil. On the path to this inflection point, we plan to continue to invest in Shopee and C-Money with efficiency. We have around $10 billion of cash, cash equivalents, and short-term investments on our balance sheet. including close to $7 billion raised last year, which we intend to invest into the growth of Shockey and C-Money over the coming years. Based on our current plan, we believe that we have the financial resources required to grow the two businesses to the inflection point without having to heavily rely on cash generated from the digital entertainment business. Of course, any additional growth from Garena will further strengthen our position, and we remain extremely focused on developing Garena's global platform, which we see as a key strategic asset in the long run. Next, let me share with you how we are thinking about resource allocation for this period. Broadly speaking, Shopee, Latam, and Brazil in particular, as well as R&D, would be our top two focus areas for investments. Our investments and the overall impact on the bottom line is likely front-loaded, as unique economics and profitability for our businesses generally improve with scale. Firstly, we will continue to invest in Shopee, Latam, with a focus on Brazil. Of course, it would be much easier operationally for us to just focus on the seven existing core markets for Shopee. However, we strongly believe that by investing prudently and sustainably in Shopee LATAM and Brazil in particular, we will generate significant value for our shareholders in the long run. While we do not underestimate the challenges of any new market expansion, I would also like to highlight that we have established track record seven times in the seven highly diverse and complex markets of Southeast Asia and Taiwan. When we started in each of those markets in 2015, we had significantly less resources, experience, and know-how and as a result fits a much more formidable competitive landscape than we currently do in our market expansion. Moreover, our growth trajectory in each existing core market has generally followed certain patterns whereby we are able to first manage strong user and order growth with improving efficiency and then achieve market leadership and profitability with scale. As I will share in greater detail when we discuss the segment results, Shopping Brazil has already achieved strong user traction, meaningful commercialization, and fast-increasing unique economics just two years after entering the market. This gives us further confidence in managing growth in this market. Achieving success in Brazil which is the sixth most popular country in the world, where the profitability model for marketplaces has also been lost to it, which allows Shopee to substantially expand its total addressable market, significantly enhance its competitiveness as a global e-commerce platform, and further diversify its businesses across the world. Secondly, Our technology and R&D capabilities are already a strong competitive model for us, and we aim to invest in deepening this advantage. Our skill, market leadership, and ability to leverage efficiencies across our entire ecosystem position us very well to continue to build core strengths in tech. We intend to ramp up investment in R&D to continually provide better and greater varieties of services, offerings, and features to our users, as well as to maximize our long-term growth potential. The results of some of these investments are already visible across our business in fast-evolving offerings and features. Such offerings and features range from UGP tools in free file user engagement features on Shopee, and FinTech products under C-Money to share technology platforms, improve security and risk management infrastructure, and enhance commercialization and financial underwriting systems. Just to name a few. These investments are both necessary for our current operations and highly important to our future growth. We strongly believe that our investment in technology will continue to serve as a key competitive mode across our ecosystem. Having discussed the near- to mid-term plans, I would also like to share our longer-term view about the future we are working very hard towards. As we look ahead, it is clear that consumer activities and experiences are increasingly converging online at the intersection of content, commerce, and community. It is also clear that agile, adaptable companies that have successfully tapped into active, engaged, and social communities will have a unique advantage as we move into this new era. Our three core businesses collectively offer immersive and interactive digital, social, and commercial experiences to large global communities, supported by our fast-growing digital financial infrastructure and deep online-offline operational capabilities. We therefore believe that our ecosystem comprises a complete consumer tech and innovation stack that is distinctively relevant to the new opportunities being presented. All the business investments and additions we are making today are intended to also factor position us to better serve the changing needs of fast-growing digital native generation. Let us now discuss the performance of our group and each of our businesses in the fourth quarter and the full year of 2021, and our outlook for 2022. At the group level, GAAP revenue increased 106 percent year-on-year to $3.2 billion, and the gross profit was $1.3 billion at 146 percent year-on-year for the fourth quarter. Meanwhile, for the full year of 2021, Gap revenue grew by 128% year-on-year to reach $10 billion, and the gross profit reached $3.9 billion, up 189% from 2020. The recent bookings for the full year is $4.6 billion, and the shortest gap revenue reached $5.1 billion. Both businesses performed in line with our recently-raised full-year guidance. For 2022, we currently expect bookings for digital entertainment to be between $2.9 billion and $3.1 billion. With many economies reopening further in the fourth quarter and into this year, we have observed some moderation in online activities and a fluctuation in user engagement. Due to unanticipated government actions, as we previously reported in the press release, Free Fire is currently unavailable in the Google Play and iOS app stores in India. Our guidance, therefore, takes into consideration these headwind factors. The midpoint of the guidance of $3 billion reflects our current expectation that our bookings for 2022 will be close to the level in 2020 while also considering the uncertainty in India. While we will continue to accept the longer-term trends as our market continues to evolve, we remain highly confident in the long-term prospects of our digital entertainment business. We expect gap revenue for e-commerce to be between $8.9 billion and $9.1 billion, representing 76% year-on-year growth at the midpoint of the guidance. This strong outlook, particularly against the very high phase of 2021, reflects our deeper engagement with consumers and small businesses across our market. vastly expanded e-commerce at the direct-goal market, and continued improvement in commercialization. I'm also excited to share our 2022 outlook for the digital financial services segment for the first time. C-Money made strong progress in 2021 as we continued to scale our mobile wallet services and launched more products and services which saw successful adoption across the ecosystem. We anticipate that this trend will continue and it seems to be a growth engine for us. We expect gas revenue for C-Money for this year to be between $1.1 billion and $1.3 billion, representing 165% year-on-year growth. at the midpoint of the guidance. Let's now turn to our businesses in more detail. Beginning with digital entertainment, in the fourth quarter, the rate of generated bookings of $1.1 billion, an increase of 7% year-on-year, as just the EBITDA was 56% of bookings at $603 million. Quarterly active users reached $654 million, up 7% from a year ago, and quarterly paying users were $77 million, an increase of 6% year-on-year. For the full year of 2021, Garena recorded bookings of $4.6 billion, up 44% year-on-year. Adjusted EBITDA was up 40%, compared to 2020 at $2.8 billion, representing 50% of bookings. During the fourth quarter, online game momentum moderated somewhat, giving the reopening trend in many of our markets. That said, it is worth emphasizing that Free Fire continues to have one of the largest and the most engaged user communities of any gaming history. According to data.ai, previously known as App Annie, for the third year in a row, Free Fire was the number one most downloaded mobile game globally in 2021. Free Fire also ranked second globally by average monthly active users for all mobile games on Google Play in the fourth quarter and the fourth year. Free Fire also returned its leadership as the highest-grossing mobile game across both iOS and Google Play in Southeast Asia and Latin America for both the fourth quarter and the full year, based on data.ai. We have maintained this leading position in Southeast Asia and Latin America for 10 consecutive quarters. Furthermore, Free Fire was the highest-grossing mobile battle royale game for the fourth consecutive quarter to the U.S., according to data.ai. We remain committed to investing in content you prefer to enhance user experience and uplift user engagement. For that, we have a comprehensive pipeline in place that includes partnerships, original and user-generated content, and esports activities. For example, this month, we have a crossover event with Assassin's Creed, one of the most popular global video game franchises. And we're also excited to have BTS, one of the world's most streamed artists worldwide, enter the universe of free fire as our global brand ambassador in the coming months. Additionally, we have seen strong engagement with user-generated content through modes like Cropland. I will recently introduce the map editor feature. Since launch, the most popular Cropland maps have subscribed by close to 40 million users so far. We will continue to encourage user-generated content by enhancing creator features and accessibility. We believe that a strong user reception to Cropland is a positive indicator of the initial success to encourage user participation in content creation and to build Free Fire into an increasingly open platform and is well aligned with major emerging industry trends such as the metaverse. Besides Free Fire's strong performance, the other games in our portfolio continue to perform well. For example, Arena of Valor has grown year-on-year in 2021 across both active users and bookings, despite being in its fifth year of operation. In 2022 and beyond, we expect to expand our portfolio with more games across diverse genres, such as multiplayer action, role-playing, sandbox, and casual games. Over the long term, Our priority remains sustaining and growing our existing major franchises while diversifying our game portfolio. Our strong and growing self-development capabilities will be a key component of this diversification effort. Our teams are working on multiple prototype games across different genres and stages. In dual course, we expect to bring more self-developed games to market. We also continue to actively acquire and invest in top talent and game IPs to further expand our capabilities across gender and geography. Meanwhile, we will keep growing our publishing relationships, leveraging our unique set of strengths across diverse global markets. We believe that this comprehensive approach to portfolio diversification will allow us to identify and execute around the largest game trends in the years to come. More importantly, we see games as one of the most engaging and immersive forms of entertainment, bringing communities from across the world together to play and interact. that will play a vital role in shaping the virtual experiences of users. And we are well-positioned to capture new opportunities that arise, giving our core competency in developing highly social, immersive, and interactive global game platforms with live operations at scale. Therefore, we are highly focused on maximizing the long-term potential of the arena. We see it as our key to potentially greater success in the future world, where activities, experiences, interactions, and consumption are increasingly virtual. Now let's turn to e-commerce. Shopee had a great year in 2021 as the business scaled and it strengthened its market position across both new and existing markets. For the quarter, Shopee's GAAP revenue grew 89% year-on-year to reach $1.6 billion. It recorded gross orders of $2 billion, an increase of 90% year-on-year, and the sole GMB growth 53% over the same period to reach $18.2 billion. The strong performance contributed to strong results for the full year of 2021, where Shopee achieved gap revenue of $5.1 billion, up 136% year-on-year. The full year's gross order totaled $6.1 billion, up 117% year-on-year, and GMB reached $62.5 billion, an increase of 77 percent from 2020. Monetization improved across all revenue components with gap revenue as a percentage of total GMB rising from 6.1 percent in 2020 to 8.2 percent in 2021. Our strong revenue growth shows how more merchants across the market trust the Shopee platform, and understand the value we deliver to them. Our leading market position is also evident in strong brand recognition and engagement from consumers on Shopee. It was the top e-commerce brand in YouGov's Best Global Brand 2021 and ranked sixth overall. In terms of engagement, our buyers shopped on Shopee over six times a month on average in the fourth quarter with initial monthly order frequency exceeding eight times. We are very pleased with the progress made around engaging our buyers and will continue to deliver more value to them. According to data.ai, Shopee ranked first in the shopping category globally by downloads in the fourth quarter and the full year. In the same category, for Google Play, Shopee ranked first globally by total time spent in apps and second by average monthly active users in the fourth quarter and the full year. During the same period, Shopee also continued to be the top-ranked app in a shocking category across both iOS and Google Play, in each of Southeast Asia and Taiwan, by average monthly active users and the total time spent in the app. In Indonesia, Shopee was ranked the number one app across the same matrix, with gross orders growing around 88% year-on-year during the fourth quarter. We have also scaled our presence in Brazil, serving the local sellers and the buyers. During the fourth quarter and the full year, Shopee was ranked first by downloads and the total time spending app, and second by average monthly active users for the Shopee category, according to data.ai. In the fourth quarter, Shopee Brazil recorded more than 140 million orders, growing at close to 400% year-on-year, and more than $70 million of gap revenue, up by around 626% year-on-year. We believe our offering provides a new and fresh online shopping experience that caters to the underserved segment of the Brazilian market. We see Brazil as a new growth market for us. and we are very excited about its growth prospects and the long-term value we can deliver to the ecosystem. Meanwhile, we continue to see efficiency gain as we scale. For shopping sites in Asia and Taiwan, the adjusted EBITDA loss per order before HQ cost allocation was 15 cents in the first quarter. an improvement from 21 cents in the fourth quarter of 2020. As shared earlier, we believe Shopee is on track to achieve positive adjusted EBITDA before HQ cost allocation in Southeast Asia and Taiwan by this year. Our newer market has also made progress with adjusted EBITDA loss per order before HQ cost allocation improving consistently in every quarter in 2021. Basically, in Brazil, our adjusted EBITDA loss per order before HQ cost allocation improved by more than 40% year-on-year during the fourth quarter to below $2. Across all our markets, our total adjusted EBITDA loss per order was 45 cents in the fourth quarter, an increase from 41 cents for the fourth quarter of 2020. This increase was attributable to the increasing contribution from the newer markets, which are at a much earlier stage of development. These markets are both growing faster and incurring higher adjusted EBITDA loss per order than Southeast Asia and Taiwan. For the full year, our total adjusted EBITDA loss per order across all markets was 42 cents, improving 9% compared to 2020. Over the past couple of years, we accelerated the growth of Shopee by quickly adapting and serving our buyers and sellers through the pandemic. We've also successfully strengthened our competitive position in Southeast Asia and Taiwan, as well as Brazil. Going forward, we expect Southeast Asia and Taiwan to keep growing healthily while we further strengthen our market leadership and execute towards profitability. In our new growth market, Brazil, we are focused on efficient and sustainable growth as we continue to scale and improve our service offerings to local sellers and buyers. Finally, Our additional financial services business, C-Money, performed well in the fourth quarter and the full year of 2021. In the fourth quarter, gas revenue was $198 million, up 711% year-on-year, driven by the growing adoption of our products and services. For the full year of 2021, our gap revenue grew 673% year-on-year to reach $470 million. Quarterly active users across our C-Money products and services reached 45.8 million, up 19% year-on-year. In the fourth quarter and full year 2021, we further expanded our digital financial service offerings across credit, in short-term and in digital bank services. For example, we launched C-Bank in Indonesia during the latter half of the year with strong traction in terms of user growth. We also obtained a bank license recently in the Philippines. In Indonesia, which has the most comprehensive set of products and services among our markets, over 20% of the quarterly active users have used the multiple C-Money products and support services in the first quarter. We view this as a highly positive indicator of the strong efficiencies we can leverage in bringing new digital financial service offerings to the large and fast-growing user base in our entire consumer internet ecosystem. In particular, We see Shopee and C-Money as both highly synergistic with one another and enjoy a strong flywheel effect in their scaling. The total payment volume of our mobile wallet was close to $5 billion in the fourth quarter, up 70% year-on-year, and $17.2 billion for the full year, up 120% year-on-year. In 2021, we grew our mobile wallet services across both on-platform and off-platform use cases, leveraging our growing ecosystem of products and services. This further drives a positive flywheel effect that allows us to benefit through higher growth and better efficiency as we drive adoption across both consumers and merchants. In the fourth quarter, We expanded our payment acceptance points to include key merchants like AirAsia in the Philippines, 7-Eleven in Malaysia, and Subway in Thailand. We believe there are many other large opportunities within our market that C-Money can address. We are looking forward to loading up more digital financial products and services in 2022. as we continue serving the underserved in our ecosystem with technology. At the same time, as the business grows with our communities adopting more financial services and products, we are also excited to see that C-Money is on track to achieve positive cash flow by next year. To conclude, I'm proud of the progress our team has made in 2021, both in scaling our businesses and serving our communities. We believe we are very well positioned to continue strengthening our market leadership while focusing on sustainable and efficient long-term growth. We are highly confident that the learning and the resilience we've built over the past years will only further enhance our ability to execute on our long-term strategies and continue to deliver significant value to our communities and stakeholders. I would also like to personally and on behalf of SEED, thank our stakeholders and friends for your continued long-term support. We hope to return your trust and investment in us. We continue strong execution and focus on the long-term success of the company. With that, I will invite Tony to discuss our financials.