Sea Limited

Good morning and good evening. Welcome to the Sea Limited Second Quarter 2022 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'd now like to turn the conference over to Ms. Minju Song. Please go ahead.

Thank you, Jason. And hello, everyone, and welcome to SEED's 2022 Second Quarter Earnings Conference Call. I'm Minju Song from SEED's 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 the discussion of certain non-GAAP financial measures, such as adjusted EBITDA and net loss, excluding share-based compensation and impairment of goodwill. We believe these measures can enact 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 debt measures, please refer to the section on non-GAAP financial measures in our press release. I have with me these Chairman and Group Chief Executive Officer, Horace Lee, Group Chief Financial Officer, Tony Ho, and Group Chief Corporate Officer, Andrew Eng. Our management will share strategy and business updates, operating highlights, and financial performance for the second quarter of 2022. 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.

Hello, everyone, and thank you all for joining us today. I'm going to start with an update on our plan to further focus on efficiency and strengthening our ecosystem for long-term profitability and competitiveness. I will also share a few highlights across our businesses as we make steady progress towards these objectives. During the pandemic lockdown, we rapidly scaled our businesses to answer to the fast-rising market demand for online consumption and services. As a result, we significantly expanded our businesses and the total addressable markets and strengthened our market leadership. while improving growth efficiency. We were able to achieve this result by focusing on doing the right thing at the right time in setting our direction and being agile and adaptable in our execution. Now, we are in an environment of increased micro uncertainty with rising inflation, rising interest rates, local currency depreciations against the U.S. dollar, and ongoing reopening trends. In this environment, being agile and adaptable is even more crucial to the long-term success of our business. We believe the right thing to do at this unprecedented time is to focus even more on self-sufficiency, long-term profitability, and the defensibility in our business operations. Our results for the second quarter demonstrate the early success of these efforts. Because of our strong execution in the quarter, Shopee's unique economics improved significantly, driven by efficiency gains across our markets. In particular, adjusted EBITDA loss per order before allocation of HQ costs in our Asian markets combined was less than one cent. and we are on track to achieving positive adjusted EBITDA before HQ cost allocation in this region. At the same time, Shopee continued to grow at healthy rates, despite the tough year-over-year comparison, with gap revenue up 61% year-on-year, or 56% year-on-year, adjusting for currency fluctuations. For Garena, quarterly active users were stable quarter-on-quarter. This positive outcome was the result of our efforts around user retention to serve our large game community through more engaging experiences. We will continue to focus on user engagement around our existing franchises, especially Free Fire. We are encouraged by Free Fire retaining its top-ranking position as the highest-grossing mobile game in Southeast Asia and Latin America during the quarter based on data.ai. Synergies between Shopee and C-Money also expanded as we continued to cross-sell more financial products and services to our underserved user base across more markets. Close to 40% of Shopee's quarterly active buyers in Southeast Asia use the C-Money products for services during the quarter. C-Money's revenue has enjoyed strong growth, and its adjusted EBITDA loss has also continued to narrow during the quarter. With the solid performance across our businesses, group gap revenue was 2.9 billion dollars. up 29% year-on-year in the second quarter, while profit grew 17% from last year to reach $1.1 billion for the quarter. Let's now discuss each business segment, beginning with e-commerce. Shopee continues to appeal to more buyers and sellers across our market, as evidenced by continued leadership in active user and engagement metrics, as well as record operational and financial metrics. In the second quarter, Shopee's GAAP revenue grew 51% year-on-year to reach $1.7 billion, driven by GAAP marketplace revenue growing close to 62% over the same period. Course orders were $2 billion, up 42 percent from last year, and the GMV grew 27 percent year-on-year to reach $19 billion. The currency fluctuations negatively impacted both GAAP revenue and the GMV year-on-year growth rate by more than four percentage points. We also drove further improvements in monetization during the quarter as we delivered more value to our sellers. across the board, sellers are investing more with us to pursue growth on our platform. These efforts continue to translate into positive financial results. For a period, GAAP marketplace revenue as a percentage of total GMV increased both year on year and quarter on quarter to reach 7.7%. The increase was mainly driven by increases from high margin value streams, like transaction-based fees and advertising, which underscores the success of our platform in driving greater economics for our sellers. As a result, there was strong fall through to the bottom line with the better monetization contributing directly towards better profitability. In the second quarter, Gross profits for Shopee grew by close to 85% year-on-year, and the gross margins continued to improve sequentially from the last quarter. Shopee's overall adjusted EBITDA loss also improved sequentially by 13% quarter-on-quarter. Moreover, in Southeast Asia and Taiwan, adjusted EBITDA loss for order before allocation of HQ costs for the quarter was less than 1%. which shows that we are well on track toward achieving positive adjusted EBITDA before HQ cost allocation in our Asian market combined. In Brazil, Shopee is also driving greater efficiencies while growing revenue rapidly. The adjusted EBITDA loss for order before allocation of HQ cost there was $1.42, improving quarter on quarter. At the same time, gap revenue in the market grew more than 270% year-on-year. We are also optimizing spend around our HQ costs. During the quarter, total HQ costs for Shopee increased by $28 million quarter-on-quarter, driven by an increase in research and development staff and server hosting costs. As we expanded our technological capabilities, and service offerings. This represents a deceleration in cost increases compared to the last quarter. While we will continue to invest to enhance our products, we have been able to strengthen our team significantly in the past period and plan to be prudent in further expanding the team. Meanwhile, Shopee continued to achieve top rankings globally and in our region. In the second quarter, Shopee ranked first in the shopping category globally by total time spending app and second by average monthly active users on Google Play, according to data.ai. We also remained as the top ranked app in the shopping category by average monthly active users and the total time spending app in each of Southeast Asia, Indonesia, and Taiwan. In Brazil, we further strengthened our leading position with Shopee ranking first by average monthly active users in the second quarter, while continuing to rank first by total time spent in app for the shopping category during the quarter. Besides engaging consumers, We are also working closely to support our sellers. We continue to empower our merchants through education and training, in addition to providing them better tools and services. This remains a key area of focus for us. Across the Shopee seller platform, resources including our Shopee University and the master classes have been especially helpful to the local entrepreneurs and MSMEs. We are also growing our brand partners on Shopee more through closer collaboration to enable greater engagement with their customers. Staying close to and collaborating with our sellers has enabled Shopee to grow and thrive together with them. For example, in Brazil, we estimate that Shopee has become the main source of income for over 300,000 local entrepreneurs and has brought 430,000 new digital entrepreneurs to e-commerce. This has been partly driven by our investment behind training our Brazilian sellers with more than 60,000 sellers attending classes at the Shopee Education Center. Now, I would like to discuss our decision to suspend the full year revenue guidance for Shopee, driven by the highly volatile and unpredictable micro environment. As shared earlier, while we think the right thing to do during the pandemic lockdown was to prioritize growth with improving efficiency, we think the right thing to do in this time of continuing heightened micro volatility is to prioritize efficiency and self-sufficiency. As we have always maintained, we think about managing our businesses as more like marathons rather than sprints. Adjusting our pace to match the moment is therefore highly important. Our ability to navigate changing times will help us win this long race ultimately. Given our strategic shift coupled with the various micro-factors that are hard to predict, as mentioned before. We believe this is prudent to maximize our focus on efficiency across our business, rather than over-committing, which we believe would be ill-advised at this time of uncertainty. As such, we are suspending the full-year guidance for Shopee, which we last provided in May. Even though we have stopped providing guidance, our focus for the rest of the year remains very clear, which is to continue to improve efficiency by both deepening monetization and optimizing our cost structure. We will be more tightly managing our operating expenses, such as marketing costs and the logistics costs, while also gradually increasing monetization across various income streams with a focus on the high margin ones. More importantly, I want to emphasize that the current micro volatility does not affect our highly positive long-term outlook for our region. Current micro uncertainties do not change the fact that our market remains some of the areas with the highest long-term growth potential in the world. with positive demographic features and deepening digitalization. The current macro uncertainties also do not change our demonstrated track record in capturing some of the largest opportunities across the consumer internet industry in our market. We believe our strong market leadership position will continue to allow us to disproportionately benefit from the long-term industry growth. and our strategic positions and operational focuses today are all directed at the best positioning us to capture this long-term opportunity. Turning to digital entertainment. In the second quarter, Garena's gap revenue was $900 million, and the bookings were $717 million. Free Fire remained the most downloaded mobile game globally during the second quarter based on data.ai. It was also the highest-grossing mobile game in Southeast Asia and Latin America during the quarter, maintaining this leading position for 12 consecutive quarters. It is encouraging to see that Free Fire continues to perform well within the mobile game industry. Moreover, Free Fire shows some early signs of active user stabilization with quarterly active users reaching 619 million compared to 616 million in the first quarter. We continue to focus on investing in user engagement around Free Fire franchise and platform, ensuring a consistent cycle of fresh and new content for our community. As an example, we celebrated Ramadan with our local communities in the second quarter. During Ramadan, we worked with local celebrities, introduced more themed items, and hosted a number of community gatherings. These highly localized efforts allowed us to better engage our local users and enjoy strong monetization during the Ramadan season. New content we introduced in the form of game modes have also helped to diversify the experiences that our gamers can enjoy on the Free Fire platform. Alongside the Battle Royale mode, we are increasingly seeing solid long-lasting retention and engagement around other game modes, like Clash Squad, which is a 4v4 game mode, and Lone Wolf, which is a 1v1 or 2v2 game mode. Besides being highly engaging and social experiences, these game modes are also shorter and more fast-paced, which are preferred by some gamers, especially as time available for entertainment is more fragmented with reopening. While short-term gaming industry trends remain relatively uncertain due to reopening trends as well as the potential impact from micro volatility, We are highly confident in the long-term structural tailwind of the segment. We expect this to be even more apparent across our market where we are well positioned and the growth runway for digital entertainment is substantial. We also expect this to support the long-term sustained lifespan of our existing franchises and the platforms. Lastly, our digital financial services business. In the second quarter, the synergies between both Shopee and C-Money continued to expand, driving revenue and value across the ecosystem. C-Money's gap revenue for the quarter was $279 million, an increase of 214% year on year. Quarterly active users across our C-Money products and services reached close to 53 million, growing 53% from last year. Our mobile wallet total payment volume also grew healthily at 36% year-on-year to reach $5.7 billion during the quarter. With the stronger adoption of our growing portfolio of financial products and services across our Shopee and C-Money ecosystem, we are driving greater efficiency across platforms. As such, C-Money's adjusted EBITDA loss continue to improve quarter on quarter. A significant population in our market is still underserved around digital financial products and services, and we are well positioned with our strong ecosystem to serve the largest segment of our market through the direct relationships and the insights we have accrued. At the same time, we are working closely with our partners and other local stakeholders to build a healthy and sustainable environment for the long term. In closing, As we navigate an increasingly uncertain market environment, the need for us to be more thoughtful, prudent, and disciplined has only grown. While we have ample resources to achieve self-sufficiency, as a business, we are nevertheless rapidly prioritizing profitability and cash flow management. In this current volatile environment, we believe our focus on these areas will be key in setting the business in touch for long-term sustained success. We are also confident that our ability to execute to achieve our objectives during this period will be further supported by our skill, leadership positions, and proven business models. We have articulated clear commitments and are well on track to achieving them. We also continue to be highly optimistic about the long-term potential of the opportunities and the market we are addressing. With that, I will invite Tony to discuss our financials.