Sea Limited
5/14/2024
Good morning and good evening to all and welcome to the SEAL Limited First 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 the star one again. For operator assistance throughout the call, please press star zero. And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Mr. MC Call to begin the conference. Please go ahead.
Hello, everyone, and welcome to SEAS 2024 First Quarter Earnings Conference Call. I'm MC, SEAS Investor Relations Director. On this call, we may make forward-looking statements which are inherently subject to risk and uncertainties and may not be realized in the future for various reasons, as stated in our press release. Also, this call includes the discussion of certain non-GAAP financial measures, such as adjusted EBITDA. We believe these measures can enhance our investors' understanding of the actual cash flows of our major businesses, when used as a complement to our GAAP disclosures. For a discussion of the use of non-GAAP financial measures and reconciliation with the closest GAAP measures, please refer to the section on non-GAAP financial measures in our press release. I have with me SEAS Chairman and Chief Executive Officer, Forrest Lee, President, Chris Fung, and Chief Financial Officer, Tony Ho. Our management will share strategy and business updates, operating highlights, and financial performance for the first quarter of 2024. This will be followed by a Q&A session in which we welcome any questions you have.
With that, let me turn the call over to Horace.
Hello everyone, and thank you for joining today's call. I'm pleased to share that we are kicking off 2024 with a strong quarter. All our three businesses have delivered solid growth with an improved profit profile. The macro environment in the past few years has been challenging. Many of you have been with us through this journey. Going through this period has made us leaner, fitter, and savvier. While we will always face new challenges, we are now much more confident of our ability to weather headwinds well and adapt quickly to changing environments. With that, let me take you through each business performance. Starting with e-commerce, we are pleased to report that Shopee delivered strong growth this quarter, achieving its highest-ever quarterly orders, GMV, and revenue. In the first quarter, on a year-on-year basis, gross order was up 57%, GMV was up 36%, and revenue was up 33%. Unit economics has also improved. Our overall adjusted EBITDA loss narrowed to $22 million, and our Asian market achieved a positive adjusted EBITDA of $11 million this quarter. Shopee's operational priorities for 2024 continue to be enhancing our price competitiveness, strengthening our content ecosystem, and improving service quality for our buyers. We are making good progress on all these fronts. On enhancing our price competitiveness, we continue to help sellers with upstream supply chain access to sell more easily on Shopee. On strengthening our content ecosystem, Shopee has become the largest live streaming e-commerce platform in Indonesia, based on average daily live streaming order in the first quarter. Live streaming e-commerce unit economics also continues to improve quarter-on-quarter. On improving service quality for buyers, our integrated logistics capability has become a key depreciating factor of our service quality. We have put a lot of hard work into XPX Express, and today it is one of the fastest and the most intensive logistics operators in our market.
greatly enhancing our customer experience.
In the first quarter, about 70% of XPX Express orders in Asia were delivered within three days of order placement. And because of the scale we have achieved in our market, we have managed to steadily reduce its cost. XPX Express's cost per order decreased by 15% for Asia and 23% for Brazil year-on-year in the first quarter. Having XPS Express in the Shopee ecosystem also allows us to efficiently roll out new features that benefit our buyers, such as the on-time guarantee program that we launched in Southeast Asia. This program provides a guaranteed delivery time for orders and this certainty is well appreciated by our buyers. Another initiative we implemented is having Shopee directly manage the return and refund process. This test resulted in a 30% year-on-year decrease in resolution time. In the first quarter, about 45% of cases were resolved within one day. So taken together, these efforts increase operational efficiency, improve customer experience, and reinforce Shopee's reputation as a reliable shopping destination. We will continue to push more on these operational priorities in the coming quarter and year. We expect these efforts to further depreciate Shopee from its competition and bring greater value to both our buyers and sellers.
Next, turning to digital financial services.
We are pleased to report that C-Money has continued its strong growth momentum and profitability into 2024 while maintaining prudent risk management. Our efforts on user acquisition have produced significant growth in both user numbers and the loan book size. In the first quarter, our digital financial services revenue grew 21% and adjusted EBITDA grew 50% year on year. Consumer and SME loan active users defined as those with loans outstanding by the end of the quarter increased 42% year-on-year to more than 18 million this quarter. As of March 31, 2024, our consumer and SME loans' principal outstanding reached $3.3 billion, up 29% year-on-year and up 5% quarter-on-quarter. Credit business is currently the primary driver of C-Money's revenue and profit growth. Our credit business benefits from Shopee's transaction volume and user base. In addition, we are also seeing strong growth in off-Shopee loans, which include cash loans and off-Shopee as pay later consumption loans. By the end of the first quarter, Off-Shopee loans accounted for over 40% of our total consumer and SME loans outstanding. Going forward, we see further upsets to improve our Off-Shopee penetration across different markets as we continue to grow. As we scale up our credit business, we continue to maintain a prudent approach to risk management. We generally begin by granting low credit limit, short tenure loans to users to build their credit history. For users with good track record, we gradually increase the credit limit, loan tenure, and the credit product offering. As we gain more users and more data, we continuously fine tune the risk model for each market. This allows us to grow our business while maintaining good risk control. Non-performing loans pass the due by more than 90 days as a percentage of total consumer and SME loans remain stable at 1.4%. We anticipate further growth for our digital financial services business throughout the year as we healthily grow our user base we will be able to offer a broader set of financial services to meet our users' needs in the future. Finally, turning to our digital entertainment business, we are pleased to share that Garena is back to positive growth, with bookings up 11% year-on-year. This was led by Free Fire's strong performance across markets. In the first quarter, Free Fire's average MAU increased 24% year-on-year. Our operational priorities for Free Fire will remain consistent in 2024, improving user acquisition, engagement, and retention. We continue to introduce play modes, redesign features, and launch new content all at a high frequency, allowing Free Fire to sustain high player engagement with its huge user base. In January, we launched Chaos, a major version update allowing players to vote for key events in the game setting. This interactive feature has made Chaos highly successful, and in April, We launched the Macadric version update, allowing players to team up to combat the mechanical monster in addition to the Euro PVP gameplay. Our constant efforts to understand the user's needs address key issues from a product perspective and frequently introduce fresh and exciting content are paying off. In its seventh year, Free Fire is still one of the largest mobile games in the world by user scale and remains highly effective in attracting new users. According to Sensor Tower, Free Fire was the most downloaded mobile game globally in the first quarter. Given this track record of being able to sustain and grow Free Fire's massive global user base, we are confident
of building Free Fire into an evergreen franchise. To conclude, we have a clear roadmap for profitable growth.
Our results in the first quarter have given us a strong start to 2024, and we are well on track to deliver our four-year guidance.
With that, I will invite Tony to discuss our financials.
Thank you, Forrest, and thanks to everyone for joining the call.
We'll see overall total gap revenue increased 23% year-on-year to $3.7 billion. This was primarily driven by GMB growth of our e-commerce business and the growth of our credit business. Our total adjusted EBITDA was $401 million in the first quarter of 2024, compared to an adjusted EBITDA of $507 million in the first quarter of 2023. On e-commerce, our first quarter gap revenue of $2.7 billion included gap marketplace revenue of $2.4 billion, up 33% year-on-year. and GAAP product revenue of $0.3 billion. Within GAAP marketplace revenue, core marketplace revenue, mainly consisting of transaction-based fees and advertising revenues, was $1.7 billion, up 47% year-on-year. Value-added services revenue, mainly consisting of revenues related to logistics services, was $0.7 billion.
up 8% year-on-year.
E-commerce adjusted EBITDA loss was $22 million in the first quarter of 2024, compared to an adjusted EBITDA of $208 million in the first quarter of 2023.
For our Asian markets, we had an adjusted EBITDA of $11 million during the quarter.
compared to an adjusted EBITDA of $276 million in the first quarter of 2023. In our other markets, the adjusted EBITDA loss was $33 million, narrowing meaningfully from last year, when losses were $68 million. Contribution margin loss per order in Brazil improved by nearly 88% year-on-year to reach negative 4 cents. Digital financial services gap revenue was up by 21% year on year to $499 million. Adjusted EBITDA was up by 50% year on year to $149 million. Digital entertainment bookings were $512 million. Gap revenue was $458 million. Adjusted EBITDA was $292 million. Returning to our consolidated numbers, we recognized a net non-operating loss of $18 million in the first quarter of 2024, compared to a net non-operating income of $23 million in the first quarter of 2023. we had a net income tax expense of $79 million in the first quarter of 2024, compared to net income tax expense of $62 million in the first quarter of 2023. As a result, net loss was $23 million in the first quarter of 2024, as compared to net income of $87 million in the first quarter of 2023.
Thank you, Forrest and Tony. We are now ready to open the call to questions. Operator?
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 1 on your telephone keypad. If you would like to withdraw your question, press the star 1 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 questions have been addressed. At this time, we will pause momentarily to assemble our roster. The first question comes from the line of Spang Veet of Goldman Sachs. Please go ahead.
Hi, good morning, good evening, management team, and congratulations for a solid set of results. Two questions from me. Number one, how do you derive confidence that you will be able to drive sustainable growth, especially once you start to lower down subsidies and move toward profitability? If your competitor decides to turn more aggressive, is there a way for you to properly react towards that? That's question number one. On number two, on gaming, given a very strong first quarter trends and results, how are you seeing trends toward second quarter and rest of the year? Can you provide color on what exactly you have done in order to derive growth and any thought on the run rate of margin going forward as well?
It's quick here. I will take the first question on the e-commerce side. I think for us, The most important thing is to work on the long-term competitive modes for e-commerce. I think to us, as I shared in the previous call, is number one, the cost to serve to make sure that we can serve the transactions to our buyers and sellers in a lower cost. Number two is the price competitiveness of the product to make sure that the price for the same product on our platform is always better than the other platforms. To do that, we have to work closely with the sellers, especially upper the value chains to ensure that we can offer the lower price to the buyers always. Number three is the quality of services. As far as I mentioned quite a few times that this is one of the key areas we're focusing on to improve not only the delivery services to our consumers, but also the return services and the customer service experiences, etc. I think all the three things will contribute to our long-term competitiveness for our e-commerce businesses. As long as we can do this well, we believe that we can deliver the better value to our buyers and sellers so we can grow better than the market that we operate in. At the same time, if you look at in the past few months, we do observe the overall market is in a stable, more stable situation, really, regarding to the competition point that you mentioned. And if the competitor does get more aggressive, I think we have to evaluate exactly, you know, what they did and how they did it. We will look at market by market, category by category, to evaluate what the best response we have. But all in all, in the long term, it's the three things I mentioned earlier. The long-term company mode will create value for our market to our consumers and our sellers. And we do believe that as long as we do well on that, we should be able to grow well regardless of what competitor does in the short term. I think that will bring us to a better position in the market over the years. Of course, there might be fluctuation in the short term, up and down, but it shouldn't change the long-term picture.
On the gaming side, we are very happy to see what we have achieved in the Q1. It's a pretty strong result and a strong trend. trends continued in Q2 so far. And in general, we are pretty optimistic about the rest of the year. I think as we shared in the last quarter, right, and we expected we're going to achieve, specifically for Free Fire, the double-digit growth, right, for the whole year. And I think the current growth and the trend is pretty much kind of a reflection of what not just what we have done in the past quarter, and it's actually reflected what we have done in the past two years, right? And we have gone through some challenges and faced some tremendous headwind, especially after COVID, right? But I think we always believe, okay, ambition and our aspiration is building Free Fire into an evergreen franchise. So with that kind of fundamental belief, and we didn't rush to monetize, think the gain weight may kind of continually go down until until it's completely gone. And we very, very much focus on all the user experience and try to fine-tune the product and with a very, very much user-centric approach. And in the past two years, we have conducted a lot of study trips and surveys and go to talk to the gamers ask them what they like and what they don't like about Briefwire, why they play and why they do not play. And the tremendous development effort is also spent on continually fine-tuning the game based on the feedback we've received. I think that that is kind of what we have seen now is an accumulated result through this effort. And another factor I want to mention is we kind of observed the whole market has gone through the post-COVID situation. Now, after almost two years of that period, and we've seen gamers really focus on the gameplay. As we shared before, during the COVID time, gamers play a lot of games, and there's not much other options for entertainment and they kind of feel burned out and that's why right after COVID and there we see there's a tremendous kind of like a trend right and the gamers start to focus on other entertainment and but after another two years I think like now the whole gamer community globally we see kind of that trend start coming back and the gamers start kind of a re-enjoined the gameplay specifically for Free Fire. And this is a trend that not just happens basically on a single market, and actually it happened across all the markets and we have the game operated. So in summary, I think based on what has happened in the market and what we have done for Free Fire, it's pretty much a very, very good product market speed. And I think we make Free Fire as an ideal product for gamers at the right timing when they have a strong appetite to enjoy the gameplay. So we will do our best to continue this trend and hopefully to continue to grow Free Fire, the user base, and also the monetization part as well for the rest of the year.
Your next question comes from the line of Alicia Yap of Citigroup. Please go ahead. Hi. Can you hear me okay?
Yeah.
Hello. Yeah. Okay. Hi. Good evening, management. Thanks for taking my questions. I have a question related to Shopee. Just wonder, were you willing to return to loss making to defend your share if the competition is indeed getting more aggressive? What other levers can you further pull to allow you to defend your share while also maintaining your profitability trend. And if we look at the commission take rate excluding the advertising, how much more room can we actually still raise the commission take rate across different countries? Thank you.
On the commission take rate, generally we still see that is a meaningful room to increase the commission take rate. although probably not as aggressive as last year in terms of increase. We also see there's a meaningful room on the ad take rate that we can look at. I think I shared this in the previous call as well, that we believe that our ad take rate is still slightly lower than it appears that we see in other markets, so there's a meaningful room there. And in terms of the competition, I think similar to the previous question that's been raised, For us, the most important thing is to focus on the long-term core competitiveness, the cost to serve, the price competitiveness, the service experience, and all those things will bring us a long-term advantage for us to outcompete the competitor in the market. In the short term, we have observed a more stable competition environment in the past few months, and if it changes, We will study it country by country, category by category, and evaluate what's the best way to respond to that.
Your next question comes from the line of Naveen Kelia from UBS. Please go ahead.
Hi. Good evening, and thank you for the opportunity. I actually had a couple of questions. The first one was, Just trying to understand the strength in the GMV for e-commerce. How much of that is attributable to seasonality given the movement that we have seen around LeBaron this year? And therefore, I guess in the context of that, I noticed that you haven't changed your GMV guidance of high single digit, sorry, high teams growth. I'm just wondering how you think about that. And I guess the second question is, you know, on the logistics strategy, clearly we are starting to see some results. If you could share some numbers on the percentage of orders that are delivered on your own platform and how do you see that number evolving in the medium to long term?
For the GMVs, as Horace said in the opening, in Q1 we did see very strong GMV growth and Part of that is contributing by the relative as this year we have both Lunar New Year and also the Ramadan falls into Q1 and the Ramadan holiday falls into Q2 versus the different patterns in the past few years. But we don't think that's the only reason. I think that's contributing part of reasons. Another part of reason is that all the execution work we've done in the past few quarters start to give us benefits in terms of the top-line growth and also the bottom-line improvement, in fact. It's coming ahead, actually. The exact split, it's probably hard to really split that in terms of the both, but I do emphasize on that it's not only the analogies, but also the hard work we've been doing are giving us the benefit on both the top-line and bottom-line. For logistics, in Asia, we do deliver more than half of our orders through our own SPX Express. In Brazil, we probably have more than 70% now, and we will be looking at increasing the percentage over time.
I think both will increase over time.
Your next question comes from the line of Divya Kothiyal of Morgan Stanley. Please go ahead.
Thank you very much. Good evening. My first question is on the e-commerce business. Could you talk about the drivers for the 23% quarter-on-quarter reduction that we've seen in sales and marketing expense for this segment, especially with regards to where we are in terms of unit economics for live streaming e-commerce versus marketplace? Yes. And also, if you can comment in which scenario do you think we can get back to the profitability levels of over 1% of GMB that we were able to achieve in the beginning of last year? My second question is on the DFS business. The marketing spends have remained elevated in this quarter. Could you talk about what parts of fee money are these being allocated to and what kind of traction you're seeing? And would it be fair to say that this segment's top-line growth may actually deviate from the e-commerce growth going forward as you build new cases? Thanks.