Hello, and welcome to the Sea Limited First Quarter 2019 Results Conference Call [Operator Instructions]. Please note, this event is being recorded. And now I'll turn the call over to your host today, Yanjun Wang, Group Chief Corporate Officer. Please go ahead, ma'am.

Thank you. Good morning, and good evening, everyone, and welcome to Sea's 2019 First Quarter Earnings Conference Call. I am Yanjun Wang, Sea's Group Chief Corporate Officer and General Counsel. 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 discussions of certain non-GAAP financial measures such as adjusted revenue and 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 on 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 here with me Sea's Chairman and Group Chief Executive Officer, Forrest Li; and Group Chief Financial Officer, Tony Hou. Forrest and Tony will share strategy and business updates, operating highlights and financial performance for the quarter. This will be followed by a Q&A session in which we welcome any questions you may have. With that, let me turn the call over to Forrest.

Thanks, Yanjun. Hello, everyone, and thank you as always for joining today's call. Building on our very strong performance in 2018, we have kicked off 2019 on an even stronger note with very healthy growth across our businesses. For Sea as a whole, our adjusted revenue for the quarter was $578.8 million, almost triple that of the same quarter last year. It is mainly attributable to strong revenue growth of both our digital entertainment and the e-commerce businesses. Moreover, we saw significant improvement on the bottom line this quarter. Total adjusted EBITDA was negative $32 million which improved from negative $144.7 million for the first quarter of 2018 and the negative $203.6 million for the fourth quarter of 2018. We believe this is a strong indication of the potential profitability of our group businesses. Let's look first at Garena. Garena had a standout quarter. Adjusted revenue for the digital entertainment business grew 159% year-on-year and 70% quarter-on-quarter to $393.3 million. Adjusted EBITDA increased 311% year-on-year and 115% quarter-on-quarter to $225.8 million. In addition, adjusted EBITDA margin increased to 57.4% from 37.7% for the first quarter of 2018 and 45.5% for the fourth quarter of 2018. The strong results are mainly attributable to the following: First, strong user growth. The number of quarterly active users reached 271.6 million, an increase of 114.4% year-on-year and 25.6% quarter-on-quarter. Second, deepening paying user penetration with sustained strong average revenue per paying user. Our pay ratio reached 7.6% for the first quarter compared to 5.7% for the same period a year ago and 5.5% for the previous quarter. Third, continued outstanding operating and financial performance of our first self-developed game, Free Fire. It contributed significantly to the margin improvement as no developer royalty is payable by us for the title. We are particularly pleased to…

Thank you, Forrest, and thanks to everyone for joining the call. We have included detailed quarterly financial schedules together with corresponding management analysis in today's press release. So I will focus my comments on the key financial metrics. For Sea overall, our first quarter total adjusted revenue was $578.8 million, an increase of 194% year-on-year and 49% quarter-on-quarter. This was mainly driven by the growth of our digital entertainment business especially our self-developed game, Free Fire, and our continuous monetization efforts in our e-commerce business in the past quarters. Digital entertainment adjusted revenue was $393.3 million, an increase of 169% year-on-year and 70% quarter-on-quarter. The growth was primarily driven by the enlarged paying user base as we continue to improve the monetization of our games, especially Free Fire. Digital entertainment adjusted EBITDA was $225.8 million, an increase of 311% year-on-year and 115% quarter-on-quarter. Thanks to the strong top line growth and our self-developed game accounting for an increased share of revenue. The increase was also partially due to the improved operating efficiencies as shown by the lower sales and marketing expenses as well as general and administrative expenses as a percentage of adjusted revenue. E-commerce adjusted revenue was $149.2 million, up 342% year-on-year and 18% quarter-on-quarter. Of this $149.2 million in adjusted revenue, marketplace revenue was $102 million, up 363% year-on-year and 16% quarter-on-quarter, while product revenue was $47.2 million, up 304% year-on-year and 20% quarter-on-quarter. As highlighted by Forrest earlier, e-commerce adjusted EBITDA loss narrowed to $235.3 million this quarter. We will continue driving high-quality growth by serving users' needs better and focusing on our operational efficiencies. Digital financial services adjusted revenue was $2.8 million, a decrease of 28% year-on-year from $3.9 million in the first quarter of 2018 as we focused our efforts on strengthening the infrastructure to support our existing platforms. Adjusted EBITDA loss was $11.9 million in the first quarter of 2019 compared to a loss of $8.6 million in the same period of 2018. This was primarily due to our continued efforts to integrate our AirPay and Shopee platforms. Returning to our consolidated numbers. We recognized a net nonoperating loss of $442.8 million in the first quarter of 2019. This was primarily due to the fair value loss of $436.1 million on the 2017 convertible notes as our share price during the quarter significantly exceeded the conversion prices of these notes. We had a net income tax expense of $7.2 million in the first quarter of 2019 which was primarily due to withholding tax and corporate income tax recognized in our digital entertainment segment. Finally, net loss excluding share-based compensation and change in fair value of the 2017 convertible notes was $237.3 million in the first quarter of 2019 as compared to $186.7 million for same period in 2018. With that, let me turn the call back to Yanjun.

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

[Operator Instructions]. And the first question comes from Miang Chuen Koh with Goldman Sachs.

Congratulations on this strong set of numbers. A few questions for me. Firstly, can you give us a sense of Free Fire revenues for this quarter? And how are you increasing monetization for this game since paid version obviously went up significantly quarter-on-quarter? Secondly, Free Fire downloads appears to be stabilizing last few months. Will we also expect revenues from Free Fire to be increasing stable in coming quarters as well versus what we've seen in first Q.? And besides Call of Duty, will it be possible to give a bit more color on the pipeline of new games for the remainder of this year? Thirdly, e-commerce, the cost of sales went up significantly Q-o-Q. Can we get more color on the cost components that drove up this increase? And lastly for e-commerce as well, cash burn trends in coming quarters, if you could give some guidance in terms of what to expect. Should we be thinking it would -- it should continuously come down Q-on-Q or should we look at it more of a Y-o-Y? Because I believe previous guidance is that we should see e-commerce cash burn being lowered this year versus last year. Are we still, I guess, on track?

Sure. Thanks for -- let me talk about the Free Fire first, and we're happy with the Free Fire result and the -- as you can tell from our -- this quarter's result and we see significant improvement in terms of the monetization of the games. I think -- well, I think this is -- mainly reflects our efforts to continually finding better ways to engage our gamers and to understand them -- and understand what they want. I think there is a -- across the quarter, we have different ways to try out the monetization mechanisms and some may work very, very well, some may not work very, very well so -- but overall, we feel very confident. And we kind of already get a strong sense, okay, what is ideal way to monetize this game -- and but at the same time, I think -- we believe we are very conscious to make sure whatever the monetization we have, we'll make sure the community is healthy and that the engagement level with the gamers is high and the gamer satisfaction is high. So in a way, we are very happy to see our monetization is improving and at the same time the engagement level of the gamers is improving as well. In terms of the user growth and -- actually, we see across the market, we still see very strong growth of our new users, right? And as we talk about in the -- just now, right, and for the recent quarter, we had more than 50 million daily active users. That is still significant increase from the previous quarter. And specifically, we see some accelerating growth for some new market which we may not really focused on previously. So as we talked about in the previous earning…

I'll take the cost of e-commerce question. So the major cost elements are the cost of logistic services, bank transaction fees, server and hosting expenses, staff cost as well as some warehousing costs. And the cost is relatively stable compared to last quarter despite some slight increase which is mainly due to the server and hosting and staff expenses. And because our monetization improved this quarter, our gross profit actually improved quite significantly compared to last quarter.

Right, and in terms of the Shopee overall cash burn, while we don't give guidance on this, as you can see that we see a very strong quarter in terms of the bottom line as well, not only sales and marketing as a percentage of G&P but in absolute dollar terms also dropped quarter-on-quarter. Obviously, there is seasonality to e-commerce, and we do time our marketing spend in accordance to seasonality to achieve maximum efficiency. In terms of the sales and marketing spend going forward, there could be fluctuations as we capture growth opportunities in the market. We believe e-commerce is still at a very nascent stage in our region. And we spend very well to gain an outsized benefit of the fast growth of the e-commerce as a whole in the region given our market leadership position. And therefore, while we continue to aim to grow very efficiently and invest prudently on long-term sustained growth, we won't be able to guide on the exact dollar spend quarter-on-quarter. We want to retain some flexibility. For example, in terms of marketing spend, most recently, we announced the appointment of Shopee as a title sponsor of Indonesian premium football league, Liga 1. And it is -- as part of the sponsorship package, we have launched a new logo and branding based on Shopee's orange -- distinctive orange color. And this sponsorship has allowed Shopee to reach the general public across the market, especially our targets of young consumers. So these are one of examples of good marketing opportunities that we might take advantage of from time to time as we consolidate our leadership positions across the market and further promote the brand awareness. So on that front, while we are very encouraged by the results and we continue to want to grow very efficiently, we do think there could be fluctuations in the overall brand. But on the other hand, in terms of group bottom line, while we don't give any guidance, we think reasonably likely will be better than the current market consensus.

And the next question comes from John Blackledge with Cowen and Company.

Just a couple of questions on the digital entertainment side. With the big increase in margins, what's a good way to think about the margin profile for digital entertainment kind of over time, just given expected growth of self-developed games? And then on Shopee, you seem to imply that market share gains are rising, obviously with the great results again this quarter. Can you just talk about how Shopee's doing relative to competitors? And any general color on the competitive environment within the e-commerce in Southeast Asia.

Sure. Thanks for the question. I would talk about the game EBITDA part and then Yanjun will comment on the Shopee questions. And for Garena EBITDA margin trend, so our -- as we talked about during the call just now, our adjusted EBITDA margin in this quarter was very high, above what we believe is overall industry average. So our EBITDA margin is mainly affected by the mix of revenue contributions from self-developed games and licensed games, spending on sales and marketing and the R&D among other things. So as mentioned before, our strategies for the game business are continuing to bring top-quality content to our users, whether it is self-developed or licensed, to further strengthen our game development capability and to extend globally beyond our core markets. So we may continue to introduce third-party IP, so we may also spend more on marketing as we bring new games to market, further growing our developer team and expanding into market outside our core region. So as we successfully executed our growth strategies, our adjusted EBITDA margin for the game business could fluctuate.

In terms of the competitive environment of Shopee, we continue to see Shopee extend its leadership position especially in the core categories and key markets. As we mentioned before, we believe Shopee is the market leader in all of the markets with perhaps the exception of Singapore which is a relatively smaller market that we haven't been strongly focused on yet. And in terms of the market leadership position, we think we are multiple times larger than our next competitor in Taiwan, for example. And as we mentioned in the earnings release that for Q1 2019, we already achieved adjusted EBITDA positive before HQ cost allocation in Taiwan. And this is an example of where we believe that we have successfully monetized on the platform and are continuing to do so as we achieve the strong leadership position to further grow the platform environment. We believe the positive dynamics will play out in all the other markets that we're currently operating in. For example, in the -- our largest market, Indonesia, we recorded a daily order of 0.9 million again this quarter -- sorry, Q1, which is again extending our leadership further in the market. And in other markets, for example, now we also believe we are about 2x larger than our next competitor. In Thailand and Philippines and Malaysia, we also become the market leader. So in all these markets, as we gradually further solidify our leadership position, we believe the positive dynamics that we are seeing in Taiwan will start to generally play out in those other markets as well.

And the next question comes from Conrad Werner with Macquarie.

Could I just maybe also see, when you talk about the market leadership, what metric are you generally homing in on? Is it orders? Is it the GMV itself? When you talk about being 2x the size of the next competitor, in Vietnam, for example, what metric are you generally looking at? That's the first question. And then the second question on the e-commerce cost. In the previous quarter, you had talked about the shipping subsidies declining in absolute terms in the fourth quarter. Has that trend continued in the first quarter? Are we getting away from shipping subsidies as kind of one of your key marketing tools in favor of other forms of expenditure? And could you maybe provide some color on that? And then just maybe on Call of Duty itself, what quarter do you expect that to be launched? Presumably, it may not be launched in all markets at once. But when does that kind of come out in a few markets, I guess? You talked about it a few months before, but is it kind of Q2, Q3, Q4?

Sure. Okay. So let me start. Yanjun, please feel free to add on. And for Call of Duty, we may -- based on the -- we are still working with Tencent, Activision to figure out what is the best time to launch it. But looking at the current schedule, it probably will be in the late Q2 or early Q3. So that's the time line we are looking at. So we want to capture the opportunity during -- for the summer break of schools. And so for Shopee, for e-commerce, the key metrics we look at is -- actually, it's quite straightforward, it's the orders and the GMV. And on top of that, and we are also specifically looking at this category by category. So we're very, very focused on the key categories. We have been really, really pushed on so like fashion, like home and living and health and beauty. So this is the key categories. I think so in those key categories and our leadership position is even stronger. And beyond that, I think in terms of the operations, and we do care about in terms of because we're mainly -- we focus on the mobile users, right? So we're very focused on the -- our traffic and engagement on our Shopee mobile app. So in that sense, the daily active users, monthly active users and the time spend are the key metrics we look at.

Right. In terms of shipping subsidies, yes, it's declined quarter-on-quarter in Q1 again. But -- overall, Q1 is a lower season so I wouldn't take that to be a promise that it will continue to always decline Q-on-Q. On thinking about shipping subsidy, I think it's important to highlight that it continues to be an effective marketing message. In fact, we have less than a quarter of people getting free shipping in one of our largest markets, while the market take the free shipping to be a very strong marketing message from Shopee. So we are spending very efficiently on that. And overall, it's more of a new user acquisition tool as our social sellers bring their followers on to our platform to encourage them to place orders through Shopee as opposed to some other social websites. This is a strong message that the buyers get a direct benefit that they can easily understand. So overall, we think the shopping subsidies tend to stabilize in the longer run. But there might be fluctuations in the short to medium term.

And I'm going to be rude and just maybe ask one more. Could you maybe talk a bit about how much digital entertainment revenue came outside Southeast Asia? It's a metric you provided over the last two quarters. Do you have an update? I think it was 28% in the fourth quarter. What about first quarter 2019?

Yes. We didn't specifically discuss that number, but suffice to say that it continued to grow. And as far as also mentioned earlier, we are very focused on growing our markets outside of Southeast Asia, now given our self-development capabilities with Free Fire having reached global audience and being one of the largest battle royale games as well as mobile games globally. We do hope to expand -- further expand into the emerging markets beyond our core markets as well as the other market that we currently see very strong growth. I think it's -- in terms of the specific numbers, it's already more than 1/3. So we are seeing very strong growth on that front as well.

And the next question comes from Nelson Cheung with Citi.

Congratulations on solid results. I have a question on e-commerce. Given that -- we noticed that the e-commerce monetization rate is very high at 4.2% in first quarter 2019, we would like to ask whether this monetization rate, is it normalized or is it sustainable monetization rate for e-commerce in long run? And can management elaborate more on what actually contribute to the strong improvement in terms of monetization rate? And maybe can management can provide more color in terms of ranking by monetization contribution and what's the growth rate by each type of e-commerce revenue stream? And a quick question on Speed Drifters, can management provide some more color on revenue contribution of Speed Drifters? And a comment on life cycle of this game will be great as well.

Sure. In terms of the monetization rate in the longer run, obviously, our e-commerce is still at a very early stage. It's part of the digital economy of our region, and we believe it's the biggest opportunity actually in that part. We believe in the longer run, we hope to see a monetization take rate that is close to our global peers for marketplace e-commerce, although, of course, there is a path to get there and we see very positive directions we are moving in this front. And in terms of overall contribution from the different streams of revenue, we see positive trends in every type of monetization avenue we have. Especially on the marketplace front, we see very encouraging signs in terms of the uptick in transaction-based fees as well as advertising and VAS on all fronts. More recently, as we gained stronger market leadership positions across the region and as we focused on further promoting the healthy growth of the ecosystem for our e-commerce platform, we have rolled out more transaction-based fees across platforms and to help the sellers grow better and distinguish the better seller and bigger seller from the crowd, so that they are more incentivized to serve the buyers better. By monetization, we not only just focus on getting money from them. We are very much focused on providing them better, more services that they would desire. On that front, we are very confident of our ability to keep raising the monetization rate over time. We don't specifically disclose each stream of monetization, our strategies quarter-on-quarter for competitive reasons. But as mentioned earlier, we think the marketplace take rate contributes quite significantly to the overall take rate increase in this quarter. In terms of Speed Drifters, it is very successfully launched in Q1 in most of our markets. And we see very strong performance in terms both of user adoption, paid user ratio as well as monetization overall. And it did contribute meaningfully to the uptick in our adjusted revenue. And we think it's one of the Top 4 games in our portfolio now.

And the next question comes from Mark Goodridge with Morgan Stanley.

I just have two questions. One on Call of Duty, I'd just ask, can you just give us a bit of strategy how you guys are going to manage any potential cannibalization of Free Fire when that game launches? And then secondly just on e-commerce, we saw you introduce some monetization late Q4, which obviously seen the results here in Q1. But specifically, could you tell us what has been the reaction of your competitors in Thailand and Indonesia and Vietnam where you've introduced the monetization? Have we seen the competitors follow suit and introduce exactly the same measures in those markets?

In terms of Call of Duty, obviously, it is a very well-known franchise, very big IP with its core followers in the West, and we are very excited about bringing into our region. We believe the experience -- although, we are still working on the -- with the developer about the exact content that's tailored for our region, the overall experience will be more of a classic FPS, action-based kind of game. I think that differentiates itself from Free Fire which is a more hybrid, battle royale games with fantasy elements, imaginative content. On that front, we are not too worried about cannibalization. While we take on any new content, we would carefully analyze its interaction with our existing portfolio. So we're, of course, very careful about that as well. In terms of monetization and competitive behavior of our competitors, so we don't comment on our competitors or other players in the market. We think overall, our monetization ability is more affected, mostly dependent on our ability to serve our sellers as well as returns, the value add the sellers derive from the platform as opposed to what the competitors are doing. So we are not really that much influenced by their behavior.

We've clearly seen that Lazada have followed. They've introduced commissions similar to your commissions in Vietnam that -- are you able to make a comment to say whether or not they've done the same thing in Indonesia?

I think in Lazada, we haven't seen they have charged a higher commission in Indonesia. But again, I think they do -- in the historical periods, our -- other players have done different things. They may or may not charge commission. They may increase or decrease commissions as we continue to grow and extend our market leadership positions. And so there hasn't really been any great impact on our business or how we think about our own monetization strategies.

And the last question comes from Varun Ahuja with Crédit Suisse.

Congrats on a good set of numbers. First on online games, a few questions. On Free Fire, can you comment how do you see this game life? Because obviously this game has done really well. Looks like 2019 will be strong for you because of Free Fire. But beyond that, generally when you have discussions, how -- what do you see of this battle royale genre which is going still strong? How much as an investor we should view this game life over the 2 to 3 years period? Secondly on self-developed, can you give -- as the last two few quarters, you have given how much of revenue is being contributed by self-developed game and what percentage of revenue came from mobile for this quarter. Thirdly, if you can elaborate any other self-developed games that you're looking at in terms of genre in order to increase that component, that will be helpful. And lastly, as you briefly mentioned, you may look at Latin American markets, so how should we look at this space? Are you in any advanced stages of discussions? Or is it a 12 to 18 months where you're away from looking at that space? Are you looking at any -- have you started making some investments? Those colors will be helpful. On e-commerce, I know you don't break it up, the revenue, by various market base, by various components, but is it fair enough to say that, that value-added services still remains the largest contribution of realization rate or take rate purely from a marketplace perspective, excluding the product revenue? Those will be helpful.

Sure. Let me start and, Tony and Yanjun, feel free to add on. And for Free Fire, actually we are pretty happy about what we have seen in terms of the trend. And to be honest, because this is a very new genre and there is not -- for the industry, there is not much historical data we can look at and specific to this genre in terms of the life cycle, so several quarters ago, we may share the similar -- we have the similar questions you asked. But looking at the trend now, we are pretty happy and we feel very optimistic that the reason we see that the gamers' engagement level is increasing, right, in terms of how often they come to play the game and how much, right, I mean in terms of average gameplay session, how long they play the game. And we believe, we see that still there's a lot of -- so we ask them about the genre specifically on Free Fire as well in the gamer community. And as I mentioned just now, we even see accelerating user growth in certain new markets. So we do feel there is still a -- we do still feel there is a long way to go, and -- for Free Fire. And specifically I think also for the battle royale, for the genre itself, we believe this genre is just at their starting page, right, and compared to MMORPG game, compared to like mobile or FPS games, so this genre is just at the very beginning. So the genre itself will continually evolve, and we believe this is -- will going to provide huge opportunities for older game studios players, specifically if you want to focus on this genre. Of course, because of the success…

Right. In terms of the components of the take rate as you mentioned, VAS is a large part of the marketplace take rate, simply because it's a recognized growth level for us based on our business model. As we charge the fees to the sellers and then outsource the logistics to third-party logistic services provider, somewhat like a tinier model. On that front overall, we think we're close to breakeven for the logistics part. And -- but important to note that sales -- sorry transaction-based fees as well as advertising is a significant part of our marketplace take rate. And more importantly that the increase we're looking at in the marketplace take rate is largely attributable to the increase in the take rate based on transaction-based fees as well as advertising.

That's helpful. Just a couple of more things. PUBG Lite was launched last quarter so just wanted to understand how much it has helped. And you didn't give the indication of what percentage of revenue is coming from mobile. That will be helpful. And lastly on Latin America, given you're looking at launching potentially the Speed Drifter, is -- how should we look at the investments in Latin American market? Will you be at similar scale as the new core market? Do you need to have physical presence or you still want to do it from here? Any commentary on that will be helpful.

Yes. So I think as we are getting close to -- on our time, I'll take these questions and if there's any further discussions, we can continue on a call later. So in terms of PUBG Lite, we have published most of our core markets. We haven't started monetizing it yet and the performance is as expected. In terms of percentage of revenue from mobile and Lat Am -- sorry is that the question you just asked, sorry.

Yes. Percentage of revenue from mobile, gaming revenue from mobile -- mobile games.

Okay. The percentage -- revenue from mobile continue to increase. And we think overall, mobile is the largest opportunity in terms of digital entertainment segment while we continue to see a strong core base from our PC users. But overall percentage, mobile will become a very significant part of our business overall. So yes, it continues to increase from last quarter.

Thank you. And that's all the time we have for questions right now. So I would like to return the floor to management for any closing comments.

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

Thank you.

Thank you.

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