Sea Limited (SE) Q2 2019 Earnings Report, Transcript and Summary

Good day and welcome to the Sea Limited Second Quarter 2019 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Yanjun Wang. Mr. Wang please go ahead.

Thank you, operator. Good evening and good morning everyone and welcome to Sea's 2019 second quarter earnings conference call. I am Yanjun Wang, Sea's Group Chief Corporate Officer. 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 flow 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 of non-GAAP financial measures in our press release. On the call with me are 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 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. I'm really pleased to report that we had another great quarter. Across the business we saw sustained strong growth and further improvement on the top and bottom lines. For Sea as a whole, our adjusted revenue tripled year-on-year to reach $665.4 million and our adjusted EBITDA improved once again to negative $11 million. Our results for the quarter show that we continued to drive revenue growth and improved efficiencies across our business. We're increasingly able to fuel our growth with cash generated through operations which we believe positions us well to continue driving long-term sustainable growth. As you know at the start of the year we set ourselves some very ambitious targets for adjusted revenue growth in 2019. With our very strong performance in the first half of the year, we have decided to raise our guidance for our full year adjusted revenue for both digital entertainment and e-commerce. For digital entertainment, we now expect full year 2019 adjusted revenue to be between $1.6 billion and $1.7 billion, representing 142.0% to 157.2% growth from 2018. This compares to the previous guidance of between $1.2 billion and $1.3 billion, representing 81.5% to 96.7% year-on-year growth. We are also increasing our guidance for full year adjusted revenue for e-commerce to between $780 million and $820 million [ph] which represents 168.3% to 182.1% growth from 2018. This compares to the previously stated guidance of between $630 million and $660 million, representing 116.7% to 127.0% year-on-year growth. Our increased full year targets reflect our confidence in both the growth opportunities ahead and in our ability to execute our strategies to capture those opportunities. Let me start with Garena where we saw healthy growth across key metrics in the second quarter. On the topline adjusted revenue for the digital entertainment business more than tripled year-on-year to $443.2 million. In terms of the bottom-line adjusted EBITDA for digital entertainment was up 443% year-on-year to $263.8 million. Adjusted EBITDA margins further increased to 59.5% for the second quarter of 2019 from 34.9% for the second quarter of 2018. Our quarterly active user numbers, or QAU, almost doubled from a year ago to reach more than 310.5 million. The paid user ratio which quarterly -- which is quarterly paying users as a percentage of QAUs more than doubled from 4.1% a year ago to 8.4% in the second quarter. There are three key highlights to Garena's success this quarter. First, we continued to drive strong organic growth in active users globally. In particular, Free Fire, our self-developed smash hit game was the third most downloaded mobile game and the most downloaded battle royale game globally across the Google Play and the iOS App Store in the second quarter according to App Annie. We are excited to see continued user growth across our core markets of Southeast Asia and Latin America as well as in other growth markets like India, Russia, Turkey, and the Middle East. Second, we are strengthening our foothold in Latin America. As we mentioned in previous quarters, the huge success of Free Fire in Latin America is opening up opportunities for Garena in this high-growth market of more than 600 million people. I'm pleased to report that in late July, we launched the Garena Speed Drifters across Latin America. This is the first third-party licensed game that we are publishing in Latin America and it is an important step forward in expanding our footprint in this very exciting market. Finally, we continue to deepen our engagement with our gamers, while driving monetization across our game portfolio. For example throughout June, we ran a series of themed competition in Free Fire and offered a wide range of in-game items based on campaign themes, which were very popular with our gamers. This translated into both user number and revenue growth for the game. At the same time our esports and community building efforts are also enhancing engagement across our titles. In Brazil, for example, we hosted our largest ever esports tournament for Free Fire in that market in July which attracted over 12 million views online. During the grand final of the tournament, the peak on current views on YouTube alone exceeded 800,000. In June and July, we also hosted Arena of Valor World Championship in Vietnam. This was the first time that this global tournament was held in Southeast Asia and it was a huge success. We recorded cumulative online views of over 74 million with over 850,000 concurrent views at the peak. We believe that this showcases Arena of Valor’s popularity as one of the region’s top mobile MOBA games. Looking to the quarters ahead, our pipeline remains strong. For example, we recently launched pre-registration for Call of Duty: Mobile in our core markets in Southeast Asia. We also see plenty of headroom for our existing titles to continue growing. In particular, as we further deepen engagement with Free Fire’s growing global user base, we believe that this game and the battle royale genre in general are still young and evolving. For the upcoming quarters, we believe that Garena is in a great position for long-term growth. This is also reflected in our decision to raise the full year outlook for the digital entertainment business. Turning to Shopee. In the second quarter, we continued to deliver on our strategy to scale with efficiency to capture market share and deepen monetization. Looking first at growth, Shopee further strengthened its market leadership. In the second quarter, it ranked the highest in the Shopping category by both average monthly active users, and by app downloads across the Google Play and iOS App Stores, in both Southeast Asia and Taiwan, and ranked the third in app downloads in the same category globally, according to App Annie. Gross orders for the quarter increased more than 90% year-on-year to 246.3 million, and GMV for the quarter increased 72.3% year-on-year to $3.8 billion. These data points underline our success in building and sustaining a strong and engaged user base across the region and continuing to capture market share. As we scale, we also continue to improve on growth efficiency. Shopee’s adjusted EBITDA loss per order decreased by $0.46, or 31.3%, compared to the same period in 2018. More importantly, we continue to see sustained improvements in monetization and take rate and adjusted revenue more than tripled year-on-year to $177.4 million dollars. Adjusted revenue as a percentage of total GMV increased to 4.6% in the second quarter, up from 2.6% for the same period a year ago. And adjusted marketplace revenue as a percentage of total GMV reached 3.6% in the quarter. Indonesia, the biggest e-commerce market in Southeast Asia and also Shopee’s biggest market, our growth accelerated in the second quarter as we further extended our market leadership. We reached over 110 million orders for the quarter, which represents a daily average of over 1.2 million orders. In Taiwan, Shopee continued to record a positive quarterly adjusted EBITDA before allocation of the headquarters’ common expenses for the second quarter. This is a powerful demonstration of the long-term profit potential of our e-commerce model. Our focus for Shopee is not only on the quantity of growth, but also on quality. We believe that long-term success for Shopee is based on capturing the hearts and minds of shoppers in our region, and translating that into deep and sustained user engagement. That’s why one metric that we track closely is total time in app, which we believe is a measure of our ability to attract, and deepen engagement with our users. By this metric, Shopee was once again number one in the second quarter in Southeast Asia as a whole and in each of our five biggest markets on Android, according to App Annie. From the beginning, we designed the Shopee experience to be highly engaging and social, by pioneering in-app live chats, games and social features in our region. And we are constantly working on new ways to enhance the user experience. For instance, we rolled out our new livestreaming feature across all of our markets by the second quarter. This feature offers a new and powerful way for consumers to engage with our platform, brands and sellers through live video streams created by Shopee or by the sellers themselves. As consumers discover new products through this feature, they can make immediate purchases without leaving the stream. We also employed AI and AR technologies to further enhance consumer experience on our platform. For example, our new AI and AR powered tools, which were introduced in partnership with L’Oreal, enable our users to try different shades of make-up or get personalized, professional skincare advice in the Shopee app. In addition, we leveraged our unique strengths in both digital entertainment and social commerce by introducing esports streaming on the Shopee platform. This has helped us attract and better engage with an even broader audience across market segments. And just last week, we announced the world-famous footballer Cristiano Ronaldo as Shopee’s new brand ambassador in Southeast Asia and Taiwan. Ronaldo is one of the world’s best known athletes and an icon across our region. We are confident that our partnership with him will resonate with consumers and deepen their engagement with the Shopee brand. We believe that our focus on keeping our users engaged and entertained gives Shopee unique strengths in better attracting and retaining users. It also offers us numerous opportunities to better understand our users’ needs and preferences to help them discover more new products on our platform. To conclude, looking to the second half of the year, we believe we are in a great position to drive sustained growth across both e-commerce and digital entertainment, and to do so with increasing efficiency. That said, we are still very much in growth mode across our businesses. We have a great opportunity ahead of us to grow our markets over the long term and we are very well placed to capture the largest slice of this growing pie. As we have always said, we believe scale and strong market leadership will translate into long-term profitability. Our results for the second quarter demonstrate that our businesses become increasingly efficient as we scale, and we are committed to continuing scaling up to maximize those efficiencies. With that, I will invite Tony to share more about the financials.

Thank you, Forrest, and thanks to everyone for joining the call. We have included detailed quarterly financial schedules together with the corresponding management analysis in today’s press release. So, I will focus my comments on the key financial metrics. For Sea overall, our second quarter total adjusted revenue was $665.4 million, an increase of 203% year-on-year. 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 $443.2 million, an increase of 219% year-on-year. 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 $263.8 million, an increase of 443% year-on-year mainly due to 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 $177.4 million, up 202% year-on-year. Within this, marketplace revenue was $137.8 million, up 269% year-on-year, while product revenue was $39.7 million, up 85% year-on-year. E-commerce adjusted EBITDA loss was $248.3 million as we continued our investment to fully capture the market opportunity in the region. We will continue driving the high quality growth by serving the users needs better and improving operational efficiencies in the long run. Digital financial services adjusted revenue was $2.8 million, a decrease of 18% year-on-year from $3.4 million in the second quarter of 2018 as we focused our efforts on strengthening the infrastructure to support our existing platforms. Adjusted EBITDA loss was $18.1 million in the second quarter of 2019 compared to a loss of $6.8 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 non-operating loss of $29.2 million in the second quarter of 2019 compared to a net non-operating loss of $30.8 million in the second quarter of 2018. We had a net income tax expense of $15.3 million in the second 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 changes in fair value of the 2017 convertible notes, was $215.1 million in the second quarter of 2019 as compared to $198.7 million for the same period in 2018. With that, let me turn the call back to Yanjun.

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

Hi. Thank you for the opportunity. On the gaming business, it appears that the average revenue per paying user fell quite a bit quarter-to-quarter. I recognized, there maybe some dilution for more Free Fire paid users but then again the paying users increased even more Q-on-Q in the first Q and the operating fallen much again on a sequential basis. So just wondering, what drove sort of the larger-than-usual decline in ARPU? And secondly, Free Fire revenues in the quarter, is it possible to give us some indications? And then thirdly, on your expansion plans globally especially in places like LatAm can you give us a sense of whether we should be expecting a lot more headcount increases in some of these regions and how that would affect your OpEx structure in the second half of this year? And then, if I may as well on the e-commerce side a couple of questions as well. One, the take rate increased 70 basis points Q-o-Q which is quite high. Can we have a sense of how much of this 70 basis points increase was from value-added service and how much was from commissions and advertising? And finally, Indonesia, will Sea start to charge Star Sellers obviously on the C2C marketplace side in July? What exactly do you see from – in the industry perspective that gives you confidence in that and what does it mean for other markets? Sorry that's quite a handful of questions. But thank you.

Thank you, MC. Happy to answer your questions. Regarding the ARPPU trends, I think as we discussed before when we look at esports title that has a large user base and long game life, we tend to focus on different things and different phase. It usually starts with growing the user base, and then gradually ramping up monetization deepen the pay user ratio and then optimize for ARPPU. So, for Free Fire in particular as you can see we have seen very strong growth both on the user side as well as on the pay user penetration quarter-on-quarter. And this is contributing significantly to the revenue increase as well. And in terms of ARPPU, it is not currently the focus for us. For Free Fire we believe the game is still very young, and has a long runway and we are focusing on broadening the user base as well as continue to deepen the pay user penetration. For example, one tool that we find pretty helpful in bringing more pay users to our game would be the Elite Pass or the Fire Pass. Although, it has a lower ticket size at $5 a month, but it's a very effective in converting free user to pay user over time. And for that, we've been focusing on promoting more of a Fire Pass user engagement over the period. So as you can see overall our revenue trend has been very positive and the margin has increased also over time even though we already started with very high margin compared to the game industry as a whole. So we think this is a positive trend and shouldn't be of any concern. And we think in the longer run, there will be growth potential on the revenue as well as ARPPU side both for the game business and for Free Fire in particular. In terms of Free Fire revenue outlook, as mentioned earlier we think the game is still young and evolving and we're very focused on bringing new contents into the game. We have more than 300 developers in our studio now and about half of them are devoted to creating new content, new innovations for the game to engage the user better. And more recently we have offered themed competitions and themed virtual items that have been very effective to attract new users. This is a new mode of play that we have introduced. So we are quite confident about Free Fire's revenue and the trend going forward. As you can see in our revised guidance that we basically are guiding towards a more than 140% to more than 150% year-on-year growth in our game revenue and that is largely attributable to the strength in the Free Fire game performance over the longer run. And also over all our other existing games so we continue to see pretty stable performance. So we are confident of our longer-term game performance in the markets. In terms of LatAm expansion, we have set up small operations locally in Brazil and Mexico and we are quite careful in expanding into new markets. These teams are focused on local operations being with payment partners and organizing local esports events and community building, as well as local customer services. So our focus will be to gradually ramp up operations. But as you can see from our past practices and track record, our gaming operation has been highly efficient in terms of G&A spending has been fairly low and that gives rise to the high EBITDA margin in our gaming business compared to the industry standard. Now turning to e-commerce, yes, as you've observed our take rate continue to rise and this is basic -- to us, it's a clear sign that as we scale and continue to gain market leadership and market share across various markets we are also able to ramp up monetization, while we continue to grow. And in terms of the up-tick in the take rate, the vast majority of that is from the high-margin type of parts of the revenue; i.e. the commission handling fee and advertisement income. So we think we're on a very healthy growth path over time to monetize over the e-commerce platform. However at this stage, we are very much focused on growing the platform and attracting more users, more sellers as well as building up our assortments and services to the sellers. We are not worried about the potential to monetize it as we have shown. This is a -- had a huge runway to go. And at this time we are focused on building up our leadership -- market leadership across the markets which is showing in all of the various -- for example, we're the top ranked app in terms of downloads, user time spent, monthly active users in the shopping category in our region. And these are also important indicators of the growth of the platform and the solid leadership it is able to command across the market. And in terms of the star seller as you correctly pointed out, we have started to charge a commission on the star sellers in Indonesia. Again, we see very robust growth in Indonesia for our e-commerce platform as we continue to extend our market leadership. In Q2 our daily order volume has exceeded 1.2 million and accelerated growth from quarter-to-quarter. And even though Indonesia is while -- actually our largest market, it is also enjoying of the highest growth rates across different markets. So as a result we are also providing more services and returning greater value to our sellers as they derive the most sales volume and income from our platform and they are happy to pay the rate because they see the value in working with us, in providing them the access to the vast user base, the services, the integrated logistics and payment services we provide them as well as the other services. And therefore we believe over the long run, we can gradually ramp up -- continue to ramp up monetization across different markets including Indonesia our biggest market where we are commanding a strong -- even stronger leadership now. And we are confident about that approach.

Got it. Thank you.

The next question comes from Mike Olson with Piper Jaffray. Please go ahead.

Hey, thanks for taking my questions. So as you just talked about Latin America has been a surprisingly strong region. But outside of Latin America, do you believe there's a significant opportunity in some of these other regions that you mentioned like Eastern Europe, India, Middle East et-cetera? And will you focus on building out those regions with Free Fire first or with other third-party games? And then just overall, you've mentioned continued opportunities for growth broadly for the business across both major segments. What do you expect your key areas of investment across the company will be in the next few quarters? Will it be new game development or new content for existing games or marketing or subsidies? Or what kinds of things will you be specifically investing in for growth? Thanks.

Thank you. In terms of expansion into the other high-growth market, we have mentioned before that we see very strong user growth in markets like India, Russia, Turkey, the Middle East for our self-developed game Free Fire. And we believe that with the wealth of user data and deepening user understanding over time, we acquire from this global hit game we are very well-positioned to introduce -- continue to build upon the success of that game to deepen monetization as well as potentially introducing new content and even new IP, whether it's self-developed or third-party to these markets; just like what we did in LatAm. We started with Free Fire, our self-developed game, grow the user base there, monetize over time. And now we are reaping the fruits of that efforts. And in addition, we have recently rolled out a second game, which is a third-party licensed game from Tencent Speed Drifters in the market. We believe this approach can also potentially work in the other high-growth markets. And I think given that our unique advantage in being able to operate well and deeply in so many complex diverse, but high-growth young markets across the globe, we are very well-positioned to capitalize on the new opportunities in these emerging markets with the rise of mobile technologies. That enables a lot more new content to be introduced to our users across the world. And in terms of key areas of investments, we are very much focused on the gaming side, both deepening our development capabilities as well as global expansion. On the other hand, if you take a look at our gaming performance so far, we enjoy very high growth at the very high EBITDA margin. That doesn't mean that we're not investing in games. We're actually investing heavily in terms of human capital. This business we believe is a creativity-based business. It's not about just dumping money to buy growth. It is about deepening understanding of the user making good use of the wealth of user data we have and leverage the experience and understanding of our complex diverse markets to build up content development capabilities and that is very much talent-driven as well as knowledge-driven. So to that thought, we devote a lot of time and resources in terms of the management timing and management focus continue to develop our game businesses and also in understanding our global markets better to introduce more content globally. On the e-commerce side, as we mentioned, we're in a better-than-ever position to build up our e-commerce ecosystem as our platform continue to scale. As you can see, we're enjoying increasing efficiency. In terms of EBITDA loss per order, this continues to decline over time. And our sales marketing has been fairly stable as a percentage of GMV. But as we mentioned before, shipping subsidy is increasingly a minor part of the sales and marketing. A large part -- the majority of the sales market spending is now discretionary brand marketing. For example, our partnership with Mr. Cristiano Ronaldo and our sponsorship of Liga 1 in Indonesia, which is the most popular football event nationally. These are very efficient marketing activities delivering high ROI for us and promoting our brand awareness across the region as well as globally. So we will continue to be opportunistic about it and leverage good marketing opportunities to further promote our brand as we become a go-to marketplace in our region.

Thank you.

The next question comes from John Blackledge with Cowen. Please go ahead.

Great. Thanks. A couple of questions on Shopee and one on Garena. How should we think about the -- for Shopee the GMV trajectory in the back half of the year? And if you can talk about kind of market share positioning and any update on the competitive environment across the different markets? And then second on Shopee. The second quarter growth was really strong, obviously particularly order growth. But the AOV was a little lower than we thought. Just any color on what drove the lower AOV and how we should think about that going forward? And then on Garena, just any color on the Free Fire Pass and what's the monetization around that and what that looks like going forward? Thank you.

Thank you. In terms of the Shopee, GMV trajectory as we continue to scale the platform across different markets for Q2 we have 70% [ph] year-on-year growth in GMV and more than 90% year-on-year growth in order. And the GMV growth is slightly lower than order growth is as you mentioned relating to the average order value. And to that, we do have a view on what will be a optimal value or range of optimal value for our markets in building out a general merchandise marketplace e-commerce. If you look at some of the large e-commerce, general merchandise e-commerce platform such as Taobao, we understand their basket size is also around the mid-teens range. We think that's a good range to have for building a e-commerce platform in all markets as well with the focus on the key categories of fashion, health and beauty, home and living as well as baby products. These are the high-margin now standardized products that lend themselves very well to build up a large diverse seller base and buyer base and eventually the largest e-commerce marketplace in China. So we believe we will focus on building out these core categories and drive user base as well as drive frequency while maintaining a healthy range of order value. So in particular relating to the Q-on-Q fluctuation, for example there are different reasons the intrinsic factor that could affect the period-to-period order -- average order value. During the Ramadan season for example, we see higher demand in the fashion category, which tend to have a smaller basket size and therefore could affect the order value as a whole. So they are -- these are the intrinsic factors we think as far as we maintain a healthy mix of in terms of the GMV of different categories for our marketplace ecosystem. We are on track to continue to grow the marketplace and extend our leadership further. So that falls to the next question regarding competition. Now I think it's -- obviously we take competition very seriously and have a deep respect for our peers in the market. And -- but some context I think it's important to note that none of the competition we currently see is new to us. Our peers have been longer established have been in the market for many years before we even started the e-commerce business. And yet, we managed to grow from zero to market leadership with more than 15 billion of annualized GMV and a Q2 4.6% of take rate in less than four years time over such diverse complex markets. None of them are in all the markets that we are in. So we have local competition, but we don't even have competition across all these markets. So I think our track record has shown that we have been very effective in competition. And we believe we will continue to be so because our competitive advantages are in our understanding of the right timing, right model and right market for the e-commerce marketplace business as well as our ability to execute very well in highly diverse complex markets, with highly localized operations and adapt our business strategies over time based on our deep understanding of local users as well as market conditions in addition to our deep understanding of the efforts of marketplace e-commerce that business model. So I think these competitive advantages remain. And we now have additional advantage of being the market leader across markets in e-commerce. And as you can see some of our peers are now following our footsteps in some of their operations. For example, focusing more on mobile, switching from 1P to a marketplace model, and focusing more on the social aspects of it or even in charging student take rates, et cetera. We have a lot of respect for our peers and their efforts in this regard, and we believe that collectively all these industry players including us growing the pie for all of us as a whole. Given the low penetration rate of online retail currently in our region, we believe there's a huge potential opportunity for all of us to tap. And being the market leader with existing scale and given our growth rate, we believe we have the best opportunity to tap the largest -- to take the largest share of the growing pie over time. And in terms of Free Fire monetization and outlook, as mentioned before, we believe this Free Fire is a battle royale game. It has a lot of depth in it. It's very young and still evolving. And we're constantly building new content, new modes of playing into this game. And we believe that as we continue to see organic user growth across markets including our core market in Southeast Asia, Taiwan, in Latin America as well as the new frontier markets in India, Russia, Middle East, Turkey we believe the game has a huge potential and a long runway, and we are now still focusing on continuing to grow the user base as well as deepen the user penetration.

Thank you.

The next question comes from Ranjan Sharma with JPMorgan. Please go ahead.

Hi. It's Ranjan from JPMorgan. Thank you for the call. Two questions for my side. Firstly, on the gaming side, you of course had a very strong second quarter, but if I look at this -- if I look at the top end of your gamings revenues guidance, it feels like you don't -- you're not expecting any further growth in quarterly revenues in the third and fourth quarter of this year, despite having two strong launches in Speed Drifters and in Call of Duty. If you can share your thoughts around -- on how you get to this guidance. ARE you expecting any kind of maturity in Free Fire coming through? So that's the first question. Secondly, in terms of Indonesia, we have seen LinkAja, a local payment business getting access to a number of platforms across the marketplaces. I don't think it's part of Shopee yet. If you can share like if you're looking to add them as well or if you're looking to grow your own Shopee pay business. Thank you.

Sure. So if you look at our guidance, it is based on the year-on-year growth. It is a very high rate at 142% to 157%. And if you look at our EBITDA -- adjusted EBITDA for this quarter, I believe it's higher than our adjusted EBITDA for last year the entire year. So we are continuing to see very strong growth in our game -- on the games side, and as usual we hope to be able to deliver beyond expectations. And for the new games, we have launched or start pre-registration for including Speed Drifters in the LatAm market as well as Call of Duty: Mobile in Southeast Asia and Taiwan as mentioned our focus would initially still be on growing the user base, understanding the user preferences for this new genre. In the case of Drifter, a racing game for the LatAm users. And in case of CODM, a mobile FPS game with a very big IP, but also being newly introduced to our region as being a free to play kind of mode. So there are a lot for us to work on to -- with in collaboration with the developers and to understand our markets better, understand the user preferences, grow the user base before we gradually ramp up monetization. So in terms of payment, we obviously don't discuss any specific commercial arrangement, but we've been supporting our Shopee platform also with our own payment app and with the integration of our own self-owned e-wallet with the Shopee app over time. We've seen user adoption very encouraging signs of user adoption. And we believe that to show financial services will be one of the largest opportunities in the digital economy of our region, and we stand very well positioned to benefit from the growth of that given our own capabilities track record in that front in building up the e-payment as an infrastructure for our Shopee as well as Garena businesses as well as further growing DFS overall.

Thank you for that. Maybe just one quick follow-up. So in terms of Speed Drifters, are you saying that you have not rolled out monetization for the game in Latin America right now?

Yes. So, we haven't been focusing on monetization yet.

Okay. Thank you.

The next question comes from Conrad Werner with Macquarie.

Hey thanks a lot. Maybe just a first question on the e-commerce side of the business. The take rates are continuing to show good momentum. You are -- it sounds like you're starting to track some more commissions. Can that trend continue? In other words, I guess, we can assume that take rates should continue to rise in the second half of the year. And if that is the case what's going to drive that? Are you able to put some more commissions into the market given your scale right now? Then one other question on the e-commerce side of the business, was there any impact on FX from exchange rates on your GMV? In other words, might your GMV have been slightly understated due to exchange rate impacts? Just thinking about the average order value stuff we were talking about before. And then just last question on the e-commerce. When you say you're leaders in all your markets what metric is that on? Is it on GMV? Or is it on orders or something else? Then maybe just on the digital entertainment side of the business. In the past, you gave a range for what percentage Free Fire was of the total revenues. It was 50% to 60% in the first quarter. Could we just have an update on that? And then also could we get an update on how much of free -- sorry how much of the games business the digital entertainment business was ex-Southeast Asia? And then maybe just as a last question on the digital entertainment, Beyond Call of Duty and Speed Drifters, I guess, which is a reasonably new title relatively speaking, any other games in the pipeline that we should be looking out for? And are you monetizing Speed Drifters in Southeast Asia to a good degree right now? And then sorry I know I'm asking a lot of questions here but the last one is just on a group level I know that you're still in investment mode, et cetera, but the margins in the digital entertainment are very good. As you say you're starting to fund the business with internal cash. Could we see group level profitability before the end of the year? Thank you, on an EBITDA basis? Thanks.

Thank you. So, on the first question regarding the take rate trends, we will continue to gradually ramp-up monetization over time. That is going to be driven by first the scale of our platform as we continue to grow engage with a larger user base, larger seller base and the sellers platform derive more income from the platform. And with their margin with the right mix of categories and focus we believe that there's a -- continue to be a very good potential to gradually ramp up monetization. And in terms of the composition of the take rate, we believe that one there is potential for higher commission, as well as the handling fees, as well as advertisement income. And at the same time, we are rolling out the full spectrum of services that seller will be very happy to utilize and pay for. So if you look at Taiwan market for example, okay, this is the first market that we have achieved positive adjusted EBITDA without common expense allocation. And this is a market where we start monetizing first a couple of years ago with advertisement and then followed by the full spectrum of commissions, handling fees, as well as VAS; Value-Added Services. By now, we have rolled out commissions for all sellers be it mall sellers, preferred sellers or other sellers across border and of course different rates based on the types of sellers and based on the categories in that market. And that has helped to increase the monetization for us. And at the same time that platform in Taiwan continues to grow at a very healthy rate. And this is what we ideally would like to see gradually roll out in all other markets as well. So by now, we have rolled out commission and handling fee for the mall sellers in all our markets. And more recently, we have rolled out the commission for star sellers in Indonesia and increased the rate for some of the mall sellers in Thailand, for example. So we believe this trend will continue. And the reason we are able to do that is the value we're delivering to our sellers and buyers in our markets for the infrastructure for e-commerce online retail tends to be underdeveloped. That also gives us more opportunities and more touchpoints with our sellers and buyers to serve them better. And that means, we also have more opportunities to charge a higher take rate over time. So that is what we believe will gradually roll out. And in terms of ForEx question, I'll invite our CFO Tony to answer that.

Yes, sure. So we constantly monitor the constant currency key metrics like GMV and revenue growth. And then actually due to the appreciation of U.S. dollar against some of our region's currencies like Indonesian Rupiah and Taiwan dollars, the growth profile had we choose to present using constant currency would be better than using the actual exchange rate. And having said that, we will be -- continue monitoring the gap and we'll choose to present the constant currency, if the gap is becoming larger.

Okay. Regarding the -- in terms of the metrics we use to measure market leadership, now we use -- we look at array of metrics to see how well our e-commerce business is growing. In some of the market, obviously our leadership is so clear, so strong that whatever metrics you use pretty much, we are the clear leader. In other metrics, there might be -- people might say this market has a different kind of GMV metrics et cetera. Now the reason we look at the range of metrics based on the disclosure in our PR including the order number, the download, the active user, time spent, in app et cetera is because looking at GMV alone can be misleading for the business as a whole. So if we tell our people to just look at GMV, the outcome might not be ideal in growing the e-commerce business, because the team will be trying to focus on growing the basket size with the higher ticket items in those more standardized goods, the lower-margin, lower-competitive modes categories such as virtual goods, electronics or even wholesale stuff. These are easy to grow GMV. And -- but they don't lead to a healthy e-commerce platform with the core category of focus that we mentioned again and again. These are fashion, health and beauty, home and living and baby products. That's why when we look at GMV or the size of GMV, we have to ask the next-level question. What's the basket size? And what's the order number? Are you growing the GMV by growing the basket size and skewing towards the different categories of goods versus the core e-commerce marketplace categories? Or are you truly growing the order? And these orders are sustainable, high-value, high-margin orders that are real and will come back again. So, these are the categories we focus on and we look at actual orders that we believe are recurring and then can allow us to charge a high take rate, allow us to build a healthy e-commerce platform with diverse seller and user base and eventually an ecosystem around it. So that's why we look at an array of different things. Another example will be time spent in app. We focus on that because we have a deep understanding of our young users in our region. These are social-community-based native generation, native to the mobile technologies. And they like to socialize and they like to talk to each other, engage with each other and that's how they express themselves, live their lives and also do their shopping transactions. So, on that front we have built in a lot of social gamification features, live streaming, AR features, even esports stream for example, leveraging our strength in the esports front to engage our users and build a community and follow in that. That also helps to retain users better as well as lower our user acquisition costs and make our scale much -- scaling much more efficient over time. So therefore, when we look at the market leadership, we look at a host of metrics together and the healthiness -- health of the ecosystem as a whole. By that, we have disclosed consistently that we are the market leader. And for example in Indonesia, we have mentioned that we are the market leader by order for several quarters already and with a specific order number being disclosed. Going back to digital entertainment. As you can probably imagine, Free Fire continue to be a large part of the revenue although we don't specifically disclose percentage. But it's been an increasing contribution from Free Fire in the revenue mix. And in terms of region outside of Southeast Asia also without disclosing the specific percentage of -- for competitive reason, this is increasingly a significant part of our revenue as we diversify our game businesses. Again as we mentioned, if you look at the -- our core market now just not just including Southeast Asia and Taiwan, we also refer to LatAm as our core -- part of our core market collectively there are about 1.2 billion to 1.3 billion population. That's almost the size of population of China, but with even younger population profile and higher population growth. So it's a very attractive demographic feature. And we're probably the best – stand in the best position given our track record in capitalizing on such high growth, but highly diverse and complex emerging markets. In terms of our pipeline, again for competitive reasons we don't disclose specifics about pipeline. But as you can imagine, while we said that, we devote half our studio to building on Free Fire, the remaining half we devote to building up our self development pipeline in small teams. Actually, it doesn't take a lot of people to come up with a prototype of a new game. When we built up Free Fire initially, there was a team of four or five people. And so we continue to work with all the game talent, we can find in the market and build up that team and let them run with their creativity and come up with all kinds of potential ideas that we could build into our game portfolio. And at the same time we work with top studios in the world. If you look at our track record we pretty much work with everybody in the U.S., Japan, Korea as well as China. And we I think given our wealth of user data from all the emerging markets globally with the hugely successful Free Fire game, I think we are very well-positioned to introduce new content into those markets, whether it's self-developed or licensed from third parties. And in terms of the group level EBITDA as you rightly pointed out, we are seeing increasingly less loss in adjusted EBITDA and increasingly we are funding growth with internal cash generated. Obviously, do we – if we want to breakeven, can we? Yeah, we can, right? But – as I said before, it's not the focus of the business as we are in a better than ever position to grow our ecosystem of digital economy of consumer Internet platform with some of the largest opportunities that we ever see in the region and beyond in digital entertainment, in e-commerce and digital financial services. And you don't have these kinds of opportunities coming along that easily for many generations. There maybe one-time we believe that you're in the historical moment where we can capture that growth in the right region where there is still low penetration, but high growth potential. And we believe given our strong cash position, given our cash also from the game business that it can fill our internal investments, we believe we want to invest in the long-term growth of our ecosystem and will not trade that for short-term profitability. And in the longer run, when we do achieve clear leadership and build out the entire ecosystem that we envision for ourselves, for our employees, and all the stakeholders we believe it's a much more valuable business.

This concludes our question-and-answer session. I would now like to turn the conference back over to Yanjun Wang for any closing remarks.

Thank you for joining the call today and we're happy to keep talking with our investors, analysts in case you have any further questions. And we look forward to speaking to you all again next quarter.

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