[Transcript provided to Seeking Alpha by the Company]:

Good morning and good evening. Welcome to the Sea Limited Second Quarter 2021 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn the conference over to Ms. Min Ju Song. Please go ahead.

Thank you, and hello, everyone, and welcome to Sea’s 2021 second quarter earnings conference call. I am Minju Song, from Sea’s Group Chief Corporate Officer’s Office. Before we continue, I would like to remind you that we may make forward-looking statements, which are inherently subject to risks and uncertainties and may not be realized in the future for various reasons as stated in our press release. Also, this call includes the discussion of certain non-GAAP financial measures such as adjusted EBITDA and net loss excluding share-based compensation. 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 Sea’s Chairman and Group Chief Executive Officer, Forrest Li, Group Chief Financial Officer, Tony Hou, and Group Chief Corporate Officer, Yanjun Wang. Our management will share strategy and business updates, operating highlights, and financial performance for the second quarter of 2021. This will be followed by a Q&A session in which we welcome any questions you have. With that, let me turn the call over to Forrest.

Hello everyone and thank you as always for joining today’s call. I am very pleased that we are reporting sustained outperformance in the second quarter of 2021. Our efforts to capture the long-term growth from the shift to digitization across our markets continued to deliver clear and strong results. At the group level, for the second quarter of 2021, we achieved GAAP revenue of 2.3 billion dollars. This represents 159% year-on-year growth. Our gross profit was 931 million dollars, up 364% year-on-year. Bookings for Garena reached 1.2 billion dollars, growing 65% compared to last year. Shopee recorded 1.4 billion gross orders, a 127% year-on-year increase. And SeaMoney’s mobile wallet services registered total payment volume of over 4.1 billion dollars, up close to 150% from last year. We are very encouraged to see such strong year-on-year growth across our businesses. This is in comparison to our stand-out results for the second quarter of 2020 when most of our markets were under the strictest form of lockdowns. Considering the strong performance observed across our businesses in the first half of 2021, we are raising our full year 2021 guidance. Our digital entertainment portfolio has outperformed our expectations so far this year. As such, we now expect bookings of between 4.5 billion and 4.7 billion dollars, representing over 44% growth from 2020 at the midpoint of the revised guidance. E-commerce results in the first half of 2021 also exceeded our expectations and GAAP revenue is now expected to be between 4.7 billion and 4.9 billion dollars, representing over 121% year-on-year growth at the midpoint of the revised guidance. While strict lockdowns have mostly been lifted in our region since the end of the second quarter last year, many of our markets continue to see a high volume of COVID cases. In this dynamic…

Thank you, Forrest, and thanks to everyone for joining the call. We have included detailed financial schedules together with the corresponding management analysis in today’s press release, and Forrest has discussed some of our financial highlights. So, I will focus my comments on the other relevant metrics. For Sea overall, total GAAP revenue increased 159% year-on-year to 2.3 billion dollars. This was mainly driven by growth in the scale of our e-commerce business, as we continue to better support our users’ needs with new features and programs, as well as growth of our digital entertainment business, especially our self-developed game, Free Fire. Digital entertainment bookings grew 65% year-on-year to 1.2 billion dollars. GAAP revenue was up 167% year-on-year to 1 billion dollars. The growth was primarily driven by the increase of our active user base and deepened paying user penetration, as we continue to engage the community through quality content and immersive experiences. Digital entertainment adjusted EBITDA was 741 million dollars. This represents year-on-year growth of 70%. This was mainly due to strong top line growth and an increased share of our self-developed game among our total bookings. On e-commerce, our second quarter GAAP revenue of 1.2 billion dollars included GAAP marketplace revenue of 905 million dollars, up 191% year-on-year, and GAAP product revenue of 251 million dollars, up 90% year-on-year. The strong results demonstrated the deepening penetration of e-commerce and our ability to capture these accelerated growth opportunities as we continuously enhance our offerings to create greater value for our platform users. E-commerce adjusted EBITDA loss was 580 million dollars as we continued our investments to fully capture the opportunities in our markets. We remain committed to efficiently investing in and growing the ecosystem to serve our users better. Digital financial services GAAP revenue was 89 million dollars, an increase of 659% year-on-year from 12 million dollars in the second quarter of 2020. The growth was primarily due to increasing traction as we continued to expand our suite of service offerings. Adjusted EBITDA loss was 155 million dollars, compared to a loss of 97 million dollars in the same period of 2020. This was primarily due to our continued efforts to drive mobile wallet adoption. Returning to our consolidated numbers, we recognized a net non-operating loss of 25 million dollars in the second quarter of 2021, compared to a net non-operating income of 8 million dollars in the second quarter of 2020. Our non-operating loss in the second quarter of 2021 was primarily due to interest expenses on our outstanding convertible notes. We had a net income tax expense of 75 million dollars in the second quarter of 2021 which was primarily due to corporate income tax and withholding tax recognized in our digital entertainment business. As a result, net loss excluding share-based compensation was 321 million dollars in the second quarter of 2021, as compared to 318 million dollars for the same period in 2020. With that, let me turn the call to Minju.

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

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Thomas Chong from Jefferies. Please go ahead.

on a very strong set of results. I have 2 questions. The first question is about Garena, our online gaming business. We have seen a very strong performance for Free Fire in Southeast Asia and Lat Am. I just want to get a sense about how we should think about potential competition for our peers developing similar game genre in the coming months. Would that affect Free Fire user as well as the revenue growth? And then regarding the new games contribution, just want to get a sense how much of the new games is factored into our revised guidance. And then my second question is about the Shopee business. We have seen very strong growth in Shopee. But given that COVID, the situation with the pandemic right now, how are we seeing the trend for different product categories in the second half? Are we going to see more people buy the online grocery? Or any color on the category trends, would be grateful.

Thank you, Thomas. Regarding the question on Free Fire and competition, I think as we discussed before, we believe that game is not a mainly competition-driven type of business. It is more content-driven. And it's in particular in the case of Free Fire, which has such a large DAU and quarterly active user base across all over the world and highly social type of game, it is even a lot more about engagement with our ever- growing user base. So in the past and currently, we also see other types of battle royale genres in the market. And so far, Free Fire has been growing robustly without being -- having any effect from any kind of similar type of games. Again, we see Free Fire to be increasingly a platform incorporating different types of game play, IP as well as social and casual elements with a lot of fantasy elements in our market, targeting best market users and we are very encouraged to see continued strong growth from its user base as well as pay user base quarter-on-quarter even against a very strong comp we have since last year. So we'll continue to focus on growing the platform and using that as a base for introducing more different types of game elements, IP, game play and other social elements into this game. In terms of the new game contribution to the revised guidance, of course, our revised guidance is based on our current expectation of all games in our publishing pipeline as well as development pipeline. And as usual, we don't specifically discuss any pipeline games. But for the new games that are already published, they are built in. In terms of the COVID and its effect on the category trends, so far, we see that our category trends have…

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

Hi. Thank you, and congratulations on the results. Two questions from my side. Firstly, can you also please talk about food delivery? We have seen ShopeeFood growing aggressively in Indonesia. What are your rollout plans in other parts of ASEAN as well? And secondly, if I come back to the guidance, you had a pretty strong first half and especially the second quarter. But the guidance for the gaming is indicating gaming revenues softening in the second half. Are you seeing any softness in the gaming trends? Or should we think that there could be upside to the guidance?

Thank you, Ranjan. In terms of ShopeeFood, we see very strong performance and positive reception by our users as well as driver communities in the markets both in Indonesia as well as Vietnam in the second quarter. And we'll continue to focus on the quality of our services to our users. Any -- if there's any new market, of course, it was -- anything, the developments, we will make announcement. But we don't have anything to report at this point. In terms of the guidance regarding the game bookings, okay, again, we believe the overall guidance showed a more than 40% year-on-year growth compared to last year, which is also a record year for us with the commencement of lockdown. And I think this is a very strong performance already. And our focus, as you can tell from game and the metrics we have indicated as well as our views in terms of how to grow our gaming platform, is to continue to first and foremost to grow our user base and also pay user base across the various markets in the world as we continue to see strong potential growth. And our past track record has shown that we're generally good at commercialization in even markets that are known to be difficult for commercialization. So we don't really worry about not being able to commercialize the content down the road. But our focus continues to be growing the user base and making this an even larger platform that allows us to really tap on to it to build a stronger game ecosystem with very strong social elements in it.

The next question comes from Piyush Choudhary from HSBC Singapore.

Congratulations for a strong set of results. Two questions. Firstly, on the e-commerce, what factors and which countries are driving an increase in take rate? And could you give some color on which countries have the lowest take rate and the highest potential to increase? Secondly, in e-commerce, we have seen a surge in sales and marketing expenses during the quarter. Can you give some color on how the competitive dynamics has changed? Has that led to increase in customer retention cost?

Thank you, Piyush. In terms of the e-commerce take rate increase, the -- it is mostly -- mainly attributable to the adoption of advertisement and increased adoption by our sellers of advertisement and marketing tools on Shopee platform. And this is across the various markets across the board. It's not driven by any one particular market. And in terms of sales and marketing and related to competitive dynamics, I think we are -- again, as we discussed it before, given our strong market leadership, we're in a good position now that our sales and marketing is more driven by our view about the efficiency of investment into various markets at various points of time, for example, any shopping event season, any particular opportunities to promote the brand, et cetera. And this is more of a managed outcome, depends on our view about the natural pace of growth in this market at any point in time. And our strategies in capturing, in an efficient manner, that growth. So it is not affected by competitive dynamics we're seeing in the market. And as you can tell from our growth rate, while we are multiple times larger than our competitors in the region, we are also growing at a faster rate.

Our next question comes from Piyush Mubayi from Goldman Sachs.

Your GMV grew very strongly. Would it be possible to shed some color on, in particular, the one new region you're moving into? And any light on the tactic you're embarking on? We understand that the app popularity has risen dramatically, but there are nuances of that market, and you are no novice to taking on a well-established competitor. So based on what you've done in the past, how would you rate your strength, weakness in that market, if at all possible, something you could comment on? And then the second area is on the cash burn side, where the cash burn is proceeding okay, just wanted to understand where that is. And when you look at that on a per order basis, that looks like it's rising. On the GMV, on a per order basis, also there's some trends that are interesting. If you could comment on that.

Yes. Thank you, Piyush. In terms of new markets, I believe you're referring to the Lat Am markets. As shared before, this is still a very early stage for us as we continue to adapt to local market practices and finetune our operations and grow our business there. We did share in this quarter's earnings that even though it's -- we have very recently launched in those markets, in particular in Brazil, our performance so far has been strong with top ranking in download and also the number 2 ranking MAU according to App Annie. And I think we will continue to focus on growth and -- in that market. Again, we're not looking at the competition per se because these markets are with still a very low level of e-commerce penetration. These are blue ocean market to us, and we see large opportunities and very long runway for these markets for the e-commerce players in their various -- based on their various strategy and focus and the market segments. So we will continue to grow and focus on efficient growth in those newer markets. And in the business model, I think as some of you are familiar with the business model in our Southeast Asia markets, we continue to promote a mobile-native, social-focused marketplace model. It doesn't -- with a focus on the core categories, those long-tail and high-margin categories and helping the local small businesses and sellers primarily to promote their business in our marketplace. I think the approach and the thesis is the same for our newer markets as well as our current markets in Southeast Asia. And in terms of the cash burn, just as I mentioned on the previous question, it is more of a managed outcome. As we look at the market opportunities, the timing of the market, for example, in Q2, we have Ramadan season in our several largest markets including Indonesia. And this is a time where investment into the growth and to promote e-commerce adoption is very efficient. We have increased our buy frequency overall to more than 6x a month. And in Indonesia, it has exceeded 7x per month, which we believe is very healthy for a marketplace platform. And as we continue to also recruit new buyers and new users and increase our active user base in the region, we believe that we continue to invest efficiently. However, that said, it is important to note that our big picture view of an e-commerce model being a highly profitable one in terms of the market-based model we are pursuing; and then second, we will continue to focus on growth efficiency and our view that long-term economics, unit economics should continue to improve long term, it doesn't change because this naturally happens with scale and continuing improvement on growth efficiency and our continued strengthening of our market leadership. This thesis never changed. So on that, I think we are continuing to monitor the market trends, and we'll invest efficiently.

Our next question comes from Alicia Yap from Citigroup.

Yes, can you hear me? Okay. Management, congrats on the strong results. My question is on Shopee in Brazil. Any color you could share in terms of the percentage of orders or the percentage of revenue contributed from Brazil currently? And if management could also remind us your goals and expectation for this market opportunity in Lat Am. And if you can elaborate the monetization rate contribution by ranking, will that actually coming more from the commission fee or the advertising? Or is it more from the cross-border, those logistics fee? And do you perceive the AOV for Brazil or Lat Am to be higher than those in the Southeast Asia? And then second question very quickly on the positive EBITDA for Malaysia. Is that because of the better monetization rate? Or is it because of the better operating cost and efficiency?

Thank you, Alicia. In terms of Brazil, we don't break down the orders or revenue contribution by country. But as we shared, we see positive reception in the market by sellers and buyers, and we'll continue to focus on driving efficient growth there. And our growth and expectations for Lat Am, I think this is still very early stage for us, and it's an evolving operation for us. So we will continue to stay humble and continue to learn about the market and focus on continued improvement of our operations and service to the users there. In terms of the monetization contribution by ranking, so our -- as you know, most of our monetization came from the high-margin types of revenue, i.e., transaction-based fees, including commissions and various types of handling fees, et cetera, as well as advertisements. And more importantly, the increase in the take rate we're seeing quarter-on-quarter is attributable to these types. And in particular, for second quarter, attributable to advertisements adoption and mainly from increasing adoption, including number of sellers placing advertisements on our platform. But still very early stage for us. I think our advertisement take rate is still low, and we have much more inventory to be rolled out and to be adopted. As we explained before, we believe our markets are still at early stage for the e-commerce ecosystem, and it takes time for our seller community to be trained and get familiar with various types of advertising and marketing tools we can leverage on our platform, and we focus on educating our seller communities on that. And at the same time, their increasing adoption shows the effectiveness of our advertising and marketing tools as well as the increasing returns, our platform is creating for our seller communities that allow them to voluntarily…

The next question comes from Varun Ahuja from Credit Suisse.

Yes. So quick few questions. Number one, if you look at your user base for the Garena, again, this quarter, it grew very strongly. It's around 75 new quarterly active users you have added. It has accelerated from last 2 quarters. Just wanted to understand despite such a game being there in the market for so long, where are you still seeing growth in new markets? Is it the existing market, new markets? Any color additional would be very helpful. Secondly, on Brazil, let me try it a little bit differently. If you can give some color, obviously, you have seen sequential increase in investments in e-commerce. And you already mentioned that 2 of the markets are profitable in ASEAN. So how should we think about it as increased investments going into Brazil? Or any color on how much on a like-for-like basis on ASEAN? How much is -- some qualitative colors will be helpful. Thirdly, on the logistics side, clearly, in Lat Am, the leader in e-commerce has made significant investments on the logistics side, and their third-party ecosystem isn't that great. So how does Shopee think about that part and bridge that gap with the market leader increasing over the next few years? Are you looking to make more investments in Lat Am? And even in ASEAN, we have seen increasing investments by Shopee on logistics. So any color on that one would be helpful.

Yes. Thank you. In terms of the game user growth, we're also very happy to report that they actually came from all 3 regions of Southeast Asia and Lat Am as well as the rest of the world. And therefore, we believe the thing that -- the market diversification has been very strong for our games, especially Free Fire. And in terms of Brazil investments, again, I think we're still at a very early stage. Our investment into Brazil is commensurate with the growth of our operations as well as adoption of our services offerings there. And obviously, we continue to evaluate and we continue to see improving unit economics as well in Brazil as we scale rapidly there. And we'll continue to focus on efficiency growth. And as you know, we recently also raised take rates in Brazil to about 12% and 18% for certain sellers who adopt our free shipping programs. So we believe that the user receptions have been very strong, and we believe it's a good market for continued investment. But we will, again, continue to assess the growth potential there. In terms of the logistics environment in Lat Am, I think there could be some similarity drawn between Brazil or Lat Am markets and to the early days of the Southeast Asian market. Part of it is a little bit of a chicken and egg problem, it's when there is not much of a demand for third-party logistics services by e-commerce platforms either because most of the platforms are using their own services or there hasn't been a lot of volume or traffic broadly generated across different platforms, then probably there is also a lack of initial growth opportunity for logistics. But on the one hand, we are also hopeful that with the growing e-commerce…

This concludes our question-and-answer session. I'd like to turn the conference back over to Min Ju Song for any closing remarks.

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

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