Good morning and good evening. Welcome to the Sea Limited Second Quarter 2022 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, Jason, and hello, everyone, and welcome to Sea's 2022 second quarter earnings conference call. I'm Min Ju 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 a discussion of certain non-GAAP financial measures, such as adjusted EBITDA and net loss excluding share-based compensation and impairment of goodwill. We believe these measures can 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 your 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 2022. This will be followed by a Q&A session, in which we welcome any questions you have. With that, let me turn the call over to Forrest.

Hello, everyone, and thank you all for joining us today. I'm going to start with an update on our plans to further focus on efficiency and strengthening our ecosystem for long-term profitability and competitiveness. I will also share a few highlights across our businesses as we made steady progress towards these objectives. During the pandemic lockdown, we rapidly scaled our businesses to answer to the fast rising market demand for online consumption and services. As a result, we significantly expanded our businesses and the total addressable market and strengthened our market leadership, while improving growth efficiency. We were able to achieve these results by focusing on doing the right thing at the right time in setting our redirection and being agile and adaptable in our execution. Now we are in an environment of increased macro uncertainty, with rising inflation, rising interest rates, local currency depreciation against the U.S. dollar and ongoing reopening trends. In this environment, being agile and adaptable is even more crucial to the long-term success of our business. We believe the right thing to do at this unprecedented time is to focus even more on self-sufficiency, long-term profitability and the defensibility in our business operations. Our results for the second quarter demonstrate the early success of this effort. Because of our strong execution in the quarter, Shopee's unique economics improved significantly, driven by efficiency gains across our markets. In particular, adjusted EBITDA loss per order before allocation of HQ costs in our Asian market combined was less than $0.01. And we are on track to achieving positive adjusted EBITDA before HQ cost allocation in this region. At the same time, Shopee continued to grow at healthy rates, despite the tough year-over-year comparison, with GAAP revenue up 51% year-on-year, or 56% year-on-year adjusting for currency fluctuations. For Garena,…

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, 29% year-on-year to $2.9 billion. This was mainly driven by the growth in our e-commerce and digital financial services businesses, as we continue to leverage the synergies across our platforms. On e-commerce, our second quarter GAAP revenue of $1.7 billion included GAAP marketplace revenue of $1.5 billion, up 62% year-on-year, and GAAP product revenue of $0.3 billion, up 14% year-on-year. E-commerce adjusted EBITDA loss was $648 million. Adjusted EBITDA loss per order was $0.33, compared to $0.41 for the second quarter of 2021, as we further improved our growth efficiency and unit economics. Digital entertainment bookings were $0.7 billion and GAAP revenue was $0.9 billion for the second quarter of 2022. Adjusted EBITDA was $334 million. The slowdown compared to the second quarter of 2021 was mainly due to moderation of user base and user trends post-COVID. Digital financial services GAAP revenue was $279 million, an increase of 214% year-on-year from $89 million in the second quarter of 2021. The growth was primarily due to the growing adoption of our financial products and services. Adjusted EBITDA loss was $112 million compared to $155 million for the second quarter of 2021 as we further improved on our growth efficiency. In the second quarter of 2022, we recorded an impairment of goodwill of $177 million. The goodwill impairment was primarily due to the change in carrying amount of goodwill associated with our prior acquisitions, mainly driven by the lower valuations amid the market uncertainties. We recognized a net non-operating loss of $33 million in the second quarter of 2022 compared to a net non-operating loss of $25 million in the second quarter of 2021. The non-operating loss in the second quarter of 2022 was primarily due to investment losses recognized amid lower valuations in the broader market. We had a net income tax expense of $65 million in the second quarter of 2022, 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 and impairment of goodwill was $570 million in the second quarter of 2022 as compared to $321 million for the same period in 2021. Net cash used in investing activities in the second quarter of 2022 was primarily attributable to an increase in loans receivable and purchase of property and equipment to support the growth of our businesses. At the end of the second quarter of 2022, we had $7.8 billion of cash, cash equivalents, and short-term investments on our balance sheet. With that, let me turn the call to Min Ju.

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

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Pang Vitt from Goldman Sachs. Please go ahead.

Thank you very much for the opportunity. Two questions from me. Firstly on e-commerce. Can I please clarify on the suspension of guidance what are management currently seeing that leads to the decision? Is the outlook that we are facing right now really that cloudy? And at this point in time we understand that macro has become very challenging, but at least up until middle of August, is there any color you can provide in terms of how Shopee has been doing so far for the quarter -- the quarter of 2022? Second question is related to Shoppe and their breakeven. Is there any update on your breakeven post headquarter target for Shopee ASEAN and Taiwan? Right now ASEAN and Taiwan breakeven is in sight, but headquarter costs still increased on a quarter-on-quarter basis. Can we understand what drives this increase in headquarter costs? And when can we actually expect to see this improve going forward?

Thank you, Pang. Regarding the guidance, we just want to clarify this is a proactive decision from the management to continue to shift our strategies, and we want to be very upfront and open to the market about it. If you look at our Q2 results, you already start to see that our actual losses for Shopee has been narrowing, not just on a unit economic basis but also on a total -- at a Shopee group level basis, and including all the costs considered. At the same time, we still achieved significant growth at 40% -- more than 40% for order. And so I think it's important that as we shared earlier, that given the macro uncertainties and our goal is to be the optimal -- to achieve optimal success, in the long run for the consumer Internet segment in our market. We think that pace ourselves well and manage the business prudently, in accordance with the macro environment is very important. And a nimble execution adaptability has really helped us in achieving great success, through the COVID period as well. And now it's a time for us to manage in a different direction, and we want to communicate proactively to the market about this different direction. Now of course, it doesn't mean that we think the market immediately are deteriorating or we see anything that significantly negative. It is more of a proactive communication to the market about management strategies, to focus on efficiency, focus on the overall strength and health of the ecosystem, and focus on continuing to tighten our operations. And that has been in our operations since earlier this year, and we want to continue in that trend. But of course to put things in context, as we also shared, our long-term view about the…

Our next question comes from Alicia Yap from Citigroup. Please go ahead.

Hi, good evening, management. Thanks for taking my questions. I wanted to follow up on the e-commerce guidance suspension. So can manage – I think because in the past few years, management have proven very diligent on providing good insight into your forecast. So I wonder if these challenges mainly on consumer is that the frequency of the spending or the ASP where the consumer become more cautious on spending on the big ticket items that affect some of this uncertainty in the forecast, or is it because of the spending willingness from the smaller merchants that you are seeing that create the difficulty on forecasting your revenue? So on – this is the first question on e-commerce. Very quickly on gaming. Just wondering without new games launched, what should we expect in terms of the Free Fire franchise to trend going forward? Would that be more stable, or would that be also potentially growing the paying ratio with the existing user base that can actually support the growth booking going forward? Thank you.

Yes. Thanks, Alicia. I think what we're trying to say here is that for us the reason we are suspending the guidance now is mainly because from a management of the business perspective, we will see the growth – top line growth more as an output at this stage not as a target. And what is the target now is going to be increasingly efficiency improvements and long-term health and strength and profitability of the platform. And that's why I want to put things into perspective. Even though we don't put as a target, naturally, we will continue to see growth. And overall the market conditions there are headwinds with as we mentioned inflation and reopening, tough comps against last year, especially given that we have supercharged growth. In fact Shopee has achieved 10 quarters of triple-digit growth in the past 20 quarters since we are public. I think that is probably a historical record for any business. Also given the emerging market that we are in with underdeveloped infrastructure and all the work we have to play in to grow a highly complex e-commerce business across so many markets. So we have no problem. We don't have to prove that we can execute growth. That has been very well established as a very strong track record and also got us here as a strong leader and continue to expand our leadership even despite all the headwinds that everybody has experienced in the market. However we are saying that at a prudent business management perspective, we think now the direction needs to shift. And we want to proactively communicate the shift of that direction to the market to our stakeholders. And that's what we are saying here. Now in terms of Free Fire trends. So as you can tell, given…

Our next question comes from Piyush Choudhary from HSBC Singapore. Please go ahead.

Yeah. Hi. Good evening to the management. Thanks a lot for the opportunity. Two questions. Firstly, can you talk a little bit about the outlook for the e-commerce industry GMV growth in your core markets in 2022 and 2023? Which markets are proving more resilient and which are showing signs of early weakness? Secondly, could you give us a breakup of gross orders and grab revenue in Brazil? And what is the likely cost savings with your recent initiatives taken? Is it already reflected in 2Q or yet to come? Thank you.

I think in terms of the industry GMV growth there are a lot of research outstanding and I think, obviously, it's going to be slower, but also it really depends on the various industry players and us and our peers, how we manage this growth. And among the various markets, we see that there are some markets, for example, like Malaysia, Singapore that enjoy spectacular growth during the previous years, there is a slowdown, given a tough comp and also the opening up versus a period of strict lockdown. I think the continuing to this year, of course, the tough comp is going to remain a fact. And at the same time, we also see markets like Indonesia, Philippines and Vietnam continue to enjoy relatively faster growth. That also in a way, sometimes affected by the comp relative to -- in terms of open up versus lockdown, the relative macro situation people are facing, the physical tools, the central banks and the government in terms of the interest rates and the fiscal tools the governments have been employing to manage the inflation and how they deploy those tools, whether it's on price cap or on coupons. And if it's on subsidies, how they channel the subsidies, so all of this can affect the overall consumption growth and where the consumption goes to whether it's the discretionary or necessities as physical consumption versus service and also the e-commerce relatively sheer online versus offline. But I think there are many factors that could affect well, in general, the big picture is going to be slower and compared to last year and how much slower, I think, remains to be seen. And overall, we hope that we can continue to see resilience. But again, as we shared from a management perspective, we think it's much better to be disciplined and prudent and manage for macro uncertainty and be prepared for any negative events and situations as opposed to hoping for resilience and the market is staying positive. In terms of the gross orders and GAAP revenues for Brazil, I think, we disclosed the strong growth. Brazil has continued to enjoy for us. And we also more importantly, continue to narrow -- improve our unit economics in Brazil. So everything is on track for us in Brazil. And in terms of the Group level, I think that the cost initiatives when we talk about the projections in the future, for the future in terms of EBITDA positive after HQ costs allocation for the Asia market, we do take into any initiatives that are visible to us at a point, of course, we don't have a perfect prediction for the future.

The next question comes from Thomas Chong from Jefferies. Please go ahead.

Hi, good evening. Thanks management for taking my questions. I would like to ask about the digital entertainment side. In particular, how we should think about the new games in the pipeline. We understand that we have a different energy development. I just want to see how the progress is going? And should we expect any renewable titles to be released in second half or 2023? And on that front, how we should think about the EBITDA margin for the digital entertainment business in coming quarters? Do we expect to invest in driving the retention and engagement of Free Fire users would continue in 2022 or 2023? Thank you.

Yeah. In terms of the game pipeline, we do have things in the pipeline whether it's our own self-development or published titles or invest details we may publish later this year. And as you know we will announce it when they're public -- when they're officially launched. And I think in the long run we do -- our goal is to continue to diversify our portfolio and in terms of genres and mix of the esports and more casual type of games and across the more diverse market so the direction is the same. From a financial perspective, we don't think there will be anything that will have an immediate meaningful significant impact like that on Free Fire in the immediate future, because; A, Free Fire is a very long the largest mobile titles in the world; and B, for any game that we launched initially our focus is more going to be user engagement and building up the momentum and also the user base and solidify that before we focus more monetization. Even for Free Fire it actually took the game quite a number of quarters, or I would say even more than a year to graduate and ramp up monetization and to develop into more full potential. So that's our view. And in terms of the EBITDA margins for digital entertainment in coming quarters, I think our EBITDA margin is still very much on the high end of the industry at more than 45%. Now from quarter-to-quarter as we shared before there could be fluctuations depending on, for example, esports events and other campaigns. For example, the second quarter we had our -- the World Series competition for Free Fire. And then that also depends on launch timing for the new games. If we have new games then there will be some sales and marketing investment to build up momentum for the public -- based on publishing timing. But generally I think even though there will be fluctuations, we do continue to expect our EBIT margin will continue to remain on the high end compared to the industry range.

The next question comes from Jiong Shao from Barclays. Please go ahead.

Thank you very much for taking my questions. I have two questions. I'd like to ask one at a time, if that's okay? As a company focuses on monetization, efficiency cost control, any comments on your take rate expectation? I think in the past you talked about increasing take rate about roughly 200 basis points this year. Should that still be our expectation or your expectation? Any comments would be super, super helpful. That's my first question. Thank you.

Thank you Jiong. I don't recall we give any take rate guidance, right? But on the whole I think -- in terms of take rate, we do expect the take rate to graduate, right and -- as we continue to deepen monetization through better services to our sellers and consumers and through growing the ecosystem as a whole.

Okay. So my apologies, I think, maybe what I remember, was I think you might have talked about, the increase in take rate this year is going to be similar to the increase in take rate last year which was roughly 170, 200 basis points, if I'm not mistaken. But maybe another way to just follow-up on this, is there any change in your expectation for your take rate. Since now you sort of suspended the revenue guide? Is there any change in your expectation of the monetization, specifically regarding to the take rate?

I think Jiong there, can be many factors affecting the take rate. We won't be providing any specific guidance on the take rate. But suffice to say that, there will be gradual increase overtime. We don't set a specific target take rate for any particular year. And when take rate rises, it can be also based on different income streams in terms of transaction-based fees and these are more like the take rate that we set. But on the other hand there are also take rates that the sellers adopt because, for example, we offer opt-in programs for sellers who joined these programs, paid as a higher take rate in getting more services and offerings in return. And this will also increase our take rate. But it is not something that is directly set by us, but it's more based on the seller adoption. There's also advertisement. Again, that is something based on adoption. Then there's also VAS [ph] and VAS take rates in a way also depends on, the rollout of our logistics and in terms of, how we manage logistics and there's also accounting-related changes that might affect the take rate. So there are many different factors that affected. But I think overall we continue to focus on the unit economic improvement and overall platform ecosystem growth of our platform.

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

Hi. Good evening and thank you for the presentation. Two questions from my side. Firstly, on the gaming guidance, I guess, there's no, changes if you can confirm that? Secondly, on your ad revenues, if you can please give more color on, how fast they're growing? And if I look at it from a percentage of GMV perspective where are we? Thank you.

Thanks Ranjan. In terms of game guidance no change to it. And in terms of ad revenue, we don't break that down, but there is also a gradual upward trend on that front. And that also part of the reason that combined with rising transaction-based fees that we see continual increase in our high-margin revenue and the improvement on our margins overall for Shopee.

The next question comes from John Choi from Daiwa. Please, go ahead.

Thank you for taking my question. My question is on your strategy to shift more on efficiency improvement. Management kind of elaborate what are the few intangible examples that you could give us, how you're going to really try to improve the efficiency on the margins. Is it going to be more by aggressive cutting or less spending in some of the strict areas? And a quick follow-up is on the Brazil strategy. I know that we are growing very nicely here. How are you going to balance the growth opportunities and investments versus your new fit strategy going forward? Thank you.

Yes. Thanks, John. In terms of the efficiency rate, I think, there's -- it's not as simple as we just cut right? It is important to want to focus on the overall efficiency of the ecosystem. For example, as we all know, logistics is a big part of the ecosystem cost. And whether it's borne by the sellers, by the buyers or by the platform like us, it is one of the biggest cost component. And there are many ways to continue to improve it. For example, we work even more closely with our 3PL partners and other agents and service providers to better route the delivery and better plan and delivery and also increase the density of delivery. There are many ways to improve the overall ecosystem efficiency. And on the payment front, for example, we continue to improve adoption of our e-wallet and also increased other online payment adoption over time and that can also lower the payment cost and reduce the transaction friction. So there are many things that we focus on the ecosystem side that we want to make sure they can be more efficient. And also, in terms of the other cost management that we continue to review various cost components and to see if there can be savings made during this process. And I think it's actually a very good exercise. Now, as we shared, we see this business as running a marathon. And during this time, I think it's good to tighten our shoelace, get water and develop and also then that prepare us to run faster down the road. And in terms of growth in Brazil on -- in terms of balancing growth and efficiency I think the big picture is still doing the right thing at the right time at the right place. And for Brazil we look at what is potentially natural or reasonable growth rates for us and what is efficient for us. So that's -- we've always emphasized on efficiency in any growth region and increasingly given the micro trends we will probably further focus on that and emphasize on that. And again, as I said, we're going to see growth rates as more output during this period of time and more focus on efficiency and that can allow us to eventually build a stronger and more profitable platform there long term.

Our next question comes from Varun Ahuja from Credit Suisse. Please go ahead.

Yeah. Hi. Thanks for the opportunity. So I've got three questions. First on the e-commerce sorry to harp on it guidance again. So it's the change in strategy that you're talking about. So the suspension in guidance is for this year or next year? Do you think you'll get back to giving guidance for the segment? And more importantly, have you going to change the metrics that you track internally with – still revenue growth or EBITDA or any of the metrics that you're going to focus on when you provide guidance? So any color on that front will be helpful. Secondly, on the fintech side. If you can tell us, how the digital bank initiatives are going across the various countries? And if you look at the loan receivables on the balance sheet is around $2 billion. How much more loans that you're giving outside of this in collaboration with the digital banks? Any color that you can share that will be good and lastly, if you can give more color on the goodwill impairment. Which segment of this investment relates to – in e-commerce or logistics gaming? How much is still left on the balance sheet of that investment? Thank you.

Yeah. Thank you, Varun. In terms of the guidance suspension, we are expanding the guidance for this year. No decision has been made with anything regarding future guidance. And in terms of the digital bank initiatives, we continue to as I shared before, we continue to focus on quality as opposed to growth for our bank initiatives. And it's going to be a very long-term effort and also the bank is we're very much aware trust and reliability and integrity driven business and it's very important to build a robust system for it. So we're not focused on driving growth on that front. And the same with our credit business, where we continue to build our models and provide needed services to our consumers in various markets and collaborating with third-party financial institutions in doing so. Again, we're not driving growth in that area. We're looking more for how to build a robust model that can withstand cycles, and can be a long-term sustainable business model for us. In terms of the rural impairment, these are related to various past investments not any specific segment focus. But as you know, given the macro environment and the movements in the market of – in company's valuations and stock prices we also think it's prudent for us to proactively manage and review our portfolio that we hold on the book to assess the rural impairments needed. So far I think we – if you look at our balance sheet, there's still around like $400 million. And of course, we – at this stage, we don't currently expect all of this needs to be written off. But on the other hand, we will continue to assess over the period.

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

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