Sea Limited (SE) Q2 2024 Earnings Report, Transcript and Summary

Good morning, and good evening to all, and welcome to the Sea Limited Second Quarter 2024 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] And finally I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Mr. MC Koh to begin the conference. Please go ahead.

Hello, everyone, and welcome to Sea's 2024 second quarter earnings conference call. I am MC, Sea's Investor Relations Director. On this call, 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. 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 of 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 Chief Executive Officer, Forrest Li; President, Chris Feng; and Chief Financial Officer, Tony Hou. Our management will share strategy and business updates, operating highlights and financial performance for the second quarter of 2024. This will be followed by a Q&A session in which we welcome any questions you have. With that let me turn the call over to Forrest.

Hello, everyone, and thank you for joining today's call. I'm happy to report that it has been a solid quarter for us with our strong momentum from Q1 continuing into Q2. All three of our businesses have shown both strong growth and higher profitability. Before I dive into each business results, I wanted to share some observations of our Southeast Asia's market. Generally, retail and consumer spending trends in the region have remained healthy with domestic consumption continuing to be a main driver of economic performance in many markets. This sets a very strong macro foundation for our e-commerce business. We are happy with Shopee's market share in Southeast Asia and our sizable lead over our peers in the region. We are seeing more market share consolidation and an industry-wide take rate increase. We believe this will move the industry toward profitability and sustainability, and we welcome this trend. With the strong results delivered in the first half and our outlook for the rest of the year, we expect that Shopee will become adjusted EBITDA positive from the third quarter. We are also revising up our guidance for Shopee's 2024 full year GMV growth rate to the mid-20s. With that, let me take you through each business's performance in more detail. Starting with e-commerce. As we have shared before, Shopee's operational priorities are to deepen our competitive moats on three fronts. Enhancing our price competitiveness, improving service quality to customers and strengthening our content ecosystem. This strategy is paying off. Over the past two quarters, Shopee has been able to post healthy, sustainable growth while also improving its profit profile. One area we are placing greater focus on is improving our ad take rate. Currently, our ad take rate is lower than the industry average we observe in more mature e-commerce markets. To us, this represents a good opportunity to improve our monetization. Over the quarter, we have made it easier and more attractive for sellers to join our ad platform. We also have a dedicated tech team working on improving our ad bidding algorithms to help sellers achieve higher returns from their advertising spend. So far the results have been encouraging. The number of sellers who pay for ads has increased by more than 20% year-on-year this quarter. We believe there is still plenty of upside and we will continue to push on this front. We have also launched Live Ads across our Asian markets, allowing streamers, including both merchants and creators to insert ads into Shopee Live. This feature has been very well received. In Indonesia, in June, one in four active streamers paid for Live Ads. This feature helps streamers boost their sales efficiency while increasing our ad take rate, enhancing our content ecosystem and improving our live streaming unique economics. On improving our service quality to customers, our logistics capabilities continue to differentiate us. In this way, 50% of buyers in Java, Indonesia cited faster delivery as their reason for choosing Shopee. We have continued to integrate more closely with our many logistics partners to widen our coverage and deliver packages faster. SPX Express, in particular, has managed to improve delivery speed while also reducing its costs. In the second quarter, more than 70% of SPX Express orders in Asia were delivered within three days of order placement with cost per order declining 8% year-on-year. Another initiative to enhance customer service quality has been improving the buyer return refund process, a common pinpoint in e-commerce. Earlier this year, we launched a change of mind returns feature in our Asian markets, letting buyers initiate no questions asked returns within 15 days. We paired this with data-driven test improvements to make the overall return refund process highly predictive and efficient. As a result, in the second quarter, more than half of our return and refund cases in Asia were resolved within one day. Making this process fast free makes buyers more willing to complete purchases, driving up user stickiness and repurchase frequency. In Malaysia, we saw a more than 10% increase in average basket size among buyers who raised change of mind return requests compared to before the feature was launched. I share these examples to demonstrate how we consistently execute on our operational priorities every quarter. We believe this approach will strengthen our market leadership in the long-term. Next, turning to Digital Financial Services. SeaMoney has continued its strong momentum in growing its loan book and profit while remaining prudent on risk management. Both revenue and adjusted EBITDA have grown very well year-on-year. Consumer and SME credit business continues to be the primary driver of SeaMoney's revenue and profit growth. We are making good progress on deepening our credit product penetration both On-Shopee and Off-Shopee. Our large Shopee user base is a unique advantage. It enables us to acquire new customers very cost efficiently by promoting the right products at the right time to the right users. In the second quarter, we registered over four million first time borrowers of our credit products, a figure that has more than doubled compared to one year ago. We have also expanded our Off-Shopee credit use cases. In Indonesia, we partnered with over 1,000 electronic stores to introduce customized SPayLater loans for mobile phone sales. We were the first player in the market to provide instant credit approval for this category at scale. We will continue to explore more credit use cases in our markets. With all these efforts, we have grown our loan book size to $3.5 billion at the end of June, up almost 40% year-on-year. Notably, our non-performing loans metric held steady at the end of the quarter. In fact, it improved slightly from the previous quarter. We now have 21 million consumers and SME loans active users, up almost 60% year-on-year. Looking forward, we will continue to invest in growing our user base efficiently and effectively as our markets are still underpenetrated and present sizable opportunities. A large user base will be a cornerstone of future growth for SeaMoney, especially as we introduce more product offerings. Finally, turning to our Digital Entertainment business. Garena's two years of hard work undertaking a user-centric approach are paying off. We have delivered a strong quarter with more than 20% year-on-year growth in bookings, mainly contributed by Free Fire. At the end of June, Free Fire released a Seventh Anniversary version update, our largest in-game event of the year. We brought back classic weapons, made a documentary on Free Fire history and hosted a Story Wall where users could share their past experiences with the game. The campaign was very successful. Our players really enjoyed revisiting their fond memories of the game's early years. Free Fire's unique strength is its large, highly engaged and loyal gamer base. I'm very proud to share that every single day throughout Q2, Free Fire had more than 100 million daily active players. This reinforces our conviction that Free Fire is an evergreen franchise. Free Fire also managed to keep growing, thanks to the strong word-of-mouth effect we see from our large user base. According to Sensor Tower, Free Fire was the most downloaded mobile game globally in the second quarter. Free Fire's organic social pool is highly valuable. Especially in today's world, we are getting users to download and try new content can be hard and costly. We are also excited about launching Need for Speed: Mobile in Taiwan, Hong Kong and Macau later this year in partnership with Tencent and Electronic Arts. We are pleased to be able to bring this high-quality game with a classic IP to our gamer community. To conclude, we are happy with the strong results, the three businesses have achieved in the first half. Thank you as always for your support. Before I hand over the call, I'm pleased to announce that two new Independent Directors have joined our Board. Dr. Silvio Savarese is a leading expert in AI; and Ms. Jessica Tan is a highly accomplished leader in financial services. I'm glad that Silvio and Jessica are waiting to lend us their deep expertise and guidance on these two areas, which will be critical in shaping Sea's future. In addition, Tony will be stepping down from our Board and will continue to serve as our CFO. With these changes, our seven-member Board has a majority of independent directors. Thank you very much. With that, I invite Tony to discuss our financials.

Thank you, Forrest, and thanks to everyone for joining the call. For Sea overall, total GAAP revenue increased 23% year-on-year to $3.8 billion in the second quarter of 2024. This was primarily driven by GMV growth of our e-commerce business and the growth of our Digital Financial Services business. Our total adjusted EBITDA was $448 million in the second quarter of 2024 compared to an adjusted EBITDA of $510 million in the second quarter of 2023. On e-commerce, Shopee's gross orders grew 40% and GMV increased by 29% year-on-year. Our second quarter GAAP revenue of $2.8 billion included GAAP marketplace revenue of $2.5 billion, up 33% year-on-year, and GAAP product revenue of $0.3 billion. Within GAAP marketplace revenue, core marketplace revenue mainly consisting of transaction-based fees and advertising revenues was $1.8 billion, up 41% year-on-year. Value-added services revenue, mainly consisting of revenues related to logistics services was $0.7 billion, up 16% year-on-year. E-commerce adjusted EBITDA improved quarter-on-quarter with losses narrowing to $9 million in the second quarter of 2024 compared to an adjusted EBITDA loss of $22 million in the first quarter of 2024 and an adjusted EBITDA of $150 million in the second quarter of 2023. For our Asia markets, we continued to achieve positive adjusted EBITDA following our first quarter of 2024 results, recording $4 million during the quarter compared to an adjusted EBITDA of $204 million in the second quarter of 2023. In our other markets, the adjusted EBITDA loss was $30 million, narrowing meaningfully from last year when losses were $54 million. In Brazil, unit economics continued to improve as we achieved a positive contribution margin per order of $0.09 for the quarter as compared to a loss of $0.24 in the second quarter of 2023. Digital Financial Services GAAP revenue was up by 21% year-on-year to $519 million. Adjusted EBITDA was up by 20% year-on-year to $165 million. As of the end of June, our consumer and SME loans principal outstanding reached $3.5 billion, up almost 40% year-on-year and 8% quarter-on-quarter. Non-performing loans past due by more than 90 days as a percentage of total consumer and SME loans was 1.3% at the end of the quarter. Digital Entertainment bookings were $537 million, up 21% year-on-year and 5% quarter-on-quarter. GAAP revenue was $436 million. Adjusted EBITDA was $303 million. Returning to our consolidated numbers. We recognized a net non-operating income of $56 million in the second quarter of 2024 compared to a net non-operating income of $108 million in the second quarter of 2023. We had a net income tax expense of $61 million in the second quarter of 2024 compared to net income tax expense of $62 million in the second quarter of 2023. As a result, net income was $80 million in the second quarter of 2024 as compared to net income of $331 million in the second quarter of 2023. With that, let me turn the call to MC.

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

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Pang Vittayaamnuaykoon with Goldman Sachs. Your line is open.

Good afternoon, management. Thank you very much for the opportunities. Two questions from my side both on e-commerce. Number one, could you please comment on the latest competitive landscape you have observed? We are seeing all players, including yourself, push for further rationalization into third quarter, especially on the merchant front. How should this translate into your results and your updated guidance? In another word, what factors do you include in your revised guidance? That's question number one. Question number two, specifically on margins, what type of near and medium-term margins can we expect Shopee to deliver? And how do you plan to achieve that? Any update on long-term margin expectations as well?

Yes, on the competitive landscape, I think as Forrest mentioned in the opening, we do see a more stable competitive environment in the past few months. And as you mentioned, we are positive movement in terms of the take rate from various players in our market. And I think we welcome that as a signal of a more stable environment for a competition perspective. And our longer-term view on the profitability target stay unchanged as 2% to 3% of the EBITDA as we shared before. However, we believe the market is still quite dynamic. And in the short-term, we will likely number one focusing on the profitability of the businesses. We were, as we shared in our guidance in Q3, we will be profitable as the Shopee business is. But at the same time, we also like to grow as there is still a good potential in the market we operate in. We would like to make sure that as a business, we can outgrow the market as well in the short-term rather than maximizing the profit in the near-term. If we look a little bit to the medium terms, we do expect the overall competitive landscape in our market to continue to evolve and continue to come into a more rational stage even compared to where we are right now which will drive the overall industry profitability to improve. If you look at the overall market, as we mentioned, is still rather dynamic with a more stable competitive environment. But there are things we can control, there are things we cannot control. We were rather focusing on the things we can control. For example, the thing that we shared in the opening, we want to have better pricing, we would like to have better user experience. We would like to have a better content supply to our users. But together with the larger scale of where we are right now compared to our competitors, we will, all those things will help us to always be better positioned to deliver better value to our consumers and ultimately have better unit economics, which will translate to the market share gain over time as well. I think that's kind of like how we probably see the market in the near-term, mid-term and the longer-term.

Your next question comes from the line of Piyush Choudhary with HSBC. Your line is open.

Yeah. Hi. Thanks for the opportunity and congrats to the management team on good set of results. Two questions, again, both on e-commerce. As you mentioned earlier, you have been increasing take rates and the industry has also increased take rates during 1H. Is it possible to further increase the take rates? And are you able to reduce the shipping subsidies? That's the first question. Secondly, can you talk about the unit economics of live-streaming business? Has it turned profitable now in some countries? How is the contribution margin for live streaming segment? Thank you.

For the take rate, we do believe there are opportunities to further increase the take rate. I think part of that comes from commissions and fees. And as you probably observed, we do increased meaningfully in the past few quarters. I think there are still opportunity to further increase that, although probably not in the magnitude that we see in the early part of the year. There's another part of take rate, which we think that is also having a sizable opportunity is on the ad side. So that, as we shared in the opening, we do focus a lot on the ad side. We spent quite effort on building infrastructure to the ad side in the past few quarters, like, for example, we built a standard platform for our recommendation and search. We also built a standard algorithm and platform for our ad system and organic traffic allocations. All those will help us to be able to allocate traffic more agile and more flexible. And this enables us to offer better ad product to the seller side as well, which we are rolling out in the next few quarters. We believe all those efforts will help us on the ad take rate improvement in the coming quarters. On the UE pool, for live stream, we do see UE improvement quarter-on-quarter actually if you look at all markets, some markets are profitable, some markets are still improving. But I think generally we believe the trend will continue in terms of the UE improvement for our live stream businesses.

Your next question comes from the line of Marissa Putri with UBS. Your line is open.

Hi, management. So I have two questions. Firstly, on e-commerce. So you've just reported your first CM positive from Brazil and I think still with ambitions to kind of be number two in the market. How do you plan in achieving this? Should we think of the improved profitability as sustainable? And number two is kind of just to make sure that I'm getting your guidance correctly. So the adjusted EBITDA positive will be just for standalone Q3 EBITDA, but not overall nine months EBITDA positive in Q3. Thanks.

For the Brazil businesses, we are very happy about the improvement on the margins in the market. As we shared in the earnings, the contribution margin for the Brazil market is positive already. And we also see there is a good potential in Brazil market. The core for us in Brazil is, I think, number one, we are able to consistently reduce our shipping costs in the market through our own largest networks. Number two is we're also improving the user experience in the market thankfully over the past quarters. I think in combination, it drives better user retention and also better unit economics to our market. The other thing that's important for our Brazil market besides the user experience and the unit economic improvement is the ability for us to increase our penetration of the higher basket categories over time. We do believe that we have a sizable potential there to further increase our market share penetrations to those categories. Traditionally, we are not as strong as compared to some of other players in the market. So with all that, we do feel that there is a meaningful potential for us to grow further in Brazil market and we can see the levers that we have and we are working on those levers. In terms of the EBITDA guidance, I think, what we refer to is the third quarter EBITDA positive. I think that the understanding is correct on that.

Your next question comes from the line of Alicia Yap with Citigroup. Your line is open.

Hi. Thank you. Good evening, management. Thanks for taking my questions. Two questions. First, can management share the update on the progress of acquiring on the non-Shopee platform user for the DFS business and the GTV growth for the non-Shopee platform? Will this be more from the offline transactions like those offline retailers, the restaurant partners or Sea actually will be open to work with any online partners, including, for example, the online travel agents? So this is for the DFS question. Second question is related to Shopee Express. So how are we going to further optimize the operational efficiency and also further improve the cost structure for the logistics business in the coming quarters? Thank you.

On the first question, if you look at our credit loan portfolio, there are a few components of that. We have Shopee PayLater, which is very much quite connected to Shopee, the SPayLater as we call it. It's used as part of Shopee transactions. Besides that, we have buying cash flow, which is the cash flow that not related to Shopee, anyone can take a loan from it. And on top of that, we also have the offline payment through SPayLater. And the same SPayLater that can be used offline can also be used online through a ShopeePay acquiring network. Besides that, we are also developing different kind of use cases for offline usage, for example, the headphone purchase as we shared in the opening. So if you -- and similar type of specialized services can be deployed in future as well that we're working on, for example, the potential home appliance purchase offline, it can be online as well. For example, the other type of [Technical Difficulty]. So the -- I think to the question whether it's mainly offline or it's online as well, I think, the answer is probably a combination of both. In fact, if you are in some of the markets offline in Indonesia, the user can use our Shopee PayLater, SPayLater solutions to pay in an online trouble website already. So we do work with various, both online and offline partners to enable SPayLater for their transactions. And we expect the partner will grow over time for both online and offline use. So it wouldn't be only offline. For the second question regarding SPX, we actually have follow-up lever to further improve the efficiency of SPX. For example number one is the scale. There is still sizable room for us to grow our scale further, which in our space still can reduce the cost and improve efficiencies. Number two is more coverage and more density of the coverage. For example, more hubs, some of the hubs can be traditional hubs as you see, some of the hubs can mobile hubs through our innovative way of deploying the hubs with low cost. And if you look at Q2, we actually add about 900 hubs in Q2 and five of them are mobile hubs with low-cost operations. Number three is we're also doing more automation through our network. For example, in our SOCs, we are adding more automation solutions. Either it's a full ASM, automatic sorting machines or it's a hybrid solution when there is a smaller SOCs, which will further improve our productivity. We're adding similar solutions not only to SOCs, but also to some of our first-mile and last-mile hubs when the scale enable it. And number four is better technology supporting our businesses. For example, a better sorting for our last-mile drivers, we are deploying a solution that we can also suggest the routing and sequencing. We have done in some markets for some in Brazil, but in some of Asian markets, that's not easy to do because of the complexity of the maps. And we are rolling out more and more of a solution in different countries because we need to customize our solution for different markets. And the last thing just to share is the off-clock, which is very important for us. The off-clock starting from the picking up from the seller side to the first-mile hub to the sorting centers and to the line haul, to the last mile to deliveries and it sounds simple, but it's actually quite complex because there are so many handovers along the way. And there are so many choices we have to make like, for example, when do you set a line haul, when do you pick up and whether you send to the hub directly or you send to a secondary sorting center. So optimizing the off-clock here will enable us to further improve our efficiencies in general. And of course, I mean, other things we're working on, but just sharing some examples for the improvement opportunity we have on the logistics side.

Your next question comes from the line of Ellie Jiang with Macquarie. Your line is open.

Hey, good evening. Thank you management for taking my question. I have two. Number one is a follow-up on e-commerce. Just wanted to ask about the ad take rate the management commented. We talked about the sizable opportunities ahead. But if we look in the next several years, what kind of timeline do we really anticipate to ramp up this app kind of revenue and potentially get to a level that's similar to the mutual market players? And so for example, how does it take to -- for us to simulate more ad spending from the merchants, would it be more efficient marketing tools or coming from more higher ticket sized item sales? And the second question is on the gaming segment. So it seems like Free Fire is really generating momentum and according to some third-party trackers, the momentum remained quite strong quarter-to-date. So can you comment on the visibility or the sustainability for the second half outlook? And for the potential kind of Need for Speed distribution that we partner with Tencent, what kind of financial kind of contribution would that be coming from the second half as well? Thank you.

On the ad take rate, I think, given the foundation we have built, as I shared earlier, we do believe that we will start to gain a benefit in the next few quarters, probably wouldn't take a few years. I think we're talking about probably quarters. I think the basic product there, I think it will take some time for the seller to adopt to it, and also why there's different seller adopt to it. We have to optimize it for different markets. And I think it comes in both in terms of the improved efficiency on how the seller use ads product and also from our side as a platform, how we can allocate the traffic in a more efficient way, giving a seller more upside without sacrificing the overall platform conversion rate. I think that's essentially the technology we've built in the past few quarters and we're trying to rollout and optimize in the next few quarters.

On the gaming side, as you mentioned, we are very happy and we are very motivated by the trend we have observed on Free Fire. This is across pretty much all the metrics in terms of the new users, in terms of the, like the user, the existing user retention and also such as some like a monetization metrics as well like paying ratios, right, and overall the growth rate. This is kind of like this is a demonstrate what we have done in the past is a right decision we made and it's the right focus we have. And we will continue to do that. And so, we'll be very, very focused on the content update, right? And in the past two quarters and we have some very, very successful new content release and around some festival campaigns and some like unique gameplay, new user, new gameplay experience. So we'll continue to do that. There will be several big updates already in the pipeline and we have a pretty kind of a strong confidence on the result of those -- on those new updates. And on top of that and we are continually seeing Free Fire as a platform and it's not just every like evergreen franchise, it's more like a platform. The way we think about it, this is, as we shared, like on every single date like Free Fire can reach more than 100 million users globally. So that is a -- that is very, very sizable. That is a very, very large scale. I think like although you may consider the game is called -- it's always the name is always called Free Fire, but in Free Fire, so if you log into the game and you start to experience all different types of game experience and like different game modes. So it's kind of like a combination of the different gameplay experiences within one platform under one Free Fire umbrella. So we will continually explore that as well. And some other like longer-term initiatives we have been very, very focused on and I personally feel very excited is about how to use the AI tools, right, and both on the like a production side, the game development side, right, how to make the production more cost-efficient like how to like improve the speed and the quality of the production. At the same time, we continually explore what is the type of new game experience for gamers enabled by AI. So this has been a focus of the team. And on the other hand, it's related to the platform perspective we have like we are not building -- only building the game content and we are continually focused on building on the game creation tools within the Free Fire ecosystem, within the Free Fire universe. And gradually we're going to like work with the third-party content creator game developers to create a different like a various experiences within the Free Fire platform to reach to like 100 million daily active user base. So this is the other. I think that will not only make the Free Fire kind of offer a more complete gamer experience at the same time like this will continue to help us to -- on the user engagement and the monetization. So we remain very, very confident for the rest of the year, the momentum. But like, as we all know, like a game business, game have -- sometimes have the impact of the seasonality, right? This is related to the school holidays, related to the certain like a festival in certain markets, but look like a little bit like a longer-term, right, and from the full-year perspective, as you asked, and we remain confident to deliver the double-digit growth for Free Fire for both the monetization side and also on the user growth side. And we are very excited, we work very, very closely with our partners like EA and Tencent to work on the new game in our pipeline. But I would say like it's still early to comment right on what in terms of the revenue contribution. And internally like we have been tremendously still focused on Free Fire. And we will let the market know and give the more kind of a detailed update when we get the new game launch. I think when we get user feedback and we see the stat, we'll have a better sense about how big potential those new games could be.

Your next question comes from the line of Divya Kothiyal with Morgan Stanley. Your line is open.

Yeah. Thank you very much. My first question is just on your views on the higher risk from competition from cross-border e-commerce in ASEAN. I mean given the traction that team was seeing in recent months in Philippines and Malaysia and their recent entry in Thailand, do you think that this could also become a credible competitor the way TikTok kind of came to this geography? And how are we planning to respond to this, especially in relation to our positive adjusted EBITDA guidance for the third quarter? And my second question is on e-commerce GMV. Is the higher guidance coming more from the surprises in Brazil or is it from ASEAN? And if you can comment on the trends that you're seeing in July and August, given that second half is slightly tougher base than the first half? And are we seeing any sort of tapering there? Thank you.

For the CB players, I think, you will probably refer to Temu's businesses coming to Asia. I mean, generally, we have a lot of respect for what Pinduoduo and Temu has achieved in the past years. However, I think, for our market, we'll probably monitor, but from what we see so far. I think the impact to our business is probably rather limited from what we see, I think, for two reasons. One is CB by nature is a smaller part of our businesses in our market. And if you look at the market like Philippines, Thailand or Malaysia mentioned, majority of the e-commerce transaction happen to be a domestic selling rather than cross-border selling, right? There are many reasons to contribute to that. Yeah, of course, but as a fact, that's how the market landscape evolved to for the better efficiency and cost structure that the domestic e-commerce offers. And that's one. Second one is the great strength for Temu other cross-border players entering to US or European market is that pricing. They typically carries a significant price advantage compared to the existing players. However, if you compare our pricing to their pricing in the market that you mentioned, Philippines, Thailand or Malaysia, we actually have a much better pricing advantage compared to them. It was mainly because we actually operate in a very competitive environment for quite a long time. And we have been essentially having a very competitive seller landscape domestically for quite a while. And also compared to a more developed market where the operating cost is much higher compared to the operating cost in China, the operating cost for our sellers in our market domestically is probably cheaper than operating costs in China. If you take a person in Philippines to open a warehouse or operate a shop, they are probably cheaper than a Chinese person. So many different reasons contribute to the fact that our pricing in our marketplace, which you can benchmark externally actually. It's very competitive compared to even the cross-border players you mentioned. To your second question around the GMV guidance, I think generally we see good growth, which are better than we thought before when we give out the previous guidance in both Asia market and Brazil market. And just in the pure scale, Brazil market is, compared to Asia, it is still relatively smaller as a total size as where we are. So the one market will not influence the number dramatically. So when we look at better growth guidance, I think, it will imply that both markets in Asia and Brazil will have a meaningful improvement from what we thought before. And as you mentioned that, last year, our Q3 and Q4 does have a higher base compared to Q1, Q2, but still that I think the core thing is that there are many initiatives we've done from last year from Q3 and Q2, sorry, Q3 and Q4 on the content side improvement and also the improvement on the service quality, the improvement on the cost structures, the improvement on the pricing, all those contribute to better retention and the new user coming to our platform, which drives a better growth that we're seeing so far, which leads to our recent guidance.

Your next question comes from the line of Sachin Salgaonkar with Bank of America. Your line is open.

Hi. Thank you for the opportunity and congrats on a good set of numbers. I have two questions. First one on gaming and second one on e-commerce. On gaming, again, when we look at your numbers, one gets a sense that your bookings are up, your users are up, but revenue is down. And we are seeing that trend for last couple of quarters where ARPU continues to go down. What happened this quarter was clearly we could see margins almost being at an all-time high. So I want to understand, is this a specific trend we should look at going ahead where ARPU continues to decline and margins continue to improve or at least stay at these levels? Second question I understand your earlier comments on competition being rational, but just want to double-click on a couple of markets. One, Taiwan, where we have a new competitor, Coupang, which is aggressive. So would love to know your thoughts on overall competitive intensity in that market. And second, in Indonesia, where one of the players had increased subsidies in the market. So any specific response from you guys to that? And how are you guys looking at the increased subsidies? Thanks.

Thanks for the question. I think for the first question, you're talking about the GAAP revenue. So basically the bookings actually improved both Q-o-Q and year-over-year and while because of the GAAP treatment, we have to defer more revenues into the fourth -- future quarters. So that's why we typically see the variations in the GAAP revenue side that is on the reverse side with the bookings side. So while for ARPU, what we see is average revenue per user is relatively stable, while it might be fluctuating a little bit, but it's more coming from the market mix. We don't see a very big fluctuation Q-o-Q for this quarter.

Yes, I think for your question on your competitive landscape in Taiwan and Indonesia. If you look at Taiwan, I think Taiwan, we still enjoy a rather dominant market position in the market. We do see some new entrances and we do look at it seriously, but I think the impact to our business at this stage is relatively small. And the core thing for us, I mean, without commenting too much on specific competitors, of course. The core thing that we are doing in Taiwan is number one, to shorten our delivery time through our own SPX network. We are covering a lot more next day deliveries through our own SPX network, which is typically done through a 3PL with much more expensive delivery systems. We are able to do a negative delivery was much cheaper in many cases probably 40% cheaper than the alternative solution in the market. And that's one. Second one is to further increase the efficiency of the supply side to work with our sellers to fulfill their orders, not only the delivery side, but also the warehousing side, the fulfillment side to do it in a more cost-effective way. And number three is to work with more sellers to increase their assortment for those areas that we think can be further enhanced. And I think all these things will help us to maintain our competitiveness in the market while maintaining the profitability in the market. For Indonesia, I think, there are different players doing different things in the market and there will be seasonal fluctuations. And we would pay less attention to sort of short-term up and downs on the subsidies you mentioned. I think we look at sort of a slightly longer-term or let's say medium-term trend, at least month-to-month or quarter-to-quarter trends. We didn't see any significant changes around that, if you look at slightly longer-term rather than focusing on specific campaigns or specific weeks or days.

Your next question comes from the line of Thomas Chong with Jefferies. Your line is open.

Hi. Good evening. Thanks management for taking my question. My first question is about our DFS business. Just now, I think, our management comments a lot about BNPL, cash loan, and off-Shopee PayLater, I just want to get some color with regard to the margin trend for different categories. Any color about the margin profile would be great. And on the other hand, I think, given the macro uncertainties we are seeing globally, how should we think about the risk management, in particular, the ticket size and the tenure, et cetera? And my second question is more about the overall business. Given our different business segments are seeing a very good growth momentum, how should we think about the longer-term revenue mix profile? Should we expect DFS to become more meaningful in the long-term? Thank you.

On the first one on the margin trends, if you look at a particular market or a particular product in our portfolio, our margin has been relatively stable. In fact, in some markets, we see better risk profiles and therefore our product, which will in turn better EBITDA ultimately. But one thing I do want to share on this topic is that, given that we have many different markets and we do see that the newer market has probably a faster speed of growth. If you track our history, we typically we started our lending products in Indonesia first and we expand to other markets like Philippines, Malaysia, Thailand, Vietnam and Brazil. So typically, you will see that given the smaller base, so the latest market has a slightly faster growth than the early market. I think that's the natural trend. And in fact, we are very happy with the growth we see in some of the new markets. For example, in Thailand, we see very good growth. In Brazil, we are -- also saw a quite good growth in the past quarters. And on these macro uncertainties, in generally, I think there are many macro factors impacting our market. And I think that was a big macro impact from the COVID time, after COVID time. I think that since late last year, we have seen a more stable macro-environment impact for most of the market. There are two things that's important for us in terms of managing the macro-environment. One is the duration of our lending product, second one is the ticket size you mentioned. So in general, our duration is rather a short duration rather than a very long duration. By short duration, we are talking about just a few months in average, right? And our ticket size also compared to many other lending products, our ticket size is more on the smaller side. So in the combination of both, it will help us to be a lot more agile in terms of how we manage our portfolio, manage portfolio in terms of how much lending we give out, how can we do risk-based pricing for different user bases and also how we do collections and how do we kind of fine-tune our portfolio based on the macro-environment. So in that sense, I think we are quite comfortable with where we are. And even if unexpected market environment changed, I think, we are probably much better positioned than anyone else that we can see in the market with our size, yeah.

For the long-term revenue mix of three businesses, if you look at each of the three businesses, I think each of them some like, at this moment, have some tailwind, right? And for our like estimated in e-commerce cycle GMV growth, right, and that will be the driver of the potential revenue growth as well. And if we continually work on the take rate and not only on the commission side, but also on the ad take rate side, right, and that is could be a driver as well. And if you look at the Financial Services business as we shared and if we continually deepen the penetration in, on Shopee ecosystem, at the same time, the total like a loan book size will be, I think, grow nicely with the overall Shopee GMV growth as well. For game business, as we shared early, right, and we found the right formula for grow the Free Fire again and we see a very, very strong momentum. So at this point, I think, it's hard to comment. We don't see like certain businesses go up and certain businesses go down. And then it is changed how the revenue mix will look like, I would say like, we will be continually focused on grow each of the businesses as much as we can. But like as Tony just mentioned, but purely from a GAAP revenue perspective, certain growth of the game business because of how the GAAP revenue works, it may be a certain delay how to reflect into the GAAP revenue, right? And so that's why, in general, we use the booking as the like a closer proxy, the benchmark in terms of the growth. From that perspective, maybe we can like see the higher percentage of the revenue contribution from Financial Services. But again, this is purely in our view, because of the GAAP revenue treatment for the game business doesn't reflect we kind of our -- we don't have the confidence on the future growth of the game business, yeah.

Your next question comes from the line of Jiong Shao of Barclays. Your line is open.

Thank you very much for taking my questions. I should have a couple of follow-ups. One is back on the take rate. You talked about increasing the advertising take rate to the global comps, global benchmark in a matter of quarters, not years. In your opening remarks, you also talked about your commission take rate, I think, is below the global comps. Even it's good that you guys and your peers are raising your take rate, but your commission take rate is still quite a bit below the Amazon's, the [indiscernible], the eBay's, I was just wondering, are there structural reasons why you think the longer-term your commission take rate won't be close to the global peers? And is there any timing to reach that sort of goal? The second follow-up is back to the gaming booking. I know you talked quite a bit about the strong booking growth, which was amazing in second quarter, in particular. Previously, you have talked about double-digit booking growth for this year for Free Fire. I think the assumption was sort of low-teens, but given the particular strength you have seen last couple of quarters, are there reasons to expect the implied, the booking growth for Free Fire for 2024 should be going higher, if not, why not? Thank you.

For the take rate question, I think, for the ad take rate, as I mentioned, I think we will see the potential growth in the next few quarters within the years. And, of course, the base is different in different markets. So ultimately, it might be different numbers in different markets. On the commissions, I think, I would rather look at the totality, if you look at commission and ads et cetera. I don't think that is the reason they will be significantly below the global peers in the market that you mentioned. Yeah, I think, this reflects to our long-term guidance on how the EBITDA will be at 2% to 3% of the market.

In terms of the game booking, Free Fire booking guidance, right, for the rest of the year, yeah, I think you are right, it's a -- we do see strong momentum and continuing. And but at this moment, we want to be cautious, right? And since we just have for this very, very strong momentum for the past two quarters and we want to continually just focus on the effort what we have done, which proved to be productive. And if we continually seeing this trend and if we will update the market, we'll like update our investors timely and accordingly.

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. MC Koh for any closing remarks.

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

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