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

Thank you, operator. Good evening and good morning everyone and welcome to Sea's 2019 second quarter earnings conference call. I am Yanjun Wang, Sea's Group Chief Corporate Officer. Before we continue, I would like to remind you that we may make forward-looking statements which are inherently subject to risks and uncertainties and may not be realized in the future for various reasons as stated in our press release. Also this call includes discussions of certain non-GAAP financial measures such as adjusted revenue and adjusted EBITDA. We believe these measures can enhance our investors' understanding of the actual cash flow of our major businesses when used as a complement to our GAAP disclosures. For a discussion of the use of non-GAAP financial measures and reconciliation with the closest GAAP measures, please refer to the section of non-GAAP financial measures in our press release. On the call with me are Sea's Chairman and Group Chief Executive Officer, Forrest Li; and Group Chief Financial Officer, Tony Hou. Forrest and Tony will share strategy and business updates, operating highlights, and financial performance for the quarter. This will be followed by a Q&A session in which we welcome any questions you have. With that, let me turn the call over to Forrest.

Thanks, Yanjun. Hello everyone and thank you as always for joining today's call. I'm really pleased to report that we had another great quarter. Across the business we saw sustained strong growth and further improvement on the top and bottom lines. For Sea as a whole, our adjusted revenue tripled year-on-year to reach $665.4 million and our adjusted EBITDA improved once again to negative $11 million. Our results for the quarter show that we continued to drive revenue growth and improved efficiencies across our business. We're increasingly able to fuel our growth with cash generated through operations which we believe positions us well to continue driving long-term sustainable growth. As you know at the start of the year we set ourselves some very ambitious targets for adjusted revenue growth in 2019. With our very strong performance in the first half of the year, we have decided to raise our guidance for our full year adjusted revenue for both digital entertainment and e-commerce. For digital entertainment, we now expect full year 2019 adjusted revenue to be between $1.6 billion and $1.7 billion, representing 142.0% to 157.2% growth from 2018. This compares to the previous guidance of between $1.2 billion and $1.3 billion, representing 81.5% to 96.7% year-on-year growth. We are also increasing our guidance for full year adjusted revenue for e-commerce to between $780 million and $820 million [ph] which represents 168.3% to 182.1% growth from 2018. This compares to the previously stated guidance of between $630 million and $660 million, representing 116.7% to 127.0% year-on-year growth. Our increased full year targets reflect our confidence in both the growth opportunities ahead and in our ability to execute our strategies to capture those opportunities. Let me start with Garena where we saw healthy growth across key metrics in the second quarter. On…

Thank you, Forrest, and thanks to everyone for joining the call. We have included detailed quarterly financial schedules together with the corresponding management analysis in today’s press release. So, I will focus my comments on the key financial metrics. For Sea overall, our second quarter total adjusted revenue was $665.4 million, an increase of 203% year-on-year. This was mainly driven by the growth of our digital entertainment business, especially our self-developed game Free Fire and our continuous monetization efforts in our e-commerce business in the past quarters. Digital entertainment adjusted revenue was $443.2 million, an increase of 219% year-on-year. The growth was primarily driven by the enlarged paying user base as we continue to improve the monetization of our games, especially Free Fire. Digital entertainment adjusted EBITDA was $263.8 million, an increase of 443% year-on-year mainly due to strong top line growth and our self-developed game accounting for an increased share of revenue. The increase was also partially due to the improved operating efficiencies as shown by the lower sales and marketing expenses as well as general and administrative expenses as a percentage of adjusted revenue. E-commerce adjusted revenue was $177.4 million, up 202% year-on-year. Within this, marketplace revenue was $137.8 million, up 269% year-on-year, while product revenue was $39.7 million, up 85% year-on-year. E-commerce adjusted EBITDA loss was $248.3 million as we continued our investment to fully capture the market opportunity in the region. We will continue driving the high quality growth by serving the users needs better and improving operational efficiencies in the long run. Digital financial services adjusted revenue was $2.8 million, a decrease of 18% year-on-year from $3.4 million in the second quarter of 2018 as we focused our efforts on strengthening the infrastructure to support our existing platforms. Adjusted EBITDA loss was $18.1 million in the second quarter of 2019 compared to a loss of $6.8 million in the same period of 2018. This was primarily due to our continued efforts to integrate our AirPay and Shopee platforms. Returning to our consolidated numbers, we recognized a net non-operating loss of $29.2 million in the second quarter of 2019 compared to a net non-operating loss of $30.8 million in the second quarter of 2018. We had a net income tax expense of $15.3 million in the second quarter of 2019, which was primarily due to withholding tax and corporate income tax recognized in our digital entertainment segment. Finally, net loss excluding share-based compensation and changes in fair value of the 2017 convertible notes, was $215.1 million in the second quarter of 2019 as compared to $198.7 million for the same period in 2018. With that, let me turn the call back to Yanjun.

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

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

Thank you, MC. Happy to answer your questions. Regarding the ARPPU trends, I think as we discussed before when we look at esports title that has a large user base and long game life, we tend to focus on different things and different phase. It usually starts with growing the user base, and then gradually ramping up monetization deepen the pay user ratio and then optimize for ARPPU. So, for Free Fire in particular as you can see we have seen very strong growth both on the user side as well as on the pay user penetration quarter-on-quarter. And this is contributing significantly to the revenue increase as well. And in terms of ARPPU, it is not currently the focus for us. For Free Fire we believe the game is still very young, and has a long runway and we are focusing on broadening the user base as well as continue to deepen the pay user penetration. For example, one tool that we find pretty helpful in bringing more pay users to our game would be the Elite Pass or the Fire Pass. Although, it has a lower ticket size at $5 a month, but it's a very effective in converting free user to pay user over time. And for that, we've been focusing on promoting more of a Fire Pass user engagement over the period. So as you can see overall our revenue trend has been very positive and the margin has increased also over time even though we already started with very high margin compared to the game industry as a whole. So we think this is a positive trend and shouldn't be of any concern. And we think in the longer run, there will be growth potential on the revenue as well as ARPPU side both for…

Got it. Thank you.

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

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

Thank you. In terms of expansion into the other high-growth market, we have mentioned before that we see very strong user growth in markets like India, Russia, Turkey, the Middle East for our self-developed game Free Fire. And we believe that with the wealth of user data and deepening user understanding over time, we acquire from this global hit game we are very well-positioned to introduce -- continue to build upon the success of that game to deepen monetization as well as potentially introducing new content and even new IP, whether it's self-developed or third-party to these markets; just like what we did in LatAm. We started with Free Fire, our self-developed game, grow the user base there, monetize over time. And now we are reaping the fruits of that efforts. And in addition, we have recently rolled out a second game, which is a third-party licensed game from Tencent Speed Drifters in the market. We believe this approach can also potentially work in the other high-growth markets. And I think given that our unique advantage in being able to operate well and deeply in so many complex diverse, but high-growth young markets across the globe, we are very well-positioned to capitalize on the new opportunities in these emerging markets with the rise of mobile technologies. That enables a lot more new content to be introduced to our users across the world. And in terms of key areas of investments, we are very much focused on the gaming side, both deepening our development capabilities as well as global expansion. On the other hand, if you take a look at our gaming performance so far, we enjoy very high growth at the very high EBITDA margin. That doesn't mean that we're not investing in games. We're actually investing heavily in terms…

Thank you.

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

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

Thank you. In terms of the Shopee, GMV trajectory as we continue to scale the platform across different markets for Q2 we have 70% [ph] year-on-year growth in GMV and more than 90% year-on-year growth in order. And the GMV growth is slightly lower than order growth is as you mentioned relating to the average order value. And to that, we do have a view on what will be a optimal value or range of optimal value for our markets in building out a general merchandise marketplace e-commerce. If you look at some of the large e-commerce, general merchandise e-commerce platform such as Taobao, we understand their basket size is also around the mid-teens range. We think that's a good range to have for building a e-commerce platform in all markets as well with the focus on the key categories of fashion, health and beauty, home and living as well as baby products. These are the high-margin now standardized products that lend themselves very well to build up a large diverse seller base and buyer base and eventually the largest e-commerce marketplace in China. So we believe we will focus on building out these core categories and drive user base as well as drive frequency while maintaining a healthy range of order value. So in particular relating to the Q-on-Q fluctuation, for example there are different reasons the intrinsic factor that could affect the period-to-period order -- average order value. During the Ramadan season for example, we see higher demand in the fashion category, which tend to have a smaller basket size and therefore could affect the order value as a whole. So they are -- these are the intrinsic factors we think as far as we maintain a healthy mix of in terms of the GMV of different categories…

Thank you.

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

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

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

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

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

Okay. Thank you.

The next question comes from Conrad Werner with Macquarie.

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

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

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

Okay. Regarding the -- in terms of the metrics we use to measure market leadership, now we use -- we look at array of metrics to see how well our e-commerce business is growing. In some of the market, obviously our leadership is so clear, so strong that whatever metrics you use pretty much, we are the clear leader. In other metrics, there might be -- people might say this market has a different kind of GMV metrics et cetera. Now the reason we look at the range of metrics based on the disclosure in our PR including the order number, the download, the active user, time spent, in app et cetera is because looking at GMV alone can be misleading for the business as a whole. So if we tell our people to just look at GMV, the outcome might not be ideal in growing the e-commerce business, because the team will be trying to focus on growing the basket size with the higher ticket items in those more standardized goods, the lower-margin, lower-competitive modes categories such as virtual goods, electronics or even wholesale stuff. These are easy to grow GMV. And -- but they don't lead to a healthy e-commerce platform with the core category of focus that we mentioned again and again. These are fashion, health and beauty, home and living and baby products. That's why when we look at GMV or the size of GMV, we have to ask the next-level question. What's the basket size? And what's the order number? Are you growing the GMV by growing the basket size and skewing towards the different categories of goods versus the core e-commerce marketplace categories? Or are you truly growing the order? And these orders are sustainable, high-value, high-margin orders that are real and will come…

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

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

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