Good morning and good evening. Welcome to the Sea Limited Second Quarter 2020 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 would now like to turn the conference over to Ms. Yanjun Wang. Please go ahead.

Thank you, operator. Good evening and good morning everyone, and welcome to Sea's 2020 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 discussion of certain non-GAAP financial measures such as adjusted revenue, adjusted EBITDA and net loss excluding share-based compensation and changes in fair value of the 2017 convertible notes. 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 here with me 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.

Thank you, Yanjun. Hello, everyone, and thank you as always for joining today's call. Over the last few months, our teams have continued to work hard to support local consumers and small businesses during these challenging times. At every level of the business, our teams have strengthened their efforts to help our communities to benefit from the digitalization of the economy. We also focused on contributing to economic recovery across our markets through various local initiatives as well as government-led efforts. Against this backdrop, I am pleased to share that Sea is reporting very strong results for the second quarter. We also enjoyed accelerating growth across all three of the key pillars of our business. As we noted last quarter, we have been witnessing a profound structural shift to digitalization across our markets. Even as movement restrictions are being loosened or lifted in many markets, we continue to see strong user growth and a deepening of user engagement across our platforms. This is well aligned with our view that the structural shift to digitalization will be long-lasting. We further believe that we are very well positioned to capture the accelerated growth opportunities created by the rapid expansion of the digital economy. This is also reflected in our very strong results for the second quarter. Let me highlight a few key performance metrics for the quarter. On a group level, I am particularly pleased to note that we recorded positive adjusted EBITDA of $7.7 million. Our quarterly adjusted revenue grew 93% year-on-year to reach $1.3 billion. Our gross profit grew by 106% year-on-year to reach $200.8 million. We believe the strong topline growth and continued bottom line improvement demonstrate our ability to deploy our capital in a highly effective and efficient manner. It also speaks to the fundamental strength of our…

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, and Forrest has discussed some of our financial highlights. So, I will focus my comments on the other key financial metrics. For Sea overall, total adjusted revenue grew by 93% year-on-year to $1.3 billion, which was mainly driven by the growth of our digital entertainment business, especially our self-developed game, Free Fire, and our continued monetization efforts in our e-commerce business in the past quarters. The 62% year-on-year growth in digital entertainment adjusted revenue to $716.2 million was primarily driven by the increase of our active user base and deepened paying user penetration, and in particular, the continued success of our self-developed game Free Fire. Digital entertainment adjusted EBITDA was $436.2 million, an increase of 65% year-on-year, mainly due to strong top line growth and our self-developed game accounting for an increased share of revenue. Our e-commerce adjusted revenue of $510.6 million included adjusted marketplace revenue of $378.7 million, up 175% year-on-year, and adjusted product revenue of $131.9 million, up 233% year-on-year. The strong results demonstrated the deepening penetration of e-commerce and our ability to capture these accelerated growth opportunities created by the rapid expansion of the digital economy. E-commerce adjusted EBITDA loss was $305.5 million as we continued our investment to fully capture the market opportunity in the region. We will continue to invest prudently and drive high quality growth by serving the users' needs better in the long run. Digital financial services adjusted revenue was $11.9 million, an increase of 328% year-on-year from $2.8 million in the second quarter of 2019. Adjusted EBITDA loss was $110.1 million in the second quarter of 2020 compared to a loss of $18.1 million…

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

[Operator Instructions]. The first question comes from Thomas Chong of Jeffries.

Congratulations on a very strong set of results. My question is about our annual – or our full-year outlook. Given the fact that our performance is so strong in the first half, how should we think about the full-year online games revenue growth as well as the e-commerce revenue growth? And my second question is about the competitive landscape in online shopping. Can you comment about any change in terms of the trends that we will anticipate in the second half of next year? Thank you.

In terms of our full-year outlook on gaming side, as you can see from our past results, we've seen very strong momentum of growth in terms of active user, pay user, and also time spent on games and with sustained ARPPU at $14.4. So, we continue to see such growth across our different regions in Southeast Asia, Latin America, as well as other frontier markets where we have a strong footprint in. And that goes true for our active user base as well as paid user base, with sustained ARPPU. Therefore, we believe we will continue to benefit from the tailwind in terms of the deepening digitization, as well as people looking for entertainment online during the social distancing requirements in the middle of a pandemic. And the situation is still evolving. We have to continue to observe. And at this stage, it's hard for us to pinpoint the exact number in terms of full-year guidance yet, but we are very confident of outperformance. That one is for sure. But in terms of the exact number, we will look to report back later when we have more information. As we mentioned, for July, our paid user for Free Fire has doubled again year-on-year and July also is a historical high in terms of adjusted revenues for our games business. Therefore, the trend still is quite positive and we will continue to observe how it goes. In terms of the e-commerce segment, again, we are seeing very strong tailwind as we expand our market leadership in each market we are in. In terms of year-on-year growth in GMV, in order, active user, time spent, frequency, all the metrics we've seen very high growth rates. And this is continuing into the third quarter. As you know, in most of our markets, the…

The next question comes from Miang Chuen Koh of Goldman Sachs.

Congrats on the results. Firstly, on gaming, can management provide some color on Free Fire's contribution to total revenues? And also, what's the latest traction in India for second quarter, alongside any comments or data points you can share on new games, such as Fantasy World which was launched fairly recently. And secondly, on ecommerce, you talk about GMV growth remaining strong in the quarter. Can you elaborate a little bit more on this? Surely, there must be some deceleration in growth as offline is gradually coming back? Is that sort of fair to say? And is it possible to break down the take rates for us in the second quarter? How much was from value-added services, commissions, advertising, et cetera? Thank you.

We definitely see very strong growth on Free Fire. And I think that the very strong growth of the gaming segment overall is largely driven by Free Fire across various markets. We don't give a specific breakdown. But overall, we continue to see Free Fire being the biggest game in our portfolio. In terms of our Fantasy [indiscernible], it is a casual farming simulation game we recently licensed. This is really as an effort by our game team to expand our portfolio of games into some of the casual genres as well. It's very preliminary, so we don't have too much to share. I think it's always a good sign as we continue to diversify our portfolio. In terms of the Shopee growth, I think if you look at our markets in a market by market analysis, I think as I shared in Q1 before, it really depends on – for some markets where it's affected by social distancing rules or strict lockdown or a longer period of strict lockdown, you see more accelerated growth compared to markets that were less affected. So, for example, some of our markets like the Philippines where you see a resurgence of cases, a reimposition of stricter lockdown, will even see further accelerated growth going into Q3 compared to Q2. In some other markets, we see sustained type of – that is at much higher level compared to pre-COVID period. That actually applies to most of our markets. And in markets like Taiwan and Vietnam where so far there haven't been many cases or they imposed very short period and very limited lockdown, the effect, it has always been more moderated. But even in a market like Taiwan where there were never a lot of cases and was never a lockdown, this year, we see meaningfully heightened growth compared to last year. Again, speaks to, A, our ability and operational strength, organizational strength in navigating a pandemic situation and capturing the growth that comes with the lockdown, and at the same time, shows that in markets where it's less affected by lockdown, given our market leadership, we continue to enjoy accelerated growth, well ahead of the general market growth rates and capturing further market share. This goes back to the strength of our business model as well.

Any comments on the take rates?

In terms of take rates breakdown in Q2, I think it's consistent with our past quarters that most of our take rates or adjusted revenue came from the high margin streams of revenue, including commissions, penalties, as well as the advertisement.

The next question is from Alicia Yap of Citigroup.

Congratulations on the strong set of results. And thanks for taking our questions. I have a question on the Shopee business. So, I wonder if management if you wanted to highlight two to three key points that you have learned, right, the most changers in terms of user behavior on the purchasing category, frequency or even the merchants' attitude? And also, the category mix in terms of the GMV contribution this year, right, post COVID versus previously you anticipated in terms of the mix. And then, second questions, wanted to ask about the change of the accounting reporting method that you highlight in the press release. So, can you elaborate a little bit the reasons for the change? And also the timing? Why don't we wait a little bit until the end of the 2020 on the full-year results and we have a change? And also, is that implying the full-year revenue guidance that you previously provide which is on the adjusted revenue basis that is no longer valid that we should not be referenced to? Thank you.

In terms of Shopee user behavior, I think we see very strong momentum on both fronts. One is active buyer number, active seller number and buy frequency and time spent have been increasing. For example, in terms of buy frequency, before we reported more than four times. And we're seeing more than five times a month on average. In some of the markets like Indonesia, it's getting close to six times a month, and this is sustaining into even after the lockdown period. In terms of category mix, we reported before in Q1 that we saw strong surges in terms of hygiene-related products as well as home and living products, which is also related to working from home requirements. We continue to see that in large part of Q2. And like I said, a bit back to normal in Q3 with easing of certain movement restrictions. We start to see fashion to pick up again. So, therefore, I think that in terms of category, growth has been quite strong for the different core categories that we have. In terms of adjusted revenue reporting, the reason we're making this change is that in connection with its ordinary course review of SEC of filers and report, we received two questions from SEC. One is relating to the MD&A section of the annual report to add a little more color on operating cash flow differences, which we have provided supplemental information to the SEC, and the other one is regarding the reporting of adjusted revenue in our earnings release. We have also, as we mentioned in the earnings release, determined that we will not be reporting adjusted revenue for the gaming segments. Instead, we'll be using bookings, which is again GAAP revenue plus changes in deferred revenue as the operating metrics going forward. So, that shouldn't change the guidance that we gave before for the gaming sector segment. And in terms of ecommerce and other segments, we will also not report adjusted revenue. And instead, we'll just be reporting GAAP revenue. For the full year guidance, for ecommerce, we will continue to provide the sales incentives net-off, so that we can use that to add back to the GAAP revenue for ecommerce and other segments – sorry, for ecommerce segment to compare against the full-year guidance on adjusted revenue we previously gave. With one round of response to SEC, SEC already feel very satisfied and closed their case. The response letter and the correspondence with the SEC will come out in about a month's time. So, we should expect to see it in September.

The next question is from Piyush Choudhary of HSBC.

Congratulations to the management. Firstly, your adjusted marketplace revenue as a percentage of GMV has increased to 4.7% this quarter. Can you elaborate what drove the increase and the medium-term outlook for the same? And secondly, on the logistics, is third-party logistics a bottleneck for growth? And what's your long-term strategy over here? Is Shopee looking to invest in its own managed logistics team? Thank you.

In terms of adjusted revenue growth, it's again mainly driven by our commission as well as advertisement and also the product revenue, which are the three main components of the marketplace adjusted revenues. In terms of commission also, given the recovery of first quarter size as well as the increased demand from Shopee Mall, with more brands joining us, we continue to see positive trends. And, in fact, we also see more users, more sellers using our advertisement programs and Fulfilled By Shopee programs to serve their buyers better during this pandemic. And so, that also helped to drive the growth rate higher – take rate higher, sorry. And so, as we mentioned, we'll continue to gradually ramp up monetization over time. In terms of 3PL, I think given the pandemic situation, so far we've seen very strong performance by our 3PL partners across different markets. They made a huge effort in close collaboration with us to deliver as many packages as possible to our users as shown in the heightened growth of our order volume in Q2 and enjoy into the Q3. And I think this is basically a demonstration of our strength of the relationship with them. And in terms of operational network, with 3PL, we continue to work across different top 3PLs in different markets as well as supplementing the capacity with our own express delivery team. So, we will continue to provide good services to our buyers despite the movement restrictions being imposed.

The next question is from John Blackledge of Cowen.

Two questions. First on Shopee, despite the huge accelerating growth this quarter, you still showed negative 17% incremental EBITDA margins, albeit it was much less than the 2Q 2019 negative EBITDA incremental margins. Just curious what are the key investments driving the negative leverage? And then, SeaMoney, can you frame the longer-term opportunity for the SeaMoney business and the mobile wallet users rose 50% year-over-year. Just discuss how you're driving the strong user growth.

In terms of ecommerce, we continue to invest in its growth. And if you look at our EBITDA loss per order, it has been fast dropping from $1 a year ago to $.60 last quarter and to $0.50 per order this quarter. Therefore, we think we are gaining efficiency – continue to gain efficiency as we invest in the rapid growth of Shopee. At the same time, we see deepening monetization over time. As we always said, we believe the business model is very clear and has proven by all major marketplace ecommerce players in the world that profitability model for marketplace ecommerce is very strong, and especially for a strong market leader. And therefore, we are investing in the long-term growth of this segment to continue to strengthen our market leadership, to build deeper competitive moats as well as to maximize our long-term profitability down the road. In terms of the SeaMoney, as we mentioned, it's showing very strong growth during this period as well. And we have the largest online use cases. And natural use cases allow us to not only build a mobile wallet with efficiency, but also to drive other digital financial services across the different markets with strong user affinity data and the sophistication of the use cases we have. I think this is a very strong synergy between – across our three core businesses that we're enjoying, and therefore, driving very fast adoption of the money wallet, as well as in terms of growth of paying users we are seeing. We will continue to drive the growth of SeaMoney primarily through our own large and sophisticated use cases that in terms of long-term potential we think is definitely very big, given that there's demand for digital payments and digital financial services. It's huge in our markets, given the under banking population and under-penetration of traditional financial services. What we can do, we have a clear ability in doing is use technology to promote financial services segments to serve more population, markets and there is a very natural demand for it. The current pandemic just further accelerated the penetration of digital financial services and the mobile wallet for everybody as people all look for alternative ways of paying for things online as well as contactless payment methods.

The next question is from Ranjan Sharma of JP Morgan.

Congratulations on the results. Two questions from my side. Firstly, on ecommerce. Talking about the competitive environment, what we understand is that some of your peers might not be on a strong footing in terms of raising capital or competing in the market. So, if you can share your thoughts around potential M&A in the space and how you would approach any potential opportunities. Secondly, you shared a bit about SeaMoney. Maybe you can also compare to other fintech companies, especially offerings from other super apps in the region and how you differ. Just a sense, like what is going to drive adoption for SeaMoney over the other apps? And are we going to see extended periods of sales and marketing and losses for SeaMoney? Thank you.

In terms of competitive landscape, I think we're in a very strong position that, A, we're growing "fast and faster." And we are also further strengthening our market leadership position. And as we have demonstrated, we're self-funding our growth in ecommerce. Now, if you look at certain other competitors who are both losing money and therefore dependent on external funding for it and losing market share, I can see why it could be very difficult to fundraise. So, I think this has put us in an even stronger competitive position. While we're open minded about all possibilities, we continue to assess the competitive landscape carefully and to focus on strengthening our own operations and serving our sellers and buyers better. I think this is the best focus long term for us in growing our marketplace. And in terms of the digital financial services, SeaMoney, I think what really give us strength or I would say competitive strength in the sense that we had very large and perhaps the largest online use case, which is the e commerce as well as digital entertainment. Especially on the ecommerce sites, this is not only big, but it's also closest to people's wallet and purchase behavior. That allows us to have the right amount of data to build more financial services on top of digital payments. We think that e-wallet is not be all, ending all kind of services. We would like to provide a comprehensive suite of services to our users to offer them more options online, and this is a strength we have in building that. And second, we are able to again self-fund our growth in SeaMoney. As you can see, we have been very focused on investment efficiency and scaling with the right amount of investment at the right time with the right market conditions and maximizing the leverage we have of our own cases. I think this really sets us apart. Super app as a concept, it is a concept people talk about, but I think there are a lot of execution of details. It's not about lumping everything together in one app and just hoping that users will somehow use all of those. You need to make sure from a user experience, operational, business model perspective, everything makes sense together and can ask each other and create synergies across different functionalities. And that's what we are very much focused on.

The next question is from of Varun Ahuja of Credit Suisse.

Congrats on a good set of numbers. Two questions for me. First, if you can give some color on the sales and marketing spend that you've been doing this quarter in terms of how the qualitative trend has been on the shipping subsidies, how much is still on brand promotion and discretionary spending, that will be helpful. Secondly, on digital financial services, if you look at – you mentioned that the total payment transaction is $1.6 billion, which is around 20% of the full ecommerce GMV for this quarter. And it looks like mostly it is in Indonesia. So, if you look at the genesis of payment business, it was pretty much strong in Thailand and Vietnam. So, just wanted to understand how the take up of payment has been because infrastructure-wise that was one of the early markets for you to – doing well, but looks like Indonesia has kind of taken over. So, just wanted to understand how you're looking at this segment. And lastly, if I can sneak in on category mix, if you can give more color on how much is grocery now versus some of the other categories which have been stronger, fashion or health and beauty, will be helpful. Thank you.

In terms of sales marketing spend for ecommerce, discretionary brand spending is already the biggest component for Q2. And in fact, we've been increasingly efficient on shipping subsidies. While our buyer continue to enjoy that, it is increasingly being funded by free shipping and other programs we have with sellers, as well as rebates from 3PL. But we also did take advantage of the airtime during the social lockdown where more users are watching TV or spending time online to do more of brand marketing, and this is also in line with the Ramadan season in Indonesia and Malaysia. And therefore, you see more of that from the discretionary brand spending. Again, this is highly discretionary and could vary from period to period. In terms of DFS, so I think Indonesia being the first country where we rode it out and in terms of the integration with the Shopee platform. And we also have been working on Thailand, Vietnam, as well as other markets. We see, over time, strong adoption in the other markets as well. But I think the strategy as well as operational approach needs to be tailored for each market. And we've demonstrated in terms of – in running our ecommerce business, this is actually one of our strengths, is to hyper-localize our operations, as well as the design of the product for each market. And we will continue to do that and we continue to see strong growth contribution from the other markets as well in addition to Indonesia. In terms of category mix for this quarter, as mentioned earlier, we see stronger demand for home and living and hygiene products as well as FMCG products during the quarter, which is probably explained by the social distancing and lockdown rules. At the same time, we saw fashion and health and beauty start to reaccelerate going into the third quarter as many of the lockdown rules have been eased, with continued strength in other categories as well. So, FMCG still remains a very small part of our category mix. Our main category mix hasn't really changed that much.

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

Thank you, everyone, for joining today's call. We look forward to speaking to you all again next quarter. Please take care.

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