Sea (Minutes): Expected GMV growth in the second half of the year similar to the first half

The following is the FY25Q2 earnings call minutes of$Sea(SE.US) compiled by Dolphin Research. For earnings interpretation, please refer to "SEA: Has the Southeast Asian Little Tencent Completely Taken Off?"

I. Review of Core Financial Information

II. Detailed Content of the Earnings Call

2.1 Key Information from Management Statements

1. Strategic Focus:

a. Continue to prioritize growth by expanding potential markets and increasing market share to pursue long-term profit maximization. While pursuing growth, improve profitability through strict cost control and efficiency enhancement.

b. Confident about the second half of 2025 and beyond, expecting to continue achieving strong profitable growth.

2. Shopee: GMV (Gross Merchandise Volume) in the first half of 2025 increased by 25% year-on-year; Q2 saw record highs in total orders, GMV, and revenue quarter-on-quarter. The number of active buyers and purchase frequency continued to increase. Both the Asian and Brazilian markets achieved year-on-year profitability improvement.

a. Advertising revenue is the main driver, with the number of sellers using ads growing by 20%, and average ad spending by paid sellers increasing by over 40%, with an 8% improvement in purchase conversion rate.

b. Brazilian market performed excellently, with monthly active buyers growing by over 30% year-on-year, achieving profitable operations, and becoming the market leader in order volume.

d. Launched the slogan "Cheaper, Faster at Shopee," with overall purchase frequency increasing by over 10% year-on-year. Reduced per-order logistics costs and improved delivery speed in Asia and Brazil. Introduced innovative services such as 4-hour instant delivery and intelligent demand forecasting.

e. VIP membership program promoted in Indonesia, Thailand, and Vietnam, with total subscriptions reaching 2 million. VIP members' GMV, average monthly purchases, and retention rates are significantly higher than non-members.

f. AI tools empower sellers to create video content. In Southeast Asia, live streaming and short video orders account for over 20% of total physical orders. Collaboration with YouTube has also been effective.

3. Monee: Q2 revenue and adjusted EBITDA both grew by over 50% year-on-year. Total loan amount increased by over 90% year-on-year, reaching $6.9 billion. Active users exceeded 30 million for the first time, growing by over 45% year-on-year. The 90-day non-performing loan rate (NPL) remained stable at 1.0%. Reduced reliance on a single market, with Malaysia becoming the third market after Indonesia and Thailand to surpass $1 billion in total loans.

a. Three major advantages: seamless integration with the Shopee ecosystem, a large user base with credit records, and AI-optimized credit models.

b. On-Shopee SPayLater: Penetration rate steadily increased, attracting more quality users through interest-free and tiered pricing measures.

c. Off-Shopee SPayLater: Integrated with the national QR network in Malaysia, offline business grew rapidly, and similar services have been launched in Thailand.

d. Personal cash loans: Cross-selling to creditworthy SPayLater users, with outstanding balances nearly doubling year-on-year.

4. Garena: Q2 Bookings grew by 23% year-on-year, and adjusted EBITDA grew by 22% year-on-year. Based on strong performance in the first half, the full-year Bookings growth forecast for 2025 has been raised to over 30%.

a. "Free Fire" performed excellently: maintained over 100 million global daily active users. The 8th-anniversary event was successful, and the new map "Solara" became the best-performing new map in history. The in-game video sharing feature increased daily shares nearly fourfold.

b. Successful IP collaborations: Collaborations with Netflix's "Squid Game" and "Naruto" IPs received positive responses from players.

2.2 Q&A Session

Q: Given the strong 25% year-on-year growth in e-commerce GMV in the first half and the expectation to continue this momentum in the third quarter, will the company consider raising the full-year performance guidance set at the beginning of the year?

A: We expect the growth momentum to continue in the third quarter, with growth rates roughly in line with the first half. Based on this, full-year growth will exceed our previous expectations.

Q: Can you share the latest competitive landscape in e-commerce? Especially in the Brazilian market, have you observed any changes in market dynamics or momentum since competitors lowered the free shipping threshold?

A: Despite competitors' actions, our business growth has not been affected. Our advantages are: 1. Our logistics cost structure is superior to competitors, and delivery speed is faster. 2. Our product pricing remains highly competitive in the market. 3. We are expanding our seller base to higher-ticket categories, and this trend is expected to continue.

In summary, with a solid cost structure, competitive pricing, and a growing seller base, we have a strong position in the Brazilian market and will continue to grow.

Q: The Shopee VIP membership program in Indonesia is progressing well. Can you share the user growth potential of this program in various markets? How should we assess its impact on costs in terms of logistics and other benefits?

A: Our pilot in Indonesia was very successful, solving the renewal issue by combining "buy now, pay later" and credit card methods, with good user growth momentum. The project is still in its early stages but has great potential. There will be some promotional investment initially, but it is not expected to significantly impact the medium to long-term cost structure.

Q: Can you introduce the new initiative of Instant Delivery? Which countries are targeted? What is the cost impact?

A: This service aims to expand our product offering by attracting high-value users. These users are more profitable and have a higher acceptance of slightly higher delivery fees. Therefore, we expect this move not only to not harm EBITDA but also to enhance overall profitability as the business grows.

Q: Considering the advancement of the VIP membership program and Instant Delivery, can we expect the EBITDA margin in the second half to remain at the current level? What is the outlook for the profit margin in 2026?

A: Recent margin fluctuations are mainly due to seasonal factors such as Ramadan. Looking ahead, while there may still be fluctuations between quarters, we expect the long-term improvement trend in EBITDA margin to remain unchanged.

Q: Besides existing competitors, how do you view the impact of new entrants (such as Temu and TikTok) on the competitive landscape in the Brazilian market?

A: Due to Brazil's tax structure limiting cross-border business, Temu is currently small in scale. TikTok's e-commerce business is also just starting, with a small order volume. We will continue to monitor, but for now, they have not changed the fundamental market landscape or affected our growth trajectory. Our focus remains on optimizing costs, logistics, and services, and ensuring competitive pricing to build a long-term moat.

Q: What is the current revenue contribution percentage of high-ticket items in the Brazilian business?

A: It depends on the definition. If we refer to our Mall business, its contribution is about in the teens. Compared to Asia, there is still significant growth potential. Considering Brazil's higher per capita GDP, we believe the penetration rate of the Mall business in Brazil will exceed that in Asia in the future.

Q: The upward revision of the full-year game bookings guidance is mainly due to the outstanding performance of "Free Fire," or is it because new games are expected to contribute more?

A: We raised the full-year guidance for the gaming business, with the main driver still being the strong performance of "Free Fire." Our confidence mainly comes from the following points:

All key metrics have shown strong growth. We released the first new map in three years in the second quarter, which was the result of two years of effort by the team and was well-received by both new and old players.

Our collaborations with Netflix and "Naruto" have yielded significant results. We have learned from these experiences and optimized the collaborations, which are currently performing well, further enhancing our confidence in the full-year outlook.

Q: Besides advertising, what other means are there to improve monetization rates? How have Southeast Asian sellers reacted to the increase in commission rates? What impact does this have on the overall competitive landscape?

A: The advertising business still has great potential. Additionally, we adjusted the commission (take rate) for sellers last quarter. The entire ecosystem (sellers) reacted smoothly to this. The pricing structure changes we focused on also met expectations, with no seller attrition. We can reinvest some of the additional revenue back into the ecosystem, which has been welcomed by both buyers and sellers. Competition is healthy. We have observed some competitors also raising their rates, with some even copying our approach entirely in specific markets, so we are not too concerned about this.

Q: What is the specific strategy for promoting fintech business in Brazil? What is the current penetration rate of BNPL in Brazil? How fast is the expected growth? How does the expansion strategy of the Brazilian financial business differ from the Southeast Asian market?

A: Brazil is an important market for us, with good growth in the loan business in the second quarter, with both active users and loan balances more than doubling year-on-year. We have combined personal cash loans and "buy now, pay later" (BNPL) limits. We have integrated more local external data from Brazil into the risk control system than in Asia. We have obtained the SE license and received preliminary approval for the SEFI license, which will provide better funding sources in the future. We have already started collaborating with external lenders.

We are still in a very early stage. Currently, the penetration rate of "buy now, pay later" in e-commerce scenarios is only in the single-digit to low-double-digit range. Compared to the Asian market, we still have huge growth potential, and the personal loan business is just starting, with many new products to be launched in the future.

Q: The advertising monetization rate (Take Rate) increased by 70 basis points this quarter. How much room is there for further improvement? With improvements in advertising technology and products (such as a 20% increase in the number of sellers using ads), how much more can advertisers' conversion rates be expected to improve?

A: We mainly improve the advertising monetization rate through two aspects:

Better algorithms: We have improved the allocation algorithm for ads and organic traffic, allowing for more efficient mixing of ad slots with organic results, thereby improving ad conversion rates and sellers' return on investment (ROI).

Better seller tools: We have launched new products like "GMV Max" and simplified the ad backend, helping sellers to place ads more easily and efficiently to maximize returns.

These improvements have had a significant effect, with the number of active advertising sellers growing by 20% this quarter, and individual sellers' ad spending also growing by 40%. We believe the advertising monetization rate will continue to improve as our new products continue to cover more sellers, and we are experimenting with using AI technology to further optimize algorithms, with promising initial results. Some of these results will be launched in the second half of the year, potentially bringing more significant growth. We expect this growth momentum will not end this quarter but will continue for several quarters.

Q: What further investments are needed to further improve logistics timeliness in Brazil (currently accelerated by 20%-40%)? Will these future logistics investments simultaneously improve the EBITDA margin, or will the company take a more cautious approach, seeking a balance between investment and profitability?

A: Our logistics model has low capital expenditure (CapEx). We do not buy land or trucks; investments are mainly focused on automatic sorting machines in sorting centers and establishing distribution hubs. This asset-light model does not impose a heavy burden on profitability. On the contrary, as we expand the coverage of our own logistics (SPX) and improve efficiency, this will continue to improve the EBITDA of the Brazilian business. In fact, we achieved profitability in Brazil several quarters ago and are still profitable while maintaining high growth.

Q: What is the current monetization rate of the advertising business? Is the previously mentioned medium to long-term target of 4-5% still valid?

A: Our current advertising monetization rate is about 2%, far below regional peers, and there is still huge growth potential.

Q: Besides using AI to improve advertising technology and internal operational efficiency, how does the company view the possibility of using AI to expand new businesses? Considering that some Asian peers have started providing cloud services to external customers, has the company considered using AI capabilities to develop new businesses beyond core e-commerce and finance?

A: We mainly use AI in two major areas:

Empowering existing businesses: optimizing advertising, improving product recommendation algorithms. Automatically generating more attractive product images and videos. Our customer service chatbot is 80% AI-driven, and we use AI to assist sellers in communicating with buyers to reduce costs and increase sales opportunities.

Optimizing internal operations: improving product development efficiency. Automating marketing activities with AI tools and optimizing processes such as payment processing.

Regarding using AI to expand new businesses, we are actively exploring various possibilities, but there are no specific plans at the moment.

Q: Besides the success of "Free Fire," how are other games (such as "Delta Force") performing?

A: While we continue to optimize "Free Fire," we are also actively developing new games of different types and markets. However, new titles like "Delta Force" and "Free City" are still in the very early stages of fine-tuning. Although we have seen some promising initial momentum and appeal, it is far too early to say they will become the next big hit.

Q: How is AI specifically empowering the gaming business? For example, what role does AI play in extending player playtime and enhancing monetization?

A: We are very excited about the prospects of AI in the gaming field and believe that the gaming industry will be among the first to benefit from AI. Currently, AI mainly helps us in two areas:

Improving development efficiency: In content creation, we use AI to generate a large amount of basic art assets (such as new maps and new content), greatly enhancing productivity, efficiency, and content diversity.

Enhancing player engagement and retention: For the many players who enjoy solo mode in "Free Fire," we have introduced AI bots as their "teammates" or "coaches," allowing them to experience the fun of team cooperation, encouraging more social interaction, and thus improving user retention. We are also actively exploring the use of generative AI to allow players to create their own content, making the gaming experience more immersive, interactive, and personalized.

Overall, while these applications are still in the early exploratory stages, especially in ensuring large-scale, high-quality experiences, we are confident that this represents the direction of the future.

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