Sea Q2 2022 Q&A Session Transcript

Q&A(Question-and-Answer Session)is a session after the company's prepared remarks where institutional investors and analysts ask management questions. In this dialogue, you may find some valuable information that might affect the stock price in the following weeks.

Now let's look at some key points from $Sea Ltd(SE)$ Q2 2022 Q&A Session Transcript

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

A:I think in terms of the industry GMV growth there are a lot of research outstanding and I think, obviously, it's going to be slower, but also it really depends on the various industry players and us and our peers, how we manage this growth. And among the various markets, we see that there are some markets, for example, like Malaysia, Singapore that enjoy spectacular growth during the previous years, there is a slowdown, given a tough comp and also the opening up versus a period of strict lockdown.

I think the continuing to this year, of course, the tough comp is going to remain a fact. And at the same time, we also see markets like Indonesia, Philippines and Vietnam continue to enjoy relatively faster growth. That also in a way, sometimes affected by the comp relative to -- in terms of open up versus lockdown, the relative macro situation people are facing, the physical tools, the central banks and the government in terms of the interest rates and the fiscal tools the governments have been employing to manage the inflation and how they deploy those tools, whether it's on price cap or on coupons.

And if it's on subsidies, how they channel the subsidies, so all of this can affect the overall consumption growth and where the consumption goes to whether it's the discretionary or necessities as physical consumption versus service and also the e-commerce relatively sheer online versus offline. But I think there are many factors that could affect well, in general, the big picture is going to be slower and compared to last year and how much slower, I think, remains to be seen.

And overall, we hope that we can continue to see resilience. But again, as we shared from a management perspective, we think it's much better to be disciplined and prudent and manage for macro uncertainty and be prepared for any negative events and situations as opposed to hoping for resilience and the market is staying positive.

In terms of the gross orders and GAAP revenues for Brazil, I think, we disclosed the strong growth. Brazil has continued to enjoy for us. And we also more importantly, continue to narrow -- improve our unit economics in Brazil. So everything is on track for us in Brazil.

And in terms of the Group level, I think that the cost initiatives when we talk about the projections in the future, for the future in terms of EBITDA positive after HQ costs allocation for the Asia market, we do take into any initiatives that are visible to us at a point, of course, we don't have a perfect prediction for the future.

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

A:In terms of the game pipeline, we do have things in the pipeline whether it's our own self-development or published titles or invest details we may publish later this year. And as you know we will announce it when they're public -- when they're officially launched. And I think in the long run we do -- our goal is to continue to diversify our portfolio and in terms of genres and mix of the esports and more casual type of games and across the more diverse market so the direction is the same.

From a financial perspective, we don't think there will be anything that will have an immediate meaningful significant impact like that on Free Fire in the immediate future, because; A, Free Fire is a very long the largest mobile titles in the world; and B, for any game that we launched initially our focus is more going to be user engagement and building up the momentum and also the user base and solidify that before we focus more monetization. Even for Free Fire it actually took the game quite a number of quarters, or I would say even more than a year to graduate and ramp up monetization and to develop into more full potential. So that's our view.

And in terms of the EBITDA margins for digital entertainment in coming quarters, I think our EBITDA margin is still very much on the high end of the industry at more than 45%. Now from quarter-to-quarter as we shared before there could be fluctuations depending on, for example, esports events and other campaigns. For example, the second quarter we had our -- the World Series competition for Free Fire. And then that also depends on launch timing for the new games. If we have new games then there will be some sales and marketing investment to build up momentum for the public -- based on publishing timing. But generally I think even though there will be fluctuations, we do continue to expect our EBIT margin will continue to remain on the high end compared to the industry range.

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

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

The above Q&A are highlights that are edited for brevity. Click here for the full Sea Q2 2022 Earnings Call Transcript.​​

# Q2 Earning Season

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