Earnings Call: Q2 2018

Aug 22, 2018

Hello, and welcome to the Sea Limited Second Quarter 2018 Results Conference Call. All participants will be in listen only mode. Please note, this event is being recorded. Now, I will turn the conference over to Alan Hallowell, Group Chief Strategy Officer. Please go ahead, sir. Thank you, Keith. Good morning and good evening, everyone, and welcome to Sea's 2018 Q2 earnings conference call. I'm Alan Hallowell, Sea's Group Chief Strategy Officer. Before we continue, I'd like to remind you that we might be making 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 adjusted net loss. We believe these measures can enhance investors' understanding of the actual cash flows of our major businesses when used as a complement to our GAAP disclosure. 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. Let me begin by introducing the management team on the call. We have our Chairman and Group Chief Executive Officer, Forrest Li and our Group Chief Financial Officer, Tony Ho. Forrest, Tony and myself will share strategy and updates, operating highlights and financial performance for the quarter. This will be followed by a Q and A session in which we welcome any questions you have. With that, let's begin with Forrest for our key strategic highlights. Thank you, Alan. Good morning and good evening, everyone. Thank you for joining today's call. I'm very pleased that we are reporting a strong set of results for this quarter. Shopee continues to cement its position as our region's most popular e commerce platform and Garena continues to deliver results from its strategy to capture new growth opportunities. Looking first at e commerce, this was another very strong quarter for Shopee. Our strategy for Shopee is clear. We intend to continue building on our position as the regional leader by providing the most innovative and engaging e commerce experience for buyers and sellers in our markets, while driving ever greater efficiency improvements as we rapidly scale up. In the Q2, we delivered on both fronts. E commerce GMV reached $2,200,000,000 almost triple that of the Q2 of 2017. Our ability to engage buyers with a huge range of products and a superior shopping experience increasingly makes Shopee the online shopping destination of choice for consumers across the region. A great example of how successful we have been in making Shopee the platform of choice is our big Ramadan sale in Indonesia. This year's sale which runs through May June saw orders and the GMV dramatically increased compared to last year's sale. This is a peak shopping season in Indonesia and our success in capturing consumers during this busy period really shows how important Shopee is for the online retail experience. We are also seeing very strong growth in marketplace revenue as more merchants made use of our value added services to better engage with their customers. Alongside this success in building engagement with buyers and sellers, we continue to drive efficiencies across the business. Our ever growing scale enables us consistently drive down costs in areas such as shipping and logistics. At the same time, as we continue to enhance the user experience and build stronger loyalty with both buyers and sellers, we are able to achieve significantly greater efficiencies in our promotional programs. Sales and marketing as a percentage of GMV, for example, fell 40 basis points quarter on quarter from 6.6% in the Q1 to 6.2% in the 2nd quarter. As Shopee goes from strength to strength, I'm pleased to say that Garena too is moving quickly to take advantage of growth opportunities in our industry. Sarena delivered adjusted revenue of $139,100,000 and adjusted EBITDA of $48,600,000 in the 2nd quarter, up 19% and 21% respectively year on year. In particular, as many of you will know, we have been focused on 3 key strategic areas for Kurena. 1, moving from PC only to mobile first 2, moving from pure publishing to a mix of game publishing and development and 3, moving from a regional footprint to a global presence. Across all three areas, we are making encouraging progress. In terms of mobile games, we are very pleased with how Garena has led a region in the development of the mobile space and we are particularly encouraged by the strong performance of Arena Valor and Free Fire, both of which are building huge and engaged mobile user base around the region. In the month of June, about 73% of our adjusted revenue for digital entertainment came from mobile games, which is a dramatic and a positive change in the short space of time. This speaks to our ability to understand the habits and the preferences of gamers in our region and adapt quickly and effectively to suit their needs. In terms of moving into game development, we view the successful launch of our first fully self developed game Free Fire as the first step in our expansion into game development as a key growth strategy. We continue to leverage our traditional strength in publishing while exploring strategic opportunities upstream and downstream. In the month of June, self developed game revenue accounted for approximately 13% of our adjusted digital entertainment revenue. This is a record high driven by the breakout success of Free Fire. The various monetization features we developed for Free Fire such as the season pass concept have led to encouraging monetizing results. Moreover, the game has most recently achieved a record high DAU count of more than 15,000,000. Looking upstream, we will continue to devote resources to enhance our in house development capabilities. Having already established a development studio in China, we intend to grow that team while tapping into other talent pools in our region and the rest of the world. We also seek to expand partnerships with independent studios capable of developing promising titles. Strong game development capabilities will serve as a springboard for Garena to build up a global presence in the long run. In terms of the downstream value chain, we continue to explore new opportunities in esports and game streaming in order to deepen user engagement. Our region continues to deliver 1 of the world's fastest growth rates in terms of organized esports. And there are still many opportunities for us as a first mover in our region. We will continue to build on our strength in esports, streaming and look forward to developing this aspect of the business further. Southeast Asia is a relatively underdeveloped market and the history of growth in of growth in more maturing gaming markets suggests that there is a huge untapped opportunity here. Finally, I have already briefly mentioned our expanding global presence. We are hugely encouraged by Free Fire's success. And if you walk down the street today in Sao Paulo or Mexico City, you are just as likely to see someone playing a greener game as you would in Bangkok or Ho Chi Minh City. According to F. Annie, in July 2018 Free Fire was ranked in the top 10 in terms of game downloads worldwide across both the App Store and the Google Play Store. What we have seen from this global success is that many of the factors that drive a game success in our core markets in Southeast Asia are the same as those in other parts of the world. I truly believe that Garena can play an important role in helping to build and develop gaming communities in many faster developing markets globally, leveraging our success and experience in Southeast Asia. A great example of this is Brazil, which is one of the fastest growing mobile markets globally. According to Sensor Tower, Brazil rests 3rd behind the U. S. And India in terms of the total number of downloads on the App Store and the Google Play Store in the Q2. Brazil is also one of the most exciting markets for Free Fire. According to period for Garena and I will personally be playing an active role as we continue to push forward with these initiatives. I intend to work closely with our management team to ensure that even as we broaden our geographic footprint and grow our ambitions, we continue to deliver the same level of executional excellence that has driven our success to date. As we push forward with these initiatives, we will periodically review our existing business to make sure we are allocating resources to where we can generate the best returns. This may mean some fluctuation from quarter to quarter as we continually optimize our game portfolio for future growth. As we move into the second half of twenty eighteen, we plan to launch new and highly anticipated titles across different genres in order to meet the evolving preferences of gamers in our region. In summary, I'm very proud of the growth that we have achieved in the Q2 of 2018 and I look forward to sustained growth for the second half of twenty eighteen. With that, let me hand the call back over to Alan. Thank you, Forrest. With regards to e commerce, the markets in our region continue to grow at a healthy rate. Frost and Sullivan recently released its quarterly e commerce report, which estimated that 2Q 2018 GMV for the markets we operate in grew by 45% year on year to US10.7 billion dollars Based on their analysis, Shopee is still the largest e commerce platform in the region by orders with an estimated regional market share by orders of between 22% to 24%. E commerce monetization meanwhile continues to rise encouragingly. Our take rate excluding product revenue rose to 1.7% in the 2nd quarter from 1.1% in the 1st quarter. Marketplace revenue surged 69% quarter on quarter as all major components, advertising, commissions, fulfillment and logistics grew nicely quarter on quarter and all grew markedly faster than GMV. The 2nd quarter improvement across all service lines of our e commerce platform is indicative of our ability to steadily improve our value proposition to our user base. We are confident that we can continue to drive the take rate upward as we share a steady stream of innovation and efficiency improvements with buyers and sellers. Turning to Garena, in the Q2, quarterly active users or QAUs grew 150% year on year and 27% quarter on quarter to 160,600,000. We deepened market penetration as new games continue to grow, while existing key franchises continued to deliver solid results. Quarterly paying users or QPUs in the quarter declined to 6,600,000 from 7,200,000 for the Q1 of 2018. The quarter on quarter drop was primarily attributable to a decrease in the number of paying users in Vietnam due to measures launched in April by Vietnam's leading mobile operators to restrict the use of prepaid telco cards for online game top ups. We are now actively strengthening alternative top up channels to assist our paying users in this market. It is still too early to predict how quickly the market will recover as we develop these new sales channels. However, we believe that fundamental demand for our games remains strong. In fact, across our titles, QAUs in Vietnam continued to grow to record highs in the Q2. We are also encouraged to see growth in the number of paying users again in the past few weeks as users adapt to the new environment. And finally, with regards to our digital financial services business, I'm pleased to tell you that earlier this month we obtained the eMoney license in Indonesia. We are still in the early stages of planning for the types of services that AirPay will provide with the license. So obviously, we see this as a significant opportunity to further strengthen our digital financial services infrastructure to support both Shopee and Garena in Indonesia. We are indeed excited about the future of online financial services in Southeast Asia. During this period of rapid evolution and the value proposition of AirPay, we realize that there is a need to update the legacy metrics that we have been sharing with you. This will in fact be the last quarter that we disclosed GTV in its current form. We aim to return in the future with disclosure that better captures the rapid adoption of eMoney and other online financial services across our markets after we have further implemented our services in connection with the recent developments. With that, I will pass on to Tony to talk more about the financials. Thank you, Alan, and thanks to everyone for joining the call. Same as the previous quarters, 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 2nd quarter total adjusted revenue was our highest at $219,600,000 an increase of 71% year on year and 11% quarter on quarter. This was mainly driven by our continuous monetization efforts in our e commerce business in the past quarters and the growth of our digital entertainment business year on year. Digital entertainment adjusted revenue was 100 and $39,100,000 an increase of 19% year on year and a decrease of 5% quarter on quarter. The year on year growth was primarily due to the improvement in monetization of our existing games and the launch of new games. For the sequential decline in revenue and QPUs, Alan has already discussed the telco cars top up restrictions in Vietnam as the main reason. Digital Entertainment adjusted EBITDA was $48,600,000 an increase of 21% year on year and a decrease of 12% quarter on quarter. E commerce adjusted revenue was $58,800,000 up 74% quarter on quarter from the Q1 of 2018. Of this $58,800,000 in adjusted revenue, marketplace revenue was $37,300,000 while product revenue was $21,500,000 Adjusted EBITDA loss widened slightly to 100 and $88,300,000 despite the increase in marketing efficiency compared to the Q1 of 2018 as we continued our investment to fully capture the market opportunity in the region. We will stick to our strategy to grow our Shopee platform and strengthen our market leadership position, especially in our focus categories. We expect our investment in sales and marketing to continue throughout 2018 as both our GMV and gross orders continue to grow. Digital Financial Services adjusted revenue was 3,400,000 dollars a decrease of 36% year on year from $5,300,000 in the Q2 of 2017 as we focused our efforts on strengthening the infrastructure to support our existing platforms. Digital Financial Services adjusted EBITDA loss was $6,800,000 in the Q2 of 2018 compared to a loss of $11,000,000 in the same period of 2017. Returning to our consolidated numbers. We recognized a net nonoperating loss of $30,800,000 in the Q2 of 2018. This was primarily due to the fair value loss of $37,200,000 arising from the fair value accounting of the convertible bonds we raised before our IPO. We had a net income tax benefit of $200,000 the Q2 of 2018, which was primarily due to the deferred tax assets we recognized in our digital entertainment segment. Finally, our adjusted net loss, which is net loss adjusted to exclude share based compensation expenses and the fair value change for the pre IPO convertible debt was $198,700,000 in the Q2 of 2018 as compared to $86,900,000 for the same period of 2017. Thank you, Tony. We shall now open the call for questions. Good morning to you. For the games business, can you perhaps elaborate a bit more on how you're strengthening the alternative pop up channel from Vietnam? And you also mentioned some improvement in paying users that you've seen in July. Can you also talk about how large the improvement was? And on the game side as well, as you're talking about going more global and more self development, can you also talk about whether or not there could be any impact on your relationship with Tencent? Thank you. Sure. This is Alan. Let me take that first question about strengthening alternative top up channels. We're doing a number of things from further pushing our own branded top up cards in the existing channels that we've worked with historically. I'm not sure, MC, if you've noticed over the past few days, but it's extremely encouraging to see that the acting Minister for Information and Communications indicating that the Ministry intends to introduce processes that should enabling companies to recommence offering telco top up cards for digital services in the coming weeks. I think the reality is this is an extremely valuable channel for the telcos. It's obviously popular means of gamers to play our games. And in sum, there are a lot of constituents who want to see the restoration of that channel. But we are confident that growth will return. As Forrest has pointed out, there's been very strong growth in our key titles. And so we would think with time things will come back to normal. Yes. And yes, I'm happy to answer the second question. Yes, so I think like we have a lot of discussion with the Tencent Games leadership team. Our interest is fully aligned. I think I suppose company have the strong interest and intention to explore international global opportunities and there is a lot of areas we can collaborate and we can learn the best practice and compare those together. Specifically, I think for certain areas because our it is related to our increasing capability in terms of the game development and we work together to explore some co development opportunities for the global market. I think an early example of that is the co development of Arena of Valor and we expect to do more with Tencent on that front in the future as well. Great. If I may ask one additional question, just curious post your recent fundraising exercise, could you also talk about whether you are not fully comfortable with your financial position now as you expand more into the e commerce space? Yes. This is Alan. I'll take that question. We're generally very comfortable with our cash balance. I think you referenced the $575,000,000 we raised through a previous CB. And as we've discussed on previous earnings calls, we moreover have multiple alternatives to raise money should we so desire. And we indeed remain very open minded about which option, if any, to proceed with. Clearly and invariably, maximizing shareholder value is our most So we're still evaluating indications of interest from potential strategic partners and members of the financial community. I would also add that we're very pleased with the valuations we're seeing among smaller e commerce players of recent in the region. And so we're very comfortable both with our position cash wise right now and the options we have going forward. Okay, great. Thank you. Thank you. And the next question comes from Mike Olson with Piper Jaffray. All right. Thanks and good morning. I had two questions. First, regarding the go forward outlook, if there is one, maybe I missed it in the press release or elsewhere. But are you providing a go forward outlook? Is it a reiteration of the existing full year guidance that you've given? And then I'll have one follow-up as well, please. Yes. Hey, Mike. So we would definitely maintain our full year 2018 revenue and GMV guidance. We're comfortable with that. We as of the Q2, the question is whether we have rolled out 2019 guidance, we have not done that yet. We'll do it at one of these upcoming quarters. Okay. And then are there any more details that you can provide on the new internally developed titles that will be coming to Garena in the second half of the year? I guess specifically are these games in a similar genre to Free Fire or are they in other genres and how many titles could we expect? Thank you. Sure. And at this moment, yes, we are still very focused on the future development of Free Fire and we believe this is just the beginning of the Battle Royale genre and there is the genre itself is still rapidly evolving and there is that will present a lot of like opportunities down the road. And even like for FlipFire itself, the user base is growing quickly and also like we still see a very promising monetization opportunity for that game. So that is at this moment we have like about half of our studio employees working on Free Fire. So we have another half is pretty much focused on exploring the prototype of some new games. This is across a quite big range of genre including MMORPG, including SLG and including the card game. So but I think all of them are still at very early stage and we are not like have a clear plan. So what will going to be the launch plan for our next game from the studio, but we are actively working on that. So we will let you know soon we have a more concrete update on that part. All right. Thank you. Thank you. And the next question comes from John Brockled with Cowen. Great. Thank you. A couple of questions on Shopee. So the GMV was better than expected in the second quarter. I'm just wondering if you could talk about the drivers, any key verticals driving that growth? And then on the monetization side, if you could discuss the value added services in some more detail, kind of the key drivers of the value added services monetization in 2Q, which markets you're seeing the most penetration? And then lastly, on the monetization side, any color on the marketplace revenue, the split between the commissions and advertising and value added services? Sure. This is Alan. So with regard to your first question about GMV, I'll say probably something that's very obvious. We saw generally strong sequential growth across all seven markets. In terms of the actual drivers, generally speaking, we continue draw the majority of our growth from new customers. Most of the other inputs of the equation are relatively stable, average basket size, frequency, etcetera. And so yes, it's characteristic of market growing from 2% to 3% to 4%. It's really user growth that's driving that. With regard to your second question, Shopee monetization, Just as I mentioned in my prepared remarks, the very nice thing is that every flavor of monetization, if we think about it as a take rate, actually increased quarter on quarter. So adoption of advertising continues to grow. We're seeing a very healthy growth in actual number of sellers using advertising. Some of the other aspects, the VAS such as logistics, we saw very appreciable growth in the number of sellers who adopted our SLS and other solutions. And so penetration is generally is spreading and this is at least across advertising and VAS across almost all of our markets. As you know, commissions are still Taiwan based game. In terms of marketplace revenues, again, advertising commissions both nicely outgrowing GMV, but VAS in turn, given that it's a relatively new service, is growing faster than those 2. I can try to give you some more color offline, but generally, again, very encouraging uptake of all of our marketplace based services. Great. Thank you. Great quarter there. Thanks. Thank you. And the next question comes from Alicia Yap with Citigroup. Hi. Good morning, Forrest, Alan, Antoni and management team. Thanks for taking my questions and congrats on the solid results. I have some follow-up on the situations in Vietnam. So what is the current status now? I understand we've tried to smooth it out gradually. And if we can get some color, for example, what was the percentage of revenue come from this mobile operator? And is this just one operator or multi operators? And why are they suddenly decided to do that? And would there be any risk that happening to other countries in the region? And then just quickly follow-up on the Shopee business. Understand one part of the main driver for the revenue uptake could be related to the logistics and the fulfillment. Any other value added service that you plan to roll out into the second half? Thank you. Great. This is Alan. With regard to your first question on Vietnam, we don't actually break out our gross billings by channel. But suffice it to say, telephone and mobile telco top ups were have historically been a pretty sizable channel. And the impact of this, I can say if this had not happened, we would have seen sequential growth in our mobile gross bookings. So that gives you a sense as to what if how it impacted our Vietnam business and also overall. You asked about the reasons behind this decision. The telcos I think wanted to ensure that this form, this application of top up was being used for all the right reasons and obviously gaming is one of those right reasons and legit applications. I think there were probably some other more untoward uses and they found it best to kind of summarily discontinue that. But as I mentioned earlier, they actually do look to top ups and the top ups for entertainment for a lot of revenues and profits. And I think this is probably one of the reasons the government has now made such committal remarks in the press. I wouldn't want to handicap when exactly things will be brought back on stream, but you can find it in the media that there's reference to likely a number of weeks before it comes back on stream. So we're cautiously optimistic there. Your third question was whether the Vietnam situation could happen in other regions. We have absolutely no reason to believe that there is this would happen in any other market, not even a whisper. I think it is very isolated and one off. And then your final question, shopping monetization, any other value added services that we intend to roll out? The answer is yes. That said, we're generally pretty conservative about signaling to the market what tools we have planned, but it will be part of our drive to continue to drive up take rate, and we'll do our very best to announce as soon as they are released. Okay. Thank you. Thank you. And the next question comes from Conrad Werner of Macquarie. Hey there. Thank you so much for taking the call. First, just a couple of questions on the e commerce business. You mentioned the successful Ramadan sale, which really helped boost the GMV through June. Is there any risk that as we head into the 3rd and 4th quarters that that creates a sort of a more tricky sequential comp? Or are we still growing at a healthy rate where we still can expect sequential growth kind of through the remaining 2 quarters of the year? The second question just on the e commerce. I tend to look at the sales incentives net off item as a sort of a proxy for commissions. I'm not sure if that's still correct or not because that was kind of down sequentially from 6,400,000 dollars in the Q1 to $4,160,000 in the 2nd quarter. And I know there's some accounting quirks that go with that. But are commissions growing sequentially? Your comments seem to suggest that they still were. Then maybe just on the games, talking about maybe some of the 3rd party games, can you tease any titles into the second half? Can we expect any new titles in the second half to kind of boost the games portfolio? And then just lastly on the balance sheet, the shareholders' equity right now stands at just above US200 $1,000,000 and given that we're still in investment mode and kind of losses are in and around that kind of ballpark, is there a risk of the company kind of tipping into a negative shareholders' equity position anytime this year? Is that something we should be concerned about? Are there solutions to that? Those are my three areas of questions. Thank you. Sure. Thanks. So with regard to your first question, you made reference to the Ramadan sale and the strength that we saw and the impact on the 3rd and 4th quarters. We envision no negative impact. We saw very appreciable sequential growth in the Q2. Obviously, we speak now as of August 22. We're generally very pleased with the Q3. So I don't think you would see what has happened in some other markets in which events become up so well consuming that they conceivably suck GMV from prior and subsequent quarters where we're generally seeing good sequential growth. So with your second question, sales incentive net off under GAAP is decreasing compared to Q1. So actually we net off on per order basis. And that's another angle to look at it as we continuously driving down the per order subsidies over the quarters. And for the 4th question about the balance sheet, well, so the main reason is that we had 2 rounds of convertibles raised pre IPO and recently. So if you're looking at the pre IPO convertibles, the conversion price is around $13 to $14 We're pretty much in the money at this moment. So not really worried on that part. And for the CVs, we raised recently the conversion price is $19.8 And we're quite confident that with the time being down the road that our share price would be higher than that and we're not quite concerned at this moment. Okay. And then regarding the second half of twenty eighteen game pipeline, and so in general, we are conservative to match any game titles, which not like 100% in the launch pipeline yet, but like what we have launched in early August is Contra Return, which is a mobile game developed by Tencent with a very famous Japanese IP contract. And it's still like it's only have been like almost 3 weeks. It's still too early to judge to the potential of the monetization of this game. And but in generally general, we are pretty happy with the result we have seen for the 1st 3 weeks. And we just launched a game in Taiwan, so in August and we plan to launch the rest of our all our markets in September. So for the other games like probably we're going to have another 2 games will be launched on the regional level, so across most of our market in the second half of this year. So we'll let you know so we'll have a more concrete launch plan of those games in the future. Thanks so much. And maybe just the last follow-up, sorry to take up all this time, but there was some news out of China talking about delays in game licenses in Tencent and other game publishers, developers being impacted by this. Does that trickle down to yourselves? Has that delayed any of the launches that you had planned for the second half in collaboration with developers or not? Like number 1, there is a I think it's a like a quite isolated China ish, industry issue. It's a market wise, this has nothing to do with our market. And actually, so if you ask me to make an estimation, it's maybe a slightly positive trend for us because like things like the China market is a little bit like a slowdown for whatever reasons and there is more and more developers start to put their eyes on the Chinese developers to try to work with us to launch their games out of China. Perfect. Thank you so much. Thank you. The next question comes from Varun Ahuja with Credit Suisse. Yes. Hi. Good morning, everyone. I've got a few questions. First, on the gaming side, can you tell us how the FIFA launch has been for you? And how is it ramping up over the last few months since you have launched? That will be number 1. Number 2, you mentioned that your self developed games are increasingly taking higher contribution of adjusted revenue. But if you look at your gross profit margin for this quarter, it was around 51%, down from 52% previous quarter. So just wanted to understand, is there any other cost elements? Because my belief is that increasing contribution from self developed game should at least help in your margin side. So that's number 2. Number 3, on the you mentioned that Brazil and Mexico has seen a decent take up of free fire. Is there any chance, given you've seen these markets are exciting that you may also consider similar arrangement with Tencent or other developers to push your games in these two markets? Are you looking at Brazil as Mexico as another extension of your Southeast Asian market, which have similar kind of attributes. So that's number 3. And lastly, on e commerce side, this product revenue, can you just a little provide more clarity in which markets are these primarily? Are they largely in Indonesia and Taiwan? That would be helpful. Thank you. Okay. Thank you. And I think like regarding like FIFA Online 4 and we launched the game right before the World Cup. And I think like at this moment, consider this game is still in the transition period from the previous like a version of FIFA Online 3. And we see a pretty good pickup like from the new launch for FIFA Online 4 both in terms of the user base and the revenue side. But we're still seeing a lot of gamers that are still continually playing FIFA Online 3 at this moment. And we recently so we recently I think this is kind of like it's not it's a plant because we really want gamers to have a transition migration period of time and let them slowly migrate to the new version. We believe it's a much better version of FIFA Online 4. But we don't want to force gamers to do that. That's why we plan a pretty like a decent transition period. And I think that is the best from the gamer's perspective. And of course, this is may at this moment may limit the monetization capability and the growth capability for FIFA Online 4. And recently we made the official announcement to the gamer community. So soon we are going to close FIFA Online 3. And in a way this is a push to gamers to migrate to new versions as quickly as possible. I think like when we finish this migration process, that is the time like we probably have a better sense of the user base and And regarding your question about the South And regarding your question about South America, yes, definitely, I think we're very excited to see the potential in those markets. And as I mentioned just now, so we do see a lot of common success factors between South America market and the Southeast Asia, which we are very familiar with. At this moment, we are really, really focused on to make sure like Free Fire continually being very successful game in those markets. And we travel there frequently and we engage with the local communities. We're going to join a big game show in Brazil in October. And I think like through all those effort and like where we get a chance to continually building up our local operation and the publishing capability. I think like when we have those capability build up and that may be the chance for us to talk to some 3rd party game developers to launch their games in South America, which is very similar to what we have done with game developers in Southeast Asia. But interestingly, we do already have some incoming like a request for us as you are if we are interested in launching like their games from like a 3rd party game developers in South America. So this could be a potential growth opportunities for us down the road. And but at this moment, we're still really, really focused on to continually make Free Fire a very, very successful game in South America? So I'll take your question on gross profit margin for the game side. So basically, under GAAP, we only defer the revenue and channel cost, but not the rest of the cost. For the revenue share part, it has to be on the cash basis. So that naturally creates a disparity sometimes over the quarter that caused the GP margin to fluctuate. But if you only look at the cash front, it's pretty stable. Maybe I'll take your last question on e commerce product revenue. We don't disclose by market, but I can say just more maybe qualitatively, we've seen very encouraging uptake in markets such as Taiwan and Indonesia, and we are obviously continuously rolling out these capabilities across all of our markets. But, yes, I would say the most encouraging results happen to be our 2 largest markets. Just two follow ups. On Free Fire, how do you see the impact of Fortnite being launched on Android platform in these markets? So that's number 1. And secondly, PUBG is I don't think Tencent is really focused on monetizing PUBG in the market. So how do you see increasing Tencent looking at international games? Will that impact Free Fire monetization potential? So increasingly more Battle Royale genre games coming in, especially Fortnite on mobile, how do you see that may impact Free Fire monetization in the next 12 months or so? That's number 1. And number 2, the gross profit margin that I was talking about was on cash basis only. So it's 51% compared to 51.6% or 52% in the previous two quarters. So I've adjusted for the accounting thing. Thank you. Sure. And for especially for Free Fire, looking at the monetization trend and what we have done about the monetization capability of Free Fire, I think like by the end of the day, there is some similar type of game in the market as you mentioned Fortnite and the PUBG Mobile. I think like those game already existed there. So for quite some time, so it's like definitely there's this like even just from the competition perspective, this is just not new competition. And specifically for Fortnite and as you mentioned, we remain to see what is the potential of this game on Android. And I think there is some factors like we are looking at and I I think we don't think this is a big threat or concern for us, number 1. So in general, I think like 4 90 is much more popular in Western markets than in some emerging markets and especially like Southeast Asia or even South America. And the second is like recently we heard and the game are not going to distribute it through Google Play and we do know. So we remain cautious to see what that impact in terms of the accessibility of Android version of Fortnite. And then the third is like even just considering the across the globe market and I think that the game itself is probably more popular on the console than on the smartphone. But if you look at the Free Fire, so our focus is very, very clear. So number 1 is it's optimized for the smartphone users and it's basically like optimized for the like Android users and with the relatively lower spec phones, right? And the second is that we have been really focused on the focused on some emerging markets, right? All of the market where like Free Fire is doing very well at the emerging market. And the third one is, at this moment, we already have decent very large user base, 16,000,000 daily active users. And we continually enlarge the user base at the same time. So over the years, we have accumulated a lot of great experience through our publishing capability, how to retain users, how to build a community among the user base and how to run all the type of like game events including esports events for those users to make sure they stay with us again. And actually that is our strength, like traditionally. So in a way, we are very confident about the prospect of Free Fire. But interestingly, on top of that, I think like we closely monitor, so we learn from the best practice of some game in the general, like we learn a lot in terms of monetizations from Fortnite, from PUBG Mobile. For some best practice, we may implement them into Free Fire, which offer Free Fire a higher, a better perspective in terms of the monetization. So for your follow-up question on GPA, I guess you add up the change in deferred revenue and the deferred channel call and derive the percentage. So that's similar in terms of cash term. So the main reason is we have some fixed costs like depreciation, like human resource costs. Naturally compared quarter to quarter, the revenue or the gross billing drops a bit. So that part contributes to the margin drop slightly. Thank you. And the next question comes from Andrew Orchard with Nomura. Hi, guys. Thanks for taking my question. Firstly, on the e commerce advertising, obviously, there's quite a big jump in the quarter. Just trying to understand where in specific the advertising growth is coming from? Are you putting in more ad loads or is your per ad price going up? And then also on Free Fire, just trying to understand what's the relative size of the game in your entire gaming portfolio right now? And can you also give us a sense of how monetization is trending relative to what you've seen in your previous games in the past? Thanks. Yes. So with regard to sources of advertising growth, I think I mentioned in passing a growth in overall number of advertisers and I think that that's one of the biggest if not the largest basic driver. We generally don't disclose ad rates, but generally they've been rising gradually. We obviously want to ensure at this important stage that sellers identify very persuasive ROI. And so you obviously, as you well know, you expand inventory to among other things relieve pressure on pricing. And so we're kind of in that mode. But I think the most important thing and the one that the thing that we do, we work toward is to educate advertisers and grow that number and I think we've been very successful in that regard. Yes. And regarding your question, the relative size of like Free Fire in our game portfolio, I think as we reported and if you look at our like June revenue, right, and actually June is the 1st full month and we start to focus on monetization of Free Fire. And if you remember like our last earnings call, so in mid May, we mentioned that, okay, we were going to have like an update, a patch in late May and that is the kind of the first patch we start to focus on monetization effort. And so June is the 1st full month of that effort. And so if you look at the June number, Free Fire has already account for 13% of our entire game revenue. And so this is very promising. And you can expect for the next couple of months and this percentage number will increase. And that gives you a sense of the size of the in terms of the revenue contribution of Free Fire in our entire game portfolio. I think in terms of the monetization like a sense of monetization relatively to other games. And I think it's relatively early to judge. And because this is a new genre, right, it's very different from the some like MMORPG or like even mobile or FPS game, which is a very mature genre and even the monetization tool is a pretty like in a way it's a pretty standard and but like a but cycle for Free Fire for Battle Royale as a new genre. So every quarter, every month we made some some new idea in terms of the monetization. And definitely this reflects there is a good potential. And I think if you just look at our number now and based on existing monetization tools, I think we're quite happy with in general about this general in terms of the monetization capability. It may not be as good as some mobile game like Arena of Valor, but definitely it's better than a lot of other games in our portfolio. And the next question comes from Mark Goodridge with Morgan Stanley. I just had a couple of questions on the e commerce business. Firstly, just on the competitive environment with Lazada. We've seen NIM introduce free commissions for the merchants in Malaysia, Thailand and Singapore since July. I just wanted to see has there been any impact on your business, any slowdown in any form whatsoever? And then secondly, last week in Indonesia, we did see that the Indonesian government Sure. This is Alan. I'll take those questions. So with regard to Lazada having introduced the 0% commission, we simply have not seen any impact on Shopee and we don't expect to see any material impact. We've historically not seen such measures as having really had any relevance on our growth trajectory. I mean, I may be stating the obvious here and as you know, we went from a 1.1% to 1.7% take rate. Our general working assumption is that as the market consolidates and matures, we should be rolling out more and more monetization tools. And so that's the direction we're headed into and we would be very firmly committed to pushing up our take rate going forward. I'll take your second question on Indonesia import tax or duties. So the impact will be minimal because at this moment, the cross border transactions are not substantial for Indonesian market. And meanwhile, we are closely monitoring the progress and the details on how the government may operate such rules or tax laws. And we'll see and we will actively seek for the consultant's opinions on how to cope with this to make sure we are fully compliant with the new regulation. Would your expectation on that Indonesian change be more affecting people in the market or your competitors in the market who have a higher proportion of 3 Seas being sold through their product mix? Well, my opinion, reasonably expected, yes, because pretty much naturally, you're going to pay more, right, as a local consumer. So that would be expected. Thank you. And the next question is a follow-up from Wangzheng Kuo with Goldman Sachs. Yes, hi. Just an additional follow-up on the e commerce business. Just wondering what's the percentage of GAB now that is from B2C and also from cross border? And also just wondering when in Taiwan, shopping mall has already started to charge you commission to create for some time. Just wondering whether other regions are in the works of seeing the same change or the same monetization or it will still be sometime down the road? Thank you. Yes, this is Alan. With regard to your first question, percentage of GMV coming from B2C and cross border, I'm sorry, when you say B2C, are you talking about direct sales? So it includes also obviously merchants listing products, the big merchants listing products in our marketplace as well? Right, right. Okay. Well, so if it's Shopee Mall, that continues to grow as a percentage of GMV. I don't have a material update for you right now. I think we have mentioned in the past that the percentage across most of our markets begins in the very high single digits and moves into the mid to high teens. And cross border, I believe would be still in the mid to slightly high ish single digits, but no major change there. And then you had another question about introducing mall commissions for other regions. Yes. And the timeline, I think notionally speaking, to the extent that shopping mall commissions are by and large being paid by multinationals and large domestic brands, basically few constituents that are have a tradition of paying commissions whether it's in China or Latin America or Japan. We structurally don't see ourselves as any different. With regard to timeline, unfortunately, we can't really give you much detail there for competitive signaling reasons and other reasons. But we have shared with you in the past, MC, that one of the big triggers in our mind is achieving a level of category dominance. And this last quarter, we feel like across all of our markets, we've moved closer to that. So I would continue to focus that as a potential catalyst. Got it. Thank you. And I think sorry, we're going to need to wrap up right now. I just wanted to thank all of you for joining today and for all of us around the table, I think I speak for the entire management team. We very much look forward to seeing you at many of the upcoming Corporate Access events over the next few weeks. And we remain totally committed to fielding any other questions you might have subsequent to this call. But I trust you all have a good day, evening and morning. Thank you very much. Thank you. The conference has now concluded.