Earnings Call: Q1 2018

May 16, 2018

Good day, and welcome to the Sea Limited First Quarter 2018 Results Conference Call. All participants will be in listen only mode. 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 Alan Hellowell, Group Chief Strategy Officer. Please go ahead. Thank you. Good morning and good evening, everyone, and welcome to Sea's 2018 Q1 earnings conference call. I am Alan Hellol, 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 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. 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 business 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. Thanks, Alan. Thank you for joining today's call. In the Q1 of 2018, we once again enjoyed robust growth across all of our businesses. I would like to start by highlighting that our digital entertainment business, Karena, returned its number one position in our region for the full year of 2017 based on a combined assessment conducted by Nikko and the Niuzu recently of the online gaming market in our region. Looking at the Q4 of 2018, Garena delivered adjusted revenue of $146,000,000 up 43% year on year and adjusted EBITDA of $55,000,000 an increase of 49% year on year. We are also pleased to share with you that our first self developed mobile title Free Fire recently achieved 13,000,000 DAUs. Free Fire's continued growth give us confidence that the title has great potential going forward. Free Fire remains in early stages of monetization as we focus on building up a critical mass of users. We will look to focus more on monetization as Free Fire's user base continues to expand. We continue to grow our esports offering to achieve even greater dominance in our region. Our annual flagship event, Garena World, had attendance of approximately 240,000 and attracted over 10,600,000 views online. Over 11,000 teams competed in the various tournaments leading up to the event in Bangkok. We are confident that our e sports franchise will drive future gamer engagement and extend the lifecycle of our games. We also have a strong pipeline of highly anticipated titles for 2018 across both classic and new franchises, and we are excited about their upcoming launches. Let's move on to e commerce. Shopee continued to enjoy rapid growth and ever improving economics. I'm pleased to report that e commerce GMV reached $1,900,000,000 in the Q4 of 2018, almost triple that for the Q4 of 2017. As mentioned previously, we continue to expand support to our sellers through value added services. Our service by Shopee offerings include inventory management, online store operations and the fulfillment services. We also provide Shopee logistics service for cross border sellers with complex logistical requirements. On top of that, we may conduct direct sales on behalf of key brands and sellers. We enable sellers to mix and match the different services based on their needs and preferences. Both service by Shopee and the Shopee Logistics service serve as natural extensions of our business as we expand our partnership with brands. At the same time, we also deepen our relationship with sellers who have outgrown their capacity to cope with the increased demand or have more complex needs. We are committed to the success of our sellers and will continue to find ways to improve the online selling experience. We expect these services to strengthen our long term relationships with our sellers. With these additional services, we are able to improve the product assortment, stock availability and the pricing for our buyers. In summary, I'm very proud of the growth that we have achieved in Q4 of 2018, and I look forward to a strong growth trend for the rest of 2018. With that, let me hand it over to Alan. Thank you, Clive. Within digital entertainment, we continue to strengthen our market leadership. Forrest has outlined adjusted revenue and adjusted EBITDA results. Garena continues to deliver significant free cash flow. Our digital entertainment adjusted EBITDA margin rose to 38% in the Q1 of 2018 compared to 36% in the same period in 2017, revealing further margin leverage as Garena benefits from greater scale. I would like to share with you one more facet of Garena's expanding role in the mobile age. As smartphones continue to improve access to gaming, a greater number of people are gaining access to better forms of entertainment. This will lead to an increasing demand from mobile gamers for high quality content. And as a result, we expect to see sustained growth in the popularity of leading multiyear mobile game franchises similar to what we've seen for PC. And as the game franchises grow, their ancillary ecosystems start to develop as well, which will in turn spark greater demand from increasingly sophisticated mobile gamers for better on the ground game services and community building. Given our position as a leading gaming platform, our geographic reach, our long running on the ground presence in these markets and our track record of success, we believe that GreenNet is well positioned to provide such services. These factors are also key enablers to our dominance in esports. We have become one of the region's most fully integrated esports operators since our inception in 2009. Critical to our success is the extensive network of community leaders we've attracted across various markets. We work closely with them to run thousands of local esports events. On top of this infrastructure, we have a suite of capabilities supporting esports content production, particularly in our largest markets. We're particularly excited about the rapid expansion in esports activities around Arena of Valor, which with Honor of Kings constituted the world's largest grossing gaming franchise based on the latest data available. We also expect the inclusion of League of Legends and AOV as eSports at the Asian Games in Jakarta to generate additional enthusiasm and gameplay around these titles. In terms of operational results, quarterly active users or QAU meanwhile grew 125% year on year and 44% quarter on quarter to 126,700,000 dollars largely driven by existing games such as Arena of Valor and Free Fire. Meanwhile, average revenue per user or ARPU came in at $1.20 compared to $1.80 for the Q1 of 2017 and $1.60 for the Q4 of 2017. The easing in ARPU was mainly due to rapid user growth around Free Fire, which resulted in faster QAU growth compared to quarterly paying users, or QPUs. QPUs remained stable at 7,200,000 in the Q1 of 2018. As Forrest has mentioned, our focus for Free Fire right now is to build up a pool of long term gamers. We are indeed experimenting with different monetization tools in parallel, albeit at a gradual pace. With regards to e commerce, the markets in our region continue to grow strongly. Frost and Sullivan, for instance, just released its quarterly e commerce report, which estimated that Q1 2018 GMV for Southeast Asia and Taiwan grew 45% year on year to US10 $1,000,000,000 Based on their analysis of our region, Shopee is the largest e commerce platform by orders in all markets other than Singapore. Once again, Shopee had an outstanding quarter with GMV reaching $1,900,000,000 almost triple the GMV for the Q1 of 2017 and representing quarter on quarter growth of 23%. Shopee's gross orders reached 111,400,000 which more than tripled year on year. Our ability to grow at such a rapid pace in an increasingly competitive market is testament to the Shopee management team's outstanding execution. In fact, Shopee's pace of growth is ahead of our already ambitious expectations. And as we disclosed in our release, we have adjusted our revenue and GMV guidance for the full year of 2018 to reflect our confidence in sustaining this strong momentum. Our sales and marketing expenses declined in absolute terms from $135,000,000 in the Q4 of 2017 to $127,000,000 in the Q1 of 2018, reflecting how well we are managing our spending while still driving strong GMV growth. S and M as a percentage of GMV declined from 8.5% in the 4th quarter to 6.6% in the Q1. In addition, we are pleased to share with you that this quarter, we have value added services contributing to our e commerce adjusted revenue. Forrest touched on these offerings and Tony will go into greater detail around these items in his remarks. Our ability to offer such value added services is in many ways driven by, 1, the unique characteristics of the markets we serve 2, the less developed e commerce value chain found in our region and 3, our unique and growing skill set in servicing sellers. We expect these value added services to grow and the business model to improve with rising scale, efficiency and constant service improvement. We also continue to cultivate our direct sales business, which has contributed to growth in product revenue. As we have referenced on previous calls, we have begun to offer direct sales service to select sellers, particularly larger brands. We view these services as an effective strategy to improve many aspects of our marketplace. They are, for instance, ideal for fast moving SKUs with demanding fulfillment needs. With regards to our digital financial services business, we continue to focus our efforts on strengthening our infrastructure to support our existing platforms. 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. First, I would like to talk about some changes in this quarter's release. For our e commerce segment, we have made additional revenue disclosures on marketplace revenue and product revenue to help you better understand Shawty's operations as the business model evolves. Marketplace revenue consists of commission and advertising income as we have disclosed in the previous quarters and revenue generated from service by Shopee, Shopee Logistics Service as well as other value add services as we continue to broaden our service offerings, while product revenue mainly consists of revenue from direct sales. We have included detailed quarterly financial schedules together with corresponding management analysis in today's press release. So rather than taking you through our disclosures line by line, I will focus my comments on some key financial metrics so that we have more time for Q and A later. For Sea overall, our Q1 total adjusted revenue was our highest ever at $197,000,000 an increase of 81% year on year and 20% quarter on quarter. This was primarily driven by the continued growth of our digital entertainment business and the monetization efforts of our e commerce business. Digital Entertainment adjusted revenue was $146,000,000 an increase of 43% year on year and 3% quarter on quarter, primarily due to the growth of our QAUs as we launched new games, expanded our existing games into new markets and grew our existing major games in the core markets. Adjusted EBITDA was $55,000,000 an increase of 49% year on year and 5% quarter on quarter as we improved our operational efficiencies. E commerce adjusted revenue was $33,700,000 up 2 62% quarter on quarter from the Q4 of 2017. Of this $33,700,000 adjusted revenue, marketplace revenue was $22,000,000 while product revenue was $11,700,000 Adjusted EBITDA loss widened slightly to negative $179,600,000 as we continue 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 to grow. Digital Financial Services adjusted revenue was $3,900,000 up 93% year on year from $2,000,000 in the Q1 of 2017. Adjusted EBITDA loss was $8,600,000 in the Q1 of 2018 compared to a loss of $9,900,000 in the same period of 2017. We had a net non operating loss of $18,200,000 recognized in the Q1 of 2018. This was primarily due to the fair value loss of $18,800,000 arising from the fair value accounting of the convertible promising notes and the interest expenses accrued on these same notes, partially offset by an investment gain arising from the disposal of an equity security investment. We had a net income tax benefit of $800,000 in the Q1 of 2018, which was primarily due to the change in salary tax rate in one of our markets we operate in and the increase in deferred revenue from our digital entertainment segment in the Q1 of 2018. Finally, our adjusted net loss, which is net loss adjusted to exclude share based compensation expenses, was 200 and $5,500,000 in the Q1 of 2018 as compared to $67,000,000 for the same period of 2017. I will conclude with our revised guidance for this year. For the full year of 2018, we now expect total adjusted revenue to be between $780,000,000 to $820,000,000 representing year on year growth of 41% to 48%. This compares to the previously disclosed guidance of $730,000,000 to $770,000,000 We're also revising our e commerce GMV guidance. We now expect the GMV to be between $8,200,000,000 to $8,700,000,000 for the full year of 2018, representing year on year growth of 99% to 112%. This compared to the previously disclosed guidance of between $7,500,000,000 to $8,000,000,000 Thank you, Tony. Austin, we shall now open the call Our first question will come from Myung Choon Jo with Goldman Sachs. Please go ahead. Thank you. Congratulations on the good results. Three questions, please. Firstly, can we have more color on the path towards monetizing Free Fire more significantly and when it could have a meaningful impact as well on payer users? Secondly is that we understand safe balance sheet of course still looks very strong. Are you considering more shopping related spending is needed to hit? Can we also have an update on any potential fundraising plans? And thirdly, for e commerce revenues, can you elaborate on the country breakdown and whether we should expect product revenues to also grow exponentially in coming quarters? Thank you. Okay. Thank you. This is Forrest. I will talk about the Free Fire monetization question and then I'll pass to Alan for the rest of the questions. And for Free Fire, we are very report and we have 6,000,000 daily active users. And after 3 months like this quarter, so now the number is growing to 13,000,000. It's more than doubled in terms of DAU. And especially like we achieved this tremendous growth with the context that actually some competing games was launched aggressively globally. And actually, very interestingly, like during that period of time when the competing game was launched and actually the user number of Free Fire the growth of that actually is accelerated. And regarding your question in terms of the monetization of Free Fire, and that has been we have been like shifting our focus from just really, really just a focus on growing the user base now to a more balanced approach, which like we start to really spend a lot of effort to think hard on how to monetize the game. We have studied all the like similar general games in terms of how they monetize the user base for Battle Royale games. And we have been have some good ideas and we see some successful examples from other similar type of games. For example, like we have been quite impressed by the monetization of Fortnite, and we believe that is a very good path for us to explore as well. And so we have been starting this effort like in the past 1 to 2 months, and we're going to release a new version, updated version later this month, probably either later this week or next week. And from that version, we're going to start to see our effort in terms of monetization. We're going to see that from the revenue result. I'm pretty confident. I think probably 3 months later, we are back to this earnings release, and we're going to have a very some very encouraging monetization number to share with you related to Free Fire. Great. Thanks, Forrest. I'll answer your second question, which as I recall, was about Shopee related spending and fundraising plans. As you've observed, MC, we very much have a healthy cash balance. When we look at the longer term, there are many options for us to strengthen our balance sheet and much more importantly unlock greater value for our shareholders. These could include raising money at the Shopee level. We believe that Shopee is being significantly undervalued. 1 only need to look at recent transactions to support this view. Flipkart, for instance, was acquired at, I think, 2.8x GMV for the March year for more than $20,000,000,000 valuation. I think as I recall, the company's GMV grew about 50% year on year during this period. Meanwhile, Shopee's GMV growth, as we know, was about 4x faster than that of Flipkart for the same period. And I think our GMV was roughly 70% that of Flipkart. So we remain totally open minded about fundraising and we're very lucky to have various and sundry options there. With regard to direct sales and product revenue, again, just a little context. This has started to evolve, largely driven by sellers' needs and preferences. We will continue to add kind of a growing toolkit to help sellers manage inventory and fulfill orders from warehouses. And we have started leasing warehouses, as you all know, several months ago. We can also help operate their stores on our platform and we may even purchase products from brands for resale on our platform. That part of the business, we don't expect to form a significant part of GMV for the foreseeable future, direct sales that is. As we're in kind of early stages rolling out these services, it would be premature to compare margin profiles, but we wouldn't expect it to be very dissimilar from our peers. Sure. And regarding the marketplace revenues, is it possible to share a bit of fee country breakdown? Is it meaning is it fairly broad those you're talking about? Or is it more Taiwan focused now? I think there's still, for obvious reasons, an outsized presence from Taiwan, largely because it was kind of a first mover market. It was the 1st market in which we rolled out all forms of commission taking. We do, however, have a growing number of monetization tools across other markets related to some of these new revenue line items. And so this kind of matrix of country versus form of monetization, we're gradually filling in. But with time, we can safely say that markets outside of Taiwan will grow to be an ever larger percentage of revenue. Our next question comes from Mike Olson with Piper Jaffray. Please go ahead. Thanks a lot for taking my question. I had a couple related to gaming specifically. When you look at the Battle Royale genre and the success that you've had with Free Fire, is the intention at this point to continue to focus on that game singularly? Or is there any reason to look at potentially additional games within that genre? Or does that potentially, I guess, dilute Free Fire? And then secondly, on eSports specifically, do you guys view that as a potential real kind of revenue standalone business? Or do you view it as more of a kind of marketing halo that helps with engagement of the titles? Thank you. Sure. Thank you for the question. And the first question, like in terms of like Free Fire and in terms of more general, the Petrol Royal General. And at this moment, we are like just within this general, we are pretty focused on Free Fire. And as we just discussed and we see a tremendous growth of our user base. And I think like in terms of user base, Free Fire is already probably one of the largest game worldwide in that specific genre. I think like at this moment, in January, we still believe for the whole genre, it's still at the very beginning stage and there is going to be continuous involvement of the genre, which means probably there is going to have a more like a different type of playability and there is going to be have more features of this genre. So I think like based on the user base of Free Fire, this is offer us a very good foundation to continually explore this genre and also probably with some like our self innovative approach, right, in terms of the playability and in terms of the feature of the game. Actually, we're keep trying that. And so that's the main task of our Shanghai studio. So basically, it's like number 1 is pretty much focused on the monetization of the existing user base. And the second is like we believe, okay, we expect to see like more growth of this genre moving forward. So we want to capture the wave and we continually explore different type of gameplays and we interact, communicate with community frequently and we ask what more they want from this game and what is some other innovative ideas around this genre. So at this moment, I don't think like we need just another battle royale game like to capture the wave of the growth of the genre. And we just need to focus on what we already have built and continually grow Free Fire. And but at the same time, we remain very open minded and we keep closely monitor worldwide how the genre is developed. We have some of our own ideas, we also love to learn the best practice from some other like peer studios worldwide. And there could be the chance, right, for certain games, like we may collaborate with them for our core market like Southeast Asia and Taiwan. And I think that is and at the same time, like other than the Battle Royale genre, I think like we continue to have a very balanced approach. And we have several very highly anticipated game titles in our pipeline to launch this year from our like developer partners. And we have a like I think we have a pretty like high confidence about the performance of those games. And I hope like I can I'll come back with some very encouraging results in 3 months. And in terms of the Esports, definitely, we believe this is a very important trend. And this is how gamers spend their time, not just in the game, but also out of the game. And this is a good way to enhance the engagement, the gamers' engagement and also increase the life cycle of the games. And definitely, at this moment, I think there is 2 steps for our approach. Number 1 is that we're just going to focus on offer the one for the esports experience for our existing user base, right? And luckily, like there is a big percentage of our games in our pipeline, in our existing portfolio are eSports related games. And this has been the genre we have been focused on since day 1. So we have a lot of good experience of that. And I think like we know, so there is a strong need from gamers in terms of those esports experience who want to fulfill that need first. And at the same time, we are being very like motivated and encouraged to see some other market like China and there's a strong monetization of esports related product and services as well. And I think like where we continue to learn from those more advanced market and hopefully, we're going to apply to our market as well. I think we're well positioned to capture the revenue potential of esports in our key markets. Thank you very much. Our next question comes from Alicia Yat with Citigroup. Please go ahead. Hi, thank you. Good morning, Forrest, Tony Allen. Congrats on the good results and thanks for taking my questions. I have some follow-up questions on the e commerce. Wanted to get a sense of these direct sales of these for some of the seller. Could you give us some color like which categories are these products and in which countries? And are we taking the inventory risk on this or more on the consignment model? And what will be our strategy of the overall mix of this 3P versus 1P going forward? And also within the marketplace, the going forward mix of the C2C versus the B2C? And second question is regarding the revised guidance. Should we assume most of the increase is mainly attributed to the better e commerce revenue? Or should we also assume the digital entertainment revenue will be also some upside with the revised guidance? And lastly, on the sales and marketing spend for the e commerce as a percentage of the GMV ratio going forward, what would be kind of the expense ratio that we should be thinking about for the rest of this year? Sure. Alicia, I'll start off with some of the answers. I think your first question was about direct sales for sellers, which categories and which countries. The more prominent categories would be FMCG. We would also do some amount of 3C related direct sales. We're generally seeing we're rolling it out in markets ranging from Taiwan to Indonesia, although we would expect other markets to follow suit. I would just pause here to just remind you that it's actually a very, very small part of GMV. And we are really just kind of taking it quarter by quarter with these key customers. But we will make sure that we keep you apprised around the growth rate of that. With regard to director consignment, it's actually it's a mix. We want to be as flexible as possible, and it may relate to the attributes of the product or the needs of the seller. But again, early to give you a sense as to what the breakdown would be between direct and consignment. I think your next question was around 3P versus 1P. Again, the vast bulk of our value proposition from day 1 and 2 to today is marketplace. And I will continue to embrace that as our main mode of business. We will do again 1P much more opportunistically. So I would not expect that 1P mix to rise significantly as a percentage. I think you also had a question about C2C and B2C. Are you basically talking about Shopee and Shopee Mall? That's right. That's right. Yes. So I would say I think I'm correct in saying that across almost every market, shopping mall is growing quite a bit faster than our incumbent C2C shopping business. And so that's obviously very encouraging for us. And the reason why it's a regional trend for us is we're often finding leading brands such as NIVEA recently who inked a multi market distribution arrangement with us. There might be one other platform that has regional reach and is very strong in certain areas. But our demographic being largely female focused, I think puts us in very good stead to build that part of the business, not just in the Taiwan, not just in Indonesia, but regionally. And so with regard to the guidance, yes, it's by and large relating to these new revenue streams that we're cultivating in e commerce. I think it's steady as she goes around the gaming business. Although obviously, as a veteran analyst in that area, we may have updates over the next couple of quarters, particularly as we start delivering games from our pipeline. And then sales and marketing as a percentage of GMV, I would say generally speaking, we're very much in a phase where we're both pushing greater efficiencies out of the incremental GMV we create. And then we're also we have a very natural tailwind by growing so much faster than our underlying markets. And those end up being better volume based discounts from our ecosystem of partners. So we're very much focused on continuously driving down sales and marketing as a percentage of GMV. Okay, great. Thank you. Sure. Our next question is from Andrew Orchard with Nomura. Please go ahead. Hi, guys. Good morning. Thanks for taking my question. Couple of questions. Number 1, I think, Alain, you just mentioned that you have some brands that look at your regional reach and think that's a benefit. How common is this sentiment, right? Because I think the thoughts behind e commerce in Southeast Asia is that it's a very fragmented and you look at individual market separately. So are brands coming around to looking at the region as a whole? And does that, like you say, drive a lot more benefit going forward? The other question is, again, on the top up in the revenue guidance. How much of that within the revenue guidance is increased in 1P sales from e commerce? Or did your original guidance already include some of this 1P product sales? And this increase in the revenue guidance is basically just coming from a lot more GMV growth? So if you could answer those two questions, that would be great. Thanks. Yes. So with regard to your first question, brands coming around to look at the region, my understanding is we have all forms and factors of a partner on that front. We may have one brand that simply wants to establish a beachhead in one of the larger markets, such as Taiwan or Indonesia, and it's mission accomplished. And that may also relate to the fact that to your point, there are different buying behaviors and preferences, mark to market. But one thing that we're seeing increasingly is a brand achieving a lot of success as working with us as a partner. Maybe it is in Taiwan or Indonesia and deciding to roll out regionally. So we're finding that there's a lot of brands that use us in 1 or 2 markets as a test bed and with satisfactory results come back to us and say, we'd like to explore new markets. But I think it's a fascinating engagement. These guys have very exacting expectations. They've been distributing on other e commerce platforms around the world. And we usually frankly have to spend maybe a good year with them to ensure the level of service that they expect. And interestingly, we're kind of making that 1 year lap with a lot of these brands. And so we're quite excited about the second half of this year as we get approved as a partner for a lot of these names. Do you want to answer the guidance? Sure. So for the guidance, as we mentioned, we're broadening our service offerings for Shopee, including the service by Shopee, Shopee Logistics and other value added service. And of course, there's a part of the direct sales. So the increment comes from the broad spectrum of all these additional services we offer to the market, not only from the direct sales part. Okay. Thank you. Thanks. Our next question is from Mark Goodridge with Morgan Stanley. Please go ahead. Hey, guys. Just two questions on the e commerce business. Firstly, in Indonesia, can you just give us an estimate on what you guys think your market share is in that market? Is it 20%? Is it 30%? Is it 40%? Any guidance would be very helpful for the Q1. And then second question is just on Taiwan. Obviously, that is your most mature market with regards to e commerce. When specifically do you think you'll be breakeven in that market? Is that 6 months away? Is it a year away? How close are we? Sure. I'll take that first question. I have a secondary career in trying to measure these markets and understand them. It is a bit tricky when across most of our markets we're the only entity producing numbers. But if you look at a sampling of what we've been able to gather, our general market share tends to be kind of 25% to 30%. These would be by and large surveys done by 3rd parties and the sample sets tend to be between 1,000,07,000 respondents. And it reflects in many cases the entirety of Indonesia. And so as I think we've discussed before, one of the benefits of a marketplace is obviously its ability to address not just the urban centers but other parts of the market. So that's kind of the best I can get you in terms of our estimate in the lack of any other data. What are the questions? So the other sorry, can you repeat your second question? Yes, just on Taiwan. So both the middle market there, you guys on the e commerce. When do you think that, that will be breakeven? Is it 6 months away, 3 months away, a year? Any color would be very helpful. Yes. We're probably not in a position to give that kind of granular guidance. I would say that, A, there are a couple of very favorable factors, as you know, Mark. We have a full commission schedule and have since maybe the middle of last year. Within that commission schedule, we are seeing a growing bias toward the higher commission rate forms of GMV, which in our case are shopping mall and cross border. And then to Tony's earlier point, these value added services that we're rolling out have seen really good traction in Taiwan. So that's kind of the revenue take rate part. I would say on the sales and marketing to GMV side, we have succeeded in driving that down and we're confident that we'll continue to drive it down further. So the two lines are definitely coming closer together. We'll do our best to give you an update as we get closer to free cash flow breakeven. But I would say, particularly on the take rate component, we're obviously climbing faster than we would have expected before we rolled out these value added services. Thanks guys. Our next question is from John Blackledge with Cowen. Please go ahead. Great. Thank you. Two questions on e commerce. So the GMV was better than expected and the guidance was raised. If you could provide any more color on kind of the key markets and or key verticals driving and D better than expected growth? And then the second question on e commerce would be the marketplace revenue is also better than expected. Just wondering if you could quantify marketplace revenue from commissions and advertising and marketplace revenue from the value added services in 1Q 2018 and how we should think about the run rate for those 2 segments within marketplace revenue for the remainder of the year? Thank you. Sure. So with regard to what might have driven stronger than anticipated GMV, Frankly, it seems to be quite broad based across country and category. We saw generally very strong growth in our largest markets of Taiwan and Indonesia. Taiwan being a little more mature is obviously not growing as fast as the overall region, but Indonesia very much is. And in terms of the kind of Tier 2 markets, if you will, we saw Vietnam and Thailand inch up a little bit in terms of their contribution to orders in GMV. So generally, again, pretty broad based. With regard to category mix, it was actually very stable. You'll recall that in our long tail focus, fashion ends up being one of is our largest category, followed by health and beauty, home and living and then baby products. 3C remain a pretty small minority of our GMV. But again, very few changes in the Q4, again, suggesting broad based growth by category. Exactly. Okay. So I think you can probably gain a sense as to what our commission contribution is by looking at the GAAP and the non GAAP numbers because as you recall GAAP guidelines force us to net out commission against sales and marketing. So I'll leave it to you to kind of do that math. VAS would be basically a would represent a significant part of the delta that you would have assumed for Q1 in your own numbers. Collectively, there's still a relatively small part. As they grow, we'll be able to give you more color. But again, it's fulfillment and logistics that contribute to BAS and we've seen good adoption of both fulfillment and logistics in our largest markets. Great. Thanks so much. Thank you. Our next question comes from Varun Ahuja with Credit Suisse Singapore. Yes. Thank you, everyone. Congrats on a good set of numbers. First question is on the gaming business. It's expected to have a decent strong growth for this year on the revenue side. If you can provide some colors on the margins also, how should we at the margins for the year? Will there be any compression? Because 'seventeen seems to have benefited from AOV. As you launch other pipeline games and stuff? Do you think the growth will be there, but the margin may see a little bit of compression? That will be helpful. Any color on that? Secondly, again, on the gaming side, you launched Free Fire in your own gaming in your market, plus Tencent has launched this PUBG Mobile in your market. So how do you see this evolving in terms of relationship? And it's in the Battle Royale genre, but given Tencent is your kind of a larger shareholder and also kind of a means provider of the games to you in terms of reselling. So how does this relationship of competition evolve over you and Tencent? That will be any color that would be helpful. Thank you. Sure. Thanks for the questions. And in terms of like our game business Garena's margin, I would expect like the margin will be pretty stable. I think like in our Q4, Web 3 is like a 38% margin and I don't see the margin will go up or go down like significantly for the rest of the year. And it's a pretty stable. As you mentioned, okay, so last year, so our margin like it has improved because of like Arena of Valor. Actually, if you're looking at this year, I could probably Arena of Valor continually contribute very positively on our margin as well because the games are still growing very, very nicely. And for some other like new games we're going to launch in our pipeline because the things we don't expect, are that going to like hit our margin like significantly because anyway, like by being the largest game platform in the region, we already have a huge, huge user game huge user base. And for the game like we are going to launch like this already really, really highly anticipated. So we don't expect or going to need to spend aggressively on user acquisition for those new titles. Yes, so which is probably the nearly the major, like, spending regarding the new game launch. Yes. I think for the second question, like PUBG, in terms of our like a relationship, like with the 10% related of the PUBG Mobile. I think like if I remember correctly, probably I gave some thoughts like in our last earnings earnings release that we have been discussing. We have always had a very open discussion with the Tencent okay amount. We have a pretty good visibility about the Tencent game pipeline as well. So we're having been like regularly discussed with Tencent what is the best approach for each of the games in their pipeline and what is our view of the game in the market and what is the best way to launch it. I think specifically for Battle Royale genre and things like so we already have the Free Fire and Free Fire is specifically developed for Southeast Asia gamers. And we say, for example, like for some very specific features, we have been very focused on to meet the needs of Southeast Asia gamers. Number 1, say, we are very like a very like cautious and very sensitive in terms of per game session. And we relatively get understanding from other our games like generally like gamers prefer like a shorter game session probably 10 minutes, 15 minutes per game session. They can enjoy a game play rather than spend like 20 minutes to 30 minutes on one game session. So we specifically developed for Free Fire, for example, like you stand off like with 100 people to play the game together, we make it to be like 50 people together with the game with the smaller map, so which so the per game session is a short term. And I think it's very welcomed by gamers in our core market. And another example is in terms of the sensitivity of the smartphone spec. So we're being trying to optimize the game experience for Free Fire on the towards the lower end like the spec phones, which is the majority of gamers like the taste like the phone they have right in our market. So there is a in a way, so we have been very confident in terms of the potential and outlook of Free Fire and considering our resources and also like to encourage like our internal studios development. And so we decided we just focus on one game rather than just have like multiple games in our portfolio. And yes, so that is I think this is probably also in the best interest of Tencent and right because like if you think about it like they give the game to us, they may say, how you're going to sounds like there's a conflict of interest, like how you're going to balance the 2 games, where you allocate your resources. I think like looking a little bit long term, so we have a very strong relationship, like a very strong trust and collaboration with Tencent. And for some games in our pipeline for the launch this year, that is a Tencent game and it's highly anticipated game as well. And I would say like I don't just want to generalize the relationship by well, 2 cases. I think it's pretty much it's a game by game discussion. And by the end of the day, so whatever is the best overall for the game rather than just okay, so yes, so this is just a one party interest. So I think looking forward, you may expect, okay, you will still see we are going to have pretty high quality games from Tencent in our pipeline. And I'll also not be surprised if Tencent will launch 1 or 2 games by themselves in our region as well. Thank you. Thank you for this detailed explanation. Just one more one I want to sneak in. The quarterly average users that you disclosed is a little bit distorted given Free Fire has been launched outside of your core market. Can you give color how much of that quarterly average user in your 7 core markets versus outside, if you can disclose that? Well, I think like we probably like don't want to like break down to that details, but I think like still majority of our user base is coming from our core markets. Our next question comes from Archana Parikh with C Town. Please go ahead. Hi, Forrest, Alan, Toni, congrats on a good set of numbers. I wanted to ask a question. Alan, I think, brought up the comparison to the Walmart, Flipkart transaction and mentioned that you may consider something at the Shopee level. Could you elaborate a little bit more on that? And also share with us sort of how similar different Flipkart and Sharpie as well as the potential that Sharpie has to attract interest in a similar sort of way? Yes. Hi, Hartna. I guess, one of our central modus operandi is obviously to create value for shareholders. That's probably the unifying thing that drives our meetings day to day and our activity. And it's actually not just Flipkart, but there are some other very, very encouraging examples of transactions that suggest people put a lot of value in a leading e commerce platform. And frankly, it was effectively the most important component of my decision to exit after almost 20 years of equity research, and that is what I was seeing with Shopee in Southeast Asia. And so at our current share price, I don't think I'm saying anything controversial by saying that it probably is not capturing the dimensions of a platform that has achieved so much in so little time and that frankly, I think has a tremendous opportunity going forward. And so we I wouldn't want to focus exclusively on that. I guess the real message here is that we remain entirely open minded and opportunistic around realizing value for shareholders. But again, I think that we're very confident quarter after quarter we will deliver on our business plan at Shopee and we're hopeful that people will ascribe increasing value to that. Again, we may offer this very rare opportunity to invest directly in this once in the generation opportunity, we may forge another path. But again, we're very much we're very keen on making sure that a shareholder realizes as much value across our business units as possible. We remain singularly focused on seizing some of the largest parts of the Southeast Asian Internet economy, and we want to share that success with our investors. Thank you. That's clear. Our next question Yes, we'll sorry, Austin. We'll take one more question. Thank you, sir. Our last question today will come from Harry Walton with Arasog Partners. Please go ahead. Hi there. I wanted to see if you could give a bit more disclosure on the state of shipping subsidies, especially in Indonesia and kind of how much of that how much of orders are being subsidized at the moment? I would say, generally speaking, we are not unlike any other market, succeeding and driving down shipping subsidies as a percentage of GMV. There's no real black magic there. It's just kind of growing scale economies. You will find that as a shopper, with time by and large and because you're not looking for free shipping, you're looking more for selection, you're looking more for pricing on the platform, you may be focused much more on the user experience, we have means of kind of gradually withdrawing that subsidy level. We're not in a position to give you an exact percentage of how many of our customers get any subsidies, but I would just say that we have a confidence that is supported by lots of precedents around the world, markets going through consolidation that we will continue to succeed in driving sales and marketing to GMV down in markets, not just like Indonesia, but hopefully all of our markets. Great. Austin, with that, I think we'll wrap up. As always, we very much appreciate you guys joining. Welcome any questions you might have. We happen to be joining some of the bigger conferences in the region over the next couple of weeks. If we don't meet you there, we look forward to hearing from you directly or through the analysts. But thanks again for joining and thank you, Austin.