Earnings Call Transcript - SE Q2 2025

Operator, Operator

Good morning and good evening to everyone, and welcome to the Sea Limited Second Quarter 2025 Results Conference Call. I would like to inform all participants that this call is being recorded. Thank you. I would now like to welcome Mr. to begin the conference. Please go ahead.

Unknown Executive, Investor Relations

Hello, everyone, and welcome to Sea's 2025 Second Quarter Earnings Conference Call. I am from Sea's Investor Relations team. On this call, we may make forward-looking statements which are inherently subject to risks and uncertainties and may not be realized in the future for various reasons as stated in our press release. Also, this call includes discussion of certain non-GAAP financial measures such as adjusted EBITDA. We believe these measures can enhance our investors' understanding of the actual cash flows of our major businesses when used as a complement to our GAAP disclosures. For a discussion of the use of non-GAAP financial measures and reconciliation with the closest GAAP measures, please refer to the section on non-GAAP financial measures in our press release. I have with me the Chairman and Chief Executive Officer, Forrest Li; President, Chris Feng; and Chief Financial Officer, Tony Hou. Our management will share strategy and business updates, operating highlights and financial performance for the second quarter of 2025. This will be followed by a Q&A session in which we welcome any questions you have. With that, let me turn the call over to Forrest.

Forrest Li, CEO

Hello, everyone, and thank you for joining today's call. The momentum from our strong start to 2025 has continued into the second quarter. All three of our businesses have delivered robust healthy growth, giving us greater confidence of delivering another great year. Shopee's GMV grew 25% year-on-year in the first half, and we expect this growth momentum to carry into Q3. Money's loan book continues to expand rapidly while maintaining a healthy NPL ratio. And for Garena, we now expect full year bookings to grow more than 30% year-on-year. Given the high potential of our market, and the stage of our business now, we will continue to prioritize growth. We still see huge opportunities in our markets to serve many more users and improve many more lives with technology. Expanding both our addressable market and capturing more market share will pave the way for us to maximize our long-term profitability. At the same time, our company has reached a stage where we can pursue growth opportunities while improving profitability by being disciplined and cost-efficient. We have turned all three businesses EBITDA positive since the second half of last year, and we are accumulating cash each quarter as we scale. We remain committed to growing profitably with a strong balance sheet that enables us to capture future opportunities. With that, let me take you through each business performance. Starting with e-commerce. Shopee has shown stellar growth performance throughout the first half of this year. After a record high Q1, we have delivered another record-breaking Q2 with quarter-on-quarter growth in gross order volume, GMV, and revenue. This was driven by a sustained increase in our active users and their purchase frequency, reinforcing our leadership across all our markets. We also delivered year-on-year profitability improvement across Asia and Brazil enabled by our expanding scale and improving cost efficiency. Our monetization improved in the second quarter, largely driven by strong growth in advertising revenue. We have worked diligently to both drive seller adoption and encourage existing ad-paying sellers to use our latest ad tech solution. Since early last year, our dedicated ad tech team has worked hard to improve algorithms, enhance traffic allocation efficiency, and deploy AI technologies to better serve our ad-paying sellers, and we have seen very encouraging results. During the second quarter, the number of sellers using our ad products rose by around 20%. And ad-paying sellers' average quarterly ad spend grew by more than 40% year-on-year. Our tech enhancements have allowed us to optimize Shopee's GMV and advertising revenue effectively at the same time. We saw an 8% uplift in Shopee's purchase conversion rates and improved our ad take rate by almost 70 basis points this quarter year-on-year. Our operational priorities have proven to be a winning formula, and they remain consistent, enhancing price competitiveness, improving service quality, and strengthening our content ecosystem. In the second quarter, we reinforced our price-competitive value proposition with the launch of the campaign slogan, 'cheaper, faster at Shopee.' It resonated well across our user base. We saw a more than 10% year-on-year uplift in overall purchase frequency during the quarter, and the buyers continued to rank us as the most price-competitive e-commerce platform in Qualtrics survey across Asia and Brazil. On service quality, our logistics capabilities continue to be an important differentiator for us. In the second quarter, we reduced the logistics cost per order and improved delivery speed across Asia and Brazil year-on-year in both urban and rural areas. We continue to roll out new initiatives to address specific customer needs, such as instant delivery options in dense urban areas. This led to some buyers receiving their orders within as little as 4 hours of order placement, our fastest shipping channel yet. We piloted it in Indonesia, and it proved so successful that we have now rolled it out to Vietnam and Thailand as well. Another example is intelligent demand forecasting, where we pre-ship commonly ordered products to warehouses closer to where we know buyer demand will likely come from, reducing buyer waiting time when actual orders are placed. Our logistics innovation not only delights our customers by improving the service quality they receive but also makes us more cost-efficient, allowing us to pass savings on to buyers. We have also been doing more to enhance buyer loyalty and stickiness. Our Shopee VIP membership program, a paid subscription service, giving buyers exclusive benefits, has shown very good momentum in Indonesia. Total GMV from VIP members there grew nearly 50% quarter-on-quarter, and VIP members bought a monthly average of around 30% more after subscribing. VIP members have also shown a roughly 20% higher retention rate compared to non-members. Building on this success, we have expanded the program to Thailand and Vietnam. At the end of June, total VIP subscribers in this market reached 2 million. We plan to roll out the program to more markets over the rest of the year. Our content ecosystem continues to be a powerful engine of buyer engagement and conversion. Our AI tools empower shopping sellers to produce high-quality video content, helping them improve user conversion and make more money without having to invest in their own studio setup. In Southeast Asia, orders from live streaming and short-form video accounted for more than 20% of our total physical goods order volume in the second quarter. Our collaboration with YouTube has also continued its strong momentum. As of June, more than 7 million YouTube videos featured Shopee product links across our Southeast Asian market, an increase of more than 60% quarter-on-quarter. Moving to Brazil, Shopee has continued to deliver exceptional growth while maintaining its positive adjusted EBITDA. Average monthly active buyers rose by over 30% year-on-year in the second quarter, much faster than the industry average growth rate. Our strong growth in Brazil is built on solid fundamentals, especially logistics improvements and product category expansion. We have brought logistics cost per order down by 15% while also reducing our average delivery time by more than 2 days year-on-year. In the Greater Sao Paulo region, about 94% of parcels were delivered the next day and 40% within 2 days, up from single-digit percentages in the same period last year. We added over 100 well-known brands to our platform, especially in higher-value product categories. This contributed to steady and healthy increases in buyers' average basket sizes in the second quarter. This combination of improving delivery service while expanding our product selection has allowed us to serve our existing users more effectively and expand into more user segments, such as urban and more affluent buyers. We will continue to push on this front and keep our strong momentum going in Brazil. This quarter, we celebrated Shopee's 5-year anniversary in Brazil, and I am very proud of what our team has achieved in this relatively short time. We have become the market leader by other volumes. We continue to grow fast, and we are operating profitably. I'm especially happy with the role we have played in promoting digital entrepreneurship to over 8 million Brazilians; 30% of our active sellers that Shopee has had their first experience selling online, and more than half of our active sellers rely on Shopee as their primary source of income. In summary, Shopee has delivered an exceptional performance in the first half of the year with 25% GMV growth year-on-year, and we are confident that this growth momentum will carry into Q3. We remain committed to delivering strong, profitable growth while reinforcing our market leadership across Asia and Brazil. Next, moving to digital financial services. Money had another very strong quarter. Both revenue and adjusted EBITDA continued to grow more than 50% year-on-year, and our loan portfolio remains healthy thanks to our prudent risk management. In the second quarter, our loan book grew over 90% year-on-year to reach $6.9 billion, driven by both our expanding user base and our wider range of products addressing more user needs. We added over 4 million first-time borrowers during the quarter, and our new cohorts are scaling well with positive unit economics. At the end of the quarter, active users for our consumer and SME loan products exceeded $30 million for the first time, representing more than 45% year-on-year growth. Our loan portfolio remains healthy with the 90-day NPL ratio staying stable at 1.0%. We have delivered strong and healthy growth across multiple markets, reducing our reliance on any single market and improving our ability to weather local economic cycles. I'm happy to report that Malaysia's loan book surpassed $1 billion at the end of June. It is our third market to reach this significant milestone after Indonesia and Thailand. Brazil also delivered robust growth in the second quarter, driven by the strong adoption of Spaylater and personal cash loan products. We have achieved such high growth while managing risk very well thanks to three unique advantages that Mani has. First, deep and seamless integration with our shopping ecosystem. Second, a very large base of users who are growing their credit track record with us over the years. Third, our increasing use of AI to improve our credit models. Together, these advantages uniquely enhance our underwriting capabilities in each market, enabling us to very effectively push for growth across our three credit product lines: On-Shopee Spaylater, Off-Shopee Spaylater, and cash loan products. On-Shopee Spaylater continues to deliver solid growth across our markets, with GMV penetration now in the mid-teens on a market-blended basis. We promoted Spaylater's one-month interest-free option at Shopee checkout, mimicking the benefits of credit card usage. We use tier-based pricing to offer lower interest rates to prime user segments who have access to more credit options and are more price-sensitive. We also introduced a feature that allows users to request a higher credit limit by voluntarily submitting proof of income. Such initiatives contributed to our record-high monthly numbers for first-time Spaylater borrowers in June. In addition, these measures have enabled us to capture more prime users with stronger repayment capacity and higher lifetime value. We see further runway to scale this product by deepening its penetration on Shopee in all our markets. Off-Shopee Spaylater is also growing healthily. In Malaysia, we recognized significant user demand for greater payment flexibility, so we integrated Spaylater with Malaysia's national QR network, Do It Now, enabling seamless and flexible offline usage on many everyday purchases. Our Off-Shopee Spaylater portfolio grew over 40% quarter-on-quarter and accounted for more than 20% of our Spaylater portfolio in Malaysia at the end of June. Building on this success, we have just launched a similar user experience with the Thailand National ProPay QR network as well. We have also gained good traction with personal cash loans, addressing the strong demand we have seen in our market for credit. We have scaled this product category both quickly and profitably by cross-selling personal cash loans to Spaylater users with good repayment trends. As a result, personal cash loans outstanding have almost doubled year-on-year as of the end of June, and a lot of headroom remains for this product in our market. In summary, Money has delivered excellent growth throughout the first half of the year, diversified its loan portfolio across markets and products and maintained high asset quality through prudent risk management. It is exciting that our credit business is still in the early stages in many of our markets, reinforcing our strong conviction in Money's long-term growth and earnings potential. Finally, moving to digital entertainment. After a strong start to the year, Garena continued its strong growth momentum into the second quarter. Bookings were up 23% and adjusted EBITDA was up 22% year-on-year. Multiple key titles delivered double-digit growth in the second quarter, including Free Fire, Arena of Valor, EA Sports FD Online, and Duty Mobile. Free Fire continues to be at the core of Garena's strong performance, sustaining its massive global user base of more than 100 million average daily active users. Free Fire continues to grow well even after 8 years, bringing joy to more users in more markets because we always put what gamers want at the heart of our work. A great example is the high-profile launch of our new map, Solora, in celebration of its 38th anniversary during the second quarter. Solora brings exciting innovations. Our veteran gamers were thrilled by the return of an iconic trend from Free Fire's earlier maps that used to be a central part of their game experience. And gamers both old and new have been very excited by the new full map light rail feature, allowing them to navigate across the entire map more rapidly, completely changing their gameplay strategy and pushing them to come up with new techniques to win. Since its launch on May 16 at the Free Fire World Series, the response from players has been exceptional. It has already become our best-performing new map. We also capitalized on excitement around this new map by introducing a new camera mode that lets players capture photos and videos of their gameplay more easily, boosting social sharing and engagement. Within a month of releasing this feature, the average daily share of in-game footage grew by nearly 4x, dramatically expanding Free Fire's visibility. Building on this excitement, we extended our anniversary celebration into July with two high-impact IP collaborations, Netflix's Squid Game and Naruto Shippuden Chapter 2. Initial responses from gamers have been extremely positive. In summary, Garena has delivered very strong performance in the first half of this year. We believe Free Fire has established itself as an evergreen franchise, both sustaining user engagement and growing its appeal in more markets globally. We are also committed to exploring new genres and markets and testing the boundaries of future game experiences by embracing AI. Given all of this, we are raising our full year guidance for Garena and expect bookings to grow more than 30% in 2025 year-on-year. In closing, we are very happy with the strong set of results we delivered both in Q2 and the first half of 2025. Overall, all three of our businesses have extended their track record of excellent execution, robust growth, and improving profitability. This gives us greater confidence about the second half of the year, and we look forward to delivering a strong 2025 and beyond. Thank you, as always, for your support. With that, I invite Tony to discuss our financials.

Hou Tianyu, CFO

Thank you, Forrest, and thanks to everyone for joining the call. For overall, total GAAP revenue increased 38% year-on-year to $5.3 billion in the second quarter of 2025. This was primarily driven by GMV growth in our e-commerce business and the growth of our digital financial services business. Our total adjusted EBITDA was $829 million in the second quarter of 2025 compared to an adjusted EBITDA of $448 million in the second quarter of 2024. On e-commerce, Shopee's gross orders grew 29% year-on-year to $3.3 billion in the second quarter of 2025, and GMV increased by 28% year-on-year to $29.8 billion in the second quarter of 2025. Our second quarter GAAP revenue of $3.8 billion included marketplace revenue of $3.3 billion, up 34% year-on-year and GAAP product revenue of $0.5 billion. Within GAAP marketplace revenue, core marketplace revenue, mainly consisting of transaction-based fees and advertising revenues, was $2.6 billion, up 46% year-on-year. Value-added services revenue, primarily consisting of revenues related to logistics services, was $0.7 billion, up 3% year-on-year. E-commerce adjusted EBITDA was $228 million in the second quarter of 2025 compared to an adjusted EBITDA loss of $9 million in the second quarter of 2024. The Digital financial services GAAP revenue was up by 70% year-on-year to $883 million. Adjusted EBITDA was up by 55% year-on-year to $255 million. As of the end of June, our consumer and SME loans principal outstanding reached $6.9 billion, up over 90% year-on-year. This consists of $5.9 billion on book and $0.9 billion of book loans principal outstanding. Nonperforming loans past due by more than 90 days as a percentage of total consumer and SME loans was 1% at the end of the quarter. Digital entertainment bookings grew 23% year-on-year to $661 million. GAAP revenue was up 28% year-on-year to $559 million. The growth was primarily due to the increase in our active user base as well as the deepened paying user penetration. Digital entertainment adjusted EBITDA was $368 million, up 22% year-on-year. Returning to our consolidated numbers. We recognized a net non-operating income of $83 million in the second quarter of 2025 compared to a net non-operating income of $56 million in the second quarter of 2024. We had a net income tax expense of $144 million in the second quarter of 2025 compared to a net income tax expense of $61 million in the second quarter of 2024. As a result, net income was $440 million in the second quarter of 2025 as compared to a net income of $80 million in the second quarter of 2024.

Unknown Executive, Investor Relations

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

Operator, Operator

Your first question comes from the line of Pang Vitt of Goldman Sachs.

Pang Vittayaamnuaykoon, Analyst

Congratulations on another solid quarter. Two questions from me, both on e-commerce. Number one, on the GMV performance. The first half of the year has already been very impressive at 25% year-on-year, and you also expect momentum to carry into the third quarter. With that, are you also looking to raise your full year guidance that you provided at the beginning of the year on the back of this strong performance? That's question number one. Question number two, can you share with us on the latest competitive landscape? Have you observed any changes in momentum, in particular, in Brazil? Have you seen any change since your competitor reduced its free shipping threshold?

Hou Tianyu, CFO

Yes. I think on the first question regarding the growth momentum, as we shared in the opening, we do see that Q3 momentum will continue. In Q3, we likely will have around a similar growth rate as we observed in the first half of the year as well. Obviously, if you take into consideration the full year growth, it will be better than what we shared before. I think that's one. Second regarding the competitive environment. For Brazil, as you shared, we do see certain actions from the competitors in the past few months. On our side, our Brazil business has been growing very well even in the last months after the competitor adjustment; we didn't see any observed impact on our growth as far as we can see for now. I think the key thing, if you look at Brazil for us, is, number one, to make sure that we operate at a best cost structure, especially on the logistics side. Even with the improved speed of delivery, as far as shedding the opening that we are two days faster than last year, we still see that costs are coming down. Our costs, we believe, are much lower than where our competitors stand, and even compared with their slow shipping, our cost structure is still very competitive, and our speed is a lot faster than theirs. So we believe that we are in a pretty good position on that. Number two, around the price competitiveness. This is publicly available; you can do your own benchmarking to see that our pricing is still very competitive in the market across all price categories, even with the adjustments from the other side. I think number three is if you look at our brands and seller side, we're expanding our seller base to include higher-ticket items, especially in the past few quarters. We believe that trend will continue as well and will not be impacted much by the competitors' movement. Overall, we believe that in Brazil, we are still well-positioned, and our growth trend will continue, especially with our core segment growth, given the strong focus that we have on the fundamental cost structure, our price competitiveness, and also the growth of our seller base.

Operator, Operator

Your next question comes from the line of Piyush Choudhary of HSBC.

Piyush Choudhary, Analyst

Congratulations on a great set of numbers. I have two questions, both on e-commerce. The Shopee VIP membership program in Indonesia has seen great progress, so could you share what's the potential for the user base in the mid-term as you are expanding across markets? And how should we think about the cost implications of this program on logistics and other benefits which you offer? Also, if you can talk about your new initiative on instant delivery, which countries you're targeting and the cost implications of this? Second question is on the Shopee EBITDA margin. With the push on VIP membership and instant delivery, should we expect margins to remain around similar levels in the second half? And what's the outlook for 2026?

Hou Tianyu, CFO

On the VIP program, we do see very good traction in Indonesia as the first country we started in. We see a very good uptake from the VIP program, especially given that we are able to ensure that users can renew with a credit card or Paylater products, which has been a significant issue for any program in this market before. We are still at the early stage of rolling this out; as you can see, it has only been a few months since we started this program. The first two to three months were really tied to the process. So I think it's too early to tell, but we see very good potential there for this to be a meaningful program in our market, comparable to programs you've seen from other e-commerce or retailers in the region or outside the region. As it is a new program, we do foresee some investment in the early times to grow the acceptance, especially getting users to sign up for it, particularly renewing their programs to build that habit. However, we don't see this as a fundamental impact or visible impact to our cost structure in the medium to long term. Regarding instant delivery, the instant delivery service, by itself, is essentially to expand our product offerings to the user base, especially targeting high-end users. Actually, those users typically have better profitability compared to the lower-end user base. We do not foresee any negative EBITDA impact from these services; rather, on the other hand, we believe this will give us better profitability in our businesses as we grow it. Admittedly, the delivery cost for instant delivery is slightly higher, but typically, for those segments, people have better acceptance of how much they are willing to pay for those faster services. Regarding the EBITDA margin, there are slight fluctuations in EBITDA margin, as you can see from Q4 last year to Q1 this year to Q2 this year. There has been significant seasonality involved in this cycle; Q1 had an exceptional quarter, especially in our business history. Ramadan in Indonesia and Malaysia fell in Q1 this year while holiday effects fell into Q2. This seasonality had a meaningful impact on our EBITDA. Going forward, we expect the long-term trend of EBITDA margin to improve. However, there may be seasonal fluctuations quarter-to-quarter, but the general trend will remain upward.

Operator, Operator

Your next question comes from the line of Alicia Yap of Citigroup.

Alicia Yap, Analyst

Congrats on the solid results. I have a follow-up on the competitive landscape in Brazil. I understand we have talked about how the impact is limited. However, how should we consider the newcomer, for example, the TM and also TikTok in Brazil, if you can comment on that. Then, also curious about the current percentage contribution from higher ticket items currently in Brazil. And then second question is on gaming. Given the increased booking guidance for this year, just wondering if it is mainly because of the outperformance of Free Fire, or do you actually expect a higher contribution from new games?

Hou Tianyu, CFO

I think for Brazil, cross-border shopping has remained a relatively smaller percentage due to the tax structure. So TM has remained relatively a smaller player in the market so far. We will observe how this evolves over time. As for TikTok, it just started, and again, the amount of orders and the size of orders is still relatively small in the market. We will continue to monitor their developments closely. Brazil is quite a different market compared to Asia, so we will observe that structure-wise, we don't see any fundamental change to the market structure that will impact our view or change our trajectory of growth in that market. To reiterate, our e-commerce business focuses on maintaining the appropriate cost structure to serve customers well through our logistics and make sure our pricing is right for the market, which will create a long-term moat. Regarding the higher ticket items, it depends on how you define them, but in Brazil, we are targeting the mall segment, and we believe there is a meaningful room to grow from there. In the long term, the penetration of more businesses in Brazil should be higher than in Asia, given the varying levels of capital and income gaps between our Asian markets.

Forrest Li, CEO

Alicia, on your question about Garena, the recent guidance in terms of bookings considers the scale and size of Free Fire. The main driver will still be Free Fire for this revised guidance. We feel very excited. As I mentioned in my remarks, we see strong momentum of growth across all metrics for Free Fire. In Q2, we launched the new map, and this is the first new map we have launched in the past three years. It has been a tremendous effort behind this launch, and we have a sizable developer team from across different countries. The launch has received exceptional feedback from both new gamers and veteran players. I think the positive trajectory we see is also largely influenced by our IP collaborations, and we excitedly expect promising results from this for the full year.

Operator, Operator

Your next question comes from the line of Divya Kothiyal of Morgan Stanley.

Divya Kothiyal, Analyst

My first question is on e-commerce. Could you talk about the upside to take rates from here on beyond advertising? Could you also maybe discuss what the seller response has been to the rising commissions in ASEAN? And how does that impact the overall competitive landscape? My second question is on fintech, specifically for Brazil, because you mentioned that it has also started growing quite robustly in this quarter. Could you talk about your strategy of ramping up fintech in Brazil? Where is the BNPL penetration now, and how fast do you expect it to grow? If you can also highlight some differences between how it should ramp up in Brazil versus how you've been able to grow the business in ASEAN?

Hou Tianyu, CFO

On the take rate side, as we shared in the opening, we see strong potential in ad performance through technology improvements and the better product offerings we provide to sellers. Beyond commissions, as you pointed out, we made some adjustments in the past quarter on the seller take rates. Overall, we have been receiving positive reactions from our ecosystem, and the key factor we anticipate looking at is how the pricing structure changes within the ecosystem. We have been observing a relatively expected response on pricing, and no particular seller segment, in particular, has shown concerns. Thus, from all the indicators, we are getting a reasonable response that is positive for the ecosystem. In the competitive aspect, you have probably noticed a healthy competitive landscape wherein some competitors also increased their rates. In fact, some have directly mirrored some of our adjustments in certain markets. As for the fintech side in Brazil, we see Brazil as a critical market for us regarding financial services. We recorded significant growth in our loan book in the second quarter, with active users for loans increasing twofold year-on-year. Our lending volume in Brazil has also grown by over two times year-on-year. One key strategy we implemented, which we discussed in our last earnings call, combines personal cash loans with the Spaylater option. This approach differs from how we operate in Asia. Furthermore, we leveraged more external data for our risk assessment system as Brazil offers more external data availability than Asia, enhancing our integration of money product offerings with our shopping ecosystem to support scaling while managing risks effectively.

Operator, Operator

Your next question comes from the line of John Choi of Daiwa Capital Markets.

John Choi, Analyst

I have my first question about advertising take rate. I mean this quarter, obviously, there was a 70 basis-point meaningful improvement. But can you share how much more upside you see? I know that you've been investing heavily in ad tech, and you shared some metrics about ad products, such as an increase in the number of sellers that were using it, up 20% for the quarter, and so on. In terms of the users or advertisers, how much more of a compression do you think you could expect? That's my first question. My second question is on Brazil right now. I think you mentioned that the delivery has improved substantially to a range of 20-40%. What kind of investments will we need to do further to improve? Will these investments improve our profitability along the way, or will we have to balance investment and profitability prudently in the Brazilian market?

Hou Tianyu, CFO

On the ad side, there are two main drivers for the take rate. One is we have better traffic allocation algorithms between ads and organic placements. We are able to mix the ad slots and organic placements more efficiently, which will improve the return on investment from sellers, enabling us to cater to more seller demand. I think that's number one. Number two is with improved seller-facing products we rolled out, such as GMV Max, which assists sellers with their ad spending effectively, thereby maximizing their ROI. We’ve also simplified the UI for setup, attracting a wider array of sellers. We have seen an increase in both seller engagement with our ad products and revenue per seller. Accordingly, we believe there is still room for meaningful increases in our take rate, given that we will continue to roll out our products to more sellers. Additionally, we see formidable potential in optimizing algorithms, especially with AI technology, which will further enhance conversion rates. We are running several experiments that have yielded positive results so far, and some of these will be rolled out later this year, which should lead to meaningful take-rate improvements. I believe the growth in our take rate is ongoing and will not be finished this quarter, but you will see this number continue to grow in the next few quarters. Regarding Brazil, our logistics services have been relatively less capex-heavy as we don't acquire land or trucks. Majority of our investments in Brazil would go into improving sorting machines and automating our sorting centers and setting up delivery hubs nationwide. It will not significantly burden our profitability. In fact, expanding our SPX coverage and improving efficiency will enhance our EBITDA in Brazil, a trend that has shown positive results in recent quarters despite our rapid growth.

Operator, Operator

Your next question comes from the line of Jiong Shao of Barclays.

Jiong Shao, Analyst

Congrats first on the very strong results. I have two follow-ups. I wonder just as Chris talked about some of the elements for ads. What’s the current take rate now for the ads? I recall a few quarters ago, you talked about a long-to-medium-term target of 4% to 5%. I just wanted to check if that remains the case. My second question is about AI. I think both Forrest and Chris talked about using AI to improve ad tech and other internal operations. Could you expand on your thoughts around using AI to improve your internal efficiency? The reason I ask is that one of your fellow e-commerce peers in Asia has recently started to expand their cloud services to external customers. Given this, are you considering what potential businesses could arise beyond your core operations by leveraging AI?

Hou Tianyu, CFO

For the ad take rate, our current ad take rate is still well below our peers in the region, probably around 2%. As you pointed out, we have considerable room to grow over time. On the AI side, as we've emphasized in various discussions, we currently leverage AI for two primary purposes. Firstly, to enhance our operational efficiencies across different areas, such as improving ads and user recommendations. This positively impacts our conversion rates by better understanding user intention. Additionally, we focus on automatically generating attractive product images and video for sellers to enhance their conversion rates. In terms of customer interaction, we are managing almost 80% of our customer service interactions through AI agents, improving costs for our sellers while also enhancing upselling opportunities during customer interactions. We’ve implemented various initiatives across our businesses to optimize operations through AI. As for the second category, we are actively evaluating opportunities to expand businesses leveraging AI solutions. Still, nothing concrete is in place at the moment.

Operator, Operator

Your next question comes from the line of Thomas Chong of Jefferies.

Thomas Chong, Analyst

Congratulations on a very strong set of results. My question is about the gaming business. Can management comment on the performance of other games aside from Free Fire, like Delta Force? Additionally, how is AI being utilized to drive gaming engagement and monetization?

Forrest Li, CEO

Sure, thanks Thomas. Yes, as from our philosophy, we consistently focus not only on continually improving Free Fire's engagement but also on new games. We see many opportunities in different genres and markets. That said, I would say that games like Delta Force, which is still in its early stage, are currently under fine-tuning rather than being labeled as 'fantastic' at this point. We are cautiously optimistic as we witness early traction for these games. I firmly believe that the gaming industry will benefit tremendously from advancements in AI technologies. On the production side, AI is improving our efficiency, especially in generating original art for new content and maps. This capability dramatically boosts our productivity, offering significant improvements in volume and variety that humans can't attain. Regarding player engagement, we anticipate that AI-enabled bots will improve the experience by allowing solo players to play with AI teammates, encouraging them to interact with others. Furthermore, we are actively experimenting with generative AI to enrich in-game experiences, providing more individualized content. While it's still early, we are committed to ensuring the quality of these experiences before scaling them.

Operator, Operator

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Casey Ong for any closing remarks.

Unknown Executive, Investor Relations

Thank you all for joining today's call. We look forward to speaking to all of you again next quarter.

Operator, Operator

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