Earnings Call Transcript - SE Q3 2022

Operator, Operator

Good morning and good evening. Welcome to the Sea Limited Third Quarter 2022 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'd now like to turn the conference over to Ms. Min Ju Song. Please go ahead.

Min Ju Song, Group Chief Corporate Officer

Thank you. Hello, everyone, and welcome to Sea's 2022 third quarter earnings conference call. I'm Min Ju Song from Sea's Group Chief Corporate Officer's office. Before we continue, I would like to remind you that 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 a discussion of certain non-GAAP financial measures, such as adjusted EBITDA and net loss excluding share-based compensation. 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 Sea's Chairman and Group Chief Executive Officer, Forrest Li; Group Chief Financial Officer, Tony Hou; and Group Chief Corporate Officer, Yanjun Wang. Our management will share strategy and business updates, operating highlights, and financial performance for the third quarter of 2022. 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, Chairman and CEO

Hello, everyone, and thank you for joining us today. We recently passed our five-year IPO anniversary. The rest of the management team and I have learned a lot from running Sea as a public company, a journey that has seen deep highs and lows. I'm grateful for the support and advice all of you have given us over the years, and thank you for your patience and faith in us. Given the significant uncertainties in the macro environment, we have entirely shifted our mindset and focus from growth to achieving self-sufficiency and profitability as soon as possible without relying on any external funding. We are adapting quickly to the changing climate because we believe that companies that fail to do so may not survive. All our efforts are directed to ensure that Sea not only survives the macro storms but emerges stronger, more efficient, and more resilient, and as a long-term winner in our markets. This positions us to continue capturing the long-term potential for our businesses and markets and to deliver strong and sustained shareholder returns over time. Over the last quarter, we took decisive actions to improve margins and set clear goals and priorities for the quarters to come. In addition, to emphasize our commitment to the stated goal, I announced in mid-September that the management team will stop receiving cash compensation until we achieve self-sufficiency. To share more color on our plan to achieve self-sufficiency, I would like to discuss our current view of a few financial metrics at the group level that we believe may have relatively important effects on our bottom line and cash position. First, adjusted EBITDA. Our group total adjusted EBITDA improved by 29% quarter-on-quarter. This meaningful improvement was a result of better profitability from both our e-commerce and digital financial services businesses. I will discuss this in greater detail later. Second, capital expenditure. Historically, our CapEx has mainly related to servers, office base related spending, as well as logistics-related real assets and equipment. In the third quarter, our group CapEx was $232 million, consisting mainly of servers and logistics-related spending. This may fluctuate from period to period due to the nature of the expense. For example, during some earlier periods, we committed to a heightened level of investment in our server capacity. This was done in anticipation of future business needs while considering potential delays in several procurements due to the supply chain disruptions earlier. These earlier commitments were partly reflected in our CapEx for the third quarter and may continue to impact our financials for the coming quarters. However, in line with our current focus, we have taken strong measures to tighten our CapEx budget and we'll manage it with a strong focus on efficiency and investment returns over the long run. Another metric that may cause fluctuations in our cash flow from period to period is changes in working capital. This may continue to fluctuate due to many factors, such as timing of billing and payment collection cycles. However, in the long run, the direction is also clear for us to focus on improving working capital management. Last, but not least, it goes without saying that we are very focused on our cash position. As at the end of the third quarter, cash, cash equivalents, and short-term investments were $7.3 billion, representing a net reduction of $485 million from the end of the second quarter. We aim to continue to maintain a net cash position after budgeting for the full retirement in cash of outstanding convertible bonds and assuming no external funding. I'm confident in our ability to execute well against our stated goals, as we have demonstrated so many times in the past. Let me now take a moment to talk about some of the specific steps we have taken to improve our bottom line. We have completely overhauled our budgeting practice to consistently and comprehensively review our spending. Across all businesses and markets, we reviewed and reduced headcount, decreased existing spending and future investment commitments on office space and logistics facilities, and tightened travel and entertainment policies. On top of that, we improved procurement policies and procedures, reduced spending on computer hardware, and stopped all new financial equity investments. We have also accelerated cost-saving initiatives in our business operations. For example, at Shopee, we have meaningfully scaled back marketing expenses, especially around shipping subsidies. At Garena, we are now focused on running our existing key franchises as efficiently as possible and are taking a more selective approach to developing and launching new games to prioritize the highest potential titles in our pipeline. Finally, at SeaMoney, we have deprioritized offline adoption of ShopeePay and further diversifying funding for our credit business across multiple sources. Our current initiatives are designed to further quantify our leading positions and enable us to continue to win in our key markets over the long run. In the coming quarters, we will continue to focus on improving key financial metrics for the long-term health of our business. While our results may fluctuate and be affected by the macro environment and many other factors, we are currently working towards adjusted EBITDA breakeven for Shopee overall by the end of 2023. We believe our strong focus on cash flow and achieving self-sufficiency as much as possible is the right strategy to pursue at this stage, even though we may see no growth or even negative growth in certain operating metrics in the near-term. To be very clear, we remain highly confident about the compelling long-term growth prospects of our businesses and the market. Once we achieve self-sufficiency, we will be in a position to decide to reaccelerate growth again in a much more efficient and a long-term sustainable manner. Let's now discuss each business segment in detail, beginning with e-commerce. We made significant progress in narrowing shopping losses across all regions, despite headwinds from ongoing macro uncertainties and reopening trends. Adjusted EBITDA loss in the third quarter was $496 million, improving quarter-on-quarter by 24%. This was driven by strong top-line growth, particularly in core marketplace revenue, and meaningful efficiency improvements in operating costs across our markets. These improvements were partially offset by severance and early lease termination related costs and increases in HQ costs, such as shared R&D staffing and shared server hosting expenses. As we began more focused efforts on optimizing HQ costs, including R&D costs from the later part of the third quarter, we expect savings on shared costs to start to show in the following quarters. GAAP revenue in the third quarter was $1.9 billion. This includes around $1 billion of core marketplace revenue, mainly consisting of transaction-based fees and advertising revenue, offering higher margins. The core marketplace revenue increased by 54% year-on-year, contributing meaningfully to the improvement in monetization and overall profitability. We aim to continue to create more value for our sellers and buyers and expect monetization to positively correlate to their satisfaction over time. As mentioned, we also further optimized costs during the quarter with a positive effect on our bottom line. For example, Shopee's GAAP sales and marketing expenses in the third quarter decreased by 15% quarter-on-quarter as we adjusted our free shipping offerings across several markets. These initiatives have accelerated Shopee's path toward profitability. During the quarter, our Asian market recorded an adjusted EBITDA loss of $217 million, improving by 31% quarter-on-quarter as a result of profitability improvement across all markets in the region. Additionally, the region combined recorded a positive contribution margin, in line with our previously shared expectations. At the individual market level, we recorded positive contribution margins for most of our Asian markets, including our largest market, Indonesia. Furthermore, Malaysia and Taiwan recorded positive adjusted EBITDA. While our other markets combined, adjusted EBITDA loss was $279 million, improving by 16% quarter-on-quarter as a result of increased monetization and cost savings. In Brazil, we saw continued improvement in unit economics with adjusted EBITDA loss per order before allocation of HQ costs at $1.03, an improvement of roughly $0.40 from the previous quarter. Meanwhile, GAAP revenue grew by over 225% year-on-year. We will continue to invest in the exciting opportunities we see in our Brazil market. I recently spent time in the country, meeting with local sellers and buyers. And I was reminded once again of Shopee Brazil's strong and clear value proposition in empowering its local community. This drives a strong and clear business case to continue to invest prudently in that market. Of course, every investment will be made with discipline and a strong focus on continued efficiency improvements to reach profitability. Overall, as we pivot toward focusing on monetization and profitability, we have continued to see healthy buyer and seller engagement across our platform. We believe this reflects the value we deliver to our communities. In the third quarter, we observed solid retention rates for our active buyers and maintained our average order frequency and time spent for active users at a stable level compared to the previous quarter. The number of brands on Shopee Mall also continued to grow strongly by 36% year-on-year to over 42,000, reflecting more brands recognizing the value Shopee brings to them. Importantly, we are always looking to further improve the services we offer our sellers and provide a superior shopping experience for our buyers. We want to make sure that incremental monetization is well justified but additional value we continue to create and deliver in our ecosystem. Over the past few quarters, we have enhanced the efficiency and the predictability of our delivery, improved the complaint resolution rate of automated customer services, and reduced response resolution time. Our sellers now enjoy more features to help them navigate our ecosystem more easily and increase their sales. For example, they have access to pricing recommendations if their item prices are detected as non-competitive and have self-service access to our many performance enhancement programs and business management tools. Moving on to digital entertainment, Garena continues to be impacted by reopening trends, especially as our gamers return to fully reopened school and work post-pandemic. At the same time, we are faced with rising global macro uncertainties. We believe this continues to impact consumer discretionary spending, including in games. These headwinds have resulted in weaker engagement and user trends in the third quarter. During the quarter, GAAP revenue was $893 million and bookings was $665 million. Garena's quarterly active users reached 568 million with 52 million quarterly paying users. Our paying user ratio and ARPU remained stable quarter-on-quarter. We experienced ongoing moderation in engagement and monetization. Still relatively to the industry overall, Free Fire performance remains robust. We are also pleased that Arena of Valor delivered solid growth in active users and bookings for the third quarter. It has been encouraging to see the game's resurgence once again and the strong support from a resilient core user base. Its performance in the past six years since launch is in line with our view that strong operations can have meaningful positive effects on the game and that a strong mobile game can be built into a long-term franchise with multiple peaks. For Garena overall, with the worsening macro environment and reopenings having a continuing impact on our markets, we now expect bookings for the full year of 2022 to be between $2.6 billion and $2.8 billion. Looking ahead, we will focus on stabilizing our large existing franchises while selectively launching new games and investing in our pipeline with greater discipline and a stronger focus on efficiency and returns. Finally, moving on to our digital financial services business, in the third quarter, SeaMoney's GAAP revenue reached $327 million, up 147% year-on-year. At the same time, adjusted EBITDA loss decreased by 57% year-on-year to $68 million. The improvement was predominantly driven by more targeted sales and marketing spending for the mobile wallet business and our credit business maintaining its healthy profitability while generating cash for the group. With the growing volatility across our markets, we are closely monitoring the health of our credit business and our loan book. As of the end of the third quarter, our loan book stood at $2.0 billion, net of allowance for credit losses of $253 million. Nonperforming loans past due by more than 90 days represented less than 4% of our total gross loans receivable, and the weighted average tenure of loans outstanding was about four months. We will continue to focus on improving the quality of our underwriting, optimizing risk controls and user experience, diversifying our sources of funding for the credit business, and improving the quality of our other digital financial offerings to users. In closing, while we have demonstrated our strong execution and ability to scale rapidly in the right market and macro environment, we believe we are also able to adapt to the current conditions swiftly and demonstrate our ability to manage toward profitability. The cadence of bottom line and cash flow improvements may vary quarter-to-quarter, but we are confident that we are becoming a more resilient and efficient business in a better position to capture the long-term opportunities for testing markets. With that, I will invite Tony to discuss our financials.

Tony Hou, CFO

Thank you, Forrest, and thanks to everyone for joining the call. We have included detailed financial schedules today together with the corresponding management analysis in today's press release, and Forrest has discussed some of our financial highlights, so I will focus my comments on the other relevant metrics. For Sea overall, total GAAP revenue increased 17% year-on-year to $3.2 billion. This was mainly driven by the increased monetization of our e-commerce business and the growth of our credit business. On e-commerce, our third quarter GAAP revenue of $1.9 million included GAAP marketplace revenue of $1.6 billion, up 39% year-on-year and GAAP product revenue of $0.3 billion, up 3% year-on-year. Within GAAP marketplace revenue, core marketplace revenue, mainly consisting of transaction-based fees and advertising revenues was $1 billion, whereas value-added service revenue, mainly consisting of revenues related to logistic services, was $0.6 billion. E-commerce adjusted EBITDA loss was $496 million as we continue to improve on monetization by creating more value for our users and further optimizing cost efficiency. Digital entertainment bookings were $665 million, and GAAP revenue was $893 million for the third quarter of 2022. Adjusted EBITDA was $290 million. We continued to experience ongoing moderation in engagement and monetization with the reopening trends and uncertain macro environment. Digital Financial Services GAAP revenue was $327 million, an increase of 147% year-on-year from $132 million in the third quarter of 2021. Adjusted EBITDA loss was $68 million, compared to $159 million for the third quarter of 2021. We recognized a net non-operating loss of $9 million in the third quarter of 2022 compared to a net non-operating loss of $13 million in the third quarter of 2021. We had a net income tax expense of $65 million in the third quarter of 2022, which was primarily due to corporate income tax and withholding tax expenses. As a result, net loss, excluding share-based compensation, was $374 million in the third quarter of 2022 as compared to $448 million for the same period in 2021. At the end of the third quarter of 2022, we had $7.3 billion of cash, cash equivalents and short-term investments on our balance sheet.

Min Ju Song, Group Chief Corporate Officer

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

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Pang Vitt from Goldman Sachs. Please go ahead.

Pang Vitt, Analyst

Thank you very much for the opportunity. Good afternoon to all the management here. Two questions from my side. Firstly, on Shopee, as you're now expecting Shopee breakeven by end of next year, can you provide a bridge from the current EBITDA loss to your breakeven target? How do you plan to get there? What is the biggest driver here, revenue increase or cost cut? And what kind of top-line growth do you expect? Are you building to sacrifice market share if your competitor doesn't follow suit? And second one on gaming. Have you seen any sign of stabilization for Free Fire? And at the same time, we have seen news of the termination of the partnership with Riot Games as well. How does it mean for your publishing business going forward? And is there any implication for the Rover agreement with Tencent.

Yanjun Wang, Group Chief Corporate Officer

Thank you, Pang. Regarding the e-commerce breakeven timing, as we shared, of course, these are the goals that we are working towards while taking into account the macro environment and fluctuations in results is factors beyond our control. But overall, I think the trends, as indicated in our third quarter results have been that we are both improving on the top line and also on the cost efficiency side. So on the top line side, as we disclosed, we've increased our take rate in particular, the core marketplace revenue and also on the cost side, we have tightened our expenses related to sales and marketing especially around logistics. This is not just for reducing logistic subsidies but overall improving logistics costs for the entire ecosystem. Such as on an order basis, adjusted costs continue to decrease, and that's a very clear direction we continue to work towards. At the same time, we also at the company level focused more on overhead and other costs and procurements, etc. So this is coming from all directions. And in terms of the drivers, we continue to believe that when we continue positive trends on both the monetization but also the efficiency and cost improvement front, some of these savings probably came at later this quarter and will continue to show in the following quarters. And in terms of the impact on market share, etc., I think from what we have so far observed in the market, we continue to maintain our strong market leadership, and our peers also have behaved in a relatively rational manner. Now a lot of this is not individual to us, but generally, we are responding to the macro trends and environment that we believe is the right thing to do for us. And so we will try to, at this point, continue to focus on improving our cost efficiency and improving our financial metrics health for the long-term success of the company. As we also shared in our view, while there are near-term headwinds from the macro developments, our view and confidence in our market's long-term growth potential remain as strong as before, given the positive demographic trends and low penetration in all markets. Therefore, whatever we are doing now is still to best position us to be a long-term winner in these markets and in all businesses. In terms of Free Fire, we continue to see headwinds impacting our user number and engagement as well as monetization, which is reflected in our third quarter results, but also reflected in our revised guidance for the full year. Of course, our efforts continue to focus on engaging with our user base and providing the best content and community engagement to Free Fire, which remains to be the biggest franchise in our portfolio. In terms of publishing, as we always shared before, we focus on game development and publishing as two key contributors of our game business. And the recent termination of our legal partnership with Riot as a result of the expiry of the agreement would have no impact on our overall publishing business as the contribution is immaterial from the particular game. We really celebrated the 10-year partnership we have with Riot, and we think it's a very fruitful partnership and success for both our partners. We also look to continue to work with top game developers around the world to strengthen our publishing pipeline. Also, this decision is the right decision and has no relationship to anything regarding the right of first refusal agreement we have with Tencent.

Alicia Yap, Analyst

Hi, thank you. Good evening, management. I appreciate you taking my questions. I have two inquiries. First, do you foresee any challenges to core marketplace revenue due to the tough macro environment? Will brands and merchants reduce their advertising spending on Shopee? Secondly, once Shopee achieves EBITDA profit, what kind of margin profile or range should we expect from the business in the long term? Lastly, regarding Brazil and Latin America, will you reduce your focus on other countries and concentrate solely on Brazil in the near term? Thank you.

Yanjun Wang, Group Chief Corporate Officer

Thank you, Alicia. Regarding any challenges for marketplace revenues, we have raised the take rates for various services, and sellers are increasingly adopting our programs and investing more in advertising, which has resulted in positive responses from them, as we previously mentioned. Our priority remains on providing greater value to both sellers and buyers, helping them grow their businesses prosperously on the platform while maintaining their partnership with Shopee. However, we are aware of potential macroeconomic challenges that could impact our region and the market overall, affecting spending power and discretionary spending, which may also have a more significant effect on our platform and e-commerce as a whole, potentially hindering our ability to monetize. We are committed to assisting our sellers in enhancing their service offerings to buyers. Ultimately, our success hinges on our sellers' performance and buyers' satisfaction with the services and products we partner with our sellers to provide. As for Shopee’s margins, we previously discussed that our marketplace revenue primarily consists of core marketplace revenue and value-added services. The core marketplace revenue mainly involves transaction-based fees and advertising. We believe that, in the long term, the margins for this revenue segment could align with typical margins found in pure-play marketplace businesses. The value-added services, which include logistics services, primarily focus on last-mile logistics and both first-party and third-party services designed to improve user experience. Consequently, we recognize revenue from both sources in accordance with GAAP accounting. Since a significant portion of this revenue stems from logistics services, we expect it to reflect margins typical of such services in the long run. We aim to enhance the cost efficiency of our logistics services across our ecosystem, whether through our own logistics providers or by partnering with third-party providers to lower costs and improve service quality for our users. Regarding our other growth markets, we consider Brazil a crucial market due to the clear value Shopee offers to local communities. We will continue to invest in this market with a focus on returns and efficiency. Additionally, we maintain a cross-border presence in other Latin American markets and currently have no plans to alter our existing strategy.

Thomas Chong, Analyst

Hi, good evening. Thanks management for taking my questions. My first question is on Shopee as well. Given that on a constant currency basis, the GMV is actually going at 21% on a year-on-year basis. I just wanted to get some color from management. How should we think about the GMV outlook in coming quarters or 2023? And given that the online penetration is still low, I just want to get some color from management, the long-term perspective on the GMV side. And my second question is about the online game as well. I think we talked about Free Fire. I just want to get management some thoughts with regard to our game pipeline. Should we expect there would be more new games to be released in 2023? Thank you.

Yanjun Wang, Group Chief Corporate Officer

Thank you, Thomas. Regarding the GMV growth, as we shared before, and at this point, our focus is very clearly on improving monetization and to achieve self-sufficiency. So GMV growth will be output until we get to that point. Then we can reassess our situation and see what's the best path forward. As I shared also our long-term prospects or the long-term prospects of the market are unchanged. The short term, there will be a lot of factors, including macro environment, inflation, ForEx and the continued reopening trends as well as tough comparisons during COVID and our own focus on efficiency, cost management, and improving monetization of the platform. So there could be impact on some of the top-line growth in operating metrics. There could be no growth or negative growth, and we can accept that. But on the other hand, as we shared, our long-term view is we want to emerge as the strongest winner in this market. In terms of the game pipeline, we do have games in our pipeline on self-development as well as publishing. And as usual, we don't discuss specific games that we haven't announced for launch yet, but there are always things that we are working on.

Piyush Choudhary, Analyst

Thank you for the opportunity. I have two questions. First, regarding Garena, could you explain the factors contributing to the change in guidance? Your bookings were approximately $2.2 billion over nine months, while the lower end of the guidance is 2.6 billion, suggesting a nearly 40% decrease in bookings from the previous quarter. Can we understand what might cause such a significant slowdown in bookings for the fourth quarter compared to the third? Second, your net cash position changed by about $485 million in the third quarter. Can you provide a breakdown of how much was spent on cash capital expenditures, how much was related to changes in working capital, and how much was associated with lending? Thank you.

Yanjun Wang, Group Chief Corporate Officer

Thank you, Piyush. Regarding the game guidance we provided, we are facing challenges in our markets due to the macro environment, particularly inflation affecting discretionary spending, including on games, as well as foreign exchange issues and overall industry weakness. While we are focused on user engagement and improving our game quality, we want to give an accurate outlook for the fourth quarter based on the current information. We continue to monitor the situation, and while the direction is clear, various external factors are beyond our control. As for cash flow improvement, it is primarily driven by better EBITDA performance in our e-commerce and digital financial services sectors, resulting from improved monetization and cost efficiency. CapEx and working capital can vary each quarter for many reasons. On the CapEx front, our investments typically go toward office buildings, servers, logistics-related leases, and machinery. We are managing our headcount, which will lower the office space we need, also reducing future renovations and computer hardware requirements. For servers, we are tightening our budget and more accurately projecting our needs based on our business requirements. We previously limited server spending in line with anticipated future growth but also accounted for past global supply chain disruptions that impacted procurement timelines. The timing of these effects in the coming quarters remains uncertain as it depends on delivery and sales schedules. Changes in working capital do not significantly impact our cash flow, as we noted. EBITDA plays a major role in that. However, fluctuations in working capital can occur due to billing and payment cycles, which we will aim to improve over the long term. Both CapEx and working capital are areas we manage and focus on continuously, but short-term fluctuations may not be meaningful. In terms of our lending business, we have about $2.4 billion in gross loans and over $200 million set aside for credit losses, representing a little over 10% of our total outstanding loans. The proportion of loans 90 days past due is around 4%, with an average loan tenure of four months. This gives you a perspective on the situation. We also provided details on credit loss impacts in our earnings release, allowing for thorough tracking.

Jiong Shao, Analyst

Thank you very much for taking my question. I have two follow-up questions around your e-commerce business. For the EBITDA loss for Q3, you talked about the one-off severance costs and the early termination of the lease costs. Would you be able to quantify that impact for Q3? And how we should think about that for the current fourth quarter? The second follow-up question is competition. There seems to be a deceleration in recent quarters and the month. And you talked about the macro. You talked about the sort of cost-cutting initiatives. I was wondering if you could potentially talk about competition impact, if any, from a particular competitor. It seems that one particular competitor has been particularly aggressive in the regions. Thank you very much.

Yanjun Wang, Group Chief Corporate Officer

Thank you, John. In terms of the severance and early termination, lease termination expenses, we did disclose that at a group level, that's about $77 million. Most of that is attributable to e-commerce related, so you can get a rough sense of the size. In terms of the competition, I think as we continue to track our peers as well in this region, we believe our progressive leading position has been maintained in the third quarter. Of course, we take competition very seriously. And we make sure that our service offerings remain competitive. And our monetization take rate is well justified by the additional value offering to our buyers and sellers in line with the overall market movement.

Venugopal Garre, Analyst

Hi. Thanks a lot for the opportunity. So two questions from me. Firstly, given all the news flow that we have seen on cost actions taken could you just highlight to us how our employee headcount looks like at the end of quarter three versus what it was, let's say, in Q2 and of Q1 end? And more importantly, what kind of overall quantum of cost we've been able to sort of take out from the system, and how much of it is yet to reflect in our overall numbers? That's the first question. My second question is more related to the investments, given the sort of cost focus now, especially in a couple of areas. One is the digi-bank side of things. I just wanted to understand how a rollout plan is shaping up in Singapore and if it could lead to any cost increases near term? And secondly on Shopee Express, how does the focus on costs sort of lead to any shift in strategy towards that because that also requires quite a bit of investments going forward? Thanks.

Yanjun Wang, Group Chief Corporate Officer

Thank you. Regarding the employee headcount management, our approach isn't about setting a specific percentage or a top-down directive. Instead, we assess our resource needs initiative by initiative, function by function, unit by unit, and project by project to determine the right amount of resources for our current and future business priorities. The recent adjustments in headcount are mainly due to deprioritizing certain market assets and business initiatives, such as the offline payment project, as well as right-sizing across different functions and teams to maintain a strong and efficient organization. This process is ongoing, and as a result, we may incur some severance costs over the upcoming quarters, as these changes began late in the third quarter and will carry into the fourth quarter. The cost savings will start to materialize in the following quarters, but we believe the long-term benefits will come from operating more efficiently, fostering a better culture, and focusing on investment returns while maintaining disciplined resource allocation. In terms of our investments in digital banks, we are still in the early stages and have initiated pilot programs for Merrybank in Singapore, introducing limited features to employees while closely collaborating with regulators to ensure everything is proceeding as planned. We do not anticipate significant immediate costs associated with this long-term initiative. Regarding ecologistics for Shopee Express, which is our last-mile delivery service, most expenses relate to staffing, vehicle rentals, and establishing hubs close to our buyers. These are operational expenses that we can adjust quickly in response to business volume changes, rather than long-term capital expenditures. Our goal is to keep Shopee Express competitive while reducing delivery costs for our buyers and working closely with third-party service providers to enhance cost efficiency and delivery quality.

Ranjan Sharma, Analyst

Hi. Good evening and thank you for the presentation and the opportunity. I have two questions. First, regarding your financial services, with nearly a 60% reduction in losses year-on-year, should we anticipate a potential EBITDA breakeven for financial services next year? My second question is about your other services. I see that adjusted EBITDA losses have increased by 140%. Could you provide more details on the reasons behind this and whether we can expect a reduction in the upcoming quarters? Thank you.

Yanjun Wang, Group Chief Corporate Officer

Thank you, Ranjan. Regarding the DFS business, the decrease in losses primarily resulted from our efforts to reduce spending, particularly in the wallet and mobile wallet initiatives. We will maintain our focus on efficiency as the current losses are at a manageable level. As we enhance cost efficiency and monetization over time, we view this business as a long-term venture, emphasizing quality over rapid growth and immediate monetization. It's important that our business model remains resilient, especially concerning the credit aspect in terms of underwriting quality, user experience, and operational efficiency. Similarly, our banking operations will prioritize quality, trust, and resilience, and we do not anticipate significant fluctuations. We currently do not see this as a growth-oriented segment. In relation to profitability for the other services, while our adjusted EBITDA has seen a quarter-on-quarter increase, it's relatively modest and affected by severance costs from the food delivery business initiated in the third quarter. If we adjust for that expense, the trend may reflect a different direction. Nevertheless, we will continue to manage both cost and growth efficiency in the other services, expecting to see additional savings in the upcoming quarters.

Varun Ahuja, Analyst

Thank you for the opportunity to ask my first question regarding the gaming sector. In the second quarter, we saw some stability in the user base, but in the third quarter, we experienced an 8% decline compared to the previous quarter. Could you clarify what’s happening? Are the new users from the last three to six months not returning to the platform, and which regions are affected? Additionally, regarding the gaming business, you've reduced your guidance since the midyear last quarter. What negative developments led to this decrease, and why hasn't there been more clarity on the situation? Furthermore, regarding the overall outlook and the possibility of resuming guidance, what specific data points are you considering regarding the markets? When can investors anticipate a return to guidance from the company, and what key data must be examined before making that decision? Thank you.

Yanjun Wang, Group Chief Corporate Officer

Thank you, Varun. In terms of the game guidance, as we shared, right now, we continue to see impacts on user engagement and user base from the macro headwinds. Also, we see that in Q3 where school reopens fully, there's also been quite a significant impact on some of the user base and user engagement numbers. That's why we revised the guidance lower. In the longer run, how this will trend? I think it still remains to be seen. Of course, as we also shared regarding Arena of Valor, as an example, it's a six-year-old game and we started to see some new growth in the game six years since its launch. So we believe that after you reach certain core user base and for a very long-term game, with the right type of operations and efforts, there could be potential upside to the game and that can for long game performance. Now for Free Fire, it still remains to be seen where the core user base might be reached. Our focus is on continuing, again, in terms of providing the best experience as we can to our users. In terms of the guidance for the future, as we shared, given the macro uncertainty, at this point, we do not intend to provide guidance for our business. So if our view changes about the macro and operations, we will update the market then.

Josh Levin, Analyst

The first question is on Garena. How much visibility do you have into Garena's bookings and EBITDA? Or asked another way, how can investors be confident that management can accurately forecast Garena's bookings and EBITDA over the next year or so? The second question is, can you provide a bit more detail on what is in the DFS loan book? What kind of loans are in there? And what you might have done to change your underwriting policies given the macro uncertainty? Thank you.

Yanjun Wang, Group Chief Corporate Officer

Thank you, Josh. As we shared, just now that we are not providing guidance for our business, including bookings for digital entertainment given the macro outlook. In terms of the digital financial services, we have various products across different markets relating to the credit business, including lending products, personal loans, and factoring to our sellers. We will continue to improve our underwriting quality by reviewing the data and also by looking at cycles information, backlog information, taking into consideration as many factors that we can, but also past track record of user and user behavior to project potential shifts in user and user patterns and adjust our underwriting policies accordingly. As we shared, our average tenure for the outstanding loans is four months. So it's a relatively short tenure at this point, and we will continue to act swiftly to manage our loan with quality and focus on user experience.

Min Ju Song, Group Chief Corporate Officer

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

Operator, Operator

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