Sea Limited (NYSE:SE) Q3 2019 Earnings Conference Call November 12, 2019 7:30 AM ET
Company Participants
Yanjun Wang – Group Chief Corporate Officer
Forrest Li – Chairman and Group Chief Executive Officer
Tony Hou – Group Chief Financial Officer
Conference Call Participants
Miang Chuen Koh – Goldman Sachs
John Blackledge – Cowen
Mike Olson – Piper Jaffray
Alicia Yap – Citigroup
Ranjan Sharma – JPMorgan
Thomas Chong – Jefferies
Varun Ahuja – Credit Suisse
Conrad Werner – Macquarie
Mark Goodrich – Morgan Stanley
Operator
Good morning and good evening. Welcome to the Sea Limited Third Quarter 2019 Results Conference Call. [Operator Instructions] 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 Ms. Yanjun Wang. Please go ahead.
Yanjun Wang
Thank you. Good evening and good morning, everyone, and welcome to Sea’s 2019 third quarter earnings conference call. I am Yanjun Wang, Sea’s Group Chief Corporate Officer.
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 discussions of certain non-GAAP financial measures, such as adjusted revenue, adjusted EBITDA and net loss, excluding share-based compensation and changes in fair value of the 2017 convertible notes. 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 here with me Sea’s Chairman and Group Chief Executive Officer, Forrest Li; and Group Chief Financial Officer, Tony Hou. Forrest and Tony will share strategy and business updates, operating highlights and financial performance for the quarter. 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
Thank you, Yanjun. Hello, everyone and thank you as always for joining today’s call. We are happy to announce a strong set of results for the third quarter. For Sea as whole our adjusted revenue tripled year-on-year to reach $763.3 million. Adjusted EBITDA improved year-on-year to negative $30.8 million compared to negative $183.8 million a year ago. We continue to found our growth primarily with cash generated through operations and are in a strong position to further capture the significant growth opportunities ahead.
As we mentioned before, our strategic goal for 2019 has been to strengthen our leadership across different markets and business lines, scale with increasing efficiency and the deepen user engagement and monetization. The results we reported today show that we are making excellent progress with this strategy. In view of our encouraging performance in Q3 and our strong outlook for the remainder of 2019, we have decided to once again raise our guidance for our full year adjusted revenue for both digital entertainment and e-commerce.
For digital entertainment, we now expect full year 2019 adjusted revenue to be between $1.7 billion and $1.8 billion, representing 157.2% to 172.3% growth from 2018. This compares for the previous guidance of between $1.6 billion and $1.7 billion. We are also increasing our guidance for full year adjusted revenue for e-commerce to between $880 million and $920 million, representing 202.7% to 216.5% growth from 2018. This compares to the previously stated guidance of between $780 million and $820 million.
I will turn first to our digital entertainment business. This was another great quarter for Garena led by the sustained success of our global smash hit Free Fire, which recently joined the $1 billion club as one of the highest grossing mobile games in the world.
Let’s look at some of our key metrics for the third quarter. Adjusted revenue for the digital entertainment business grew by 212% year-on-year to $451 million and we continued to deliver an excellent performance on the bottom line with adjusted EBITDA increasing 395% year-on-year to $266 million. The increase in adjusted revenue was mainly driven by an increase in our user numbers and the deepening pay user penetration. In particular, our quarterly active user numbers or QAU, increased by 82% to 321.1 million compared to 176.1 million a year ago. And the pay user ratio, which is quarterly paying users as a percentage of QAUs increased again in the third quarter to 9.1% compared to 4.1% a year ago.
Turning to our games portfolio. Free Fire celebrated its second anniversary recently and it continues to be one of the world’s most popular mobile battle royale games.
According to App Annie, in Q3 it ranked among the top five most downloaded mobile games globally for the third straight quarter and was the highest grossing mobile game in Latin America and Southeast Asia in the quarter. We believe that Free Fire continued global popularity also reflects the success of our effort to build a highly engaged global community around the game and keep this community engaged by constantly providing fresh, high quality in-game content as well as driving an extremely successful global esports program. Sustaining this level of community engagement is an important focus for Garena. We are convinced that the huge popularity of Free Fire worldwide give us an opportunity to build a long lasting franchise around this IP.
Let me share a few recent examples of our initiatives to drive community engagement. In terms of content, we rolled out a number of new experimental modes of play. The response from our community has been overwhelmingly positive. Our Clash Squad for example, allowed teams of four to compete against each other and proofed extremely popular with our players. As Free Fire has increasingly become a national pastime in Latin America, especially for the young and social population, we have further extended the game’s reach into the local communities with our network of followers, influencers as well as popular icons.
For example, we partnered with a DJ Alok, Brazil’s most popular DJ and one of the country’s best loved music stars for the game. Alok is now a playable character in our game and we’ll also provide one of his songs for Free Fire in our esports events. Esports is also a key driver of user engagement and stickiness. Over the past several weeks we have been rolling out our largest ever esports event for Free Fire, the Free Fire World Series. In September we hosted regional qualifiers across all our markets globally for the World Series, this included hugely successful esports events in our newer markets such as India. India’s Sports Minister attended our event as our guest of honor. We also partnered on this event with one of the country’s largest media powerhouses India Today.
We are seeing very strong online engagement with these events. The final match of our Brazil qualifiers recorded over 1 million concurrent viewers online. To date our World Series events around the globe have accumulated over 100 million viewers across all platforms. The highly anticipated World Series will conclude at the Grand Finals in Rio in a few days’ time. We are encouraged by the strength, depth and strong gamer affinity that Free Fire is demonstrating. By combining this with our unique ability to build and deepen engagement with game communities on a hyper local level in diverse markets globally. We are confident in Free Fire’s long-term success for years to come.
Looking at the publishing side of the Garena business. We continue to work with the world’s top developers to bring the highest quality titles to our market. In October, we launched Call of Duty: Mobile in our core markets in Southeast Asia and Taiwan and the game received a immediate strong reception from our users. It was the most downloaded mobile game on both the Google Play and iOS App Store’s in each of our markets for the month of October. For the rest of the year and beyond, we will continue to work closely with Activision and Tencent to enlarge the game’s user base and the deepen user engagement in our markets.
I’m pleased to note that we are seeing the strong momentum of the third quarter, sustaining into Q4. In October, we kept a new record high for monthly digital entertainment adjusted revenue, which was mainly attributable to the continued growth of Free Fire.
Our strategy goal for Garena for this year has been to enhance our position as the leading global game developer and publisher, to extend our global footprint and to translate this into sustainable success. Our results for the quarter demonstrate that the strategy is well on track and we believe that Garena is in a stronger position than ever as we head into the fourth quarter and beyond.
Let’s look now at e-commerce. In the third quarter, Shopee sustained its strong growth momentum and continued to extend its lead at the forefront of the very promising e-commerce opportunities in Southeast Asia and Taiwan. The recent Google and the Temasek report projected that e-commerce GMV in Southeast Asia will grow from $38.2 billion in 2019 to $153 billion by 2025. As the market leader, we believe Shopee is in the ideal position to capture an outside the share of this growth opportunity. And our results for the quarter underlying how Shopee is clear leadership is translating into business success.
During the quarter, the pace of growth in total orders further accelerated to our year-on-year rate of 103% to reach 321.4 million orders. Meanwhile, GMV increased to $4.6 billion, up 70% year-on-year. In the third quarter, we also extended our lead as the most popular e-commerce platform in our region.
According to App Annie, Shopee was once again the leading e-commerce platform in both Southeast Asia and the Taiwan by average monthly active users and the downloads across the Google Play and iOS App Store combined and at the top-ranked app in Southeast Asia as a whole and in each of our five largest markets by total timing app on Android.
Shopee is now one of the most popular and the fastest growing e-commerce platform globally. In the third quarter, it was ranked the fifth most of downloaded app in the shopping category of worldwide across both Google Play and iOS App Store, according to App Annie.
In our largest market Indonesia, Shopee continues to solidify its market leadership as the shopping platform of choice. Orders in Indonesia grew 118% year-on-year to 138 million orders in the third quarter, which we believe makes the Shopee the clear leader by orders in that market. That is a daily average of more than 1.5 million orders compared to a daily average of 1.2 million orders in the second quarter.
Shopee was also the number one ranked app in the shopping category in Indonesia by all key metrics, in terms of average monthly active users and the downloads across the Google Play and iOS App Store combined, as well as in terms of total time in app on Android, according to App Annie. Our leading market position across the region is reflected in our very strong performance during our recent shopping festivals.
Building on our successful branding campaign featuring the football icon Cristiano Ronaldo, we recorded three times more orders on September 9 alone than we did a year ago during our 9:9 shopping event. Our 11.11 Big Sale, which we concluded yesterday, was also a huge success with approximately 70 million items sold during the 24 hours of November 11. We saw very strong user engagement during the 11.11 festival period with our Shopee live streams recording approximately 65 million views during the three weeks of the sales campaign.
At the same time, our growing scale and the efficiency is translating into improvements in both revenue and our key bottom line metrics. We continue to ramp up monetization during the quarter. In the third quarter, our overall take rate in terms of e-commerce adjusted revenue as a percentage of GMV increased from 2.6% for the same period a year ago to 5.6% with adjusted revenue rising by 251% year-on-year $257.2 million.
Our overall unit economics for Shopee also improved further this quarter. The adjusted EBITDA loss per order further declined by 41.9% to $0.79 compared to $1.36 in the same period last year. In Taiwan, we recorded a positive adjusted EBITDA, even after allocation of the headquarters’ common expenses in the third quarter.
To conclude, Shopee is well on track with our strategy to scale with efficiency, capture increasing market share across our region and the deepen monetization. It is now formally established as the clear market leader and in a better than ever position to benefit from the rapid growth of e-commerce in our region.
With that, I will invite Tony to discuss our financials.
Tony Hou
Thank you, Forrest, and thanks to everyone for joining the call. We have included detailed quarterly financial schedules together with the corresponding management analysis in today’s press release. So I will focus my comments on the key financial metrics.
For Sea overall, our third quarter total adjusted revenue was $763.3 million, an increase of 214% year-on-year. This was mainly driven by the growth of our digital entertainment business, especially our self-developed game, Free Fire, and our continuous monetization efforts in our e-commerce business in the past quarters.
Digital entertainment adjusted revenue was $451 million, an increase of 212% year-on-year. The growth was primarily driven by the enlarged paying user base as we continue to improve the monetization of our games, especially Free Fire. Digital entertainment adjusted EBITDA was $266 million, an increase of 395% year-on-year, mainly due to strong top line growth and our self-developed game accounting for an increased share of revenue. The increase was also partially due to the improved operating efficiencies, as shown by the lower sales and marketing expenses as a percentage of adjusted revenue as well as G&A expenses as a percentage of adjusted revenue.
E-commerce adjusted revenue was $257.2 million, up 261% year-on-year. Within this, marketplace revenue was $208.1 million, up 314% year-on-year, while product revenue was $49.2 million, up 135% year-on-year. E-commerce adjusted EBITDA loss was $253.7 million as we continued our investment to fully capture the market opportunity in the region. We will continue driving the high quality growth by serving the users’ needs better and improving operational efficiencies in the long run.
Digital financial services adjusted revenue was $2 million, a decrease of 35% year-on-year from $3.1 million in the third quarter of 2018, as we focused our efforts on strengthening the infrastructure to support our existing platforms.
Adjusted EBITDA loss was $33.6 million in the third quarter of 2019 compared to a loss of $7 million in the same period of 2018. This was primarily due to our continued efforts to integrate our AirPay and Shopee platforms.
Returning to our consolidated numbers. We recognized a net non-operating income of $9.8 million in the third quarter of 2019 compared to a net non-operating income of $30.9 million in the third quarter of 2018. We had a net income tax expense of $27.4 million in the third quarter of 2019, which was primarily due to withholding tax and corporate income tax recognized in our digital entertainment business.
Finally, net loss, excluding share-based compensation and changes in fair value of the 2017 convertible notes, was $175.2 million in the third quarter of 2019 as compared to $237.6 million for the same period in 2018.
With that, let me turn the call back to Yanjun.
Yanjun Wang
Thank you, Forrest and Tony. We’re now ready to open the call for questions. Operator?
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today will come from Miang Chuen Koh of Goldman Sachs. Please go ahead.
Miang Chuen Koh
Hi. Congratulations on the results. The two questions from me. Firstly, can you give a sense of Free Fire’s revenue contribution this quarter? And along that line, your new gaming revenue guidance implies fourth quarter gaming revenues of $430 million at the low end, $530 million at the high end. Just wondering what’s the factors, I mean, swing revenues by $100 million or so in a quarter. Is it recurring Free Fire’s trends as well that may result in that? And the second question is more around Latin America. Can we discuss on the gaming side how is Speed Drifter doing so far? Any likely new titles? And also, e-commerce in LatAm. I understand that Shopee has started a cross-border business there. Can we get clarification on Shopee’s ambitions as well in LatAm? Thank you.
Yanjun Wang
Thank you, MC. So in terms of the Free Fire revenue and the new revenue guidance for our gaming business, the reason we are revising the guidance is because we continue to see strong growth from Free Fire both in terms of users and pay user penetration. While we continue to focus on user engagement, the monetization just naturally follows, which is a very positive sign for this game that we see as a potential ability to devolve this into a long-term franchise and a classic IP. More importantly, we see this game has increasingly become a platform with hundreds of millions of users playing this game and interacting with each other the billion communities online and offline.
And the amount of creativity and the connections coming from this kind of community events and interactions within and outside the game give us a lot of encouragement to continue to build out the franchise and to maximize its long-term potential. So for this game, we’ll not look at any quarter-on-quarter or month-to-month or even year-on-year short-term performance, but we are really looking to build into a long-term IP franchise. And so therefore, I think while we reflect the potential monetization potential in the revised gaming revenue guidance, but I would like to ask our investors and community to really look at long term for this game and the great potential, whether on the user, community building, the platform as well as on monetization, that we’ll bring with it.
In terms of LatAm, it’s a very exciting market for us. It is a – obviously with more than 600 million population. And with our Free Fire in LatAm, we have basically doubled the total addressable market. So if you look at the population size of LatAm, it’s about the same as Southeast Asia and also with a very young population and a high-growth population size and a deepening mobile penetration in those markets. So all the market dynamic present great opportunities for us to grow the digital entertainment business there.
And after Free Fire, we have now also introduced Speed Drifter, also the game from Tencent, into LatAm markets after its success under our publishing arrangement with Tencent in Southeast Asia. This, again, is a show of our strength in publishing partnership to extend our footprint globally with our – the large user base we now have from the Latin America based on the Free Fire success as well as our local operation capabilities that we are fast building up in the local markets. So we are very optimistic in the long-term prospects of our digital entertainment business in LatAm.
As far as e-commerce is concerned, as we mentioned before, it’s an initiative by our cross-border team to cater to the demands of their existing cross-border merchants who would like to access more markets globally. And given that we have the capabilities and our team would like to serve them better, we are, as a group, supportive of such a bottom-up initiative by our team to service their merchants better.
Miang Chuen Koh
Just to clarify, are you looking at Shopee’s engagement in LatAm in a similar fashion as in Southeast Asia or largely just sort of a bit more peripheral to them, yes?
Yanjun Wang
So I think for LatAm Shopee, I think our approach has been just to, as I said before, to serve the cross-border merchants.
Operator
Our next question today will come from John Blackledge of Cowen. Please go ahead.
John Blackledge
Great. Thank you. Just curious what the key drivers of the order growth acceleration were at Shopee. And also, the marketplace take rate was better than what we expected. If you can discuss the drivers there. And then also on Shopee. Just curious, is 2019 the peak EBITDA loss year? Thank you.
Yanjun Wang
Thank you for the questions on the acceleration of Shopee’s growth. And I think as we mentioned earlier, we believe that we have captured the right market at the right time with the right business model, and that’s very important. With a two-sided marketplace model, we enjoy strong flywheel effect and overall economies of scale as we ascend to market leadership and now further extending our leadership vis-a-vis peers in the market. So this is actually shown in our results quarter-on-quarter. Shopee continued to accelerate its growth and claim more market share over time. And we think, as we mentioned before, we stand in a very good position to gain from the overall market growth as well.
In terms of the take rate, we’ve been working with our sellers to improve our services to them, increase their returns at the same time as growing in the marketplace. And as a result, that is reflected in our gradual deepening on monetization as well. And we have rolled out more programs for the sellers to advertise our platform and attract more buyers to their shops and services for them. As a result, we are also able to charge a higher take rate over time. As we mentioned before, our investment in the long-term growth of the platform, we believe, is highly efficient and will eventually generate long-term profitability. And now is – for us, it’s a good time to continue to invest in growing the market, in growing our market leadership and improving in the future our long-term profitability. And therefore, we will continue to invest in growth.
Operator
Our next question today will come from Mike Olson of Piper Jaffray. Please go ahead.
Mike Olson
Thanks for taking my questions. So you mentioned strong downloads of Call of Duty: Mobile. Is there anything else you can say about how that game is doing so far and just to what extent the success of that title could be competitive with Free Fire and, I guess, potentially cannibalize Free Fire? Or do you really see it as just a different player base? And then for Shopee. What are you seeing competitively right now in the core Southeast Asia e-commerce market? Is there any kind of change in marketing trends or other signs of aggressiveness from other competitors? Thanks.
Yanjun Wang
Thank you. Yes. So we’re very excited about the strong performance of Call of Duty: Mobile so far and received – the strong reception in our markets by our users, which is within our expectation. And right now, we are continuing to focus on further tailoring the content for our local markets in partnership with Tencent and Activision for this game. It’s too early to tell the long-term monetization and potential for this game at this stage as it was just launched. We will continue to work hard on it and observe the trends closely.
In terms of our core marketplace competitive landscape, we believe we continue to extend our market leadership. And ultimately, how fast we can grow is now increasingly depend on how well we serve our users, our merchants as well as buyers and scale the marketplace with efficiency. It will increasingly less and less affected by what the other peers might be doing in the market as we extend our market leadership and continue to gain market share. So I would say we don’t observe much change in the trend or – nor does that have much impact on us anymore.
Operator
Our next question will come from Alicia Yap of Citigroup. Please go ahead.
Alicia Yap
Hi, good evening, Forrest and Tony and Yanjun and other management. Thanks for taking my questions. Congrats on the very strong number. My first question is related to the Call of Duty and Free Fire. So based on your team experience, what is the expectation for the longevity of Call of Duty: Mobile and monetization potential as compared to Free Fire? And then for Latin America, it seems like Free Fire remain very strong despite the launch of Call of Duty: Mobile. Could you share with us what is the secret sauce for Free Fire to remain so resilient and so strong in LatAm?
Second question is on e-commerce. If we take a little bit like three to five year view for longer term, could you share with us on your e-commerce monetization model breakdown? What could be the percentage contribution from, for example, the advertising revenue versus the commission take rate versus the logistic delivery and the cross-border fee? Given the AOV seems quite stable if we – assuming annual consumption power, what could be the annual spending per user that you’re expecting in three to five years? Thank you.
Yanjun Wang
Thank you, Alicia. So regarding CODM in terms of longevity and the monetization potential, again it’s a bit too early to tell at this stage. But we see very strong initial trends, and we’ll continue to work hard with the developers to improve the game and further tailor to the markets so – to continue to improve the game’s content and also the user base over time. And we – of course, we hope to have as long a game life as possible and deep monetization for this game given that it has a relatively strong user follower base for this IP as well as traditionally FPS games in our region.
In terms of Free Fire’s continued strength in LatAm, as we mentioned before, we’re not too worried about people who were wondering about potential cannibalization before we launched CODM. And we always said we believe these games cater to different crowds and also have a complementary effect to each other within our portfolio as we are very careful about selecting games within the portfolio and the pipeline. So this has exactly played out as we believe it would.
And Free Fire’s continued strength, we believe, is attributable to, a, the depth and – of the game itself and the network effect of a game that supports 50 and – users playing, interacting with each other as in session; at the same time building a large community, online, off-line, and building more cultural game, entertainment, other forms of elements into the game over time and we cross-learning from – with cross-learning from other games as well as other forms of entertainment; and of course, our own team’s efforts and – in continuing to build out this game and their creativity and their understanding of the local markets with the large user data we have already for this game. So I think that’s why we remain very optimistic about the longevity and the future monetization of Free Fire over the long run.
In terms of e-commerce revenue breakdown, so the – we see a pretty significant increase in the take rate quarter-on-quarter, and that’s largely attributable to the high margin, transaction-based fees, i.e. commissions and handling fees and advertisement. We believe that the high-margin revenue will continue to grow – or drive the growth of our e-commerce monetization. Of course, the value-added services, including the cross-border logistics revenue, will continue to grow as we continue to grow the platform. And increasingly, however, the revenue growth as well as, in the longer run, the margin expansion, we believe, will be more driven by the high-margin items within the revenue, although it’s a bit too early to detail out the exact breakdown between the different streams of revenue.
And in terms of spending. On the cost of revenue side, of course, right now we see that our first-party product revenue pretty much already offset the cost of revenue on the cost of goods sold. And also, at the same time, the cost of cross-border logistics have been offset by the cross-border logistics revenue as well. So increasingly, we’re hoping to cover the cost of revenue as well revenue as well as R&D, G&A and, of course, the sales and marketing costs over time with economy of scale. So we believe that the long term profitability of the e-commerce model is very clear to us.
Operator
The next question will come from Ranjan Sharma of JPMorgan. Please go ahead.
Ranjan Sharma
Hi, good evening, and thank you for the call and for taking my questions. Two questions from my side, both on gaming. Firstly, on India, it seems that your – the Garena brand is growing there. You have partnered with India Today, which is one of the leading magazines in the market. Would you also be looking to establish a presence in India like what you have done with Latin America and potentially bring more third-party IP into that market as well? The second question is on the margins for the gaming business. It feels that increase – that some of your revenues are coming from non-App Store or Google Play store. So let’s say through vouchers. Can you give us a sense on how big that number is and if that’s growing much faster than your revenues on the different app stores? Thank you.
Yanjun Wang
Sure. Thank you. In terms of India, we are very encouraged to see the results in India that recently especially, we’ve now become the top-grossing game based on App Annie for October in the country, and we have also rolled out lots of esports and community-building events. We currently don’t have a meaningful physical presence locally. And – but like LatAm, we will assess the situation to see if at some point it’s appropriate to build up some local teams to help with local community building and operational capacity. So on that front, we will remain flexible and assess based on business needs.
And of course, we are hopeful of strengthening our global footprint, and India is a huge market with great potential. We are seeing very encouraging user growth there and very encouraging pay user growth there. That is a very important, actually, sign for our potential gaming opportunities there. And we do hope to work with global partners to further strengthen the presence in that market and explore the huge market potential in that market. I think we’ll continue to innovate. As we’ve always mentioned, we believe that with that big of a user base and with creativity, we’re optimistic that eventually, we will be able to make something out of that very big market, and we already start to see the results.
And in terms of the vouchers versus Google Play, App Store, actually most of our gaming revenue still for mobile game has come from Google Play and App Store. There are some alternative channels in the different markets based on local demands and circumstances, but we won’t believe that that’s a drive – makes a significant difference at this stage.
Operator
Our next question today will come from Thomas Chong of Jefferies. Please go ahead.
Thomas Chong
Hi. Thanks management for taking my question. May I ask about how many game developers do we have right now in Shanghai versus last quarter? And what’s our headcount plan for our game development team next year? And my second question is about the revenue mix in Southeast Asia versus LatAm going into 2020. How should we think about also in terms of the paying ratio as well as the ARPPU between the two regions? Thank you.
Yanjun Wang
Thank you. We have more than 300 developers in Shanghai studio. I think last time we disclosed was more than 200 about a couple of quarters ago. And we will continue to build out our development capabilities and augment our development teams in Shanghai and also other places where we find great gaming talent. It will be a very important focus for us in the coming quarter and going forward as we continue to build out our development capabilities and leveraging the existing user information data and strength we already have in our global footprint for game.
But at the same time, we’ll be very prudent in developing our team as we pick people with proven track record, industry veterans and people who are truly passionate about game as their life choice career, and these are the people that we want to bring to our home. And we focus on looking for such talent globally as opposed to just adding, piling up number. So – and overall, our G&A and R&D expenses have been very efficient if you look at our margin as well, and we’ll continue to manage that with a lot of prudence.
In terms of revenue mix, I think we see that LatAm has become increasingly important market for us as we continue to build out our game presence there. And we also have increasing revenue contribution for the newer markets such as India, Russia and MENA, as we mentioned before. And in terms of pay ratio and ARPPU, we do not see material difference between LatAm and Southeast Asia. I think it’s more of – more dependent on the specific game type. But we think the market potential is there.
nd also, sometimes, an example for Indonesia, we might – traditionally, people might think it’s not the most affluent market in the world and, therefore, attribute low pay user ratio or low ARPPU to this market and subsequent low monetization potential. But our game, Free Fire, has definitely proven otherwise. We see very high double-digit paying ratio coming from Indonesia market as well as very good monetization potential.
So we think at the end of the day, it is about knowing the market, getting the right IP to the right crowd and to be able to execute well and accurately so that you can maximize monetization potential of IP in any particular market, which we think is something that we are super focused on doing. And we already reap the fruits of such efforts for several markets already, and we’ll continue to expand our presence in the global emerging markets where we have already accumulated so much know-how and operational expertise.
Operator
Our next question today will come from Varun Ahuja of Credit Suisse. Please go ahead.
Varun Ahuja
Hi. Good evening. And congrats on a good set of numbers. I’ve got quick three questions. So the Q4 guidance increased – sorry, the full year guidance increased. Do you think – how much of it from India? Do you think you’re seeing – after this last few quarters of effort that we’ve been putting, has it really come to a stage where it will start contributing meaningfully? In 4Q, do you think a lot of it is coming from India? That’s number one.
Number two, can you give a little bit more color on Free Fire? How do you see users graduating from free passes to other high-margin virtual items purchased? Because you still – ARPPU is – continues to go down, but existing users, how much of are using upgrade to higher-margin products? That’s number two. And number three, if you can give some color on new game launches. I know you’re very – you don’t disclose much. But any commentary how you’re thinking about this landscape? And any – your self-developed game, any time line that you’re thinking about it? Because it will be almost three years since you launched, by next year, your own game. So anything on that front will be helpful. Thank you.
Yanjun Wang
Thank you. So in terms of the Q4 guidance increase, based on what we are observing, the revenue increase, sure, we see increasing revenues across different markets in Southeast Asia, LatAm as well as the new markets, including India. So it’s not any kind of single-market kind of event. It’s really more across different – across the region for us. And for India, we believe that the market potential is huge. And while the – in terms of the pay ratio, it’s still below the average for us in Southeast Asia and LatAm, but the increase in the paying user is very encouraging, which is fueled by both the increase in the user base as well as increasing the pay user ratio.
So I think we’ll continue to experiment with different things such as the Elite Passes, which has been quite effective in helping converting a free user to a pay user for some of our markets over time and also some of the airdrop packages. For example, we have personalized attractive items grouped into packages with personalized prices targeting different users to convert them into a paying user. So we’re continuing to innovate with different features into – in the game to help deepen monetization with – at the same time, we want to keep building out the user base. And we’re very encouraged by the size we’re seeing in India as well as the different markets we’re operating in.
In terms of the Fire Pass, or Elite Pass, as mentioned, we believe that tool has served its intended purposes of creating a free user to paying users, at the same time increasing user stickiness as well as engagement level based on the data we have. So we will continue to deploy that from time to time. And of course, we will come up with new innovation, for example bundling or themed passes, et cetera, to further explore the potential – its potential.
And in terms of new game launches, as always, for commercial reasons, we don’t discuss game pipeline for confidentiality. But again, you can trust that the number one priority that we are focused on is, in the longer run, continue to bring top IP to our world users. And as a game developer and a publisher, we are well blessed by the – our strength in both development and self-development as well as our partnership with global developers that send us very well to hopefully capture any opportunities and new creativity rising in the world gaming communities and bring that, whether through our own development capabilities or publishing arrangement, to our users.
And again, let’s not forget right of first refusal we also have with Tencent, which is one of the largest gaming company. And we continue to see strong pipeline, and we will, of course, select a potential IP based on the appropriateness to our market and our assessment of the – our own portfolio.
Operator
Our next question today will come from Conrad Werner of Macquarie. Please go ahead.
Conrad Werner
Hi. Thanks a lot for taking my questions. The first one is just maybe since the last quarter’s update, have you been able to or felt it was appropriate to introduce kind of either new or higher commissions in any of the markets for e-commerce? That’s the first question. And then also kind of related to the whole kind of competition question, maybe putting it into – looking at it the other way, I mean, are you almost kind of at the point now where you’re sort of seeing less competition in your chosen categories because you’ve kind of achieved the sort of a multiple in terms of scale versus the nearest competitors? And perhaps maybe in some of the markets, even in Indonesia, we’re seeing people kind of drawing back and not maybe wanting to compete generally but compete more in their chosen categories. If that kind of makes life a little easier for you in your categories? Is that something you might be seeing? Those are my two questions.
Yanjun Wang
Yes. Thank you. In terms of the commissions, and we continue to gradually ramp up commission in some markets over time. Of course, it is something that we may do from time to time based on local market conditions and our assessment of the appropriateness of different levels of commissions and seasonal – also taking into account of the seasonal effects. So more recently, for example, we increased the normal seller commission for Taiwan slightly and also the seller commission for more sellers in Indonesia. So these are some of the measures that we are taking to hope to further differentiate the best-performing merchants and also with more resources to be invested into the ecosystem to serve our merchants better to help them grow even faster. So it’s a kind of win-win situation between the platform and the merchants and eventually benefit the – our buyers.
So in terms of competitive landscape, we always take competition very seriously. But at the end, regardless of what the competitors do, we always have our clear playbook in terms of grow the marketplace model, focusing on core category that we have always focused on from the very beginning and continue to capture the market share and also serve our users better. Eventually, we think that will lead us to very strong market leadership position, and we are well on path to doing that.
And I think you’re right to – in a way that our hands are increasing – or definitely is increasing our own hands. It’s less relevant to us what our competitor is doing day-to-day, but increasing is more about how we can serve our users better.
Operator
Our next question will come from Mark Goodrich of Morgan Stanley. Please go ahead.
Mark Goodrich
Hi, guys. Just a quick question from me on the gaming business. It looks like the average revenue per paying user fell in Q3. Specifically, was that just due to the mix shift to the lower-paying markets? Or was that more due to some of the promotional activity that you had for Free Fire’s anniversary during the quarter? Thanks.
Yanjun Wang
Thanks, Mark. So ARPPU decreased a little bit, mainly due to two factors. One is the increasing revenue mix attributable to Free Fire with the strong growth. And as we mentioned before, ARPPU sometimes is genre specific for Free Fire is type of genre where you are targeting mass audience. With hundreds of millions of active users, you tend to see lower ARPPU compared to some of the mid-core games such as, for example, Speed, where you will see higher ARPPU. So I think it’s generally natural based on the game revenue mix.
And second, we also introduced the, for example, the airdrop packages and other Elite Passes et cetera, to continue to grow our pay user ratio in the region because we believe that with – a larger user base and a larger pay user base will lead to a longevity of the game and the better monetization over the longer run. And this, in fact, is playing out as we believed. And as Forrest mentioned earlier, that we see a new record high in monetization based on our results in October so far. And that, we believe, is a positive effect coming from our expansion of the pay user program to attract more paying users and increasing our game stickiness.
So I think this overall is a strategy that’s well played out for us. But if – also, if you look at revenue per user, which is stable at $1.04, that shows that while we are expanding our pay user base and further strengthening our long-term monetization potential, we’re not sacrificing our immediate monetization opportunity either.
Operator
Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I’d like to turn the conference back over to Yanjun Wang for any closing remarks.
Yanjun Wang
Thank you, operator. Thank you, everyone, for joining today’s call. We look forward to speaking to you all again next quarter.
Operator
Ladies and gentlemen, the conference has now concluded, and we thank you for attending today’s presentation. You may now disconnect your lines.