Sea Limited (NYSE: SE) just announced their earnings – their efforts have paid off, delivering strong 4Q22 results to closeout FY22 with revenue and earnings beating expectations.
In September 2022, the company announced significant cost cutting measures and its CEO and top management would not take any cash compensation until the company reached self-sufficiency.
Just one quarter later, Sea recorded its first quarterly profit in history! This goes to show that when the management is properly incentivised, they are able to achieve plenty.
Sea’s revenue trajectory also recovered, with Dec’22 revenue exceeding Dec’21’s after a dip in the last three quarters. Revenue for 4Q22 was $3.5 billion, up 7 year on year or 9% QoQ.
For what is likely the first time as well, three of the major segments, namely the Digital Entertainment, E-commerce and Digital financial services all recorded profits at an adjusted EBITDA level.
The company also generated overall net income of $0.4 billion for 4Q22 as compared to losses of between $0.6 billion to $0.9 billion in each of the last quarters.
Here we analyse what contributed to Sea’s turnaround and other key points to take note of.
Summary of Sea’s financial results
| Financials in US$’m | Dec’22 | Sept’22 | Jun’22 | Mar’22 | Dec’21 | Variance (%) | Variance (%) |
| EPS in US’$ | 4Q22 | 3Q22 | 2Q22 | 1Q22 | 4Q21 | 4Q22 vs 3Q22 | 4Q22 vs 4Q21 |
| Digital Entertainment revenue | 949 | 893 | 900 | 1,135 | 1,415 | 6% | -33% |
| E-commerce and other services revenue | 2,231 | 1,977 | 1,756 | 1,500 | 1,483 | 13% | 50% |
| Sales of goods | 272 | 286 | 287 | 265 | 324 | -5% | -16% |
| Total revenue | 3,452 | 3,156 | 2,943 | 2,900 | 3,222 | 9% | 7% |
| Net income/(loss) | 423 | (569) | (931) | (580) | (616) | 26% | 31% |
| EPS/(Loss per share) | 0.77 | (1.01) | (1.68) | (1.04) | (1.12) | N.M. | N.M. |
| Adjusted EBITDA for Digital Entertainment | 258 | 290 | 334 | 461 | 603 | -11% | -57% |
| Adjusted EBITDA for E-commerce | 196 | (496) | (648) | (743) | (878) | N.M. | N.M. |
| Adjusted EBITDA for Digital financial services | 76 | (68) | (112) | (125) | (150) | N.M. | N.M. |
| Adjusted EBITDA for Other services | (25) | (77) | (73) | (65) | (57) | -68% | -56% |
1) Strong E-commerce performance
Market place revenue from e-commerce grew 44% YoY from $1.3 billion to $1.8 billion. Shopee turned positive for the first time as its Asia markets turned positive even without the help of its accounting reversals.
One market that still recorded losses was Brazil, as loss per order improved 54% QoQ to $0.47.
Its core marketplace revenue grew 54% YoY while value added services increased 29% YoY.
Although number of orders declined 12% YoY, GMV was down 1% YoY or up 8% YoY on a constant currency basis.
Sea believes that e-commerce penetration remains low compared to offline retail in its key markets and will continue to benefit from demographic trends.
2) Strong cash balance
There was a point in time where the market was worried that Sea would not have enough cash to tide through till it turned cash flow positive. The recent quarter showed a decline of $0.4 billion.
This decline was because Sea repurchased some of its outstanding convertible bonds, otherwise it would have seen its cash position increase by $0.2 billion.
This means that Sea has achieved operational cash self-sufficiency, generating $0.3 billion for the quarter.
3) Sea’s cost control pays off
Sea was able to achieve operational cash self-sufficiency as the company was able to substantially reduce its cost of revenue as well as sales & marketing expenses.
Reduction in cost of revenue was supported by improvement in gross margins in the E-commerce segment while Digital Entertainment’s cost of revenue declined in line with the decrease in its revenue.
Sales & marketing expenses declined 61% YoY as it cut spending in all 3 of its major segment. This was due to targeted spending and efficient brand marketing.
The Digital Entertainment segment reduced its spending by 61% from $110 million to $43 million. The E-commerce reduced its spending by 55% from $841 million to $379 million. Lastly, the Digital Financial services segment tightened by 87% from $229 million to $30 million.
General and administrative expenses was still higher YoY but recorded a substantial decline from $552 million in 3Q22 to $352 million.
4) Strong growth trajectory in Digital Financial services
Revenue for the Digital Financial Services segment nearly doubled, increasing 92% YoY. The segment was also profitable, driven by the top line growth and optimisation of sales & marketing spend.
5) Digital Entertainment is still on the decline
Bookings for the Digital Entertainment segment declined 18% QoQ while active users declined 15% YoY.
Paying user ratio also declined by 0.1% QoQ to 9%. This means that quarterly paying users declined from 51.5 million to 43.6 million.
The decline was much steeper than some of the previous quarter, indicating potential worsening.
In view of this trend, Sea has streamlined its game development pipeline with a focus on content quality and prioritising user engagement to retain user.
Closing statements
Sea’s pivot to focus on sustainable growth, efficiency and profitability has shown in its bottom line with positive net income for the quarter.
Some of us may get the feeling that Sea has exhaust all avenues in cost cutting and are not sure if the company can grow with the current cost baseline.
Time will tell if Sea is on the right track and able to continue on its path of sustainable growth, generating profits for its shareholders.
CEO Forrest Li has said that he will remain cautious of the macro uncertainty and will continue to adjust the company’s pace and fine-tune its operations accordingly. He opines that there may be near-term fluctuations in performance but remain highly confident in the long-term growth potential of the markets in which the company operates in.
After the results were released during premarket hours, the stock went up 12%.
Looking at Sea’s share price movement over the last 5 years, it is clear that the stock still has ground to recover.
