Singapore’s Sea Group turns profitable for the first time

Singapore based Sea Limited closed more than 20% higher on Tuesday after the tech giant posted its first positive net income since it was founded in 2009.

Total net income for the fourth quarter of 2022 was $422.8 million, up from negative $616.3 million in the same period a year ago.

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That was partly due to a $746 million reduction in sales and marketing expenses, as management promised to cut costs during the previous quarter’s earnings report. Costs incurred to earn revenue also fell by $157 million in the quarter.

Shares of Sea closed 21.78% higher on the New York Stock Exchange Tuesday.

“New cost-cutting measures like freezing salaries and headcount [have] given the Sea Stock some much needed reprieve. Additionally, a positive surprise in fourth quarter 2022 earnings should provide continued upward momentum for Sea – especially with the path to profitability somewhat clear,” said Jonathan Woo, senior research analyst at Phillip Securities.

“However, there are still some macro headwinds and a downward trend in gross merchandise value (GMV) that could delay the path to profitability,” Woo said. GMV refers to the total dollar value of goods and services sold during a given period of time.

Sea’s core businesses are in digital entertainment (Garena), e-commerce (Shopee), as well as digital payments and financial services (SeaMoney).

Chairman and CEO of Sea Limited group, said on Tuesday that 2022 is “another year of evolution for us.”

“Due to macro uncertainty, we pivoted late last year to focus on efficiency and profitability,” Forrest Li said during the earnings call. “As a result, we’re starting to see meaningful improvements in the bottom line.”

“First, we sharpen our focus on the areas with the greatest potential in our business. We exit or reduce operations in non-core markets, accelerate our game pipeline with divestment and project closures, and reduce the priority of non-core initiatives,” said the CEO. .

Revenue from the Garena game unit fell 32.9% to $948.8 million in the quarter, while it was $1.41 billion in the same period last year.

“We expect Garena’s growth to continue, given the lack of a strong game pipeline, and the continued download ban on Free Fire in India,” said Woo Phillip Securities, adding that monthly active users and paying users have stopped. in the last five quarters.

Meanwhile, Shopee’s e-commerce and digital payment business SeaMoney continues to grow strongly in 2022.

Shopee’s adjusted EBITDA turned positive for the first time at $196.1 million in the fourth quarter, with an increase in revenue and operating expenses. A positive EBITDA, or earnings before interest, taxes, depreciation and amortization, indicates a company is operating at a profitable level.

“In our Asian market, we will be able to further strengthen our leading position and profitability. In Brazil, we will focus on driving the business to profitability to take significant opportunities in this new market,” said Li during the earnings call.

Shopee was a success in Brazil after several trials and came out in the European market. Most recently, it announced that it will expand its presence in Malaysia, according to Malaysia’s international trade and industry minister, Tengku Zafrul Aziz.

Woo expects Shopee to continue to be a key revenue driver.

“Our continued dominance in many mature markets should also allow the company to continue to increase its take rate despite slow GMV and total orders,” Woo said.

SeaMoney’s adjusted EBITDA also turned positive for the first time to $75.6 million for the fourth quarter, driven by an increase in revenue and sales and marketing expenses.

SeaMoney is making big strides in improving its product offering, as well as the quality of its loan book, both of which are good signs for a small business, Woo said.

CEO Li said Sea’s mobile wallet has lowered transaction fees for Shopee users, increased Shopee’s large user base, and allowed mobile wallet and credit businesses to grow their user base.

He expects the continued synergy of Sea’s core business to drive efficiency and profitability forward.

“Due to macro uncertainty and a strong new pivot, we are closely monitoring the market environment and we will continue to adjust our pace and adjust our operations,” Li said.