newly, sea ltd (SE -0.07%), a Singapore-based technology company, announced a 5% salary increase for most of its employees from July. The reason behind this decision is the company achieving self-sufficiency with the growth of its cash balance during the quarter.
This news has relieved investors who have had a turbulent journey over the past three years. However, whether this indicates the completion of the company’s transformation efforts and a return to its previous growth trajectory remains uncertain.
Let’s examine Sea Limited’s latest earnings announcement to get some insight into its current position.
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Shopee reported another profitable quarter
Shopee has been a controversial business. On one level, it has been growing at an astounding rate in the past few years, thanks to the increase in e-commerce penetration rate in Southeast Asia and Brazil. However, skeptics worry that Shopee’s growth has resulted from massive subsidies and is unsustainable — especially after it removes subsidies.
But with Shopee cutting its investment to focus on profitability (rather than growth), there are early signs that the e-commerce platform is a viable business. In the first quarter of 2023, revenue grew 36% to $2.1 billion. Furthermore, after reporting a positive unexpected adjusted EBITDA of $196 million in the fourth quarter of 2022, Shopee reported another profitable quarter of $208 million in EBITDA.
The good news is that Shopee has been able to maintain its revenue even with the subsidies cut — sales and marketing expenses are down 52% year-over-year. Strong performance indicates customers are returning despite support cuts. However, it would be too early to declare victory. Ideally, I want to see a few more profitable quarters to remove any doubt about its ability to maintain profitability over the long term.
But Garena failed to stop her decline
While its sister company achieved a commendable result, Garena struggled to contain its business decline.
Once the crown jewel in the sea, the online gaming company saw bookings peak at $1.2 billion per quarter in the second and third quarters of 2021. Since then, that metric has gone nowhere but declined. In the first quarter of 2023, bookings fell 15% quarter-over-quarter to $462 million. In other words, bookings are down more than 60% from the peak.
The decrease in bookings over the prior quarter was due to a decrease in the percentage of paying (as opposed to non-paying) users from 9% to 7.7%, and a decrease in bookings per user from $1.1 to $0.9. The silver lining was that quarterly active users grew 1% qoq, which indicates that Garena’s decline may have bottomed out. If Garena can grow its user base from here, there’s potential for a turnaround in the coming quarters.
Overall, another disappointing quarter for Garena suggests it has more work to do before the business stabilizes.
Fortunately, SeaMoney came to the rescue
Investors will likely be unhappy with Garena’s performance. However, they also found some solace in SeaMoney’s strong performance.
Revenue grew 75% year-over-year to $413 million, and adjusted EBITDA was $99 million, a significant improvement from a loss of $125 million a year earlier. The strong top line performance resulted from growth in the credit business, while EBITDA improved due to higher earnings and improved sales and marketing spend.
In many ways, SeaMoney has benefited from its association with Shopee and Garena, leveraging users from the latter to sell its financial products. Over time, investors can expect SeaMoney to grow by diversifying its offering and increasing penetration of its sister companies’ existing user base.
Despite the strong performance, I’ll keep a close eye on SeaMoney’s non-performing loan — currently at 2% — as that will be the most significant risk for this business. A rapid rise in this percentage would be a red flag.
So, is the transformation complete?
The short answer is not yet. It’s nice to see another profitable quarter for Shopee and Sea Money. However, Garena continued to struggle as revenue declined further in the quarter.
As a shareholder, I’m cautiously optimistic about the turnaround thanks to some good progress from Shopee and Sea Money. But the transformation is still a work in progress, especially for Garena. Investors need to be patient with the company.
