Sea posts another profitable quarter, but weighed down by gaming woes

GAMING and e-commerce giant Sea posted its second profitable quarter in a row, with US$87.3 million in net profit for Q1 ended March 31, a reversal of the US$580.1 million net loss in the year-ago period.

But jittery investors sent Sea shares down 13.1 per cent to US$76.58 as of 9.43 pm (Singapore time) on Tuesday (May 16). This came amid a weaker showing in gaming division Garena, which dragged on the New York-listed company’s topline.

Sea’s revenue for the quarter was up 4.9 per cent to US$3 billion. This growth was thanks to its e-commerce arm Shopee and other services, for which revenue surged 50.7 per cent to US$2.3 billion.

However, this was dampened by the digital entertainment segment, where revenue was down 52.5 per cent to US$539.7 million. Sea also recorded a goodwill impairment of US$117.9 million, linked to a prior acquisition.

On an adjusted Ebitda (earnings before interest, taxes, depreciation and amortisation) basis, Sea posted a US$507.2 million profit, reversing the year-ago US$509.9 million adjusted Ebitda loss.

Sea’s latest performance comes after the company posted a surprise US$422.8 million net profit in Q4 last year – its first-ever quarterly profit following aggressive cost cuts and layoffs.

Shop-pi-ping in Brazil

Sea’s online shopping business Shopee continued to show improvements, with chief executive Forrest Li emphasising prospects in the up-and-coming Brazil market in Tuesday’s earnings call.

Sea’s e-commerce topline for Q1 included US$1.2 billion of “core marketplace” revenue, comprising transaction-based fees and advertising revenues, up 54.3 per cent from the previous year. Value-added services revenue, mainly from logistics, was up 32.6 per cent to US$700 million.

Overall the e-commerce segment’s adjusted Ebitda came in at US$207.7 million, compared with the US$742.8 million adjusted Ebitda loss in Q1 2022. While Shopee’s Asian markets were in the black, its other markets continue to be loss-making, with an adjusted Ebitda loss of US$68.1 million.

Sea nevertheless highlighted that the Brazil market shows improving unit economics, with the contribution margin loss per order improving 77.4 per cent to reach US$0.34. The company sees “significant opportunities” in the market, said chief corporate officer Wang Yanjun in the earnings call.

“We’re only in Brazil for four years… However, we have achieved very significant scale, being among the leading e-commerce players, especially on the (local) e-commerce marketplace targeting mass market segments in that country,” she said.

Logistics is another key focus, as the company improves the capacity and integration of its in-house logistics arm while also working with third-party players, Li said.

“In our largest market, Indonesia, which consists of more than 10,000 islands, 95 per cent of our buyer base is now covered by our delivery services. In Brazil, we already have eight distribution and sorting centres, with the most recent expansion in North-east Brazil,” he said.

Li added that Sea has opened 50 new logistics hubs in recent months to further strengthen its capabilities.

Gaming woes

Unlike the e-commerce segment, Sea’s digital entertainment unit saw a slowdown, with adjusted Ebitda down 46.7 per cent to US$230.1 million.

The decline in performance came on the back of “ongoing moderation in user engagement and monetisation”, Sea said in its earnings report. Average bookings per user were down at US$0.90, from US$1.10 in the previous quarter.

The company however added that quarterly active users had improved to 491.6 million, as compared with 485.5 million for the previous quarter. Monthly active users for its once-popular game Free Fire hit “a new peak” in the last eight months.

Wang said that the company’s efforts are directed at “making Free Fire into a long-term franchise” upon which Sea can build new content and attract more users. “We think there’s a very good chance this can be made into a strong evergreen game,” she said.

In the meantime, Garena is also set to publish two new third-party games, Undawn and Black Clover.

Early days for digibank

Over in Sea’s youngest vertical, digital financial services or SeaMoney, revenue was up 75 per cent to US$412.8 million. Adjusted Ebitda also came in positive at US$98.9 million, reversing the year-ago US$124.9 million loss.

As of end-March, the segment’s total loans receivable was US$2 billion, net of allowance for credit losses of US$281.1 million. Non-performing loans past due by more than 90 days comprised about 2 per cent of total gross loans receivable, which Sea called “stable”.

Asked about Sea’s digital bank in Singapore, MariBank, Wang said that it is still at a “very early stage”, with no material topline or bottomline contributions.

Overall, Li emphasised that Sea will continue to navigate macro uncertainties with discipline. The company has continued slashing costs, with sales and marketing expenses down by 60.2 per cent to US$400.1 million in Q1.

Li noted that Sea has had to “do more with fewer resources”, but also managed to hit positive cash flow. It generated US$605.5 million in net cash from operations in Q1, and maintained steady cash holdings of US$6.1 billion as of end-March.