Singapore's Sea Group Turns Profitable for the First Time

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  • Tech giant Sea Limited posted a positive net income for the first time in the fourth quarter of 2022.
  • This comes after Sea's management pledged cost-cutting measures amid economic uncertainties.
  • "The positive surprise in fourth-quarter 2022 earnings should provide continued upward momentum for Sea – especially with the path to profitability slightly clearer," said Jonathan Woo, senior research analyst at Phillip Securities.
  • The company expects its e-commerce and financial services units to drive revenue moving forward.

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

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

That's partly due to a $746 million reduction in sales and marketing expenses, as management pledged to reduce costs during the previous quarter's earnings report. Cost incurred to obtain revenue also decreased by $157 million in the quarter.

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

"Recent cost-cutting measures like freezing salaries and employee headcount [have] given Sea's stock some much needed reprieve. Additionally, the positive surprise in fourth-quarter 2022 earnings should provide continued upward momentum for Sea – especially with the path to profitability slightly clearer," said Jonathan Woo, senior research analyst at Phillip Securities.

"However, there are still some macro headwinds and declining gross merchandize value (GMV) trends that could further delay its path to profitability," said Woo. GMV refers to the total dollar value of goods and services sold over a certain period of time.

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

The chairman and group CEO of Sea Limited, said on Tuesday that 2022 was "another year of evolution for us."

"Given the macro uncertainties, we pivoted decisively late last year to focus on efficiency and profitability," Forrest Li said during the earnings call. "As a result, we began to see meaningful improvements in the bottom line."

"First, we sharpened our focus on the areas with the greatest potential across our businesses. We exited or downsized operations in non-core markets, streamlined our game pipeline with divestments and project closures, and deprioritized non-core initiatives," the CEO said.

Garena: Digital entertainment

Revenue from its gaming unit Garena slipped 32.9% to $948.8 million in the quarter, when it was $1.41 billion in the same period a year ago.

"We do expect Garena's growth to continue declining moving forward, given the lack of a strong games pipeline, and the continued download ban on Free Fire in India," said Phillip Securities' Woo, adding that quarterly active users and paying users have been dropping in the last five quarters.

Shopee and SeaMoney

Meanwhile, e-commerce business Shopee and digital payments arm SeaMoney continued to see strong growth in 2022.

Shopee's adjusted EBITDA turned positive for the first time at $196.1 million in the fourth quarter, with improvements in revenue and operating costs. Positive EBITDA, or earnings before interest, taxes, depreciation and amortization, refers to the company operating at a profitable level.

"In our Asia markets, we will work to further strengthen our leading position and profitability. In Brazil, we will focus on driving the business towards profitability to capture the significant opportunity in this new market," Li said during the earnings call.

Shopee found success in Brazil after several trials and exits in European markets. Most recently, it announced that it will be expanding its presence in Malaysia, according to Malaysia's minister of international trade and industry, Tengku Zafrul Aziz.

Woo expects Shopee to continue to be the main revenue driver moving forward.

"Its continued dominance in many of its matured markets should also allow the company to continue increasing its take rate even as GMV and total orders slow," said Woo.

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

SeaMoney is making great strides in improving its product offerings, as well as the quality of its loan book, which are both good signs for a business still in its infancy, said Woo.

CEO Li said that Sea's mobile wallet has lowered transaction costs for Shopee users, adding that Shopee's large user base, in turn, has allowed the mobile wallet and lending business to grow their user bases.

He expects the continued synergies of Sea's core businesses to drive efficiency and profitability moving forward.

"Given the macro uncertainty and our recent strong pivot, we are closely monitoring the market environment and we will continue to adjust our pace and fine-tune our operations accordingly," said Li.

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