There was perhaps no bigger poster child for the pandemic boom-and-bust cycle than Sea Limited (SE 3.11%). During that time, the Southeast Asian "super-app" rode massive growth across its stay-at-home portfolio of e-commerce, gaming, and fintech businesses. Yet as the pandemic faded and inflation rose, the profitable gaming division, led by global hit Free Fire, declined, sending Sea deeper into companywide operating losses.
As a result, Sea's stock plunged nearly 90% at one point from its 2021 peak to last October's lows.
Management responded by aggressively cutting costs and scaling back Sea's geographical ambitions to focus on its core markets. And after a year of painful cutting, Sea posted a surprise first-time profit in the fourth quarter last year.
Now, just before first-quarter earnings, management gave investors a new sign that Sea's turnaround may, in fact, be solidifying.
Raising pay by 5%
In a memo to employees seen by Bloomberg on May 8, CEO Forrest Li announced an across-the-board 5% pay raise for Sea employees who joined the company before March 31, beginning in July.
According to Bloomberg, Li feels comfortable that the company has achieved "self-sufficiency," a goal Sea's management set for itself a little more than a year ago and achieved earlier than anticipated. Li defines self-sufficiency as the ability to grow Sea's cash balance every quarter rather than having it shrink.
Surprisingly, Sea achieved positive net income in the fourth quarter -- a stark turnaround from the early part of 2022 and the first such quarter in company history.
SE Operating Income (Quarterly) data by YCharts.
However, that was in the stronger holiday quarter, which is typically the biggest for e-commerce, and e-commerce is Sea's largest business by revenue. The quarter that follows typically sees a sequential drop-off. So it was an especially good sign that Li is confident enough to raise pay after seeing the company's first-quarter results, which will be reported tomorrow, May 16.
Image source: Getty Images.
How Sea did it
Sea has burned through lots of cash since its founding in 2009 and its 2017 IPO. But it didn't waste those dollars. During that time, the company developed a massive video game hit in Free Fire. And its Shopee e-commerce platform surpassed incumbents to become the leading e-commerce platform in Southeast Asia, cracking the code on how to deliver goods efficiently in complicated emerging markets.
Operating with a moat that had just been fashioned over a mere decade, Sea was able to both raise the fees it charged its sellers and cut back severely on costs in 2022.
The aggressive moves worked. Sea's revenue grew just 7% in the fourth quarter -- a much lower figure than those of the go-go days during the pandemic. However, thanks to its vigorous cost-cutting efforts, its cost of revenues actually declined 8.2% at the same time. It's really hard to lower cost of goods that much while growing revenues that much.
Even more strikingly, Sea was able to slash sales and marketing expenses by a stunning 61.1%! The fact that the business was able to grow at all with that kind of marketing pullback also speaks volumes about its leadership position in Southeast Asia.
A subsequent Bloomberg article profiled Sea's cost-cutting efforts over the past year. These include top executives foregoing salaries altogether, cutting roughly 10% of its workforce, making executives fly economy class instead of business class, capping hotel night fees, replacing luxury tea with Lipton at the office, and even switching from double-ply to single-ply toilet paper.
Encouragingly for Sea's investors, this ruthless focus on costs and efficiency doesn't appear to be a one-off. Li wrote in an employee memo last year:
We're going to continually push down the costs... It's not just for saving but for running the business more efficiently. This is going to be the long-term mode for us.
What investors could expect next
Now that Sea has proven it can be profitable at its current size, management might pursue more growth, albeit more efficiently. After all, the 5% raise for employees is emblematic of management's comfort that the company won't run out of money.
While top-line growth might not go back to the triple-digit figures seen during the pandemic, investors should expect more of a balance, with positive profits but perhaps a pivot to investing for growth greater than last quarter's 7%.
If growth reaccelerates and Sea can maintain profitability, the stock could very well experience another growth spurt. Investors will find out more when the company reports first-quarter earnings tomorrow.
