Recently, Sea Limited (SE 0.77%), a technology conglomerate based in Singapore, announced a 5% pay raise for most of its employees starting in July. The reason behind this decision is the company's achievement of self-sufficiency, with its cash balance growing during the quarter.
This news has relieved investors who have experienced a turbulent journey over the past three years. However, whether this indicates the completion of the company's turnaround efforts and a return to its previous growth trajectory remains uncertain.
Let's examine Sea Limited's latest earnings announcement to gain insights into its current situation.
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Shopee reported another profitable quarter
Shopee has been a controversial business. On one level, it has been growing at a breathtaking rate in the last few years, thanks to the increase in e-commerce penetration rate in Southeast Asia and Brazil. Yet, the skeptics are concerned that Shopee's growth resulted from massive subsidies and is unsustainable -- especially after it removes the subsidies.
But as Shopee cuts back its investments to focus on profitability (instead of 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. Moreover, after reporting unexpected positive adjusted earnings before interest, taxes, depreciation, and amortization (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 managed to sustain its revenue even as it cut back on subsidies -- sales and marketing expenses fell 52% year over year. The solid performance indicates that customers are returning despite the subsidies cut. Still, 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 sustain profitability over the long run.
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But Garena failed to halt its decline
While its sister company delivered a commendable result, Garena struggled to contain the decline of its business.
Once a crown jewel in Sea, the online gaming company saw its bookings peak at $1.2 billion per quarter in the second and third quarters of 2021. Since then, that metric has gone nowhere but down. In the first quarter of 2023, bookings fell 15% quarter over quarter to $462 million. In other words, bookings have fallen by more than 60% from the peak.
The fall in bookings over the previous quarter was due to a decline in the paying (versus non-paying) user ratio from 9% to 7.7%, and a decrease in bookings per user, down from $1.1 to $0.9. The silver lining was that quarterly active users grew 1% quarter over quarter, indicating that Garena's decline might have reached the bottom. If Garena can grow its user base from here, there is a possibility of 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 would likely have been dissatisfied with Garena's performance. Still, they would also have found some solace in SeaMoney's solid performance.
Revenue grew 75% year over year to $413 million, and adjusted EBITDA reached $99 million, a significant improvement from a loss of $125 million in the previous year. The strong top-line performance resulted from the growth of the credit business, while EBITDA improved due to top-line gains and the optimization of sales and marketing spend.
In many ways, SeaMoney has benefited from its affiliation with Shopee and Garena, leveraging the users from the latter to cross-sell its financial products. Over time, investors can expect SeaMoney to grow by diversifying its offerings and further penetrating its sister companies' existing user base.
Despite the strong performance, I will keep a close eye on SeaMoney's nonperforming loan -- currently at 2% -- as that will be the most significant risk for this business. A rapid rise in this ratio will be a red flag.
So, is the turnaround completed?
The short answer is not yet. It's good to see another profitable quarter for Shopee and Sea Money. Yet, Garena continued to struggle with revenue declining further in the quarter.
As a shareholder, I'm cautiously optimistic about a turnaround thanks to some good progress from Shopee and Sea Money. But the turnaround remains a work in progress, especially for Garena. Investors need to remain patient with the company.
