SEA: Jumping up and down, might get oneself injured in the end
On the evening of November 14th, before the US stock market opened, SEA Winter Sea Group released its third-quarter earnings report for 2023. Although the market had anticipated the company's trade-off between profit and growth, the actual performance fell far short of expectations. The key points are as follows:
Shopee's e-commerce sector returns to growth, but with limited value: Due to a significant slowdown in business growth in the previous three quarters, Shopee announced in the second quarter that it would increase investment to stimulate growth. In this quarter, the announced GMV growth has indeed reversed to a YoY growth of 5%, reaching $20 billion, and the number of orders has also increased by 13%, reaching a historical high. It can be seen that the company has indeed achieved its goal of accelerating growth.
However, compared to market expectations, the company's actual delivered GMV only increased by 2%, without any surprising results. In terms of price and volume breakdown, the average order value in this quarter has decreased significantly by 7% YoY, indicating that the increase in order volume is mainly achieved through price reductions, rather than healthy natural growth, resulting in limited value.
On the other hand, in order to increase profitability, the company had previously significantly increased the monetization rate. However, in the past two quarters, in order to promote growth, the monetization rate has been continuously reduced (decreased by 0.4% and 0.6% QoQ). As a result, the growth rate of e-commerce revenue has continued to slow down to 16%, ultimately achieving a revenue slightly higher than expected by 2%, but still lacking highlights.
However, the cost is an unbearable huge loss: Behind the GMV and revenue data that did not meet expectations, the cost is a collapse in profits. Shopee's operating loss in this quarter reached a staggering $430 million, approaching the loss of $590 million in the same period last year, almost nullifying the achievements of turning losses around in the past few quarters. Although it is reasonable to increase investment and losses to revive Shopee's business volume, such a huge loss that exceeds expectations is obviously unacceptable to the market.
Garena appears to be shining on the surface, but it is actually mediocre: As for the second important gaming sector, although the financial data of revenue and profit seem good, exceeding market expectations by more than 10%, the key operational data is not satisfactory.
Firstly, in terms of user data, although the high-frequency user data of Free Fire has stabilized, the market expected an improvement in the number of users MoM, but in reality, the number of active users and paying users decreased by 1 million and 2 million respectively.
Although the average payment amount per user has increased due to further "purification" of users, the revenue for this quarter is only 448 million, with a MoM growth of only 0.05 billion, indicating little improvement. Although the revenue exceeded expectations, it was mainly due to a significant decrease in deferred revenue balance, which disguises the current performance with the "financial technique" of overdrawing surplus. Similarly, although the operating profit of the Garena segment is also higher than expected, most of the excess profit is probably derived from accelerated recognition of deferred revenue.
SeaMoney maintains steady growth and is the most worry-free: Among the three main business segments, the financial segment, which started the latest, has the most worry-free performance. Revenue continues to maintain a high YoY growth rate of 37%. In terms of key operating data, the outstanding loan balance at the end of the quarter was $2.4 billion, a significant increase from the previous quarter's $2 billion, and the bad debt ratio for loans overdue for more than 90 days has decreased from 2% to 1.6%, showing a healthy growth trend. The segment's profit has also increased from 28% to 34%, achieving an operating profit of $150 million, which is about 20% higher than market expectations. Although this segment has performed well, it is the least important among the three main businesses and cannot completely cover up the shortcomings of the e-commerce and gaming segments.
Declining gross profit, explosive increase in marketing expenses, and another loss: Corresponding to the company's investment in the e-commerce segment, the gross profit margin of the e-commerce segment has declined from 46% to 42% this quarter, reflecting the increase in the company's subsidy intensity. In addition, the marketing expense ratio of the e-commerce segment has jumped from 16% to 39% MoM, returning to the level of the second quarter of last year. It is also fluctuating, with too drastic changes.
Adding up the three business segments, although the e-commerce segment has a low gold content, it has improved to some extent, and the gaming business is also "overweight". Therefore, the company's overall revenue is slightly higher than expected by 4%. However, due to the huge losses in the e-commerce segment, although the gaming and financial businesses are better than expected, the company's overall operating loss is $130 million, compared to the expected profit of $48 million, which can be described as a thousand miles away.
Dolphin Research's viewpoint:
Overall, we can clearly see that the biggest flaw in SEA's financial report this quarter is that the degree of improvement in business growth under the narrative of reinvesting to stimulate e-commerce growth is not very good, but the erosion of profits is far greater than expected. This actually means that the profits the company sacrificed for growth in the previous few quarters are not sustainable. Once Shopee loses its subsidies and price advantages, it seems unable to maintain its competitive advantage, which is a major blow to the long-term profit expectations of this business.
In addition, the second most important gaming business continues to lose users, and there is no sign of improvement in revenue, which is the second headache for the market and management.
But more importantly, in addition to the flaws in this quarter's business, the management's previous significant increase in monetization rate and reduction of subsidies in order to make profits will inevitably lead to a decline in competitiveness and a slowdown in growth. And this time, in order to achieve growth, the company increased investment without considering the consequences, resulting in the segment going from profitability to huge losses. This kind of fluctuating and intense changes in business direction to achieve short-term goals to some extent shows that the management is somewhat shortsighted and does not consider the consequences and costs. Causing the company's performance to collapse has become almost normal.
In reality, it is reasonable business behavior to invest and expand losses in order to stimulate growth. However, such unreliable execution makes it difficult for investors to feel at ease. Looking ahead to future development, although TikTok is banned in Southeast Asia, it will create a window of opportunity for Sea to seize market share. It is a reasonable strategy to invest heavily and capture the market. However, the return of TikTok is only a matter of time, and competition will only be temporarily relieved. With Lazada, Temu, and TikTok all joining Southeast Asia, the competition in this market will only become stronger. Therefore, the management must find a stable and sustainable operational strategy.
The following is a detailed interpretation of the financial report:
1. Shopee: Focusing on growth at the expense of profits
During the last performance meeting, Sea explicitly mentioned that the biggest KPI for the third quarter was to accelerate the growth of Shopee's business. It seems that this goal has indeed been achieved, as the company has once again disclosed the GMV and order volume data that had been "paused for two quarters".
Specifically, in this quarter, Shopee achieved a GMV scale of $2.01 billion, finally reversing the negative growth trend of the previous three quarters and achieving a YoY growth rate of 5%.
In terms of order volume, the YoY decline of 11-15% in the first three quarters was indeed a "family secret" that should not be disclosed. Fortunately, the order volume growth rate has significantly reversed to 13% this quarter, reaching a historical high in absolute terms.
Based on the above, Shopee's successful reversal of order value and order volume growth rate this quarter is commendable. However, the GMV is only about 1% ahead of market expectations, and the improvement is not surprising.
The reason behind this is that the average order value has dropped significantly by 7% YoY this quarter, indicating that the increase in order volume is mainly achieved through price reductions rather than healthy natural growth (driven by increased demand or market share), further reducing the significance of GMV growth.
Therefore, Shopee achieved a revenue of $2.23 billion this quarter, also reaching a historical high. However, the MoM increase was only slightly over $100 million, only 2% ahead of market expectations, and did not bring any additional surprises beyond the expected targets. In addition, it can also be seen that Shopee, in order to increase its growth rate, has once again lowered its monetization rate in the past two quarters (a decrease of 0.4% and 0.6% MoM respectively), disregarding the cost in order to achieve its business goals. Dolphin Research believes that this "single-minded" adjustment and readjustment of the monetization rate to a certain extent reflects the management's short-sightedness in pursuing current KPIs at the expense of long-term consequences.
Secondly, the Garena gaming segment, which is the second most important, appears to have better-than-expected revenue and operating profit at first glance, but the key operational data is actually mediocre. Firstly, although the monthly active users of Free Fire have stabilized and rebounded, the market initially expected an increase in the number of users, but the quarterly active user base continued to decrease by one million, and the number of paying users decreased by two million. The user base continues to shrink. Although the average payment amount per user has increased due to further "purification" of the user base, the revenue for this quarter is 448 million, which is only a slight improvement of 0.05 million MoM, and there is no significant sign of improvement.
Despite the significant increase in revenue this quarter, reaching 590 million, which is about 6% higher than expected, it is mainly due to the significant decrease in deferred revenue balance, indicating obvious signs of manipulating current performance by using up future resources.
The performance of the SeaMoney digital financial business, the third pillar, has no obvious flaws. It continues to maintain a high growth momentum of 37% YoY, achieving a revenue of about 446 million this quarter. In terms of operational data, the outstanding loan balance at the end of this quarter was 2.4 billion US dollars, a significant increase from the 2 billion in the previous quarter, and the bad debt ratio of overdue loans over 90 days also decreased from 2% to 1.6%, reflecting a healthy and stable growth trend.
E-commerce sector suffers heavy losses, previous turnaround efforts go in vain
To sum up the previous discussion, although the e-commerce sector has indeed reversed its growth trend, the extent of improvement is within expectations. Moreover, the strategy of trading price for volume has not yielded satisfactory results, and the unexpected increase in revenue from the gaming sector is mainly due to changes in deferred income, which is also not ideal. In contrast, the company's losses this quarter have exceeded expectations.
Specifically, the e-commerce sector, which is the most crucial, suffered an operating loss of $430 million this quarter, which is on the same scale as the $590 million loss in the third quarter of last year, almost nullifying the achievements of the past few quarters in turning losses around. Although it is understandable that the company has invested and expanded losses in order to revive the Shopee business, the extent of Shopee's losses is far worse than market expectations (approximately $100 million in operating profit), which is truly unforgivable given the lackluster growth in GMV and revenue acceleration.
The operating profit of the gaming sector, which is $350 million, seems to be significantly higher than the expected $290 million, but it is also mainly achieved through adjustments to deferred income, which is not a significant positive factor.
Only the DFS financial sector continues to perform well, with operating profit increasing from 28% to 34%, achieving an operating profit of $150 million, which is approximately 20% higher than market expectations. However, unfortunately, the DFS sector ranks last in terms of importance, and with the drag from the poor e-commerce sector and the bloated gaming sector, the company as a whole suffered an operating loss of $130 million this quarter, while the expected profit was $48 million, a significant deviation.
IV. Overall performance
Taking into account the performance of the three core businesses mentioned above, Sea achieved a total revenue of $3.31 billion this quarter, which is 4% higher than market expectations. However, as analyzed earlier, the core e-commerce and gaming sectors have not performed well.
In terms of gross profit, due to the significant decline in average order value and platform monetization rate in the e-commerce sector, the gross profit margin of the e-commerce sector has dropped from 46% to 42%. Although the gross profit margin of the gaming sector remained stable, the overall gross profit margin of the company has also declined by approximately 3 percentage points due to the drag from the e-commerce and gaming sectors. Therefore, despite the record high revenue, the gross profit has not increased but decreased compared to the previous period. On the expense side, it corresponds to the company's increased investment in the e-commerce business. The marketing expense ratio of the e-commerce sector has increased significantly from 16% to 39%, returning to the level of the second quarter of last year. This indicates a significant increase in investment, but the magnitude of the changes is too drastic.
As for administrative expenses and research and development expenses, they continue to show a shrinking trend, indicating that the company has concentrated all its resources on subsidies and marketing. This also implies that the company has been relatively restrained in its investment in game development.
Dolphin Research's previous SEA research:
August 15, 2023, conference call "SEA: Focus on User Scale and Engagement, Seize the Live Streaming Opportunity"
August 15, 2023, earnings report review "Little Tencent SEA: After Desperate Survival, Counterattack is Surging"
May 17, 2023, conference call "SEA: Not Focusing on Short-term Profits, but Long-term Profits"
May 17, 2023, earnings report review "Little Tencent SEA: Will It Be Dragged into the Abyss by Another Terrible Game?"
March 8, 2023, conference call "SEA: No Intention to Tinker Again, Profit Comes First in 23 Years"
March 8, 2023, earnings report review "Surviving at All Costs! Little Tencent SEA's Desperate Survival" Telephone Conference on November 16, 2022: "SEA: Tightening the Belt and Surviving is the Top Priority (3Q22 Summary)".
Earnings Report Review on November 16, 2022: "Game in a Terrible State, Shopee's Last Stand, Can SEA Make a Comeback?".
Telephone Conference on August 17, 2022: "SEA: Efficiency Comes First, Regardless of Scale (Conference Call Summary)".
Earnings Report Review on August 17, 2022: "No More Growth, Yet Still Suffering Huge Losses, How Can SEA Save Its Valuation?".
Telephone Conference on May 17, 2022: "Diversifying the Gaming Business, Making E-commerce Profitable (SEA Conference Call Summary)".
Earnings Report Review on May 17, 2022: "SEA: Gaming Business Aging, E-commerce Holding the Fort Alone".
Risk Disclosure and Statement in this Article: Dolphin Research Disclaimer and General Disclosures
