A guide to Sea’s upcoming Q1 2022 earnings

Sea Group’s shareholders can be forgiven for feeling a little nauseated. They have endured choppy waters since the company last reported its numbers, with shares down 44% since its fourth quarter and full-year 2021 results.

The Singapore-based tech giant faces many headwinds. As economies reopen, more people are heading out of their homes, with less time for leisure and commerce online. This has reduced user numbers at Sea’s gaming unit, Garena.

Reopening has also contributed to record inflation. This has forced the hand of the US Federal Reserve, which is now expected to significantly hike interest rates throughout the year. Investors value companies by discounting their future cash flows using a risk-free rate that incorporates the rate set by the Fed. As such, higher interest rates results in lower valuations especially for companies like Sea, which are expected to generate much of their free cash flow in the distant future.

To make things worse, markets are increasingly pricing in the likelihood of a global recession, which will slash consumer demand.

Amid the gloom and doom, Sea will report its results for the first quarter of 2022 later today at 7:30 p.m. (Singapore time), right before US markets open for trading.

What should weary investors be on the lookout for?

QAUs and bookings for gaming

For a snapshot of Garena’s performance, investors should eyeball the company’s most recent quarterly active users (QAUs) and bookings.

“The primary driver for revenue in our digital entertainment business is the size of our active user base and the level of user engagement,” Sea said in a filing with the US Securities and Exchange Commission.

Some of these QAUs – 12% in 2021 – will make in-game purchases. Garena also tracks these transacting users as quarterly paying users (QPUs), and the paying user penetration (QPUs divided by QAUs) is a proxy for the level of user engagement since more engaged users are more likely to make purchases.

The cash spent by QPUs in the period is approximated by the bookings metric. Accounting rules require these purchases to be spread out over a period of time that extends beyond the quarter, making bookings a good leading indicator of revenue in future periods.

QAUs were 654 million in Q4 2021, slumping by 10% from the previous quarter. This was the first time that Sea saw a quarter-on-quarter (q-o-q) decline in QAUs as a public company.

Similarly, bookings shrank by 8% to US$1.1 billion from the previous quarter, only the second q-o-q decline since Sea listed.

Expect a further reduction in bookings this quarter as Sea’s guidance has bookings for 2022 coming in at US$3 billion, for an average of US$750 million per quarter.

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