Why Sea’s shares jumped 36% after its Q3 results

Sea had one main job as it announced its results for the third quarter of 2022 on Tuesday – reassure jittery investors, who had sent its shares down by over 80% year-to-date.

The company pulled this off successfully – after its Q3 results were released, its shares surged by 36% for the day.

How did CEO and founder Forrest Li and his beleaguered team do it?

Photo credit: Tech in Asia

Walking the growth/costs tightrope

Most importantly, Sea had to show that it was getting a grip on costs and was on a credible path to profitability that didn’t sacrifice too much growth. The company largely managed to do this despite declining revenue at its gaming arm Garena.

Group revenue for the quarter stood at US$3.2 billion, up 17% from the same period last year. This was driven by its ecommerce unit Shopee, which registered revenue of US$1.9 billion, growing 32% year on year; and its digital financial services arm SeaMoney, where revenue of US$327 million was up 147% from a year ago.

The group’s total adjusted EBITDA loss of US$358 million was double the amount from Q3 2021. However, it was a 29% improvement from Q2 2022, the result of various cost-cutting measures starting to bear fruit.

Li told analysts and investors that Sea had “completely overhauled” its budgeting practice. He highlighted measures the company had taken such as reducing headcount, tightening travel and entertainment policies, and decreasing spending on office space, logistics facilities, and computer hardware.

The CEO also said that Sea has stopped all new financial equity investments, which was particularly pertinent given the recent spectacular collapse of crypto exchange FTX. Sea Capital, the group’s VC arm, invested in FTX in October 2021, although any losses are unlikely to be material to Sea.

Cutbacks on sales and marketing

The improving adjusted EBITDA figure can be attributed to substantial cuts in sales and marketing expenses during the quarter.

Compared to the previous quarter, total adjusted EBITDA loss narrowed by US$149 million from US$506 million.

On an absolute basis, the biggest cuts to sales and marketing expenses were borne by Shopee, which saw a US$98 million reduction on that line item between Q2 and Q3 of this year. However, Garena saw the largest percentage decline, with sales and marketing expenses down by nearly a third quarter on quarter.

A major part of this decline came from reducing logistics subsidies for shipping as well as more targeted sales and marketing spending for Sea’s mobile wallet business.

Shopee on track to break even by 2023

Garena in decline

Digital financial services scaling up nicely