Sea Group’s triple win: how it pulled off a stunning reversal

Tech giant Sea surprised the market by reporting results for the fourth quarter of 2022 that were “very strong,” representing a “solid turnaround.”

All three business units – digital entertainment player Garena, ecommerce platform Shopee, and fintech service Sea Money – achieved positive adjusted EBITDA, the latter two for the first time ever.

But Sea also generated a quarter of positive net income at US$423 million, upending the US$434 million loss on average expected by analysts.

Unlike adjusted EBITDA, net income includes expenses such as depreciation, amortization, interest payments, and share-based compensation. It also represents what shareholders actually earn from their ownership of the company’s shares.

Buyers drove up Sea’s shares by 22% in the trading session that followed the results announcement.

Biggest contributor: sales and marketing

In its previous quarter, Sea reported net income of -US$569 million. This means that between Q3 and Q4, the company’s bottom line improved by nearly a billion dollars – US$992 million, to be precise.

What contributed to this stellar outcome?

Based on the difference between Q3 and Q4 results, we broke down the contributions from each line item in the chart below.

In order, the biggest contributors to Sea’s bottom line expansion were: sales and marketing expenses, revenue, general and administrative (G&A) expenses, research and development (R&D) expenses, and cost of goods and services sold.

Sea’s success in turning a net profit clearly didn’t just come from cutting back on sales and marketing spend, although that was the no. 1 factor.

Crucially, the latest results prove that Sea’s growth was not reliant on ever-increasing sales and marketing expenses, pointing to a sustainable long-run business model.

As management highlighted during the company’s post-results Q&A session, Shopee boosted revenue for the quarter by 32% year on year, despite sales and marketing expenses dropping by over 50%.

While gross merchandise value over the period stagnated, Shopee upped its take rate from 7.1% to 10%, charging sellers for value-added services such as advertising.

Sea’s net income would have been even higher if not for a couple of expense items that were higher in Q4 – increased provision for credit losses of US$175 million and a US$178 million impairment of goodwill, which was attributed to the decision to shut down certain historical investments made by Garena.

G&A expenses has room to fall

Brazil could drive growth at Shopee

Fewer users for Garena