Sea earnings: Strong growth from Shopee and Garena, but cost of revenue balloons

Sea, a major internet company in Southeast Asia, has again grown its revenue and widened its net loss as it continues to double down on Shopee, its ecommerce marketplace.

According to Sea’s latest earnings report, its adjusted revenue grew to US$1.05 billion in 2018, almost doubling from the previous year. While the company’s digital entertainment business improved, its ecommerce segment contributed most of the increase, accounting for 39 percent of the total adjusted revenue (or US$387 million), up from 10.4 percent the year before.

However, looking at the bottom line, adjusted net loss has continued to widen – doubling to US$944 million for 2018.

Forrest Li, Sea founder and group CEO / Photo credit: Sea

Again, ecommerce is contributing to Sea’s widening net loss, with adjusted negative EBITDA for Shopee soaring by 93.6 percent to US$860 million in 2018.

The good news is that Shopee’s sales and marketing cost as a percentage of gross merchandise volume (GMV) has dropped on a quarterly basis once again, hitting 5.4 percent in Q4. (It was 5.7 percent in the previous quarter.)

Shipping subsidies have also declined in the same period, and are expected to go down further in 2019, noted Sea CEO Forrest Li.

Meanwhile, Shopee’s GMV in Q4 was US$3.4 billion, a 27.3 percent increase from the preceding quarter.

The biggest reason for Shopee’s high negative EBITDA growth was its cost of revenue, which hit US$545 million in 2018 – up five times from the previous year.

The rise in the cost of revenue was caused by increased expenses related to Shopee’s expansion, higher bank transaction fees from ecommerce transactions, increased costs from ancillary services for ecommerce users, and higher staff compensation and benefit costs.

Cost of revenue also includes mounting expenses from products that Shopee is selling directly to users. (Vendors on Shopee are usually third-party merchants.)

See: Shopee claims to be Southeast Asia’s ecommerce leader

Looking ahead, Shopee is projecting an adjusted revenue of between US$630 million to US$660 million for 2019, which would represent a growth of 117 percent to 127 percent. It expects the increase to come from both GMV growth and an improvement in take rate – or the percentage of GMV it keeps as revenue.

Beginning this year, Shopee expects to reduce its sales and marketing costs in absolute terms as it claims to benefit from the organic traction that it’s seeing as “the leading” ecommerce marketplace in the region.

Garena’s mobile business booming

Improving the bottom line this year?