Sea Limited (NYSE:SE) Q4 2022 Earnings Call Transcript

Sea Limited (NYSE:SE) Q4 2022 Earnings Call Transcript March 7, 2023

Operator: Good morning and good evening. Welcome to the Sea Limited Fourth Quarter and Full Year 2022 Results Conference Call. All participants will be in listen-only mode . Please note this event is being recorded. I would now like to turn the conference over to Ms. Min Ju Song. Please go ahead.

Min Ju Song: Hello, everyone, and welcome to Sea’s 2022 fourth quarter and full year earnings conference call. I am Min Ju Song from Sea’s Group Chief Corporate Officer’s office. Before we continue, I would like to remind you that we may make forward-looking statements, which are inherently subject to risks and uncertainties and may not be realized in the future for various reasons as stated in our press release. Also, this call includes a discussion of certain non-GAAP financial measures, such as adjusted EBITDA. We believe these measures can enhance our investors’ understanding of the actual cash flows of our major businesses when used as a complement to our GAAP disclosures. For a discussion of the use of non-GAAP financial measures and reconciliation with the closest GAAP measures, please refer to the section on non-GAAP financial measures in our press release.

I have with me Sea’s Chairman and Group Chief Executive Officer, Forrest Li; Group Chief Financial Officer, Tony Hou; and Group Chief Corporate Officer, Yanjun Wang. Our management will share strategy and business updates, operating highlights and financial performance for the fourth quarter and full year of 2022. This will be followed by a Q&A session in which we welcome any questions you have. With that, let me turn the call over to Forrest.

Forrest Li: Hello, everyone, and thank you for joining today’s call. 2022 was another year of evolution for us, given the macro uncertainties, we pivoted decisively late last year to focus on efficiency and profitability. As a result, we began to see meaningful improvements in the bottom line. For the fourth quarter, our net income and the total adjusted EBITDA both turned positive. Moreover, we generated $320 million of cash from operations in the quarter. It has not been an easy journey. We could make this significant shift within such a short period of time only because of the collective efforts of our Sea team as a whole and a very strong determination and resilience that our team has demonstrated. We took the hard part, but we believe this is the right path to achieve long-term success.

As we continue this transition and manage sustainable growth going forward, we have adopted the approach of doing less, but doing this better. First, we sharpened our focus on areas with the greatest of potential across our businesses. We exited or downsized operations in non-core markets, streamlined our pipeline with investments and project closures and deprioritized non-core initiatives. These measures brought immediate cost improvements. More importantly, they allowed us to focus our managerial, operational and financial resources on doing the core things better. Meanwhile, we focused on doing better for our users across our digital ecosystem. At Shoppe, we continue to optimize customer services, seller management and logistics. At Garena, we worked to improve accessibility and the content quality of our core game.

We have also been leveraging SeaMoney’s strong synergies with the rest of our ecosystem to better serve the under addressed the financial needs in our market. I will elaborate more in detail during the segment discussions. Given the macro uncertainty and our recent strong EBIT, we continue to closely monitor the market environment and adjust our and fine-tune our operations accordingly. As a result, there may be near-term fluctuations in our results and performance. However, we remain highly confident in the long-term growth potential of our markets and highly focused on capturing these opportunities. More importantly, our determination and ability to execute towards profitability enable us to start 2023 on a much stronger footing. Let’s now discuss each business segment in detail.

Starting with e-commerce. I’m pleased to share that Shopee’s adjusted EBITDA turned positive for the fourth time in the fourth quarter of 2022. The improvement we achieved in core marketplace revenue and operating costs were key factors driving fourth quarter profitability. In the fourth quarter, GAAP revenue was $2.1 billion, up 32% year-on-year. This was mainly due to strong growth in core marketplace revenue. Within the core marketplace revenue, both transaction-based fees and advertising revenue increased as we deepened monetization and saw greater investments by sellers on our platform to serve buyers better. Full year performance generally mirrored the trend of the fourth quarter with GAAP revenue growing 44% from 2021. In terms of operating costs, we made improvements for each of the major expenses in the fourth quarter.

GAAP sales and marketing expenses improved by 34% quarter-on-quarter and 55% year-on-year driven by more targeted investments across shipping incentives and brand marketing. There were also sequential improvements in R&D and G&A expenses. Now looking at each region. In our Asia market, we reported a positive adjusted EBITDA of $320 million in the fourth quarter. This represents a significant improvement from the previous quarter, which had an adjusted EBITDA loss of $270 million. In our other markets, the adjusted EBITDA loss also decreased by more than 50% quarter-on-quarter to $124 million. In Brazil, we continued to enjoy strong improvement in unit economics. Our contribution margin loss per order decreased by 54% from the previous quarter to $0.47.

During 2022, we have been able to drive meaningful improvements in logistics costs to our ecosystem. This will remain an important area of focus going forward. We believe that lowering the cost to serve will be key to our long-term growth by unlocking large underserved user segments across our markets. While we have already seen early results from these efforts, there is still greater room for improvement. In addition to cost management, we remain highly focused on improving user experience. For example, we have been systematically reviewing and optimizing our process management for customer services. We focus not only on certain key metrics and targets for general user experience, but also on more proactive management of cases. On logistics, we have been working to provide a more efficient and reliable experience to our users.

This includes reducing wait time, minimizing delivery losses, and providing a more seamless impact experience to both sellers and buyers in managing logistics. The macro environment remains uncertain and there are still headwind on consumption in our market. With our recent pivot, we are showing a positive bottom line for the first time. As such, our focus this year will be to continue to solidify the efficiency gains and optimize the cost structure across our markets. In our Asian market, we will work to further strengthen our leading position and profitability. In Brazil, we will focus on driving the business towards profitability to capture the significant opportunity in this new market. GMV will largely remain an output for us in the near term.

It is important to reemphasize our long-term focus on sustainable growth for Shopee. In our view, e-commerce penetration to our market remains low as compared to its full potential relative to off-line retail. Our market also enjoys highly favorable demographical trend in terms of their large and growing digital population. This is further supported by long-term economic growth potential across our markets. The key question presented to us at this stage is how much of these underserved needs for online consumption we can sustainably address? This determines the size of the profitable TAM we will be able to capture. We believe a large part of the answer lies in our ability to continue to improve the cost structure of our ecosystem through creativity, technology, operational excellence and the most importantly an unwavering commitment to serve our users.

We believe everything we are doing now is to best position us to achieve visible growth, profitability and the defensibility of our ecosystem in the long run. Now let’s turn to digital entertainment. In 2022, online game as the market was broadly impacted by ongoing moderation in user engagement and monetization, our game experience and similar trends. During the fourth quarter, Garena guest revenue was $949 million and bookings were $544 million. Quarterly active users reached 486 million with 44 million quarterly paying users. The paying user ratio and average revenue per user remains relatively stable quarter-on-quarter. For the full year of 2022, GAAP revenue was $3.9 billion, with bookings at $2.8 billion. Despite ongoing moderation, we remain highly focused on sustaining our current core games.

We prioritize user engagement by offering better and more enjoyable experiences in our game. We have targeted initiatives for existing and returning users. We have also been streaming line game content to improve accessibility and gameplay for all users across diverse markets. In managing cost efficiency, we have comprehensively reviewed our publishing and staff development pipeline in line with our principle of doing less, but doing it better. As a result, we have divested and closed certain projects and remain selective about high potential projects to better direct our resources. This year, we will focus on solidifying our strength in core games and communities while continuing to position ourselves to pursue long-term growth opportunities as they arise.

Lastly, our digital financial services business. SeaMoney’s GAAP revenue was $318 million in the fourth quarter of 2022, up 92% year-on-year. Adjusted EBITDA also turned positive for the fourth time at $76 million for the fourth quarter. The improvement in profitability was driven by both strong top line growth and optimization of sales and marketing spends. For the full year of 2022 GAAP revenue was $1.2 billion, growing 150% year-on-year, and adjusted EBITDA loss was $229 million. As of the end of the fourth quarter, the total loans receivable on our balance sheet was $2.1 billion, net of allowance for credit losses of $239 million. Our SeaMoney business is a highly synergistic part of our digital ecosystem. For example, our mobile wallet has resulted in lower transaction costs and more stimulus transaction experience on Shopee.

Shopee has allowed the mobile wallet to grow its user base and build user habits more efficiently. With Shopee, our credit business is able to leverage a large captive user base, a highly relevant use case with significant scale and the wealth of user insights for more effective underwriting. At the same time, Shopee benefit as consumers enjoy more flexible payment options, successful credit and greater affordability. We expect our digital insurance wealth management and the best businesses to enjoy similar synergies with our e-commerce platform to serve a large underserved community in our market. We see SeaMoney as an important long-term growth engine for us. We will continue to prioritize the ecosystem strategy in pursuing this significant opportunity with efficiency and profitability.

To conclude, our performance in the fourth quarter was an important demonstration of our ability to focus on profitability and deliver meaningful results. This is a testament to the strength and the resilience of our underlying business model and the execution capability of our team. Although we expect macro uncertainty to continue to cloud the horizon in the near term, the long-term potential of our businesses and the market remains fast. We plan to capture these opportunities while delivering strong and sustained shareholder returns over time. With that, I will invite Tony to discuss our financials. Tony Hou Thank you, Forrest, and thanks to everyone for joining the call. We have included detailed financial schedules together with the corresponding management analysis in today’s press release and Forrest has discussed some of our financial highlights, so I will focus my comments on the other relevant metrics.

For Sea overall, total GAAP revenue increased 7% year-on-year to $3.5 billion in the fourth quarter and 25% year-on-year to $12.4 billion for the full year of 2022. This was primarily driven by the improved monetization in our e-commerce and digital financial services businesses, partially offset by lower GAAP revenue in our digital entertainment business. On e-commerce, our fourth quarter GAAP revenue of $2.1 billion included GAAP marketplace revenue of $1.8 billion, up 43% year-on-year and GAAP product revenue of $0.3 billion. For the full year of 2022, GAAP revenue of $7.3 billion included GAAP marketplace revenue of $6.2 billion, up 52% year-on-year, and GAAP product revenue of $1.1 billion. E-commerce adjusted EBITDA stands positive for the first time in the fourth quarter at $196 million.

The improvements were mainly from more targeted investments in our sales and marketing spending, deepened monetization and other optimization of cost structure. Adjusted EBITDA for the fourth quarter was also positively impacted by approximately $80 million of accrual reversal resulting from changes in previous estimations of certain expenses as we made the management decision to strong exit a clear focus on cost efficiency. 2022 full year adjusted EBITDA loss improved by 34% year-on-year to $1.7 billion. Digital entertainment bookings were $544 million in the fourth quarter and $2.8 billion for the full year of 2022. The GAAP revenue was $949 million in the fourth quarter and $3.9 billion for the full year of 2022. Digital entertainment adjusted EBITDA was $258 million in the fourth quarter and $1.3 billion for the full year of 2022.

In the fourth quarter of 2022, we also recognized an impairment of goodwill charge of $178 million pertaining to certain historical investments for the digital entertainment business. Impairment of goodwill are excluded from segment adjusted EBITDA calculation as it is not reflected of the underlying trends in our current quarter operating performance. Digital Financial Services GAAP revenue was up by 92% year-on-year to $380 million in the fourth quarter and up by 116% year-over-year to $1.2 billion for the full year of 2022. This was mainly driven by the growth in our credit businesses. Adjusted EBITDA turned positive for the first time at $76 million in the fourth quarter and adjusted EBITDA loss was $229 million for the full year of 2022.

Improvements in the bottom line was driven by both strong top line growth and optimization of sales and marketing spend. As of end of the fourth quarter, total loans receivable was $2.1 billion, net of allowance for credit losses of $239 million. Nonperforming loans past due by more than 90 days as a percentage of our total gross loans receivable declined from less than 4% in the third quarter to less than 2%, mainly due to the shortening of loan write-off period in a certain market from 180 days to 120 days in the fourth quarter based on our assessment of historical credit losses. Without this change in write-off period, the ratio would be around 5%. Returning to our consolidated numbers. We recognized a net nonoperating income of $35 million in the fourth quarter of 2022 compared to a net nonoperating loss of $71 million in the fourth quarter of 2021.

Our nonoperating income for the fourth quarter was primarily due to a $200 million net gain from 2022 convertible bond repurchase, partially offset by investment losses recognized amidst lower valuations in the broader markets. For the full year, our net nonoperating loss was $13 million compared to loss of $132 million for the full year of 2021. We had a net income tax credit of $43 million in the fourth quarter of 2022 compared to net income tax expense of $106 million in the fourth quarter of 2021. The income tax credit was primarily due to recognition of deferred tax assets from certain tax losses carried forward from our e-commerce business, partially offset by income tax incurred by our Digital Entertainment business. We recognized the deferred tax assets as we assess that it is more likely than not that our future taxable income will be sufficient to allow the deferred tax assets to be utilized.

For the full year, our net income tax expense was $168 million compared to $333 million for the full year of 2021. As a result, net income was $423 million in the fourth quarter of 2022 as compared to net loss of $616 million in the fourth quarter of 2021. This includes negative impact of $178 million impairment of goodwill related to certain historical investments for the Digital Entertainment business and the positive impact of $200 million net gain on debt extinguishment as well as positive impact of approximately $130 million in accrual reversal. For the full year, net loss was $1.7 billion. With that, let me turn the call to Min Ju.

Min Ju Song: Thank you for that, Tony. We are now ready to open the call for questions. As usual, our Group Chief Corporate Officer, Yanjun Wang, will lead this call. Operator?

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Q&A Session

Operator: Our first question comes from Pang Vitt from Goldman Sachs. Please go ahead.

Pang Vitt: Thank you, very much for the opportunity and Congratulations management team on a very strong quarter and solid turnaround. Two questions from me, please, on Shopee. Number one, can you please explain to us on the major drivers that led to this really fast on about in Shopee earnings this quarter? How did you manage to achieve this? Is it by way of the take rate increase and cost cutting? Or is there a deliberate attempt to cut off unprofitable GMV in order to achieve this? That’s question number one. Question number 2, going forward, as you have already achieved solid turnaround in bottom line, how do you plan to balance between growth and profitability? How do we feel confident that growth will come back? And how do you view the current competitive landscape, especially direct from new social commerce player? Will you make sure that you maintain your market share? And is there any color or soft guidance that you can provide us when it comes to growth?

Yanjun Wang: Thank you, Pang. In terms of the drivers for our quick turnaround for Shopee, I think as we shared in the earnings and Forrest messaged earlier on, that it’s on all fronts. In terms of top line, we managed to increase our take rate and the monetization across various types of revenue, including the core marketplace revenue, which are relatively high margin as well as other types of revenue as our sellers invest more in the platform to grow with us. And also on the cost front and expense front, we reduced sales marketing expense. If you noticed, our sales and marketing for Shopee dropped more than 50% year-on-year, while GMV sustained and grew around 7% on the constant currency basis year-on-year, so that shows the resilience of our ecosystem and the strong leadership and execution excellence of our team in managing this fast transition over a few months’ time to turn the platform into a positive bottom line, while still sustain a strong leadership of the platform.

At the same time, we also enjoyed savings in our R&D and G&A expenses quarter-on-quarter. So on all fronts, we’ve been improving and also is well aligned with our previous target to turn quickly and decisively as we see macro uncertainties in our markets. And that has always been our ability to execute on what we deliver — what we promised to the market and to our own teams. As we shared, there has not been an easy quarter. There’s a lot of hard work, and we make sacrifices. We exited the markets, we downsized operations, we walked through all these initiatives to decide which is core, which is less core, what we need to prioritize and what we need to deprioritize. With a lot of work condensed in a few months’ time with a tremendous effort by the entire Sea team, and therefore, we managed to achieve this.

And I think this also gives us much better confidence to navigate whatever challenges that might come our way in the future. Now in terms of outlook and balancing growth and profitability. So as we shared also, our outlook for markets in the long run remains very strong. Because of its demographic features, the young rolling population, deepened digital penetration vis-à-vis offline retail and also the economic growth potential of our region. At the same time, we believe that all these efforts we are making in reducing the cost structure of our ecosystem, and strengthening our ability to serve our users with better user experience will allow us to capture a larger share of the pie in the long run and further strengthen our market leadership which is a dual role in addition to profitability we have for our Asian markets.