Sea Ltd (NYSE: SE), which I will refer to as Sea from here on, reported its 2021 third-quarter financial results on 18 November. The parent company of Shopee and Garena saw its total revenue grow 122% year-on-year to US$2.7 billion, while gross profit surged 148% to reach US$1 billion.
Here’s how its three segments of e-commerce, digital entertainment, and digital financial services fared.
E-commerce revenue surged 134% year on year to US$1.5 billion. This was driven by an 81% increase in gross merchandise value (GMV) to US$16.8 billion and an uptick in the take rate from 6.7% to 8.6%.
Forrest Li, CEO and founder of Sea Ltd, said in the earnings conference call that the stronger monetisation was due to growth across value-added services, transaction-based fees, and advertising revenue. I’m keeping my eye on future comments from Sea’s management on advertising revenue as this is a relatively higher margin item and should be an important contributor to Shopee’s long-term profitability.
On a sequential basis, GMV grew an impressive 12%.
Li and his team are providing more tools for merchants to succeed on the platform to create a more comprehensive ecosystem. He said:
“We are helping sellers be more competitive. For example, we have rolled out more features, tools and services to help them build engagement with their customers and grow their businesses. We recently launched Seller Missions, an incentive program that rewards sellers with privileges as they complete certain tasks. The program gamifies the experience of sellers as it guides them through features and tools on Shopee they can use to become better sellers. We also introduced tools like Listing Optimizer which helps sellers identify listings that can be improved and how to improve them. These initiatives help sellers grow on the Shopee platform and create better experiences for our buyers too.
We also recently celebrated the first anniversary of Shopee Premium, a dedicated space on Shopee for select brand partners in the luxury segment. Since launch, we have doubled the number of Shopee Premium brands. Through a more immersive shopping experience, Shopee Premium helps brands share their stories and build deeper personalized relationships with buyers.”
Li also hinted that Sea’s e-commerce ambitions lie beyond its current core markets of Southeast Asia, Taiwan, and Brazil.
In recent months, Sea has launched in Poland, France, Spain and India, gradually creating a truly global presence.
Although each new market poses its own set of challenges, Shopee’s competitive edge lies in its ready-base of sellers who are looking to sell abroad and expand their global reach. This should provide the initial seller base for Shopee to enter into new territories.
E-commerce profitability improving
One of the main risk factors I’m watching for Sea is the cash burn rate for its e-commerce segment. However, there are encouraging signs in the quarter as the e-commerce gross margin is now 16%, up from just 6.4% in the corresponding period in 2020.
The gross margin even reached 18.3% in the second quarter of 2021. The last two quarters show signs that Sea’s e-commerce segment is heading in the right direction in terms of profitability as scale effects and the ability to offer sellers advertising becomes more relevant over time.
I believe Shopee is on track to increase its take rate to above 10% over time (comparable with other marketplaces which may have take rates above 15%) and help e-commerce gross margins to widen substantially.
Sea’s strategy to grow its e-commerce business is to spend heavily on sales and marketing, often at the expense of near-term profitability and resulting in extremely heavy cash burn.
But this is a well-calculated strategy. Sea has two sources of cash that other e-commerce companies may not have. First, the gaming business – which I will touch on shortly – is a cash machine.
Second, investors love Sea. The company has already taken advantage of this by raising US$1.35 billion in 2019, US$2.6 billion in 2020, and more than US$6 billion in its latest stock and bond offering announced in September this year.
As such, Sea exited the third quarter of 2021 with a war chest of US$11.8 billion. This is up from US$5.6 billion at the end of the second quarter of 2021.
2. Digital Entertainment (Gaming)
Free Fire growth slowing but outlook still bright
Sea’s gaming segment, Garena, delivered explosive growth over the last few years as one of its self-developed games, Free Fire, became a global hit. Free Fire is a phenomenon as it has the second-highest average monthly active users among mobile games on Google Play in the quarter.
But growth has started to slow. Quarterly active users only inched up by 0.5% sequentially to 729 million users from 725 million.
Gross bookings also came in flat quarter-on-quarter. With Free Fire already such a big hit in its key markets, it is no surprise that growth will taper off over time. On a brighter note, Garena is still highly profitable and continues to help fuel the growth of Sea’s e-commerce business.
Engagement levels for Free Fire also still remained strong and the signs are that Free Fire will be a long-lasting global franchise that acts as a stable source of cash for Sea for many years to come.
Garena is focused on building the Free Fire franchise with Li reiterating in the latest earnings conference call:
“Given Free Fire’s growing global popularity, we see significant opportunity to provide our community with many kinds of ways to enjoy the Free Fire platform, and we continue to invest in building towards a long-lasting global franchise.”
Gaming options beyond Free Fire to drive growth
Sea is looking to develop other games beyond Free Fire.
With Garena’s global reach and the success of Free Fire, the company can now attract the best talent and form partnerships with renowned game developers to try to build the new big thing. It also helps that Sea’s share price has been on a tear of late, which should be a big pull factor for top talent.
Li summed it up by saying:
“We are also very focused on growing our global reach and building a games pipeline that ensures we can capture the most promising and valuable long-term trends in online games. Our growing global presence across diverse high-growth markets gives us important local insights and strong local operational capabilities. And our in-house development team is tapping into this as they work on both existing games and new ideas. Moreover, given our proven global track record, we have received more interest from studios keen to build strategic relationships with us. As such, our pace of investments in and partnerships with games studios worldwide has stepped up.”
3. Digital financial services
Lastly, Sea’s digital financial services segment, which includes its digital wallet offering and payment services, saw continued growth. Total payment volume for Sea’s mobile wallet was US$4.6 billion for the quarter, up 111% from a year ago.
Quarterly paying users also increased to 39.3 million, up 120% compared to a year ago. SeaMoney has a large potential to grow in Southeast Asia where many people are unbanked. The company is doing an excellent job in tying up with merchants both online and offline to offer users ways to pay with SeaMoney.
It was another excellent quarter for Sea as its e-commerce business surged and showed signs of improving profitability. The gaming unit continues to generate healthy profits and Sea’s balance sheet has been strengthened by the recent cash injection from its secondary offering.
The only blip was the slowing growth in its digital entertainment bookings and active users on a sequential basis. But the signs point to Free Fire being a long-lasting global franchise that will rake in tonnes of cash for Sea for years to come. With Sea’s e-commerce business scaling nicely, and financial services growing at triple-digit rates, the future looks bright for Singapore’s home-grown tech giant.
Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.
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Disclosure: Jeremy Chia owns shares of Sea Limited.