Sea Limited (NYSE:SE) Q4 2023 Earnings Call Transcript

Sea Limited (NYSE:SE) Q4 2023 Earnings Call Transcript March 4, 2024

Sea Limited misses on earnings expectations. Reported EPS is $-0.01 EPS, expectations were $0.02. SE isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and good evening to all, and welcome to the Sea Limited Fourth Quarter and Full Year 2023 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] And finally, I would like to advise all participants that, this call is being recorded. Thank you. I’d now like to welcome Miss. Minju Song to begin the conference. Please go ahead.

Minju Song: Thank you, and hello, everyone, and welcome to Sea’s 2023 fourth quarter and full year earnings conference call. I’m Minju Song, from Sea’s 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 the 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 Chief Executive Officer, Forrest Li, President, Chris Feng, Chief Financial Officer, Tony Hou, and 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 2023. 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. I am happy to share that we have achieved our first full year of annual profit since our IPO. In 2023, we achieved profitability, strengthened our market leadership for our e-commerce business, grew our digital financial services business, and stabilized the performance of our digital entertainment business. We have emerged with a much stronger balance sheet with our cash position increasing to $8.5 billion as of the end of 2023, demonstrating the discipline and prudence we have applied in our investments over the past year. Looking ahead, we expect 2024 to be another profitable year. Let me recap our performance at the individual business level in 2023, and share the key strategic focus for each business in 2024.

Starting with Shopee. First, Shopee’s investments since July last year have paid off. I am pleased to report that, despite an environment of intensified competition in Southeast Asia, we believe we had a meaningful gain in market share between the start and the end of 2023. We are happy to have solidified Shopee’s market share in the region, and we intend to maintain our market share in 2024. We expect Shopee’s full year GMV growth to be in the high-teens range and its adjusted EBITDA to turn positive in the second half of this year. To retain and strengthen our competitive advantage, Shopee’s three operational priorities in 2024 are improving service quality for buyers, enhancing the price competitiveness of our product listings, and strengthening our content ecosystem.

On service quality for buyers, we will do more to optimize key aspects of the buyers’ experience such as delivery speed and consistency, return and refund processes, and customer service. These are areas we already excel in, and will continue to improve on. On keeping our product listings price competitive, we will continue to work more with sellers who have more upstream supply chain access, and provide more fulfillment, marketing, and shop management services to our sellers. On content, we will deepen and broaden engagement with creators, sellers and partners across the content ecosystem and better integrate live streaming and short form video into the shopping experience. Let me now highlight some of Shopee’s achievements in the fourth quarter.

During the quarter, Shopee delivered strong results with both top-line growth acceleration and bottom-line improvement. Shopee’s GMV and orders grew 29% and 46% year-on-year and 15% and 13% quarter-on-quarter, respectively, resulting in solid market share gains across our markets. Meanwhile, Shopee’s adjusted EBITDA loss improved by 35% sequentially. Adjusted EBITDA loss per order improved by 43% quarter-on-quarter. On logistics, we opened five new sorting centers and 385 new first and last mile hubs across our Asia markets and extended our logistics network further to improve our coverage. Through more automation, tighter planning, better routing and other operational improvements, our platform logistics cost per order in Asia decreased by 12% year-on-year in the fourth quarter.

This was partly driven by our own logistics network cost per order decreasing by 20% from the same period last year. We are also seeing good progress made on delivery speed. In Indonesia, in December 2023, more than half of the orders from buyers in Java were delivered within two days. We will continue to improve logistics service quality in terms of both speed and consistency. At the same time, we are also expanding premium services such as next day delivery and introducing new features. For example, we commenced return-on spot services in Indonesia and Vietnam. This initiative has resulted in higher trust and increased product frequency – purchase frequency from our buyers, particularly those who are new to Shopee. Our e-commerce logistics network is now one of the most extensive and efficient in our markets, and a strong competitive moat for us.

We have rapidly ramped up live streaming e-commerce, which accounted for around 15% of our physical order volume in Southeast Asia last December. With the scale and leadership achieved, unit economics of the segment also improved meaningfully quarter-on-quarter. Shopee Brazil continued its strong performance in the fourth quarter. Its contribution margin loss per order improved by nearly 90% year-on-year. This was driven by improvements in both user monetization and cost efficiency. We believe we have achieved cost leadership in logistics through scale and operational efficiencies, which have been and will be key to our success in the market. Turning to our Digital Financial Services segment. SeaMoney has delivered a strong year in 2023, primarily attributed to our consumer and SME credit business.

Our journey to build the credit business dates back to 2019. We initially started by introducing SPayLater consumption loans in response to Shopee buyers’ strong need for such services. Subsequently, we extended our offerings to cash loan services to both buyers and the sellers on Shopee. This underscores our user-centric approach, and the unique advantage offered by the Shopee ecosystem for SeaMoney to quickly achieve critical scale and profitability. 2023 was the first year of positive profit for SeaMoney, with full year adjusted EBITDA of $550 million. As of December 31, 2023, our consumer and SME loans principal outstanding was $3.1 billion, a 27% increase year-on-year. $2.5 billion of that was on the book. Consumer and SME loans active users for the fourth quarter, defined as credit users with loans outstanding by the end of the quarter, was over $16 million, a 28% increase year-on-year.

In 2024, we will continue to invest in user acquisition for our credit business, both on and off Shopee platform as we see significant upside in our markets. As we scale, we will remain prudent on risk management. In addition to our credit business, SeaMoney is also growing our digital banking and insurance services to capture future business opportunities in the digital financial services segment. We expect SeaMoney to continue its robust growth in 2024. In digital entertainment, Garena has done well in enhancing and optimizing game experiences for its players For instance, we have continuously introduced fresh and highly localized content to Free Fire. In the fourth quarter, we collaborated with Lamborghini to allow players to drive their cars in-game.

We also recently announced our collaboration with JKT48, an idol group from Jakarta, as our Indonesian brand ambassador. These partnerships excite and delight our players, and enable us to nurture our local communities. I am happy to share that we are seeing improved user acquisition and retention trends for Free Fire. In 2023, Free Fire was the most downloaded mobile game globally according to Sensor Tower. We are pleased that these positive trends are continuing into 2024. In February, Free Fire achieved more than 100 million peak daily active users. It remains one of the largest mobile games in the world. With this positive momentum, we currently expect Free Fire to grow double-digits year-on-year for both user base and bookings in 2024.

To conclude, we are pleased to see positive trends in both growth and profitability for all three of our businesses. We will continue to invest for the future with discipline and focus. I would also like to take this opportunity to thank our employees, users, investors, and partners for your continued support throughout this journey. With that, I will invite Tony to discuss our financials.

Tony Hou: Thank you, Forrest, and thanks to everyone for joining the call. For Sea overall, total GAAP revenue increased 5% year-on-year to $3.6 billion in the fourth quarter, and 5% year-on-year to $13.1 billion for the full year of 2023. This was primarily driven by the improved monetization in our e-commerce and digital financial services businesses. Our total adjusted EBITDA was $127 million in the fourth quarter of 2023, compared to an adjusted EBITDA of $496 million in the fourth quarter of 2022. For the full year of 2023, our total adjusted EBITDA was $1.2 billion, compared to an adjusted EBITDA loss of $878 million for the full year of 2022. On e-commerce, our fourth quarter GAAP revenue of $2.6 billion included GAAP marketplace revenue of $2.3 billion, up 23% year-on-year, and GAAP product revenue of $0.3 billion.

Within GAAP marketplace revenue, core marketplace revenue, mainly consisting of transaction-based fees and advertising revenues was $1.6 billion, up 41% year-on-year as a result of platform growth and improved monetization. Value-added services revenue, mainly consisting of revenues related to logistics services, was $0.7 billion, down 5% year-on-year as a result of higher revenue net-off against shipping subsidies. For the full year of 2023, GAAP revenue of $9.0 billion included GAAP marketplace revenue of $7.9 billion, up 27% year-on-year, and GAAP product revenue of $1.1 billion. E-commerce adjusted EBITDA loss was $225 million in the fourth quarter of 2023, compared to an adjusted EBITDA of $196 million in the fourth quarter of 2022. 2023 full year adjusted EBITDA loss improved by 87% year-on-year to $214 million.

For our Asia markets, we had an adjusted EBITDA loss of $193 million during the quarter, compared to an adjusted EBITDA of $320 million in the fourth quarter of 2022. In our other markets, the adjusted EBITDA loss was $32 million, narrowing meaningfully from last year, when losses were $124 million. Contribution margin loss per order in Brazil improved by nearly 90% year-on-year to reach negative $0.05. Digital financial services GAAP revenue was up by 24% year-on-year to $472 million in the fourth quarter and up by 44% year-on-year to $1.8 billion for the full year of 2023. Adjusted EBITDA was up by 96% year-on-year to $148 million in the fourth quarter of 2023 and up by 341% year-on-year to $550 million for the full year of 2023. Digital entertainment bookings were $456 million in the fourth quarter and $1.8 billion for the full year of 2023.

GAAP revenue was $511 million in the fourth quarter and $2.2 billion for the full year of 2023. Adjusted EBITDA was $217 million in the fourth quarter and $921 million for the full year of 2023. Returning to our consolidated numbers, we recognized a net non-operating income of $32 million in the fourth quarter of 2023, compared to a net non-operating income of $35 million in the fourth quarter of 2022. For the full year, our non-operating income was $208 million, compared to a loss of $13 million for the full year of 2022. The improvement was mainly due to higher interest income for the full year of 2023, as compared to the full year of 2022. We had a net income tax expense of $77 million in the fourth quarter of 2023, compared to net income tax credit of $43 million in the fourth quarter of 2022.

For the full year, our net income tax expense was $263 million, compared to $168 million for the full year of 2022. As a result, net loss was $112 million in the fourth quarter of 2023, as compared to net income of $423 million in the fourth quarter of 2022. For the full year, net income was $163 million, as compared to net loss of $1.7 billion for the full year of 2022. At the end of the fourth quarter of 2023, cash, cash equivalents, short-term and other treasury investments were $8.5 billion, representing a net increase of $566 million from the previous quarter. The increase includes proceeds of approximately $370 million from lower securities purchased under agreements to resell relating to our banking operations. From the first quarter of 2024 onwards, we will include this as part of other treasury investments as these are highly liquid marketable securities.

With that, let me turn the call to Minju.

Minju Song: Thank you, Forrest and Tony. We are now ready to open the call to questions. Operator?

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from a line of Pang Vitt from Goldman Sachs. Your line is open.

Pang Vittayaamnuaykoon: Hi. Good morning, management team. Thank you very much for the opportunities, and congratulations for the solid set of results. Two questions from me. Firstly, on Shopee. Can you please provide a little bit more color on the guidance you gave out for 2024? What is the assumption behind in terms of competitive landscape and market share, especially in Indonesia? When it comes to high-teen growth, how do you plan to achieve this? And on the margin size, what gave you the confidence that we can go back to breakeven by second half of this year? And what kind of EBITDA margin we can expect as well for Shopee to achieve in the near-term? That’s question number one. Question number two, related to SeaMoney. Can you provide some color on why EBITDA was weaker quarter-on-quarter?

We noticed that you spend more on marketing this quarter. Should we expect this to be the new run rate? What kind of growth outlook can we expect for 2024 and can we still expect to see EBITDA growth here? Thank you.

Forrest Li: I think the, let me address the first question first. I think in term of the Shopee, we do believe that we are able to grow high-teens for the full year 2024 as we shared in the opening. For particular for Indonesia, we do see Indonesia is a good market for us in the Q4. And we will believe that the trend, likely, the growth trend, like, you’re considering Q1 and in line with the other market in the following quarters. If you look at the overall competitive landscape, we have seen a more stable competitive landscape in the past quarters. Again, we cannot sort of control, I guess, our competitors, but if you look at the past, we have been competing with the similar set of competitors for quite a while. And even with the most intensive competition during the past few quarters, we’re able to gain market share while improving our unit economics.

They are contributing by a few factors. I think number one is, we are a clear market leader in the market. This translates to the economic scale benefiting by both having better monetization capabilities and also better cost efficiencies. And if you look at the scale, we are in a much better position now compared with a year ago. We do believe that we have gained market share in Indonesia if you compare the beginning of the year or last year and now. The second one is, I do believe that we have a strong local leadership team and operating team to execute on what we set up to execute and also make the right judgment based on what we see in the market. I spent probably most of my time, if you compare all countries, I spent most time in Indonesia.

And many of our management team, including myself, learned to speak Bahasa Indonesia over time as well to understand the market better. Number three is, we have built infrastructure for the market over time. For example, our logistics coverage in Indonesia has been larger than before. Our cost has reduced significantly over the past few quarters for shipping one order. Also, the quality has been improved. But most importantly, by having our own logistics in the market, enabling us to offer differentiated services. If you follow the market closely, we have recently started the return on the spot for the users, which had very good feedback, not only for Indonesia, but also for Vietnam. We also started differentiated return services that we’re going to allow the user to ask for return anytime during the shipping process.

And we can intersect the orders even during the shipping, which is not offered by any other one in the market so far. And also, on top of that, we have our strong integration with our digital financial services businesses. This not only enable us to reduce the cost for transactions, for example, on the payment side, but also allow us to untapped cycle potential by offering the SPayLater to a broader segment that we have never seen in the market before. All of this help us not only to reduce cost but increase the conversions in the market. We’ve been doing all this in the past few quarters and we do believe across all dimensions we’re able to do better over this year. So that even with whatever competitive landscape that we’re facing, we’re able to outperform our competitor in the market, be more efficient in the market.

I think that’s kind of like, how we see the market so far and how this is going to evolve in the future. In terms of the margins, as we shared in the openings, we believe that overall, business with Shopee, we’re able to breakeven in the second half of the year, while with the intention to at least maintain our current market share in the market and this apply to Indonesia as well. I think as I shared earlier compared to a year ago, we gained size of the market shares. And we are going to execute even better over this year, giving the foundations we’ve built during the last year. On top of what I mentioned just now in terms of other things we’re doing, there are a couple of other things we are doing further even over the year. One is the price comparison is, we do believe we are the most price competitive platform in the market, as you can do benchmark externally.

We’re going to deep dive — we’re going to deep dive on that even further over the year. In particular for, not only for Indonesia, but for the other markets as well, but yeah, Indonesia is the key market for us. They were also going to further drive the service quality, I shared earlier, not only on the logistics, but also on the after procurement, like the return on services, the customer service quality, etc. And all this will essentially put us into an even better position in the future. Not only sort of maintaining our growth trajectories, but also improving our EBITDA. For the live stream that we talked about in the past earning call, we have seen quite fast growth on the live stream in this quarter as well. As we share in the opening, we have — across the region, we have about 15% of our orders come from live stream.