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Sea Misses Profit Estimates, Showing Turnaround Still Fragile

(Bloomberg) -- Sea Ltd. had its worst day in more than a year after earnings missed estimates and gaming revenue plunged 43%, raising questions around its nascent profitability drive.

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Despite posting its second consecutive quarterly profit, Sea said revenue grew just 5% and a goodwill impairment charge of more than $100 million slashed net income to $88.1 million, missing the $224.4 million analysts expected. Its US-listed shares fell the most since February 2022, dropping 18% to close Tuesday at $72.45 in New York.

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The miss shows that sustained profitability still isn’t guaranteed for Singapore-based Sea, which embarked on a brutal cost-cutting drive to reverse years of losses. The company, which grew at triple-digit percentage rates just two years ago, cut thousands of jobs, froze salaries and slashed hundreds of millions of dollars in sales and marketing expenses in a bid to trim costs and reach positive cash flows.

“The major disappointment was around the modest top line growth and declining profitability, which sparked the profit taking,” said Esme Pau, regional internet analyst at Macquarie Capital Ltd. “My view is that Sea has gone through the toughest time. The profitability trajectory will continue, though may be less linear.”

Sea, the largest of Southeast Asia’s internet firms and briefly the world’s best-performing stock, shifted from spending on global expansion to focusing on its core operations after it struggled to convince investors of its money-making potential. Last year was one of the most difficult for Sea shareholders since the company was founded in 2009 — the gaming and e-commerce giant lost about $150 billion of its value since a peak in October 2021 as the world turned against money-losing tech companies like Sea.

Sea’s Path to Profit Paved With Layoffs, Single-Ply Toilet Paper

The mixed quarterly performance of Sea’s various units signals investors may face more volatility. Revenue from Shopee, Sea’s e-commerce unit, gained 36% to about $2.1 billion. Sales at gaming arm Garena slumped 43% to $540 million, while revenue from SeaMoney, the digital financial services business, rose 75%.

Last week, Sea said it would hand out 5% raises to most staff. Before its latest earnings result, the company had more than doubled its market value since November. The slump in the shares cost it almost $9 billion of that gain, leaving it at $41 billion.

Sea and its regional peers Grab Holdings Ltd. and GoTo Group continue to face challenges in an era of slowing economic growth, rising costs and a decline in technology company valuations. Grab, which is set to report results this week, is losing more than $300 million a quarter, while Indonesia’s GoTo Group’s losses exceed $250 million.

What Bloomberg Intelligence Says:

“Sea’s growth risks appear contained despite 1Q sales and profit missing consensus, as a potential recovery in Garena, its digital entertainment arm, and rising monetization in e-commerce and fintech may revive growth and fuel the bottom line.”

-Nathan Naidu, analyst

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(Updates with comment from analyst in fourth paragraph)

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