Let start with a review of their 2021 Q3 results at the group level:
• Total GAAP revenue was US$2.7 billion, up 121.8% year-on-year.
•Total gross profit was US$1.0 billion, up 147.5% year-on-year.
•Total adjusted EBITDA1 was US$(165.5) million compared to US$120.4 million for the third quarter of 2020.
YoY Revenue growth
Year Q1 Q2 Q3 Q4
2021 147% 159% 123%
2020 24% 33% 99% 101%
2019 194% 203% 151% 492%
Compared to 2020 the YoY revenue has clearly accelerated. However, compared to 2019 growth seems to have slowed down. It shouldn’t come as a surprise because of the law of large numbers. The QoQ revenue growth rate also tells a similar story.
Year Q1 Q2 Q3 Q4
2021 13% 29% 18%
2020 -8% 23% 37% 29%
2019 -45% 15% -8% 27%
At group level the EBITDA remained negative like last quarter. However, it was positive in Q3 of 2020 and in 2021. The operating expenses grew 105% this quarter compared to 120% in Q2 which is good as it may indicate economies of scale kicking in. They also grew their sales and marketing spend by 114% which could have a positive impact on sales next quarter. At group level the results look quite good.
Sea limited guidance for their digital entertainment and e-commerce group (updated this quarter). I will discuss the guidance under the respective section below.
However, on double clicking on the different divisions of sea limited the picture suddenly changes. Sea is showing some serious signs of slowing growth.
Digital entertainment posted the following numbers:
• Bookings were US$1.2 billion, up 29.2% year-on-year.
• Adjusted EBITDA1 was US$715.1 million, up 22.3% year-on-year
Their most profitable division i.e., the digital entertainment division and it did not see any QoQ growth 2021:Q2 1,2 billion > 2021:Q3 1,2 billion . So, in essence the growth was flat. This is how the growth looked in the previous quarters 2021:Q1 1,1 billion>2020: Q4 1,0 billion> 2020: Q3 944,7 million>2020:Q2 716,2 million >2020: Q1 512,4 million. So, the trend is clear there is a slowdown. This matter because this is the only profitable division of sea limited. Additionally, their gross margins fell by about 3,5 percent. So, the digital entertainment side of the business seems to have hit a ceiling. Furthermore, they continue to rely heavily on the free fire game and are working on introducing other version of the Game (better graphics); is that the best you can do? So flat growth for their digital entertainment group. Just to drive the point home see the figures below.
QoQ Digital entertainment revenue
Year Q1 Q2 Q3 Q4
2021 10% 9% 0%
2020 7% 40% 32% 6%
2019 70% 13% 2% 6%
2018 -5% 4% 60%
The underlying growth drivers i.e., new users (paying users as well as active users) also tells a similar story growth is flatlining.
QoQ Quarterly paying users
Year Q1 Q2 Q3 Q4
2021 9% 16% 1%
2020 7% 40% 31% 12%
2019 74% 26% 12% 14%
QoQ Quarterly active users
Year Q1 Q2 Q3 Q4
2021 6% 12% 1%
2020 13% 24% 15% 7%
2019 26% 14% 3% 10%
Now to guidance:
They guided for 4.5 billion for 2021 at the high end. So their guidance for next quarter is 4.5 – Q1+Q2+Q3 = 1,0 billion which is a contraction. Furthermore, their conference call was all about free fire which is worrying because the growth is already contracting.
Their ecommerce quarterly earnings are 2021:Q1 922,3 million > 2021:Q2 1,2 billion > 2021:Q3 1,5 billion. QoQ growth rates 2021:Q1 10%> Q2 30% >Q3 25% and for 2020 they were Q1-12%> Q2 63% (seems like a fluke)> Q3 21%>Q4 36%. 2021 seems much better than 2020 for e-commerce except for the one fluke quarter. Their take rate improved from 6.7% to 8.6% percent which is good. Also, their revenue from e-commerce surpassed the revenue from digital entertainment by about 200 million.
From their recent earnings call:
“According to App Annie, globally on Google Play, Shopee ranked first in the Shopping category by total time spent in app, and second by downloads and average monthly active users in the third quarter. Shopee also continued to be the top ranked app in the Shopping category, in both Southeast Asia and Taiwan by average monthly active users and total time spent in app during the quarter. Shopee was the leading app across these same metrics in Indonesia, where we recorded another quarter of triple digit year-on-year order growth”
“Shopee also continued to make good progress in Brazil. In the third quarter, it was once again ranked first by downloads and total time spent in app, and second by average monthly active users, for the Shopping category, according to App Annie”
“Shopee’s total adjusted EBITDA loss per order across all markets was 41 cents in the third quarter. As we have said previously, we are committed to investing efficiently and growing in a sustainable manner across all our markets as Shopee scales. And with that in mind we are pleased to note that adjusted EBITDA loss per order improved both on a year-on-year and a quarter-on-quarter basis in Southeast Asia and Taiwan combined, as well as in Shopee’s other markets combined.”
“Looking ahead, we are prudently and efficiently exploring how to maximize our largest addressable opportunities given our growing market position. In the recent months, we launched Shopee in Poland, France, Spain and India.” They are rapidly expanding to culturally diverse countries and it may not be easy to capture market share in such countries. Moreover, there is the risk spreading yourself too thin in terms of resources and focus.
The seemingly beat and raise guidance of 5,2billion for the full year 2021 at the top end turned out to be very disappointing. 5,2-Q1+Q2+Q3=1,57 which is approximately how much they earned this quarter, so their e-commerce growth is also flatlining.
QoQ growth rates for digital finance were as follows 2021:Q1 240%> 2021:Q2 156%> > 2021:Q3 119%Digital finance division is showing signs of slowing revenue. However, the underlying growth lever of paid user growth is showing signs of acceleration. Seems odd it could be that the users are using their mobile wallet less or are not making many transactions using the digital wallet. Which is not a very positive sign.
Sea limited is slowing down and dramatically. Their QoQ growth is flatlining / contracting across their major business divisions i.e., digital entertainment and e-commerce. Staying true hyper growth investing style I am going to exit my position. To add to my woes the company isn’t talking about new titles or games. Furthermore, their expansion strategy for e-commerce is entering new markets. Which is not always easy. Of course they have a proven track record of entering new markets(e.g., brazil) and growing at a meaningful pace but can they replicate it in other countries too?
Thank you to board managers and all who contribute meaningful analysis.