Troubles plague Sea Ltd following India exit

By Lee Kah Whye
Singapore, September 5 : Last week, it was reported that Singapore-based e-commerce and gaming giant Sea Limited was closing its Livestream gaming platform, and ceasing some developmental projects, resulting in job losses.
Sources have told news agencies Reuters and Bloomberg that Southeast Asia's leading consumer internet company is shutting its live stream app Booyah! and several pre-market experiments in its research and development arm in an attempt to rein in costs and accelerate its path to profitability.
That these cuts are taking place in Sea's profitable gaming division, Garena, comes as a surprise. It is widely known that Garena's profitability is fuelling the growth of its e-commerce arm, Shopee, which to date is still losing massive amounts of money. Adjusted EBITDA (earnings before interest, tax, depreciation, and amortisation) loss for its e-commerce arm grew 11.8 per cent to USD 648,145 in Q2-2022, its latest reporting quarter. The company did not report the division's net loss.
It should however be noted that in February this year, India banned its popular action-adventure battle royale mobile game Free Fire. Subsequently, the company unilaterally withdrew its e-commerce service, Shopee from India in late March. It is not known if these events are related.
At the time of the ban, although India was the top market for both Free Fire and its premium version Free Fire Max based on downloads, analysts estimated that India just made up about 2.5 per cent of Sea's mobile game net sales in 2021. They had not expected it to impact the company significantly.
With Covid lockdowns over in most of the world, perhaps the writing may already have been on the wall for Sea's gaming division as the company's profit engine. Its paying users have been on the decline since late 2021. This trend continued into the second quarter of 2022. Active users fell 15 per cent year over year, and paying users fell 39 per cent.
Despite this, Sea reported that Free Fire was still the most downloaded mobile game globally in the second quarter of 2022 and ranked third highest by average monthly active users on Google Play in the same quarter. It has been the highest-grossing mobile game in Southeast Asia for the past 12 consecutive quarters.
All is also not well in Sea's e-commerce division.
In June, amidst growing geopolitical tensions and a global economic slowdown, Shopee let go scores of workers in Southeast Asia as well as in South America. It also ended its early-stage pilot in Spain. This was after closing its French operations only four months into its pilot.
Singapore's Straits Times had earlier last week reported that Shopee had rescinded a number of job offers for positions at its headquarters in Singapore, including for someone who had already flown in to take up a new role. The firm has reportedly frozen recruitment as well.
In an email statement to Bloomberg, the company said, "We continue to focus on the long-term strength of our ecosystem. In line with this, we have made some changes to improve efficiency in our operations that impact a number of roles."
Just two weeks ago, Sea reported a wider than expected net loss when announcing its Q2 results. For the reporting quarter, which ended June, it posted an adjusted EBITDA loss of USD 506.3 million (S$698 million) surpassing the average estimate by analysts for a USD 482.3 million loss.
Sea's net loss more than doubled to USD 931.2 million in Q2, from USD 433.7 million in the same period a year ago, and cited higher overhead costs and allowances for credit losses for this.
Strikingly, it joined other online giants in declining to forecast the performance of its e-commerce business due to an uncertain global economic outlook. In May, it revised its e-commerce revenue outlook downwards from USD 8.9 billion to USD 8.5 billion as the trend of online shopping slowed. Consumers are cutting back on online purchases with most countries in which it operates no longer enforcing pandemic lockdowns.
All these factors combined to cause investors jitters, resulting in a sell-down of the company's stock.
Sea Limited which is listed on NYSE saw its shares tumble 14 per cent to close at USD77.43 following the announcement of its Q2 results two weeks ago. It has since fallen another 22.5 per cent to USD59.93 last Friday (September 2) which is 84 per cent off its peak value in October.
This is a significant fall for a company which once had a market value of USD208 billion when its share price achieved its all-time high of USD372.70 in October 2021. For comparison, the tech-heavy Nasdaq composite index has fallen about 29 per cent during the same period.
At its peak, the market valued Sea at almost three times of Singapore's next most valuable company and Southeast Asia's largest bank, DBS Bank.
On the bright side, Sea has plenty of cash to sustain itself in the short to medium term. It raised about USD6.3 billion of cash at about the time the company share price was near its highest, either through a stroke of fortune or genius. Based on its cash burn rate of USD 1.4 billion last year, the amount of cash will keep the business running for a while.
Furthermore, with the company now focusing on profitability instead of global expansion as topline growth plateaus, investors may in the near future see a reason to buy into the company stock once again.
"As we navigate the current environment of increased macro uncertainty with that same nimble and decisive approach, we believe it is vital to be thoughtful, prudent, and disciplined," said Forrest Li, Sea's Chairman and CEO in a statement accompanying the firm's Q2 results.
"We are nevertheless rapidly prioritising profitability and cash flow management. We are confident that this focus, combined with our demonstrated ability to execute, our scale and leadership, and our proven business models, will position us for long-term sustained success."