Sea shares jump overnight on first-ever profit

Having been expected to post widening losses and flatlining revenues, Sea Limited’s Q4 2022 results saw its share price jump before markets opened, as the Singaporean tech house announced its first-ever quarterly profit. The achievement is especially significant given tough economic conditions in Southeast Asia.

- Sea shares jumped 7.5% overnight on first quarterly profit.

- Southeast Asian companies are cutting costs amid tough macro environment.

- Sea is Next Frontier Internet & Ecommerce ETF’s second-largest holding.

Sea Limited’s [SE] share price opened 7.5% above its previous close Tuesday morning, after having announced its first-ever quarterly profit before markets opened.

The Singaporean technology company’s ecommerce arm drove unexpected gains in revenue, while cost-cutting measures during the second half of 2022 brought down the cost of sales.

While analysts had expected Sea—which offers digital entertainment and financial services alongside ecommerce—to post widening losses and declining revenue, the results beat expectations on both fronts, with revenues increasing year-over-year.

As of Monday, Sea’s share price had gained 26.3% year to date, although despite these gains the stock was still down 27% over the preceding 12 months.

The results come at a time when Southeast Asian economies are facing a slow-down that started last year. High interest rates and inflation are bad news for technology companies in the region, but Sea is not the only company to have reported positive results from tightening its purse strings.

Cutting costs bears fruit

Prior to the release of Sea’s fourth quarter (Q4) 2022 earnings, analysts polled by Refinitiv had expected the company to post a quarterly loss of $0.79 per share on revenue of $3.1bn. These numbers underlined bleak expectations for Sea in the face of worsening economic conditions in Southeast Asia; the revenue expectation itself was 3.2% below the previous quarter and would have represented a 3.1% year-over-year decline.

In its earnings release, Sea confounded all expectations by posting diluted EPS of $0.72, its first-ever quarterly profit. Revenue for the quarter came in at $3.5bn, a 7.1% increase year-over-year, and 14.4% ahead of analyst expectations.

Full-year revenue came in at $12.4bn, up 25.1% year-over-year and 3.5% ahead of analyst expectations. Full-year losses had been expected to widen to $4.5 per share, but instead contracted by 22.9% year-over-year to $2.96.

Sea’s shareholders have its ecommerce division to thank for the performance. While digital entertainment revenue fell by 32.9% for the quarter and by 10.3% for the full year, ecommerce and other services increased 50.5% year-over-year for the quarter to $2.2bn, and by 63.5% for the full year to $7.5bn. These gains meant that ecommerce accounted for 62.9% of all Q4 revenue and 60.5% of full-year revenue.

The cost-cutting that took place during the second half of 2022 also paid dividends, with cost of revenue falling 8.2% year-over-year in Q4 despite revenue increasing.

Further headwinds expected

Sea is at the forefront of a rash of job cuts in Southeast Asia’s technology sector. It announced a pay freeze and bonus cut in December, having cut 7,000 jobs, approximately 10% of its staff, in the six months to November. Research from ISC2 shows that 68% of organisations in Singapore anticipate further job cuts during 2023 as the economy continues to slow.

Signs of this slow-down are already starting to appear. Tech salaries lag rent hike growth in Singapore, which rose 7.6% during 2022, relative to rent hikes of as much as 21% during the first nine months of the year.

Sea, however, is not the only company in the region to have turned cost efficiency into positive results. Singapore’s food delivery giant Grab’s [GRAB] CEO Anthony Tan said at its earnings call in February that the company’s break-even date was being brought forward to Q4 2023, thanks to cost-cutting measures.

It appears, given Sea’s strong results, that its cuts so far have had a positive impact on business performance, delivering its own first quarterly profit in the face of significant macro headwinds.

Funds in focus: Next Frontier Internet & Ecommerce ETF

According to ETF.com, the ETF offering greatest exposure to Sea’s shares is the Next Frontier Internet & Ecommerce ETF [FMQQ], which holds internet and ecommerce companies in the developing world outside of China.

As of 6 March, 9.5% of the fund’s assets are Singaporean companies, compared to 27% from South Korea, 13.3% from Brazil, 12.7% from India, and 8.1% from Argentina.

The majority of those Singaporean assets are Sea shares, with an 8.00% weighting making it FMQQ’s second-largest holding (behind Mercadolibre Inc. [MELI], with 10.28%). Grab accounts for most of the remainder, with a 2.48% weighting.

FMQQ has gained 7.8% year-to-date, but has fallen 4.9% in the past month.

Analysts polled by Refinitiv offering 12-month price targets for Sea yielded a median target of $92.00, 40% above the 6 March close.