Thread by @kevg1412

1/ $SE reported 3Q21 earnings today and is down 5% after opening around flat in early morning trading. A quick business update on how our Sea thesis is holding up and how investors should think about this quarter.

A short $SE thread below.

2/ GAAP revenue was +122% y/y to $2.7bn which is a deceleration from last Q’s +159% y/y rate. However, keep in mind they are working against the law of large numbers, and this still represents a ~$200mn beat vs consensus.

Digging into ecommerce first…

3/ GMV grew 81% y/y to $16.8bn or $1.8bn higher than last quarter (consensus $16.5bn). However, 3Q21 is usually seasonally stronger than 2Q. This is still a >$60bn run-rate, 3x higher than what they were generating pre-covid.

4/ Focusing on just the 3P marketplace, they grew 151% y/y to $1.2bn which is +33% q/q but a ~40 point y/y deceleration sequentially. These growth rates can be deceiving though.

They added $300mn of marketplace revenue q/q which is an acceleration of the $190mn they added last q

5/ Their 1P business grew +82% y/y to $280mn, but still remains a low % of GMV at 1.7%. They will continue to grow this business to fill out inventory selection, especially of low value SKUs and not as a profit driver.

6/ Orders grew 300mn q/q the same rate as last quarter, but on lower AOVs (average order value). In fact, AOVs have dropped almost in half since just 2018 to break below $10 for the first time.

7/ The lower AOVs help expand Shopee’s use cases and grow active buyers. It can also be indicative of users feeling there is a lower “friction” to transact and buy whatever comes to their mind versus “planning” multiple items each time they shop.

8/ However, this will also weigh on profitability as shipping costs have a high fixed cost portion and some of these transactions have dubious unit economics. Building out logistics infrastructure to take advantage of their scale will help $SE reduce shipping costs.

9/ If you recall from our $SE Update (free, link at end of thread), we found they placed orders for Isuzu N-series trucks (pictured below), which suggest an increased emphasis on fulfillment with Shopee consolidating inventory at warehouses to centralize it for faster delivery.

10/ On the logistics front, they noted on the call that they are very flexible to how they will approach logistics going forward; whether that be more 3PL or building out their last-mile delivery Shopee Express network more.

11/ Shopee also is rolling out more SME tools to help them sell online. This is a nice example of how symbiotic Shopee’s relationship with merchants is. They rolled out local campuses to teach sellers to sell exports internationally, which will increase consumer selection...

12/ ... inventory management systems which help a merchant manage stock, but also makes sure goods are available for the consumer (also sticky software that is hard to rip out), and photography studios which means better photos and higher conversion rates.

13/ Similarly, they are working with rural sellers in Malaysia to increase the long-tail of merchants (creates inventory only Shopee has) and also further localizes their selection while being great PR.

14/ On the other side of the world, in Brazil, they disclosed that over 1mn merchants have registered with Shopee, putting to bed doubts that they are solely facilitating cross-border transactions.

15/ Other efforts include Seller Missions, which is a gamified incentive program for sellers, and listing optimization tools. Creating more engaged sellers with semi-standardized listings helps decrease consumer purchasing friction.

16/ Ecommerce S&M was elevated to ~$690mn as they expand into new markets and continue to be aggressive in acquiring new users. This contributed to an ecomm. segment loss of ($680mn), a $100mn miss vs. consensus.

Not a huge deal in the grand scheme of things…

17/ Digital Entertainment (namely Free Fire) revenues were $1.1bn, up 10% q/q. However, bookings (which are a leading indicator of revenues) were $1.2bn, the first flat quarter sequentially in years.

18/ Paying users grew only 1mn sequentially to 93.2mn versus last quarter where they added 12mn.

Quarterly average users grew only 4mn versus 76mn user adds last quarter. This could indicate that Free Fire growth is nearing saturation.

19/ It is likely that the market is spooked by this, but Free Fire is still one of the strongest gaming franchises ever and they still have ample opportunity to increase % of paying users, which sits at 12.7%. New content could also bring back growth.

20/ Revenue per paying user grew again (!) sequentially to $11.80 this quarter, or ~$47 annualized. This is ~70% higher than their ARPPU in 2020.

21/ While we wouldn’t want to underwrite the old Free Fire growth rates as already 1 out of every 10 people on earth plays Free Fire, there is still ample opportunity to grow engagement, monetization, and adjacent properties (like Pet Rumble).

22/ Forrest noted a few initiatives including a fashion week where in-game “skins” are worn by models, a movie collaboration with Venom, and new in-game modes like 1v1 and 2v2.

23/ Most interestingly though, they launched “Craftland,” which allows users to customize their own maps, tapping into the power of their massive community. This could unlock a whole new leg of growth for them led by user created experiences.

24/ SeaMoney reached $4.6bn of TPV with 39.3mn paying users, up nicely from $4.1bn TPV and 32.7mn users last Q. However, their wallet share continues to lag behind Grab and GoJek regionally, especially off-platform. (See our GRAB piece for more; paid)

djyresearch.com/2021/11/09/gra…

25/ Lastly, it was announced that Chris Feng is now President of SE group (CEO of Shopee and DFS before), which he will help drive more cohesion amongst the group's businesses. (See our Sea Management piece for more on Chris; free)

djyresearch.com/2021/05/27/sea…

26/ All in all, these results give us increased confidence that our decade-out topline estimates are trending in the right direction, but of course we are still far too early to judge how the mature margin structure is unfolding.

27/ For valuation, we would point you to our free write-up. Like all growth companies, the range of outcomes is still wide, but you can pencil out a high single digit return with relatively conservative assumptions. Of course, the real return comes from being bold though.

End/ Our most recent $SE writeup (free):

djyresearch.com/2021/10/07/sea…