Sea's Naruto IP Strategy: Can Blockbuster Gaming Results Maintain Longevity?​

On the evening of May 13th, Beijing time, Southeast Asia's little Tencent $Sea(SE.US) announced its Q1 2025 financial report, with the biggest highlights being the gaming segment's revenue significantly exceeding expectations and the e-commerce segment's profit margin rapidly improving. However, not all indicators performed perfectly above expectations. The key points are as follows:

1. Collaboration with "Naruto" brings explosive gaming performance: The most remarkable aspect of this performance is that Garena's gaming business this quarter saw a year-on-year revenue surge of nearly 51%, far exceeding the sell-side's expected growth rate of around 11%, and compared to the roughly 20% growth in previous quarters, this can be described as a rocket-like acceleration. According to the company, this is mainly attributed to Free Fire's collaboration with the top IP "Naruto" this quarter, significantly boosting FF's daily active user count (approaching the historical peak before the pandemic).

In actual data, the number of active users and paying users increased by 15 million and 4.7 million respectively compared to the previous quarter, confirming a substantial return of users. The actual number of paying users reached 65 million, far exceeding the market expectation of 53 million. With the return of lapsed players, the proportion of paying users this quarter surged from 8.2% in the previous quarter to 9.8%, and the average revenue per paying user also increased by 15% year-on-year to $12. These factors collectively contributed to the explosive revenue growth.

At the same time, the adjusted EBITDA of the gaming business (accounting for deferred revenue) also saw a year-on-year increase of 56.8%, consistent with the revenue growth rate, and the adjusted EBITDA margin increased from 57.1% in the same period last year to 59.1%. Both growth and profit performance were explosive.

However, since a large portion of the new revenue (over one-third) is accounted for as deferred revenue, the revenue and operating profit under GAAP standards actually fell short of expectations. But the market is clearly more focused on the revenue and adjusted EBITDA metrics that reflect actual performance.

2. Shopee's e-commerce growth is mediocre, but profit release exceeds expectations: The group's most important Shopee e-commerce segment saw GMV reach $28.6 billion this quarter, remaining flat quarter-on-quarter and with a year-on-year growth rate slightly declining to 21.2%, below the market expectation of 23%. A quarter-on-quarter slowdown of 2 percentage points is not a major issue and is still considered stable, but the market's original expectations were higher.

Breaking down price and volume, the year-on-year growth rate of order volume this quarter was 19%, slowing down by 1 percentage point quarter-on-quarter. The year-on-year increase in average order value also slightly decreased from 3% in the previous quarter to 2%. Volume and price each "contributed" 1 percentage point to the GMV growth rate's quarter-on-quarter slowdown.

As for revenue growth, it was even less satisfactory. This quarter's revenue grew by 28% year-on-year, a significant decline from 41% in the previous quarter, and it also fell short of the market expectation of 33%. The reason is that the monetization rate of the 3P marketplace model declined by nearly 0.3 percentage points quarter-on-quarter, marking the first decline since Q4 2023.Research indicates that the company's recent focus has shifted towards reducing shipping costs for merchants (recorded as a deduction from revenue), resulting in a decline in overall monetization rate despite Shopee raising commission rates in some markets.

Fortunately, regarding the improvement in profit margins that the market is more concerned about, the e-commerce segment achieved approximately $200 million in operating profit this quarter, more than double the market expectation of $86 million. The operating profit margin reached 5.5%, significantly higher than the market expectation of 2.4% and last quarter's 2.2%, with the pace of profit improvement far exceeding expectations, compensating for the poor performance on the growth front.

3. Rapidly expanding into new markets, is Monee Finance's scale and risk increasing?: The financial segment, which has just completed its name change, achieved revenue of approximately $790 million this quarter, a year-on-year increase of 58%, continuing to accelerate by 3 percentage points compared to the previous quarter, and exceeding the 48% expectation shown by Bloomberg's sell-side. It continues its strong growth momentum.

In terms of core operating indicators, including the total loan balance on and off the balance sheet of $5.8 billion, a year-on-year increase of 76%, continuing to accelerate from 64% in the previous quarter. Meanwhile, the ratio of overdue loans over 90 days decreased by 0.1 percentage points to 1.1% this quarter, suggesting that while the business scale is growing, the loan quality is improving as well.

However, Dolphin Research has noted that this quarter the bad debt loss provision recognized in expenses was $280 million, significantly increasing by 174% and 20% year-on-year and quarter-on-quarter respectively, both exceeding the corresponding growth rate of the loan balance, indicating rising pressure from bad debts. Additionally, some investment banks have indicated that with Monee's rapid business expansion into more (potentially lower credit quality) new markets, there may be an increase in bad debt pressure and a decline in profit margins.

In fact, the operating profit margin of the financial segment this quarter was 29%, which is indeed lower than the market expectation of 30.7%. This means that despite the financial segment's revenue exceeding expectations, the profit only met expectations, seemingly validating the logic that new markets drag down credit quality and profit margins.

1. From the perspective of costs and expenses, this quarter the overall gross profit reached $2.24 billion, with the overall gross profit margin increasing from 44.6% in the previous quarter to 46.2%, significantly higher than market expectations.

Additionally, it is worth praising that this quarter the company revised its cost disclosure criteria, providing more detailed gross profit breakdowns for each business segment. Specifically, aside from a slight decline in the gross profit margin of the gaming segment year-on-year (possibly also affected by a significant increase in deferred revenue), the gross profit margins of other segments have all shown year-on-year increases. Among them, the gross profit margin of the 3P mall business increased significantly from 10% in the same period last year to 16.5% this quarter, marking the most notable improvement and being the main reason for the e-commerce segment's profit exceeding expectations this quarter.

In terms of expenses, the total expenditure for the four operating expenses was nearly $1.82 billion, a year-on-year increase of 19%. Clearly, this is lower than the revenue growth rate of over 30%, but from an absolute perspective, a 20% increase in expenses is not low, reflecting that Sea is currently in an optimistic expansion cycle**

Specifically, marketing expenses increased by 21% year-on-year, significantly up from the previous quarter's 9% growth. This is mainly due to the financial sector's marketing expenses surging nearly 400% year-on-year. At the same time, bad debt provisions also skyrocketed by 174% year-on-year, both of which are related to financial operations, further validating the situation where financial operations are expanding into new markets on a large scale, leading to a decline in sector profit margins.

1. Overall, on one hand, the growth of the e-commerce sector is indeed below market expectations, and on the other hand, the gaming sector's revenue under GAAP standards is also below expectations due to deferred revenue impacts. Therefore, Sea's overall revenue growth this quarter is 30% year-on-year, a significant decline of 7 percentage points quarter-on-quarter, which appears to be below the market expectation of 31% growth.

However, conversely, due to the significant improvement in profits (adj. EBITDA) from both the e-commerce and gaming businesses, Sea's overall adj. EBITDA this quarter reached $950 million, far exceeding the market expectation of approximately $660 million by about 44%.

Dolphin Research Insights:

As mentioned earlier, although Sea's performance this time cannot be considered a comprehensive exceedance of expectations, the core indicators show that gaming revenue growth significantly exceeded expectations, and the profit margin improvement in the e-commerce business was also much higher than expected. These two highlights are enough to warrant praise, and the post-earnings rise is recognized by Dolphin.

However, the more critical question is whether, after this decent performance and the high opening stock price, one should continue to be bullish and vote with their funds? Dolphin Research believes this should be viewed from two perspectives:

1. Firstly, from a medium to long-term perspective, Sea is undoubtedly still in an upward cycle. In the gaming sector, even if such explosive growth cannot be sustained this quarter, it is highly probable that revenue growth will stabilize and trend upwards after activating old users for a period.

In the e-commerce sector, although there were slight blemishes in this quarter's growth, the narrative from sell-side analysts before the earnings was that they did not have particularly high expectations for GMV growth, believing it would likely maintain around 20% growth with a gradual slowdown each quarter. Moreover, with the preliminary agreement reached between China and the U.S., concerns over tariff impacts have also eased. In contrast, the market is more concerned about what the steady-state profit margin of the e-commerce business can actually be, and how fast and at what pace it can improve. This performance has clearly given the market more confidence and imaginative space. (Although the ultimate question of what the profit margin actually is remains unknown).

The financial sector, recognized by the market as the second growth curve outside of e-commerce, reflects the accelerated efforts to explore new markets shown in this performance. Although this may bring short-term pressure on profit margins, in the long run, it will undoubtedly further increase the revenue ceiling of this sector and the incremental market value imagination space it brings.

Therefore, it can be said that Sea's overall performance trend remains positive.

1. However, from another perspective, the company's current price and market capitalization of over $90 billion already reflect a considerable degree of the aforementioned optimistic performance expectations. Although there are no definitive answers within the market regarding the long-term steady-state profit margins of the e-commerce business and the long-term market scale of the financial business, it is difficult to assess the long-term outlookIs Sea's current price considered expensive or cheap?

However, the expectations of mainstream sell-side analysts in the market mostly project a linear extrapolation of the currently optimistic performance trend to at least 2026. This is the performance requirement implied by the current market capitalization. In this regard, Dolphin's view is that there is a high probability of achieving this, but it does not possess a high degree of certainty and confidence.

From a short to medium-term perspective, this quarter may belong to a "one-time" strong performance in the gaming business, which may instead create a short-term peak in performance and valuation. The risks that may arise subsequently are that after the co-branded benefits fade, the revenue growth of the gaming business may decline again; the slowdown in e-commerce growth this quarter may further worsen due to potential tariffs and the impact of global economic growth slowing down; and the financial business may face rising bad debt risks and business scale due to "overly aggressive" expansion, leading to pressure on profitability in the financial sector. These three issues are potential concerns that we need to pay close attention to, as they will affect decision-making in the short to medium term.

The following is a detailed interpretation of the financial report:

1. Garena Games: Co-branding with "Naruto" brings explosive performance

First, let's look at the segment that exceeded expectations the most this quarter—the gaming segment, which in the past had been a "drag," has "exploded" this season with revenue actually soaring nearly 51% year-on-year, greatly exceeding the sell-side expectation of only around 11% growth (which may be relatively outdated) , and the growth rate, which was only around 20% in previous quarters, has also jumped significantly.

According to high-frequency data from Sensor Tower provided by HSBC, the expectation was that Garena's revenue would only increase by 4% quarter-on-quarter (actual increase of 43%), and we speculate that this may be due to sell-side analysts not having high expectations for revenue growth, leading to a significant error. However, based on communications between Dolphin's investment research and some buy-side investors, there are other high-frequency data points that validate the substantial increase in revenue, and for some informed buy-side investors, the actual exceedance of expectations is not as large as it appears.

According to management's explanation, the main reason is that Free Fire collaborated with the top IP "Naruto" this season, significantly boosting FF's daily active user count (which is close to the historical peak before the pandemic). According to the company's disclosed data, this season's active users are approximately 662 million, with 65 million paying users (far exceeding the market expectation of 53 million) , representing a quarter-on-quarter increase of 15 million and 4.7 million, respectively. This indeed verifies the explosive growth in active user numbers.

From the data, it appears that a significant portion of the active users recalled this time are likely to be lost old players, resulting in the proportion of paying users this quarter skyrocketing from 8.2% last season to 9.8%, and the average revenue per paying user also surged by 15% year-on-year to $12.

However, in terms of financial revenue, due to a considerable portion of this massive revenue not yet converted into income and still counted as deferred revenue, the GAAP revenue for the gaming business this season only grew by 8%, which underperformed expectations. However, this is not necessarily a drawback, as the market does not pay much attention to the financial revenue of the gaming business; the actual revenue reflecting business conditions is key.

The more important issue is that this surge in revenue is ultimately driven by the favorable effects of collaboration with popular IPs, which may have a "one-time" benefit factor. Whether the recalled players will churn again after the collaboration and whether subsequent revenue can maintain such high growth is questionable. Attention should be paid to the management's views during the conference call.

II. Growth is not surprising, but profits save the day

For the group’s most important Shopee e-commerce segment, this quarter has both good and bad news; the growth performance is not impressive, but the profit improvement has exceeded expectations. This season, GMV reached 28.6 billion, remaining flat quarter-on-quarter, with a year-on-year growth rate slightly dropping to 21.2%, which is below the market expectation of 23%.** In terms of trends, a quarter-on-quarter slowdown of 2 percentage points is not a major issue and can be seen as stable performance, but not meeting the market's higher expectations is undeniable.

Breaking down price and volume, the year-on-year growth rate of order volume this season is 19%, with a quarter-on-quarter slowdown of 1 percentage point, while the year-on-year increase in average order value also slightly decreased from 3% last quarter to 2%. The combined quarter-on-quarter slowdown of 1 percentage point in both volume and price has led to a slowdown in GMV growth, but currently, the extent is minimal, and the risks of global economic slowdown caused by U.S. tariffs have not yet manifested.

However, in terms of revenue, this season, Shopee's revenue grew by 28% year-on-year, a significant decline from last season's 41%, and it clearly underperformed the market expectation of 33%.The main reason is that the monetization rate of the 3P mall model this quarter has declined by nearly 0.3 percentage points compared to the previous quarter, marking the first decline since Q4 2023.

Although the company continues to slightly raise the commission rate in some markets, research indicates that the company's recent focus has shifted towards reducing shipping costs for merchants (recorded as a reduction in revenue), which has led to the decline in the monetization rate, and thus the market has certain expectations regarding this.

Fortunately, although the growth performance is not particularly strong, the profit release from the e-commerce business this quarter has still significantly exceeded expectations, which we will detail later.

3. The financial business renamed Monee is growing "steadily" and rapidly, but is the bad debt risk increasing?

The financial segment, which has just completed its renaming, confirmed revenue of approximately $790 million this quarter, a year-on-year increase of 58%, continuing to accelerate by 3 percentage points compared to the previous quarter, and exceeding the 48% expectation shown by Bloomberg's sell-side. It continues to maintain strong growth momentum.

In terms of operational indicators, the on-balance sheet loan balance reached $4.9 billion this quarter, a year-on-year increase of 81.5%, including a total loan balance of $5.8 billion on and off the balance sheet, which is a year-on-year increase of 76%, continuing to accelerate from the previous quarter's 64%.

However, it is worth noting that although the proportion of bad debts overdue by more than 90 days disclosed by the company has decreased to 1.1% this quarter, the confirmed bad debt provision loss this quarter is $280 million, which has increased significantly by 174% and 20% respectively compared to the previous quarter, both of which are higher than the corresponding growth rate of the loan balance. From this perspective, as Monee's business rapidly expands and gradually moves into more (potentially lower credit quality) new markets, the risk of bad debt losses it bears may actually be increasing.

4. The Progress of E-commerce Profit Improvement Exceeds Expectations

Compared to the positive growth indicators (games and finance) and the negative ones (the most important television segment), the performance of profit indicators is relatively outstanding.

First, the standout gaming segment this season, although the operating profit under GAAP standards fell short of market expectations due to the low conversion rate of revenue from actual cash flow. However, the more noteworthy adjusted EBITDA for games (due to deferred revenue) actually surged by 56.8% year-on-year, consistent with the growth rate of cash flow. The EBITDA margin as a percentage of cash flow also increased from 57.1% in the same period last year to 59.1%.

The e-commerce segment achieved approximately $200 million in operating profit this season, more than double the market expectation of $86 million. The operating profit margin reached 5.5%, far exceeding the market expectation of 2.4% and the previous quarter's 2.2%. The pace of profit improvement is significantly better than expected.

As for the DFS financial segment, although the revenue growth rate significantly exceeded market expectations, the actual operating profit of $230 million only met market expectations. Combined with the previously mentioned increase in bad debt provisions, this may indeed validate some sell-side concerns that Monee's expansion into relatively lower-quality markets has led to an increase in bad debts and a decline in profit margins.

5. Significant Improvement in E-commerce Gross Margin

Due to the actual growth of the e-commerce segment being lower than market expectations, and the gaming segment also underperforming in revenue due to deferred income issues under GAAP standards, Sea's overall revenue this season grew by 30% year-on-year, with a noticeable sequential decline of 7 percentage points, appearing to be below the market expectation of 31%.

In terms of gross profit, the company achieved a gross profit of $2.24 billion this season, with the overall gross margin increasing from 44.6% to 46.2%, better than market expectations.

This quarter, the company revised the disclosure standards for costs and gross profits in its segmented reporting, providing more detailed information on the gross profit changes for each business segment. Specifically, aside from the slight decline in gross margin for the gaming segment (possibly affected by the significant increase in deferred revenue, resulting in lower recognized revenue), the gross margins for other segments, excluding gaming, have all shown year-on-year increases. Notably, the gross margin for the 3P mall business increased significantly from 10% in the same period last year to 16.5% this season, marking the most substantial improvement. This is also the main reason why the profit margin for the e-commerce business can significantly exceed expectations

6. Expense growth accelerates, pointing to new market expansion in financial services

On the expense side, total operating expenses amounted to nearly $1.82 billion, a year-on-year increase of 19%, with the growth rate remaining basically flat compared to the previous quarter. Clearly, this is lower than the revenue growth rate of over 30%, indicating that the expense ratio is still being passively diluted. However, from an absolute perspective, a 20% increase in expense investment is evidently not low, reflecting that Sea is still in an optimistic expansion cycle.

Specifically, marketing expenses increased by 21% year-on-year, which is a significant improvement compared to the less than 10% growth in the third and fourth quarters of last year, primarily due to the marketing expenses in the financial sector surging nearly 400% year-on-year. At the same time, the bad debt provision losses mentioned earlier also surged by 174% year-on-year, with these two financial-related expenditures being the main reasons for the overall increase in Sea's expenses this quarter, both of which validate the trend of financial services expanding into new markets on a large scale.

Dolphin Research's past analysis on [Sea]:

November 13, 2024, financial report commentary “ Sea: Is Southeast Asia's Little Tencent becoming 'Little Sweetheart'? ”

November 13, 2024, conference call minutes “ Sea: How to view subsequent growth (3Q24 conference call) ”

August 13, 2024, financial report commentary “ Sea: Strength shatters ghost stories, Southeast Asia's Little Tencent is still doing well ”Minutes of the conference call on August 13, 2024: Sea: Will the good growth trend in e-commerce and gaming continue?

Financial report commentary on May 17, 2024: ** Southeast Asia's little Tencent: "Dead enemies" turn into "friends," is Sea rising again?****

Minutes of the conference call on May 17, 2024: ** Sea: We believe e-commerce competition will not become extreme again****

Financial report commentary on March 5, 2024: ** Tiktok's absence sends a reversal, is SEA's spring coming?****

Minutes of the conference call on March 5, 2024: ** Sea: E-commerce GMV in 2024 is expected to achieve around 18% growth****

Financial report commentary on November 15, 2023: SEA: Jumping left and right, successfully playing itself to collapse

Conference call on November 15, 2023: SEA: Seize the time window, invest heavily in live streaming & logistics facilities

Conference call on August 15, 2023: SEA: Focus on user scale and engagement, seize live streaming opportunities

Financial report commentary on August 15, 2023: Little Tencent SEA: After severing an arm to survive, the backlash is surging ？

In-depth:

On June 8, 2022: "Dual business flywheel stops turning, SEA deeply trapped in transformation pain period"

On January 10, 2022: "Stay in a corner or strike across the sea? Southeast Asia is still SEA's 'dragon's rising place'"Risk Disclosure and Disclaimer of This Article: Dolphin Research Disclaimer and General Disclosure