To The Moon

Forrest Li, CEO of Sea Ltd, wrote a memo to rally its staff to achieve positive cash flow for the company as fast as possible.

The bearish sentiment has made fund raising difficult. To achieve the goal, the management will forgo salaries and rein in expenses.

The message was specific to cash-based compensation and that could mean share grants may continue for the executives.

That could be limited in scope too considering that Forrest didn't receive any stock options since 2020. About 10,000 stock options were given to the management in 2021. Estimated to cost just US$150,000.

In FY21, the directors and executives received US$6.4m in compensation.

Compared to the cash flow from operations of US$209m, it is a mere 3% difference. Unlikely to move the needle for Sea.

The signalling is more important than the monetary value. It shows the management is serious about cost cutting and has led by example.

This reminds us of Ingvar Kamprad, the IKEA founder who flew economy and stayed at budget hotels. He was exemplary in his action and enforced his frugal philosophy in the company. He said, "wasting resources is a mortal sin at IKEA".

Now Sea employees have prudence drilled into their heads.

At least Sea has been generating positive cash flow from its operations for the last 3 years.

Free cash flow is the number to watch in order to be really sustainable. In FY21, the free cash flow was -US$563m.

However, the 1H22 results showed that Sea is moving further away from the goalpost. Even its operating cash flow was negative at -US$1.2b, don't even talk about achieving positive free cash flow.

Indeed they need to slash expenses fast and reverse the grow-at-all-cost mentality. It is unlikely they will achieve positive free cash flow in FY22. Hopefully their cost cutting work and FY23 turns out to be a better year.

$Sea Ltd(SE)$