Singapore-based and New York Stock Exchange (NYSE)-listed online games publisher and e-commerce player Sea Limited (Sea) beat street expectations on its first-quarter numbers riding on various factors such as multiple monetisation streams, strong pipeline of games, growth in paid users and a part of the e-commerce business turning cash flow positive.
Sea Ltd posted a whopping 193.8 per cent jump in adjusted total revenue at $578.82 million in the first quarter (2019) compared to $142.08 million in the corresponding period last year.
It reported losses of minus $690.36 million in the said quarter due to a one-time fair value adjustment of minus $436.1 million relating to its 2017 convertible notes in 1QFY2019. However, excluding this one-time charge, the losses remained flat.
Setting the group’s future growth agenda, Sea Ltd founder Forrest Li said, in his opening remarks during the earnings call, “while our strong results for the first quarter demonstrated our potential profitability, we will continue to focus on investing prudently and efficiently in growth…we will continue to prioritise sustainable growth and the long-term market leadership considerations as opposed to short-term profitability.”
Let us take a look at some of the key performance metrics that drove its numbers up and have perhaps set the Sea Group on a path to profitability.
The Singapore-based company that launched its initial public offering (IPO) in October 2017 has seen its stock prices double in less than two years. From $15.00, it traded at $30.59 on May 23 – a day after it declared its 2019 Q1 results. On May 28, its stock price closed at $29.19, down 80 cents, or minus 2.67 per cent.
Paid user growth cheers market
So, how has the $13.61-billion market-cap company managed to keep pace with investor expectations? The upward surge in stock prices post Q1 results can be primarily attributed to the company’s digital entertainment division that drives its ‘paid user growth.’
During the earnings call last week, the company noted that the digital entertainment (Garena) division’s adjusted revenue increased to $393.3 million in 1QFY19 – up 169 per cent YoY, and 70 per cent quarter-on quarter (QoQ). This, say analysts, can be attributed to the enlarged ‘paid user base’ (seen from blue line which denotes average revenue per user (ARPU).
The company has been monetising its games, with the most popular ones such as Free Fire – also considered Sea’s flagship game – garnering over 450 million registered users, of which 50 million are active users who log in daily in over 130 markets.
To break down the numbers further, Sea’s average revenue per user (ARPU) climbed to $1.40 in 1QFY19 from $1.10 in 4QFY18, and $1.20 in the previous year’s quarter (1QFY18). Although there have been drops in ARPPU on both QoQ and YoY basis, the magnitude of the drop has not veered far from the $19 to $20 range.
Moreover, the company noted that the pay-ratio (ratio of paid subscribers to freemium subscribers) rose to 7.6 per cent in 1QFY2019 compared to 5.7 per cent in 1QFY2018 and 5.5 per cent in 4QFY2018.
According to Nomura Global Markets Research, Sea’s e-commerce, online games, and online advertising are likely to witness a rapid growth over the next few years as the ASEAN digital economy, on the whole, is pegged to touch $350 billion by 2026, implying a 10-year cumulative average growth rate (CAGR) of about 20 per cent.
Strong games pipeline may push up earnings
During the current fiscal, Sea expects its adjusted revenue guidance for Digital Entertainment division to grow to $1.3 billion from $1.2 billion in FY19 as it has lined up a slew of launches to monetise it further.
The company has also hinted during the earnings call that they might revise the FY19 Digital Entertainment adjusted revenue guidance in 2QFY19 upon receiving more data.
The move has heightened investors’ expectations that more upside is expected to come from moves to solidify its market leadership in their game lineups, and user engagements.
Sea has entered into a partnership with China’s Tencent Holdings and US-listed Activision Blizzard, Inc to launch its latest game titled, ‘Call of Duty Mobile’, by September 2019, when schools are shut – a strategy that will help the company rope in more users.
This is not the first time that Sea has tied up with the Chinese behemoth. Earlier, in November 2018, the company got into a partnership with Tencent Holdings to launch ‘Speed Drifters’ (QQ Speed) in January 2019.
Sea is also in talks with Tencent to launch Speed Drifters in Latin America, a market where it foresees a lot of growth potential. “In terms of Latin America, we are very excited about the opportunity we have observed there,” Sea founder Forrest Li mentioned in the earnings call.
In February 2019, the company launched another game ‘PUBG Lite’, that it developed in partnership with PUBG Corporation.
Shopee Taiwan turns EBITDA positive
The first quarter has garnered some positive results for the e-commerce division as the company disclosed that Shopee Taiwan has achieved a positive adjusted EBITDA before accounting for headquarters (HQ) cost allocation.
This is regarded as a significant achievement for Sea especially after having launched in the island nation in 2015, and slowly making inroads in the country.
Going forward, the company is looking at a similar growth in the Southeast Asian market, in countries such as Indonesia, Thailand, the Philippines, and Malaysia where the company has a significant presence.
Shopee saw its total gross merchandise value (GMV) climb to 2.9 per cent in 1QFY19 from near zero levels in 1QFY18 and 2.6 per cent in 4QFY18.
The company reiterated on its value-added services (VAS) that contribute a significant portion to the marketplace. In fact, a bulk of the company’s VAS comprises fees that are charged to sellers who then outsource the logistics to third-party logistics service providers. The rest includes transaction and advertising fees.
Although Sea did not break down the VAS separately, it is reasonable to think that as take rates continue to climb, the monetisation benefits derived from user penetration to the Shopee platform will eventually contribute to the adjusted EBITDA growth for the e-commerce division in the long-run as the company seeks to turn around the segment.
Arun George, IPOs, M&A and TMT analyst, Global Equity Research, and a Smartkarma Insight provider, noted that the e-commerce business continues to exhibit exponential revenue growth and a narrowing loss margin. Although cash burn remains a key investor concern, the net cash outflows from operations (net CFO) has dramatically reduced YoY from minus $94.36 million in 1QFY18 to minus $17.82 million in 1QFY19.