One year after IPO, have Sea and Razer delivered on their promise to shareholders?

The Shopee app, Garena Interactive Holding Ltd.'s mobile marketplace, is displayed on the smartphone of an employee at the company's headquarters in Singapore, on Thursday, Aug. 25, 2016. Photographer: Nicky Loh/Bloomberg

Singapore-based Sea Ltd and Razer Inc’s IPOs last year on the New York Stock Exchange and Hong Kong exchange, respectively, marked a milestone for the region’s fledgling startup ecosystem. As other unicorns in the region mull a potential listing, it is time to look at how Sea and Razer have performed in the public markets.

Let’s look at Sea Ltd first

Sea Ltd had a reasonably good third quarter with total GAAP revenues rising 117.8 per cent to $204.92 million from $94.09 million a year earlier. While both GAAP and adjusted non-GAPP net losses worsened during the third quarter, sales and marketing expenses as a percentage of Gross Merchandise Value (SG&A/GMV) fell from a high of 8-9 per cent last year to 5.7 per cent during the third quarter of 2018. This metric is specific to Sea’s e-commerce business called Shopee where its marketplace revenue rose 34.8 per cent quarter-on-quarter (QoQ) as more sellers use its suite of advertising and value-added services.

The following is a snapshot of Sea’s income statement as of the end of Q3 2018:

Source: Company’s earnings report

For the digital entertainment segment, adjusted revenue and adjusted EBITDA rose 7.4 per cent and 19.2 per cent to $144.56 million and $53.72 million respectively. This was driven by the performance of its key game titles. One of the self-developed games, ‘Free Fire’, grew rapidly, surpassing 200-million registered users globally and achieving a peak daily active user count of over 27 million, compared to the previously disclosed peak of over 16 million daily active users (DAUs).

On November 19, the company made further inroads with its digital entertainment division when it announced the signing of a binding letter of intent with Tencent to gain the right of first refusal to publish the latter’s mobile and PC games in the core markets of Indonesia, Taiwan, Thailand, the Philippines, Malaysia, and Singapore.

How has the Sea Ltd stock fared on the NYSE

Source: Phillip Securities Pte Ltd (23 November 2018)

Sea Ltd debuted on the New York Stock Exchange in October 2017 at an IPO price of $15.00. The stock rose to an all-time high of $17.19 in mid-June 2018 possibly due to the news of its successful capital raise of $575 million through a convertible note offering. The company’s management said that it plans to use the new financing to support its business expansion, especially its Shopee e-commerce platform.

Since then, the stock has largely moved sideways and stayed in the $12-13 range, not far from the IPO price. On November 20, the stock closed at $12.11 ahead of the earnings release. On November 21, 2018, it closed at $12.80, indicating a positive investor reaction to its financial performance.

Potential concerns

Cash flow is still king for many investors. Sea’s net cash flow from operating activities (CFO) for the six months ending September 30, 2018, worsened to a negative S$353.03 million. While the company is currently in expansion mode, investors will be closely watching how the company works towards achieving positive net cash flow, especially on the operating side.

Now on to Razer

The Razer scrip has seen several ups and downs, spending a majority of the year trading below its IPO price of HK$3.88. On November 23, 2018, the stock was trading at HK$1.19, a fall of approximately 69.3 per cent over a period of one year.

This is a far cry from one year ago when investor enthusiasm, buoyed by the backing of marquee names such as Singapore’s GIC and Hong Kong’s Li Ka-shing, propped the stock up to a high of HK$5.49 on its first day of trading on November 13, 2017.

This decline has chipped away at the gaming hardware maker’s market capitalisation, bringing it down to HK$11.06 billion ($1.41 billion).

Source: Phillip Securities Pte Ltd (November 23, 2018)

The stock price has been underperforming right from the start, except for a short technical rebound from HK$3.00 on 20 February 2018 to hit a high of HK$3.73 the following day. The one-year price has remained below the major 50-, 100-, and 200-day moving averages (MA), with relatively low trading volumes.

Razer’s financial performance

Fundamentally, Razer’s financials showed increased losses based on its latest interim six-month financials as of the end of June 30, 2018. Though total revenues rose 38.5 per cent during the six months till June 2018 to $274.22 million, the company’s net loss attributable to shareholders stood at $56.32 million, up slightly from $51.9 million a year earlier.

Source: Razer’s financial report

Let’s look at a breakdown of its revenues for the same period.

Razer Inc. (Six Months Ending June 30)

 2018 Revenues
US$'000 (Unaudited)
% of 2018 Revenues2017 Revenues
US$'000 (Audited)
% of 2017 Revenues% Year-Over Year Change
Peripherals176,00764.2%132,464 66.9%32.9%
Systems64,747 23.6%62,296 31.5%3.9%
Software Services16,977 6.2%1100.1%15333.6%
Others16,487 6.0%3,134 1.6%426.1%
Total Revenue274,218 100.0%198,004 100.0%38.5%

While Software Services was among the smallest revenue contributors in terms of percentage, the year-over-year (YoY) growth was phenomenal. This can largely be attributed to Razer’s revenue-sharing arrangement with Malaysian e-payments firm MOL Global for the sale of zGold (Razer’s virtual credits for games and entertainment) and revenue generated from MOL subsequent to its acquisition. Razer announced its acquisition of MOL Global in May 2018.

Peripherals continue to be the largest revenue contributor. This is the segment where Razer derives revenues from the sale of high-precision mice, fully customisable keyboards, audio devices and gaming console controllers.

Cash burnt so far

Source: Company financial reports

Cash flow used in operations (CFO) rose to a negative $31.46 million for six months ending 30 June 2018 from a negative $26.69 million a year earlier. In its IPO prospectus in 2017, Razer’s management had noted that the company’s business model has not historically required extensive external capital expenditure, and it does not expect it to change in the future.

However, take a look at the cash flow statement breakdown. Under the line item ‘Acquisition of property, plant and equipment’, cash outflows rose from $5.71 million for the six-month period last year to $8.011 million this year. This is equivalent to a 40.3 per cent jump in capital-related expenditures.

While there is some comfort in knowing that cash and cash equivalents balance as of June 30, 2018, was at a comfortable level of $633.82 million and up from $127.73 million a year ago, shareholders might be concerned about the level of cash outflows from operating activities, and may question when CFO might turn positive.