AP NEWS

Sea Limited Reports First Quarter 2018 Results

May 15, 2018

SINGAPORE--(BUSINESS WIRE)--May 15, 2018--Sea Limited (NYSE:SE) (“Sea” or the “Company”) today announced its financial results for the quarter ended March 31, 2018.

“We again saw healthy growth in our digital entertainment revenue in the first quarter of 2018, and have several new games in the pipeline for launch this year. Meanwhile, Shopee continues to grow ahead of expectations as we capture a larger share of our region’s e-commerce market, and the virtuous cycle created by that accelerated scaling is driving ever-improving economics on our platform,” said Forrest Li, Chairman and Group Chief Executive Officer of Sea. “We will continue to invest in growth, and to focus on improving our services to our platform users, as well as the infrastructure supporting our core businesses.”

First Quarter 2018 Key Metrics

Group Total adjusted revenue was US$197.0 million, up 81.2% year-on-year from US$108.8 million for the first quarter of 2017 and up 19.8% quarter-on-quarter from US$164.5 million for the fourth quarter of 2017. Total adjusted EBITDA was US$(144.7) million, compared to US$(41.4) million for the first quarter of 2017 and US$(140.2) million for the fourth quarter of 2017. Digital Entertainment Adjusted revenue was US$146.0 million, up 42.6% year-on-year from US$102.4 million for the first quarter of 2017 and up 2.9% quarter-on-quarter from US$141.9 million for the fourth quarter of 2017. Adjusted EBITDA was US$55.0 million, an increase of 48.6% year-on-year from US$37.0 million for the first quarter of 2017 and up 4.6% quarter-on-quarter from $52.6 million for the fourth quarter of 2017. Quarterly active users (“QAUs”) reached 126.7 million, an increase of 124.6% year-on-year from 56.4 million for the first quarter of 2017 and up 44.3% quarter-on-quarter from 87.8 million for the fourth quarter of 2017. Average revenue per user (“ARPU”) was US$1.2 compared to US$1.8 for the first quarter of 2017 and US$1.6 for the fourth quarter of 2017. E-commerce Gross merchandise value (“GMV”) was US$1.9 billion, an increase of 199.5% year-on-year from US$648.3 million for the first quarter of 2017 and up 23.0% quarter-on-quarter from US$1.6 billion for the fourth quarter of 2017. Gross orders for the quarter totaled 111.4 million, an increase of 217.4% year-on-year from 35.1 million for the first quarter of 2017 and up 13.3% quarter-on-quarter from 98.3 million for the fourth quarter of 2017. Adjusted revenue was US$33.7 million, up 262.1% quarter-on-quarter from US$9.3 million for the fourth quarter of 2017. Adjusted revenue included US$22.0 million of marketplace revenue 1 and US$11.7 million of product revenue 2. There was negligible e-commerce adjusted revenue for the first quarter of 2017. Adjusted EBITDA was US$(179.6) million, compared to US$(62.7) million for the first quarter of 2017 and US$(175.4) million for the fourth quarter of 2017. Sales and marketing as a percentage of GMV stood at 6.6%, and improved from 7.1% for the first quarter of 2017 and 8.5% for the fourth quarter of 2017.

1 Marketplace revenue mainly consists of commission and advertising income and revenue generated from other value-added services. 2 Product revenue mainly consists of revenue generated from direct sales.

Digital Financial Services Gross transaction value of our digital financial services as a whole (“GTV”) was US$1.7 billion, an increase of 428.6% year-on-year from US$322.0 million for the first quarter of 2017 and up 65.7% quarter-on-quarter from US$1.0 billion for the fourth quarter of 2017. The growth was attributable to the payment processing services provided by AirPay to Shopee in most of our markets, which, depending on the operational arrangement in each relevant market, may include payments from buyers to Shopee accounts under Shopee Guarantee as well as outgoing payments from Shopee accounts to Shopee seller accounts that are operationally handled by AirPay.

Strategic Business Updates

Digital Entertainment

Garena enjoyed healthy growth this quarter, buoyed by factors including the continued expansion of our leading mobile games in the region, Arena of Valor and Free Fire. Free Fire recently achieved 13 million daily active users, placing it amongst the world’s most popular mobile battle royale titles. We continue to complement our leading franchises through growing e-sports leagues, video streaming options, and other ancillary services.

We held Garena World 2018, our region’s largest eSports event, from March 31 to April 1, 2018 in Bangkok, Thailand. We had an attendance of approximately 240 thousand and attracted over 10.6 million views online for the various tournaments at Garena World. In total, over 11,000 teams participated in the tournaments leading up to the event in Bangkok. Garena is well-positioned to ride on the wave of eSports growth as one of the region’s leading game platforms. We continue to invest in our eSports operations to generate user engagement for our games and to promote user acquisition and retention.

Our pipeline of games for release in 2018 features a series of highly anticipated PC and mobile titles. These include both classic and new franchises in different genres.

E-commerce

Shopee achieved robust growth in both GMV and gross orders in each of our markets in the first quarter of 2018 and saw a decrease in sales and marketing expenses from US$135.0 million in the fourth quarter of 2017 to US$127.2 million in the first quarter of 2018. This was driven primarily by our continuous efforts to attract new buyers and sellers in our focus categories while improving our cost efficiency.

Shopee has focused much of its innovation on launching value-added services to our ever-expanding seller base. We continue to broaden our ‘Service by Shopee’ offering in select markets, where we offer sellers a number of value-added services, such as inventory management, online store operations, and fulfillment services. We also provide ‘Shopee Logistics Service’ to create a seamless logistics experience for sellers and buyers. In addition, we conduct direct sales of certain products. With this diverse portfolio of services and offerings, depending on the needs and preferences of our sellers, we can help them manage inventory and fulfill orders from warehouses leased and operated by us, operate their stores on our platform, or purchase products from them for resale on our platform.

Other Development

Appointment of Group Chief Economist

The Company also announced that Santitarn Sathirathai is expected to join the Company as Group Chief Economist in June 2018. Mr. Sathirathai will focus on establishing Sea as a key thought leader in the digital economy and work with policy makers to promote digital transformation in the region. He will report to Forrest Li, Chairman and Group Chief Executive Officer.

Mr. Sathirathai will be joining the Company from Credit Suisse, where he is the head of Emerging Asia Economics Research. He won the award for best economic forecaster for Indonesia by Consensus Economics for each of 2013, 2014 and 2015, the very first economist in Asia to receive such award for three consecutive years, and was selected as one of Asia’s 21 young leaders in 2017 by Asia Society. He is a highly ranked economist for ASEAN and was also rated the best economist for Thailand by Asia Money. Prior to joining Credit Suisse, Mr. Sathirathai worked at the Ministry of Finance of Thailand and Government of Singapore Investment Corporation, and taught macroeconomic courses at Chulalongkorn University in Thailand. Mr. Sathirathai holds a doctorate degree in Public Policy and a master’s degree in Public Administration from Harvard University, as well as a bachelor’s degree in Economics and a master’s degree in Public Policy from the London School of Economics and Political Science.

Summary of Financial Results (Amounts are expressed in thousands of US dollars “$”)

(1) For a discussion of the use of non-GAAP financial measures, see “Non-GAAP Financial Measures.” (2) Unallocated expenses are mainly related to share-based compensation and general and corporate administrative costs such as professional fees and other miscellaneous items that are not allocated to segments. These expenses are excluded from segment results as they are not reviewed by the Chief Operation Decision Maker (“CODM”) as part of segment performance.

Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017

Revenue

The table below sets forth revenue and adjusted revenue generated from our reported segments. Amounts are expressed in thousands of US dollars (“$”).

Our total revenue increased by 65.0% to US$155.0 million in the first quarter of 2018 from US$93.9 million in the first quarter of 2017. Our total adjusted revenue increased by 81.2% to US$197.0 million in the first quarter of 2018 from US$108.8 million in the first quarter of 2017. These increases were mainly driven by the growth in each of the segments detailed as follows:

Digital Entertainment: Revenue increased by 26.3% to US$110.7 million in the first quarter of 2018 from US$87.6 million in the first quarter of 2017. Adjusted revenue increased by 42.6% to US$146.0 million in the first quarter of 2018 from US$102.4 million in the first quarter of 2017. This increase was primarily due to the growth of our QAUs to 126.7 million in the first quarter of 2018 from 56.4 million in the first quarter of 2017, as we launched new games and expanded our existing games into new markets, which in turn increased the number of our paying users. E-commerce: We began monetizing our e-commerce business in 2017. In the first quarter of 2018, our e-commerce revenue was US$27.3 million, including US$15.6 million of marketplace revenue and US$11.7 million of product revenue. Our e-commerce adjusted revenue was US$33.7 million in the same period. There was negligible e-commerce revenue for the first quarter of 2017. The additional services and product offerings we introduced to sellers under ‘Service by Shopee,’ ‘Shopee Logistics Service,’ as well as the other value-added services we recently started to offer created additional income streams for our e-commerce business. Digital Financial Services: Revenue increased by 81.9% to US$3.7 million in the first quarter of 2018 from US$2.0 million in the first quarter of 2017. Adjusted revenue increased by 92.9% to US$3.9 million in the first quarter of 2018 from US$2.0 million in the first quarter of 2017. The increase was primarily attributable to the addition of use cases to our AirPay platform and a further deepening of our market penetration. Other Services: Revenue increased by 210.9% to US$13.3 million in the first quarter of 2018 from US$4.3 million in the first quarter of 2017. The increase was primarily due to ancillary services we provide to our e-commerce platform users.

Cost of Revenue

Our total cost of revenue increased by 119.2% to US$146.5 million in the first quarter of 2018 from US$66.8 million in the first quarter of 2017.

Digital Entertainment: Cost of revenue increased by 29.0% to US$63.6 million in the first quarter of 2018 from US$49.3 million in the first quarter of 2017. The increase was primarily due to the increase in royalty payments to game developers as well as other costs directly associated with our digital entertainment segment which were largely in line with the revenue growth of our business. Others: Cost of revenue for our other segments combined increased by 372.3% to US$82.9 million in the first quarter of 2018 from US$17.6 million in the first quarter of 2017. The increase was primarily due to the costs incurred following the launch of ‘Service by Shopee,’ ‘Shopee Logistics Service,’ and direct sales at the end of 2017; higher bank transaction fees driven by GMV growth from our e-commerce business; higher costs associated with other ancillary services we provided to our e-commerce platform users; as well as higher staff compensation and benefit costs.

Sales and Marketing Expenses

Our total sales and marketing expenses increased by 138.1% to US$152.1 million in the first quarter of 2018 from US$63.9 million in the first quarter of 2017. The table below sets forth the breakdown of the sales and marketing expenses of our two major reporting segments. Amounts are expressed in thousands of US dollars (“$”).

Digital Entertainment: Sales and marketing expenses increased by 47.2% to US$16.2 million in the first quarter of 2018 from US$11.0 million in the first quarter of 2017. The increase was primarily due to the launch of new games and our continued efforts to expand our existing games into new markets, which in turn enlarged our user base and increased the number of our paying users.

Sales and marketing expenses as a percentage of adjusted revenue of 11.1% in the first quarter of 2018 was comparable to the first quarter of 2017.

E-commerce: Sales and marketing expenses increased by 177.1% to US$127.2 million in the first quarter of 2018 from US$45.9 million in the first quarter of 2017. The increase in marketing efforts was aligned with our strategy to fully capture the market growth opportunity and was primarily in connection with shipping and other promotions on our platform in order to increase our user base and enhance user engagement.

Sales and marketing expenses as a percentage of GMV was 6.6% in the first quarter of 2018 and improved from 7.1% in the first quarter of 2017.

General and Administrative Expenses

Our general and administrative expenses increased by 76.5% to US$44.5 million in the first quarter of 2018 from US$25.2 million in the first quarter of 2017. This increase was primarily due to the expansion of our staff force, the increase in office facilities and related expenses, as well as the increase in other expenses.

Research and Development Expenses

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