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Sea Limited Reports Second Quarter 2018 Results

August 21, 2018

SINGAPORE--(BUSINESS WIRE)--Aug 21, 2018--Sea Limited (NYSE:SE) (“Sea” or the “Company”) today announced its financial results for the quarter ended June 30, 2018.

“Sea again delivered strong results in the second quarter of 2018 as we capitalized on our ability to anticipate and quickly adapt to evolving industry dynamics,” said Forrest Li, Chairman and Group Chief Executive Officer of Sea. “Shopee continued to expand rapidly across all markets, strengthening its leadership in the region. Our monetization strategy for Shopee is delivering ahead of expectations, even at this early stage. Marketplace revenue surged by more than 69% sequentially to US$37.3 million, as more merchants invested in our value-added services to deepen engagement with their customers. GMV increased more than 14% sequentially to US$2.2 billion, while sales and marketing expenses as a percentage of GMV continued to decline as our growing scale enabled further cost efficiencies.”

Mr. Li continued, “In digital entertainment, our efforts to deepen our diversification into mobile games, self-development, and new markets globally are yielding encouraging results. In the month of June, self-developed game revenue accounted for approximately 13% of adjusted digital entertainment revenue, a new record high, driven by the breakout success of our first self-developed global hit, Free Fire.”

Second Quarter 2018 Key Metrics

Group Total adjusted revenue was US$219.6 million, up 71.0% year-on-year from US$128.4 million for the second quarter of 2017 and up 11.4% quarter-on-quarter from US$197.0 million for the first quarter of 2018. Total adjusted EBITDA was US$(161.9) million, compared to US$(50.9) million for the second quarter of 2017 and US$(144.7) million for the first quarter of 2018. Digital Entertainment Adjusted revenue was US$139.1 million, up 19.0% year-on-year from US$116.9 million for the second quarter of 2017 and a decrease of 4.7% quarter-on-quarter from US$146.0 million for the first quarter of 2018. The quarter-on-quarter drop was primarily attributable to a decrease in the number of paying users in Vietnam, as a result of measures launched in April by Vietnam’s leading mobile operators to restrict the use of prepaid telco cards for online game top-ups. We are actively strengthening alternative top-up channels to assist our paying users in Vietnam. Adjusted EBITDA was US$48.6 million, up 20.8% year-on-year from US$40.2 million for the second quarter of 2017 and decreased 11.6% quarter-on-quarter from US$55.0 million for the first quarter of 2018. Quarterly active users (“QAUs”) reached 160.6 million, an increase of 150.2% year-on-year from 64.2 million for the second quarter of 2017 and up 26.8% quarter-on-quarter from 126.7 million for the first quarter of 2018. Average revenue per user (“ARPU”) was US$0.9 compared to US$1.8 for the second quarter of 2017 and US$1.2 for the first quarter of 2018. E-commerce Gross merchandise value (“GMV”) was US$2.2 billion, an increase of 170.6% year-on-year from US$821.2 million for the second quarter of 2017 and up 14.4% quarter-on-quarter from US$1.9 billion for the first quarter of 2018. Gross orders for the quarter totaled 127.8 million, an increase of 180.9% year-on-year from 45.5 million for the second quarter of 2017 and up 14.7% quarter-on-quarter from 111.4 million for the first quarter of 2018. Adjusted revenue was US$58.8 million, up 2,164.7% year-on-year from US$2.6 million for the second quarter of 2017 and up 74.3% quarter-on-quarter from US$33.7 million for the first quarter of 2018. Adjusted revenue included US$37.3 million of marketplace revenue 1 and US$21.5 million of product revenue 2. Adjusted EBITDA was US$(188.3) million, compared to US$(76.2) million for the second quarter of 2017 and US$(179.6) million for the first quarter of 2018. Sales and marketing as a percentage of GMV stood at 6.2%, and improved from 6.8% for the second quarter of 2017 and 6.6% for the first quarter of 2018. Digital Financial Services Gross transaction value of our digital financial services as a whole (“GTV”) was US$2.5 billion, an increase of 608.0% year-on-year from US$348.0 million for the second quarter of 2017 and up 44.7% quarter-on-quarter from US$1.7 billion for the first quarter of 2018. 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.

_____________________________________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.

Strategic Business Updates

Digital Entertainment

As growing smartphone penetration continues to improve access to online games globally, Garena has taken steps to leverage our leading position in the industry and our clear competitive strengths to capture the growth opportunities ahead. In particular, we have focused on three key strategic initiatives – moving from PC-only to mobile-first, moving from pure game publishing to both game publishing and development, and expanding from a regional footprint to a global presence.

These efforts continue to generate positive results. In June 2018, approximately 73% of our adjusted revenue for digital entertainment was derived from mobile games, approximately 13% was generated by our self-developed game, and approximately 7% was derived from outside the seven core markets in our region.

Free Fire, our first self-developed hit game, remains one of the leading games in the battle royale category in our region, and during the quarter was among the top-ranked games in its category in the App Store and on the Google Play Store in several non-core markets, including Brazil and Mexico. Its daily active user (“DAU”) count has reached a record high of more than 16 million. With the development of various monetization features in the game such as the season pass concept, we see encouraging results from monetizing the game, which accounted for an increasingly significant share of our adjusted revenue for digital entertainment.

Moreover, we continue to explore opportunities to expand the focus of our game business to capture new trends and opportunities, including those related to esports and game streaming, to further enhance our user engagement and develop additional avenues of income.

For example, Garena was one of the organizers of the Arena of Valor World Cup (“AOV World Cup”) held in Los Angeles in late July. Garena organized a series of tournaments across the region leading to the final. In our markets, the competitions in aggregate attracted over 33 million views online across all streaming platforms, with the final attracting over 5 million views. We believe the enthusiasm generated by the esports and streaming activities further enhanced the user engagement of the game, which has recently achieved a record high DAU count of more than 14 million.

Our efforts to foster strong community engagement around our key titles on streaming platforms continued to gain traction. According to research by Newzoo on the global esports streaming market, two of our esports channels – Garena and Vietnam Esports TV – ranked in the top five Youtube channels globally in terms of esports hours viewed during the first quarter of 2018.

E-commerce

In the second quarter of 2018, Shopee continued to demonstrate robust growth in GMV, gross orders, and adjusted revenue, complemented by continuing efficiency improvements.

We also recorded significant growth in marketplace revenue of 69.3% quarter-on-quarter, well ahead of the GMV growth rate, as a larger number of sellers made use of our expanding suite of offerings, from advertising tools to value-added services such as fulfillment and logistics.

Shopee is also benefiting from ever-improving economies of scale as the number of buyers and sellers on the platform grows, and users build greater loyalty to the platform. During the quarter, sales and marketing expenses as a percentage of GMV fell once again to 6.2%, compared to 6.6% in the first quarter of 2018.

Other Developments

Convertible Notes Offering

In June 2018, we raised US$575 million in aggregate principal amount of 2.25% convertible senior notes due 2023. The offering size was increased from the original US$400 million to US$500 million to address investor demand, and the subsequent full exercise by the initial purchasers of a 15% ‘greenshoe’ option brought the total offering to US$575 million.

The additional capital further bolsters our balance sheet, and strengthens our ability to address the evolving needs of the users in our region, be they in digital entertainment, e-commerce, or digital financial services. The net proceeds from this offering will be used for business expansion and other general corporate purposes.

(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 June 30, 2018 Compared to Three Months Ended June 30, 2017

Revenue

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

Our total revenue increased by 81.0% to US$183.8 million in the second quarter of 2018 from US$101.5 million in the second quarter of 2017. Our total adjusted revenue increased by 71.0% to US$219.6 million in the second quarter of 2018 from US$128.4 million in the second quarter of 2017. These increases were mainly driven by the growth in each of the segments detailed as follows:

Digital Entertainment: Revenue increased by 18.1% to US$108.0 million in the second quarter of 2018 from US$91.5 million in the second quarter of 2017. Adjusted revenue increased by 19.0% to US$139.1 million in the second quarter of 2018 from US$116.9 million in the second quarter of 2017. This increase was primarily due to improvements in monetization of our existing games and the launch of new games. E-commerce: Revenue increased by 4,652.6% to US$54.7 million in the second quarter of 2018 from US$1.2 million in the second quarter of 2017. Adjusted revenue increased by 2,164.7% to US$58.8 million in the second quarter of 2018 from US$2.6 million in the second quarter of 2017. This increase was primarily due to the growth of our GMV and 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. Digital Financial Services: Revenue decreased by 46.3% to US$2.9 million in the second quarter of 2018 from US$5.3 million in the second quarter of 2017. Adjusted revenue decreased by 36.1% to US$3.4 million in the second quarter of 2018 from US$5.3 million in the second quarter of 2017, as we switched to focus our efforts on strengthening our infrastructure to support our existing platforms. The decrease was also in part due to the restrictive measures imposed by Vietnam’s leading mobile operators on using prepaid telco cards for online game top-ups. Other Services: Revenue increased by 406.9% to US$18.2 million in the second quarter of 2018 from US$3.6 million in the second 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 131.4% to US$175.2 million in the second quarter of 2018 from US$75.7 million in the second quarter of 2017.

Digital Entertainment: Cost of revenue increased by 17.2% to US$62.0 million in the second quarter of 2018 from US$52.9 million in the second quarter of 2017. The increase was primarily due to the increase in royalty payments to game developers as well as in 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 396.3% to US$113.2 million in the second quarter of 2018 from US$22.8 million in the second 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

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