AP NEWS

Sea Limited Reports Third Quarter 2018 Results

November 20, 2018

SINGAPORE--(BUSINESS WIRE)--Nov 20, 2018--Sea Limited (NYSE:SE) (“Sea” or the “Company”) today announced its financial results for the quarter ended September 30, 2018.

“We once again achieved strong growth in the third quarter of 2018,” said Forrest Li, Chairman and Group Chief Executive Officer of Sea. “Shopee posted its best ever quarterly gross merchandise value and number of orders as it extended its lead as the largest e-commerce platform in our region. Building on this momentum, our recent annual ‘Shopee 11.11 Big Sale’ also set a historical high record for Shopee, helping to cement its reputation as the go-to online destination for consumers in our region.”

“In digital entertainment, our self-developed game, Free Fire, is now one of the world’s most popular online games, recently achieving its record high peak daily active user count of over 27 million and surpassing 200 million registered users globally,” Forrest continued. “We are also excited about our strong game pipeline, boosted by the new publishing arrangement with Tencent, our long-term investor and strategic partner. The strong momentum across our e-commerce and digital entertainment businesses is reflected in our revised full year outlook.”

Third Quarter 2018 Key Metrics

Group Total adjusted revenue was US$242.8 million, up 60.1% year-on-year from US$151.7 million for the third quarter of 2017 and up 10.6% quarter-on-quarter from US$219.6 million for the second quarter of 2018. Total adjusted EBITDA was US$(183.8) million, compared to US$(99.7) million for the third quarter of 2017 and US$(161.9) million for the second quarter of 2018. Digital Entertainment Adjusted revenue was US$144.6 million, up 7.4% year-on-year from US$134.5 million for the third quarter of 2017 and an increase of 3.9% quarter-on-quarter from US$139.1 million for the second quarter of 2018. Adjusted EBITDA was US$53.7 million, up 19.2% year-on-year from US$45.1 million for the third quarter of 2017 and increased 10.5% quarter-on-quarter from US$48.6 million for the second quarter of 2018. Quarterly active users reached 176.1 million, an increase of 155.2% year-on-year from 69.0 million for the third quarter of 2017 and up 9.7% quarter-on-quarter from 160.6 million for the second quarter of 2018. Average revenue per user was US$0.8 compared to US$2.0 for the third quarter of 2017 and US$0.9 for the second quarter of 2018.

E-commerce

Gross merchandise value (“GMV”) was US$2.7 billion, an increase of 152.7% year-on-year from US$1.1 billion for the third quarter of 2017 and up 21.1% quarter-on-quarter from US$2.2 billion for the second quarter of 2018. Gross orders for the quarter totaled 158.5 million, an increase of 140.5% year-on-year from 65.9 million for the third quarter of 2017 and up 24.0% quarter-on-quarter from 127.8 million for the second quarter of 2018. Adjusted revenue was US$71.2 million, up 1,156.5% year-on-year from US$5.7 million for the third quarter of 2017 and up 21.1% quarter-on-quarter from US$58.8 million for the second quarter of 2018. Adjusted revenue included US$50.3 million of marketplace revenue 1 and US$20.9 million of product revenue 2. Adjusted EBITDA was US$(214.9) million, compared to US$(130.0) million for the third quarter of 2017 and US$(188.3) million for the second quarter of 2018. Sales and marketing as a percentage of GMV stood at 5.7%, and improved from 9.7% for the third quarter of 2017 and 6.2% for the second quarter of 2018. In Indonesia, Shopee’s largest market, total orders for the quarter reached 63.7 million, or a daily average of 0.7 million orders, which we believe made Shopee the largest e-commerce platform in Indonesia. Sales and marketing as a percentage of GMV for Indonesia was even lower than the ratio for Shopee as a whole, as Shopee achieved greater marketing efficiency in its largest market.

____________________ 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

Driven by the strong performance of our key game titles, Garena continued to deliver robust growth in the third quarter of 2018.

Our self-developed game, Free Fire, continues to grow quickly, recently surpassing 200 million registered users globally and achieving a peak daily active user count of over 27 million, compared to our previously disclosed peak of over 16 million daily active users. Our monetization programs for Free Fire are also generating results. Throughout the month of October, Free Fire was consistently the highest grossing game on the Google Play Store in Brazil, Argentina, and Mexico, according to App Annie. It is also building traction in our core markets in Southeast Asia, becoming the highest grossing game on the Google Play Store in Indonesia in late October, based on App Annie’s rankings.

On November 19, we announced a binding letter of intent with Tencent for it to grant us a right of first refusal to publish its mobile and PC games in Indonesia, Taiwan, Thailand, the Philippines, Malaysia, and Singapore.

We believe our strategic partnership with Tencent will enhance our continual efforts to bring top quality content to our region.

E-commerce

Shopee continued to scale rapidly in the third quarter, driven by robust GMV and order growth across all our markets. Its marketplace revenue grew by 34.8% quarter-on-quarter as more sellers made use of Shopee’s suite of advertising and value added services to reach its fast-growing consumer community.

During the quarter, Shopee also continued to benefit from improved economies of scale and greater marketing efficiencies, with sales and marketing expenses as a percentage of GMV falling further to 5.7%, compared to 6.2% in the second quarter of 2018.

This strong momentum was driven by robust user engagement on the platform. At the culmination of the Shopee 11.11 Big Sale, an annual shopping festival held from late October to mid-November, Shopee set its new record with over 11 million orders recorded on the platform over the 24 hours of November 11, 2018. This represented approximately 4.5 times the number of orders recorded on the same date last year.

Other Developments

The Company announced today that Terry Zhao has been appointed President of Garena. Terry has been with the Company since its inception in 2009 and has served in a number of senior roles in our digital entertainment business across several key markets, most recently running our games studio in Shanghai. He has been heavily involved in our push into self-developed games and mobile games and, in his new role, will focus on further extending our offering in these important strategic areas.

The Company also announced that Group Chief Strategy Officer, Alan Hellawell, will depart the Company effective November 23, 2018. Drawing on his prior experience as a seasoned equity analyst in the technology sector, Alan made important contributions to the Company’s successful initial public offering and its transition through the initial stage as a publicly listed company during his tenure. “On behalf of Sea, I would like to thank Alan for his service to the Company, and wish him all the best in his future endeavors,” said Forrest, Sea’s Chairman and Group Chief Executive Officer.

Alan’s responsibilities have been assumed by the Company’s corporate development and strategy team under the oversight of its Group General Counsel, Yanjun Wang. In addition to the legal function, Yanjun also oversees the corporate development, investor relations, public policy, and public relations functions of the Company. Yanjun has been with the Company since early 2014 and, as a member of the Company’s leadership team, worked closely with the board and Group Chief Executive Officer on all key strategic and corporate matters of the Company in the past few years.

(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 September 30, 2018 Compared to Three Months Ended September 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 117.8% to US$204.9 million in the third quarter of 2018 from US$94.1 million in the third quarter of 2017. Our total adjusted revenue increased by 60.1% to US$242.8 million in the third quarter of 2018 from US$151.7 million in the third quarter of 2017. These increases were mainly driven by the growth in each of the segments detailed as follows:

Digital Entertainment: Revenue increased by 41.0% to US$112.5 million in the third quarter of 2018 from US$79.8 million in the third quarter of 2017. Adjusted revenue increased by 7.4% to US$144.6 million in the third quarter of 2018 from US$134.5 million in the third quarter of 2017. This increase was primarily due to improvements in the monetization of our existing games and the launch of new games. E-commerce: Revenue increased by 2,266.1% to US$65.9 million in the third quarter of 2018 from US$2.8 million in the third quarter of 2017. Adjusted revenue increased by 1,156.5% to US$71.2 million in the third quarter of 2018 from US$5.7 million in the third quarter of 2017. This increase was primarily due to the growth of our GMV and our sellers’ use of our services and product offerings under ‘Service by Shopee,’ ‘Shopee Logistics Service,’ as well as our other value-added services. Digital Financial Services: Revenue decreased by 46.8% to US$2.5 million in the third quarter of 2018 from US$4.8 million in the third quarter of 2017. Adjusted revenue decreased by 35.0% to US$3.1 million in the third quarter of 2018 from US$4.8 million in the third 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 continuation of 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 256.3% to US$23.9 million in the third quarter of 2018 from US$6.7 million in the third quarter of 2017. The increase was primarily due to the growth of the ancillary services we provide to our e-commerce platform users.

Cost of Revenue

Our total cost of revenue increased by 139.3% to US$199.3 million in the third quarter of 2018 from US$83.3 million in the third quarter of 2017.

Digital Entertainment: Cost of revenue increased by 15.1% to US$64.0 million in the third quarter of 2018 from US$55.6 million in the third quarter of 2017. The increase was largely in line with revenue growth in our digital entertainment business. Others: Cost of revenue for our other segments combined increased by 388.7% to US$135.4 million in the third quarter of 2018 from US$27.7 million in the third 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 37.0% to US$180.3 million in the third quarter of 2018 from US$131.6 million in the third quarter of 2017. The table below sets forth the breakdown of our sales and marketing expenses of our two major reporting segments. Amounts are expressed in thousands of US dollars (“$”).

Digital Entertainment: Sales and marketing expenses decreased by 12.3% to US$19.0 million in the third quarter of 2018 from US$21.7 million in the third quarter of 2017. The decrease was primarily due to higher marketing pushes around the competition back in 2017.

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