Sea Limited Reports Fourth Quarter and Full Year 2017 Results

SINGAPORE--(BUSINESS WIRE)--Sea Limited (NYSE:SE) (“Sea” or the “Company”) today announced its financial results for the fourth quarter and full year ended December 31, 2017.

“We made excellent progress in all of our businesses in the fourth quarter,” stated Forrest Li, Chairman and Group Chief Executive Officer of Sea. “Garena, our digital entertainment business, launched its first self-developed mobile game, Free Fire. Shopee, our e-commerce platform, continued to grow robustly across all of our markets, as we forged ahead in our mission to support millions of sellers across the region, and empower consumers. AirPay, our digital financial services platform, further strengthened its payment infrastructure. We remain deeply committed to serving as a key enabler to our region’s rapid digital evolution.”

Fourth Quarter 2017 Key Metrics

  • Group
    • Total adjusted revenue was US$164.5 million, up 72.8% year-on-year from US$95.2 million for the fourth quarter of 2016 and up 8.3% quarter-on-quarter from US$151.9 million for the third quarter of 2017.
    • Total adjusted EBITDA was US$(140.2) million, compared to US$(56.0) million for the fourth quarter of 2016 and US$(99.7) million for the third quarter of 2017.
  • Digital Entertainment
    • Adjusted revenue was US$141.9 million, up 59.2% year-on-year from US$89.1 million for the fourth quarter of 2016 and up 5.3% quarter-on-quarter from US$134.7 million for the third quarter of 2017.
    • Adjusted EBITDA was US$52.6 million, an increase of 216.4% year-on-year from US$16.6 million for the fourth quarter of 2016 and up 16.7% quarter-on-quarter from $45.1 million for the third quarter of 2017.
    • Quarterly active users (“QAU”) was 87.8 million, an increase of 74.2% year-on-year from 50.4 million for the fourth quarter of 2016 and up 27.2% quarter-on-quarter from 69.0 million for the third quarter of 2017.
    • Average revenue per user (“ARPU”) was US$1.6 compared to US$1.8 for the fourth quarter of 2016 and US$2.0 for the third quarter of 2017.
  • E-Commerce
    • Gross merchandise value (“GMV”) was US$1.6 billion, an increase of 206.1% year-on-year from US$515.8 million for the fourth quarter of 2016 and up 48.3% quarter-on-quarter from US$1.1 billion for the third quarter of 2017.
    • Gross orders for the quarter was 98.3 million, an increase of 243.7% year-on-year from 28.6 million for the fourth quarter of 2016 and up 49.2% quarter-on-quarter from 65.9 million for the third quarter of 2017.
    • Adjusted revenue for the quarter was US$9.3 million, up 61.6% quarter-on-quarter from US$5.8 million. There was no e-commerce adjusted revenue for the fourth quarter of 2016.
    • Adjusted EBITDA was US$(175.4) million, compared to US$(59.2) million for the fourth quarter of 2016 and US$(130.0) million for the third quarter of 2017.
    • Sales and marketing as a percentage of GMV stood at 8.5%, for both the fourth quarters of 2016 and 2017, and improved from 9.7% for the third quarter of 2017.
  • Digital Financial Services
    • Gross transaction value of our digital financial services as a whole (“GTV”) grew 310.7% year-on-year from US$250.2 million and 129.3% quarter-on-quarter from US$448.2 million to reach US$1.0 billion.

Full Year 2017 Key Metrics

  • Group
    • Total adjusted revenue was US$553.6 million, up 58.6% year-on-year from US$348.9 million for the full year of 2016.
    • Total adjusted EBITDA was US$(332.1) million, compared to US$(130.1) million for the full year of 2016.
  • Digital Entertainment
    • Adjusted revenue was US$495.9 million, up 49.7% year-on-year from US$331.3 million for the full year of 2016.
    • Adjusted EBITDA was US$174.9 million, an increase of 104.6% year-on-year from US$85.5 million for the full year of 2016.
  • E-Commerce
    • GMV was US$4.1 billion, an increase of 257.5% year-on-year from US$1.2 billion for the full year of 2016.
    • Gross orders was 244.8 million, an increase of 231.7% year-on-year from 73.8 million for the full year of 2016.
    • Adjusted revenue was US$17.7 million.
    • Adjusted EBITDA was US$(444.3) million, compared to US$(169.7) million for the full year of 2016.
    • Sales and marketing as a percentage of GMV was 8.3% compared to 11.0% for the full year of 2016.
  • Digital Financial Services
    • GTV grew 249.2% year-on-year from US$614.4 million to reach US$2.1 billion.

Strategic Business Updates

Digital Entertainment

Garena enjoyed healthy growth this quarter, buoyed by factors including the continued growth of one of the leading mobile games in the region, Arena of Valor. Our mobile game business has been a key beneficiary of the increasing smartphone penetration in the region. For instance, Arena of Valor has achieved 10 million daily active users (“DAU”). Moreover, we continue to complement this franchise through a growing e-sports league, video streaming options and other ancillary services.

Another important milestone this quarter was the launch of our fully self-developed game, Free Fire, on December 4, 2017. Free Fire is a “battle royale” type of mobile game developed in-house by Garena. The game was launched on both the iOS App Store and Google Play Store in many markets around the world and has achieved 6 million DAUs. We are committed to expanding our game development capabilities further, while continuing to build our position as the partner of choice in our markets for the world’s leading game development studios.

E-Commerce

Shopee achieved robust growth in both GMV and gross orders in each of our markets in the fourth quarter of 2017. This growth was driven primarily by our on-the-ground efforts to attract new buyers and sellers in our focus categories.

Shopee has focused much of its innovation on launching value-added services to our ever-expanding seller base, particularly for brands that use our Shopee Mall platform. We continue to expand our support for sellers by offering them integrated logistics and payments solutions as well as fulfilment and other services.

We have begun monetization by rolling out performance-based advertising tools in all of our markets. In Taiwan and in our cross-border transactions, we have also started to charge transaction-based commissions to sellers.

Digital Financial Services

We continue to focus our efforts on building up the infrastructure to support our existing platforms and to improve user experience. One of our recent initiatives in this area is the deeper integration of AirPay with Shopee.

Other Developments

Retirement of Director and Group President and Election of New Director

The Company’s Group President and Director, Nicholas A. Nash, plans to retire from his position as the Group President at the end of 2018. During the period before his retirement, Mr. Nash will continue to advise the Company’s Group Chief Executive Officer on the Company’s long-term strategic priorities. Concurrent with announcing his retirement, Mr. Nash has also retired from the Company’s board as of February 23, 2018. On February 24, 2018, the Company’s board elected Tony Tianyu Hou to serve as a director. Mr. Hou is also the Group Chief Financial Officer of the Company.

Amendment of Equity Incentive Plan

The Company has amended its Amended and Restated Incentive Plan (the “Plan”), effective on February 24, 2018, to increase the maximum number of its Class A ordinary shares (“Ordinary Shares”) that may be delivered under the Plan from 53,000,000 shares to 83,000,000 shares (the “ESOP Pool Size”), and to increase the ESOP Pool Size on the first day of year 2019, 2020, 2021 and 2022 by 5% of the total number of Ordinary Shares outstanding on that day immediately before such annual increase. Sea intends to use such increases in the ESOP Pool Size to make equity grants to its management team and other employees, so as to better attract global talents and more closely align the interest of its employees with the Company and its shareholders.

Summary of Financial Results

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

       
For Three Month For Full Year
ended December 31, ended December 31,
2016   2017 2016   2017
$   $ YOY% $   $ YOY%
(unaudited) (unaudited) (unaudited) (unaudited)
 
Revenue
Digital Entertainment 82,407 106,323 29.0% 327,985 365,167 11.3%
Others 6,054   18,281 202.0% 17,685   49,023 177.2%
88,461 124,604 40.9% 345,670 414,190 19.8%
 
Cost of revenue
Digital Entertainment (47,298) (60,240) 27.4% (185,314) (217,986) 17.6%
Others (15,879)   (40,819) 157.1% (47,284)   (108,892) 130.3%
(63,177)   (101,059) 60.0% (232,598)   (326,878) 40.5%
Gross profit 25,284   23,545 (6.9)% 113,072   87,312 (22.8)%
Other operating income 415 2,157 419.8% 2,103 3,497 66.3%
Sales and marketing expenses (61,763) (156,418) 153.3% (187,372) (425,974) 127.3%
General and administrative expenses (41,304) (51,754) 25.3% (112,383) (137,868) 22.7%
Research and development expenses (5,786)   (8,671) 49.9% (20,809)   (29,323) 40.9%
Total operating expenses (108,438)   (214,686) 98.0% (318,461)   (589,668) 85.2%
Operating loss (83,154) (191,141) 129.9% (205,389) (502,356) 144.6%
Non-operating income (loss), net 15,150 (62,283) (511.1)% 8,503 (46,153) (642.8)%
Income tax expense 1,047 (8,730) (933.8)% (8,546) (10,745) 25.7%
Share of results of equity

investees

(5,279)   (986) (81.3)% (19,523)   (1,912) (90.2)%
Net loss (72,236)   (263,140) 264.3% (224,955)   (561,166) 149.5%
Adjusted net loss (1) (61,981)   (251,563) 305.9% (196,114)   (532,530) 171.5%
 
Adjusted revenue of Digital

Entertainment (1)

89,132 141,883 59.2% 331,252 495,878 49.7%
Adjusted revenue of E-Commerce (1) - 9,319 - - 17,717 -
Revenue of Digital Financial Services 1,709 4,102 140.0% 5,892 16,270 176.1%
Revenue of Other Services 4,345   9,213 112.0% 11,793   23,719 101.1%
Total adjusted revenue (1) 95,186   164,517 72.8% 348,937   553,584 58.6%
 
Adjusted EBITDA for Digital

Entertainment (1)

16,626 52,607 216.4% 85,492 174,939 104.6%
Adjusted EBITDA for E-Commerce (1) (59,188) (175,414) (196.4)% (169,716) (444,280) (161.8)%
Adjusted EBITDA for Digital

Financial Services (1)

(9,240) (7,551) 18.3% (33,682) (36,697) (9.0)%
Adjusted EBITDA for Other Services (1) (2,495) (7,276) (191.6)% (9,276) (18,190) (96.1)%
Unallocated expenses (2) (1,708)   (2,579) (51.0)% (2,937)   (7,887) (168.5)%
Total adjusted EBITDA (1) (56,005)   (140,213) (150.4)% (130,119)   (332,115) (155.2)%
 

(1) For a discussion of the use of non-GAAP financial measures, see “Non-GAAP Financial Measures.”
(2) Unallocated expenses are mainly relating 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 December 31, 2017 Compared to Three Months Ended December 31, 2016

Revenue

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

  For the Three Months ended December 31,  
2016   2017
$  

% of
revenue

$  

% of
revenue

YOY%
(unaudited) (unaudited)
Revenue
Digital Entertainment 82,407 93.2 106,323 85.3 29.0%
E-Commerce - - 4,966 4.0 -
Digital Financial Services 1,709 1.9 4,102 3.3 140.0%
Other Services 4,345 4.9 9,213 7.4 112.0%
88,461 100.0 124,604 100.0 40.9%
 
2016 2017
$

% of total
adjusted
revenue

$

% of total
adjusted
revenue

YOY%
(unaudited) (unaudited)
 
Adjusted revenue of Digital Entertainment 89,132 93.6 141,883 86.2 59.2%
Adjusted revenue of E-Commerce - - 9,319 5.7 -
Revenue of Digital Financial Services 1,709 1.8 4,102 2.5 140.0%
Revenue of Other Services 4,345 4.6 9,213 5.6 112.0%
Total adjusted revenue 95,186 100.0 164,517 100.0 72.8%
 

Our total revenue increased by 40.9% to US$124.6 million in the fourth quarter of 2017 from US$88.5 million in the fourth quarter of 2016. Our total adjusted revenue increased by 72.8% to US$164.5 million in the fourth quarter of 2017 from US$95.2 million in the fourth quarter of 2016. These increases were mainly driven by the growth in each of the segments detailed as follows:

  • Digital Entertainment: Revenue increased by 29.0% to US$106.3 million in the fourth quarter of 2017 from US$82.4 million in the fourth quarter of 2016. Adjusted revenue increased by 59.2% to US$141.9 million in the fourth quarter of 2017 from US$89.1 million in the fourth quarter of 2016. This increase was primarily due to the growth of our QAUs to 87.8 million in the fourth quarter of 2017 from 50.4 million in the fourth quarter of 2016, as we launched new games and expanded our existing games into new markets, which in turn increased the number of our paying users. In the fourth quarter of 2017, we have revised our estimation on certain games’ revenue recognition period (including Arena of Valor’s), using average paying user lives instead of game licensing periods of the respective games. The change in estimation was based on management’s best understanding of the user behaviours reflected in the data that management collected over time. The impact of such changes was accounted for prospectively and was not significant to our digital entertainment revenue had we not made such changes. We believe changing the estimation reflects the economic essence of the respective games better and provides better quality financial reporting.
  • E-Commerce: We began monetizing our e-commerce business in 2017. In the fourth quarter of 2017, our e-commerce revenue was US$5.0 million. Our e-commerce adjusted revenue was US$9.3 million in the same period.
  • Digital Financial Services: Revenue increased by 140.0% to US$4.1 million in the fourth quarter of 2017 from US$1.7 million in the fourth quarter of 2016. This 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 112.0% to US$9.2 million in the fourth quarter of 2017 from US$4.3 million in the fourth quarter of 2016. This 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 60.0% to US$101.1 million in the fourth quarter of 2017 from US$63.2 million in the fourth quarter of 2016. This increase was in line with the overall growth of our businesses:

  • Digital Entertainment: Cost of revenue increased by 27.4% to US$60.2 million in the fourth quarter of 2017 from US$47.3 million in the fourth quarter of 2016. This increase was primarily due to an 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 157.1% to US$40.8 million in the fourth quarter of 2017 from US$15.9 million in the fourth quarter of 2016. This increase was primarily due to bank transaction fees driven by GMV growth from our e–commerce business, as well as higher staff compensation and benefit costs.

Sales and Marketing Expenses

Our total sales and marketing expenses increased by 153.3% to US$156.4 million in the fourth quarter of 2017 from US$61.8 million in the fourth quarter of 2016. This increase was in line with the overall growth of our businesses. The table below sets forth the breakdown of our sales and marketing expenses of our two major reporting segments. Amounts are expressed in thousands of US dollars (“$”).

 

For the Three Months
ended December 31,

 
2016   2017 YOY%
Sales and Marketing Expenses $

(unaudited)

  $

(unaudited)

Digital Entertainment 13,335 16,854 26.4%
E-Commerce 43,990 134,961 206.8%
 
  • Digital Entertainment: Sales and marketing expenses increased by 26.4% to US$16.9 million in the fourth quarter of 2017 from US$13.3 million in the fourth quarter of 2016. This 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.
 

For the Three Months
ended December 31,

2016   2017
Digital Entertainment $

(unaudited)

$

(unaudited)

Sales and marketing expenses 13,335 16,854
Adjusted revenue 89,132 141,883
Sales and marketing expenses as a percentage of adjusted revenue 15.0% 11.9%
 

Sales and marketing expenses as a percentage of adjusted revenue decreased to 11.9% in the fourth quarter of 2017 from 15.0% in the fourth quarter of 2016 as we continue to improve the efficiency of our marketing efforts.

  • E-Commerce: Sales and marketing expenses increased by 206.8% to US$135.0 million in the fourth quarter of 2017 from US$44.0 million in the fourth quarter of 2016. The increase in marketing efforts was aligned with our strategy to fully capture the market growth opportunity and was primarily driven by shipping and other promotions on our platform in order to increase user base and enhance user engagement.
 

For the Three Months ended
December 31,

2016   2017
E-Commerce $

(unaudited)

$

(unaudited)

Sales and marketing expenses 43,990 134,961
GMV 515,791 1,578,599
Sales and marketing expenses as a percentage of GMV 8.5% 8.5%
 

Sales and marketing expenses as a percentage of GMV was 8.5% in the fourth quarter of 2016 and 2017. It improved from 9.7% in the third quarter of 2017.

General and Administrative Expenses

Our general and administrative expenses increased by 25.3% to US$51.8 million in the fourth quarter of 2017 from US$41.3 million in the fourth quarter of 2016. This increase was primarily due to an expansion of our staff force, an increase in office facilities and related expenses, as well as an increase in professional fees and other expenses.

Research and Development Expenses

Our research and development expenses increased by 49.9% to US$8.7 million in the fourth quarter of 2017 from US$5.8 million in the fourth quarter of 2016, primarily due to an increase in research and development staff force as we expanded and enriched our product offerings.

Non-operating Income or Losses, Net

Non-operating income or losses consists of interest income, interest expense, investment gain (loss), fair value change for convertible promissory notes and foreign exchange gain (loss). The amount was a net non-operating loss of US$62.3 million in the fourth quarter of 2017, compared to a net non-operating gain of US$15.2 million in the fourth quarter of 2016. This was primarily due to a charge of fair value loss of US$52.0 million from the fair value accounting treatment for the convertible promissory notes and interest expense on those convertible promissory notes recognized in the fourth quarter of 2017; while an investment gain was recognized in the fourth quarter of 2016 due to the disposal of an associated company.

Income Tax Expense

We had an income tax expense of US$8.7 million in the fourth quarter of 2017 which was primarily due to the corporate income taxes and withholding tax expenses recognized for our digital entertainment segment. The income tax benefit in the fourth quarter of 2016 was mainly driven by a reduction in statutory withholding tax rate in one of our markets.

Share of Results of Equity Investees

We had share of losses of equity investees of US$1.0 million in the fourth quarter of 2017, compared with US$5.3 million in the fourth quarter of 2016. This is primarily due to lower losses we picked up following the disposal of an associated company in 2017.

Net Loss

As a result of the foregoing, we had net losses of US$263.1 million and US$72.2 million in the fourth quarter of 2017 and 2016, respectively.

Adjusted Net Loss

Adjusted net loss, which is net loss adjusted to remove share-based compensation expenses, was US$251.6 million and US$62.0 million in the fourth quarter of 2017 and 2016, respectively.

Full Year Ended December 31, 2017 Compared to Full Year Ended December 31, 2016

Revenue

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

  For the Full Year ended December 31,  
2016   2017
$  

% of
revenue

$  

% of
revenue

YOY%
(unaudited) (unaudited)
Revenue
Digital Entertainment 327,985 94.9 365,167 88.2 11.3%
E-Commerce - - 9,034 2.2 -
Digital Financial Services 5,892 1.7 16,270 3.9 176.1%
Other Services 11,793 3.4 23,719 5.7 101.1%
345,670 100.0 414,190 100.0 19.8%
 
2016 2017
$

% of total
adjusted
revenue

$

% of total
adjusted
revenue

YOY%
(unaudited) (unaudited)
 
Adjusted revenue of Digital Entertainment 331,252 94.9 495,878 89.6 49.7%
Adjusted revenue of E-Commerce - - 17,717 3.2 -
Revenue of Digital Financial Services 5,892 1.7 16,270 2.9 176.1%
Revenue of Other Services 11,793 3.4 23,719 4.3 101.1%
Total adjusted revenue 348,937 100.0 553,584 100.0 58.6%
 

Our total revenue increased by 19.8% to US$414.2 million for the full year ended December 31, 2017 from US$345.7 million for the full year ended December 31, 2016. Our total adjusted revenue increased by 58.6% to US$553.6 million for the full year ended December 31, 2017 from US$348.9 million for the full year ended December 31, 2016. These increases were mainly driven by the growth in each of the segments detailed as follows:

  • Digital Entertainment: Revenue increased by 11.3% to US$365.2 million for the full year ended December 31, 2017 from US$328.0 million for the full year ended December 31, 2016. Adjusted revenue increased by 49.7% to US$495.9 million for the full year ended December 31, 2017 from US$331.3 million in the full year ended December 31, 2016. This increase was primarily due to the growth of our user base in 2017, as we launched new games and expanded our existing games into new markets, which in turn increased the number of paying users.
  • E-Commerce: We began monetizing our e-commerce business in 2017. For the full year ended December 31, 2017, our e-commerce revenue was US$9.0 million. Our e-commerce adjusted revenue was US$17.7 million in the same period.
  • Digital Financial Services: Revenue increased by 176.1% to US$16.3 million for the full year ended December 31, 2017 from US$5.9 million for the full year ended December 31, 2016. This 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 101.1% to US$23.7 million for the full year ended December 31, 2017 from US$11.8 million for the full year ended December 31, 2016. This 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 40.5% to US$326.9 million for the full year ended December 31, 2017 from US$232.6 million for the full year ended December 31, 2016. This increase was in line with the overall growth of our businesses:

  • Digital Entertainment: Cost of revenue increased by 17.6% to US$218.0 million for the full year ended December 31, 2017 from US$185.3 million for the full year ended December 31, 2016. This increase was primarily due to an increase in royalty payments to game developers as well as in other costs directly associated with our digital entertainment business which were in line with the increased revenue in this segment.
  • Others: Cost of revenue for our other segments combined increased by 130.3% to US$108.9 million for the full year ended December 31, 2017 from US$47.3 million for the full year ended December 31, 2016. This increase was primarily due to bank transaction fees driven by GMV growth from our e-commerce business, as well as higher staff compensation and benefit costs.

Sales and Marketing Expenses

Our total sales and marketing expenses increased by 127.3% to US$426.0 million for the full year ended December 31, 2017 from US$187.4 million for the full year ended December 31, 2016.


Contacts

For enquiries, please contact:
Investors / analysts: ir@seagroup.com
Media: media@seagroup.com or sea@brunswickgroup.com


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