After indicating to open with solid gains, shares of recent IPO Sea Limited (SE) have slipped and are trading slightly lower this morning after the company reported its Q3 results and provided FY17 guidance before the open. This was its first quarterly report since going public on October 20.
As we discuss in more detail below, the headline numbers don't look all that impressive on the surface -- a modest $0.02 bottom line beat with revenue up 4%, essentially inline with consensus. But, a deeper dive into its results reveal that there is some solid momentum underlying its business as it continues to take market share and dominate the e-commerce and online gaming industries in Southeast Asia.
That said, SE is bleeding plenty of red ink as it invests heavily for growth.
First, before taking a closer look at the quarterly performance and outlook, we wanted to provide a more detailed look at SE.
SE is a Singapore-based internet company consisting of digital entertainment (mostly online games), e-commerce, and digital financial services. It focuses on the regions of Indonesia, Taiwan, Vietnam, Thailand, Phillipines, Malaysia, and Singapore -- collectively known as "Greater Southeast Asia (GSEA)".
The company operating three key platforms: Garena, Shopee, and AirPay. Here's a closer look at each:
- Garena -- With this platform, users can access mobile and PC online games that SE curates and localizes for each market. With 64.2 million Quarterly Active Users in 2Q17, the Garena platform was number one in terms of market share, measured by revenue in GSEA.
- Shopee: This is its e-commerce platform which also was number one in market share in GSEA in terms of gross merchandise volume and total orders. In fact, Shopee had about 2.2x the number of total orders than its closest competitor in 1H17. Shopee is a third-party marketplace that connects buyers and sellers. During 2Q17, Shopee had on average 9.8 million MAUs.
- AirPay: A platform that provides digital financial services. Through its AirPay e-wallet, consumers can use the AirPay app or one of its partner-operated service counters, to make payments to a wide variety of product and service providers. During 2016, gross transaction volume and transactions for AirPay e-wallet totaled $501.2 million and 133.6 million, respectively.
SE has forged long-term collaborative relationships with global industry leaders as well as local partners that have supported its success and growth. For example, Tencent Holdings and its affiliates, is one of its key game developer-partners and also a shareholder. This long-term relationship is based on aligned interests, and allows SE to benefit from Tencent’s experience as a leading global industry player. In addition, many of GSEA’s most respected and established family investors and sovereign wealth funds are our shareholders.
Now, with a better understanding of SE's business, let's take a closer look at its first quarterly report as a public company. As reported earlier, the company had a loss per share of ($0.75), beating consensus by $0.02. Its operating loss widened considerably to $160.7 million from $52.9 million in the year ago period. This was mostly a result of Sales and Marketing expenses surging by 156% as it builds out its E-commerce business.
On the topline, revenue was up 4% to $94.1 million vs. the $95.1 million expectation. Again, that doesn't look overly impressive. However, in cash terms (which it defines as GAAP revenue + change in Digital Entertainment deferred revenue and E-Commerce commission income), the topline surged by 73% year/year. Breaking this down by segment, Digital Entertainment saw a 62% jump to $134.5 million. In fact, more than half of its Q3 gross billings came from mobile games, hitting a new milestone for SE. Management expects this trend to continue, too, as smart phones continue to proliferate across GSEA. From a product standpoint, its "Arena of Valor" game carried much of the growth.
The E-Commerce business, Shopee, saw gross merchandise volume surge by 219%, making it the largest online retailer in GSEA by a wide margin -- nearly 1.5x the size of its nearest competitor. Essentially all of the underlying user metrics are growing sharply here. For instance, average monthly active buyers were up 247% to 5.9 million. Average order value was $16.2, also higher year/year.
While SE still has a ways to go in terms of monetizing this business, it is making some important strides. Late in 2016, it launched official Shopee stores and has now taken that further with the launch of Shopee Malls, introduced in Taiwan and Singapore in Q3. Additionally, SE is also increasing its collaboration with major department stores in its regions.
And lastly, AirPay also delivered strong growth with GTV up 172% to $448.2 million. Overall, SE says that it is seeing synergies across all three platforms with early success in cross-selling Shopee to its Garena users, as well as improved integration between Shopee and AirPay for payments.
In terms of its outlook, SE guided for FY17 GAAP revenue plus change in Digital Entertainment deferred revenue and E-Commerce commission income to be $540.0 million to $550.0 million for the fiscal year 2017, representing a year-over-year growth of 53% to 56%. For the E-Commerce segment specifically, it expects GMV to be between $3.8 billion to $4.0 billion for the fiscal year 2017, representing a year-over-year growth of 230 % to 248%.
This growth will be supported by the launch of new games, including the mobile launch of Arena of Valor in Singapore, Malaysia, and Philippines, as well as a new title, Onmyoji, which it licensed from NetEase. Also, SE continues to build out its Shopee segment, building its market share in under-penetrated geographies and adding new product lines to its mix.
To summarize, SE is clearly emerging as the market leader in Southeast Asia, akin to an Alibaba for that region. It should continue to drive strong double-digit growth into the foreseeable future. That said, the company is nowhere near profitable and likely won't be for quite some time as it invests for growth.