Sea’s a steady ship, but shares drop after first quarterly results as a public company

Sea chairman and CEO Forrest Li rings the NYSE opening bell. Photo credit: NYSE.

Sea has announced growth in its revenue, gross merchandise volume, and gross billings during Q3 2017. Its net loss has widened, however, and its share price on the New York Stock Exchange (NYSE) continued to fall during after-hours trading.

The Southeast Asian company, the most valuable to list on the exchange in recent memory, released its first quarterly financial results since its US$844 million IPO last month.

Sea grew its ecommerce, payments, and gaming segments. The group’s total GAAP-recognized revenue plus non-GAAP deferred revenue from its Garena digital entertainment business and non-GAAP ecommerce commission income from Shopee was US$151.7 million for the quarter. This translates into 73 percent growth in revenue year-on-year, and 21 percent growth over the preceding three months.

Digital payments platform AirPay reported a gross transaction value of US$448 million, representing year-on-year growth of 172 percent and 29 percent growth on the previous quarter.

NB: Financial figures are unaudited. 1: DE = digital entertainment. EC = ecommerce. 2: DE gross billings = digital entertainment GAAP revenue plus change in digital entertainment deferred revenue. Image credit: Sea.

Speaking today during a conference call, Sea CEO Forrest Li said that mobile drove Garena’s performance during the quarter. “More than half of our billings came from mobile games,” he said. “This is a new milestone as mobile use continues to grow across the region.”

Li attributed Shopee’s growth to its asset-light marketplace model, which he said was perfectly suited to the logistical practicalities of Southeast Asia. “There’s a strong network effect – the more sellers we have, the more buyers we have, and that attracts even more buyers. It is a virtuous cycle of growth. Shopee is now part of the daily life of our users. Shopee is close to 1.5 percent of the region’s GDP.”

He also underlined Shopee’s claim to be the biggest ecommerce player in the region. “[Shopee] is over twice the size of its nearest competitor [by revenue],” he said. “Also in terms of GMV, we’re close to one-and-a-half times the size of our nearest competitor.”

The unnamed rival is presumably Lazada, which was acquired by Alibaba in April 2016. Speaking at Tech in Asia Jakarta 2017, Lazada CEO Max Bittner argued that publicly-held Shopee “will have a harder time continuously raising money… At some point public market investors expect improvements in profitability. The luxury of being [Lazada] is we’re not exposed to that scrutiny.”

There was some indication of that exposure today as Sea’s share price tumbled, from US$15.70 at the start of the day to US$14.78 by the close of the market. It appears that some investors may have been spooked in advance of the company’s earnings release. After-hours trading saw a further decline in share price, influenced by Sea’s US$127 million adjusted net loss for the quarter – more than twice the US$60.2 million loss it reported in Q3 2016.

NB: Financial figures are unaudited. 1: Excludes stock-based compensation. Image credit: Sea.

Costs were also higher year-on-year, particularly with regards to sales and marketing expenses. Speaking on the conference call, Sea group president Nick Nash said that the higher spend is critical for the company’s forward plans.

“We spent more in Q3 as a percentage of GMV than in Q2, but by design, and in line with our budgets.”

“Some of our markets have developed into a two-horse race faster than we expected, and we can tip the market in our favor” through additional marketing investment, he said.

Also, with Shopee now claiming ecommerce market leadership in Indonesia and Taiwan, Nash explained that it makes sense to focus more sales and marketing effort on where the company sees its major opportunities for future growth – namely the Philippines, Thailand, and Vietnam.

Nash also underlined some of the difficulties that Sea faces with completing orders and how this can result in higher costs.

“Our key pain point is in payments – that’s not just for us, that’s a regional issue.”

See: How Shopee plans to reign supreme in Southeast Asia’s fashion ecommerce scene

The Singapore-based company combines financial measures recognized under US accounting standards – “generally accepted accounting principles,” or GAAP – with certain non-GAAP figures to give an overall picture of its performance. Sea says that it and other gaming and ecommerce companies do this due to the nature of their online businesses, where a substantial amount of revenue is deferred and user numbers and trends are seen as important indicators.

Looking more closely at Shopee:

• Gross merchandise volume (GMV, the total volume of sales over a given period) grew 219 percent year-on-year and 30 percent quarter-on-quarter to hit US$1.06 billion.
• Gross orders increased 204 percent between Q3 2016 and Q3 2017, and 45 percent quarter-on-quarter to reach 65.9 million.
• Ecommerce monetization – including GAAP revenue plus non-GAAP income from sales commissions – was US$5.7 million for the quarter, up 111 percent on Q2 2017.
• Average monthly active buyers grew from 1.7 million in Q3 2016 to 5.9 million in Q3 2017 – up 247 percent year-over-year.
• There were 3.7 monthly orders per active buyer with an average order value of US$16.20.
• More than 93 percent of Shopee orders in Q3 2017 were transacted through its mobile app.

As for Garena, Sea’s gaming and digital entertainment unit:

• Digital entertainment gross billings – comprising GAAP revenue plus the change in digital entertainment-related deferred revenue – increased 62 percent from US$83.2 million in Q3 2016 to US$135 million in Q3 2017.
• Quarterly active users hit 69 million, representing 54 percent year-on-year growth. There were 42.7 million monthly active users in the last month of Q3 2017, reflecting a 61 percent increase year-on-year. Quarterly paying users grew 38 percent year-on-year to 6.5 million.

This post Sea’s a steady ship, but shares drop after first quarterly results as a public company appeared first on Tech in Asia.

from Tech in Asia https://www.techinasia.com/sea-q3-2017-earnings
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