Sea Limited Reports Second Quarter 2019 Results

SINGAPORE, Aug. 20, 2019 /PRNewswire/ -- Sea Limited (NYSE: SE) ("Sea" or the "Company") today announced its financial results for the quarter ended June 30, 2019.

Second Quarter 2019 Highlights 

- Group

• Total adjusted revenue was US$665.4 million, up 203.1% year-on-year from US$219.6 million for the second quarter of 2018.
• Total adjusted EBITDA was US$(11.0) million compared to US$(161.9) million for the second quarter of 2018.

- Digital Entertainment

• Adjusted revenue was US$443.2 million, up 218.6% year-on-year from US$139.1 million for the second quarter of 2018.
• Adjusted EBITDA was US$263.8 million, up 442.6% year-on-year from US$48.6 million for the second quarter of 2018.
• Adjusted EBITDA margin increased to 59.5% for the second quarter of 2019 from 34.9% for the second quarter of 2018.
• Quarterly active users ("QAUs") reached 310.5 million, an increase of 93.3% year-on-year from 160.6 million for the second quarter of 2018.
• Quarterly paying users continued to grow, accounting for 8.4% of QAUs for the second quarter of 2019, increasing from 4.1% for the same period in 2018.
• Average revenue per user was US$1.4 compared to US$0.9 for the second quarter of 2018.
• Our self-developed game, Free Fire, continued to grow. It was the third most downloaded mobile game and the most downloaded battle royale game globally across the Google Play and iOS App Stores combined in the second quarter, according to App Annie. It also continued to be the top ranking game by monthly active users and consumer spending in Latin America^[1] in the second quarter, according to App Annie.
• We started pre-registration for Call of Duty®: Mobile, a mobile version of the classic action game which is a collaboration between Activision and Tencent Games, under our right of first refusal arrangement with Tencent, and published Garena Speed Drifters in Latin America, the first third-party game that we are publishing in this region.
• Our esports efforts continue to support the growth of our most popular titles. In July, we hosted the Arena of Valor World Cup in Vietnam, in partnership with Tencent. This global Arena of Valor event was held in our region for the first time, and the tournament attracted more than 74 million cumulative views online. In July, we also hosted the largest ever esports event for Free Fire in Brazil, which attracted over 12 million cumulative views online, with the final match recording peak concurrent viewers of over 800 thousand on YouTube.

- E-commerce

• Adjusted revenue was US$177.4 million, up 201.7% year-on-year from US$58.8 million for the second quarter of 2018.
• Adjusted revenue included US$137.8 million of marketplace revenue^[2], up 269.2% year-on-year from US$37.3 million for the second quarter of 2018, and US$39.7 million of product revenue^[3], up 84.5% year-on-year from US$21.5 million for the second quarter of 2018.
• Gross merchandise value ("GMV") was US$3.8 billion, an increase of 72.3% year-on-year from US$2.2 billion for the second quarter of 2018.
• Adjusted revenue as a percentage of total GMV increased to 4.6% in the second quarter of 2019, up from 2.6% for the same period a year ago. Adjusted marketplace revenue as a percentage of total GMV was 3.6% in the second quarter of 2019.
• Gross orders for the quarter totaled 246.3 million, an increase of 92.7% year-on-year from 127.8 million for the second quarter of 2018.
• Sales and marketing expenses were US$163.7 million, an increase of 18.6% year-on-year from US$138.0 million for the second quarter of 2018.
• Adjusted EBITDA was US$(248.3) million compared to US$(188.3) million for the second quarter of 2018. Adjusted EBITDA loss per order decreased by US 46 cents, or 31.3%, in the second quarter, compared to the same period in 2018.
• In Taiwan, Shopee continued to record a positive quarterly adjusted EBITDA before allocation of the headquarters' common expenses in the second quarter of 2019.
• In Indonesia, its largest market, Shopee's year-on-year growth rate accelerated compared to the previous quarter, with over 110 million orders registered in the second quarter, or a daily average of over 1.2 million orders.
• Shopee ranked number one in the Shopping category by average monthly active users, and by downloads across the Google Play and iOS App Stores combined, in both Southeast Asia and Taiwan in the second quarter, according to App Annie.
• Shopee was also the top ranking app by total time spent in app on Android in the second quarter in Southeast Asia as a whole, and in each of our five biggest markets, according to App Annie.
• In mid-August, Shopee announced the global football icon, Cristiano Ronaldo, as its newest brand ambassador in Southeast Asia and Taiwan. He will work with Shopee on a wide range of activities in the region, starting with Shopee's signature annual shopping event, 9.9 Super Shopping Day.

Guidance

We are raising the guidance for both digital entertainment and e-commerce for the full year of 2019.

We now expect adjusted revenue for digital entertainment to be between US$1.6 billion and US$1.7 billion, representing 142.0% to 157.2% growth from 2018. This compares to the previously disclosed guidance of between US$1.2 billion and US$1.3 billion, representing 81.5% to 96.7% growth.

We also expect adjusted revenue for e-commerce to be between US$780 million and US$820 million, representing 168.3% to 182.1% growth from 2018. This compares to the previously disclosed guidance of between US$630 million and US$660 million, representing 116.7% to 127.0% growth.

Unaudited Summary of Financial Results

(Amounts are expressed in thousands of US dollars "$")

Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018

Revenue

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

Our total revenue increased by 137.3% to US$436.2 million in the second quarter of 2019 from US$183.8 million in the second quarter of 2018. Our total adjusted revenue increased by 203.1% to US$665.4 million in the second quarter of 2019 from US$219.6 million in the second quarter of 2018. These increases were mainly driven by the growth in each of the segments detailed as follows:

• Digital Entertainment: Revenue increased by 112.4% to US$229.5 million in the second quarter of 2019 from US$108.0 million in the second quarter of 2018. Adjusted revenue increased by 218.6% to US$443.2 million in the second quarter of 2019 from US$139.1 million in the second quarter of 2018. This increase was primarily due to the increase of our active user base as well as the deepened paying user penetration as we continue to bring new and engaging content to our users and enhance the game and monetization features based on a deep understanding of local preferences and conditions as well as our strong efforts in esports and community-building.
• E-commerce and other services: Revenue increased by 207.4% to US$165.7 million in the second quarter of 2019 from US$53.9 million in the second quarter of 2018. Adjusted revenue increased by 209.2% to US$181.3 million in the second quarter of 2019 from US$58.6 million in the second quarter of 2018. This increase was primarily driven by the growth of our e-commerce marketplace, and positive development in each of our marketplace revenue streams – transaction-based fees, value-added services, and advertising.
• Sales of goods: Revenue increased by 87.5% to US$40.9 million in the second quarter of 2019 from US$21.8 million in the second quarter of 2018. The increase was primarily due to the increase in our product offerings.

Cost of Revenue

Our total cost of revenue increased by 93.3% to US$338.7 million in the second quarter of 2019 from US$175.2 million in the second quarter of 2018.

• Digital Entertainment: Cost of revenue increased by 53.2% to US$95.0 million in the second quarter of 2019 from US$62.0 million in the second quarter of 2018. The increase was largely in line with revenue growth in our digital entertainment business. Improvement in gross profit margins was largely due to higher revenue contribution from our self-developed game.
• E-commerce and other services: Cost of revenue for our e-commerce and other services combined increased by 118.0% to US$198.4 million in the second quarter of 2019 from US$91.0 million in the second quarter of 2018. The increase was primarily due to costs incurred in line with growth of our e-commerce marketplace, including, among other costs, higher bank transaction fees driven by GMV growth, higher costs associated with value-added services and other ancillary services we provided to our e-commerce platform users, as well as higher staff compensation and benefit costs.
• Cost of goods sold: Cost of goods sold increased by 104.3% to US$45.3 million in the second quarter of 2019 from US$22.2 million in the second quarter of 2018. The increase was largely in line with the increase in our product offerings.

Sales and Marketing Expenses

Our total sales and marketing expenses increased by 20.0% to US$198.1 million in the second quarter of 2019 from US$165.1 million in the second quarter of 2018. The table below sets forth the breakdown of the sales and marketing expenses of our two major reporting segments. Amounts are expressed in thousands of US dollars ("$").

• E-commerce: Sales and marketing expenses increased by 18.6% to US$163.7 million in the second quarter of 2019 from US$138.0 million in the second quarter of 2018. The increase in marketing efforts was aligned with our strategy to fully capture the market growth opportunity and was primarily attributable to the ramping up of brand marketing as well as higher staff compensation and benefit costs.

General and Administrative Expenses

Our general and administrative expenses increased by 95.3% to US$101.3 million in the second quarter of 2019 from US$51.8 million in the second quarter of 2018. This increase was primarily due to the expansion of our staff force and the increase in office facilities and related expenses.

Research and Development Expenses

Our research and development expenses increased by 172.2% to US$35.1 million in the second quarter of 2019 from US$12.9 million in the second quarter of 2018, primarily due to the increase in research and development staff force.

Non-operating Income or Losses, Net

Non-operating income or losses consist of interest income, interest expense, investment gain (loss), fair value change for the 2017 convertible notes and foreign exchange gain (loss). We recorded a net non-operating loss of US$29.2 million in the second quarter of 2019, compared to a net non-operating loss of US$30.8 million in the second quarter of 2018, both of which arose mainly from the fair value loss on the 2017 convertible notes.

Income Tax Expense

We had a net income tax expense of US$15.3 million in the second quarter of 2019 and net income tax credit of US$0.2 million in the second quarter of 2018. The income tax expense in the second quarter of 2019 was primarily due to withholding tax and corporate income tax expenses incurred by our digital entertainment segment, partially offset by deferred tax assets recognized during the period.

Net Loss

As a result of the foregoing, we had net losses of US$280.1 million and US$250.8 million in the second quarter of 2019 and 2018, respectively.

Net Loss Excluding Share-based Compensation and Changes in Fair Value of the 2017 Convertible Notes

Net loss excluding share-based compensation and changes in fair value of the 2017 convertible notes, was US$215.1 million and US$198.7 million in the second quarter of 2019 and 2018, respectively.

Webcast and Conference Call Information

The Company's management will host a conference call today to review Sea's business and financial performance.

Details of the conference call and webcast are as follows:

A replay of the conference call will be available at the Company's investor relations website (https://www.seagroup.com/investor/financials). An archived webcast will be available at the same link above.

For enquiries, please contact:

Investors / analysts: ir@seagroup.com
Media: media@seagroup.com

About Sea Limited

Sea's mission is to better the lives of the consumers and small businesses of our region with technology. Our region includes the key markets of Indonesia, Taiwan, Vietnam, Thailand, the Philippines, Malaysia and Singapore. Sea operates three businesses across digital entertainment, e-commerce, and digital financial services, known as Garena, Shopee, and AirPay, respectively.

Forward-Looking Statements

This announcement contains forward-looking statements. These statements are made under the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as "will," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates," "confident," "guidance," and similar statements. Among other things, statements that are not historical facts, including statements about Sea's beliefs and expectations, the business, financial and market outlook, and projections from its management in this announcement, as well as Sea's strategic and operational plans, contain forward-looking statements. Sea may also make written or oral forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission (the "SEC"), in its annual report to shareholders, in press releases, and other written materials, and in oral statements made by its officers, directors, or employees to third parties. Forward-looking statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statement, including but not limited to the following: Sea's goals and strategies; its future business development, financial condition, financial results, and results of operations; the growth in, and market size of, the digital entertainment, e-commerce and digital financial services industries in the region, including segments within those industries; changes in its revenue, costs or expenditures; its ability to continue to source, develop and offer new and attractive online games and to offer other engaging digital entertainment content; the growth of its digital entertainment, e-commerce and digital financial services businesses and platforms; the growth in its user base, level of user engagement, and monetization; its ability to continue to develop new technologies and/or upgrade its existing technologies; growth and trends of its markets and competition in its industries; government policies and regulations relating to its industries; and general economic and business conditions in the region. Further information regarding these and other risks is included in Sea's filings with the SEC. All information provided in this press release and in the attachments is as of the date of this press release, and Sea undertakes no obligation to update any forward-looking statement, except as required under applicable law.

Non-GAAP Financial Measures

To supplement our consolidated financial statements, which are prepared and presented in accordance with U.S. GAAP, we use the following non-GAAP financial measures to help evaluate our operating performance:

• "Adjusted revenue" of our digital entertainment segment represents revenue of the digital entertainment segment plus change in digital entertainment deferred revenue. This financial measure is used as an approximation of cash spent by our users in the applicable period that is attributable to our digital entertainment segment. Although other companies may present such measures related to gross billings differently or not at all, we believe that the adjusted revenue of our digital entertainment segment provides useful information to investors about the segment's core operating results, enhancing their understanding of our past performance and future prospects.
• "Adjusted revenue" of our e-commerce segment represents revenue of the e-commerce segment (currently consisting of marketplace revenue and product revenue) plus certain revenues that were net-off against their corresponding sales incentives. This financial measure enables our investors to follow trends in our e-commerce monetization capability over time and is a useful performance measure.
• "Adjusted revenue" of our digital financial services segment represents revenue of the digital financial services segment plus certain revenues that were net-off against their corresponding sales incentives.
• "Total adjusted revenue" represents the sum of the adjusted revenue of our digital entertainment segment, the adjusted revenue of our e-commerce segment, the adjusted revenue of our digital financial services segment, and the revenue of our other services. This financial measure enables our investors to follow trends in our overall group monetization capability over time and is a useful performance measure.
• "Adjusted EBITDA" for our digital entertainment segment represents operating income (loss) before share-based compensation plus (a) depreciation and amortization expenses, and (b) the net effect of changes in deferred revenue and its related cost for our digital entertainment segment. Although other companies may calculate adjusted EBITDA differently or not present it at all, we believe that the segment adjusted EBITDA helps to identify underlying trends in our operating results, enhancing their understanding of the past performance and future prospects.
• "Adjusted EBITDA" for our e-commerce segment, digital financial services segment and other services segment represents operating income (loss) before share-based compensation plus depreciation and amortization expenses. Although other companies may calculate adjusted EBITDA differently or not present it at all, we believe that the segment adjusted EBITDA helps to identify underlying trends in our operating results, enhancing their understanding of the past performance and future prospects.
• "Total adjusted EBITDA" represents the sum of adjusted EBITDA of all our segments combined, plus unallocated expenses. Although other companies may calculate adjusted EBITDA differently or not present it at all, we believe that the total adjusted EBITDA helps to identify underlying trends in our operating results, enhancing their understanding of the past performance and future prospects.

These non-GAAP financial measures have limitations as analytical tools. None of the above financial measures should be considered in isolation or construed as an alternative to revenue, net loss/income, or any other measure of performance or as an indicator of our operating performance. These non-GAAP financial measures presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to Sea's data. We compensate for these limitations by reconciling the non-GAAP financial measures to their nearest U.S. GAAP financial measures, all of which should be considered when evaluating our performance. We encourage you to review our financial information in its entirety and not rely on any single financial measure.

The tables below present selected unaudited financial information of our reporting segments, the non-GAAP financial measures that are most directly comparable to GAAP financial measures, and the related reconciliations between the financial measures. Amounts are expressed in thousands of US dollars ("$").

1           UNAUDITED SEGMENT INFORMATION

The Company has three reportable segments, namely digital entertainment, e-commerce and digital financial services. The Chief Operation Decision Maker ("CODM") reviews the performance of each segment based on revenue and certain key operating metrics of the operations and uses these results for the purposes of allocating resources to and evaluating the financial performance of each segment. Amounts are expressed in thousands of US dollars ("$").

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