Sea Limited (NYSE: SE) — FY2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone Q4 filing; annual financial results are presented, with Q4 operating metrics disclosed. Financial statements are prepared under U.S. GAAP and audited by Ernst & Young LLP, which issued unqualified opinions on the financial statements and internal controls.
Business context and operating performance
Sea operates Garena digital entertainment, Shopee e-commerce and SeaMoney digital financial services, primarily across Southeast Asia and Taiwan, with growing international game operations and e-commerce expansion into Brazil. The company describes 2019 as a period of rapid user, transaction and revenue growth, while continuing to invest heavily in expansion.
| Operating metric | Q4 2018 | Q4 2019 |
|---|---|---|
| Game quarterly active users (millions) | 216.2 | 354.7 |
| Game quarterly paying users (millions) | 11.9 | 33.3 |
| Shopee GMV (US$ billions) | 3.425 | 5.646 |
| Shopee orders (millions) | 206.9 | 440.5 |
Financial results and liquidity
| US$ millions, except margins and per-share data | FY2018 | FY2019 |
|---|---|---|
| Revenue | 827.0 | 2,175.4 |
| Gross profit / gross margin | 14.8 / 1.8% | 604.9 / 27.8% |
| Operating loss | (988.8) | (891.2) |
| Net loss | (961.0) | (1,457.7) |
| Net loss excluding share-based compensation and 2017 convertible-note fair-value changes (non-GAAP) | (944.2) | (867.8) |
| Operating cash flow | (495.2) | 69.9 |
| Investing cash flow | (224.5) | (363.2) |
| Financing cash flow | 546.6 | 2,579.6 |
- Revenue rose 163.1%. Digital entertainment revenue increased 145.6% to US$1,136.0 million; e-commerce and other services revenue rose 204.6% to US$822.7 million; sales of goods rose 129.4% to US$216.7 million.
- Gross margin improved sharply, including digital entertainment gross margin rising from 42.2% to 61.6%. Management attributed the improvement partly to higher revenue from self-developed games.
- Operating loss narrowed despite higher spending. Sales and marketing expense increased 37.5% to US$969.5 million, while general and administrative expense rose 60.3% to US$385.9 million and research and development expense rose 132.0% to US$156.6 million.
- GAAP net loss widened chiefly because of a US$472.9 million non-cash fair-value loss on 2017 convertible notes, compared with a US$41.3 million gain in 2018. The disclosed non-GAAP loss improved, but excludes significant items and is not a substitute for GAAP results. Basic and diluted loss per share was US$3.35, versus US$2.84 in 2018.
- Operating cash flow turned positive, supported in part by increases in deferred revenue (US$637.2 million) and accrued expenses and other payables (US$354.2 million). Cash generation should therefore be assessed alongside working-capital movements and the continuing net loss.
- At year-end, cash and cash equivalents were US$3,119.0 million and restricted cash was US$451.6 million. Current assets were US$4,410.1 million versus current liabilities of US$2,362.4 million; working capital was US$2,047.8 million. Management said available cash and cash equivalents should cover ordinary-course working capital and capital expenditure needs for the next 12 months.
- Convertible-note principal outstanding included US$575 million of 2.25% notes due 2023 and US$1,150 million of 1.00% notes due 2024. Balance-sheet carrying values differ from principal. The 2019 notes include capped calls intended to limit dilution or offset certain conversion cash costs, subject to a cap. Small borrowings totaled US$1.6 million at year-end.
- Capital expenditures were US$247.1 million. Total contractual obligations were US$2,168.1 million, including US$1,829.9 million of debt payments and scheduled interest, largely due in years three to five.
Material changes, outlook and risks
- Business mix and growth: Digital entertainment represented 52.2% of revenue, down from 55.9% in 2018, while e-commerce and other services grew to 37.8%. Shopee growth drove substantial cost and marketing investment; the e-commerce segment reported an operating loss of US$1,131.8 million in 2019. Digital entertainment reported operating income of US$529.5 million.
- Management outlook: No specific numerical revenue, earnings or profitability guidance is provided. Management said it expects continued investment and increases in general and administrative and research and development expense; it also expects significant sales and marketing spending to support user growth and engagement. The company did not provide a timetable for reaching profitability.
- COVID-19: The filing, dated April 14, 2020, describes potential disruptions to sellers, merchants, logistics, supply chains, employee operations and consumer spending, as well as possible costs from relief measures and currency volatility. Management said the ultimate financial impact could not then be reasonably estimated. These are post-year-end risks, not FY2019 operating results.
- Revenue and business concentration: The top five games contributed 94.5% of digital entertainment revenue in 2019. The filing also cites reliance on third-party game licenses and notes that e-commerce activity is concentrated in its largest markets.
- Other key risks: Sea has a history of losses and may not achieve profitability; Shopee and SeaMoney monetization and cross-platform synergies may not meet expectations. Foreign-exchange volatility, evolving regulation, cybersecurity and data-protection exposure, consumer-credit defaults, and difficulty operating across diverse jurisdictions could adversely affect results.
- Corporate structure and legal matters: Vietnam operations include VIEs consolidated through contractual arrangements; VIEs accounted for 20.4% of 2019 revenue. Authorities could challenge these structures, potentially affecting control or consolidation. A putative securities class action related to the 2017 IPO remained pending; the company said it could not estimate a possible loss range and intended to defend the case.
- Other notable items: Sea acquired Phoenix Labs in January 2020. No material off-balance-sheet arrangements were reported at year-end. The 20-F reports effective disclosure controls and internal control over financial reporting as of December 31, 2019. No cash dividends are planned for the foreseeable future.
Important facts for investors to verify
- Whether operating cash flow remains positive without relying materially on deferred revenue and increases in payables.
- Whether Shopee can improve segment economics as monetization expands, without undermining user and seller growth.
- Whether game-user growth and revenue remain durable given the high contribution from a small number of titles and licensed content.
- The terms, conversion or cash-settlement outcomes, interest burden and dilution potential of the 2018 and 2019 convertible notes, including the limits of the capped calls.
- Whether COVID-19, local-currency depreciation, regulation or logistics disruption materially changes demand, costs or reported U.S.-dollar results.
- The enforceability and ongoing regulatory standing of VIE arrangements, and the status and potential exposure of the pending securities litigation.
- How management’s non-GAAP loss measure reconciles to GAAP results and how share-based compensation affects expenses and dilution.