Sea Limited (Form 20-F) — FY2018 Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone Q4 filing; the filing provides selected Q4 operating metrics but not a clear standalone Q4 income statement or cash-flow statement. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars.
Business context and operating performance
Sea operates Garena digital entertainment, Shopee e-commerce and AirPay digital financial services, primarily across Southeast Asia and Taiwan. Management described Garena and Shopee as market leaders in their regional categories, while noting that the businesses were investing heavily to expand users and platform scale.
- In Q4 2018, game quarterly active users were 216.2 million and paying users were 11.9 million, compared with 87.8 million and 7.2 million, respectively, in Q4 2017.
- Shopee Q4 2018 GMV was $3.425 billion and orders were 206.9 million, versus $1.579 billion and 98.3 million in Q4 2017. These are operating metrics, not revenue.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $827.0 million | $414.2 million |
| Gross profit / margin | $14.8 million / 1.8% | $87.3 million / 21.1% |
| Operating loss | $988.8 million | $502.4 million |
| Net loss | $961.0 million | $561.2 million |
| Adjusted net loss (non-GAAP) | $944.2 million | $480.6 million |
| Net cash used in operating activities | $495.2 million | $259.2 million |
| Cash, cash equivalents and restricted cash at year-end | $1,259.3 million | $1,445.0 million |
- Revenue grew 99.7%. Digital entertainment revenue rose 26.6% to $462.5 million; e-commerce and other services rose to $270.0 million; sales of goods rose to $94.5 million.
- Cost of revenue increased 148.5% to $812.2 million. Sales and marketing expense rose 65.5% to $705.0 million, largely reflecting Shopee marketing and promotions. The sharp increase in e-commerce costs and direct product sales contributed to the decline in consolidated gross margin.
- FY2018 digital entertainment gross margin was 42.2%, up from 40.3% in 2017. Segment operating income was $69.4 million for digital entertainment; e-commerce recorded an operating loss of $893.5 million.
- Investing cash outflow was $224.5 million, including $177.3 million for property and equipment. Financing cash inflow was $546.6 million, primarily from the 2018 convertible notes offering.
- Year-end current assets were $1,710.7 million and current liabilities $1,186.5 million, yielding working capital of $524.2 million. Total liabilities were $2,432.1 million and shareholders’ deficit was $239.5 million.
- Convertible notes had a carrying value of $1,061.8 million at year-end; bank borrowings totaled $1.9 million. The company issued $575 million of 2.25% convertible senior notes due 2023 in June 2018. The 2017 notes were subject to conversion, with holders subsequently electing to convert $417.5 million of principal after year-end.
Material changes, outlook and risks
- Revenue mix shifted: digital entertainment fell to 55.9% of total revenue from 88.2% in 2017, while e-commerce and other services rose to 32.7%; sales of goods represented 11.4%.
- Management said it expects significant sales and marketing, general and administrative, and research and development expenses to continue increasing as the company expands. The filing provides no specific revenue, earnings, cash-flow or profitability guidance.
- Management stated current cash and cash equivalents should cover ordinary-course working capital and capital expenditure needs for the next 12 months. This outlook is subject to continued cash burn and the availability of future financing.
- Key risks include ongoing losses and e-commerce economics; dependence on a limited number of games and third-party game licenses; intense competition; user engagement and monetization; regulation and licensing across multiple markets; foreign-exchange and currency-conversion restrictions; cybersecurity and privacy; and reliance on Vietnam VIE contractual structures.
- A putative securities class action filed in November 2018 alleges IPO registration-statement misstatements or omissions. The company said it intends to defend the case; it could not estimate a possible loss or range of loss.
- The company recorded a $5.1 million impairment of an intellectual-property right and a $1.0 million inventory write-down in 2018. A $41.3 million fair-value gain on 2017 convertible notes partly offset non-operating expenses; this was a non-cash accounting item.
- The company reported that a material weakness in financial-reporting controls identified for 2017 was remediated. Management and the auditor concluded internal control over financial reporting was effective as of December 31, 2018; the auditor gave unqualified opinions on the financial statements and controls.
Important facts for investors to verify
- Whether Shopee’s rapid GMV and order growth can translate into improved unit economics and gross margins, given the $893.5 million e-commerce segment operating loss.
- The sustainability of Garena’s user growth, paying-user conversion and revenue concentration in a small group of games, including licensed titles.
- Cash burn, restricted cash availability, capital expenditure commitments and the company’s funding needs relative to the stated 12-month liquidity outlook.
- Convertible-note conversion, dilution and interest effects, alongside potential dilution from the share incentive plan.
- The status and potential financial impact of the securities litigation, and whether the remediated control environment remains effective as operations scale.
- Exposure from VIE arrangements, local regulation, currency controls and the ability to move funds from operating markets to the holding company.