Sea Limited Q3: Did It Sink or Swim in Its First Post-IPO Earnings Report?

One of the newest tech companies to join the market, Sea Limited (NYSE: SE), has released the first set of quarterly results following its October IPO. The Singapore-based e-gaming business didn't manage to post a single profit in the run-up to its IPO; let's boot up these latest results and see if it managed to flip into the black in its Q3.


I won't leave anyone in suspense -- Sea is still underwater on the bottom line. In fact, the company's attributable net loss deepened considerably in the quarter, more than doubling on a year-over-year basis to almost $133 million. That, however, was much better than the roughly $157 million loss expected by analysts.

Deep losses aren't so unusual for young-ish tech companies (Sea Limited, formerly known as Garena, was founded in 2009). Those who invest in such enterprises are generally willing to forgive the red ink if a company is growing its top line rapidly. That, however, is not really the case with Sea Limited; its revenue inched up by only 4% to $94 million in Q3, broadly matching analysts' projections.

The company was founded as a mobile gaming provider, and this business still comprises far and away the majority (85%) of its revenue. It distributes 18 games, including top selling fantasy title League of Legends from Riot Games, a studio owned by China's fast-growing Tencent Holdings (NASDAQOTH: TCEHY). (It should be noted that Tencent is a major Sea Limited shareholder, with around 30% of voting power in the company).

If the change in deferred revenue from games is taken into account (plus the small take from e-commerce commissions), Sea Limited's top line amounted to nearly $152 million for the quarter. That's 73% above its Q3 2016 tally.

Meanwhile, Sea Limited's two other divisions -- e-commerce and digital financial services -- are relatively new. Combined, the two produced nearly $16 million in revenue during the quarter; in Q3 2016, that figure was under $6 million.

But getting the word out about a new service or two doesn't come cheap, particularly considering that Sea Limited operates in the sprawling Greater Southeast Asia (GSEA) region, comprising Indonesia, Malaysia, Thailand, the Philippines, Taiwan, Vietnam, and Singapore. Sales and marketing expenses ballooned nearly three-fold to over $131 million in Q3; the category represents the company's single largest cost by far.

If such outlays don't keep ballooning, the company's bottom line should improve markedly. Sea Limited is guiding for $540 million to $550 million in revenue plus deferred revenue and e-commerce commissions for fiscal 2017. That would amount to 53% to 56% growth from its 2016 result.

Superb potential, but...

According to data from Frost & Sullivan, NewZoo and Niko Partners cited by Sea Limited, the GSEA region is well-primed for growth in the company's major business activities.

The number of internet users in the region, which stood at just over 315 million in 2016, should experience a compound annual growth rate of nearly 13% through 2021. Across the same stretch of time, the online games market's CAGR is forecast to hit nearly 20%, while the broad e-commerce space will rise by 29% a year.

Sea Limited, which claims it's the leading company in the region for all three of its activities, is well positioned to take advantage of such robust growth. It should be kept firmly in mind, though, that the company has yet to turn a profit. Growing markets are only beneficial to a company if it's eventually able to squeeze a surplus from them, and so far this operator hasn't proven it can.

Sea Limited certainly has compelling potential, but it might be best to stay away until it demonstrates that it can book a bottom-line profit for at least a quarter or two.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.