Sea triples ‘adjusted revenue,’ closes in on profitability

Sea, a leading digital entertainment and ecommerce company in Southeast Asia, announced a substantial increase in its adjusted revenue for its digital gaming business over the previous quarter.

As a result, Sea’s adjusted EBITDA (a measure of its bottom line) for Q1 2019 climbed to negative US$31.9 million. That’s a sizable improvement over negative US$144 million for the same period last year.

The group’s adjusted revenue for the quarter reached US$579 million, more than triple of last year’s figure of US$197 million.

Forrest Li, founder and group CEO, Sea / Photo credit: Sea

However, Sea reported a significant difference between its GAAP revenue (an accounting standard followed by the US Securities and Exchange Commission) and adjusted revenue.

Its GAAP revenue was US$352 million for Q1 2019 and US$155 million for Q1 2018.

GAAP regulations require listed gaming companies to defer revenues over the expected life cycle of a game. This can vary depending on the expected life of the game, which is usually determined by the company and its auditors.

In other words, if a company paid US$24 for an item in a game that is expected to have a life of two years, the company that owns that game might recognize US$3 per quarter for the next eight quarters.

The accounting rationale here is that the revenue is recognized against the cost of running the game that is generating revenue over months or years.

While the difference between GAAP and non-GAAP revenue can be pronounced for a recently launched game, it tends to smooth out over time as games mature.

In an earnings call, Sea chairman and group CEO Forrest Li attributed the revenue growth to the performance of its games Free Fire and Speed Drifters, which monetize via micro-transactions. Speed Drifters is the international version of Tencent’s popular game QQ Speed.

Garena, Sea’s digital entertainment business, almost doubled its paying users over a quarter. / Photo credit: Sea

“Speed Drifters, the first game we launched early this year under our right-of-first-refusal arrangement with Tencent, has quickly become one of the best-performing games in some of our key markets, in terms of both user growth and financial performance. Our efforts in this car racing game delivered meaningful contributions to Garena’s strong results for the quarter,” said Li.