Inside Sea’s Billion Dollar IPO

One firm’s IPO filing slipped through our fingers this week. Consider this piece makeup work for both of us.

The firm, Sea, is a digital shop based in Singapore. Its IPO filing notes that it could raise as much as $1 billion in the transaction.

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Of course, IPO documents claiming overly-round “proposed maximum aggregate offering price” numbers — $100 million is a standard kludge — are often merely recorded placeholders. So we can expect the Sea IPO to raise a number higher or lower than the $1 billion figure. Still, the large dollar amount indicates that Sea expects to raise quite a lot of money.

Since we are woefully late to this offering, we’ll move quickly today. First, what is Sea? Second, how is it doing? And third, if this is going public, what does that tell us about the state of the public markets?

What Is Sea?

Sea is a gaming, ecommerce, and mobile payment company operating in Southeast Asia (GSEA). Here’s what the company claims to be in its market:

• First place in “digital entertainment” GSEA revenue across mobile and PC gaming.
• First place in GSEA ecommerce “GMV and total orders” through its Shopee service.
• First place in “digital financial services” through its AirPay tool that it claims is the “#1 digital payments provider in GSEA in the first half of 2017 by e-wallet GTV.”

Unpacking gently, the first bullet point is simple. In the greater Southeast Asia region, the firm is the leading revenue-driver in mobile and PC gaming. Its filing claims 40.1 million gaming MAUs, which translates to 12.9 million gaming DAUs.

The second point discusses GMV, which translates to gross merchandise volume. Shopee claims to be both the largest ecommerce vendor in its region by gross dollar revenue and total orders. We’ll circle back to this business shortly.

Meanwhile, the third point states that the firm claims to be the leading GSEA digital payments tool, as measured by gross transaction volume (GTV). Simple enough.

How does all that sum into revenue and profit? Let’s find out.

How Is Sea Doing?

Sea grew its revenue by 17.3 percent in the first half of 2017, compared to the year-ago period. That modest growth percentage raised the firm’s revenue in the first two quarters of the year from $166.7 million in 2016 to $195.5 million this year.

However, the firm’s unprofitability during the same period rose. The firm’s net loss grew from $87.1 million in the first half of 2016 to $165.2 million in the first half of 2017.

And, notably, Sea’s gross profit fell year-over-year in the first half of 2017 even as revenue rose.

What gives? The company’s ecommerce business is expensive as heck. Gross profit appears to be going down due to the very high cost of revenue. Sea breaks its revenue into two buckets: “Digital entertainment” and “Others.” The Others category is where we find some tricky math for Sea.

The category is growing as a percentage of Sea revenue. From 6.8 percent in the first quarter of 2017 to 9.9 percent in the second. That sort of growth in a secondary revenue stream may be soothing to investors worried that Sea is too heavily dependent on gaming incomes.

But the cost of revenue associated with Others top line came to 22.5 percent of total top line in the second quarter, generating double-digit percentage losses on a gross basis before operational costs were factored in.

The company’s eventual 90.7 percent net loss (in terms of percent of revenue) in the second quarter of this year — a net loss of $92.119 months in three months — was the company’s highest to date. Indeed, every quarter listed in the firm’s F-1 has led to sequential increases in both adjusted and actual net losses at the firm.

Observe the highlighted line in the below image:

The firm had over $650 million in cash at the end of its second quarter. That figure was up dramatically compared to the end of 2016, when the firm had a thin $170 million in cash and equivalents on hand. The firm raised $550 million earlier this year. That will keep you afloat.

The pace of loss at Sea is notable. However, that it hasn’t made money isn’t a sin, and that it has lost more money over time isn’t bad in and of itself. But falling gross profit, rising revenue from a less profitable segment at a mature company — the opposite of the Roku situation — and steadily increasing adjusted and actual net losses are not encouraging over the short-term.

This will all gist down to the firm’s valuation. Here’s what we know on that count, courtesy of Bloomberg’s coverage of Sea’s May capital infusion:

Sea declined to disclose the valuation after the latest round. It last raised $170 million at a valuation of $3.75 billion in 2016, and its roster of previous investors include Malaysian sovereign wealth fund Khazanah Nasional Bhd. and General Atlantic LLC. The startup has said it grew net revenue 13-fold from 2011 to about $270 million in 2015.

So before it raised the $550 million, the firm was worth nearly $4 billion. Presumably its most recent round pushed it over that mark.

What Does Sea’s IPO Tell Us About The Market?

It depends.

If Sea prices down, the scale of declines will tell us something interesting. Given that the firm had a private capital event inside the last twelve months, we’ll have a decently unfogged window into how differently private and public investors value certain companies.

If the firm prices flat and performs well, it will illustrate a public market hungry for technology shares, even those with lower growth and higher losses.

And if it prices up, Sea looks like a genius.

We’ll know more when it sets a price range.