this is one of the best researches on SEA i have seen.. thank you so much for enlightening us.. one question.. how did you get the split of Sales and Marketing and other income for just Garena? There is 1,016,793 of operating income i can see for Digital entertainment in their 10-K for end 2020.. but i cant find the split for the operating expenses for Digital entertainment between S&M and other expense. Any suggestion would help. Thanks!
Thanks so much Varun! The quarterly earnings reports actually have the breakdown by segment. Cant copy the image in here but for instance if you go to this Q4 2020 report, page 8 has the breakdown of S&M (see link below)
Thanks a lot for writing this detailed blog. Most of the analysis I have read on Sea just mentions the Free Fire concentration risk and stop. They don't elaborate on how superhit games evolve, risk profile of other game developers, how Free Fire has already extended its longevity, etc.
Question on Adjusted EBITDA formula.. im a little confused how the 2020 Adj EBITDA of 1,983 is calculated. I can see from SEA's presentation that its Operating income (1,016) + Net effect of changes in deferred revenue & related cost (939) + D&A (26,125) = 1,983.. but i am super confused on how the 939 came about..
the 939m is the difference between bookings and GAAP revenue (net of some costs). Essentially bookings = cash received upfront for prepaid virtual currency, monthly packs etc, and this gets captured in "Deferred revenue". GAAP revenue is what gets recognised in accounting terms as these bookings get used by users over time, ie. the deferred revenues gets unwound and flows through to accounting revenue. Gaming companies often show this adjusted EBITDA number which is higher than GAAP EBITDA (or operating income) as it recognises all the cash received upfront, so in other words it's a good reflection of cash earnings. hope this helps!
it does.. so am i right to assume that in your forward estimates.. you are estimating the adjusted EBITDA as a % of bookings based on historical patterns..
and not calculating the way the company does right? because we cant predict the costs and the D&A..
I had to make some assumptions on the flow between bookings ---> GAAP revenue, which i did based on historical trends, but ultimately it is the bookings number that flows through to Adjusted EBITDA, so it is consistent with how the company defines it. Happy to send you the model so you can see how i've done it.
it would be amazing if i could access your model.. im trying to create my own and your models would help.. varunvithalani0@gmail.com please.. if you dont mind pls send for Shopee and Sea money too? thanks a ton!
Hi Michael - thanks for the feedback and the great question. I discussed this point around Q3 results a bit in my Part 4 article, but in summary i think it's too early to over-extrapolate one quarter's performance. However it could be the case that that going forward the active user base slows (say it caps out in the 700s) but the company shifts its focus more to increasing the paying ratio and ARPU, so it still ends up generating revenue growth as per my base case, but the levers to get there have shifted. For instance one data point i recently heard is that in its more mature markets like Indonesia Garena's paying ratio is 17%, whereas i have assumed the entire business only gets to 14% by FY25, so i may have been too conservative there. Will see what the next few quarters bring but that is a change that i'm thinking about. Hope that helps
very well covered - are you based out of singapore? if so and ever want to grab coffee can reach out to pratyush@farrerwealth.com. we're based here too and are also investor in Sea.
this is one of the best researches on SEA i have seen.. thank you so much for enlightening us.. one question.. how did you get the split of Sales and Marketing and other income for just Garena? There is 1,016,793 of operating income i can see for Digital entertainment in their 10-K for end 2020.. but i cant find the split for the operating expenses for Digital entertainment between S&M and other expense. Any suggestion would help. Thanks!
Thanks so much Varun! The quarterly earnings reports actually have the breakdown by segment. Cant copy the image in here but for instance if you go to this Q4 2020 report, page 8 has the breakdown of S&M (see link below)
https://cdn.sea.com/webmain/static/resource/seagroup/website/investornews/4Q2020/khiWHUxulNOmaecf/2021.03.02%20Sea%20Fourth%20Quarter%20and%20Full%20Year%202020%20Results.pdf
oh i missed this document.. thanks so much!
Thanks a lot for writing this detailed blog. Most of the analysis I have read on Sea just mentions the Free Fire concentration risk and stop. They don't elaborate on how superhit games evolve, risk profile of other game developers, how Free Fire has already extended its longevity, etc.
Solid and Insightful case study. Easy to read too.
Just started to get to know SEA. This article help me a lot.
Thks a lot.
thanks very much Jacky for nice feedback - glad you found it helpful! Welcome to the Sea club :)
I'm also an investor in Sea stock. This is probably the most insightful article about Garena that I've read so far. Thanks a lot for your sharing!
Thanks Sarah! really appreciate the feedback
Nice writeup! I saw a chinese translation of your article, not sure it is with your approval. https://singledoggy.investments/2021/09/04/garena/
Had no idea - thanks for letting me know !
Question on Adjusted EBITDA formula.. im a little confused how the 2020 Adj EBITDA of 1,983 is calculated. I can see from SEA's presentation that its Operating income (1,016) + Net effect of changes in deferred revenue & related cost (939) + D&A (26,125) = 1,983.. but i am super confused on how the 939 came about..
the 939m is the difference between bookings and GAAP revenue (net of some costs). Essentially bookings = cash received upfront for prepaid virtual currency, monthly packs etc, and this gets captured in "Deferred revenue". GAAP revenue is what gets recognised in accounting terms as these bookings get used by users over time, ie. the deferred revenues gets unwound and flows through to accounting revenue. Gaming companies often show this adjusted EBITDA number which is higher than GAAP EBITDA (or operating income) as it recognises all the cash received upfront, so in other words it's a good reflection of cash earnings. hope this helps!
it does.. so am i right to assume that in your forward estimates.. you are estimating the adjusted EBITDA as a % of bookings based on historical patterns..
and not calculating the way the company does right? because we cant predict the costs and the D&A..
I had to make some assumptions on the flow between bookings ---> GAAP revenue, which i did based on historical trends, but ultimately it is the bookings number that flows through to Adjusted EBITDA, so it is consistent with how the company defines it. Happy to send you the model so you can see how i've done it.
it would be amazing if i could access your model.. im trying to create my own and your models would help.. varunvithalani0@gmail.com please.. if you dont mind pls send for Shopee and Sea money too? thanks a ton!
This is fantastic analysis. Really enjoyed reading it.
What's your view on the 3Q21 results with respect to your bull, base and bear scenarios for Garena?
I understand that Garena is going to provide steady free cash flow for reinvestment.
But I wonder if it's now tilting towards your bear scenario rather than bull scenario, even accounting for Free Fire Max?
Hi Michael - thanks for the feedback and the great question. I discussed this point around Q3 results a bit in my Part 4 article, but in summary i think it's too early to over-extrapolate one quarter's performance. However it could be the case that that going forward the active user base slows (say it caps out in the 700s) but the company shifts its focus more to increasing the paying ratio and ARPU, so it still ends up generating revenue growth as per my base case, but the levers to get there have shifted. For instance one data point i recently heard is that in its more mature markets like Indonesia Garena's paying ratio is 17%, whereas i have assumed the entire business only gets to 14% by FY25, so i may have been too conservative there. Will see what the next few quarters bring but that is a change that i'm thinking about. Hope that helps
Yes this shift in levers of revenue growth makes sense. Interesting times for Sea Limited/Garena. Thank you for your very thoughtful reply.
Hi, do you have any analysis on SWAV, I am also long SWAV now
sorry - don't really cover biotech!
very well covered - are you based out of singapore? if so and ever want to grab coffee can reach out to pratyush@farrerwealth.com. we're based here too and are also investor in Sea.
Hi Pratyush, thanks for reaching out, I am in SG. Will connect over email