💡 This note tries to understand the traction of Free Fire. Generally, I would start with metrics which are more top of funnel such as downloads, number of active users, conversion, number of paying users or even engagement metrics. However, I was triggered by a Sensor Tower blog post the other day which mentioned Garena Free Fire revenue in 1H2020. I was confused by my back of the envelop growth rate calculation because I only had some rough ideas on how well Garena Free Fire performed financially before putting together this post. The confusion probably came from that there’re few financial metrics available in the market – revenue from third party analytics, Non-GAAP adjusted revenue from Sea’s Digital Entertainment, and GAAP revenue from Sea’s Digital Entertainment. It seems I encountered some difficulties when collecting those data to understand Garena Fire Fire financial performance. This post shows the traction of price-driving metric – adjusted revenue and digs out the history of a parameter which is key to determine Garena Free Fire adjusted revenue but not being disclosed anymore.
Announcement from Sea Limited
As of the end of October 2019, Free Fire had recorded a total cumulative adjusted revenue of over US$1 billion since launch.6-K Reports Third Quarter 2019 Results
Estimation: Free Fire’s Contribution to Adjusted Revenue in Sea’s Digital Entertainment (DE)
- Launched on Dec 4, 2017
- Accumulated $1B adjusted revenue (adj. rev.) by Oct 31, 2019 → roughly 23 months since launch or average $43.5M per month
1st Attempt to Estimate Garena Free Fire Adjusted Revenue Contribution
- As of Oct 31, 2018, Garena Free Fire’s lifetime adj rev. contribution to Sea’s Digital Entertainment since its launch was estimated to be ~60% (see estimation in Window Matching and Accumulated Adj. Rev. in the Window toggle lists below).
- Window Matching (Notion)
- Accumulated Adj. Rev. in the Window (Notion)
Filing Walk-Through to Gather Additional Info
- Started monetization in January 2018
- Ramped up monetization in June 2018
- Garena Free Fire adj. rev. contribution as % of Sea’s Digital Entertainment disclosed in the earnings call (see Filings & Transcripts toggle list below)
- 13% in June 2018
- 22% in 3Q18
- 44.5% in 4Q18
- 50%-60% in 1Q19
- Stop disclosing in earnings call since 2Q19
- The accumulated Garena Free Fire adj. rev during 1Q18-3Q19 + 1/3 of 4Q19 above was $1,024M which is close to the announced $1B lifetime adjusted revenue as of Oct 31, 2019.
- Approximately, Garena Free Fire contributed ~48.6% of Sea’s Digital Entertainment adjusted revenue during 1Q18-Oct. 2019.
- Garena Free Fire’s 65% adj. rev. contribution in 4Q19 looks reasonable and can be bridged to current 70% estimated by s-s analyst.
Third Party Analytics – Senor Tower
Cross Check with Official Data
- Numbers from third party analytics are more timely and detailed but we need to check the relationship between the reported numbers from analytics firms and numbers from the company. Sea discloses two top-line metrics: 1) GAAP revenue 2) Non-GAAP adjusted revenue which takes the changes in deferred revenue in the period into account. Sea believes that the Non-GAAP measure can better represent the performance of the business.
- If there’s wide difference and inconsistent between numbers from analytics firm and the company, the third party number might be less informative while it’s still an estimate to gauge the underlying performance. The difference and inconsistency might come from measures adopted, coverage difference, my mistake in merging/inferencing data from different sources. For example, I calculate Garena Free Fire 2Q19 revenue in Senor Tower by deducting cumulative revenue 1Q18-2Q19 by cumulative revenue 1Q18-1Q19.
- Senor Tower has reported Garena Free Fire revenue several times.
- From the charts below, it seems the discrepancy between Senor Tower and Garena Free Fire adj. rev. expands in tandem with discrepancy between GAAP and Non-GAAP numbers.
- Sensor Tower’s 1H20 number implies a 11.5% yoy growth which is difficult to reconcile with Garena Free Fire adjusted revenue trajectory as the gap between GAAP/Non-GAAP expands when game with large user base stated to ramp up monetization.
- A quick guesstimate on Garena Free Fire adj. rev in 2Q20 by observing the pattern is $375M (+$30M from 1Q20 which is based the assumption of 67.5% contribution) or around 41% yoy growth which implies yoy growth around 50% in first half of 2020. I believe adj revenue has more impact on price. While third part analytic is more timely, it’s too difficult for me to interpret.
Stick with Price-driving Metric, Focus on Long Term, and Believe Platform Brings in Optionality
So for this game, we’ll not look at any quarter-on-quarter or month-to-month or even year-on-year short-term performance, but we are really looking to build it into a long-term IP franchise.3Q19 Earnings Call