Razer Earnings – Bigger Growth, Bigger Margins, Bigger Losses
Razer (HKG:1337) has had an interesting time since it went public last year, initially struggling with too much demand through the book build, it ultimately shifted part of the institutional tranche of stock to the retail tranche for the IPO. Since then, we’ve seen the institutions exercise the option they were granted during the shift to take an additional allocation of shares after trading started on Hong Kong, followed by a relatively slow overall decline. The initial offering occurred at HK$3.88 before the debut on the HKSE saw it reach an initial peak of 5.49. Since then, things have trailed off and the stock now stands at 2.86, likely via a combination of investor apathy while waiting for results as well as the various US – China shenanigans ratcheting up trade tensions.
Reminder – IPO Funds
Razer cited the money raised in the IPO as being aimed at the following areas:
- 25% to develop new verticals in gaming and digital entertainment including mobile devices.
- 25% to finance acquisitions that will fit with the existing company ecosystem.
- 20% to expand existing R&D
- 20% to sales and marketing initiatives.
- 10% for general working capital.
Ultimately, Razer netted over $600m from the IPO, so where does that leave it now? Of course the Razer Phone launched around the same time as the IPO and was the major diversification play of a firm mostly known for its peripherals business. It’s pretty unlikely that the firm had a major effect on the wider smartphone market, despite its strong entry and that is backed up by the initial observation in the results. Razer puts the Razer Phone into its “Others” business category and says revenue for this unit grew 12 times to US$31.6 million, driven mostly by the phone.
If that money was entirely phone based, that equates to a little over 45,000 phones sold. Pretty respectable for its first attempt and considering that the numbers only include 2 months of sales from the end of 2017, but even if we were to annualise that early rate (unlikely to be representative given the initial must have sales surge for the new device), it still only comes out at 270,000 units.
Razer 2017 Earnings – By the Numbers
- Year on year revenue grew 32.1% to US$517.9m.
- Year on year gross margin grew from 27.9% to 29.2%.
- Loss for the year grew to US$165.8m (US$31.8m adjusted) vs US$59.6m (US$20.3m adjusted) for 2016.
- The IPO meanwhile has contributed to a healthy war chest with the company holding almost US$ 740m in cash.
The adjusted loss number excludes non-operating factors such as non-cash share based compensation and listing expenses for the IPO which sounds pretty big, we’ll have to see how losses shape up once they start reporting numbers which don’t include IPO fees and stock grants (likely increased prior to the IPO) in future. Razer puts the rest of the loss mostly down to entering the smartphone business.
Reading Between the Lines…
Somewhat interesting is what isn’t included in the earnings release. Razer’s systems business heading into the IPO was a reasonable revenue generator but anaemic when it came to contributing margin with gross margin on blades at sub-3%. Several comments in the earnings talk about the increased profitability of the systems business but decline to mention specifically where it now stands. They do however point to expected future increases in margin on the systems business which should be seen as mandatory given the maturity of the unit.
Obviously the company wouldn’t have invested that much money in a mobile division if it wasn’t going to keep the line going. Rumours are already swirling around the firm being likely to shorten its cycle for the Razer Phone 2 to align the launch with the rest of the industry, as such an IFA launch (either at the event itself or if Razer decide to do their own thing again, around that time frame) seems a distinct possibility.
Razer did make a statement about an additional investment in MOL Global in February of US$15m to take its interest in the company to 34.9%. For those unfamiliar, MOL Global has an e-payments system which drives the zGold virtual cash platform that Razer touts so strongly. It’s also a profit driver for the company and the firm comments about how it continues to monetise the platform, of course what investors want to see, but something it needs to be cautious around. Nobody wants to be associated with EA (NASDAQ:EA) levels of monetisation and gamers can be a fickle bunch.
Razer also makes some forward looking statements talking about significant investment in early 2018 for major new product launches in the second half of the year. A new Razer Phone is obviously a likely given. Updated Blade laptops are probably due at some point too, although whether there will be anything significant before NVIDIA (NASDAQ:NVDA) launches its next generation of GeForce graphics cards is unclear.
Ultimately, this is a company which is investing heavily for the future. Everyone knows that gaming is a growth market. Razer does indeed appear to be well positioned to take advantage of that fact, although its reliance on Chinese manufacturing may see it hit if a US – China trade war takes an ugly turn and hits the firm’s interests. As long as they keep in mind that there are two approaches to loss/break even based growth, the Amazon one as opposed to the Tesla one. Losses are fine as long as they are continually and carefully balanced against growth and I know which firm I would rather be trying to emulate.