Can Razer sharpen its strategy?

RAZER was one of Hong Kong's hottest tech listings in 2017. But the stock has fallen 47.4 per cent since. The company is evolving, but investors aren't completely sold.

The loss-making Singapore- and California-based company derives most of its revenue from selling gaming accessories and laptops - 85.5 per cent in H1 2020 - but it has increasingly diversified into services over the past four years.

Razer now operates a virtual credits system for gamers, a merchant payments business and a consumer e-wallet. It also wants to create a digital bank for youth and millennials.

In an interview with The Business Times, Razer's chief strategy officer and fintech head Lee Limeng said the company wants to expand its audience beyond gamers and build a platform that caters to those in their 20s and 30s. This could include offering investment and insurance products as well as financial literacy content.

Mr Lee was quick to dismiss notions that the company is attempting to build a "super app". Razer intends to enter into partnerships, he said, not build capabilities on its own like other super app players have done.

For instance, it is connecting companies to Funding Societies' financing solutions via its business-to-business platform Razer Merchant Services. It is also collaborating with Franklin Templeton to build a digital wealth management platform.

This partnership model echoes Ant Group's strategy. The Chinese fintech giant owns a distribution channel for providers of financial services.

But Ant also has a successful mobile wallet called Alipay, which supported the growth of the Ant brand.

Meanwhile, Razer's e-wallet Razer Pay is up against more than 40 other peers in Malaysia and Singapore.

Mr Lee is aware of the tough competition. "We don't see it as a viable business if you have just an e-wallet because it's very difficult today, especially when you have to go after the attention of users," he said.

Instead, Razer will build its digital bank atop the Razer Pay platform and offer a wide array of services.

Razer could, however, struggle to build trust in its platform. The company took three weeks to fix an issue that exposed the personal data of about 100,000 individuals in August. It only began notifying its customers a week following the fix, and after the incident was reported by the media.

Mr Lee attributed the issue to a vendor error and said customers were notified as soon as it could be determined that they had been affected. He added that the incident affected only customers of Razer's online store, and not its fintech unit.

Analysts have mixed views about the firm's digital banking ambitions. Some highlight its strong branding and the potential to cross-sell financial products to some 100 million global registered (though not necessarily active) users.

But building a digital bank would also require sizeable cash investments. This could restrict the company's core business expansion, wrote analyst Valerie Law in a January report on Smartkarma.

The company had cash and cash equivalents of US$585.9 million as at June 30, with no debt. It has said it intends to use this cash for research and development into new hardware categories and services, and on value-accretive mergers and acquisitions.

But Razer also had payables of S$503.4 million as at end-June.

Improving numbers

Covid-19 stay-home measures globally boosted Razer's hardware sales in the first half of 2020 by 26 per cent, to US$382.7 million.

But margins in this segment have shrunk from 27.8 per cent in 2016 to 18.6 per cent in H1 2020.

Software and services, on the other hand, had a gross profit margin of 46 per cent in H1 2020. This segment made up almost 30 per cent of the group's gross profit, up from 20 per cent a year ago.

Revenue from software and services grew 79 per cent to US$64 million in H1. It made up 14.3 per cent of revenue, up from 7 per cent in 2018.

As the software and services side grows, the company is inching towards profitability. Net losses in H1 narrowed to US$17.3 million, compared with a loss of US$48.1 million a year ago. The group generated operating cashflow of US$66 million, against a negative operating cashflow of US$54.5 million a year ago.

Building on gaming

Mr Lee said Razer's services businesses - comprising Razer Gold and Razer Fintech - emerged naturally from its gaming roots.

While gaming has been picking up in emerging markets, in-game monetisation by publishers was limited by the level of credit card penetration within the population, he said.

Razer therefore created a virtual currency called Razer Gold that could also be bought using cash handed over the counter at mom-and-pop or convenience stores. It acquired a 19.9 per cent stake in Malaysian payments firm MOL Global in July 2017, and appointed the firm master distributor for the virtual credit.

Razer takes a cut of every transaction made using Razer Gold. In the first half of 2020, total payment volume (TPV) rose 125.9 per cent from a year ago. The service, which is also a loyalty programme, is currently used in over 33,000 digital entertainment titles such as Call of Duty and Mobile Legends.

Analysts have been positive about the development of Razer Gold, citing its ability to retain users in the ecosystem and a partnership with gaming giant Tencent to explore additional monetisation opportunities for mobile gaming.

In 2018, Razer fully acquired MOL for US$61 million in cash. It has built an offline payment network on the back of this acquisition, with over a million physical acceptance points in South-east Asia. Razer Fintech's TPV increased 114.3 per cent to US$1.8 billion for H1.

Shares of Razer are up 47.8 per cent this year. Most of that gain has come in the last month, as investors turned positive following the most recent set of results.

Said Mr Lee: "We see a real growth potential in the (fintech) business, in terms of leveraging a lot on the brand growth and the reach of Razer."