Opera Ltd Q3 FY2020 Earnings Call

Thanks for joining us this morning, or this evening depending on where you are. With me today, I have our Co-CEO, Song Lin; and our CFO, Frode Jacobsen. Before I hand over the call to Song Lin, I would like to remind everyone that in the conference call today, the company will be making statements about its future results and expectations, which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Such statements are based on current expectations and how we perceive the current economic environment and are inherently subject to economic, competitive, and other uncertainties and contingencies beyond the control of management. You should be cautioned that these statements are not guarantees of future performance. You may refer to the Safe Harbor Statement in the company’s earnings release for further details. Our commentary today will also include non-IFRS financial measures, including adjusted EBITDA, which are different from our consolidated financial statements that are prepared and presented based on IFRS. We believe that the use of our non-IFRS financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends. These measures should not be considered in isolation or as a substitute for financial information prepared in accordance with IFRS. We have also posted unaudited supplemental information on our Investor Relations website that includes historical financial results of Opera, reflecting microlending and retailer discontinued operations and pro forma for Nanobank. With that, let me turn over the call to our co-CEO, Song Lin, who will cover our operational highlights and strategy; and then Frode who will finish up with financials and updates on our investments and our expectations going forward. Song?

Yeah, sure. Thank you, Derrick. This is Song Lin. And again I would just like to say thanks to everyone for joining us and hearing this report. This quarter, we really showed the strength of the Opera core business. Like many others, we are still feeling the pandemic, but we were able to achieve very nice growth in users and also engagement for both our browsers and Opera News. Our monetization recovery has led to search revenue already being back on par with the same period last year and advertising revenue showing year-over-year growth. If you zoom in, you will see that these revenue categories have grown by 20% for search and 50% for ads, respectively compared to the second quarter. We are ahead of our recovery expectations and feel great about our trajectory. At the same time, we have shown discipline on the cost side, achieving a 25% adjusted EBITDA margin while investing meaningfully in our European fintech and other growth initiatives that aren't yet generating meaningful revenue. We want to be clear that we still prioritize growing the business instead of short-term EBITDA margins. Opera is still a growth company with attractive opportunities that we are pursuing, and our margins might fluctuate before increasing beyond this level. This quarter's results really speak to our agility and the lean cost base of our structure. At the core of Opera are our browsers. For over two decades, we have demonstrated that this is a very good business where there is room for independent, more niche-oriented players. We have been very innovative with features like multiple tabs and better workspace management through integrations with messengers like WhatsApp. Recently, we have integrated music streaming with Spotify, YouTube Music, and many others. Our gaming browser, Opera GX, has also reached new heights with over 300 million browser users, bringing predictable and nicely growing user-driven revenue streams and high incremental margins. We believe there is significant additional growth potential in the next year and beyond from our browser-plus strategy, which allows us to launch new products and services with ease. I am truly excited about our prospects. Our key regions, Africa, Europe, and South Asia, contributed to an average of 380 million users in the third quarter, including almost 20 million new MAUs for our browsers, and Opera GX reaching 5 million monthly active gamers. The growth drives a strong recovery in our monetization, powered by Opera News, which has exceeded 200 million monthly users and is becoming Africa's biggest content publisher platform. Furthermore, we are very excited about our fintech initiatives as we expect to drive major GMV around e-commerce in Europe next year. So, as we look forward to 2021, we anticipate revenue of about $200 million, representing approximately 25% growth over 2020, with our assumptions around our core business being relatively conservative.

Thanks, Song Lin. Before I get into the numbers, I'll mention a few strategic changes affecting how we present our financial results. The first was the creation of Nanobank, where we contributed our microlending business in exchange for a 42% ownership stake. As a consequence, revenue previously reported under Fintech along with all directly attributable costs are now excluded from our historical operating results. Instead, you will see the post-tax profit of our former microlending business reported as discontinued operations. Our other relevant decision in the quarter was to discontinue our retail business as we concluded this to have limited strategic potential and do not see a path for it to contribute meaningfully to our profit. Now moving to the third quarter results, revenue for the third quarter was $42.4 million excluding microlending and retail, which compares to $32.2 million in the prior quarter for 32% sequential growth as we recovered from COVID impacts. Search revenue was $21.2 million, down 1% year-over-year and up 20% sequentially. Advertising was $19 million, up 4% year-over-year and up 50% sequentially, driven by the return of the sports vertical and increased monetization from Opera News. Our operating expenses were $39 million, down 15% year-over-year due to discipline around marketing and other variable expenses. As a result, adjusted EBITDA was positive at $10.7 million in the quarter, representing a 25% margin, which compares to 5% in the second quarter, benefiting from strong increases in high-margin search and advertising revenue. Our operating cash flow was positive at $17.4 million for the quarter, driven by our underlying profitability and strong collections. We believe Nanobank is on a trajectory to reach pre-COVID levels within 2021; however, it is too soon to gauge when we expect the per-user economics to normalize like pre-COVID levels. As we look forward, we expect a revenue baseline expectation of around $200 million for next year, reflecting our strong user gains and accelerated monetization prospects.

Hi guys, thanks. Congratulations on the quarter. It's good to see revenue per MAU rebounding. We're still well below the pre-COVID peak from the fourth quarter of 2019, based on the historical data you provided. Do you think the new concerns about COVID could lead to a decrease in revenue per MAU again before we eventually reach that peak?

Frode here, I can maybe begin. We're pleased with the trajectory we have seen in Q3 and what we're seeing in Q4. Monetization on a per-user basis is still lower than what we have had in the past, but we've also seen increased engagement leading to more inventory for our ads. I think we will continue to benefit from the assets we've built up and the strength in our user base over this quarter. It is too early to predict when user economics will normalize back to pre-COVID levels.

And Lance, this is Derrick. One thing to keep in mind is that in the year-ago quarter, we did almost $6 million of technology revenue, which doesn't relate directly to our user base. When looking at our search and advertising revenue, it's expected to be up year-over-year in Q4. Overall, we believe the user-driven revenue metrics are performing above peak levels again.

That's great. I think the numbers I'm looking at, I'm excluding the technology licensing from the equation, Derrick. My point is you've got this opportunity where you're expanding your user base and now we have recovery in your per-user economics, so there should be quite a bit of incremental revenue as that continues to improve. I'm wondering if you could comment a little on the incremental margin profile. As monetization picks up, what should we expect on the flow through to the bottom line?

I think you are correct. If you look at search and advertising revenue in isolation for our existing browser and news product, we expect a very high flow-through from incremental revenue to profit.

Thank you. On the guidance for Q4, you mentioned revenue of $45 million to $47 million, which is a little better than we had modeled coming into the quarter. But what surprised me most is the EBITDA margin showing consistency. Should we expect that margin to remain stable as we think into 2021?

If we did nothing between now and the end of Q4 tracking towards the revenue guideline we gave, that should increase our EBITDA margin. However, we expect to invest more in our newer initiatives in Q4 compared to Q3.

On the revenue guidance for the full year, just to clarify: the $200 million talks about continuing operations and excludes retail, correct?

Correct.

And so 25% growth is reflecting this year's COVID depression, but it's still up about 13% from 2019. Is that 13% growth rate over the unaffected 2019 perhaps a more reliable indicator of the longer-term growth rate? How should I position my model for 2022?

I understand. When we began 2020, we anticipated better than 20% advertising growth and mid-single-digit search revenue growth in a steady-state scenario. The fact that we are back to year-over-year growth speaks to our trajectory, although on a per-user basis, more normalization is expected.

Hi, good evening and good morning, management. Thanks for taking my questions. I wanted to follow up on your advertising monetization. Specifically, could you share some user profiles for the new 35% MAU growth for Opera News? What age groups are you seeing and how long are users spending on the news per day?

It's Song Lin here. The major growth of those new users are still primarily in our key news markets, especially in Africa, Nigeria, and South Africa, where operators significantly drive user uptake. The monetization, however, is still limited by regional spending capacity. Despite a strong growth rate in users, the advertising revenues may lag as user spending capacity increases, which we anticipate to see as online engagement continues to rise.

Thank you, Song.

Hey guys, congrats on the quarter and thanks for taking my question. I was wondering if you could peel the onion a bit on the utilization trends that you've been seeing. What is giving you confidence that this can continue going forward?

Yes, I think we'll see continued user growth, particularly through COVID-19 as users rely more heavily on online resources. People are finding these tools essential. I believe usage trends will continue shaping behavior and vast increases in online engagement will endure. This transition from offline to online is especially pronounced in Africa where we've seen significant increases in usage.

Thanks for taking my questions. On the Q4 guidance, does the current guidance reflect assumptions for second-wave impacts? I know we've seen lockdowns in Europe.

Hi Lee. The forecast is based on the latest data available, so it reflects the situation as it stands now.

Could you break down where specifically you're spending in Q4 and into 2021? Are these investments focused on building brand awareness through marketing or are they more operational and product-specific?

Sure. In Q4, there's $2 million to $3 million of additional investment, mostly in personnel and staffing up, alongside marketing.

Could you talk about the assumptions around a return in ad spend from severely impacted verticals like travel? Also, the guidance indicates potential revenue growth from new initiatives; could you rank where the most growth might come from?

It's hard to predict how that will specifically play out since we observe stable activity in search and on a per-user basis for PC. Increased advertising activity on mobile is driven by higher user engagement. However, we prefer not to be overly specific around new initiatives until we see their performance. We want a cautious approach as we scale what works. As a general answer, we always evaluate our investments based on professional judgment for our shareholders' interest. Currently, we see substantial value potential, particularly in OPay and StarMaker, based on the progress they have made.

In conclusion, we have a healthy quarter and expect this trend to continue into Q4. We have even higher expectations for 2021, both in our core business and new initiatives. Thank you all for your support.