Opera Ltd Q4 FY2020 Earnings Call

Thanks to everyone for joining us today. With me today on the call 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 more 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 on IFRS. We believe that the use of our non-IFRS financial measures provides an additional tool for investors to evaluate ongoing operating results and trends. These measures should not be considered in isolation or as a substitute for the financial information prepared in accordance with IFRS. We have also posted unaudited supplemental information on our Investor Relations website that includes historical financial results for Opera, which reflects micro lending and retail as discontinued operations. We've also included pro forma results for Nanobank, which we own 42% of. With that, let me turn over the call to our Co-CEO, Song Lin, who'll cover our operational highlights and strategy and then our CFO, Frode Jacobsen will finish up with financials and an update on our investments and our expectations going forward. With that, let me turn it over to Song.

Sure. Thank you, Derrick. So, first I want to say thank you everyone for joining us today. This is Song Lin here. 2020 presented us with special challenges for many businesses alike. Despite that, I'm pleased to report that the fourth quarter substantially exceeded all expectations for Opera with accelerating year-over-year revenue growth rates and strong margins in our core business. We are really excited as a company about the road ahead. So number one, our core business, both the Opera Browser and Opera News have demonstrated not just resilience but strength. This means we are now operating with more users and at greater scale in our key markets, seeing greater user engagement and an increasing ability to monetize. This, along with the recovery from COVID-19 impacts led to accelerating revenue growth and an even stronger trajectory than we expected as Opera enters 2021. Secondly, the strength of our core business puts Opera in a position to not only benefit from our ability to create value through these core products but to leverage that strength by investing where we see clear opportunities for growth. We have multiple growth initiatives in rapidly expanding categories with high potential, including gaming, payments, and news in developed markets, each of which benefits from our existing market position and represents significant upside. So in combination, the scale and performance of our core business combined with our new initiatives makes this an exciting time for Opera. We believe that we can and we will grow to be a much larger business as these growth strategies play out over the next few years. But before I talk about our future, I also want to offer some highlights of our performance. So for the last year, we added 29 million monthly active users to our base in 2020. We have also reached 79 million average monthly PC users in the fourth quarter, which is up 17% year-over-year, compared to about 10% growth in the third quarter. This was driven by our Opera GX browser, which exceeded 7 million users in December, up 350% year-over-year and we continue to see elevated growth rates so far this year. On Opera News, monetization has also reached an inflection point. It has grown more than 150% year-over-year and 60% compared with the third quarter. Our mobile users have also achieved record revenue while continuing the expansion of the user base, especially for our most advanced browsers, Opera for Android and Opera Touch, which are up 18% and 51%, respectively. We also recently launched Hype, an in-browser messaging feature in Opera Mini, and this is an example of features we are launching to further increase engagement in key African markets. Finally, thanks to our increasing scale and engagement, advertisers not only returned to Opera, but have increased their spending with us. So the combined search and advertising revenue growth accelerated to be 14% year-over-year from about 1% last quarter. So looking ahead, we expect that our new initiatives, which both complement and benefit from our core processing business, will contribute significantly to user engagement, advertising growth, and SaaS revenue. Let's talk about those initiatives and also where we are. I will start with our European payments efforts. We've just announced the launch of Dify, a new digital wallet that will fully integrate into our browser. So every day millions of people shop online and make payments using Opera browsers. The first use case for Dify will focus on online shopping, providing cash-back benefits from more than 300 merchants that are already part of our program. This has significant potential for Opera. It will attract many users we know are looking for a better shopping experience with integrated payments and the ability to earn discounts through cash-back. Second and more broadly, this will deepen our penetration of e-commerce, which we have done throughout 2020. Opera can accelerate partnerships with an increasing number of merchants by offering an even more seamless transaction layer into the browsing experience and use Dify as a permanent choice. Dify is now live in Spain, and the next steps will be to expand to additional European markets and as the year progresses, launch additional payment solutions and services such as nanopay levels, further building out the ecosystem around our browser and Dify wallet. Gaming is another area we are very excited about. The online gaming market itself is huge and growing. Recent market research suggests that in 2020 the global games market generated revenues almost 10 times global box office revenues. Our Opera GX browser is the world's first browser built specifically for gamers and we are encouraged by our overall successes. The Opera GX user base has grown tremendously to over 7 million monthly active users in December and is significantly contributing to our core business growth, demonstrated by the fact that every million monthly active users on Opera GX now delivers more than $2.5 million in annual revenue already. We continued to invest in gaming. In January, we acquired YoY0 Games, a long-standing gaming engine well-liked by gaming communities and independent game developers. We believe the combination of the fast-growing GX targeted at gamers and the well-recognized GMS gaming engine will allow us to build out a comprehensive gaming ecosystem, accelerating our monetization potential. We would like to call it a game changer. Expect more details in the next few months. Finally, and perhaps most importantly in terms of revenue growth potential for this year is Opera News. As you all know, Opera News has been a huge success in emerging markets, especially Africa. We have over 200 million users in Africa and other emerging markets, and revenue is becoming substantial with a healthy gross margin as a direct result of all our investments in users and market share. At the end of last year, we began efforts to replicate the success we've had in more developed markets. The early results have been promising with overall MAU on similar apps, and is already the leading news app in several markets with very good user engagement and monetization, positioning us to scale further. We're glad that our trial and substantial experience around AI, algorithms, and data will allow us to create a competitive edge in developed markets as well. We are well-positioned to scale. While there will be meaningful upfront and marketing costs in our user acquisition, we will broaden our ecosystem in developed markets with a larger and profitable content business, with major potential impacts on our revenue growth this year. To wrap up, our core business is getting stronger with accelerating revenue growth and increasing profitability. We are using these strengths to build a bigger ecosystem, positioning our browser user base through e-commerce and payments, building a gaming universe around Opera GX, and bringing news to developed markets. We are growing our business in markets that are themselves growing, leveraging the scale and success of our core business with investments that will draw new users to Opera while increasing engagement with existing customers, creating meaningful upside for our company and hopefully our shareholders. Before I hand the call over to Frode, I want to express how excited we are about the year and even more about the years ahead. We've seen the potential to materially accelerate our growth rates this year with clear implications for our value. With that, I will turn it over to Frode to continue. Hi, Frode?

Thanks, Song Lin. The fourth quarter was very strong, exceeding our expectations and placing us on an elevated growth trajectory for 2021 and beyond. Let me cover some highlights of the quarter and then provide some details on our growth plans. Revenue for the fourth quarter was $50.4 million. This compares to $42.4 million of revenue in the prior quarter or sequential growth of 19%. Specifically, in the quarter, search was $25.7 million, up 13% year-over-year and 21% sequentially. This was driven by our record desktop users and recovering monetization. Advertising was $23.3 million, up 16% year-over-year and 23% sequentially, driven by accelerating monetization from Opera News and strong mobile browser monetization. Finally, tech and other revenue was $1.5 million. Year-over-year, this revenue category has been reduced by $4.5 million although with almost no impact on profits as the decline relates primarily to low-margin professional services to OPay. Our operating expenses were $46.4 million, up 19% sequentially, primarily explained by increased marketing spend and a write-down of receivables related to Powerbet, which was a small joint venture that we dissolved in Q4. Adjusted EBITDA was $14.3 million in the quarter. This represented a 28% adjusted EBITDA margin, highlighting the strong profitability of our core search and advertising business. Other items of note include other income of $3.9 million related to a cash refund of VAT that had been recognized as other expenses over the past years, a $5.2 million share of profit from Nanobank, an $8 million increase in the book value of our preference shares in Starmaker and OPay, and $5.9 million in realized finance gains on public securities held as part of our treasury function. All items included, net income was $25.4 million. Our operating cash flow was positive at $17.5 million for the quarter, where the biggest driver was our underlying profitability. Net of other items, including $8.2 million of share buybacks, total cash and marketable securities ended the quarter at $134.2 million, up $14.5 million from the prior quarter. In terms of our share buyback program, we repurchased a total of 5.89 million ADSs in 2020 for a total spend of $49 million, averaging $832 per ADS. Then moving to our investments. As we have discussed, our investments represent significant upside potential for Opera shareholders and in Q4, we saw a continuation of the positive trends we outlined last quarter. As a reminder, Opera holds 42% of Nanobank, 13.1% of OPay, and 19.35% of Starmaker. Beginning with Nanobank, it continues to recover from COVID-19 impacts. Indonesia and Mexico are outperforming, while other geographies have been slower to recover. Further, Nanobank is in the process of launching in several new markets and we will provide more details as those markets begin to scale. For the quarter, Nanobank posted revenue of $46 million, up 32% compared to the third quarter, and disbursed 3.2 million loans, representing $239 million in total value. Adjusted EBITDA was $13.8 million, representing a 30% margin and post-tax profits were $12.3 million. We continue to believe Nanobank will scale meaningfully in 2021 as its markets fully recover and it launches in new geographies and adds products. We expect this to be more evident toward the middle to later part of the year. Our two other significant investments, OPay and Starmaker, continued to experience strong growth in the fourth quarter. In December, OPay processed a gross transaction value of $2 billion on its platform compared to $1.4 billion in October, a 43% increase in just over two months. Further, OPay's revenue is increasing quite rapidly while the company is able to achieve profits right around breakeven despite the growth. We expect this growth to continue as OPay continues to scale in Nigeria and expands to an additional country in Africa. Starmaker continues to scale rapidly. The company exited 2020 with an annual revenue run rate in excess of $130 million, which was more than three times the comparable exiting run rates of 2019. Starmaker also achieved double-digit net income margins for the year and daily active users more than doubled year-over-year. Now moving to our forward-looking commentary. Repeating what Song Lin said earlier, our core business exceeded expectations in 2020 with strong momentum. This has made us more confident in near-term growth and we expect our core business growth rates to increase in 2021 compared to this past quarter. This is being driven by a combination of strong PC user growth, Opera News monetization reaching an inflection point, and strong mobile revenue trends. We expect our core business to contribute significantly more in adjusted EBITDA in 2021 versus 2020. However, we plan to take all of our underlying adjusted EBITDA growth and reinvest it into our new initiatives that Song Lin discussed to seize the opportunity to accelerate our long-term trajectory. We believe the ROI on those investments will enable us to achieve growth rates well in excess of the 20% to 30% level and accelerate our path toward becoming multiples of our current size. We have confidence in this strategy from the consistent strength demonstrated by our core business and our demonstrated ability to scale new initiatives such as Opera News and the Fintech businesses that we've established as independent companies. Finally, we believe all of these initiatives have strong risk-reward profiles and the ability to drive outsized long-term profitable growth. Now getting into our 2021 guidance. We are taking a conservative approach, not including anywhere near the full potential from new initiatives, while making sure potential investment is reflected. We believe that will provide us flexibility to execute on our growth plans and provide investors with baseline expectations that we will hopefully be able to outperform as the year progresses. We expect 2021 revenue of $220 million to $240 million, representing 39% growth at the midpoint, up from our former indication of 25% growth or $200 million. We expect adjusted EBITDA of $10 million to $30 million. In Q1, we expect revenue of $47 million to $48 million, representing 18% year-over-year growth at the midpoint, roughly a 15 percentage point increase versus the growth rate of the fourth quarter. This will be driven by search and advertising revenue growth combined exceeding 25%, partially offset by a $2 million to $3 million year-over-year decline in other non-user-driven revenue. Adjusted EBITDA is expected to be around breakeven in this first quarter as we invest aggressively in our new initiatives. To wrap up, we are very excited about 2021 and our ability to build something big. We will be investing in our future and believe we've got a great setup ranging from a core business that is very profitable with solid growth to a set of strategic investments in businesses that offer multiple incremental revenue and cash flow opportunities. We look forward to keeping you updated. Thanks. We'll now take questions.

Thank you. We'll take our first question from Mark Argento with Lake Street Capital Markets.

Hey, good morning guys and congrats on a strong quarter. Just had a handful of questions. On the advertising side, it looks like business has bounced back nicely there, talk a little bit about what are some of the properties where you're monetizing the highest in terms of advertising, is it through the browser in particular or some of the new products? Maybe just touch on kind of where you're seeing that strength in advertising coming from? Thanks.

Yes. It's Song Lin. I guess maybe I'll just comment a bit on the general line and then Frode can probably comment a bit on the numbers. So I think high level as we mentioned in our Q4 results, we see very strong growth in the news, highlighted by the fact that news alone grows around 50% year-over-year and 60% compared to the third quarter, so obviously that's very strong and above the average growth of ads. But on top of that, we do also have quite strong growth on the browser as well. But yes, I think news has been instrumental and we see that trend continuing into the New Year. So maybe Frode can also complement.

Yes. I would say, overall we benefit from a normalization in terms of demand post-COVID impacts earlier in the year giving a return to year-over-year growth now. For the fourth quarter relative to the third quarter, approximately half of our advertising growth was driven by the Opera News app and the other half driven by the browser side.

Great. It's helpful. And then in terms of the Opera Mini browser, I know that business has picked up, that product has really proliferated nicely. Are you able to generate ad revenues out of the Mini browser as well and what is the anticipation in terms of scaling that out into other markets?

Yes. So maybe I'll just comment here. So, first clarifying that, of course, Opera Mini is actually the major browser generating good ad revenues. It's still because Opera Mini is the emerging markets offering, so it is quite significant in emerging markets, like Africa. It is already very well engaged and generates a big chunk of ads revenue. If we set aside news, then Opera Mini itself is one of the major ad generation opportunities. So I think the next opportunity is actually Opera, which is a bit more high-end and which is also now performing well in more developed markets like Europe and the U.S. I think within 2021, you will be able to see very strong ad monetization potential for Opera for Android and also Opera Touch in more developed markets.

Mark, this is Derrick. Going back to Opera Mini, just as a reminder for everyone on the call, we have 100 million users on Opera Mini and our focus there is creating more and more features and functionality that drive engagement. Over the last 12 months, we've dropped a bunch of new features there and our focus is going to be to try to make the browser better and better. Obviously, the same thing with Opera for Android and Opera Touch, as Song Lin said.

All right. Given that you are committing fully to reinvestment this year, what are the key areas you will focus on for reallocating that capital?

Yes. So, just to be a bit high-level right and then Frode probably will elaborate on the numbers, but I would just say that, in terms of the major growth area, which will have a direct impact on the numbers even for this year, I would say that Opera News, because that's a very material product and it's yielding very good potential. We see how it's performing in African markets and we have actually launched that already in some key new markets, which is performing well. So for us, it is almost a very simple decision that if you have a product with very high user engagement, retention, and a good market, then, of course, there is no reason why we should not plan to invest to ensure it grows properly to scale. So I would say that constitutes the majority of our investment in terms of money. The other two directions, while gaming itself is already very profitable, and also Dify aims toward a bigger scale but slightly long-term.

Yes, let me chime in. We are very pleased that we're able to guide about 40% revenue growth at the midpoint and the vast majority of that growth is coming from our core businesses as Song explains with Opera News and the potential that we see to scale that, but also the browser business is doing well. The amount of investment really depends on how successful we are; the better we do, the more we will invest to seize that opportunity and that is what we have provided for in our ranges today.

And then just last one from me, it looks like some of your minority investments including Nanobank are performing at a high level. Is there any talk or thoughts on looking for liquidity for any of those assets either in an IPO or an outright sale of the stakes? Just wanted to better understand your long-term thinking around those minority assets.

Sure. We are very rational when it comes to maximizing the value for our brand and our shareholders. We don't have anything specific to announce for now, just very pleased that all of these businesses are performing well.

And Mark, this is Derrick. I would add on our investments, obviously we're not running those businesses, but the individual management teams of each business are really excited during 2021 and they think they can generate strong growth rates. So that's a good thing as far as we're concerned in terms of our optionality.

Just one follow-up there, any of those three assets taken in any capital or have there been any valuation marks on any of those recently?

No, not externally. Obviously, we took a gain on those investments from the fair value of this quarter.

Great, thanks guys. Congrats again on a good quarter.

Thanks, Mark.

Our next question comes from the line of Vicky Wei with Citi.

Good morning, management. Thanks for taking my questions and congratulations on the strong results. This is Vicky Wei on behalf of Alicia Yap. My first question is regarding our Opera gaming. What is the strategic target for Opera gaming in 2021, and can management comment on the competitive landscape of the online games in your business regions? Thank you.

Yes, it's Song Lin. Maybe I will just comment a bit. It's new for us as we just announced the acquisition in January, but however, I would say we have already demonstrated the strength of Opera in gaming through the Opera GX, which has 7 million monthly active users, just a little bit more than one year, and an above 300% year-over-year growth, which is tremendous. As also noted, this is already becoming quite profitable. As a highlight, right, so you probably know that with the addition of the GNS gaming engine, we will have a community that comprises plenty of gamers, fast-growing and gaining momentum in the gaming community, linking both players and game creators together. We believe there is a lot of potential in combining these aspects, building up a community or offering one-stop-shop services. We are very excited about it.

Thank you. And for the competition, please?

Yes. I would say if you look at the level globally, there's a trend with both players and gaming creators. You're really looking at the likes of Beam or Roblox which are solid communities for both players and creators. While those are huge companies, our target is a slightly niche segment, focusing on independent gaming developers and also a particular niche of the market. So yes, there are a lot of potentials, but we feel combining these elements could be very relevant. However, as this is fresh, you'll see new products and press releases this year and we are very excited about the opportunities.

Your next question is from Sarah Simon with Berenberg.

Yes. Good morning. I apologize if these are stupid questions, but it's the first time I've listened to an Opera call. But I've got three. The first one is with regard to monetizing the browser, do you think that you will benefit from the removal of cookies by other browsers, notably Chrome obviously next year and whether you've seen that already with other browsers dropping the cookie thing? And I guess related to that, do you feel any pressure to remove support for third-party cookies yourself? The other question would be OPay. Did I hear you say that you did process $2 billion of payments, and I think that was just in a month, right? So who are your main competitors for OPay, and am I right in thinking it's just really Nigeria for that at the moment? Thanks.

Yes. It's Song Lin. Thanks for the question. That's a very good question actually. First on OPay, just to clarify: they are making $2 billion transaction volumes a month, which is indeed huge. Yes, you are also right that for now they are primarily operating in Nigeria, that's where they have their license. They do plan to expand into other regions in Africa, but it is still up to them to announce that. I can say that, through our best knowledge, they are number one in the market in terms of payments in Nigeria with a major market share. As for cookies, we work very closely with Google and other major players in the ecosystem. So we monitor this very closely. We want to be part of this same ecosystem moving forward.

Sarah, I would add that we are a Norwegian browser company and that Norway has very strict data laws, so a lot of privacy features within our browser we have been practicing for a long time. Regarding our browser revenue, it primarily comes from search and advertising revenue done through affiliate deals. We feel confident as a result of that.

Okay. And can I just ask about OPay? How do you distribute it? What's your marketing strategy, how come it's so big? Who are your distribution partners?

Yes. It's Song Lin. Again, like this is almost a question for OPay, but from my insights, I can say that OPay acts differently in Nigeria due to a lack of infrastructure and banks. They have created a huge network of distributors—more than 300,000—acting as mini bank branches across Nigeria. Whenever people want to do transactions, they go to these agents, allowing them to withdraw, deposit, and transfer money or pay for utilities. They have solved a major issue in facilitating transactions between cash and electronic money, which explains their success.

Yes, Sarah. Just to clarify: there are online wallet users generating transactions along with those through points of sale as Song mentioned.

The infrastructure they provide is substantial, allowing for more than just simple e-commerce transactions.

I think in the near term, OPay will be a little more public with some of the things they're doing. We'll let them talk more about it, but we're pleased with the growth.

Yes. Okay, that's super helpful. Thank you very much.

Our next question comes from Zaudan Zeng with CICC.

Okay. Thanks management for taking my questions. This is Zaudan from CICC Research and congratulations on the strong fourth quarter results. My first question is regarding your full year 2021 guidance. Does it incorporate revenue contribution from your new initiatives such as the newly acquired gaming company? My second question is regarding your near to mid-term business strategy, so just wondering, going forward what will be the primary focus in terms of building an ecosystem or doing investments in the next few years?

Hi, Frode here. In 2021, the growth is predominantly driven by our existing products, existing core, Opera News most importantly, and geographic expansion and monetization efforts we are doing around Opera News and our browsers. We have been very cautious to build in much upside from new initiatives, such as gaming and European Fintech in 2021. We have included all expected costs, but I would expect those to be more material next year rather than this year. The near-term strategy comment is really to set these new businesses up for success and for ramp while operational focus remains around our core and expanding that.

Thanks.

Yes. It aligns with what I was saying. We see great opportunities to grow our core business, both for Browser and News while incubating gaming and other initiatives.

All right.

At this time there are no additional questions. I would like to hand the call back over to Song Lin for additional closing remarks.

Yes, sure. As you know, we've ended 2020 really strongly and 2021 is off to a good start. Our core business continues to do really well, and as discussed, our new opportunities have tremendous promise. We look forward to keeping you updated along the way. Thanks for the support in the past few years. Have a good rest of the day, everyone. Thank you.