Opera Ltd Q3 FY2021 Earnings Call

Welcome to the Opera Limited Third Quarter twenty twenty one Earnings Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to turn the call over to your speaker today, Matt Wolfson, Head of Investor Relations. Please, begin.

Thanks for joining us today. 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 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 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 and of our investee Nanobank. We will be live tweeting highlights from the call at @InvestorOpera. So, please follow along there during the call and in the future. With that, let me turn the conference call over to our co-CEO, Song Lin, who will cover our operational highlights and strategy and then Frode will finish up with financials and our expectations going forward. Song?

Sure. Thank you, Matt. This is Song Lin. Thank you everyone for joining us today. So, I'm pleased to report that Opera once again outperformed, delivering financial results for the quarter that exceeded the high end of both our revenue and EBITDA guidance. So, revenue was up thirty-seven percent year over year and represented a continuation of our strong growth trajectory with eleven percent sequential growth when comparing with the previous quarters. The quarter also represents an earlier than expected overall margin expansion with a twelve percent adjusted EBITDA margin, well ahead of our breakeven guidance. Looking ahead, we are confident that our strong performance will continue. We remain on track to have a record year for the company as search and advertising revenues both set new highs. Revenue growth continues to be driven by advertising, generating ninety-eight percent of our total revenue on a combined basis. For the first time in Opera's history, advertising has surpassed search revenues in terms of mix. In the third quarter, search revenue grew approximately forty-five percent year over year, while advertising was nearly double that rate at eighty-four percent growth. Our advertising revenue is accelerating, thanks to new products and features in user engagement, a focus on growing high-value users, and finally, a rich toolset for advertisers to target and connect with our audiences. We continue to focus on products and services that highlight the browser and how its advertisement services, which we call Browser+, have enhanced people's online services. On mobile, we have continued to expand our offerings in Africa. Even though we already have over one hundred forty million monthly active users in Africa, representing one of the most relevant internet companies in the region, we believe this region has great growth potential as there are eight hundred million users that are not aligned. We were pleased to see one of our key partners, Google, announced a one billion dollar investment earlier this month, accompanying that our option is well deserved. Our messaging app, Hype, which we designed in collaboration with local artists in multiple African geographies and built into the Opera Mini mobile browser, is showing strong adoption. We have launched Hype cloud services, which allow users to participate in conversations about diverse topics such as football or music. While Hype is still in the starting stages, it has more than tripled its registered users during the third quarter. Another good example would be Opera News, which is the number one news app in Africa and has been launched in several countries in Europe and in the U.S., continues to grow in financial significance. Advertising revenue from Opera News and our broader platform offerings now make up almost half of our total advertising revenue, following over two percent year over year growth. We see tremendous opportunity in the AI-driven content application space in new phones and new markets around the world. We have leveraged our dominant position in Africa’s biggest markets to launch specialized Opera Football services using the same AI technology that follows Opera News. With the English Premier League in full swing, we're seeing very high engagement, with quarterly active users growing more than fifty percent from previous quarters. Moving to PCs, we continue to invest in innovations to make it more relevant to our users. One good example is our in-browser shopping solution, which after launching has expanded into several new markets in Europe, starting with Poland, the location of our development team, and is also one of the faster-growing new economies in Europe with additional countries to follow. We've also added features, including cashback and coupon offerings, to make this solution even more attractive to our end users. All the results are promising, and we look forward to sharing more details in the future. In combination, those offerings serve as good examples of how the browser has become the hub of managed services and connections of many points of engagement and monetization opportunities. Gaming represents also an extraordinary opportunity for Opera, with billions of people globally spending money on games and related activities. Our GX browser is an excellent example of designing browsers with user experience in mind and how we are able to build on our core assets to expand into adjacent areas. As of now, we have over forty million GX users across both mobile and PC, and that number continues to grow. During the quarter, we also hosted the Opera GX Game Jam focused on game developers, who in turn submitted more than nine hundred games created using Opera’s game maker studio over a few weeks, indicating the power of creation. We are now announcing GXC, a gaming and self-publishing platform where new users can directly create and publish games for free, using the game maker studio. These games are then available to be played natively in the GX browser by millions of users without needing to install the game. We believe this latest addition to our offering to gamers is another strong indication of potential in this vibrant space and the opportunities ahead. Stepping back, I'd like to talk about particular strengths that will benefit Opera. Many people believe that the history of the browser has already been written; we believe the opposite. The way people use the internet is changing, and the browser itself has never been more relevant or important. Users want their online experience to be well-suited to their individual needs. Opera improving user experience has driven continuous innovation in all browsers and related products. Consumers are increasingly recognizing the benefits of using a product designed for them; for example, Opera’s GX browser is already very highly regarded within the gamer community, differentiating itself from standardized products that just become bundled with the operating system of the device. Opera has become the browser of choice for hundreds of millions of people who want to choose their browser, and we believe this will continue to increase. Our intention is to capture this growing market by offering the best browser experience for those looking for something more, introducing the improvements and innovations that will drive user engagement, audience growth, and naturally our ability to increase monetization. I will let Frode speak to our financial results, but before I do, I want to let our investors know that this quarter's results continue to validate our belief that the browser business is a great business to be in. There is a huge opportunity ahead of us as hundreds of millions of consumers increasingly seek a browser that allows them to modernize their online lives and get the online experience that best fits their needs. In summary, Opera’s growth is accelerating, our profits and margins are expanding, and our products have never been more relevant to more people.

Thanks, Song Lin. As Song Lin said, our strategy of increasing the value of our user base by introducing adjacent products and opening new markets is producing record results for Opera. Our results this quarter are a strong validation of our Browser+ strategy, and we see the strength continuing through the fourth quarter. As a result, I'm pleased to announce that we yet again raise our guidance for the full year revenue and adjusted EBITDA. Revenue for the third quarter was a record sixty-six point six million, up fifty-seven percent year over year and up eleven percent versus the prior quarter. After a few quarters of favorable comparisons due to COVID, the search and advertising revenues had returned to pre-COVID levels by the third quarter of twenty twenty, making us particularly pleased with this year-over-year achievement. For the first time, our revenue mix skews towards advertising revenue, which is now fifty-two percent of the total, a trend we expect to continue. Specifically in the quarter, search revenue was thirty point seven million, growing forty-five percent year over year, driven by monetization gains for both PC and mobile browsers. Advertising revenue was thirty-four point nine million, growing eighty-three percent year over year, driven by strong monetization from Opera News and our mobile browsers. Our strategy to improve revenue and profitability by focusing on not just growth, but also improving the value of our user base is clearly demonstrated by Opera’s consistent and continuing trend of growing our ARPU. One simple way to demonstrate this is to take our search and advertising revenue and divide it by our entire user base. In the third quarter, each user generated an average record of zero point seven five dollars on an annualized basis, up nineteen percent sequentially and up eighty percent compared to the third quarter of twenty twenty. Great products and features and the increasing relevance of the browser mean that Opera continues to expand the profitability of every user over time. In terms of our user base, we continue to direct our resources towards growing the users with the highest value and highest potential for Opera. For example, user growth in the EU was up nine percent compared to the third quarter of twenty twenty, and in the Americas, we saw an increase of thirty percent, led by North America, which was up forty-six percent. Our record high revenue across all regions reflects better monetization in every market where we operate. This means we are doing a great job of improving the value of every user we have, and that's something we intend to remain focused on. In terms of gross margin, the three cost items that scaled with revenue—our tech and platform fees, content costs, and inventory costs—combined add up to three point three million, resulting in a gross margin of sixty-three point three million, or ninety-five percent. On the cost side, we managed to drive this growth with less investment in acceleration through marketing and distribution expenses versus what we have considered as the basis for our prior guidance. Marketing and distribution expenses remain elevated as we continue our rapid expansion but slightly decreased from the prior quarter. As a consequence, we generated better than expected adjusted EBITDA of eight point two million. Our core margins are very high and when our investments come in below plans, such as it did this quarter, you can see the start of our trajectory towards a more normalized profitability level. Our net income for the quarter was twenty-three point five million, predominantly driven by the step-up in valuation for the OPay ordinary shares we had not previously recorded at fair value. Our operating cash flow was negative at three point four million for the quarter, largely explained by a catch-up in the accounts payable balance following the plateauing of marketing costs. Combined with smaller non-operating items such as lease payments and development expenditure, we reduced our total cash and marketable securities by eight million, ending the period at one hundred ninety-three million. Now, moving to our forward-looking commentary. Our core business continues to perform and grow ahead of expectations, increasing our confidence in our outlook for the rest of the year. We believe our browsers are well-positioned to continue to grow both our high-margin search and advertising revenues. For the fourth quarter, we expect revenue of seventy to seventy-two million, representing forty-one percent year over year growth at the midpoint. This fourth quarter revenue growth is fueled by strong continued results from Opera’s core search and advertising business and the underlying seasonality. Adjusted EBITDA is expected to be between eleven million to fourteen million in the quarter, translating to a margin of eighteen percent at the midpoint. Profits are expected to benefit from the combination of the additional scale we built during the year and the continuation towards a normalization of marketing and distribution spend. However, I want to remind you that, as in the past, the fourth quarter profits also benefit from seasonality on the top line. As a consequence, our full year twenty twenty-one revenue guidance adds up to two forty-eight to two fifty million, representing fifty-one percent year over year growth at the midpoint. This constitutes yet another lift versus prior guidance, which stood at forty-eight percent growth after the second quarter and was at thirty-nine percent for the year when we initially guided back in February. For the full year, we expect adjusted EBITDA to be between twenty-three million and twenty-six million, which is in the higher end of our initial expectations for the year and well above the expectations we previously set in light of our even stronger revenue growth trajectory. Overall, and in sum, Q3 was another great quarter leading to record revenue for both search and advertising. We are very pleased with these results and strongly believe we are pursuing the right strategy of innovating upon our high-margin core browser business and investing in adjacent initiatives such as news and gaming to drive continued growth into the future.

We will take our first question from Lance Vitanza with Cowen.

Thanks guys. It's Lance at Cowen. A couple of questions for me. First, you call out in the headline that the ad revenue exceeded search for the first time, but could you just explain why that is significant? Why do we care that advertising revenue is exceeding search revenue? What's the implication of that?

Hi, Lance. I would say two quick comments for that. Number one, I think it’s a demonstration of the combined success of Opera News on top of the browser because the only revenue category we drive from Opera News is advertising. Number two, of course, the advertising revenues are far more diversified, meaning there’s a much longer list of partners, so it means that the sum of many is starting to add up to now be our biggest revenue stream.

Okay, great. If I look back from the beginning of COVID to twenty nineteen, I calculate a two-year revenue CAGR of about nineteen percent, which is outstanding, but my question is, how does that compare to other internet media players? I mean, on a two-year basis and looking through COVID, is Opera growing in line with its peers or is it growing faster or slower than peers?

I mean, I can only speak for us. In many ways, twenty twenty from a revenue perspective was a bit of an anomaly given the decline, particularly in Q2, Q3 was essentially back to year over year flat, and then we had a good Q4 again. If you look at the growth rate from Q3 twenty nineteen and Q3 twenty twenty, the revenue was about the same when you look at search and advertising. So, I think, of course, we came out broader and we came out with good products and uptake. Still, the monetization gains we're seeing now are relative to the same level that we had before COVID, but we only got back there by Q3 twenty.

Okay. I guess where I'm trying to go with this question is, I know it's a little early. I'm not going to ask for guidance, but as we think about our models in twenty twenty-two revenue growth, I can't imagine that it continues in the fifty percent to sixty percent range. So, I'm thinking about moderating from the nineteen percent CAGR to something like a mid-teens growth rate. Is that a decent place to be modeling twenty twenty-two from a revenue perspective?

As you say, it's also a little bit early for me to go out publicly with guidance now. We do feel great about the trajectory of the business. I would agree that fifty percent year over year growth is a fantastic performance that we've had. So the direction of the growth rate will be lower than what it was in twenty twenty-one, which I think is reasonable, but it's hard to give something very specific. We are investing in our business and continue to invest at very high levels in growing our business. We are working on our initiatives that we have talked about before to sustain very attractive growth also looking ahead.

Okay. Just one last question for me and then I'll turn it over, but on OPay, you mentioned in your prepared remarks the stepped-up valuation now that you're using a fair value approach, but didn't the fair value of the asset itself also increase given that they had raised some money at a higher valuation? I think from my notes, and I'm hoping you can confirm this for me that OPay had raised four hundred million at a one point five billion dollars valuation last May and then maybe raised another four hundred million at a two billion dollars valuation late August, is that right? And then presumably, you've been diluted by these raises. So, could you just confirm what percentage of OPay the company owns today? Thanks.

Sure. To begin with, it's just the timing of different types of releases. There has been one funding round for OPay this year, and that's the one with about a two billion dollars post-money valuation, which is also the evaluation at which Opera divested a bit less than a third of our ownership. There has been a single funding round for the share. The fair value, so the assumed value of OPay, that formed the basis for our recognition of ownership was updated at the end of the second quarter to reflect that funding round and that we have not changed since. The reason we have a gain now is that we have two types of shares, ordinary and preference shares. From the past, ordinary shares were recorded under the equity method and not fair value. So this is just an accounting topic. Our ownership of OPay is now at six point four percent; it used to be thirteen point one, and we sold twenty-nine percent of our stake, which took us to nine point three. There was also some equity set aside for employee grants held in the separate company, which takes all that dilution upfront down to eight point two, and then the funding round reduced that to six point four.

Perfect. Thanks so much for clarifying. Appreciate it. Congratulations on the quarter, guys.

Thanks, Lance.

We'll go next to Mark Argento with Lake Street.

Good morning, guys. A few quick questions. One is, looks like you're getting some pretty good traction with the news product in North America. Maybe talk about what your penetration rate is and where you think you can go with that, and ultimately what kind of monetization rates that you could see there just in terms of trying to size up that opportunity?

Yes, okay. So, it's Song Lin. I’d like to just try to answer a bit broader. I would say when it comes to Europe and North America, it is a huge market itself. I think it’s too early to say regarding penetration. I would say we are just getting started, but it is good to see that we have very good engagement and retention. All the numbers are really strong. However, we want to be very targeted on the high ARPU value, not just going for the broader user base. We want to ensure we are targeting the right audience with very high engagement. To sum up, we're feeling better about our state, and I think we have many growth potentials, especially when referring to our position in Africa, where we have a dominating presence. In the U.S., we also feature in some traditional media outlets. So, I would just say, there are many opportunities awaiting us, but we want to be cautious as we move ahead.

I know one of the previous ideas was to spend aggressively on customer acquisition. Maybe talk a little about the strategy shift there. Was the ROI not where you wanted it? Did you retrench a little bit and focus on higher value verticals, or what prompted this strategy shift?

I don't think it's a strategy shift; we are still spending at elevated levels compared to before. The major difference is that we are continuing to be smarter in our approach. Previously, we spent less in developed regions and now are exploring many interesting ways to buy. The goal is to be extremely targeted and only spend on users we want. This new approach allows us to spend less while achieving higher revenue compared to what we predicted. We will continue on this trend.

That’s helpful. Just one last one for me. In terms of your search partnerships, remind us who you're partnered with on the search side and whether those contracts need to be renewed regularly?

Most important search partners are Google and Yandex. We typically enter contracts for three to four years. I believe we attached them to our annual reports, but they are long-standing partnerships, over fifteen years.

When are those set to renew? Is it an auto-renew situation or do you renegotiate?

We try to negotiate them each time they renew, and they typically don’t auto-renew. There are instances where the partner has the right to extend the contract for another year on the same terms, but beyond that, we meet to negotiate.

We don't expect surprises; we hope this will be a straightforward process.

When is the next renewal? Are we on a renewal cycle this year or next year?

I think Google's renewal would be next year. Yandex is due in either twenty twenty-two or twenty twenty-three.

Great. Thanks, guys. Congratulations on a really strong quarter.

Thanks, Mark.

Thank you.

We will now take our next question from Alicia Yap with Citigroup.

Hi. Good evening, morning management. Thanks for taking my questions. Congrats on the strong quarter and guidance. I have a couple of questions here. First, can you elaborate on the geographic distribution of your ad revenue? How big is the ad revenue contribution from the Americas, Europe, and Asia? If you could share a little bit rough percentage? I'm also curious about the growth rate of the ad revenue coming from the Americas. Given eighty-three percent growth, I would assume the Americas have high triple-digit growth. So, any specific MAU target that you wanted to reach in the U.S.?

We don't disclose revenues at the detailed level by country and geography, but roughly speaking, advertising is quite balanced between Europe and the Americas versus the emerging markets. In terms of Opera News, we are spending big marketing dollars, which is generating good revenue growth for us, primarily driven by the growth from virtually nothing to starting to have a presence in western markets. This contributes to our advertising revenue stream and explains why it is growing faster than search.

Any color on the users you wanted to further penetrate in the U.S. user base?

I think it's less about specific users and more about our overall strategy. We want to achieve the best results in the U.S. by targeting high-engagement users. We see opportunities with users who have news reading habits and we are growing significantly in gaming. The U.S. is one of the biggest markets for gaming development, so our approach will be carefully targeted to leverage those opportunities.

For your 4Q EBITDA guidance, is it right to assume that your sales and marketing spend in absolute dollar terms, as well as the percentage of revenue, is actually coming down sequentially from Q2?

Implicit in our guidance is the expectation that marketing spend will be at about the same level as in the third quarter; hence, on the margin, it may go down slightly, but not a significant change relative to the third quarter.

Could you split the Android versus iOS users for your news app? Just wondering if there have been any impacts from iOS changes in the recent quarter?

By far, the majority of our user base is Android. This is not by intention; it is simply because we launched the iOS platform much later. We’re continuing to invest in iOS and we hope to elevate its impact with our platform as we grow.

All right. Sounds good. Thank you. Congrats again.

Sure. Thank you.

Thanks, Alicia.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.