Opera Ltd Q4 FY2021 Earnings Call

Welcome to the Opera Limited Fourth Quarter and Full Year 2021 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.

Sure. Thank you, Matt. And thank you everyone for joining us today. This is Song Lin. We are excited to report that the fourth quarter of 2021 came in ahead of expectations, closing out a record 2021 for Opera. The investments we have made to develop new products and expand into new geographies rewarded us with accelerating revenue growth and strengthened our position in higher ARPU markets. Even more encouragingly, as we look ahead to 2022 and beyond, we have every expectation that we will continue to grow, driven by continued innovations in our core offering and the tailwind provided by the long term secular trend as we move towards an increasingly digital future. So before digging deeper, I would like to offer a few key financial highlights from our fourth quarter. First, revenue was $72.6 million, exceeding the top end of our revenue guidance for the quarter. This was up 45% year-over-year and was driven by both search and advertising revenue categories. Second, adjusted EBITDA also exceeded the high end of our guidance at $16.1 million or 22% margin. Our margins expanded even more than expected, following the accumulated topline impact of our overall investments to scale during 2021 and Oslo ARPU has increased 62% year-over-year to $0.83 on an annualized basis, reflecting our growth in higher value markets and focus high value segments. Further, we will offer more detail on our financial results shortly. But as our financial performance makes clear, being the world’s best independent browser company is a good business. And the strategic value of Opera’s position has never been greater. One way to look at the direction the internet is heading is through the step changes in scale and complexity, as more people need greater portions of their lives online. The requirement for a browser that integrates the tools and features people need, such as personalization, security, and privacy, creates a huge opportunity for Opera. Many players in our space, including ourselves at Opera, share great excitement for the potential of next generation Internet services, sometimes referred to as Web 3.0, and the impact it can have on people’s daily lives. While Web 3.0 is still in its inception phase, we can observe multiple trends that suggest that whatever form it takes, it will certainly be defined by individuality, the ability to operate as a distinct, permanent, and unique individual online, along with improved ways to communicate, create, share, and transact with other individuals. So you may have seen that during the first column, we have launched a new browser, both on desktop and mobile, with the idea that it will continuously be tailored to the Web 3.0 audience. Opera believes that in Web 3.0 the browser is not just a doorway or an onramp. The browser is both the launch pad and foundation for the entire online experience from start to finish. So we believe it goes beyond functionality and becomes a lifestyle that we want to help empower. In addition to providing a unique and compelling browser to potentially high value Web 3.0 user segments, the Web 3.0 browser, and how its audience takes advantage of the product will also allow us to refine and integrate many Web 3.0 aspects, from blockchain to smart contract computing, community governance, and monetization for our browsers more broadly. So the logic behind our Web 3.0 browser is seminal to the logic that also drove the launch of our fully integrated gaming browser, Opera GX, which is already our highest engagement and highest ARPU product. We believe monetization is still in the early stages. For instance, Opera GX had over 14 million users at year-end across both mobile and desktop versions, more than double from a year ago, and an annualized ARPU growth from $2.7 in the short quarter to $3 in Q4. Being an OS independent browser allows us to tailor make browsers that cater to specific use cases people have. One of those use cases initially appeals to groups that represent segments of the market; these segments can be both very large and also highly attractive. So when the fundamentals of growth and value potential are in place we go after it at full speed. The logic goes back to Opera Mini, the best browser for emerging markets, which secured our strategic foothold and brand awareness in Africa, enabling a mobile digitalized in the Web 2.0 space, and we will play an even bigger role moving forward in Web 3.0. Since inception, Opera has found success in developing browsers that meet the needs of individual users and following success with specific user segments, we have been able to expand into new areas and services. This is the path our news, content, communications, and shopping functionality have all followed. And looking ahead, we will see even more reasons why our investment in those initiatives will pay off. Ultimately, we believe that each person will need these capabilities integrated and personalized to fully participate in Web 3.0 times. So this browser-plus strategy has been accelerating user adoption across a number of our strategic initiatives. I should be clear that these initiatives, such as Web 3.0 and gaming features, as well as moving our content and new offerings to new markets, are all still young. However, each is showing promise and we believe that taken together they put Opera in a very strong competitive position. So with increased user engagement, alongside the ongoing development of our ad tech business, we have also rapidly grown our advertising revenues. Our tech stacks allow us to aggregate additional high-quality inventory to sell to our existing advertising partners and continues to scale as a natural organic extension for any advertiser in the open network. During the quarter, total advertising revenues grew 59% compared to last year, and we have also begun forging partnerships to bring functionality into our browser products, which will complement the geographic expansion of our cashback platform and also broaden our e-commerce footprint. And our content and Opera's new service continues to resonate with our users. We are very pleased with how it has scaled beyond Africa and also into Western markets. Additional key revenue components for Opera grew 35% compared to last year, and during the quarter we renewed our partnership agreement with Google under materially similar terms to our previous agreements. We continue to have this deal and the visibility it provides is one of the factors in our confidence for continued revenue growth. Our overall average monthly active users was 344 million in the quarter compared to 352 million in the prior quarter. Our output increased by 11% from Q3 to Q4, demonstrating the value of our strategy to shift our user base toward higher ARPU users. We talked about it last quarter as we continue to focus our investments and resources in markets and initiatives that offer a combination of high growth potential with high profit potential, and the strategy is working as evidenced during the quarter by the record revenue combined with extending margins. In terms of our outlook, given the strengths we are seeing in our advertising revenues, and the continued improvement in ARPU from all our initiatives to attract and retain high-value users, we feel confident in our continued growth trajectory in the years to come, both for revenue and margin expansion. There’s a lot to look forward to at Opera, and we’re very excited about the future. So with this, I’ll hand over to Frode for more financial details.

Thanks, Song Lin. Revenue for the fourth quarter was a record of $72.6 million, up 45% year-over-year, and up 9% versus the prior quarter. Specifically, in the quarter, search was $34.8 million, growing 35% year-over-year. This was driven by monetization gains for both PC and mobile browsers. Advertising was $36.7 million, growing 69% year-over-year. This was driven by strong monetization from Opera News and our ad tech platform, as well as our mobile browsers. In total, our full year 2021 revenues exceeded $250 million versus $165 million in 2020. Our focus on improving the value of our user base continues to drive strong results, and as revenue and ARPU grow, our EBITDA margins continue to expand on a materially higher revenue base. In the fourth quarter, each of our users on average generated a record $0.83 on an annualized basis, up 11% sequentially, and up 62% compared to the fourth quarter of 2020. We believe that our focus on innovation to create value for those wanting more than the default browser will continue to benefit us as we look ahead. We continue to make headway in new and desirable markets; compared to the fourth quarter of 2020, user growth was strongest in the Americas this time led by Latin America up 35% and North America up 22%, while we continue to focus investments in emerging markets, more specifically towards users that are monetizable. Consequently, we saw revenue growth across all regions. What this means is that we’re 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 scale with revenue, our tech and platform fees, compute costs and inventory costs, combined, they add up to $5.5 million, resulting in a gross margin of $67.1 million, or 92%. On the cost side, while our marketing expense remains higher than it’s been previously typical for Opera, we were able to exceed our revenue trajectory expectations, while at the same time slightly reducing our spend relative to the prior quarters. As a result, we generated better than expected adjusted EBITDA of $16.1 million, representing a 22% margin. Our core margins are very high, and when our marketing spend comes in lower than planned, and as the scale of our business continues to grow, our trajectory towards a more normalized profitability level becomes very visible. As described in our press release, our Q4 net income was affected by non-cash adjustments related to our investee Nanobank, pending a resolution of the situation in India. A substantial portion of the funds of Nanobank's subsidiary there have been subject to seizure, effectively halting operations in India. However, the other geographies of Nanobank are doing better than ever, but given the current inability to resume operations in India, under the standards of IFRS, we believe it’s appropriate to effectively take the book value associated with Nanobank's Indian subsidiary to zero. Its future cash flows are so uncertain. Of course, this does not mean that Nanobank has given up on India. In addition to supporting official inquiries, Nanobank has appealed measures taken against it in the local court system. India represented a very big market for Nanobank pre-COVID, and the ambition remains to get started again. However, such an outcome is uncertain, and any resolution will take time. Consequently, our net profit for the quarter was at a loss of $84.2 million, taking our full year net profits to negative $15.8 million. Our operating cash flow was positive at $16.5 million for the quarter and in line with adjusted EBITDA as changes in working capital and tax prepayments largely offset one another. Our free cash flow was $13.4 million, and our total cash and marketable securities stood at $181 million at year end, a $12 million reduction versus the third quarter, but that included a $15.2 million repayment of a credit facility related to marketable securities. Finally, as we announced in mid-January, we have put in place a program to repurchase up to $50 million worth of Opera shares over the next two years, taking advantage of our strong cash position opportunistically. For management and the board, this was an easy decision to make as our business is firing on all cylinders with multiple long-term growth opportunities ahead of us. Now moving to our guidance, for the first quarter, we expect revenue of $67 million to $70 million, representing 33% year-over-year growth at the midpoint. First quarter revenue growth is fueled by expected strong continuing results from Opera’s core search and advertising business, largely offsetting the typical seasonality between the fourth and first quarter. Relative to Q4, we built in about $6 million of additional costs, mainly related to marketing and compensation expenses, resulting in $4 million to $7 million of adjusted EBITDA guidance. For the full year 2022, our revenue guidance is $300 million to $310 million, representing 22% year-over-year growth at the midpoint. We believe the top drivers of revenue growth in 2022 will be the continued growth of our products in Western markets, as well as the continuation of underlying ARPU improvements across regions. For the full year, we expect adjusted EBITDA to be between $50 million and $60 million, representing an adjusted EBITDA margin of 18% at the midpoint, a significant increase from the 11% margin of 2021. Profits are expected to benefit from the combination of the additional scale we built during the year, our ongoing strategy of focusing on high profit potential users, and stabilizing marketing and distribution spend. Overall, in sum, Q4 was a great end to 2021. We experienced record revenue for both search and advertising, and continued to focus on high potential markets and users. 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 continuing to invest in the next wave of the Internet to drive continued growth well into the future. So with that, I’ll say thanks, and we can open up for questions.

Thank you. We’ll take our first question from Lance Vitanza with Cowen. Your line is open.

Hi, thanks, guys. Can you hear me? Congratulations on just a tremendous quarter. I have a few questions if you allow. I want to start with the revenue guidance for 2022, the 20% to 24% revenue growth forecast, could you break that down perhaps into audience growth versus monetization or revenue per unit of audience so to speak? And specifically, I guess, on the monetization gain, is any of that gain occurring within a given geography or is it really more just the shift of users to more profitable markets, or is it both?

Lance, would you mind repeating the opening of the second question?

Sure. On the monetization gain, I’m assuming that at least part of your growth forecast comes from more revenue per user. And if that’s the case, I’m wondering if that more revenue per user is occurring within a given geography or is it just a function of the fact that you are seeing your user base shift to more profitable markets?

Understood. Thanks, Lance. I’ll begin with the second. So when we look at the fourth quarter, the growth that we had compared to the prior quarter was about half and half, driven by the shift into a geo mix towards more western markets, and underlying ARPU improvements within all markets. So on a like-for-like basis, it was mixed. As it relates to guidance, I think it’s always hard to predict that at the very detailed level. But I think the trend that we saw in Q4 is a pretty good starting point in terms of expectations on how we look ahead, and that’s how we touch on the combination of successful growth in Western markets, our newer products, such as Opera GX, for example, combined with the underlying ARPU growth that we see in all markets.

And I guess just to that, the first part of my question was, as you think about the guidance for revenue growth, do you expect that a decent portion of that will also come from just expanding the audience, or is it mostly going to be just on the monetization side?

We typically don’t break our guidance into very specific buckets. So I think we tend to be a bit cautious on user expectations. Of course, we have products that are scaling well in Western markets. We do expect that to continue. At the same time, when you look at the totality and how we focus in emerging markets on the most revenue-generating segments for now, I feel the guidance is based on a net quite stable.

Fair enough. And then my next question is on the EBITDA margin performance, which is stronger than we’d expected, and we like the guidance. It looks like you’re expecting essentially a 50% incremental EBITDA margin right at the midpoint of your guidance. We’re looking at basically $50 million to $60 million of incremental revenues and $25 million to $30 million incremental EBITDA. So a 50% incremental EBITDA margin, is that mostly the benefit of scaling on the marketing and distribution expense? And how should we think about modeling that line in particular going forward for the next year, or maybe even beyond that?

So overall, the business has, as we also discussed, an effective gross margin that’s well into the 90s. It’s a model that benefits greatly from scale. That’s what we have been investing in and accelerating in 2021. Why Q4 came in ahead of expectations and why we’ve felt confident as we’ve spoken over the past few quarters. We expect to continue to see normalization in our profitability. When you look at our balance sheet, we increased the revenue at the midpoints by just over $50 million, and you can see we built in about $25 million of additional costs. It’s mainly related to marketing, but also team spend, and to some extent, cost of revenue as the advertising revenue category becomes bigger, whereas the other ones are more stable in nature.

And my last question is with respect to Nanobank. I’m sorry to hear that things are not being resolved more quickly in India, but pleased to hear that the rest of Nanobank seems to be performing well. Can you give me some additional information on the scope of the non-India operations? I don’t know what the consolidated revenue picture looks like for Nanobank, but any update there with respect to total revenue performance at Nanobank in the quarter would be really helpful. And then I guess there’s a related question, is the worst-case scenario that we simply don’t do business in India and India is effectively a zero? Or is there a scenario where for some reason India becomes a negative where you actually have to pay money to settle with regulators and it detracts from the value of the other assets? Thank you.

Yes, so to begin with the first part of the question, the revenue growth of Nanobank is driven by two bigger countries, which are Indonesia and Mexico. But we have all countries doing great; they are just at different stages of maturity essentially. For the second part of the question, I think what I should say is that we essentially put it to a zero book value now. We wanted to make sure that we believe it’s appropriate; we cannot reliably forecast cash flows, and we should not keep the value on our balance sheet that we cannot properly back up. As I mentioned, this does not mean that the team is giving up on India; it’s quite the contrary. It’s high activity to facilitate an eventual re-launch. In terms of liabilities, we are an investor; Nanobank itself operates in India through a subsidiary. But I’m not a corporate lawyer, so I’ll be a little bit careful to speculate. As far as I see it, we put it to zero, and like I couldn’t put it lower than that.

Your next question comes from Mark Argento with Lake Street. Your line is open.

Good morning, guys. A lot of my questions have been answered, but I wanted to see; I know you guys earlier in the quarter talked about launching a crypto product. I wanted to see if you’ve been getting any traction there. And do you see an opportunity to launch additional crypto or crypto-related Bitcoin products?

Yes. I can probably just give some insights. We also talked a bit in this group about the launching of all of our Europe product, which are available on the website, both on desktop and mobile. So, I would say, the great organization that we have been seeing in the industry, it’s probably one of the bigger launches that Opera has ever made. Especially that now it’s quite early stage; we have been getting quite early access points, and many of them are also showing a lot of good acceptance from the community, which gives us even more confidence that it’s the right thing to do. I think to us, probably at this stage, is more important to show our stance as a browser company, and probably also one of the biggest independent ones. We feel that we are moving towards web 2.0 decentralization, and we feel that it’s the right place to be. So yes, even though we have not really colored too much about it in terms of revenue analysis, we feel it’s the right time to talk about it, and hopefully, in the coming full year, you will be able to see us pull a lot more around the topics and what we can do.

Great. So just pivoting back to the Nanobank in India, can you just refresh us a little bit as to what the issues are there? And you had mentioned kind of a re-launch. What’s the probability or what needs to happen to get that business re-launched in India?

Yes, I’ll recap a bit. At least from our perspective, there are some processes from the Ministry of Finance to look into what seemed to be most focused on platform fees. So Nano develops their platform centrally and uses it across its markets. It’s a key component of the value offering. It’s what enables them to scale quickly while at the same time keeping loan losses under control. That product is licensed from its central operations to the various operative countries. It was that fee payable from the subsidiary in India that I think triggered that review. As of now, I don’t think any formal accusations have been made, but their funds are frozen, so they cannot operate.

We’ll take the next question from Alicia Yap with Citigroup. Your line is open.

Hi, good evening, and good morning management. Thanks for taking my questions, and congrats on the solid results. My first question relates to the user growth. It looks like your strategy of shifting focus to the higher ARPU markets, like America, has worked out. Just wondering how much more room we can anticipate for further growth in new users for this year?

Yes. I would say that we’re definitely going to see very good growth opportunity in Western markets, especially in the U.S. and Europe, as well as in South America, such as Brazil and Argentina. We feel that we’re quite in the early stage considering the size of the market. We are still relatively small in size; we feel that there’s a lot of room for us to grow compared to the marketplace in Africa, where we are almost the market leader. Of course, the Western market still has a long way to go, and we feel that huge wins will continue to grow. We feel that the growth exploration will only accelerate. Regarding potential verticals, for instance, we saw that traveling is definitely coming back from what we saw in both Q4 and Q1 this year. We observed tremendous growth and with the lifting of many COVID restrictions in Western markets, we will see much more growth still. We are optimistic about executing plans that we had before COVID, which is great. Additionally, we expect very good growth in cashback and related products, and gaming is also growing very nicely. So we just see that trend continuing.

If I can just have one last follow-up on the margin questions, looking at your Q4 where your EBITDA came in at 22%, your Q1 guidance, and your full-year guidance, it looks like percentage-wise, it does look lower than Q4. We understand that the revenue came in better in Q4, which is kind of getting leverage on that. But could you give us some color on spending? Should we expect more aggressive spending in the first half, and then maybe it tapers off a bit in the second half in terms of spending? Any insights on the trends we should be expecting?

We tend to lower margins in the first quarter if you look back historically. In this particular context, for seasonality, we expect revenues to come in slightly below Q4, which is the norm, and I think the only time in history that did not happen was Q1 2021. On top of that, we built in about $6 million of extra costs. Some of this is compensation, but we also think that marketing will be a bit higher in Q1 than it was in Q4. So that’s how it builds up. As you mentioned, we believe in a good margin expansion for the year as a whole, but we typically start off below the annual average margin in the beginning of the year.

We’ll take our next question from Zaudan Zeng with CICC. Your line is open.

Good morning management, and thanks for taking the questions. I have two questions here regarding Opera's strategy for Metaverse and browser products respectively. First, Opera has accomplished several notable milestones to venture into Metaverse. How do we plan to further embrace fields and what do we think of our monetization potential? Second, in terms of browser products, Opera GX has been proven to be a very successful launch. Do we see any opportunity to enter into more verticals aside from gaming? Thank you.

So I’m not sure if I caught all of it. What I will say is yes, if you’re asking about the monetization opportunity for the Metaverse, I would say, certainly. I think you also mentioned GX, and I would say that GX itself; we don’t really see it as just a browser, but more like a lifestyle product that you spend time on to use it to know what gaming roles are. We incorporate our gaming engine, enabling users to play games and chat. Overall, although we have not really started any serious monetization in this space due to high user engagement on the GX platform, it has the highest ARPU among all Opera products and is already quite profitable. We have published scripts for the annualized ARPU, and you can imagine that results will lead to significant revenues. Moving forward this year, we will focus on providing interesting functionalities within our GX Metaverse, allowing users more ways to engage with more games and creating a platform for creators. So those are our priorities, and we expect that as more users engage, ARPU will increase, benefiting revenue as well. So, that’s the high level of what we see in the Metaverse. Fortunately, we are among the few that have already reached profitability in this space, and we hope to continue to grow.

Okay, got it. Thank you.

We have no further questions in queue at this time. I would like to turn the call back over to Song Lin for any closing remarks.

Sure, excellent. I would say for all of you, thank you again for joining us today. As you have all heard, we believe Opera is well positioned to continue to grow and are very excited about our core business and our initiatives. Finally, we are also excited about the potential that Web 3.0 has for Opera. The history of the browser is only just the beginning, and we appreciate your time, and we look forward to speaking with you again.

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