Opera Ltd Q1 FY2022 Earnings Call

Welcome to the Opera Limited First Quarter, 2022, Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's call is being recorded. I would now like to turn the call over to your speaker today, Matt Wolfson, Head of Investor Relations. Please, go ahead.

Thank you for joining us. 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 results 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 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 audited quarterly historical financial results of Opera on our Investor Relations website. We'll be live tweeting highlights from the call @InvestorOpera so please follow along there during the call and in the future. With that, let me turn the conference call over to co-CEO Song Lin, who will cover our operational highlights and strategy and then Frode who will discuss our financials and expectations going forward.

Thank you, everyone for joining us today. We're excited to report another strong quarter that came in above expectations both in terms of revenue and adjusted EBITDA with the momentum and scale we have achieved here in 2021 continuing to pay off. Our revenue has grown by 39%, supported by a 20% growth in such revenue largely due to strengths in Western markets, and the acceleration of advertising revenue rose to 64% year over year, now representing 54% of total revenue. Our advertising revenue benefits from the same underlying trends. As such, though it is magnified as we monetize through advertising. Additionally, we can leverage our inventory as we serve our advertisers throughout the Opera apps, as tech platforms. We continue our strategy, focusing on users in high upper markets and those users which we believe are mostly engaged, providing us with ample monetization opportunities. As a result of the strategy, ARPU grew by 54% year over year on an annualized basis, which significantly offset the reduction in our overall user base, as we selectively run our marketing initiatives. Our user base in the U.S., the rest of the Americas, and in Europe continued the growth trajectory from 2021, while key products like GX and Opera News have been very successful. We saw revenue growth across every region except for one based in Eastern Europe. We see our strong results as a clear validation of our focus on developing and delivering differentiated products that appeal to users in every geography. The combination of those western and emerging market user bases represents a compounding mix, allowing us to generate immediate and meaningful incremental revenue on newer products while benefiting from the ongoing growth of online services in emerging markets. In this context, I'm confident that Opera's core product offering will have increasing strategic value. While we can't see the future, one thing we are certain of is that our digital future will be defined by increasing user personalization. As an independent browsing company, we have always focused on differentiating ourselves through technological innovation. We've launched products and services that meet the needs of specific use cases and user segments. Whether that's in different communications, gaming, news, or privacy and security, we have a history of success building the browser of choice for people who actively choose GX browsers. The trend is stronger and clearer than ever. One example is gaming. Not long ago, we launched our GX browser specifically designed for gamers. As of this call, we have over two million mobile and 14 million PC users, a sequential increase of roughly 15% and almost double from a year ago. The Opera GX is performing higher than any other product with $2.7 on an annualized basis. Beyond the GX browser, our game maker studio now has over 500,000 developers and the GX games has over one million monthly active users. Opera GX is more than three times the output for Opera as a whole, though its revenue mix contains only a fraction of advertising relative to our other browsers. Later this year, we will begin to introduce tailored advertising in GX as well as other economic models to entice both game developers and gamers. While we are cautious on the near-term financial impact, we're expected to ramp over the course of the year. This is a common thread amongst all of our products: we identify a use case with clear value, we launch and scale it, and then we tap into those existing and new monetization structures. As we look ahead, there are clear applications for our model relating to multiple aspects of Web 3.0 trends. Opera News continues to grow in higher monetization regions, and we are particularly pleased with how the product is now also making a meaningful foothold in Brazil. In terms of vertical focus, the domains based on the same core technology remain the most popular but we have also introduced other verticals such as cricket and basketball alongside generic news and sports sites. These services have more than 10 million users. We're applying that same AI-driven news engine to begin aggregating news related to gaming or the GX browser, as well as our plans to introduce a section for relevant content in our Web 3.0 browser as the landscape opens up for news, market data, and trend analysis. These are examples of the constant improvements we are making to ensure that our users have the best experiences, in addition to enhanced social features and security measures. Our new VPN product showcases how security and privacy are becoming crucial concerns in online interactions. While our website is being rolled out, we are developing our approach to integrating Web 3 into all of our products, starting with the market share wallet, tech stack across both mobile and desktop browsers. Please stay tuned for further developments. We are also ensuring that we have the right tools in place to maximize our ability to monetize our audiences and in particular, continue to improve our advertising tech stack. Although I noted that our advertising revenues continued to grow as a percentage of overall revenue, the improvements made in our advertising business are leveraging our advertiser demand. Non-native inventory, combined with increasing audiences, is allowing us to build higher value markets, a trend we expect to continue. Given the opportunities we see ahead, we are confident in the prospects for our core businesses. Since our last call during our fourth quarter results, we have also sold our equity stakes in both Nanobank and StarMaker. The decision to monetize those financial investments was due to our desire to remain laser-focused on our core business and the opportunities we are pursuing. Recently, we were presented with opportunities to realize gains for our shareholders on liquid assets in a volatile market, and we chose to act. I will say, though, that the resulting cash payments to Opera over the next two years will offer us significant operational flexibility. Again, our products and initiatives continue to show great momentum, and we think that the browser has never been more relevant than it is today. We have a very exciting time ahead for Opera. And with that, let me turn it over to Frode.

Thanks, Song Lin. Starting with revenue, which came in at $71.6 million for the quarter. This was ahead of our expectations and the previously issued $67 million to $70 million guidance. It was particularly strong in light of the headwinds associated with the war in Ukraine and how that in turn affects regional monetization and strengthened the U.S. dollar relative to other currencies in which we ultimately generate most of our revenue. We estimate that the war resulted in a $2 million revenue headwind in the first quarter predominantly due to changes in exchange rates as the underlying impacts have less time to materialize and only affected the later parts of the quarter. The reason we still exceeded guidance in Q1 and are able to maintain our previous guidance for the year as a whole is that the core machinery of Opera's business performed ahead of expectations. Operational expenses came in largely according to expectations resulting in adjusted EBITDA of $7.3 million, also exceeding the top of our guidance range. Recently, you have seen us divest our former ownership stakes in both Nanobank and StarMaker, allowing us to realize about $70 million of value creation or over $110 million in the aggregate when including our partial sale in OPay last year. A common question I receive is what we intend to do with the cash ahead of collecting any proceeds from the sales of Nanobank and StarMaker. Our cash and marketable securities already stand at $182 million, taking together with the $215 million we will collect from the sales. This adds up to nearly $400 million, which is indeed a significant amount relative to our current market cap. In addition, we still hold a fixed 0.44% ownership stake in OPay, and in line with our decision to focus our attention on our core business, these shares have also been classified as held for sale. All in all, this makes for some interesting calculations of our implied enterprise value and trading multiples. For now, we have a $50 million buyback program in place of which we've utilized $3 million by repurchasing 569,000 shares in Q1. We consider our buybacks to be an excellent contributor to ROI for our shareholders. In terms of the broader perspective, we have chosen to prioritize our efforts on the realization of our investment gains with less urgency to commit the resulting proceeds. The dominating value-creation potential of Opera lies in our core business, and the opportunities we can see from our very strategic position. Having a strong balance sheet in this context only adds to our flexibility to drive investor returns. In terms of quarterly operating cash flow, we generated $13.5 million, which essentially represented our adjusted EBITDA combined with a slight reduction in our working capital. Now, moving to our guidance. We are maintaining our full-year revenue guidance of $300 million to $310 million, representing a 22% increase at the midpoint. We continue to expect adjusted EBITDA to be between $50 million to $60 million, representing an 18% margin at the midpoints, and an increase of 90% compared to 2021. We expect the quarterly headwinds from the Russian invasion of Ukraine to approximately double from the $2 million in the first quarter, representing around $12 million in headwind for the remainder of the year, bringing the total impact to about $14 million or just below 5% of the midpoints of our guidance. However, the strong underlying performance in our core business is expected to offset those effects, which we consider a very healthy indication when looking beyond the current year. For the second quarter, we expect revenue of $71 million to $74 million, representing 21% year-over-year growth at the midpoints. Relative to Q1, we assumed a stable to declining cost base overall. Cash compensation is expected to increase by about 15%, following team growth and salary adjustments. The cost of revenue items combined is expected to increase to represent approximately 15% of total revenue. This is expected to be offset by reduced marketing spend and a slight net reduction within the other cost items. As a result, we expect $8 million to $12 million of adjusted EBITDA in Q2. Overall and in sum, we are very pleased with these results and our strategic direction. There was a lot to cover today, but I hope you found this call to be useful in conjunction with our release, and we're now happy to move to questions.

We'll take our first question from Lance Vitanza with Cowen.

Hi, guys. Thanks and congratulations on a strong quarter. I guess I have two basic questions for you. The first is on the Russia-Ukraine situation. Beyond the human tragedy, I'm just wondering if you could help us think through the revenue implications in a little bit more granularity and I appreciate the guidance that you gave for sort of the total impact. On the one hand, I just want to try to understand how this is playing out. We presumably have displaced Ukrainians, and on the other hand, we have the Russian population that is presumably economically impacted due to global sanctions. And there is also the currency or exchange rate impact. I suppose it's the latter two problems that are more relevant from the standpoint of Opera's business, is that right? And could you quantify or maybe just talk in percentage terms how each of these specific issues kind of add up to the revenue drag numbers that you talked about during your prepared remarks?

Hey, Lance, Frode here. So you are right. In the first quarter, as I mentioned, that was essentially a foreign currency translation just from the strengthening of the U.S. dollar. As best as we can estimate, looking at the remainder of the year, the FX impact and the underlying business impact will be about the same size. So I mentioned about $12 million for the remainder of the year, about half and half for FX versus business impact.

Okay. So are you still doing business in Russia and are there any thoughts of suspending operations there until the conflict is resolved? In other words, until Russia rejoins the global community?

Song can probably also chime in here. We do continue to offer our products in Russia. We've spent a lot of time thinking about it, obviously, it's very close to our home in terms of being in the Polish, Swedish, and European footprint. So, it became a question of what the right thing to do is, as limiting information availability seems like the wrong step to take. So that's how we thought about it.

You have provided us with a base case in your outlook for Q2 and the full year. How should we consider a realistic down case? Should we simply remove the 10% of revenues that you mentioned come from the region, or would that approach be too conservative? I'm trying to understand what would happen if the situation deteriorates, rather than just sticking to your forecast.

I mean, we do build into our forecast that things will get worse, right? As you say, there was an opening expectation of representing around 10% of our revenue this year, probably with a 25% to 30% margin on that, because we do, of course, also invest in our user base across both European and Eastern European markets. There are costs associated with this, but as of now, we don't see the scenario going to zero unfold. So, we consider what we presented today as the most realistic expectation.

Okay, thanks. Let me turn to something a little bit more hopeful. The divestitures of Nanobank and StarMaker and the partial monetization of OPay have obviously gone a long way towards streamlining the business and the story. You talked about how you're classifying the remaining OPay stake, it's held for sale. Could you discuss the timeline for potential monetization of that remaining stake and remind us of the book value of that stake? I think you might have called it out in your prepared remarks but I missed it.

To begin with the latter, I think it's about $84 million that we have on our books from OPay. We can double check later. In terms of timeline, when we classify something as held for sale, the implicit expectation is within 12 months. So, within 2022 is the implicit expectation.

And then just lastly, for me, you started to sort of walk through the math on the call. I was actually going to be my question, but if I start with a $600 million market cap. There's $115 million ADSs at about five 20 - ish share. I get to a 600 million at each market cap. I back out the cash, I back out the present value. If I use the present value of the stake right, as opposed to the sales rather that you saw. And then I take out the book value of the OPay stake. I'm getting to about $150 million implied for valuation for the browser business. Am I doing that correctly? That just seems too low, or wondering if you have any comments.

As far as we're trading at about 0.3, 0.4 times revenue and we are at around 1.5 times adjusted EBITDA of 2022, something like that, 1.6 or 1.7 maybe.

I mean, at the rate you're going, your EBITDA margin is going to be higher than your revenue multiple.

I'm getting to about $150 million implied for valuation for the browser business. Am I doing that correctly? That just seems too low, or wondering if you have any comments. As far as we're trading at about 0.3, 0.4 times revenue and we are at around 1.5 times adjusted EBITDA of 2022, something like that, 1.6 or 1.7 maybe. I mean, at the rate you're going, your EBITDA margin is going to be higher than your revenue multiple.

Yeah, thanks guys for taking the questions. I'll get back in queue.

Sure. Thanks, Lance.

Thank you. Our next question will come from Mark Argentino with Lake Street.

Hey, good morning, guys. Just a quick question on your capitalization and strategy going forward. You have the model, and then you have the core browser business, and then you leverage that into other technology areas. Going forward, how do you think about deploying capital and the strategy? Do you anticipate a similar type of strategy? Could it be investing or maybe doing something more substantial and buying larger, more established businesses?

Hey, Mark. It is a broad question. I think the investments that we have made in Opera, we are proud of them because, as you mentioned, to a great deal, we were able to create value for Opera by participating in these companies and co-founding them, etc. And so, it is a good example of how our browser business is a strategic asset that we can launch products and services from. Of course, we focus mostly on what we do internally with Opera News and our gaming initiatives, but these were some specific opportunities we had in earlier years that have done well for us. When we look ahead, we are definitely more focused on what we can create internally, and I don't see the same situations of participating in the launch of separate companies. I don't have an indication that there are opportunities in that space right now, so it’s more of an internal focus.

Great. And just one follow-up in terms of monetization. That incremental of $211 million and so, do you need to tax-effect that at all or is that actual that you guys will receive after you collect all the proceeds?

There's no tax on that. So these are essentially shares that we sold, which is not a taxable gain.

Great. I appreciate it. We've been locked, and I know it’s been a difficult environment for you guys, just given your exposure to the region going forward.

Thank you.

Our next question will come from Alicia Yap with Citibank.

Hi. Thank you. Good evening or good morning, management. Thanks for taking my question and also congratulations on the solid results despite some headwinds in Europe. I have a couple of questions. First of all, I think you mentioned the impact from Russia, and you reiterated the guidance. I'm just wondering, has there been any impact on other advertisers, especially the advertisers that are based in Europe soon, in that region? Will they become more cautious on spending their dollars? So that's the first question. The second question I also wanted to follow up on the use of cash. With the incoming cash that you have received or will receive, how should we think about any future plans on cash use? Would there be any special cash dividend or would you plan on some acquisition targets that fit into your search and advertising business? And as you expand into the GX browser, will you also be interested in acquiring some game studios, for example?

Yes. Sure. So, it's Song Lin and I'll also try to answer a bit. For your first question about advertiser sentiment, we see that generally speaking, advertisers in Europe are still quite strong. The only impact we observe is more towards maybe the exchange rates, as Europe is a bit weaker compared with the U.S. On a high level, we feel advertisers are still going strong, and this is indicated by our strong performance, which exceeded our guidance. We also maintain our guidance. All those factors mean we will need to keep a closer eye on how that changes. For your second question, concerning the cash path, the importance to us is to demonstrate that our passive investments can bring value. We aim to convert those into cash and bring substantial returns to the company. Hopefully, this gives the investment community a clearer understanding of our ambitions. This cash will give us more flexibility for strategic investments in online gaming or gaming partnerships and the like. So, while we are open to potential target acquisitions, we don't have anything specific in mind at this moment, and our primary focus remains on our technology and growth.

Thank you, Song. I understand you may not have identified a specific target at this moment, but I am curious about what your strategy could be going forward. Looking into your business with non-core adjustments, focusing on search and advertising, which areas do you feel need further strengthening?

Yes, that’s a relevant question. At a high level, our GX gaming field orders are growing very fast and align with our overall strategy to provide a tailored browser for specific segments, including gamers. I'm confident that we will continue to expand in the gaming sector, growing our GX user base but also enhancing our gaming platform. We are open to collaborating with gaming partners and studios to develop better economies, and we're excited about potential product announcements this year. Moreover, we see significant potential in areas like Web3, which we plan to invest in actively. At the end of the day, we are a tech company with the capacity to leverage our strengths in technology and innovation.

I see. Okay. Thank you, Song.

Sure. Thank you.

Thank you. This concludes today's Q&A. I would now like to turn the call back to Song Lin for closing remarks.

Thank you again for joining us today. It's an exciting time for Opera. We have demonstrated that our core browser business continues to succeed, and our gaming initiatives are becoming increasingly significant. We now also have a strong cash balance and good visibility regarding upcoming cash payments from our divestitures. This will provide us with better insights into our access trends. We hope to continue delivering above expectations and truly appreciate your time today. We look forward to speaking with you again in the future.

Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect.