Opera Limited
Q3 2020 Earnings Call Transcript

Published: 19 Nov 2020

[Operator:]

Welcome to the Opera Limited Third Quarter Earnings Conference 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 conference is being recorded. I would now like to turn the call over to your speaker today, Derrick Nueman, Head of Investor Relations. Please go ahead.

[Derrick Nueman:]

Thanks for joining us this morning, or this evening depending on where you are. With me today, I have our Co-CEO, Song Lin; and our CFO, Frode Jacobsen. Before I hand over the call to Song Lin, I would like to remind everyone that in the conference call today, the company will be making statements about its future results and expectations, which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Such statements are based on current expectations and how we perceive the current economic environment, and are inherently subject to economic, competitive and other uncertainties and contingencies beyond the control of management. You should be cautioned that these statements are not guarantees of future performance. You may refer to the Safe Harbor Statement in the company’s earnings release for further details.

[Song Lin:]

Yeah, sure. So yeah thank you Derrick. This is Song Lin. And again I would just like to say that thanks everyone for joining us or actually hearing this report. So I think highlighted that this quarter we really showed that the strength of the Opera core business. Like many others, we are still feeling the pandemic, but we were able to achieve a very nice growth in users and also engagement for both our browsers and Opera News. There's long wait monetization recovering has led to search revenue already being back on par with the same period last year and advertising revenue showing year-over-year growth. So -- and of course if you zoom in, you will be able to see that those revenue categories has grown by 20% that is search and also 50% that is ads, respectively if you compare that with the second quarter. So in general, we are ahead of our recovery expectations and we feel great about our trajectory. At the same time, we have shown discipline on the cost side. And as a result, we have achieved 25% adjusted EBITDA margin even while investing meaningfully in our European fintech and other growth initiatives that aren't yet generating meaningful revenue. We want to be clear that we still prioritize on growing the business instead of any near-term EBITDA margins. Opera is still a growth company with attractive opportunities that we are pursuing that our margins might as well fluctuate before increasing even beyond this level. So, however, this quarter's result really speaks to our agility and also the lean cost base of our structure. And since we have been speaking about the growth and the profile of Opera, we also feel that it's probably a good time to share some thoughts on how we view ourselves.

[Frode Jacobsen:]

Thanks, Song Lin. Before I get into the numbers, I'll say a few words about the changes we have made that affect how we present our financial results. In the third quarter, two such strategic changes are relevant. The first was the previously announced creation of Nanobank where we contributed our microlending business in exchange for a 42% ownership stake in the joint business. As a consequence, revenue previously reported under Fintech along with all directly attributable costs are now excluded from our historical operating results. Instead, you will see the post-tax profit of our former microlending business reported as discontinued operations. As promised, we'll continue to disclose Nanobank operating results given our large ownership today. To provide historical comparables, we are today also publishing Nanobank's pro forma financials by quarter as of Q1 2019. Our other relevant decision in the quarter was to discontinue our retail business. You may remember that we launched this initiative in late 2018 with the intention of exploring opportunities in the ecosystems around prepaid mobile credit and mobile phone sales. We now concluded this to carry limited strategic potential and do not see a path for that business to contribute meaningfully to our profit. As a consequence, the revenue and costs previously reported under retail are also presented as discontinued operations. Now moving now to the third quarter results. Revenue for the third quarter was $42.4 million excluding both microlending and retail. This compares to $32.2 million of revenue in the prior quarter or a sequential growth of 32% as we recovered from COVID impact to monetization. Specifically in the quarter, search was $21.2 million, down 1% year-over-year and up 20% sequentially. Trend improved each month of the quarter with August and September returning to year-over-year growth. Advertising was $19 million up 4% year-over-year and up 50% sequentially. The sequential strength was driven by a return of the sports vertical and growing monetization from Opera News.

[Operator:]

Our first question comes from the line of Lance Vitanza of Cowen.

[Lance Vitanza:]

Hi guys, thanks. Congratulations on the quarter. It's good to see revenue per MAU rebounding. We're still way off the pre-COVID peak, I think 4Q 2019 that when I look at -- and thank you for providing the historicals by the way. But I believe that 4Q 2019 revenue per MAU was over $48. So you still have some room to go there. But do you think the second wave COVID concerns would potentially cause revenue per MAU to dip lower again, before we eventually retake that to hit a new peak?

[Frode Jacobsen:]

Frode here, I can maybe begin. So first, we're very pleased with the trajectory that we have seen in Q3 and what we're seeing going into Q4. Monetization on a per user basis is, as you say, still lower than what we have had in the past. But then what we've also seen is increased engagement and more activity, more inventory for our ads. So as we look ahead, I think, we will continue to benefit from the assets that we have built up and the strength in user base over this quarter. We also have a more diversified revenue mix now than we had pre-COVID. But it's a bit too soon to say when we think the per user economics will be the same as it was pre-COVID.

[Derrick Nueman:]

And Lance, this is Derrick. I mean one thing to keep in mind is in the year-ago quarter, we did almost $6 million of technology revenue, which doesn't really relate to our user base. So when you look at our search and advertising revenue, it's going to be up year-over-year in Q4. So we're actually going to do from Opera News or from the browser higher monetization than what we did a year ago. So I think we -- yes, on the top line it doesn't hit here because we have that headwind from some professional services work we did. But the user-driven stuff is actually above its peak or should be above its peak in Q4.

[Lance Vitanza:]

Well, that's great. I mean, I think, the numbers I'm looking at I'm taking the technology licensing out of the equation, Derrick. And so look my point is I think that you've got this opportunity where you're expanding your user base and now we've got recovery in your per user economics. So there should be quite a bit of incremental revenue as that continues to improve. I'm wondering if you could comment a little bit on what the incremental sort of margin profile is right? Presumably as monetization picks up I would think that the incremental margin on the additional revenue would be quite high. Is there anything maybe that cuts against that, or should most of that just be kind of flowing to the bottom line?

[Frode Jacobsen:]

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

[Lance Vitanza:]

Yes. So, okay. Thanks. So on the guidance Q4 you start there. $45 million to $47 million of revenues that's already a little bit better than we have modeled coming into the quarter. But what surprised me most is the EBITDA the margin which when we look back, EBITDA margin has been a little bit all over the map. And so you did 25% margin this quarter. You're guiding to 24%. That's more consistent than I think we've seen over the past couple of years. So can we sort of think about that as maybe some sort of new plane or new trajectory? Or as you think about 2021, I mean, I recognize that you guys have a lot going on there's new businesses, should we expect that that quarterly EBITDA margin will it continue to be as volatile as it's been in the past?

[Frode Jacobsen:]

So I'll begin by saying, if we did nothing between now and sort of the end of Q4 and we are tracking towards the revenue guideline that we gave and that would have increased our EBITDA margin in Q4. The reason we still guide for it to be we might -- we also expect to invest more in our newer initiatives in Q4 compared to Q3.

[Lance Vitanza:]

Okay. Sorry, I had a little bit of phone problems on my end. But let me just get my last question in and then I'll get back in the queue. And that is on the revenue guide for the full year and I apologize, if you just addressed this because my phone was cutting out. But just to be clear the $200 million-ish that you're talking about that compares with the $160 million or so that you'll report this year from continuing ops? In other words, retail is excluded from that $200 million?

[Frode Jacobsen:]

Correct.

[Lance Vitanza:]

And then so 25% growth I mean that obviously reflects this year's COVID depression, but it's still up about 13% year-on-year or not year-on-year, it's up about 13% from 2019. So I guess my question is, is that 13% growth rate over the sort of unaffected 2019 is that perhaps a more reliable indicator of the longer-term growth rate? I mean I'm just trying to think about what do I do in my model for 2022 here?

[Frode Jacobsen:]

No, I understand. I think when we began 2020, we talked about let's say more baseline levels of advertising growth above 20% and search revenue growth in sort of the mid-single-digit in a normal and steady-state scenario. Since then, of course, we have accelerated our user growth more than we expected. The fact that we are back to year-over-year growth now really speaks to that even though on a per user basis as you pointed out we still -- there is still more COVID impact left to normalize. And when -- let me just think what was the beginning of your question. So, when we -- yes, the final comment I wanted to make is that we are providing the $200 million indication as a baseline as we realized we made changes with Nanobank and retail. Of course, as we also talked about we -- our ambitions are greater than that.

[Lance Vitanza:]

Okay. Thanks guys. Appreciate your time.

[Operator:]

Our next question comes from the line of Alicia Yap of Citigroup.

[Alicia Yap:]

Hi, good evening and good morning management. Thanks for taking my questions. I wanted to follow-up and ask about the overall advertising monetization. First, when we look at your 35% MAU growth for your Opera News, could you share with us some of these new user right the user profile for these new users coming on board. What type of -- in terms of the age group, right? And then how long they are spending on the news per day. And the reason is that I wanted to understand the monetization along the way, right, because usually monetization effort will follow the user growth, it might be maybe three to six months lag. But just trying to get some expectations coming from the combination of this new user profile, what type of new industry vertical advertiser that we could potentially attract down the road especially into next year. And if you could remind us a little bit what are the current ad loads right now? And also Opera News as a percentage of contribution within the advertising revenue. Thank you.

[Song Lin:]

Yes. So, it's Song Lin here. I think I'll just try to give some briefing specifically on the users within that. And then Frode and -- can also add. So, however, I would say that for now the major growth of those new users are still primarily in our key news market that is Africa and to some extent also in South Asia. But I think the primary growth is actually still in the core regions which is Africa. I would say that's probably still the most fundamental characteristic of it that they are typically are still in our traditionally very strong Nigeria, Kenya, South Africa, especially, there where we also cooperate with operators for a lot of initiatives. So that remain our strong point and major drivers for those user base. When it comes to monetization, I would just like to point out that you probably also see the correlation that revenue -- ad revenue-wise news we believe we reported about 70% quarter-to-quarter growth -- sorry 70% growth if you compare with the same quarter last year. So, it is a very strong growth already much higher than the absolute amount of user growth sort of like two times of the user growth already. So, with that in mind, I would almost comment that I think for now in Africa, the still limiting factor are still around monetization capability in that region right? So, as we all know that the average user in Africa is still much lower maybe one-tenth of -- compared to the other regions. So, I think we are still waiting for that time where when that region in general continue to grow and we'll hopefully see even accelerating growth of it. So, I think maybe that's a very super high level description of what we see on news and how perhaps you could model around the potential increase on the ad revenue, especially on the news sector. But we definitely hope that we will still maintain perhaps the higher growth on monetization compared with the pure user growth. Yes. So, like maybe that's the comment that I would have.

[Alicia Yap:]

Any color on some of the industry vertical that we could potentially try to penetrate into next year?

[Song Lin:]

Yes. So, I guess, it's more like I think in Africa also it is -- this year is also a bit special, right? So I think what we see high level maybe to say that in most part of the world, you will see that say for instance in gaming, mobile gaming is actually one of the major part of the ads revenue. So it's not the case in Africa. Because for now, what we're seeing in Africa is that, a lot of ad spend are still a bit more on the traditional say operator-based verticals. Because operators are still by far the most reaching service that everybody can use online. And for instance, it doesn't really have mobile gaming, but it does have content like sports gaming well highly dependent on EPL like English Premium League among others, right? So, I would almost say that this year at least the deal to call this we see even much stronger focus online because offline is almost not possible, right? Too many places are closed. And we see in places like Africa, it's actually hit affected more than some other place, right? So, we -- I would almost feel that we are actually benefiting a bit more than Europe because of the transition from a much more aggressive transition from offline to online because in place like Africa, there's still too much offline compared to other places. But now we see transition actually move faster right? So that's partly why I think we're actually growing better than like I guess than our user growth in terms of monetization. And my prediction is that COVID will continue to be with us probably especially in Africa for the next, I would say half a year or so. And we probably will see the similar trend continues next year that the majority will still be on online and also accelerating even transition from offline to online.

[Alicia Yap:]

Thank you, Song.

[Operator:]

Our next question comes from the line of John Godin of Lake Street Capital.

[John Godin:]

Hey guys. Congrats on the quarter and thanks for taking my question. First, I was wondering if you could peel the onion a bit on the utilization trends that you've been seeing. And what is kind of giving you confidence that you think that this can continue going forward? And just thinking about, how sticky the cohort of kind of new users both on the browser and the news platform this point forward...

[Song Lin:]

Yes, sure. So I think, I'll just try to -- so like I'm not sure if I 100% hear you clearly, so I apologize if I'm not to the point. But I think in general, what we see during the COVID time is that, all the user figures has growth quite a lot understandably I guess because user actually spend more time online and then online also becoming more relevant source for them, right? So yes, so like I think what we would see is that, both on desktop which is actually mainly from Europe, we see a lot of users actually using -- a lot of new users are using definitely much more offering than before just because they find out that since they're at home, they can't really go anywhere it's just very natural for them to use it more frequently. And the same as mobile browser in Africa the same story that people get to use it a bit more because they can't -- they rely on it more heavily. Of course, it's also partially benefiting from the program which we worked with operator to also launch many data program to help them enable that. And the same as Opera News, all the triggers, user metrics have been increasing based on it. So like I -- without being very specific because it's always really hard to predict, but I would almost say that, I think the trend will definitely continue all the way probably until some time next year. And I actually feel that it's not temporary. It's just because, it's not like user habit change right? So at the moment user getting used to have anything done online, I think it will be very difficult for them to go back off-line. Again for instance, if you ask both gaming people pretty much that you are doing some sports gaming in some offline shop. But the moment you're actually getting used to do it online, I think online will actually eventually becoming the majority part of the things anyway. So yes, so the same around news that if you're getting used to see the news on app, it's really less likely for you to buy a newspaper anymore. So yes, so there will be fluctuations. There will be some normalization. But at the high level, we see the trend definitely speaks at the trends moving from offline are accelerating especially in places like Africa, where people are not so used to it before, but now they are used to now.

[John Godin:]

That's helpful. And then second, thinking about kind of your priorities for investment in the coming quarter and into 2021. How do you think about kind of weighing investment in current initiatives and potentially expanding into new markets versus some of the other new initiatives, such as OList and anything else you guys have been working on?

[Song Lin:]

Sure. So, I'll probably discuss or comment a bit, right? So, Frode can probably also comment, but I will almost say that, there are a few things that we see, right? First of all, we see that due to the COVID impact, which are still there, that we will continue to focus more on online, for instance, which means that, since you mentioned OList, right? So, I think, OList is doing really well, a lot of users. But, I think, when it comes to more investment, especially -- pretty much that’s all about the combination of offline and online, right? So that will be less, I would say, because I think it's realistic to say that now it's probably not best timing to invest too heavily on offline, it's also not responsible for that -- for those kind of sales, right? So, high level, I would say that, our focus for now will be more -- even more online, maybe less frequent on the combination of between offline and online, because now it's not the best timing for that. Another point I would say is that, on top of maintain our already very strong position in Africa, we do see very good openings in Europe. Just have to comment on that. Because of, partially, really of COVID, of course, that we see there's very strong growth on desktop. And everybody is also seeing desktop that, how important it is, right? E-commerce has -- for a particular desktop service has almost 3 times than before. So that's also why we are saying that our focus will probably also around our European fintech. We have done the fintech service in many other places, as you know. But we feel that the real e-commerce/fintech opportunity into Europe are now opening up, because of -- partly related, of course, with the pandemic. And it's just too good an opportunity to not grasp. So that will be my comment.

[John Godin:]

Great. Thank you, guys.

[Operator:]

Our next question comes from the line of Lee Krowl of B. Riley Securities.

[Lee Krowl:]

Great. Thanks for taking my questions. A few just kind of on some minor details. First one on the Q4 guidance. Does the current guidance have any assumptions for kind of second wave impact? I know we've seen lockdowns in Europe. Are any elements of your guidance reflect, perhaps, this lockdown dynamic that we're starting to see in real time?

[Frode Jacobsen:]

Hi, Lee. It's a forecast based on the very latest data that we have. So it's just a couple of days back in time. So it's based on the reality as it is now.

[Lee Krowl:]

Okay. And then, on the incremental investment front both in Q4 and perhaps into 2021. Could you maybe kind of itemize or break down where specifically are you spending? And, I guess, the reason I'm asking is, are these investments focused on building brand awareness through marketing investments, or is there more operational and product-specific investments building headcount and capacity to fulfill scale and growth?

[Frode Jacobsen:]

Sure. So when you look at Q4, implicitly in our guidance there's $2 million to $3 million of additional investment. And the bulk of that money is between personnel and staffing up and marketing. So those are the two primary areas where you will see it.

[Lee Krowl:]

Got it. Okay. And then, when we think about the guidance for next year, could you maybe talk about the assumptions around a return in ad spend from critically impacted verticals such as travel? And then, secondly, with regards to that guidance. You guys kind of highlighted that there is a fairly wide range of potential scenarios for new growth initiatives contributing to revenue growth. Could you maybe just specify or rank where you would expect the most growth to come from, from new growth initiatives? Would it be the fintech solution? Is it a combination of fintech solution and OList, or are there perhaps products you haven't announced yet? I'm just trying to figure out what sort of mix and what are the orders of magnitude that there's potential growth from new initiatives and what specifically they are.

[Frode Jacobsen:]

Sure. So, beginning with the first question on verticals. It's, of course, hard for us to say now how that specifically will look going ahead. If we just look at the trends we have seen in this quarter, how we compare now versus pre-COVID same quarter last year. Overall, I would say, we see pretty stable activity on a per user basis for PC and for search for mobile. But we're getting much more activity per user related to advertising on mobile as engagement is increasing time spent and as Opera News monetization is growing. And of course, our user numbers have grown, but the per unit pricing is still lower than last year and we see that search is recovering faster than advertising which is predominantly related to the geographic footprint of the revenue sources. When we talk about a wide range of potential revenue impacts from these initiatives, the reason we say that is we're always testing. And then, once we see something work and we are happy with the unit economics, we scale. And we want to be a bit cautious at this point in time to be too specific around the expectations. As I mentioned, we'd rather start with a baseline that we are comfortable with and then, update you with our expectations as we see the initiatives perform.

[Lee Krowl:]

Got it. And then, last question for me. You guys, kind of highlight in the press release, your select investments in kind of outside operations OPay, StarMaker, et cetera. Just given the solid inflection points in those businesses, would you expect to make any incremental investment in any of these kind of outside investments, or conversely, would you anticipate to monetize any of these assets call it, in the next 12 months?

[Frode Jacobsen:]

As a general answer, I would say, we try to always look professional on our investment and do the best thing for our shareholders. We are extremely pleased with both the companies you mentioned. I referenced some of their operating metrics in the past quarter. And I think we will evaluate this as time goes by, and announce if we make any changes. But for now, we definitely see the value potential in both of these companies as significant, and very pleased with how they are performing.

[Lee Krowl:]

Got it. Thanks for taking my questions, guys.

[Frode Jacobsen:]

All right.

[Operator:]

And ladies and gentlemen, that was our final question. I'd like to turn the floor back over to Song Lin for any additional or closing remarks.

[Song Lin:]

No, I think maybe the last comment it just be that, I think we have a very good healthy quarter, and hopefully this trend will continue in Q4. And we have even higher expectation 2021, both for our core business but also for some of the new initiatives. So like again, I think I would just like to say that thanks to all the people for supporting us. And we'll continue to perform, and hopefully beyond expectations. So, thank you for joining us.

[Operator:]

And thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.