Opera Ltd (OPRA) 2019 Q1 法說會逐字稿

Good day, everyone, and welcome to Opera's First Quarter 2019 Earnings Call. (Operator Instructions)

I will now like to hand it over to Mr. Derrick Nueman, Opera's Head of Investor Relations, to open the call.

Thank you, and welcome to Opera's First Quarter 2019 Earnings Call. Together with me today, our CFO, Frode Jacobsen; and our COO, Song Lin.

Before we begin, I refer you to safe harbor statement in the company's earnings release, which also applies to the conference call today as management will be make forward-looking statements.

Our commentary today will also include non-IFRS financial measures. We believe that the use of these 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. Reconciliations between IFRS and non-IFRS metrics for our reported results can be found in our press release that was issued earlier today, a copy of which can be found on our Investor Relations website.

With that, it is now my pleasure to turn over the call to our CFO, Frode Jacobsen.

Thanks, Derrick. And good morning, afternoon and evening, everyone. We are excited to share our results today and to talk about the ambitions we have to accelerate our growth trajectory.

But first, we had a record first quarter, highlighting our continued execution and growth.

Let me go through the highlights. First, revenue grew 30% year-over-year to a new all-time high, exceeding the top-end of our guidance. Second, our user base hit new all-time highs as well, and our total MAUs now exceed 350 million. Third, we moved aggressively to capitalize on the large opportunities in front of us, investing more to accelerate long-term growth. And four, while investing in growth, we still exceeded the top-end of our adjusted EBITDA guidance range. And finally, these strong results and our plans for the year have enabled us to raise our full year revenue guidance.

As we discussed last quarter, we are focused on 2 meaningful opportunities. First, we want to build on our strong position, focusing in particular on Africa and emerging Asian countries, to create leadership beyond browsers. Second, we are growing our browser user base in targeted markets where we think a differentiated offering and high monetization will lead to financial upside. Because we believe these opportunities are so large, we'll be putting more resources into them in the short term.

So now let me talk about the opportunities in more detail. First, starting with Africa. The long-term opportunity is enormous. Africa's population is 1.2 billion people and growing rapidly. Internet penetration is still low but growing even faster, and GDP growth is outpacing most developed markets. Additionally, Africa relies heavily on mobile for Internet access. As a result, our strong mobile footprint carries even greater strategic potential and allows us to capitalize on opportunities that don't exist in many developed markets.

Similar dynamics also exist in several emerging Asian countries where we have a strong position such as India and Indonesia. All of these factors create a significant market opportunity both for our strong browser position that we'll capitalize on the ever-increasing value of the traffic we can drive to e-commerce and other local partners, and more importantly, as we leverage that browser position into other online areas.

This growth strategy is well underway with the Opera News and our fintech microlending offering, OKash. For Opera News, in the 15 months since we launched our stand-alone news app, we have grown MAUs to over 30 million. Song will share more operational details on this in his commentary.

OKash nearly quadrupled in size over just 1 quarter, already exceeding $25 million in annualized revenue run rate, even though it is only live in 1 country, Kenya. While it is still early, the progress we've seen today has only bolstered our confidence in this opportunity.

Our continued browser innovation and strong track record in growing our user base sets the stage for a potential upside. We've got several things working in our favor. We're an independent player with a proven history of innovation in an evolving ecosystem. We have built a strong lineup of OEM distribution partners, and there's potential to further benefit through Google's recent European Union agreement to provide browser choice on Android smartphones. We believe several European markets such as Germany present an opportunity for us to grow market share where we believe a subset of consumers will highly value our offering and even small market share gains will equate to meaningful upside given the high ARPU levels seen in the region.

With that, I will turn it over to Song to cover operational highlights, and then I'll come back and talk about the quarter and our guidance.

Thank you, Frode. And hi, everyone. Good day. For Q1 2019, we are pleased with our strong user growth and product innovation. In particular, we delivered growth in our smartphone browser, PC browser and news user bases both on a sequential and year-over-year basis. We now have 222 million average active smartphone users and 65 million average PC users. I'll get into more details on both shortly, but let me start with one of our rapidly growing strategic initiatives, Opera News.

Opera News, our AI-based content platform, achieved an important milestone this past quarter, exceeding 150 million monthly active users. Perhaps, more importantly, users of our stand-alone news app increased 62% versus last quarter to almost 32 million. This is significant growth independent of our browsers. We are very proud.

There are a couple of factors driving this, including the launch of Opera News local initiatives in new countries, specifically much of North America including Egypt, French-speaking African countries, our presence for expansion in India, Indonesia and for the benefit from our video functionality is complete.

Despite our rapid growth, we think we are still very early in our opportunity. Our plans for Opera News are as aggressive as ever and nicely payout with this large addressable markets across Africa and South Asia.

On the browser side, we have continued to drive growth. Our PC monthly active users have increased 14% in mature market, and smartphone browser MAU had increased 4% year-over-year based on an already very large user base. Again, our browser efforts are always focused on innovation. For instance, Opera for Android, which is our high-end browser, have saw year-over-year growth of 38% and sequential growth of 15%. Our product differentiation continued to focus on privacy and security, which is very attractive to many European users.

We launched the new version of our browser for Android with free and top-notch VPN and the new redesigned digital browser called R3 with Web 3.0 support for PC users.

As of Tuesday, we have also announced the Opera GX initiative to be launched in June. It will be the first-ever gaming browser.

Opera has always led the way with innovation, and we are always working out the next improvement we can bring to our user base.

In addition to our organic efforts, we have also heightened our focus on driving user growth through marketing and distribution efforts to further accelerate our growth. We have chosen to invest in our brand and general awareness in key markets. We have TV campaigns now running across sub-Saharan Africa, which is our key region and where we have market dominance.

In light of the Google EU agreement, where Android users in Europe will be presented with a browser alternative, as also mentioned by Frode. We think the timing is also right for us to explore a more aggressive approach initially focusing on brand marketing, mostly in Germany.

The market of Germany represents both large and attractive geography and where we believe our offering has been met with a very favorable reception. A parallel effort to our user growth is our focus on increasing monetization. This starts with leveraging our AI capabilities in driving conversion to partner. For instance, we are able to optimize e-commerce experience for our end users by predicting sites they might be interested. More important, we have took a significant step forward last week with announcing of the launch of Opera Ads.

Based on user intent and contextual relevance, Opera Ads offers an intelligent advertising solution to digital agencies, advertisers and brands to connect and engage with Opera audiences. Opera Ads is now available in both traditional and programmatic buy-in models and provides advertisers with the opportunity to access our large base of users and get traffic where they will not be able to get elsewhere. We have had early pilot programs on Opera Ads already with several of our key partners, where we're able to see significant growth potential. We think the combination of Opera Ads, the expansion of Opera browser and Opera News and the very favorable underlying macro trends will improve our overall monetization at the same time while we continue to grow our users. As a result, we expect that our year-over-year advertising growth rate will accelerate during rest or part of this year.

As discussed over the last year, we are in a strong position with an abundance of opportunities. Just to echo on Frode's comments, Africa and several emerging Asian markets represent a significant multiyear opportunity. And we have a leading position and have driven strong growth over the last year. We think this is just the beginning, and there is a real opportunity to build upon our leadership positions.

As we mentioned last quarter, we will be making additional investments this year in product, marketing and new markets to drive accelerated growth. We look forward to updating you on our progress as we execute on our vision.

Thanks, Song. Let me now get into the quarter and guidance, and then we'll open it up for questions. Opera had a record revenue quarter reaching $51.3 million, up 30% versus the year ago quarter. Search revenue represented 40% of the total or $20.6 million, up 2% year-over-year or up 5% on a constant currency basis. As communicated over the past year, while we expect search to continue to grow, we expect it to become a smaller share of our revenue over time. Search is already a pretty well-optimized revenue source for us with revenue as a function of our search partners monetization as well as our own browser user base footprint.

Advertising revenue was 29% of the total or $14.1 million, up 10% year-over-year. This growth was driven by increased user numbers as we've been prioritizing user growth over monetization. Also, we are using our advertising inventory to promote OKash, resulting in record fintech revenue.

Looking ahead, our increased focus on monetization gives us confidence that the year-over-year advertising revenue growth rates will accelerate.

Fintech revenue, which is a new revenue category, represented 13% of total revenue or $6.5 million. This scaled significantly from the fourth quarter when we acquired OKash, and we expect it to be a growing percentage of revenue going forward.

Retail revenue represented 13% of total or $6.8 million. In other words, quite stable versus last quarter. We continue to expect retail revenue to remain at the current levels while we explore a wider retail opportunity.

The technology licensing and other revenue category represented 6% of the total or $3.3 million. Total operating expenses were $45.8 million in the first quarter. And I'll go through the main components.

Compensation expenses were $11.1 million, flat year-over-year. Within the total, cash-based compensation was up 12%, following a growth in staff relating to our growth initiatives and annual salary adjustments, while equity-based compensation costs was lower than a year ago.

Marketing and distribution expenses increased to $14.7 million, up $7.3 million or 100% year-over-year. This follows the quarterly guidance we gave earlier this year and our overall strategic choice to invest in accelerating our growth.

Cost of revenue was $7.9 million, compared to $0.7 million in the first quarter of 2018. As in recent quarters, the increase is primarily a result of our retail activities, which represented $6.8 million of the total.

Credit loss expense was $1.9 million and were mainly related to fintech, which represented $1.7 million of the total. The sum of all other operating expenses, including depreciation and amortization, was $10.4 million, declining 4% in the aggregate versus the first quarter of 2018. As a result, we achieved an operating profit of $5.5 million and net income of $5.4 million. And finally, adjusted EBITDA was $11 million, representing a 21% margin; and adjusted net income of $7.8 million, representing a 15% margin.

The main difference between our margins in both last and the year ago quarter is the increased investment mostly in marketing and distribution aimed at accelerating our growth and taking advantage of the opportunities we have both in Africa and emerging Asia and in targeted browser markets.

With that, let me turn to our guidance and 2019 outlook. Given the opportunities, momentum and results we've discussed today, we have a lot of potential. To that point, 2019 will be a year of investment. In 2018, you saw the core profitability and the scalability of our business model, and nothing has changed. This year, we are investing a significant part of our profits back into our business for long-term growth and profitability, and we are confident that this will create value. Over the course of the past several months, we've worked through our plans, identifying the areas that will generate long-term value and strong returns.

Let me now go through the specifics of our investment plans. First, and not surprisingly, given the success and the comments we've made around Opera News, we're accelerating our investment there versus 2018. Most of this will be marketing and distribution to gain additional scale. But as stated during last quarter's call, we'll also invest more in localization. Much of the benefit from this investment won't be captured this year. Rather, we are staging the user base of the product such that we can benefit from significantly greater revenue impact and larger profit contributions in future years.

Second, we are also investing more in innovation, most importantly, in Opera News. This includes enhancements to our product and AI capabilities which combined with strength and localization is aimed at increasing retention and time spent. Further, as Song mentioned, we are focused on accelerating our monetization capabilities with a dedicated team that already launched a new ads platform, starting with Nigeria.

Finally, as discussed earlier, we are increasing marketing and distribution spend for browsers in markets where we think we can acquire users at reasonable levels and monetize very well. This builds on our innovation, and we consistently assess results to make sure our investments are delivering strong ROIs.

With that said, we are raising our expectation for 2019 revenue. Our increased range is $230 million to $240 million, representing year-over-year growth of 34% to 39%. This compares to our prior range of $220 million to $230 million, and for now reflects moderate increases in monetization, limited gains from browser product initiatives and finally some contribution from taking microlending to new markets.

We are also guiding for adjusted EBITDA between $30 million to $45 million for the year. This is inclusive of additional marketing investment for the remainder of the year, potentially as high as $40 million, to accelerate long-term revenue and adjusted EBITDA growth.

Turning to the second quarter of 2019. We estimate revenue of $53 million to $57 million. This accounts for an acceleration in year-over-year growth rates in advertising and further growth in our fintech business, OKash, offset by continued year-over-year declines in technology licensing and other revenue. Overall, this corresponds to a 33% to 43% year-over-year growth, which represents a meaningful acceleration versus the 30% we saw in the first quarter.

As for adjusted EBITDA, we expect to be in the range of $2 million to $5 million. This includes up to $14 million more in marketing and distribution spend as compared to the year ago quarter. And as discussed, we'll be very focused on returns.

To summarize, we are pleased with our strong growth, consistent execution and increased full year revenue guidance. We are excited about our trajectory and the opportunities we see to grow our business even faster as we look to 2020 and beyond. We believe the extra investment this year sets us up for strong and multiyear double-digit percentage revenue growth. Adjusted EBITDA will grow even faster as our business model scales. We look forward to keeping you updated on our progress as we continue to execute on our plans and ambitions.

With that, I'll turn it over to the operator to take questions.

(Operator Instructions) Our first question comes from the line of Hillman Chan of Citigroup.

I have a couple of questions here. So first one is on the Opera News MAU. We noticed a very strong sequential growth in the stand-alone news app MAU, and you also shared in your prepared remarks about the focus of these new market including Nigeria, Kenya, Ivory Coast and also to some French-speaking African countries. And could you give us more granularity into where these new MAUs are coming from exactly and how are the ARPU of these new MAUs as far as the user behavior of these new MAUs are compared to the existing MAUs that you have in last year? That's my first question.

And my second question is on the incremental marketing investments of $35 million to $40 million. I think you break down a little bit on how we go about spending the money. But still, if you can give us more granularity by geography and product lines, that will be helpful.

And also, how should we think about the key KPI that we are looking to achieve with these incremental marketing investments? If there's something you can share, that will be helpful as well. And then I have other question later on, on the Opera Ads.

Yes. Sure. Sure. Hi, Hillman. Good to hear from you. This is Song Lin. I think I'll try to first address the question -- the first question you're having on Opera News. So -- yes. Yes. We've been seeing very strong growth in Opera News in MAU. I would say -- so you're asking a bit about granularities. So I think, in short, we see both strong growth in Africa as well as South Asia, Southeast Asia. So I think they pretty much grow at similar levels. I would say -- yes, so it's that. I think -- yes.

So in terms of -- you also asked about ARPU in comparison. So I would want to say that in those regions, our first focus is actually around building up the user base. However, that being said, we actually have seen a very strong ARPU growth both in existing countries like in Nigeria and Kenya where we are already quite big, but we also see very strong growth in, say, India, Indonesia, which is fairly mature ad market anyway. So -- yes. So I think at high level we see good potential there. I think that's also why we decided to be aggressive in user acquisition because we think now it's right time for us to be able to do it. Yes, I hope that does answer your question.

Yes. And what about the second question on the incremental marketing investments?

Yes, maybe, Hillman. I'll say a few words about that. So first, I would say news is the main part of it. That is the most strategic aspect of our investments this year. We also, as announced previously, see opportunity to increase distribution spend related to our browsers, and that represent sort of one opportunity to scale the business where we see a good financial opportunity.

You asked about, sort of, return on investment, the multiple. So Lin talked a lot today about our work on monetizing Opera News, which is critical. That is an area where we're not talking sort of percentage improvements, we are talking levers with multiple times over improvements. So without getting too specific, I mean, the plans we are working on now has us going to sort of closer to be 10x the current per-user monetization relative to where we are today. So just to speak a little bit about, sort of the, what feeds the potential that we are going after.

Got it. Got it. And -- so my another question will be on the Opera Ads. So noticing it is just newly launched recently. Still, if you can also share more into this strategy with this business. How we should think about the contribution to our ads business in the -- maybe in 1 year or in the longer term, in terms of utilizing our ad inventories or help raising the cost, eCPM with these Opera Ads, then that will be helpful.

Yes. Hillman, this is Song Lin. I think I'll try to comment a bit on Opera Ads, perhaps a bit more on the product itself and technology, and Frode can also comment a bit on potential financial impact. So yes, internally, we actually think this is a very important step for us by actually launching Opera Ads initiative. Just to clarify with you that like we are always be able to monetize on our inventory based on Opera News inside the browser as a stand-alone app. We already see very good growth in the past quarters, as you also see that in the Frode's report. However, what's been differentiating about launching Opera Ads is that Opera Ads actually is the first time allow the advertisers to directly -- advertisers or ad agencies to directly go to Opera Ads platform to be able to reach those Opera users compared to if they have to go to Facebook or Google to (inaudible) to reach out user base. So I would say previously we focused a bit more monetization, which we have achieved some good results. But Opera Ads is a step further that especially in the regions where we are very strong, like in Africa, we are able to be able to all our advertisers to directly engage with a massive user base that who have email. For instance, we said in our press release that we have pilot launch of this in Nigeria which -- we are actually -- last week to address the launch of Opera Ads with local ad agency advertisers, et cetera. They're all feel very excited because again it's the first time ever that they're able to be able to develop our platform to reach all those user base. So I think that's number one aspect of Opera Ads is that by being able to doing that, we allow the advertising agency to directly engage. From our point of view, I think this has several potential benefits on top of what we've already doing now.

So number one is that this will largely be able to broaden our user range because this allows -- basically, this allows ads to be shown a lot more users than previously possible. For instance, in our pilot programs, we will be able to reach, I would say almost a few times higher of users than what we've previously been seeing. So that's number one, because we're able to have define functional since it is all directly by our own platform and onto our own inventories.

So number two is that we're also be able to see that this directly contributing a lot into eCPM. Because, again, when advertisers directly advertise with us, it cuts the middleman like the likes of Facebook or Google. So that also helps.

And the third opportunity that this also allow us to approach opportunities which is previously not possible, for instance, by Opera Ads, we're able to do a lot programmatic direct buy, we're able to do -- like allow advertisers to be their own PTP for instance like all of this allow us to have much better control. Again, we have already pilot this in our cases, and we see very good results.

So high level, maybe, I'll refer to what Frode has been said earlier that launching Opera Ads is actually quite strategic for us internally. We have done a lot of preparations. And we feel that this will actually allow us to be able to even up to 10x of what we are monetized before.

Maybe just to chime in to -- on that and why we see a potential like that. If you just break it down, the advertising revenue, of course, it consists of sort of how many impressions you show per user and eCPMs obtained, and of course, the user base. And if we look at it right now, for the Opera News inventory, of course, we present it in the browser and in the dedicated app. And the ad load in the dedicated app on sort of the per-user basis, is still a minority compared to what it is in the browser, even though time spent on use in the dedicated app is significantly higher in the dedicated app.

So that is why, even just volume itself represents several multiple opportunities. And then pricing with everything we're doing, we see potential there. And of course, it's all multiplied as you look at the per-user potential. And that is why we see that over time we can get to such dramatic increases. And of course, even now we're just past -- past quarter, when you look at it on a per-user basis, monetization was up 30% sequentially.

Got it. Got it. And also to ask a bit more on the Opera News stand-alone app. So with the monetization [only last year], how is the contribution to your advertising revenue so far in the stand-alone news app?

You mean the Opera News app, how much is it contributing today?

Yes.

I'll, maybe, I can chime in here. We haven't, at least for now, disclosed revenues by products. Of course, it's growing in importance in terms of user account. And we are very ambitious, as also laid out, with our investments when it comes to this product. But of course, it still represents 15% of our mobile user base and a bit less when you will also include the PC users. And as we've gone through the ad load of the product, that has just not been priority. So it's relatively limited as a starting point with the biggest product upside we are seeing for the periods to come.

Yes. Got it. Okay. And...

Now it's obvious, I guess, I can comment. I guess I can just chime in a bit. I think, internally, we are actually quite pleased with the growth of Opera News, especially on eCPM point of view because we see it already performs a lot better in comparison to, say, the same news service when it comes to our browser. So I think we are quite pleased about it. And that's actually one of the major reason why we are also thinking now it's material to launch Opera Ads, you know the key regions for instance.

In terms of absolute revenue, just chime in a bit as what Frode has been saying, that still it's smaller percentages, partly it's also because we still consciously choose to focus a bit more on user growth and in product engagement. Also, in line with the question you have asked earlier is that, for instance, we're now still intentionally choose to, say, limiting the user exposure to the ads when it comes to new user in those new regions, like those African new users or new users in South Asia or Sourtheast Asia. It's just because we think it's still more important, we allow them to spend more time on the news app and then to be familiar with it to add the engagement and retention. And then we will show ads afterwards when they're becoming more familiar.

So overall, we almost intentionally lower down the app modes, especially our stand-alone clients, especially when they are new. But we -- now we're able to have very fine control of when to show them and what time and what's the ad load. And we will be able to control this. And right timing, we'll be able to tell you that. So I think that's just to chime in a bit about what Frode had been saying that in terms of ad load it's probably still smaller percentages, while we think there's a big potential to grow afterwards.

Got it. And talking about OKash. We are excited to see the run rate, the revenue generated from this product. And you also mentioned that some of the traffic is diverted from our Opera browsers news app as well. And so that also come as a cost. And could you also share about how we should think about the investment on OKash from both marketing side as well as some of these other cost revenue and the profitability of it, if possible?

Yes. Hillman, I'll chime in here. So to just clarify the first point that is correct, as you are saying, we are using the Opera browser inventory to sort of promote and raise awareness around the OKash, that app and that service offering. That is something prior to Opera acquiring the business that would've been advertising revenue for us. And now of course, we made the decision late last year to take over that business. And we're very pleased with how we have scaled it from there. So if you -- in one sense, we think of both the advertising and the fintech as user generated revenues that we initiate. And of course, if you add them up, we have increased from Q4 to Q1 even in spite of the seasonality. So very, very pleased with the results that we've obtained for the microlending business. It was -- it's been even better than what we expected.

Yes. When it comes to the cost side, so this really limited third-party marketing, as you see in sort of segment notes in our financials. It's about $0.5 million in the quarter. We don't really think that's going to scale a lot. And then when you look at the, let's say, the more variable cost components of OKash, namely cost of revenue, but also accruals for loan losses, they are in the low 30 -- 30s as a percentage of revenue. And that's roughly where we expect them to remain, plus/minus 5 points.

Okay. Okay. And the last...

Sorry. Just to chiming in a bit. I think just a second on what Frode had been saying that from -- I think it's more like from a product and technology point of view, what we're trying to say here is more like, of course, all of those will probably not be able to help us if we don't have such a strong position of browser and news. But then we are also very agile in looking at all those important verticals that if we feel that a certain verticals in, say, our key markets like Africa will be beneficial for us to do it ourselves. We'll make it more profitable. Then of course, we would also consider to enter into that. But that, of course, all based on strong presence we have in browser and news. For instance, we launched microlending in Kenya, which is now the only country. But then if you look in Kenya Google Play, you will be able to see that out of the top 10 Google Play apps across both, we have full apps there. Both news, browser, but also those fintech apps which is almost the strong testify of the influence that we're having there. We will probably also replicate the similar model in all the other countries where we are strong in the key markets. And as Frode said, it's highly profitable, and we are pleased about that.

Got it. And lastly, just on the Crypto Wallet that we are introducing to our browsers. Could you also share more on the longer-term strategy with the Crypto Wallet business, how should we think about the monetization, if any, to this part?

Yes, understood. So -- yes, so this is Song Lin here. Yes. So I think, I would only say that for that we see that as more user engagement tools. Because we are actually, as a browser company, we do support Web 3.0. We do support the concept of the app, distributed apps. We think that is potentially going to be very interesting in the future. We think this is also very interesting towards a specific segment of users, especially, say, in Europe which is very in line with our core market from, say, PC or Opera for Android where the wallet is available. So I would almost say that for that part, it's -- I think it's more product play. It's more like user retention play, it's a user segmentation play, that we think is highly appealing to the full user base that we have in Europe in particular and also in other developed markets. We have not so far focusing heavily on the potential monetization aspect of it. We do see a strong interest in that field. We have many interesting leads and, you know, coming in. But for us, I think it will remain a very key product play at the moment.

(Operator Instructions)

Okay. This is Frode here. It sounds like we're -- we've covered the questions. So I'd just like to thank everyone again for joining this call. Again, we are very excited about this quarter and the growth that is ahead of us. And we look forward to updating you on our progress. So have a good day, everyone. And -- yes, all right, thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.