Opera Ltd (OPRA) 2021 Q4 法說會逐字稿

Welcome to the Opera Limited Fourth Quarter and Full Year 2021 Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) 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. With me today, I have our co-CEO, Song Lin; and our CFO, Frode Jacobsen. Before I hand the call over to Song Lin, I would like to remind everyone that in the conference call today, the company will be making statements about 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 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 unaudited supplemental information on our Investor Relations website that includes historical financial results of Opera and our investee, Nanobank. We'll be live-tweeting highlights from the call @Investor Opera. So please follow on 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 off with financials and our expectations going forward.

Sure. Thanks, Matt, and thank you, everyone, for joining us today. This is Song Lin. So we are excited to report that the fourth quarter of 2021 coming 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 aftermarkets. 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 (inaudible) trend as we move towards an increasingly (inaudible) jobs.

So before begin depot, 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 fueled by both search and advertising revenue categories. Second, adjusted EBITDA also exceeded the high end of our guidance and $16.1 million or a 22% margin.

Our margins expanded even more than expected following the accumulated top line impact of our investments to scale during 2021. And so ARPU has increased 62% year-over-year to $0.83 on an annualized basis, reflecting our growth in higher-value markets and focus on high-value segments. Frode will offer more detail on our financial results shortly, but as our financial performance makes clear that being the world's best independent browser company is a good business.

And the strategic value of our trust position has never been greater. When we look at the direction the Internet is heading, 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 raised depersonalization, security and privacy people want create a huge opportunity for Opera.

Many players in our space, including ourselves at Opera share a 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 prominent 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 fourth quarter, we have launched a new browser both on desktop and mobile with the idea that it will continuously be tailored to the Web 3 audiences.

Opera believe that new Web 3.0, the browser, is not just a doorway on ramp. The browser is both the launch pad and foundation for the entire online experiences 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 a potentially high-value Web3 user segment, the Web3 browser and how its audience takes advantage of the product will also allow us to refine and integrate many Web3 aspects from blockchain to smart contracts computing, community governance and (inaudible) for our browsers more broadly.

So the logic behind our Web3 browser is similar to the logic that also drove the launch of our fully integrated gaming browser, Opera GX, which is already our highest engagement and highest after product, and we believe monetization is still early. For instance, Opera GX had over 14 million users and year-end across both mobile and desktop versions more than doubled from a year ago. And on top, annualized ARPU grow from $2.70 in the short color to $3 in Q4.

Being an OS-independent browser provide us -- allow us to tailor-made browsers that source for specific use case people have. While those use cases initially appeal 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 full speed. So 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 digital life in the Web 2.0 Airedale and we will play even bigger role moving forward in the Web3 space.

Since inception, Opera has found success in developing browsers that meet the needs of the individual users. And following success ways specific user segment, 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 see even more reasons our investment in those initiatives will pay off.

Ultimately, we believe that each person will need these capabilities, integrated and personalized to be able to fully participate in Web3x. So this browser-plus strategy has been accelerating user adoption across a number of our strategic initiatives. I should be clear that these initiatives, for example, our Web 3.0 and gaming shows as well as moving our content and news offering to new markets are all still young. However, each ensuring 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 [Adtech] business, we have also rapidly grown our advertising revenues. Our tech staffs allow us to aggregate additional high-quality inventory to sell to our existing advertising partners and continues to scale at 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 other partnerships to bring forth shopping 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 offer new service continues to resonate with the users, and we are very pleased with how it has scaled beyond Africa and also into Western markets.

As such the other key revenue component for Opera grew 35% compared to last year and during the quarter, we renewed our partnership agreement with Google on materially similar terms to our previous agreement. The continuity of this deal and the visibility it provides involve 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 ARPU increased by 11% from Q3 to Q4, demonstrating the value of our strategy to shift our user base towards higher ARPU, higher profit users.

We talked about it last quarter as we continue to focus our investments and resources on 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 expanding margins.

In terms of our outlook, given the strength we are seeing in our advertising and such 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 the revenue as well as for margin expansion. So on the other note to look forward to at Opera, and we are 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 59% year-over-year. This was driven by strong monetization from Opera News and our Adtech platform and 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 that want 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 the 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 3 cost items that scale with revenue, our tech and platform fees, comping 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 below plan 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 colored by noncash 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.

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 0 as 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. As a consequence, our net profit for the quarter was a loss of $84.2 million, taking our full year net profit 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 of cash and marketable securities stood at a $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 2 years, taking advantage of our strong cash position in an opportunistic way. 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 '22 will be the continued growth of our products in western markets as well as the continuation of underlying ARPU improvements across our 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, and 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 for questions.

(Operator Instructions) We'll take our first question from Lance Vitanza with Cowen.

Congratulations on just a tremendous quarter. I have a few questions, if you'll allow. I want to start with the revenue guide for 2022. 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 -- do you expect -- 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. Yes. On the monetization gain, I'm assuming that at least part of your growth forecast comes from more revenues per user. And if that's the case, I'm wondering if that more revenues 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. 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 in the geo mix towards more western markets and underlying ARPU improvements within all markets, so on a like-for-like basis. So it was mixed.

And then as it relates to guidance, I think it's always hard to predict at a very detailed level. But I think the trend that we saw into Q4 is a pretty good starting point in terms of expectations, how we look ahead. And that's how we sort of 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.

Okay. And then I guess just the first part of my question was, as you think about the guidance, the 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 the very specific buckets. So I think we tend to be a bit cautious on user expectations. But we -- 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-grade generating segments, for now, I just build guidance based on the 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%, 5-0% 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 of 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, maybe even if you can even beyond that?

So overall the business has, as we also discussed when we discussed our effective gross margin that's well into the 90%s, a very -- a model that is -- benefits greatly from scale. That's what we have been investing in accelerating in 2021, why Q4 came in ahead of expectations and why we felt confident, as we've spoken over the past few quarters, about we expect to continue to see normalization on our profitability.

So when you look at our guidance, it's correct, as you say, that we increased the revenue at the midpoint 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.

Okay. 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 some -- any more 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 as a related question, is there any -- is the worst-case scenario that we simply don't do business in India and India is effectively a 0, 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 becomes -- and it detracts from the value of the other assets?

Yes. So to begin with the first part of the question, the revenue growth of Nanobank is driven. The 2 bigger countries are Indonesia and Mexico. But we have all countries doing great. They're 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 0 book value now. We wanted to make sure to -- well, we believe it's appropriate. We cannot reliably forecast cash flows and then we should not keep the value on our balance sheet to -- that we cannot properly back up.

As I mentioned, it does not mean that the team is giving up on India, it's quite the contrary. It's a 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 the corporate lawyer, so I'll be a little bit careful to speculate. But as I see it, we put it to 0 and I couldn't put it lower than that.

The next question comes from Mark Argento with Lake Street.

One of my questions have been answered, but I just 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 guess -- this is Song Lin. I can probably just give some color. So yes, we also talked a bit in the script about the -- yes, the launching of our Web 3.0 product, which is already available on our website for both desktop and mobile, right? So no, I would say great reorganization that we have been seeing in the industry, it's probably one of the most -- bigger launches that Opera has ever made, right? Especially that now it's (inaudible).

It's more like the way that we want to invite the users and we don't show attitude, right? So high level, I would say, even though it's super early stage where we even got all the access portions. And many of them are also invitation -- only we show a lot of good acceptance from the community, which probably gives us even more confidence, right, that's the right thing to do.

And I think to us probably at this stage, probably more important is to show our stance that as a browser company and probably also one of the biggest third-party independent ones, we feel that we are [compatible] or Web 3.0 decentralization, and we feel that it's the right place to be. So yes, even though we have not really color too much about it in terms of revenue among other things, we feel that it's the right time to talk about it. And hopefully, in the coming of this full year, we will be able to see us prove a lot more around the topics and what we can do.

Great. That's helpful. And then 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. And what's the probability or what needs to happen to get that business re-launched in India?

Yes, I'll recap a bit. So at least seen from our perspective, there were some minister of finance process 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 has been licensed from its central operations to the various operating countries, and it was that fee payable from the subsidiary in India that I think triggered the 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.

Congrats on the solid results. My first question related to the user growth. So it does look like your strategy of shifting focus to the higher ARPU markets like America has worked out. Just wondering how much more legroom that -- can we anticipate that we can further grow and further penetrate in the American market in terms of new user growth for this year?

And then second question I have is, in light of this geographic mix, any meaningful change of the advertising category mix that we are gaining from the new ad demand from these higher ARPU Americas market? So any new industry verticals that we are in the early stage of penetrating that we could further attract the ad budget from especially for later this year or next couple of years?

Yes. So yes, maybe I'll try to answer that. Yes, first of all, I would say that we definitely see very good growth opportunity in western markets, especially in the U.S. and also in Europe or in South America, Brazil, and Argentina and those countries that, yes, like we feel that we are still at quite early stage. They are considerable size of the market and consider we are still the small size, we feel that there's a lot of response to grow, right? Compare in emerging markets like in Africa, we are already one of the almost -- the market leader there, while, of course, the rest of the market, we still have long, long, long way to go. And then we feel that the huge win there that will continue to grow.

So I -- we feel that, yes, the growth acceleration will just only be accelerated on that. And then you asked about the potential vertical, right? For instance, we saw that traveling is definitely coming back. From what we saw both in Q4 and also in Q1 this year, yes, what we saw is that very good growth back. And hopefully, ways also lifting up of many corporate restrictions in western markets, we will see a lot more growth there. So very excited about it. So finally, we can execute what we have already planned almost the pre-COVID, which is great.

And then on top, I would say, yes, I mean, new commodities is hot those days, and we also see very good growth on cash-back and related products. So very excited about it. And then finally, of course, gaming is growing very nicely to get all -- we don't get new products. And yes, we do see that that trend will continue.

So yes, so as a summary, we feel that traveling, gaming and commerce will probably be very strong verticals that will help us continue to grow in the months to come.

I see. Great. If I just one last follow-up on the margin question. Just kind of like looking at your 4Q, which your EBITDA came in at 22%. But for your 1Q guidance and your full year guidance, it does looks like the percentage of margin, it does look lower than 4Q.

For 4Q, it's because we under-spent a little bit, right, on the -- and the revenue came in better. So it's kind of get this leverage that appears on 4Q, right? But we kind of budget that in so that our full year margin now is about 18%. But I guess from the spending, wanted to get some color a bit more towards first half that we will still spend a bit more aggressive so that we will ride on the momentum to grow this user in this new market. And then maybe tail off a little bit into the second half in terms of the spending. So any color in terms of the trends that we should be expecting?

We tend to lower margins in the first quarter, if you look back too. So in this particular context, we -- 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 export costs. Some of it 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.

(Operator Instructions) We'll take our next question from Xiaodan Zhang with CICC.

I've got 2 questions here regarding Opera strategy for metaverse and browser products respectively. So first of all, Opera has accomplished several notable milestones to venture into metaverse. So how do we plan to further embrace the sales? And what do you think of our monetization potential? So secondly, in terms of browser products, Opera GX has been proved to be a very successful launch. So do we see any opportunity to enter into a more verticals except for gaming?

Okay. So I'm not sure if I catch all of it. The voice is a bit mix, but I'll try that. So yes, just to comment that if I hear you correctly, you are asking about monetization opportunity for the metaverse, right?

So I would say -- yes, so I think you also mentioned GX, so I would say, of course, the GX itself, we don't really see it as a browser instead of more like lifestyle thing that user spend time on it. They use it to watch -- getting mails, to chat with others by the integrated chat functionalities. And of course, the way the incorporating ways our gaming engine made by game-maker, they are now also be able to play games into it, for instance.

So yes, so overall, I would say, even though we have not really started any monetization seriously in that space, just because of the high user engagement in the GX platform, we are already reported that GX has already now have the highest ARPU about all the Opera products. And it's already quite profitable already, right? So we have published that probably down script for the annualized ARPUs. And then if you could just mark it by users, you could also already come up to a big number of revenues. You might -- and the early stage.

So I think moving forward for this year, we will try to stick with the same strategy that we'll probably focus on since it's already very profitable, we will probably starting off by focusing and providing more interesting functionalities within I will call that GX metaverse, right? Allow them to play more games and then there will be more interesting fund creations allow also more (inaudible) to also be able to create games for that platform. So those would not be the priority.

But of course, yes, when we -- we expect that when more user actually spend more time on to it, then very naturally the upward trend of outgrowing will continue and that will benefit the revenue as well. So I would say that's a high-level cover of what we see in the metaverse. And just as a summary, luckily, we are one of the few ones, which even though at a starting stage, are already quite profitable in that space, and hopefully we'll just be able to continue to grow. So it's a very healthy business.

And then you mentioned about other vertical, right? So I would say the launch of our 2.0 browser is a very good example in Q1 that we feel that's also a very interesting vertical that we want people to be able to see because same as in GX, we really view the trend of decentralization and Web 3.0 as almost one of the lifestyle theme that we want to be able to build a browser where we can use it to capture all the related ecosystems. You can do many things in this browser and use it not only as browser, but also as a platform to manage integrity stuffs. So yes, so that's one of the initiatives that we really focus on and yes, hopefully, we'll be able to also drive that and replicate what we have been seeing on GX.

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. So yes, so I would say for all of you, thank you again for joining us today. As you have 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 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.