Opera Ltd (OPRA) 2022 Q1 法說會逐字稿

Welcome to the Opera Limited First Quarter 2022 Earnings Call. (Operator Instructions) Please be advised that today's call 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 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 non -- 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 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 call -- 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.

Sure. Thanks, Matt. So thank you, everyone, for joining us today. We are excited to report another strong quarter that come in above our expectations, both in terms of revenue and adjusted EBITDA with the momentum and scale we have achieved during 2021 continuing to pay off. Our revenue has growth of 39% was supported by 20% growth in search revenue largely filled by strength 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 open yields monetize only through advertising. And additionally, we can leverage third-party inventory as we serve our advertisers through the Opera Ads [ad tech] platform.

We continue our strategy of focusing on users in high upper markets and those users, which we believe are most engaged, providing us with ample monetization opportunities. As a result of the strategy, ARPU grow 54% year-over-year on an annualized basis, which greatly offset the 9% 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, and we saw revenue growth across every region, except for war-impacted Eastern Europe.

We see our strong results as a clear validation of our focus on developing and delivering differentiated products that appeal to valuable users in every geography. The combination of both a Western and an emerging market user base represents a pretty compelling mix. We are able to generate immediate and meaningful incremental revenue on newer products, while benefiting from the underlying growth of online services in emerging markets. So 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.

Opera's DNA as an independent browsing company has always been in differentiating ourselves through technology innovation. We have serially developed and launched products and services that meet the needs of specific use cases and specific user segments. Whether that's in (inaudible) communications, promos, gaming, news or privacy and security, Opera has a history of objective success in building the browsers of choice for people who actively chose their browsers. The trend is stronger and more clear than ever.

One example is gaming, not long ago we launched our GX browser specifically designed for gamers. As of this quarter, we have over 2 million mobile and 14 million PC users, a sequential increase of roughly 15% and almost double from a year ago. The ARPU for GX is higher than for any other product and $2.7 on an annualized basis. And beyond the GX browser, our GameMaker Studio now has over 500,000 developers and GX games had over 1 million monthly active users. And while ARPU for GX is more than 3x the ARPU for Opera as a whole, its revenue mix contains only a fraction of advertising relative to search when compared to our other browsers.

Later this year, we will begin to introduce payload advertising in GX as well as other economic models to empower both game developers and gamers alike. While we are cautious on the near-term financial impact, we expect it 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 both existing and new monetization structures. As we look ahead, there are clear applications for our model also as it is related to multiple aspects of Web3 trends.

Opera News continues to grow in higher monetization regions, and we are particularly pleased with how the product is now also taking a meaningful foot holder in Brazil. In terms of vertical focus to domains based on the same core technology, football remains the most popular. But over the past 12 months, we have also introduced other verticals such as cricket and basketball as well as generic news and sports sites. So in total, these services have more than 10 million users. We are using that same AI-driven news engine to begin aggregating news related to gaming on GX browser as well as our plans to introduce a section for relevant content in our Web3 browser as the one stop shop for news, market data and trend analysis. These are examples of the constant improvements we introduced to ensure that our users have the best interactions in addition to enhanced search features, integrated personalized speed dials and our new VPN pro feature as security and privacy are becoming crucial concerns in your online interactions.

And while our Web3 browser is being rolled out in developer version, we are starting to bring Web3 into all of our products, starting with market chain wallet tech stack across both mobile and desktop browsers. Please stay tuned for updates here. We are also ensuring that we have the right tools to maximize our ability to monetize our audiences, and in particular, continue to improve our advertising tech stack. Earlier, I noted that our advertising revenues continue to grow as a percent of overall revenue and with the improvements we continue to make in our ad tech business to leverage our advertiser demand on non-native inventory combined with the increasing audiences we are building in higher-value markets. That's a trend we expect to continue.

So all in all, we are internally focused on our core businesses, given the opportunities we see ahead. Since we last spoke 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 a desire to remain laser-focused on our core business and the opportunities we are seeing in front of us. Recently, we were presented with opportunities to take sales and lock in gains for our shareholders on liquid assets in a volatile market, and so we chose to act. Also Frode will detail the results, but the resulting cash payments to Opera over the next 2 years will offer us significant operational flexibility. So again, our products and initiatives continue to show great momentum and [waiting] that the browser has never been more relevant than it is today. We have a very exciting time ahead of us and Opera.

And with that, let me turn 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. And of course, it was particularly strong in light of the headwinds associated with the war in Ukraine, and how that, in turn, affects regional monetization and has 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 had 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 prewar guidance for the year as a whole is the core machinery of Opera's business performing 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 received 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 stands at $182 million. Taken together with the $216 million we will collect in 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 6.44% ownership stake in OPay, but in line with our decision to focus our attention on our core business, these shares are also 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 sense of urgency in terms of committing the resulting proceeds.

The dominating value creation potential of Opera is in our core business and the opportunities we can see from our very strategic position and 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, 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 midpoint and an increase of 90% compared to 2021. We expect the quarterly headwinds from Russia's invasion of Ukraine to approximately double from the $2 million in the first quarter and represents around $12 million in headwinds for the remainder of the year, bringing the total impact to about $14 million or just below 5% of the midpoint of our guidance. However, the strong underlying performance in our core business is expected to offset those effects, and we consider this a very healthy indication also 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 midpoint. Relative to Q1, we assumed a stable to declining cost base overall. Cash compensation is expected to increase about 15% following team growth and salary adjustments and cost of revenue items combined are 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.

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

Congratulations on a strong quarter. I guess I have 2 basic questions for you. The first is on the Russia-Ukraine situation. And 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 the -- for sort of the total impact. But on the one hand, I just want to try to understand how this is playing out.

On the one hand, we have presumably displaced Ukrainians. On the other hand, we have a Russian population that is presumably economically bankrupt due to global sanctions. And then there's the currency or exchange rate impact. I suppose it's the latter 2 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?

Lance, Frode here. So you're right. In the first quarter, as I mentioned, there was essentially a foreign currency translation just from the strengthening of U.S. dollar. As best as we can estimate, looking at the remainder of the year, the FX impact and, let's say, 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 FX versus business impact.

Okay. And 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. And so we've spent a lot of time thinking about it. Obviously, it's very close to home in terms of being in the Norwegian, Polish, Swedish European footprint. But -- so it became what's the right thing to do kind of position and limiting information, both availability seems like the wrong step to take. So that's how we thought about it.

And then you've given us a base case in your outlook for 2Q and for the full year, how should we think about a realistic down case? I mean is the stress test to simply take the 10% of the revenues that you've sort of said come from the region? Is the stress test to simply take that revenue out of the equation full stop? Or if we were to do that, would there be any cost removal that would go away? Or is that too conservative a way to look at it? Again, I'm trying to get to something that if things get worse as opposed to meet your forecast.

Yes. I mean we do build into our forecast that things will get worse, right? So, correct, as you say, there was an opening expectations 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. So there is cost associated with the 2. But as of now, we don't see the scenario of going to 0 unfold. So we have -- we consider what we presented today as the most realistic expectation.

Okay. Let me turn to something a little bit more hopeful. The divestitures of Nanobank and StarMaker and the partial monetization of OPay, you've obviously gone a long way towards streamlining the business, streamlining the story. And obviously you talked about how you're classifying the remaining OPay stake as held for sale. Could you discuss maybe the timeline for potential monetization of that, the remaining stake and remind us what's 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, $85 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 then, you started to sort of walk through the math on the call. That was actually going to be my question. But if I start with a $600 million market cap, right, there's a $115 million ADSs at about $5.20 a share, I get to a $600 million-ish market cap. I back out the cash, I back out the PV. If I even just if I use the PV of the stake, right, as opposed to -- of the sales rather that you sold and then I take out the book value, right, of the OPay stake, I'm getting to like about $150 million implied for valuation for the browser business. And I'm just -- am I doing that correctly? I mean, that just seems too low or wondering if you have any comments there.

As far -- we're trading at like [0.3%, 0.4%] revenue and we are like 1.5x 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.

Yes.

Our next question will come from Mark Argento with Lake Street.

Just a quick question on -- well dovetailing a little bit with the capitalization and the strategy going forward. So the model had been you have the core browser business, and then you'd leverage that in other technology areas. Going forward, how do you think about deploying capital and the strategy? Do you anticipate a similar type of strategy, it could be investing to base harvest or maybe doing something more substantial in buying larger, more established businesses?

Mark, yes, it's a broad question to comment on it. I think the investments that we have between Nanobank, StarMaker and OPay we have left, we are proud of them because like you mentioned, to a great deal, we were able to create that value for Opera by participating in these companies, co-founding et cetera. And so it is a good example of how the Browser business that we have, it's 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 on Gaming initiatives, but these were some specific opportunities we had in earlier years that have done well for us.

So when -- I think when we look ahead, we are definitely more focused on what we can create internally and as part of Opera. And I don't see the same situations of sort of participating in the launch of separate companies. I don't have any indication that there are opportunities in that space right now. So it's more an internal focus.

Great. And then just one follow-up. In terms of -- as you monetize these stakes and so that incremental $211 million and so, do we need a tax effect that at all? Or is that actually the net cash that you guys should receive after you collect all the proceeds?

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

Great. I appreciate it. Good luck. And I know it's been a difficult environment for you guys given your exposure to Russia. So, best of luck going forward.

(Operator Instructions) Our next question will come from Alicia Yap with Citibank.

And also, congrats on the solid results despite having some headwinds in Europe. I have a couple of questions. First one, well, I think you mentioned about the impact from Russia came in, also reiterate the guidance and all that. But I'm just wondering, has there been any impact on other advertiser sentiment, especially the advertiser that based in Europe, so like in the region? And would that be actually become more cautious on spending the ad dollars? So that's the first question.

And then second question, I also wanted to follow up on the use of the cash with the incoming cash that you have received or will receive. How should we think about any future plans on the cash use? Would there be any like special cash dividend? Or would you plan on some acquisition targets that fit into your search and advertising business? And then maybe on -- as you expand into the GX browser, which you're doing very well, will you also be interested in acquiring some game studio, for example?

Yes. Sure. So it's Song Lin, and I'll also try to answer a bit. So, I guess, for your first question of advertiser sentiment, I guess, it's more what we see is that, I think in general, we feel the advertisers in Europe are still quite strong, the way we see it. The only impact is more towards maybe the exchange rates that, of course, with the euro actually being a bit weaker compared to U.S. And then if you mail by U.S., of course, that's more the impact which Frode is talking about.

But yes, high level, we feel that at least to what we can see, it's still going strong, and that's an indication of why we have keep going strong and exceeding guidance and we also keep our full year guidance. In all that, we have to keep a closer look to see how that changes and the same, yes, in other regions. So that's more like a general high level observation. And then I guess Frode has already pretty much answered a bit about the cash part.

I think to us, the importance is to demonstrate that this past investment had to be able to bring us good value. And then we are also able to bring that into cash. So I guess it's more like maybe clearer demonstration of the work that will be done, which are bringing value to the company. And so hopefully, it will be more easier for the investment community to be able to see it.

We like -- other than that, I think it's fair to say in a (inaudible) this will give us more flexibility to be able to invest into more strategic stuff that we are focusing on, like game, gaming for instance. I guess we wouldn't mind if there is a potential target or anything to acquire, but we don't have anything at this end. And we are just happy that it will give us some flexibility.

I understand, especially at this moment, you may not have identified a specific target. But I guess just wondering maybe you can help us form a little bit what you are thinking about the strategy or what -- if you look at your business after kind of like [divesting] all these kind of the noncore and then now focusing on the search and the advertising. As you look into the next few years, what are things that you feel your business needs to be further strengthened, right? And then also the regions that you feel you wanted to explore into or you have opportunity to explore into?

Yes, sure. So yes, it's a very relevant question. So I would say, a high level, first of all, our GX gaming field obviously is growing very fast. And it's also in line with perhaps Opera's overall strategy to provide personalized browser for a particular segment in [strategy] gamers. So I'm quite certain that they will continue to deliver and expand. On the gaming sector, both in terms of growing or continue to grow our GX user base, but also in growing our gaming platform and also our gaming engines.

And if along the way, we have to work with more gaming partners or gaming companies or studios and provide better economies, we will do it. So I think we're actually quite proud and also confident about we are able to make a difference there like I think you will see probably more announcements product-wise latter part of this year. And then I think on top of it, it's more likely continue like -- or maybe we could almost say a continuation of the same strategy that we feel there are similar verticals that we could make a difference.

We mentioned our Web3 for instance. We do getting there, we think it can be perhaps as important as gaming and -- or even more, right? So there's a huge potential. Then we will also invest our R&D resources into it. At the end of the day, we are a tech company, we are very good in tech, not really others. So I think hopefully, we should be able to also create similar very attractive personalized products, which will be appealing to the [energy losses]. So I think this is really what we are thinking about -- we have not really spent lot of time thinking about acquisition or others, is that's what I mean.

Because to us, it's very important we have to win by technology. And the rest, of course, if there's a good candidate like the case when we have bought GameMaker engines. That, of course, is going to be a company you'd probably we should buy, we should do it, but that's not the focus, I guess. The focus is still to win by technology and by innovation.

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

Sure. So like, again, thank you again for joining us today. It's just an exciting time for Opera. As always, I think we are able to demonstrate that our core browser is a good business together with our content and the gaming initiatives, that is great, and with even more numerous growth drivers still to come. And now I think we are able to also demonstrate we have a strong cash balance and also good visibility now about those cash payments from our divestitures, which will leave us with much more visibility about our actual strength as a company. So we hope we will continue to deliver above expectations. So, all in all, we appreciate your time, and 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.