This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk05: Thanks for joining us. With me today, I have our co-CEO, Song Lin, and our CFO, Frodo Jacobson. 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 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 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've also posted unaudited supplemental information on our investor relations website that includes historical financial results of Opera and of our Investee Nanobank. We'll be live-sweeting highlights from the call at Investor Opera, so please follow along 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 Frodo will finish up with financials and our expectations going forward. Song?
spk03: Sure. Thank you, Matt. And, you know, this is Song Lin. Thank you, everyone, for joining us today. So I'm pleased to report that Opera once again outperformed delivering financial results for the quarter that exceeded the high end of both our revenue and EBITDA guidance. So revenue was up 57% year over year and represented a continuation of our strong growth trajectory with 11% sequential growth when comparing with the previous quarter. The quarter also represents an earlier than expected start of our margin expansion with a 12% adjusted EBITDA margin well ahead of our break-even guidance. Looking ahead, we are confident that our strong performance will continue. We remain on track to have a record year for the company as search and advertising revenues both set new high watermarks. Revenue growth continues to be driven by advertising and search, generating 98% of our quarterly revenue on a combined basis. And for the first time in Opera history, advertising has surpassed search revenues in terms of mix. So in the short haul, such revenue grow approximately 45% year over year, while advertising was nearly double that rate and 84% growth. Our advertising revenue is accelerating thanks to new products and features, increasing user engagement, a focus on growing high-value users, and finally, a reach toolset for advertisers to target and connect with our audiences. We continue to focus on products and services that highlight the browser and how its adjacent services, which we call BrowserPlus, have been able to enhance people's online experiences. On mobile, we have continued to expand our offerings in Africa. So even though we already have over 140 million monthly active users in Africa and represent one of the most relevant Internet companies in the region, we believe this region possesses great growth potential as there are still 800 million users that are not online. We were pleased to see one of our key partners, Google, has announced a $1 billion investment earlier this month, confirming that our optimism is well deserved. Our messaging app, Hype, which we designed in collaboration with local artists in multiple African geographies and built into the Opera Mini mobile browser, is showing strong adoption we have launched a Hype Club services, which allow the users to participate in conversations about diverse topics, such as football or music. So while Hype is still in its early stages, it more than tripled its registered users during the third quarter. Another good example would be Opera News, which is the number one news app in Africa and has been launched in several countries in Europe and the US continues to grow in financial significance. Advertising revenue from Opera News and our broader platform offerings now make up almost half of our total advertising revenue, following over 200% year-over-year growth, with tremendous potential in the AI-driven content aggregation space with planned rollouts in new forms and new markets around the world. For example, we have leveraged our dominant position in Africa's biggest markets to launch a specialized opera football services using the same AI technology that powers opera news. So when the English Premier League in course win, we are seeing very high engagement with quarterly active users growing more than 50% from the previous columns. Moving to pieces, we continue to invest in innovations and to make it more relevant to our users. So one good example is our in-browser shopping solution, DeFi, and after first launching in Spain, is now preparing to enter several new markets in Europe, starting with Poland, which happened to be where our development center is based and is also one of the faster-growing new economies in Europe, with additional countries to follow. In addition also to cashback, we have also added additional features including coupon offerings to make the solution even more attractive to our end users. So the only results are promising and we look forward to sharing more details in the future. In combination, those offerings serve as good examples of how the browser, being the hub of many services and connections, offers so many points of engagement and thereby monetization opportunities. Gaming represents also an extraordinary opportunity for Opera, with billions of people globally who are spending money on games and related activities. Our GX browser is an excellent example of designing browsers with the user experience in mind and how we are able to build on our core assets to expand into adjacent areas. As of now, we have over 13 million GX users across both mobile and PC, and that number continues to grow. So during the quarter, we also hosted an Opera GX gaming jam focused on game developers, who in turn submitted more than 900 games created with Opera's Game Maker Studio over a few weeks, indicating the power of creation. So we are now also announcing GXC. It's a gaming and self-publishing platform where new users can directly create and publish games for free using the Game Maker Studio. These games will then be available to be played natively in the GX browser by millions of users without having to install the game first. So we believe this latest addition to our offerings for gamers is another strong indication of potentials in this vibrant space and also of the opportunities ahead. So stepping a bit back, I'd also like to talk about a particular trend that will benefit Opera. Many people believe that the history of the browser has already been written. We believe the opposite. that the way people use the internet is changing and that the browser itself has never been more relevant or more important. People want their online experience to be better suited to their individual needs. So at Opera, improving the user experience has driven continuous innovation in our browsers and also related products. consumers are increasingly recognizing the benefit of using a product designed for them. For example, GX Browser is already very highly regarded within the Gamer community, differentiating itself from a standardized product that just came bundled with the operating system of a device. So simply, Opera has become the browser of choice for the hundreds of millions of people who want to choose their browser. And we think the number of people who want to do so will continue to increase. Our intention is to capture this growing market by offering the best browser experience for those that look for something more. introducing improvements and innovations that will drive user engagement, audience growth, and naturally, our ability to increase monetization. So I will next speak to our financial results, but before I do, I want to let our investors know that this quarter's results continue to validate our belief that the browser business is a great business to be in. There is a huge opportunity ahead of us as hundreds of millions of consumers increasingly seek a browser that allows them to harmonize their online lives and get the online experience they choose to best fit their needs. So in summary, WordPress growth is accelerating, our profits and margins are expanding, and our products have never been more relevant to more people. So with this, I'll hand over to Frida.
spk01: FRIDA CHENG YIU- Thanks, Peng Min. As Anglind said, our strategy of increasing the value of our user base by introducing adjacent products and opening new markets is producing record results for Opera. Our results this quarter are a strong validation of our browser plus strategy, and we see the strength continuing through the fourth quarter. As a result, I'm pleased to announce that we yet again raise our guidance for the full year revenue and adjusted EBITDA. Revenue for the third quarter was a record 66.6 million, up 57% year-over-year, and up 11% versus the prior quarter. After a few quarters of favorable comps due to COVID, the search and advertising revenues had returned to pre-COVID levels by the third quarter of 2020, making us extra pleased with the year-over-year achievement. For the first time, our revenue mix skews towards advertising revenue, which is now 52% of the total, a trend we expect to continue. Specifically in the quarter, search was 30.7 million, growing 45% year over year. This was driven by monetization gains for both PC and mobile browsers. Advertising was 34.9 million, growing 83% year over year. This was driven by strong monetization from Opera News and our mobile browsers. Our strategy to improve revenue and profitability by focusing on not just growth, but also improving the value of our user base is clearly demonstrated by Opera's consistent and continuing trend of growing our ARPU. One simple way to demonstrate this is to take our search and advertising revenue and divide it by our entire user base. In the third quarter, each user on average generated a record $0.75 on an annualized basis, up 19% sequentially, and up 80% compared to the third quarter of 2020. Great products and features and the increasing relevance of the browser itself mean that over time, Opera continues to expand the profitability of each and every user. In terms of our user base, we continue to direct our resources towards growing the users with the highest value and highest potential for Opera. For example, user growth in the EU was up 9% compared to the third quarter of 2020, and in the Americas, we saw an increase of 30%, led by North America, up 46%. At the same time, our users in Asia, which has historically represented our least profitable market, continue to decline as we de-emphasize that region. Our record high revenue across all regions also reflects better monetization in every market where we operate. 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 three cost items that scale with revenue are tech and platform fees, content cost, and inventory cost. Combined, they add up to $3.3 million, resulting in a gross margin of $63.3 million, or 95%. On the cost side, most notable is that we managed to drive this growth with less investments and acceleration through marketing and distribution expenses versus what we had considered as basis for our prior guidance. Marketing and distribution expenses remain elevated as we continue our rapid expansion, but slightly decreased from the prior quarter. As a consequence, we generated better than expected adjusted EBITDA of 8.2 million. Our core margins are very high, and when our investments come in below plan, such as it did this quarter, you can see the start of our trajectory towards a more normalized profitability level. Our net income for the quarter was 23.5 million, predominantly driven by the step-up in valuation for the O-Pay ordinary shares we had not previously recorded at fair value. Our operating cash flow was negative at 3.4 million for the quarter, largely explained by a catch-up in the account's payable balance following the plateauing of marketing costs. Combined with smaller non-operating items, such as lease payments and development expenditure, we reduced our total cash and marketable securities by 8 million, ending the period at 193 million. Now, moving to our forward-looking commentary. Our core business continues to perform and grow ahead of expectations, increasing our confidence in our outlook for the rest of the year. We believe our browsers are well positioned to continue to grow both our high margin search and advertising revenues. For the fourth quarter, we expect revenue of 70 to 72 million, representing 41% year over year growth at the midpoint. The fourth quarter revenue growth is fueled by strong continued results from upper score search and advertising business and the underlying seasonality. Adjusted EBITDA is expected to be between 11 to 14 million in the quarter, translating to a margin of 18% at the midpoints. Profits are expected to benefit from the combination of the additional scale we built during the year and the continuation towards a normalization of marketing and distribution spend. However, I want to remind you that as in the past, the fourth quarter profits also benefit from seasonality on the top line. As a consequence, our full year 2021 revenue guidance adds up to 248 to 250 million, representing 51% year-over-year growth at the midpoints. That constitutes yet another lift versus prior guidance, which did at 48% growth after the second quarter and was at 39% for the year when we initially guided back in February. For the full year, we expect adjusted EBITDA to be between 23 and 26 million, which is in the higher end of our initial expectations for the year and well above the expectations we previously set in light of our even stronger revenue growth trajectory. Overall and in sum, Q3 was another great quarter leading to record revenue for both search and advertising. 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 investing in adjacent initiatives such as news and gaming to drive continued growth into the future. Thanks. I think we can now take questions.
spk04: As a reminder, to ask a question, please press star one on your telephone keypad. To withdraw your question, press the pound key. We do ask that you please pick up your handset to optimal sound quality. And we will take our first question from Lance Vitaz with Cowen.
spk06: Thanks, guys. It's Lance at Cowen. A couple questions for me. First, you call out in the headline, that the headline of the press release that ad revenue exceeded search for the first time, but could you just, stupid question, but could you explain why that is significant? Why do we care that advertising revenue is exceeding search revenue? What's the implication of that?
spk01: Hi, Lance. I would say two quick comments to that. Number one, I think it's a demonstration of the combined success of Opera News on top of the browser because the only revenue category we drive from Upper News is advertising. Number two, of course, the advertising revenues are far more... What's the word? Much less concentrated. There's a much longer list of partners in that. So it means that the sum of very many is starting to add up to now be our biggest revenue stream.
spk06: Okay, great. And then, so if I look back through the beginning of COVID to 2019, I calculate a two-year revenue kegger of about 19%, which is outstanding. But my question is, how does that compare to other internet media players? I mean, on a two-year basis and looking through COVID, is opera growing in line with its peers, or is it growing faster or slower than peers?
spk01: I can only speak for us, but in many ways, 2020, from a revenue perspective, was a bit of a lost year, given the declines, in particular in Q2. Q3 was essentially back to year-over-year flats, and then we had a good Q4 again. uh and and so when we if you look at the growth rates uh from if you look at q3 19 and q3 2020 the revenue was about the same when you look at search and advertising uh so so i think uh of course we we came out of it broader and we come out of it with good products and good good uptake but the monetization gains we're seeing now is relative to the same level that we had before covet but we only got back there by Q3 20.
spk06: Okay. I guess where I'm trying to go with this question is, you know, I know it's a little early. I'm not going to ask for guidance, but as we think about our models in 2022, you know, revenue growth, I can't imagine that it continues, you know, in the 50 to 60% range. So I'm thinking about, you know, moderating from the 19% CAGR to something like you know, kind of a mid teens growth rate. Is that a decent place to be modeling 2022 from a revenue perspective?
spk01: As you say, it's also a little bit early for me to go out publicly with, uh, with guidance. Now we, we, uh, we do feel great about the trajectory of the business. Uh, I would agree with you that, you know, a 50 ish percent year over year growth is, is, uh, It's a fantastic performance that we've had, so that the direction of the growth rate will be lower than what it was in 2021. I think that's reasonable, but it's hard to give something very specific. We are investing in our business. We continue to invest at very high levels. in growing our business. And we work on our initiatives that we have talked about before to sustain very attractive growth, also looking ahead, of course.
spk06: Okay, just one last question for me, and then I'll turn it over. But on OPE, you mentioned in your prepared remarks the stepped-up valuation now that you're using a fair value approach. But didn't fair value of the asset itself also increase given that they had raised some money at a higher valuation? I think from my notes, and I'm hoping you can confirm this for me, that OPE had raised $400 million at a $1.5 billion valuation last May and then maybe raised another $400 million at a $2 billion valuation late August. Is that right? And then Presumably, you've been diluted by these raises, and I know there was a monetization as well, so could you just confirm what percentage of OPE the company owns today? Thanks.
spk01: Sure. So, number one, it's just the timing of different types of releases. There has been one funding round for OPE this year, and that's the one with about $2 billion post-money valuation, which is also the valuation that OPERA we divested a bit less than a third of our ownership at that valuation. So there's been one. When it comes to the share, so the fair value, so the assumed value of OPE that formed the basis for our recognition of ownership, we updated that at the end of the second quarter to reflect that funding round, and that we have not changed since. The reason we have a gain now is that we have two types of shares, ordinary and preference shares. And from the past, ordinary shares were recorded under the equity method and not fair value. So it's just an accounting topic. Our ownership of OPE is now sent at 6.44%. It used to be 13.1%. Then we sold 29% of our stake, so that took us to 9.3%. And then there was some equity set aside for employee grants held in a separate company. So we take all that dilution up front, taking it to 8.2. And then there was the funding round that took it down to the 6.44.
spk06: Perfect. Thanks so much for clarifying. Appreciate it. Congratulations on the quarter, guys.
spk00: Thanks, Lance.
spk04: We'll go next to Mark Argento with Lake Street.
spk00: Morning, guys. A few quick questions. One is, it looks like you're getting some pretty good traction with the news product in North America. Maybe talk about what penetration rate you're at, where you think you can go with that, and ultimately, what kind of monetization rates that you could see there just in terms of trying to size up that opportunity.
spk03: Yeah, okay, so it's only helped me that I can just try to also be broader, right? So, I mean, I would say when it comes to, you know, the Europe and North America, all the states, you know, considering that it's a huge market itself, right? I mean, I think it's probably wrong to say penetration. I would say we are just, you know, getting started. But it is good to see we have a very good ranking, very good retention, very good evaluation, engagement. So all the numbers are really good. But, yeah, more like, but then, of course, I guess we're also rational. We, you know, we want to, of course, just be, you know, the same as what they're doing now, right? We want to always be, you know, ally conscious. and be very targeted, focused on the high output value users, not just going for the broader user base, but we want to make sure we target those users who really need it, very high engagement among others. So more like, yeah, I guess to sum up, I would say, number one, we are still in very early stage. I think we at least have probably many times growth potentials, especially if you reference to our position in Africa, right? If you look at Africa, we are by far the number one We are almost dominating in the region. And in the US, of course, you're also facing so many traditional media outlets among others. So I would just say, yeah, we'll have probably many, many times opportunity waiting for us. But on the other end, I think, yeah, on the other end, I think we just also be very systematic about it. We want to be cautious. and we will, you know, make sure we target the right audience. The other comment I think we'll be also saying that we're also trying to focus different verticals, you know, both in Africa but also in other regions that, you know, we will strengthen many particular vertical by vertical and just make sure that, you know, on that particular vertical, may that be sports, may that be some others, the AI, the intelligence will be able to differentiate it from the more normal source, right? So I think that's our general approach. So, high-level, I feel that there's still going to be a great growth opportunity ahead of it, but on the other end, we also want to be very cautious and move steadily ahead.
spk00: I know one of, you know, previously the idea was to spend aggressively on customer acquisition. You know, maybe talk a little bit about the strategy shift there in particular. You know, was the ROI not where you wanted it? And so you kind of retrenched a little bit and focused on, like you said, some of the higher value verticals or what happened with the strategy? What did you see out there?
spk03: Yeah, yeah. Maybe I'll just high-level comment, and Frida can just add on top, right? So no, I don't think it's more like, I don't think it's a strategy shift. We are still spending on very elevated levels compared with before. And more like, yeah, so by all means, I don't think there's a strategy shifting. I think the major difference is more like we are being continuous to be smarter. Previously, we spent less in the developed regions, and now when we are spending there, we find that there are also many interesting ways that we can buy results that make us a lot more smarter. For instance, And without it being too long, I would just say the traditional user acquisition way is to set up a fixed price, and you buy it, you pay our attention. But now, actually, by programmatic ways, we are able to buy users, particularly to that particular user's potential value of it instead of generic buy. And the result of that is that that allows us to almost be extremely targeted and the user what we want. But then, of course, with the potential that we find out maybe many users we don't want, and so we don't have to spend money on it. And I think that's more like the signal why you see we are able to spend less but achieve almost higher revenue compared with what we predicted we will. And we'll continue that trend.
spk00: That's helpful. And this last one for me, in terms of your search partnerships, remind us, who you're partnered with on the search side, and are those contracts that need to be renewed on a regular basis? If you could refresh us on that, it would be helpful. Thank you.
spk03: Frida, do you want to comment or do you want me to comment?
spk01: I mean, most important search partners are Google and Yandex. We typically enter three, four-year contracts with them. I believe we actually attach them to our annual reports, but with all that juicy stuff grayed out because we cannot disclose. They've been long partnerships for 15-plus years, probably.
spk00: And the next time those are set to renew, just like you said, is that kind of an auto-renew situation, or do you guys actually sit down and renegotiate those every year or every three years?
spk01: No, we try to negotiate them every time they renew. So they typically don't auto-renew. There are some instances where the partner has the right to extend the contract, let's say, for another year post-initial term on the same terms. And then beyond that, we meet and negotiate. But they tend to be quite stable in terms of, you know, important terms. Quite stable.
spk03: And then, of course, maybe I'll just comment that, yeah, more like for the most relevant ones, we're moving ahead. We don't expect any surprises. And if anything, we'll hopefully just be upside down.
spk00: And when is the next renewal? Are we on a renewal cycle this year or next year?
spk01: I think Google auto renews, not auto renews, sorry. Google renewal would be for next year. Yandex is in, I think it's 2022 or 2023. Great.
spk00: Thanks, guys, and congrats on a really strong quarter.
spk01: Thanks, Mark. Thank you. Thank you.
spk04: We'll go next to Risha Yap of Citigroup.
spk02: Hi. Good evening. Good morning, management. Thanks for taking my questions. Congrats on the strong quarter and guidance. I have a couple questions here. Number one, can you elaborate the geographic distributions of your ad revenue? So how big is the ad revenue contribution from the America and the Europe and the Asia if you could share a little bit rough percentage? And then also just curious if you could also share the growth rate of the ad revenue coming from America. I guess given thirty eighty three percent growth so I would assume the America growth is like you know the very good like high triple digit growth so any specific and then you target that you wanted to reach in the US so Alicia maybe I can begin at least answering your your question
spk01: We don't disclose revenues at the detail level by country and geography, but roughly speaking, advertising is quite balanced between Europe and the Americas versus the emerging markets. In terms of upper news, Of course, we are spending big marketing dollars, but that is also generating good revenue growth for us, and that has been driven by actually both, but of course the most step up is due to sort of the growth from virtually nothing to actually starting to have a presence in Western markets. That benefits our advertising revenue stream and sort of explaining why it is growing faster than search.
spk02: Any color that the user that you want to further penetrate in terms of the user base in the U.S.
spk01: Yeah, Song, I think you touched on that before. Maybe you just comment.
spk03: Sure, yeah. So, yeah, more like I would just say, I think, to be honest, I guess it's probably less about, more like I think overall our overall strategy, just that way we do want to touch user base in U.S. ways, more like high engagement with people which, you know, feel more natural with our product, among others, right? So, yeah, more like I would say, yeah, Yeah, I mean, I think at least for the results that we have been seeing, especially when it comes to, let's just say that there's a few types, right? So when it comes to open news, I would say those are more typical, I would say high value users, which do have a news reading habit. That's what we see. There tends to be, I would say, maybe slightly towards middle-aged, because those are the ones which have a lot of need of reading news. While, for instance, we're also growing very big in gaming. The U.S. is one of the biggest markets in GX, and there we see a lot of teens, young kids, which are probably not reading a whole lot of news, but they do a lot of gaming. So, yeah, so like high-level, I think we are now quite smart in the way that we buy, of course, different users or acquire different users by influence or marketing by different means, and we just see that it's a very natural, natural mix among others.
spk02: I see. And for your 4Q EBITDA guidance, judging from that, is that right to assume that your sales and marketing spend on the absolute dollar terms as well as the percentage of revenue is actually coming down sequentially from 3Q?
spk01: So what you'll see implicit in our guidance, since the rest of the OPEC sort of moves with more limited steps, is that we essentially expect marketing spend to be at about the same level as the third quarter. I guess on the margin, more likely a bit down. But not a big change relative to the third quarter.
spk02: I see. Okay. And then lastly, could you remind us the split of the Android versus the iOS user for your news app? Just wondering if there have been any impact to your news app from the iOS 14 changes in the recent quarter.
spk03: You understood. So, yeah, I would say by far majority of our user base are still on Android. That's not by intention. It's just because we launched iOS a lot later. So, yeah, so for us, by far majority will be still on Android, and that's why we're also... let's say, positively not affected or even elevated by the trend. I mean, of course, we do think it's making sense to continue to invest in iOS, but I guess now the good thing is that since the monetization has a bit of a challenge, it's also slightly easier for us to acquire users in iOS. So that matches out, and hopefully we'll just benefit from it.
spk02: Okay. All right. Sounds good. Thank you. Congrats again.
spk03: Sure. Thank you. Thanks, Lucia. Thank you.
spk04: There are no further questions at this time. I'll turn the call over to Song Lin for any additional or closing remarks.
spk03: Sure, guys. Okay. Then I'll just say that, you know, thank you all of you for joining us today. As you also have heard that we believe Opera is well positioned to continue to grow and we are very excited about our new initiatives. We appreciate your time and we look forward to speaking with you again.
Disclaimer