Opera Limited (OPRA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the 22nd Annual Needham Growth Conference. Reminder, one-on-one desks are on the second floor and 10-20 on the tenth floor. If you need to request meetings or changes to your individual schedule, you can do that there. I would like -- and now, I'd like to introduce Derrick Nueman from Opera.

Good morning, and really appreciate you guys coming to join me this really early in the morning. Apologize, probably a slide before you get to the meat of the presentation. Thank you. All right. Now that I can actually hit the slides, okay, let's get going. So Opera, it's probably one of the biggest Internet companies very few people have heard of. We've got 350 million global users, very few are in the United States. The 3 regions where we're really strong are Europe, Asia and Africa. And we've been a growing platform both in terms of users and in revenue. And what's really interesting, given our brand, we have a real opportunity to leverage into new products, which we'll get into as we go through the presentation. So as I said, we're a very big consumer brand. Our legacy with the Opera browser, it's continuing to grow. And we've launched a handful of new businesses. The 2 which I'll highlight in this presentation are Opera News. I'll get into more details in a second, but it's an AI news platform with 170 million users that's personalized for each user. And the second one is our microlending business, where we're doing small microloans to people in emerging markets and giving the unbanked access to credit. Before I get into the details, I do want to go through our time line. Many of you may have met with Opera through the past. It was one of the first browsers. The company went private in 2016. It was taken private by a Chinese consortium with the idea that the browser could reignite growth through a combination of growing users and being differentiated; and the number two, increasing monetization. Again, additionally, the idea was with a very strong brand in those 3 key regions, we had the opportunity to launch a bunch of new products. And the company started showing success on the browser, started showing success on launching new products and went public last year on the NASDAQ. Just at a high level, we're again a very big global Internet brand. We have very good revenue growth. We have very good monetization. Our existing core business continues to grow. And we have these new exciting opportunities in news, fintech and other verticals such as classifieds where we're showing hyper growth. And while we're investing heavily in our business, we are seeing margin expansion. So let's start with our Opera browser. Again, it's our legacy business, but it doesn't feel like a legacy business. And when I say that, our browser users keep growing. An example, on our desktop sort of vertical, we grew 16% year-over-year last quarter. Our monetization continues to get better as we optimize our search and our advertising partners. And what this means is we're having low double-digit revenue growth. And we have an avenue, again, to launch all these new products. One thing I want to show you is we have a really big TAM for what we are. I assume most of the people in the room are using a default browser, whether it's Safari or Chrome. But there is a large population who's looking to use an alternative browser, and we put that at about 20% in developed markets. And there's pretty big growth to this market. And from our perspective, we're not sitting here trying to unseat Chrome or Safari. We're here for those people who are looking for a non-default browser to choose Opera. I want to go back here to some of the stats that I referenced earlier. You can see that we've grown both on mobile and PC. Interesting enough, mobile, we're very strong in emerging markets, Africa and Asia. And PC, we're very strong in Europe. Obviously, in a place like Africa and Asia, there aren't a lot of PC users given some of the bandwidth constraints. We have very good brand awareness in a couple of key markets in Africa. As an example, in Nigeria, we have close to 50% market share. And that's important as we launch new products. One of the thing that's different about Opera versus, let's say, a Chrome or Safari is we're a very, very flexible platform. And we have differing offerings for different markets. So if you look all the way at the left, you have -- or sorry, the right, you have Opera Mini. And this is really our product for emerging markets. And what's really great there is telecom networks and data is very expensive, and the telecom networks aren't very good. And what we do is we make sure the pages load quicker and we optimize for data. And that's why we have such strong market share in those markets. Interesting enough, this is based on the first web browser we launched in 2006, which was meant for the very slow networks here in the U.S. As you can see, as you move along the page, we have some more high-end products like Opera for Android, which is a highly featured mobile browser. And then we have Opera for computers, which again is very, very well regarded in the tech community. So again, why do people choose Opera? We believe it's our continuous innovation. And if you look here, you can see some of the things that we've created: tabbed browsing, so if you want to look at multiple browsers -- multiple tabs when you're browsing; a news feed data savings. But as we go forward, we're continually looking for new features where we can differentiate. So we have an ad blocker, a built-in VPN. Last year, we launched a Crypto Wallet. It's something that not a lot of people utilize, but the tech community thinks it's pretty cool. And our most recent innovation is we launched a gaming browser called Opera GX, and it's really meant to help online gamers get more out of their PC using experience. And it's had very good downloads, which really great is the growth has been very organic. And people are using it quite a bit, meaning the monthly active user, the daily active user ratio is very low. So how do we monetize our browser? We do it in 2 simple ways. The first way is we do it through search relationships. So as you can see, there's a search box up there. When you do a search for Google and, let's say, type in running shoes and you buy something or you click on a paid link, we get paid. Google loves us as a partner because we, a, bring traffic to them; and b, it shows their competition in the market. The second way we monetize is through what we call speed dials, so you can see those advertising bookmarks. And when you click on a booking.com as an example and you do a transaction, we get paid an affiliate fee. And those are both very good models, very -- not very interruptive, and we think they help the user experience. So let's get into the hyper growth of our business. Let's start with Opera News. Again, it's an AI-powered content distribution platform. And we use AI, your click streams to serve you a personalized experience. It's a very good product. It's constantly evolving. We're constantly updating our algorithm. As you can see here, it's had very, very strong growth. Over the last 2 years, we've guided 130 million MAUs. The reason why we've been able to scale so fast is we're able to use our browser. So in that 169 million number, 130 million people have access to the browser and about 40 million have access through a stand-alone app. And our focus here continues to be, how do we make that 169 million number grow. But more importantly, how do we increase engagement. These numbers are a little dated. But you can see earlier in 2019, we were one of the most downloaded news apps. I think it was a little -- I think we're a little further down the list in Q3 and Q4. But we've driven really, really good growth in our app. You can see in 1.5 years, we've gone from 8 million MAUs to 41 million MAUs. What's interesting is the markets where we're focused on tend to be underserved. So the first market we went into was Sub-Sahara Africa, and we are, by and large, the leader there. Since then, we've gained some users in places like India, Northern Africa, which is not shaded here. And I don't think we're going to put too much focus on the rest of the world because we want to focus on markets where we can really differentiate and show a difference. Just a little highlighting the brand awareness of Opera News in a given market, I'm going to use Nigeria as an example. We are the most popular news out there by a wide margin. You can see our unaided brand awareness is almost 50%, and it's one of the most well-known news apps and most-used news apps in Nigeria. This is a market of 200 million people. So it's a very interesting product in those markets, and there's not a lot of competition today. I'll leave this slide in here. I don't want to go into details, but you can see how sophisticated our AI content is. And we're constantly evolving this. One of the innovations that we've made over the last 6 months is incorporating an editorial staff to do 2 things. The first thing is, is make sure that the AI is working as planned because sometimes computers will fur up content that isn't good in a given market, and we want to make sure that we assist the machines. The second thing we're doing is using local content bloggers to improve the quality of our content and give it more of a hyper-local band. So an example, in Nigeria, we now have a lot of local bloggers in Lagos, the biggest city, and they're blogging about things that are more specific to that market, and we've seen that health engagement. Now what the really exciting thing about Opera News is the monetization opportunity. So when I gave the past example of where we had been with the browser, it was very, very focused on search and affiliate revenue deals. When we do the Opera News app, there's really 2 opportunities for monetization. The first one is putting in native ads, as you can see here, where we're going to be able to take a lot more ad inventory than before. And today, our ad load on our site is very low. We are still working on improving CPMs in the given market, and our targeting gets better and better every day. A couple of months ago, we launched our own targeting platform, Opera Ads, and we've seen it increase CPMs. The second reason why Opera News is so exciting to us is it provides a lot of inventory for us to launch new offerings. So for example, we'll get into our microlending in a second, but we use the Opera News in Kenya and India to help push our product and help drive cheaper user acquisition. So let's get into our microlending. This business has been absolutely amazing this year. Just before I get into the details, let's talk about it. It's loans for the unbanked in many of these countries, where people don't have access to capital or where they have access to capital, it's from an unsavory source. So we do very small loans, on average of $50 per loan. The average duration is about 2 weeks, and we don't trade cash. We use mobile wallets. And to give you an example of how it works, you download the microlending app. It's called OKash in Kenya, but it's got other names in other markets. You fill out an application. As part of that process, you give us access to your phone, and we look at your apps and your contacts. And our AI will credit score you. And if you're creditworthy, we will give you a loan utilizing a mobile money currency. So for example, in Kenya, it's called M-Pesa, which the local telecom is like PayPal. It's like a local currency. It's Paytm in India. And you have this money in your wallet. You can take money out of it via an agent. But it's a really effective way for people to get money to fund, generally, their businesses or everyday life. So let's talk a little about the stats in the business. So in Q3, we outperformed our expectations. We did 5 million total loans. It averaged $50. We disbursed $250 million of loans. Of that, about 8% were nonperforming, which I think in these markets is a pretty good number. This all equated to about $40 million in revenue and a 20% contribution margin. So a very profitable business. It's interesting because credit risk in this business is very different than traditional lending. Because the loans are so short, we get data in every day. And if things are going well, we can loosen up data -- I mean loosen up lending restrictions to drive revenue faster. And if we're not seeing a high-enough quality, we can tighten our lending to make sure we're getting higher-quality loans. And so this is great. This business continues to perform very, very well for us in Q4. We continue to outperform internal expectations. And what's really great is as we see more and more returning users, we see the credit default levels drop. And we've definitely seen that trend over the last couple of months. So at a high level, let's talk about our growth strategy. So we talked about continuing to grow the browser. It's sort of steady Eddie, growing at low double digits every year. We'll continue to focus on how do we add users, how do we monetize better. We're going to continue to expand into new verticals. We talked about Opera News. We talked about how well microlending is going. We'll be into some new markets pretty soon in 2020. And we have not talked about our classified offering in Nigeria, where we launched a classifieds product mid last year. It's scaled very good to date. We have well over 1 million listings. We have a couple million MAUs. And we have some designs to go very deep into a couple of verticals. The first vertical we're working on is the rental market in Nigeria. That market is very fragmented. There's a lot of fraud. And our hope is on our listing site, we can bring on a lot of supply. We can make it a safe place for people to rent and, at the same time, generate a significant amount of economic benefit for Opera from doing that. Another thing I would highlight in terms of expanding to new verticals is we will launch a couple of new fintech verticals within 2020. We haven't spoken about them publicly yet. But similar to all these things, they're leveraging our existing base of users. And so we think we have a decent chance of success because, again, using people who like Opera, the brand, we think we have a lot to offer. The final part of our investment strategy is investing in companies that we think can drive growth. And the example over here is a company called OPay, which we helped to create and eventually, it spun out very quickly because of its capital requirements. But it's basically Nigeria's biggest mobile wallet and ride-sharing company, and it's not very profitable today. It took in $170 million of outside capital last year, and so we thought it didn't make sense for us to own all of it. But again, it's using the Opera brand to scale very, very quickly. And the great thing about OPay is even though we only own 13%, it's benefiting our brand, our browser brand, our News brand, because most people in Nigeria don't know the difference between OPay and Opera. Real quickly, I just want to show you some of our key markets. There's a really, really big population. So if you look here between India, Indonesia and Africa, we have almost 3 billion user potential. All of these markets have low broadband penetration. So we're in markets with a lot of growth ahead of us, and we're continuing to launch a lot of new businesses. Looking at our management team, the things I would highlight is we have a very global team. Our corporate headquarters are in Norway. We do our audit, our BD, our marketing there. Our browser business is done out of Poland. And then our new initiatives are typically done out of China. And the reason why we've hired R&D talent in China is because we have access to people who we think have had experience in what we're trying to do and can increase our chances of success. And so as we look at initiatives, we're really, really focused on hiring the best people we can to help us move quickly and see how well we can do. So let's get into the financials. So again, we're pretty diversified. We're in multiple regions. We've shown that we can generate significant growth, have very good profitability. And as we look forward, we're investing a lot in this business. And we're entering a period where we took down our margins, and our margins are beginning to inflect positively again. So let's start with our revenue. In Q3, we had an amazing quarter. We grew 119% year-over-year. As you can see, the biggest driver was our microlending business, which went from $0 to $40 million in less than 12 months. We also continue to grow our search and advertising business, which was about $40 million as well. When you look to Q4, we've guided at the midpoint for about 100% revenue growth. And that's a combination of all the trends you're seeing on this slide from search and advertising continue to growing to microlending growing. And as we look forward, we expect search and advertising to continue to have really good rates. Microlending will continue to grow really nicely, obviously, off a higher base, which will challenge some of the absolute growth -- the percentage growth rate numbers. But we're very excited going forward. Talking about profitability, last year, just to give you a sense of what the core business can do, we had 38% EBITDA margins. We made a strategic decision to invest more in the business this year, investing quite a bit more in marketing and product development. This is taking our margins down this year to about 15% on an EBITDA basis. We think it's the right move because our growth has accelerated again from roughly 30% to 100% this year or exiting this year at around 100%. But we think we can drive significant profitability. If you look here at our different cost lines, you can see from 2016 to 2018, as we get bigger, there's a ton of leverage. So as our revenue expands, we don't need to hire a ton of G&A people. We don't need to staff up our sales and marketing staff. And there's only a certain amount you can do from a fixed perspective. So where we are spending money is really around the new initiatives. So when you look at our headcount, if you just took what was existing in the corporate structure, maybe we'll add a couple of heads in 2020, but it's really around creating new revenue opportunities and increasing our TAM. Again, we just sort of talked about investing for growth. We tend to spend money upfront in R&D and we tend to see the revenue benefit later. We did put more money into marketing this year on the browser and the news app. We've seen some good results, some results that aren't as good. And I think we're pretty excited about what all of this is set up for 2020 between all these businesses. So with that, any questions?

Yes?

You've spoken about the kind of users of the browser. Are they coming [indiscernible] PC there on? Or are they getting it from a mobile device? And then how do they -- as most [ growth ], people migrate and move away from that [ growth ].

Good question. So the majority of our users come organically. Let me start with desktop. In that market, we grew 16% year-over-year in terms of users. Some of those users came through OEM relationships. But a lot of those users chose Opera because we have some sort of thing like whether it's privacy or security, the gaming browser or maybe they did see some of our paid marketing. On the mobile side, we rely a little more heavily on OEM. It's still a minority of our ads. For example, if you buy a phone in many African countries, Opera will come as a pre-installed app. We typically are not the default, and we typically get charged when somebody uses the app twice. We think, organically, the OEM deals, paid marketing, that whole combination is great. But again, we want people to choose us because we have some sort of product reason, right, whether it's data savings, whether it's -- they like our privacy and security, whatever it is. So I think to your question, as mobile networks get better in Africa, I think we still have a very compelling proposition. I think our products will innovate. And remember, a lot of people in these countries have only used Opera as their browser and they view Opera as the Internet. So I think we feel pretty good about the world and our ability to maintain our user base on the browser side.

And as far as market share in those markets, who else has the most share?

In most of our markets, our biggest competitor is Google Chrome for a default browser. The reason why I don't say Safari is most people aren't buying $1,000 phones in those markets. But we don't -- how to say this, we view them as competition, but we don't because somebody is going to look to take Chrome because it's the default, not because they want to. And so our focus is, if somebody wants an alternative or there's a certain reason why you wouldn't use a default, we want to be that reason. Yes?

If you look across your businesses, can you give us an idea of the regional mix of revenue for you guys?

Yes. I mean it's changed a little to microlending where Asia is -- India is probably one of our biggest regions, Africa and then Europe. But we've got a pretty good mix between those 3 regions.

What do you -- like you disclosed that India was X percent and Nigeria...

No. We do disclose geographic, but it's somewhat skewed because Google is paying us through Ireland, and that covers a lot of African countries and a lot of other stuff. But if you look at the microlending business as an example, that is all through India and Kenya today. And if you look at the desktop, the search business, the majority of that's from Europe. And so you can sort of back into things, but just really think about Europe, Asia and Africa having a pretty -- it's going to vary by quarter, but a pretty consistent contribution from all 3.

And is there a reason why microlending is in Nigeria?

So we do offer it in Nigeria. We launched it middle of last year, and it's just starting to scale. I think part of the reason why it's scaled slower than India and Kenya is those countries had better mobile wallets. And so I think it was an easier -- just where the development was, it was easier to roll out. And I think you'll see us roll out in some other markets where it's really easy to develop. And hopefully, we can get Nigeria to start to scale like those 2 other markets. Yes?

Can you walk through the economics of [indiscernible]?

Yes. So to us or to the consumer?

[indiscernible] $250 million [indiscernible]?

Yes. So we -- last quarter, we lent out 5 million loans, $250 million of loans dispersed. As I said, 8% of our loans were nonperforming, which has improved in Q4. That -- those loans equated to $40 million of revenue. We had $20 million of credit loss. Between marketing and a rev share to a partner, we ended up picking up another $12 million of cost. So that equated to about a 20% contribution margin. The APRs are a little more difficult to define because when you take out a loan, you end up paying a service fee as well as an interest rate, and they're very, very short-term loans. I mean think of it almost as a credit card where a lot of these people are doing businesses or need money for everyday life, and we're providing them a very easy way to get access to capital. The other point I would make out is the more you come back to our site and use it, the lower interest rates you're going to pay because you're less of a credit risk. And we typically see more credit risk with new users than returning users, not surprising at all. Did that answer your question?

So you've got [ $40 million ] of revenue and $250 million of loans, so that's -- it's like [ 8% ] interest in your earnings, but it's credit loan anyway, so that's going to be, I don't know...

Again, it's because they're short-term loans, there are other competitors in the market, so we're not doing anything that's sort of -- it's very market normal. And again, because these people don't have access to credit and the cost of capital is high in these markets, that's sort of how the microloans work. I mean if you think about credit card fees here or you look at what an ATM service fee would be in a Las Vegas casino, I think there's some similar things there. And again, there's multiple competitors in all these markets, and we've taken a market structure that's pretty normalized.

Is there a regulatory cap on what's being charged?

There are -- it's going to vary based on market. In some markets, there are regulatory caps. Some of the app stores have some rules around it. We do our best to follow the rules. Typically, again, that's why the structure is service fees and interest rates because you charge a certain interest rate, but then you have a service fee.

And you said that there was $20 million of losses on $250 million. So with the losses [indiscernible] the recovery is like 0?

Yes. I mean out of those $20 million, it's close to 0. It's based on -- I mean we've taken a lot of big data. We look at the numbers every single day, and that $20 million is based on the data we're seeing. So if we thought we recovered it, it probably wouldn't be written off.

What's the typical use [indiscernible]? And what's the typical loan duration?

So our typical loan duration is 2 weeks. I think the use cases tend to be either, a, people who are called -- or sort of entrepreneurs. And in these markets, there's high unemployment rates, so a lot of people need capital to sell goods and services. And this product and other people's products allow them to sort of be entrepreneurs in that sense. I think, two, it's used for everyday life. I need to pay for my cellphone, my electric bills. I know I'm getting paid on a certain day. Because we have the AI credit scoring and we look at what apps you have, who your contacts are, I think we weed out a lot of the uses, like betting on sports and stuff like that, that just wouldn't be good for the business. Yes?

You talked about your investment in OPay. Is ORide and OFood also done via investment? Or is that...

Yes, sorry. Yes, at a high level, OPay owns ORide and OFood. And some other stats on it. I mean they're doing $300 million a month in mobile wallet transactions in Nigeria. They're by far the leading ride-sharing company there, and they're doing a lot of really interesting things around payments. And they're going to go to some other African markets, which will benefit us, both from an investment perspective but also from a brand perspective.

Is there a reason why -- I mean there are a lot of countries in Sub-Saharan Africa and a lot of -- when you talk about those countries, I mean is there a reason why you're not more diversified from the standpoint of reach in news or browser or anything like that?

I mean we're -- in browser, we're pretty diversified. At a high level, we like -- at least on the browser and news side, we like Africa better than we like South Asia. Part of that deal is with competition. So we feel like we can acquire users, monetize users better in Africa than we can in, let's say, in India. On the fintech side, since it's more transactional, I think we have more of a balanced view of regions. And so we really look at markets at what returns are we going to see. And one of the things that we don't want to do is go around and chase users. So as an example, Alibaba owns a company called UCWeb. And they spent a ton of money going after market share in India. And as soon as they stopped spending, that market share went away. So we're very cognizant of what is our ROI, where can we be successful. In general, on the news and content, Africa tends to be less competitive than, let's say, in India, for example.

And then you talked about new initiatives. Is that initiative beyond OList and the related OPay service that we expect you will roll out in 2020?

Correct. I mean an example on the fintech side, we're working on 2 separate initiatives. I want to be a little careful here. One initiative, I think, will target our base in Europe. And another initiative will play into our base in another way. But again, the key sort of commonality here is that we're going to use our base to see if we can make it successful.

How about video gaming?

The problem with video gaming is the markets -- I mean we're doing video gaming in terms of the PC in Europe in terms of that, and we've actually seen a decent amount of downloads in the U.S., in places like Brazil, but it's really a desktop product. In the markets we're really strong on, data is very expensive. And it's not that we're against -- not against video gaming, it's just I don't know how popular it's going to be given where they are. Yes?

Maybe just talk a little bit about your ad loads or wherever you are in [indiscernible]?

Yes, it's a hard question. So we've really managed our ad load in terms of our Opera News app. I think we're showing an ad for sort of every 4 or 5 articles shown on our front page. I think we can increase that quite a bit. I think there's also a lot of in-article advertising we haven't sort of optimized yet. When we think about our advertising business, we really think of a couple of drivers. I mean one is more and more inventory. Two is we launched our Opera Ads, we're targeting really, really well now, but we can always get better. And three, in the markets we're in, they're really underdeveloped. So if you think about Nigeria today, it's a branding market. You have consumer brands like Guinness or Coke, you have the banks, you have the telecoms, but you don't have a lot of e-commerce players or small businesses. So we're spending a lot of time trying to bring more and more advertisers online and really trying to shift the market from an offline advertising market to an online advertising market. And so as you do those things, your ability to grow will be much higher. We have an initiative called Opera -- sorry, OLeads, and it's really taking our inventory, putting it together with inventory from other players like Google and Facebook and trying to get a lot of these smaller guys online. We're creating 3 micro sites and then we're charging per lead. I don't know how big that business is going to be, but I think it's really critical in the development of that market. So there's a lot of things we're doing to try to accelerate that ad market.

Do you have [indiscernible]?

I don't have a specific number.

[indiscernible]?

Sorry, which one?

[indiscernible] advertisers?

Yes. I mean it's just a matter of us increasing ad load. I mean you could do that today because it's very easy to insert an ad unit. And I think we've done that. I just think we're -- we've held back on ad load because we want to increase engagement and we focused on engagement first.

On OKash, do you use your own balance sheet? [indiscernible]?

So we have utilized our own balance sheet. Today, we thought those have had the best returns. As we scale this business, assuming it continues with contribution margins at or above current levels, they will be self-funding. It's been a little of a drain on our cash flow over the last 6 months because our loan book has scaled from $0 to $20 million to $55 million. But I think we have adequate finances to fund everything right now. And over time, we can look at other alternatives on how to fund things. But right now, our return on capital is very good. And we have more control over growth, and we sort of we like that dynamic.

So is it fair to say that from an adjusted [indiscernible]?

Sorry, is that -- yes, meaning where we have -- yes, because right at the end of last quarter, we had $55 million held up and it's turning over really quickly, but that's constantly held up in months.

And then my last question. On additional investments [indiscernible] where is the [indiscernible]?

So in terms of our extra spending in '19, we spent a big chunk of that on marketing, both on the news app as well as on the browser. And then we spent -- it's probably 2/3 of it. And the other 1/3 was towards product development, towards launching new initiatives, so hiring people for a OList. We hired more people for news. We hired more people for microlending and some of these fintech initiatives I alluded to. But I think if you think about our business next year and you say, look, this is the news business, this is the browser business, this is our G&A organization, we're not hiring a lot of new people. All right. Well, thank you, guys, for joining. I think Opera -- it's a really exciting time for Opera. We're really happy with where things are. And we look forward to talking to you about our Q4 results when we report in mid-February. Thanks.