Opera Limited (OPRA) Earnings Call Transcript & Summary

All right. I think we are on. So good morning, everybody. This is Stephen Ju from the Crédit Suisse Internet Equity Research team. We are very pleased to have joining us Frode Jacobsen, the Chief Financial Officer of Opera. I think we also have Derrick Nueman from Investor Relations as well. So thanks gentlemen for joining us this morning.

Stephen, thanks for having us.

Thank you, Stephen.

All right. So let's talk about the browser first, which is the basic starting point of the business. So it has a fairly global footprint. This includes Africa, Europe and South Asia. And you have different growth drivers for some of these markets. So talk about what's going on from a macro perspective across each of these markets, for Africa, slightly fast mobile growth, where you are probably seeing different types of user behavior versus Europe and other places?

Sure. I can begin. So correct, Opera, to many, a bit surprising as they sort of getting our story, but we have about 380 million monthly users. So we are a really big consumer Internet platform. The browsers are sort of the core of what we are, that is what we have been known for a couple of decades. We have big user bases in Africa, in Asia, emerging Asia, I would say, and in Europe as well. Those are the 3 regions where we are the strongest. They play together quite well. So of course, Africa and other emerging markets will have sort of the strongest growth in number of new users coming into the market and sort of the underlying growth in the market. But I think also on our European user base, we have seen more and more that sort of the alternative that you could say we represent versus a system default browser product has actually increased in popularity also over the most recent years with good traffic growth. Monetization wise, we monetize all the regions, broadly speaking, in the same way, advertising and driving traffic to search partners. Broadly speaking, advertising, we're more tilted towards advertising in the emerging markets and search is a bigger -- driving traffic to search partners is relatively bigger in the developed markets. But there are sort of mix differences, both revenue types are important across geographies.

You talked about the browser as being the core -- the baseline operations. I would also say -- think that when you have the users and the engagement, it affords you the opportunity to roll out other services to that user base. You see this with WeChat, you see this with the other Asia-Pac based communication apps out there. So talk about your other businesses and the other sort of engagement modalities that you're offering as well?

So I think one important realization or something that we have proven a bit to ourselves and sort of the investors that look at us over the past years is that one thing is the sort of the user base and the brand that we have as a catalyst to launch new products and services, the other thing is sort of the fact that the base is a browser and why we call it the browser plus strategy is that the browser is already used for so many things online to consume content, to make transactions, purchases and it has proven to be a really good launchpad for new services because we can take something that our users would normally do, read the news, we have Opera News, that was the first product that we launched on top, and we can try to create a better experience around that. So that is something that we have been very pleased with how well the browser has worked as a baseline like that. We launched Opera News as mentioned, which is probably now the biggest content platform in Africa with well over 100 million monthly users. We have launched financial services as we have now operated a separate company for called Nanobank, which is active in emerging countries. We incubated OPay, which is the biggest mobile wallet service in Nigeria. We've launched OList, which is the beginning of a classifieds product that we have for the African market. And most recently is our efforts around European FinTech solutions, which we are extremely excited about internally, huge ambitions. And it all sort of follows a bit the same recipe on building on that core and creating a good user experience and sort of, let's say, adjacent products.

Yes, Stephen, one thing I'd like to speak. I think often it's overlooked at our core browser and news business has quite good growth rates. We guided to revenues next year of baseline of 25% and most of that is being driven by our browser, which continues to grow a couple of hundred basis points of traffic a year, picks up a couple of hundred basis points of monetization a year. So you end up with a growth rate somewhere in 10% to 20% range. And then as Frode said, our Opera News has 200 million global users. And we're just at the early stages of monetizing, and we saw 70% year-over-year growth last quarter despite COVID. And what's great is, we have the solid baseline of growth and then all these new initiatives that Frode mentioned, they're all upside. So when we think externally to The Street, we think about our baseline growth and what we know, and then historically, we've seen upside from these new initiatives, and hopefully, that continues.

Got you. Frode, you mentioned advertising as a means of monetizing the browser, and I think you have a classifieds business as well. And News, I presume that as sort of feed format, so I think that's a type of format that marketer is already know how to buy. So can you talk about the different types of advertising revenue streams that you have for the business?

Yes. So what we report our browser products, the Opera News, right, always -- it's all user-generated revenue to begin with that. We're not a B2B-oriented company. We monetize our products through driving traffic. So either pure advertising, as you mentioned, it can be in-feed native ads; it can be pre-installed bookmarks with a small icon and something that's included in the product to promote the service. They are, of course, more static than a normal display ad, but they are tailored to the different countries and the language settings and so on. And finally, we monetize search. So what we do is when we -- when the user enters a search in our browser and we send that user to Google or Yandex or another search partner, then we collect the revenue share from that search partner based on their ad monetization. So it's always all fundamentally advertising. It's either direct or indirect via a search partner.

Yes. And I think you just talked about 70% year-over-year growth in your ad revenue in the latest reported quarter. So it seems like, in general, the ad market has been improving month-on-month after bottoming out in April. So -- I mean you operate across a number of different territories so what are you currently seeing with the holidays, we're in the midst of it right now, so I would imagine different regions are probably recovering at different rates. So I was wondering if you can shed some light on what might -- what you might be seeing sort of [indiscernible].

Yes. I mean we were very happy to report our third quarter a couple of weeks back. We were back to year-over-year growth in search -- sorry, from advertising for the quarter as a whole and also in search towards sort of the end of the quarter. And we've also guided for a continuation of year-over-year improvement. So I would say when it comes to the regions that you asked, western markets have recovered faster than emerging markets in our case. The net is now already back to year-over-year growth, which is very positive. And of course, we have guided a continuation of that trend into the fourth quarter, which we're very pleased to sort of see the recovery from sort of the initial COVID impact that we saw in April as you mentioned then, sort of -- but then it has been recovering from there.

I think there has still been some lingering headwinds in your advertising business. I think travel accounted for a decent percentage of the overall revenue?

Yes. Travel has been an important vertical for us. And now we're back to year-over-year growth again. So in spite of the travel segment, of course, not being anywhere near its normal levels, but then other verticals have become more important such as online, commerce, other types of digital services that are sort of stepped in and filled that. So I think as we look ahead, and as we hopefully move into more and more normalization also into 2021, then I think we -- that's something we have in our back pocket, right? There are also segments that have recovery, nice recovery left ahead of the current.

And Stephen to give you a little more detail. I mean one of the nice things is once we sort of have better testing in a vaccine and people can travel again, we probably have 10 basis points of additional growth from that fully recovering. So it's something that -- it's hard for us to predict when that will happen, but it's going to be a nice tailwind for us.

Got it. One other question is that...

That 10% is on our advertising, not our total revenues, just to be clear.

Understood. Understood. One of the questions that we get consistently from investors, I think the optimist in us want to believe that this is probably a permanent change that the virus has ushered in, in terms of online behavior. And the optimist in me wants to also believe that the ad recovery that you're seeing right now has to be, to some degree, from the incremental tailwind from what is an accelerated transition from off-line to online. So you guys have a pretty wide lens into the global population. Based on the user behavior that you're seeing, is the world going back to pre-COVID behavior or from what you can see is this is a permanent change? And how is that type of behavior different from the various markets of around the globe, if at all there's any call out?

Yes. I think, fundamentally, we believe that the impact of COVID and sort of how that has resulted in, in some daily habits changing has also sort of carried with it discovery, let's say, of how things can be done digitally and maybe users or people, in general, discovered something faster than they would have otherwise discovered, whether that is like the ease of purchasing groceries online to making other purchases or other types of experiences. So I think when we talk about the return to normal, I think it's important to keep in mind that we're already on this trajectory of online taking a bigger and bigger share of the pie. I think COVID probably accelerated that trend. I don't necessarily see that it would go sort of back to where it was. Having said that, I would also say that we're talking about being back to year-over-year growth, which is very positive. It's with the per user monetization, I mean, that's still lower than it was last year. And then the user growth still is taking us to a net of growth. I think what we're seeing ahead is sort of a continuation of the, also on a per user basis, return to normal and then benefiting from a bigger user base. But that is sort of upside that we have ahead of us rather than something that we have reported today.

Understood. Let's talk about the franchise in Africa. I think we hear in the West and quite a developed world, I think we always sometimes want to think in terms of copy-paste into emerging markets, since it happened in a particular way in the U.S. and Western Europe, it must happen in a particular way in an emerging market. But I guess, weigh in please, on how you think Internet user and services development in Africa will be the same or different from what we have seen in the U.S. and Western Europe and also versus what you might have seen in China as well?

Yes. I think, overall, if we zoom in on Africa, one of the challenges of the continent over the past many decades has probably been around infrastructure. And even today, we are seeing it's with sort of limited connectivity, expensive data and lower qualities of their connections. But it's quite comparable to sort of, well, you have to go quite far back, but to the building of this physical infrastructure in Europe. But -- so what we believe in is that those limitations that are more digital in nature, as seen in India, that can change very rapidly, maybe not overnight, but it certainly will improve. There's no physical constraints like they cannot -- there's not enough bandwidth or it's definitely something that we expect to normalize, and we believe it can happen quickly. That's on connectivity. And then if we also zoom in on FinTech and payments, that's an area that we have a lot of focus on. I think unlike Europe and North America, where sort of the classic banks and payment cards are very dominating and strong players. So I think in Africa, we'll see more similar to the Chinese market where you have OPesa, we have our -- the company, we incubated OPay. You see this digital players taking a very important role in sort of the specialization of payments in mobile money. So we see that as an opportunity. So overall, we think that the constraints that are currently present are probably -- will probably diminish in importance and turnaround maybe faster than sort of online adoption, et cetera, in western markets.

I think the thing that people don't understand about Africa is it's the fastest-growing region, both in terms of population as well as the Internet. So it's still -- while there's hundreds of millions of users, it's still relatively nascent even compared to in India. And I know there's companies doing e-commerce and other things that are getting quite a bit of attention. And where we're excited is more users. Eventually, this e-commerce stuff will figure out the logistics problems, which tend to be a little tougher in Africa than let's say China. And I think it's a multiyear growth area, which I think we'll start to get more and more attention just given the massive amount of users there and the growth rate.

And Frode, if I understand your prior comment correctly, I think we, here in the West, are probably burdened by infrastructure, right? The previous way of doing things, to learn behavior over the last century. You're actually going to the store to buy something as opposed to just going online. So as you look at Africa overall or your very important operating regions, is that infrastructure, do we -- do the users there need to unlearn certain types of behavior in order for the e-commerce transition given the fact that it ensures the FinTech transition?

Yes. Chiming into that, I think that, that is a benefit with sort of supporting the speed of which that confidence drive economic development. That infrastructure -- we focus on digital infrastructure and connectivity, et cetera, but with -- when even like the sort of roads and rail and other forms of transport and the other physical infrastructure has been lacking. Then, now we're in an age that the digital infrastructure represents such a big part of the economy or the activity that you can have and it can be improved so quickly. Then -- I think then we can see an acceleration and sort of an adoption much faster than the adoption of mobile banking or online purchases, et cetera, in the western world.

Yes. So hopefully, the S-curve will be sharper in terms of new launch [indiscernible].

Yes.

Yes. Gone up, okay, and FinTech, a couple of times. Sometimes you might be too early or at the time you might be off with some products You recently restructured your microlending business. So walk us through what happened there and the rationale?

Well, to begin, I don't think -- we have never felt that we were too early with something. It's more the other way around that we feel we don't have a minute to lose, right? We see opportunities, and we try to cease them, and we try to take positions as quickly as we can. And from day 1, we have sort of looked, in particular, at the fields of content consumption and financial services and tried to be quick. OList, our classifieds solution, is an example of that. We decided in July last year that we thought we had a big opportunity there. And by August, we had the first version out in the market. So we rather try to be as quick as we can. The microlending restructuring that we did, that wasn't really -- that didn't have anything to do with that we felt we had started it too soon or something like that, that was to move that business to the next level in terms of its maturing and sort of the next level of its growth. So I think the fact that we launched that inside Opera was really fast and good way to accelerate that business, leverage the user base and the sort of the distribution power of Opera. We got it off the ground, and we, you can say, institutionalized it a little bit to -- and now we have set it up as an independent player with multiple geographies at scale and sort of ready to continue to grow and also sort of be it's own business, it's own dedicated leadership with full focus on sort of next -- the next chapters with the new services, new geographies that will be offered.

One of the questions that we ask all companies is whether the newest cohorts of users behaves like the existing cohorts of users? So what are you seeing in terms of behavior with your newest users out there today?

That's actually -- it's an interesting thing to look at. I think what we have seen, I've talked to some of our teams, and I think the general theme back is that users that -- the growth in our user base now during the COVID period tended to be a bit younger than our existing user base, millennials, maybe -- so 5, 10 years younger. We've actually seen higher engagements than with the past averages. And I think one very interesting thing when you think about the browser as a core, which is an attractive core, as Derrick also talked about, is that the users we have gotten in, let's say, this COVID time, they are more actively using the features of the product that is unique to Opera compared to system default. So it sort of speaks to sort of taking the time to understand why Opera or what makes Opera different and are using those features even more than the average users we had in the past.

So it does sound like, hopefully, the newest cohorts will become power users over time?

Yes. I mean those are pretty encouraging steps to look at for now.

Yes. Got it. You have guided to increased investment in the fourth quarter as well as 2021, and I think there's a modest compression in your EBITDA margins action of fun -- some of these growth initiatives. So what's next for Opera's product release date? And why is this worthwhile?

Yes. So the fundamental thing here is that the browser business, the Opera News business, is a very high margin business that are driving very good cash flow into Opera. We had about 25% EBITDA margin in Q3. I think we got more or less the same for Q4. What -- the reason why we don't want to sort of get too ahead of ourselves in terms of setting expectations for our margin is that, as discussed, we see a lot of opportunities to continue to scale the company. We see some really -- we've talked about European financial services, that's one that we are particularly excited about just because of the magnitude of the potential and the benefit that we may have compared to other players is that we have tens and tens of millions of people already using our products to make online purchases, for example, in Europe. And we have an opportunity to take a quite active role in that and sort of create value from our user base beyond just sort of advertising and driving them to partners, but actually take an active part in how they could transact online, improve that experience and create a compelling product. So that is something that we just think that is so material and such a big opportunity that we don't want to underinvest in it. We want to make sure that we do what we can to seize that opportunity. And for that reason, we -- at our core, we are a very high margin business. And then it becomes -- but at the same time, we want to be able to drive these massive opportunities. We haven't guided yet for margin next year because we want to see -- we want to be informed by the remainder of this year and the start of next year in order to be able to assess, okay, how quickly will we scale, how quickly do we expand additional markets, the offering itself, and then we can share our expectations for next year as a whole when we announce Q4.

Got you. We're coming up on time here. So to close out, a year from now when Opera is once again presenting at the Crédit Suisse conference, hopefully, in person this time in Arizona, instead of virtual, what do you think will be talking about in terms of your accomplishments of the trailing year?

Hopefully, we'll be able to look back at sort of another 12 months of continued nice user growth and the revenue and profitability of the core continuing to scale and benefit from our, not unit economics, but sort of economics of scale that we have there, which we have done now for many years. And then to be able to see that the initiatives that we have launched, like the European FinTech, the classifieds offering, as well as the Nanobank [indiscernible] that we have OPay that these initiatives that have been the pluses of the browser plus strategy that they continue to perform very well and mature and take a real attractive decisions in their markets. Many of them already have, like the ones we have had out the longest. I think most exciting will be to tell you about the European FinTech, which is actually now very close to being officially launched. And then we have our products and launch plans going through next year.

Got it. Well, gentlemen, Frode and Derrick, thank you very much for joining us once again, and best for luck in the coming year.

Thanks for having us. Thank you.

All right. Take care.

Bye. You too.