Opera Limited (OPRA) Earnings Call Transcript & Summary

Good afternoon, everyone. Thanks for coming to the session. So this is company, Opera. And then with me today, we have CFO of Opera, Mr. Frode Jacobsen; and then also IR, Matt Wolfson. And I'm Alicia Yap; I'm analyst of Opera and actually Head of PanAsia Internet research based in Hong Kong. So I cover mostly some of the Chinese Internet names and also Southeast Asia Internet names as well.

So thank you, all. So without delay, let's maybe get started. I think many of us actually -- or in the audience, actually, not very familiar with the company. So maybe if you can help us to get started. There's been -- Opera has been around for quite some time, right? And if you can give a little bit brief history and also your product portfolio? And also, what is the monetization model of the company?

Yes, sure. Hey, by the way, nice to be here. I'm based in Norway, so where we have the group headquarters, but I can get back more to the geographies. It's -- many of you or maybe your geeky friends will know Opera because we have been around as a company for 30 years as a Norwegian company started to make web browsers. Then it's always about making browsers that stand out enough from like the Chrome and Safari and Edges of the world that people care enough that, "Okay, I'll download that, and I'll use that instead of whatever came with the phone or computer." So that's what we do. We believe we make it a better web browsing experience for the people that download us and use our apps for it. So that's what the company is. We also have some content apps. And we have some balance sheet values, but that's the main part. Headquarter in Norway, as I mentioned. We make our browsers in Europe, in Poland, Sweden, U.K., as key locations. And we also have a Chinese office, R&D center, more around ad tech and content products. How we make money is to drive traffic to partners. So search is -- 40-some percent of our total revenue is mainly Google, driving search queries and collecting revenue share. But we also promote other partners that we call advertising revenue, whether it's bookmarks to promote partners and collect rev share or show ads, normal native ads in content to monetize that way.

Okay. And then -- so maybe if you can drill down a little bit. I know the two main ad revenue: one is the search and then one is the advertising, right? So then within that, what is the split of that?

With -- yes, I mean search is predominantly driven by Google since they are the biggest sort of global. We have a very global footprint. We have close to 320 million monthly active users. I actually should have said that in the introduction because it's not that many European consumer Internet companies that have that kind of user base. So bigger than maybe you would think. On the advertising side, it's, let's say, three components in the role of equal order of magnitude, whether it's integrating bookmarks, showing ads, and also, using our ad platform and the targeting benefits we have as a browser to let also other third-party apps monetize through what we call Opera ads that they connect other apps to.

And then I think the search is mainly -- a lot of that is actually in Europe, right? But I think the news, which is the Opera app, I think, this is in other regions. So if you can elaborate a little bit in in terms of geographic footprint of your app portfolio.

So of our 320 million MAUs, starting with that, about 15% of our user base is in Western markets, in the most strict definition of it. So it's, let's say, the EU countries in Europe, and that's Western Europe region and North America. So there, we have 15% of our base. And then the other 85% is then in our emerging markets with Africa, Asia, LatAm, Eastern Europe, et cetera. We have, for the past years, made products that are very tailored for the Western user bases. We have had an explicit strategy to grow our footprint in the West. So it's still only 15% of our total user base. But 4 years ago, it was 80% of our total user base. So that's -- and that shift has been very key in the tripling of ARPU that we have had over the past few years. So it's been a rewarding strategy, I would say. Because, on average, we say it's about 6x higher ARPU in the average Western country compared to the average emerging countries. So even if it's only 15% of the total user base, it represents about half of total revenue.

Okay. I see. And I guess, the last few quarters, you guys have been delivering pretty good results, right? I think despite there are some macro headwinds, ups and down, but still inside your ad revenue is actually pretty consistent, okay? So how is that? What is the main reasons behind you're able to sustain some of the macro headwinds?

Yes, I think benefit of being -- I mean, we are still a relatively small company, close to $400 million of revenue this year, just over 20% EBITDA margin. But we have a good combination, I would say, of growth and profitability. And I think being small is sometimes also a benefit because we have more maneuvering abilities. So yes, there are macroeconomic headwinds, both in terms of advertiser demand, but also currency since we are such a global company, have such a global business, and then the dollar is strengthening. So expressed in dollars, that's also a headwind. But I think what has allowed us to still have a good trajectory is that we -- U.S. is our fastest-growing country. So we grow in these high-value regions. We still -- our product portfolio, we like to think it's never been better, but I would encourage you to give it a try so you get a feel of what we talk about. But they have been attracting users that spend more and more time in the browser and then more and more activities, so then we can monetize better.

Okay. And I think talking about U.S., which is one or two sideway to, I think, is Opera GX browser, your game browser. So that is something that actually gets you a pretty fast growth driver and then also a much higher ARPU, right? So can you kind of elaborate a little bit the background like how you get into the game browser? And then will that kind of, like, growth is actually -- will be sustainable?

Yes. Because when we talk about growing high-value users, there's the geographic perspective, like Western Europe, North America, but then there's also segments. And it was quite a new thing we did some years back where we said, "Okay, we always develop browsers, and we talk about the functionality and features, and then for anyone who may be interested." But then we have a lot of gamers also amongst our -- in our product teams. And they were saying that there's nobody really has made a web browser for PC gamers, which is a big part of the whole sort of daily routine. And then what we did then was to make a browser that had some specific features that are tailor-made for gamers, integrations and also -- but also the look and feel of it, like the color and the way it behaves on. So it fits with -- if you imagine those, like, black and red setups with keyboards with all the lights and -- like, the whole thing is like gamer setup. And then you don't want like some sharp Chrome or Edge. You want the browser to look like it fits. So that scaled from nothing to be about 24 million users in Q2, by far, highest ARPU product we have, best retention, best engagement metrics. Even though it's still quite early days in how we monetize it, it has like nearly 3x the ARPU of the group as a whole on average. And I think you asked what we think about that going forward. And I think it's still kind of only 24 million users, and the TAM is in the hundreds of millions. So we keep building that -- building awareness around that product, I would say.

So your 24 million is part of that 320 million, right? So that's completely a subset of that?

Yes.

Okay. And then I think on the background is that -- how many years ago was that? There was also a small acquisition that you did, also kind of like -- kind of strengthen your game browser exposure as well, right?

Yes. There's some rendering engine to make kind of simple gaming effects. It was a small U.K. company that we acquired. They had almost no revenue. We made their product free. So it's more -- I would say it was an acquisition, not of revenue, but just of, let's say, a feature set that we take advantage of within the whole gaming ecosystem.

And then since then, actually, then you do more aggressively on growing the user, right? The last two years, actually, is a very fast growth of the game browser.

Yes.

Okay. All right. Okay. And then when you mentioned because of 24 million versus what you have on 320 million, and given this is like 3x higher on the ARPU, and if this is actually sustainable, so does that mean this will be one of the fastest growth driver in the next -- at least in the probably near term, like the next 12 months, also -- 12, 24 months?

I think it's been a super successful segment for us. And what's holding it back is not people not liking the products because it does rate very highly. So it's more about building the awareness of it. If we do a lot of branding ecosystem type of materials, you guys can have a look at YouTube and search for us, and you can see some of it, stuff that's out already. But yes...

Would you characterize some of the sales and marketing spend over the past like 1 and 1.5 years? Some of that is actually used to drive the user awareness and the branding campaign.

Yes.

Okay. And that's actually -- it seems like you're also committed to continue, right, in terms of the sales and marketing spend?

Well, we find it a very effective way too. Because the net result of investing in the brand and awareness is that, when we look at our inflow of new users, new installs, 3 quarters are organic. So that -- because that brand has been in the market for 30 years, and then we build a lot of awareness around the newest products that we have to keep adopting that. But I would say our product lineup as a whole is very made for driving more ARPU headroom. The newer products we have out, we see -- we get better and better at increasing time spent in engagement and activity within the apps. So they are performing quite well.

Okay. Any more details about the user profile on the GX browser that you can share?

Younger. Still more male than female...

Use desktop. There is like 24 million users on GX; roughly 20 million are desktop, with 4 million, mobile. Versus our entire of the 320 million users, it's roughly 75 million that are desktop, with the balance being mobile. So it's kind of like the inverse on GX versus our total portfolio.

I see. Okay. That's very helpful. I think before we drill more on the apps, I think the other thing that you guys recently announced is the collaboration with Google and also your own Aria, right, which is on the AI browser. So can you also talk a little bit more about that? Because it seems like you are one of the earlier browser to really announce that you have a partnership and then doing something on a generative AI front.

Yes. I think for us, browser geeks, 2023 has been an exciting year because there is so much stuff happening with these AI tools or content generation tools. So we very early entered a partnership with OpenAI for ChatGPT. We work with Google and their relevant teams with, essentially, what we want to do, because we believe that these tools will become more and more useful, let's say, companions for people as they browse the web. Then the opportunity we have is that we are not locked within any of those major ecosystems. So for example, when you are Microsoft, you kind of have to work with OpenAI only-ish, and Google really can't do that. They have their own, et cetera. So our benefit is that we can integrate with all of them. And then our pitch almost to the users that want to try us is you download Opera, you can sort of use these integrations across the most popular services to create, hopefully, an experience that's better not doing it via Opera. And the reason why that is even possible to think is if you go to like ChatGPT and ask them like, "What's going on this weekend, right?" That's a website, so it doesn't really know who you are, where you are. ChatGPT, they -- many of these language models don't have current information. They are trained on historic text, right? So it lacks the context. But when you are the browser, first of all, you can have these chats in a window next to your browsing so you can integrate at the same time. And then on the back end, when a user puts in a query, we could say, well, this is most likely a female, seems to live in Hong Kong. When she's asking about what's happening this weekend, here's some -- we check through Google integrations, what is going on in Hong Kong this weekend? And then so the language model gets -- answer the question, which is all you typed in, taking into account that this, this, this, and then in theory, then you get a better answer.

I see. So it's more like a combination of the original search plus the ChatGPT-like kind of stuff?

Yes.

And then answer can actually have both the GPT answer with relevant web links from the search results into that answer. So it's not just the answer that ChatGPT wants to give, but with the additional context of Google search results...

Would you say some of that links is the original sponsor link from the search that will appear on the answer?

When it fits, that's the plan. We don't really -- so if we -- because it's probably then moving to monetization at some stage, right? And I think these types of services, we are very excited about it, not just because of the technical things it enables, but also because it means more normal people will have some interest in their browser. Like, if these tools become talked about, that's pretty good, and so it helps us get new users. So I would say, for us, in terms of revenue impact, the step one is just when we have more users come in that spend more time in the product, then the existing monetization works very well with existing advertising and search. And then I think it's almost like a new layer that -- where we are still very early in the game in where you can integrate partners and drive traffic to partners as part of the AI dialogue.

And I think you -- after -- not long after you released the product, you also announced, is it 1 million user that is on the Aria, right?

Yes. Because, I mean, what we do is we turn it on and then we let the existing user base update, and we don't push it very hard. But then, of course, that number quickly goes up as more and more people update to the latest.

Do we have the latest number like beyond that...

We haven't disclosed it. So then I'll be careful to not say. But, no, we feel very encouraged by that whole trend and what it means to us especially.

I see. I see. And you did mention it is still very early in terms of actual monetization, right? So it's something that you guys are thinking that potentially it could further enhance some of the ad dollars that you can generate. Or is that, like, additional monetization model that you are thinking behind your mind?

I think, as a step one, it just plays right into the existing monetization setup that we already have. So the more users we get and the more time they spend in our apps, the more likely they are to do activities that generate revenue for us. So that one is there from the beginning. That one is always there. But then in terms of seizing new opportunities like other ways to work with partners and drive traffic to partners and so on, that is not where our focus is yet. But yes, I think that could be, let's say, a new revenue category over time.

I see. Maybe before I go on, I wanted to pass a little bit to see if the audience -- any audience wanted to ask a question, like follow up on some of the features that they are doing on the AI with the browser. No? Okay. So maybe we can continue. Okay. A little bit. I guess, maybe to help the audience also understand a little bit better your industry vertical exposure in terms of the advertiser industry vertical, what are some of the common kind of advertiser and then also the ad's formats, right? Because I think -- not on the search, I mean on the Opera side, right, the news app. What type of -- for example, is it like the pop-up screen ads? Or is it more the banner ads? Like, what type of format that's actually generate most of the revenue on the news app side?

I think it's nothing too special on these things in terms of the verticals. I'm sure it's the same verticals that every other sort of inventory owner would see, but from e-commerce, travel, retail, sports, media, like media platforms, subscription platforms, advertising. In terms of the format, I think in the content, it's just you scroll, and every so often, you see an ad in there, just like...

So the feed space more...

The feed, yes.

And then the browser itself, we also have needed advertising from what we call our speed dials, which are pre-installed bookmarks that come preloaded when you were to install that app on your mobile or desktop device. When you open up that launch page, there might be -- depending on the size of the real estate and where you are, 60 kinds of links to websites that we think are -- and we've partnered with companies that we think are very useful to the users. So they don't even view them as ads. It might be a Netflix, an Amazon, a Booking.com, where to the user, they're like, oh, that's Netflix. That's really helpful. But from our perspective, that's an ad. So it's that pre-installed bookmark. We call those speed dials, and that's part of the advertising piece of the browser.

How big is that install bookmark thing? The contribution, it's a smaller part, right? The feed base is the largest?

They're all in the same order of magnitude, I would say.

Okay. All right. All right. And I think you mentioned earlier in terms of your EBITDA margins is about 20%, and it actually seems to be quite consistent. So just wondering, is there any room for further upside on the EBITDA margin, especially over time, when we have additional revenue or efficiency coming out from the generative AI?

Yes. I think our P&L is pretty simple and straightforward, which is a very economies of scale type of business. But our biggest cost items are marketing. We spend about 30% of our revenue on marketing, and then it's down to less than half of that, which is the next one, which would maybe be salary costs, et cetera. But that doesn't scale so much with our size. So I think this year, we've guided to 21% EBITDA margin, something like that. And we also have good cash flow conversion from EBITDA to free cash flow. We could always -- it's an ongoing choice between how much do we want to invest in marketing our products and accelerating like awareness and adoption versus near-term profitability dollars, right? So we've been navigating it. We're trying to grow revenue just over 20%, trying to margin just over 20%. But of course, it's very discretionary when 30% of -- or when marketing costs represent 30% of our revenue. And you can just turn it on and off on a very short notice, right?

I see. So that means like in some quarters that you don't spend some of that marketing dollars, and it is that leverage that you can grow?

Yes, it translates. Because -- but of course, we like to spend -- like, we've been spending relatively stable amount over the past years in various marketing activities. We do that. We try to spend more second half this year than we did first because it just puts us on a good trajectory. It doesn't maybe impact the revenue in the quarter that you spend so much, but it stages, you -- when we're still small, and then we still have a potential to accelerate the growth through awareness.

Can you remind us in terms of the ad dollar spend? Is it more to drive the traffic, right, which is -- could be related to, let's say, some of the app store installations and also potentially some branding ad campaign as well?

Yes. The single biggest cost item is just normal online ads, click here to download. Because that is so expensive on a per user basis. But it only represents about 10% of our new users becoming that way so that we use quite opportunistically. Then we work with OEMs for another 15% of new installs. So it's predictable, stable, cost-effective method of distribution. And then 75% of our new installs are organic. So that comes from the work with influencers and productions and raising awareness around Opera. So I think that it's a quite healthy mix of inflow given that organic is such a big part of it, but we do invest in the awareness of the brand to be in that position.

I see. I see. So in that case, because your GX browser is a lot of it is from the PC, right? So then that doesn't apply in terms of some of the ad dollars. So then when you wanted to promote your GX browser, is it mostly you do more the campaign, like the brand awareness?

There's been a lot of campaign, a lot of gaming influencers, YouTubers to talk about it. We connect with them. It's good because they are quite connected in that space. So they say, hey, I already used your browser. Okay, so then we can pay them a little bit to talk about it or create something together or some content or something that gives them something to talk about to their audiences. So I think that's been a big part in building the credibility of that product.

I see. I see. And then I think in the very beginning, when you introduced your team, it seems that you have the European, Oslo, Poland team, and then also the China team. So maybe a little bit more background in terms of the China R&D team. And then, like, how management actually manage, like, the two separate teams? And then, is there any collaborations between those? And then what's the -- I know one is specifically more on the news, right, in China and then the search is mostly in Europe. But then any of the crossover, right? And then what about kind of the newest one, which is the Aria which is -- where does it come from in terms of the R&D development effort?

Yes, I understand. We've been working together like a global team, super close for -- I've been in the company 10 years, and I'm the least tenured executive. So we don't really have a turnover problem, I guess. But we've operated in the key countries, Norway, Sweden, Poland, and China, for over 10 years in all these places. I think we have those hubs because they are good talent hubs and the products we make a bit historical and a bit like the type of engineering talent that we find. But it's -- I mean you could say the Opera news, the content team that -- as the example, based in China, reports to Head of Mobile who is based in Norway, for example.

I see. Okay. All right. And then -- but then the Poland team doesn't report to the China team, right? So there's like a leadership in Poland that's in charge of that?

Yes, it's a local leadership in Poland. But we all -- I mean, we are a group of business unit leaders, executive responsibilities. We gather as a group quite frequently. So it is operating as one company, I would say, just across these locations.

Okay. Even though it looks like quite diverse and brought right across -- okay. All right. All right. So maybe I'll pause here a little bit to see if anyone from the audience wanted to ask more on the business side as well.

Maybe just -- I guess, I haven't followed the company too well over the last few years, but there were other verticals like OPay, OKash. I don't know if those are still in the business, and if they still -- what the plans are there for those?

You're right. Along the way, we have had ownerships, minority stakes in three private companies that have been -- two of the three have been in like the fintech space, I would say. So one was this Nanobank, which is fintech emerging markets; OKash was one of the brands that we divested. Then we had a social platform around music that we have also divested. And then we have our stake in a company called OPay, which is the biggest one of the 3, that Opera was a founding member of this company, but doesn't play an active role in the management. So we -- that's the one we have left, which we classified as held for sale since we don't have any operational involvement anymore, but we're also not super rush to sell it. The company is doing well. And if we get a good offer, I think we would seriously consider, yes.

Okay. Any other questions? Okay. So maybe that's the right way to the dividend questions or the cash return. So I think you did a special dividend in the beginning of the year, right? And then in the middle of the year in June, I think you also announced there will be -- going forward, it is a semiannual dividend pay. So I know because the business turned out a lot of cash, and there's also a way that you want to kind of return to the shareholder. So maybe a little bit more background on this. I think there's maybe some audience, maybe a little bit confused with the actual cash outflow versus the actual cash dividend with the receivables.

Well, I can begin with taking a bigger step back to say, we try to run the company in the most, like, healthy basic way possible. Like, you should grow a company, but it should ultimately create profit. So I talked before a bit how we think about balancing that. But then we -- you have a company to drive profit, and then we give back to the shareholders. So since 2020, we have given back over $300 million in dividends and buybacks as a starting point, which relative to our market cap, is a quite sizable amount. And we started off buying back shares. We did a major exit of a pre-IPO investor in late 2022. It's a 20% holder of Opera. That's combined with market buybacks, so leads there now to be fewer outstanding shares than what we had pre our 2018 IPO. We actually declined the number of shares outstanding, a good ROI for our investors. And then in the connection with simplifying and monetizing some of these positions that we've had. They've all been good investments, but too distracting, I think, for people, too much to study. So as we have simplified, we paid our first dividend ever of $0.80 in the beginning of the year. And then as you mentioned, we launched a recurring dividend program of $0.80 annualized this summer, $0.40 twice a year. So that's the context, at least, for what we have done, and it just follows this whole very basic. We run the company, and it generates some profit and then good ways to give it back.

And then because Kunlun is the largest shareholder, then I think some of the dividend payable is actually will be offset, right, by the receivable that you're supposed to receive?

Yes, because one of those three assets that we sold, we sold to our biggest shareholder. So now, instead of them paying us for the asset and we paying them dividend, we just agreed that until the dividends you would have otherwise gotten equal the remaining value that they owed us, then there's no cash transaction. So it's been good for us because otherwise, we would have had to pay also then the dividend first, and then they would pay us back...

Sure. Sure. And then lastly, just -- I know it's not too much to ask, but I guess that currently, you probably will plan to keep the dividend paid out steady. But over time, we'll see how the profit and the cash flow coming and then you can decide in terms of the dividend payment amount if there's any chance to further increase that.

We know the textbook behavior that we should have with dividends. So we are very aware of that. But we scale the company. We scale our revenue. We tick up a bit on our profitability. And so, of course, we hope to be in a position to -- the dividend then also following that trend.

I see. Okay. And then I think we almost run out of time. Any last question from the audience?

All right.

Okay. Any conclusions you wanted to make?

Thanks for joining us today. We have -- Matt is based here in New York, so he's quite accessible for people and, yes, we're happy to connect to more people. I think we're -- even though we've been public now for 5 years, we're still in the mode of raising awareness, I think. And -- it's helped quite a bit in the last year or 2 that our products are more and more picked up by Americans, for example. So more people will speak to us like, oh yes, my kids are using that or this and that. So that helps, but yes, we...

I think the shareholder return is also important, right, to bring the awareness as well.

Yes, we want to be a good company to own stock in...

Okay. All right. With that, we're going to leave it. Thank you so much for everyone attending, and then have a good afternoon. Thank you.

Thanks, Alicia.