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00:04 Welcome to the Opera Limited Third Quarter twenty twenty one Earnings Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.

[Operator Instructions] 00:32 I would now like to turn the call over to your speaker today, Matt Wolfson, Head of Investor Relations. Please, begin..

00:40 Thanks for joining us today. With me today, I have our co-CEO, Song Lin; and our CFO, Frode Jacobsen.

Before I hand over the call to Song Lin, I would like to remind everyone that in the conference call today, the company will be making statements about its future results and expectations which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

01:01 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. 01:21 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. 01:42 These measures should not be considered in isolation or as a substitute for financial information prepared in accordance with IFRS.

We have also posted unaudited supplemental information on our Investor Relations website that includes historical financial results of Opera and of our investee Nanobank. We will be live tweeting highlights from the call at @InvestorOpera. So, please follow along there during the call and in the future.

02:06 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 Frode will finish up with financials and our expectations going forward.

Song?.

02:20 Sure. Thank you, Matt. 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 thirty seven percent year over year and represented a continuation of our strong growth trajectory with eleven percent sequential growth when comparing with the previous quarters.

02:57 The quarter also represents and earlier than expected that overall margin expansion with twelve percent adjusted EBITDA margin well ahead of our breakeven guidance. Looking ahead, we are confident that our strong performance will continue.

We remain on track to have record year for the company as search and advertising revenues both set new high [indiscernible]. 03:27 Revenue growth continues to be driven by advertising and such, generating ninety eight percent of our total revenue on combined basis.

And for the first time in Opera history, advertising has surpassed such revenues in terms of mix. So, in the third quarter such revenue grew approximately forty five percent year over year, while advertising was nearly double that rate and eighty four percent growth.

03:59 Our advertising revenue is accelerating, thanks to new products and features in credit user engagement, a focus on growing high value users and finally, a rich toolset for advertisers to target and connect with our audiences.

04:15 We continue to focus on products and services that highlight the browser and how it's advertisement services, which we call Browser+ haven't been able to enhance people's online service. 04:31 On mobile, we have continued to expand our offerings in Africa.

So, even though we already have over one hundred million forty million monthly active users in Africa, and represent one of the most relevant internet companies in the region we believe this region processes great growth potential as thereafter eight hundred million users that are not aligned.

04:57 We were pleased to see one of our key partners Google has announced a one billion dollar investment earlier month accompanying that our option is well deserved. Our messaging app, Hype, which we designed in collaboration with local artists in multiple African geographies, and building to the Opera Mini mobile browser is showing strong adoption.

We have launched a [Hype cloud services] [ph] which allow users two participate in conversations about diverse topics such as football or music. 05:32 So, while Hype is still in starting 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 African and had been launched in several countries in Europe and in the U.S., continues to grow in financial significance.

05:55 Advertising revenue from Opera News and our broader platform offerings now make up almost half of our total advertising revenue following over two percent year over year growth. We see tremendous in the AI driven content application space [indiscernible] in new phones and new markets around the world.

06:18 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 follows Opera News.

So, with the English Premium League in full swing, we're seeing very high engagement with quarterly active users growing more than fifty percent from the previous quarters. 06:44 Moving to PCs, 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 post-launching expand is not preparing to enter several new market in Europe, starting with Poland, which happened to be where our development is based and is also one of the faster growing new economies in Europe with additional countries to follow.

07:13 In addition also to cash back, we have also added additional features, including coupon offerings to make [this solution] [ph] even more attractive to our end users. So, all the results are promising and we look forward to sharing more details in the future.

07:31 In combination, those offerings saw as a good examples of how the browser been the [hub] [ph] of managed services and connections of so many points of engagement and thereby monetization opportunities.

07:46 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 the designing browsers with the user experience in mind and how we are able to build on our core assets to expand into adjacent areas.

08:12 As of now, we have over forty million GX users across both mobile and PC and that number continues to grow. So, during the quarter, we also hosted a Opera GX Game Jam focused on game developers, who in turn submitted more than nine hundred games created with Opera’s game maker studio over a few weeks, indicating the power of creation.

08:40 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 were then available to be played natively in the GX browser by millions of users without having to install the [game cost] [ph].

09:04 So, we believe this latest addition to our offering to gamers is another strong indication of potential user’s vibrant space and also of the opportunities ahead. So, stepping a bit back. I'd also like to talk about, [particular strength] [ph] that will benefit Opera.

09:24 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. 09:41 People once their online experience to be well-suited to their individual needs.

So, at Opera improving user experience has driven continuous innovation in all browsers and also related products.

09:57 Consumers are increasingly recognizing the benefit of using a product designed for them for example Opera’s GX browser is already very highly regarded within the gamer community, differentiating itself from a standardized product that just became bundled with the operating system of the device.

10:18 So simply, Opera has become the browser of choice for the hundreds of millions of people who want to choose their browser and the way the normal 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 to look for something more, introducing the improvements and innovations that will drive user engagement, audience growth and naturally our ability to increase monetization.

10:53 So, I will let Frode speak to our financial results, but before I do, I want to let our investors to know that this quarter's result 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 modernize their online lives and get the online experience that choose to best fit their needs.

11:27 So, in summary, Opera’s growth is accelerating our profits and margins are expanding and our products have never been more relevant to more people. 11:37 So, with this, I'll hand over to Frode..

11:41 Thanks, Song Lin. As Song Lin 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. 11:54 Our results this quarter are a strong validation of our Browser+ 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. 12:13 Revenue for the third quarter was a record sixty six point six million, up fifty seven percent year over year and up eleven percent 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 twenty twenty, making us extra pleased with the year over year achievement.

12:42 For the first time, our revenue mix skews towards advertising revenue, which is now fifty two percent of the total, a trend we expect to continue. Specifically in the quarter, search was thirty point seven million, growing forty five percent year over year. This was driven by monetization gains for both PC and mobile browsers.

13:05 Advertising was thirty four point nine million, growing eighty three percent 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. 13:35 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 zero point seven five dollars on an annualized basis, up nineteen percent sequentially and up eighty percent compared to the third quarter of twenty twenty.

13:59 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.

14:19 For example, user growth in the EU was up nine percent compared to the third quarter of twenty twenty, and in the Americas we saw an increase of thirty percent, led by North America, up forty six percent.

At the same time, our users in Asia, which has historically represented our least profitable market continued to decline as we deemphasis that region. 14:45 Our record high revenue across all regions also reflects better monetization in every markets 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. 15:04 In terms of gross margin, the three cost items that scaled with revenue, our tech and platform fees, content cost and inventory costs.

Combined they add up to three point three million, resulting in a gross margin of sixty three point three million or ninety five percent.

15:24 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 have 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. 15:49 As a consequence, we generated better than expected adjusted EBITDA of eight point two million.

Our core margins are very high and when our investments come in below plans, such as it did this quarter, you can see the start of our trajectory towards a more normalized profitability level.

16:10 Our net income for the quarter was twenty three point five million, predominantly driven by the step-up in valuation for the OPay ordinary shares we had not previously recorded at fair value.

16:22 Our operating cash flow was negative at three point four million for the quarter, largely explained by a catch up in the accounts payable balance following the plateauing of marketing costs.

16:35 Combined with smaller non-operating items such as lease payments and development expenditure, we reduced our total cash and marketable securities by eight million, ending the period at one hundred ninety three million. 16:50 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.

17:12 For the fourth quarter, we expect revenue of seventy to seventy two million, representing forty one percent year over year growth at the midpoint. The fourth quarter revenue growth is fueled by strong continued results from Opera’s core search and advertising business and the underlying seasonality.

17:33 Adjusted EBITDA is expected to be between eleven million to fourteen million in the quarter, translating to a margin of eighteen percent at the midpoint. 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.

17:54 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 twenty twenty one revenue guidance adds up to two forty eight to two fifty million, representing fifty one percent year over year growth at the midpoint.

18:16 That constitutes yet another lift versus prior guidance, which stood at forty eight percent growth after the second quarter and was at thirty nine percent for the year when we initially guided back in February.

18:30 For the full year, we expect adjusted EBITDA to be between twenty three million and twenty six 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.

18:49 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. 19:14 Thanks. I think we can now take questions..

19:22 [Operator Instructions] We will take our first question from Lance Vitanza with Cowen..

19:40 Thanks guys. It's Lance at Cowen. A couple of questions for me.

First you call out in the headline that the – in 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?.

20:09 So, hi, Lance. I would say two quick comments for 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 Opera 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..

20:47 Okay, great. And then so if I look back through the beginning of COVID to twenty nineteen, I calculate a two-year revenue CAGR of about nineteen percent, 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?.

21:18 I mean, I can only speak for us. But in many ways, twenty twenty from a revenue perspective was a bit of last year given the decline in particular in Q2, Q3 was essentially back to year over year flat, and then we had a good Q4 again.

And so, if you look at the growth rate from, if you look at Q3 twenty nineteen and Q3 twenty twenty the revenue was about the same when you look at search and advertising. 21:50 So, I think, of course, we came out of it broader and we come out of it with good products, and good uptake.

But the monetization gains we're seeing now is relative to the same level that we had before COVID, but we only got back there by Q3 twenty..

22:11 Okay. I guess where I'm trying to go with this question is, I know it's a little early. I'm not going to ask for guidance, but as we think about our models in twenty twenty two revenue growth, I can't imagine that it continues in the fifty percent to sixty percent range.

So, I'm thinking about moderating from the nineteen percent CAGR to something like, kind of a mid-teens growth rate.

Is that a decent place to be modeling twenty twenty two from a revenue per perspective?.

22:45 As you say, it's also a little bit early for me to go out publicly with guidance now. We do feel great about the trajectory of the business.

I would agree with you that fifty-ish percent year over year growth is a fantastic performance that we've had and I would be – so that the direction of the growth rate will be lower than what it was in twenty twenty one. At these I think that's reasonable, but it's hard to give something very specific.

23:22 We are doing, 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..

23:46 Okay.

Just one last question for me and then I'll turn it over, but on OPay, 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 OPay had raised four hundred million at a one point five billion dollars valuation last May and then maybe raised another four hundred million at a two billion dollars valuation late August, is that right? And then presumably, you've been diluted by these raises.

So, and I know there was a monetization as well. So, could you just confirm what percentage of OPay the company owns today? Thanks..

24:36 Sure. So, number one, it's just the timing of different types of releases. There been one funding around for OPay this year, and that's the one with about two billion dollars post money valuation, which is also the evaluation that Opera, we divested a bit less than a third of our ownership at that valuation.

24:58 So, there's been one when it comes to the share. So, the fair value, so the assumed value of OPay that formed the basis for our recognition of ownership, we updated that at the end of the second quarter to reflected that funding around and that we have not changed since.

25:20 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, this is just an accounting topic.

Our ownership of OPay is, now sense at six point four percent, used to be thirteen point one and we sold twenty nine percent of our stake, so that took us to nine point three. Then there was some equity set aside for employee grants held in the separate company.

25:51 So, we take all that dilution upfront taking it to eight point two and then there was the funding round that took it down to the six point forty four..

26:03 Perfect. Thanks so much for clarifying. Appreciate it. Congratulations on the quarter guys..

26:08 Thanks Lance..

26:11 We'll go next to Mark Argento with Lake Street..

26:16 Good morning, guys. A few quick questions. One is, looks like you're getting some pretty good traction with the news product in North America.

Maybe talk about, kind of what penetration rate you are at, where do 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?.

26:40 Yes, Okay. So, it's Song Lin. I’d that just try to answer a bit broader, right. So, I mean, I would say when it comes to the Europe and North America, the other states is considering that. It is a huge market itself, right. So, I mean, I think it's a run to say penetration.

I would say, we are just getting started, but it is good to see we have a very good [indiscernible], very good retention, very good valuation engagement.

27:06 So, all the numbers are really good, but yes – but then well of course, I guess well it is a rational way, you know where once you of course just being – you know the same time what they're doing now, right? They want to be always be [indiscernible] and be very target focused on the high ARPU value.

27:23 So, not just going for the broader user base, but we want to make show the target [indiscernible] we're going to need it, very high engagement [indiscernible]. So, more like it. I guess to sum up, I would say, number one, we are feeling better on the stage. I think we, at least probably many times growth potentials.

But especially if you reference to our position in Africa, right. 27:41 If you look at Africa we have the final number one. We’re almost dominate in the region and U.S., of course, we also feature in some of their traditional media outlet on others.

So, I would just say, I've got probably many, many times opportunity waiting for us, but on the other end, I think yes, on the other end, I think we just also be very systematic about it. We want to be cautious. And we will make sure we're talking the right audience.

28:05 The other comment I think we will be also saying that we're also trying to focus different verticals both in Africa, but also in other regions that we’re experiencing many particular vertical by vertical and just make sure that on that particular vertical may that be [indiscernible] the AI, intelligent news will be able to differentiate it from the more normal source, right? So, I think that's our general approach.

28:31 So, I feel that there’s still going to be a great growth opportunity ahead of that, but on the other end, we also want to be very cautious and we move steady ahead..

28:42 I know one of, previously the idea was to spending aggressively on customer acquisition.

Maybe talk a little bit about the strategy shift there in particular, 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 happens with the strategy shift? What did you see out there?.

29:09 Yeah. Maybe just a high level comment and Frode could add on top of that. 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 likely yes.

So, I don't think that is a strategy shifting, I think the major difference is more like we are being continue to be smarter.

29:30 You know, previously, we spent, I guess little bit less in the developed regions and now sending [indiscernible] to find out there are also many interesting ways that we can buy those that make us a little more smarter, you know without being too long.

I would just say, the traditional user acquisition is [indiscernible] price that you buy it you may have be retention.

But now, actually programmatic ways, we are able to buy particularly to that particular user's potential value, instead of generic buy and the result of that is that allow us to almost to be extremely targeted and the user what we want. 30:09 But then of course with the potential that we find out maybe many of those we don't want.

And so, we don't have to spend money on it. And I think that’s more actually thinking you know why you we see, we’re able to spend less, but achieve almost the higher revenue compared with what we predicted we will. And we will continue to that trend..

30:28 That’s helpful. And just last one for me. In terms of your search partnerships, remind us, you know 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..

30:48 Sure.

Frode, do you want to comment or do you want me to comment?.

30:53 Yeah, I mean, most important search partners are Google and Yandex. We typically enter three, four year contracts with them. I believe we actually attached them to our annual reports, but with all this juicy stuff grayed out because that we cannot disclose, they've been long partnerships for fifteen plus years probably..

31:22 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 out and renegotiate those every year, every three years?.

31:35 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. So, let's say for another year, post initial term on the same terms, and then beyond that we meet to negotiate.

But they tend to be quite stable in terms of, in terms of important terms. Quite stable and of course yes [Multiple Speakers].

32:08 Maybe I'll just comment that. Yes, more likely the most relevant ones, where I'm moving ahead, we don't expect surprises and if anything will hopefully this to be [off-site] [ph]..

32:20 And when is the next renewal, are we on a renewal cycle this year or next year?.

32:29 I think Google renewal would be for next year. Yandex is in, I think it's twenty twenty two or twenty twenty three..

32:44 Great. Thanks, guys. And congrats on a really strong quarter..

32:49 Thanks, Mark..

32:50 Thank you..

32:53 We'll go next to Alicia Yap with Citigroup..

32:58 Hi. Good evening, 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 distribution of your ad revenue? So, how big is the ad revenue contribution from the America and the Europe and the Asia, if it 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 eighty three percent growth, so I would assume the America growth is like the very good high triple-digit growth.

So, any specific MAU target that you wanted to reach in the U.S?.

33:59 So Alicia, maybe I can begin at least answering your question. We don't disclose revenues at the detailed level by country and geography, but roughly speaking, advertising is quite balanced between Europe and the Americas versus the emerging markets.

34:25 In terms of Opera 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 market.

So, that benefits our advertising revenue stream. And sort of explaining why it is growing faster than search..

35:07 Any color that the user that you wanted to further penetrate in terms of the user base in the U.S.?.

35:14 Yes. Song, I think you touched on that before, maybe you just comment..

35:26 Sure, yes. So, yeah, I would say, I think to be honest, I guess it's probably less about and more like I think overall, our overall strategy just that we do want to achieve the best. In U.S. we are more like high engagement where people are which – feel that people [natural] [ph] with our product.

35:47 So, yes, more like, I would say, yes I mean like, I think at least for the results that we have been it is especially when comes to more or like, just to say there are few types, right. So, when it comes to Opera News, I would say, don’t have typical, I would say, high value users which do have a news reading habit. That's what we see.

It tends to be outside maybe slightly towards middle age, because those ones which have a lot of – need already news while for instance, we're also growing very big in gaming. 36:21 U.S.

is one of the biggest market in [Jersey] [ph] also and they always develop teams, young kids, which probably not readying a whole lot of news, but they do a lot of gaming.

So, yes, so I think we are now [indiscernible] starting the way that we buy of course difference users, cloud difference user doing so well marketing by different means, and we just see that it is a very natural mix among others..

36:47 I see.

And for your 4Q EBITDA guidance, checking 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 2Q?.

37:11 So, what you'll see implicit in our guidance since the rest of the OpEx, 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..

37:39 I see. Okay.

And then lastly, could you might split of the android versus the iOS users for your news app? Just wondering if there have been any impact to your news app from the iOS changes in the recent quarter?.

38:03 Yeah, understood. So yes, I would say, by far majority of our user base are android. That's not by intention it is just because we launched the iOS a lot later. So, yes, our majority would be still on android and that’s why. Well, so let’s say positively not effected or even elevated by the trend.

38:24 And of course we do think it is making sense to continue to invest in iOS, but I guess now, you could see that since the [monetization] [ph] has to be challenging it is also flat [indiscernible] iOS. So, that math is up and hopefully would just benefit on..

38:41 All right. Sounds good. Thank you. Congrats again..

38:47 Sure. Thank you..

38:48 Thanks Alicia..

38:53 There are no further questions at this time. I'll turn the call over to Song Lin for any additional or closing remarks..

39:01 Sure, guys. Okay. Then as I said, thank you all of you for joining us today. As you also have hoped, 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..

39:24 This does conclude today's program. Thank you for your participation. You may disconnect at any time..