Opera Ltd annual report, Q4 FY2018

Opera Limited 2018 Form 20-F Summary

Business Context and Reporting Period

Opera Limited filed an annual report on Form 20-F for the fiscal year ended December 31, 2018. The company is incorporated in the Cayman Islands, headquartered in Oslo, Norway, and reports under IFRS as issued by the IASB. Its Nasdaq-listed ADSs trade under the symbol OPRA, with each ADS representing two ordinary shares.

Opera operates browser, AI-powered content discovery and recommendation, advertising, retail, technology licensing, and emerging fintech businesses. The 2018 results reflect the Successor Group following the 2016 acquisition of Opera Software AS; prior-period comparisons are therefore affected by predecessor/successor and pro forma presentation issues.

Key Financial Metrics

US$ in thousands, except percentages and per-share data	2017	2018	Change
Revenue	128,893	172,276	+33.7%
Operating profit	10,239	45,301	+342.4%
Operating margin	7.9%	26.3%	+18.4 percentage points
Net income	6,064	35,160	+479.8%
Diluted income per ADS	US$0.063	US$0.337	Improved
Adjusted EBITDA	34,119	65,794	+92.8%
Operating cash flow	11,653	33,828	+190.3%
Cash and cash equivalents at year-end	33,207	177,873	+435.6%

Revenue consisted of search revenue of US$80.2 million, advertising revenue of US$59.9 million, retail revenue of US$9.3 million, and technology licensing and other revenue of US$22.9 million. Search represented 46.6% of revenue and advertising represented 34.8%.

Operating expenses increased modestly to US$127.0 million from US$124.1 million, while declining to 73.7% of revenue from 96.3%. Cost of revenue increased sharply to US$13.3 million, primarily because of the new retail business. Personnel expense declined to US$41.0 million, including US$4.8 million of share-based remuneration, and depreciation and amortization declined to US$12.7 million.

Liquidity, Debt and Capital Resources

• Net cash provided by operating activities was US$33.8 million.
• Investing cash outflow was US$47.3 million, primarily reflecting the US$30.0 million StarMaker investment, the US$9.5 million OKash acquisition, and other investments and loans to associates and joint ventures.
• Financing cash inflow was US$158.9 million, principally from the IPO and concurrent private placements.
• Cash and cash equivalents were US$177.9 million at December 31, 2018, including US$177.6 million of unrestricted cash and US$0.2 million of restricted cash.
• Finance lease liabilities and other loans totaled approximately US$4.8 million including current and non-current amounts; contractual debt obligations were US$4.5 million.
• Total liabilities were US$49.8 million against total equity of US$775.5 million. Management stated that existing liquidity was sufficient for ordinary-course working capital and capital expenditures for at least the following 12 months.
• Contractual commitments totaled US$12.6 million, including US$7.8 million of operating leases, US$4.5 million of debt obligations, and US$0.2 million of finance lease liabilities.

Material Changes Versus the Prior Comparable Period

• Revenue growth was driven by higher browser users, improved search monetization, rapid Opera News advertising growth, and the launch of retail sales.
• Search revenue increased 17.6% and advertising revenue increased 45.9%. Retail revenue began scaling in the second half of 2018.
• Operating leverage materially improved profitability. Operating margin rose to 26.3% from 7.9%, and net income increased to US$35.2 million from US$6.1 million.
• Opera News average monthly active users increased to 111.7 million in 2018 from 36.4 million in 2017. Smartphone and PC users totaled 251.1 million on an average basis, compared with 216.2 million in 2017.
• Average total monthly active users across the platform were 326.7 million in 2018.
• Cash increased substantially following US$167.8 million of net IPO proceeds and related financing activity.
• Opera invested US$30.0 million in StarMaker for a 19.35% interest and acquired the OKash microfinance business for US$9.5 million from related-party associate Opay.
• Opera repurchased 728,912 ADSs for US$4.9 million by year-end. The program was completed in February 2019 at a total cost of approximately US$10.6 million.
• The company adopted IFRS 9 and IFRS 15 effective January 1, 2018. The reported impact was not material to 2018 operations; opening retained earnings were reduced by US$629 thousand in aggregate.

Guidance, Outlook, Commentary and Unusual Items

Management did not provide formal numerical 2019 revenue or earnings guidance in the filing. Management expected continued user growth, higher monetization per user, increased Opera News monetization, expansion of retail and fintech activities, and further investment in AI, big data, products, and distribution. Management also expected operating expenses to rise in absolute terms, while declining as a percentage of revenue over time through scale and operating efficiency.

• Retail revenue was expected to stabilize near fourth-quarter 2018 levels in the near term while Opera assessed broader expansion.
• The OKash microfinance business disbursed more than 280,000 loans in Kenya during the fourth quarter of 2018. Management identified credit risk, delinquency, regulatory compliance, and execution as material risks to this expansion.
• Search partners remained concentrated: Google and Yandex accounted for approximately 49.3% of 2018 revenue, while search revenue represented 46.6% of total revenue.
• Revenue was also concentrated by monetization-partner domicile, with Ireland and Russia accounting for 44.6% and 10.1%, respectively.
• Opera reported a remaining material weakness in internal control over financial reporting, involving formalized policies, procedures, risk assessment, control activities, monitoring, and sufficient IFRS and reporting resources. Management concluded that disclosure controls and procedures were not effective as of December 31, 2018.
• Goodwill was US$421.6 million and intangible assets were US$115.4 million. Although market capitalization was below book equity, the annual impairment test resulted in no impairment charge. Future impairment remains a potentially material risk.
• Related-party transactions were significant, including US$10.9 million of 2018 revenue from Opay, US$7.5 million of marketing and distribution expense with 360 Mobile Security, and the StarMaker investment and OKash acquisition involving entities associated with the chairman and CEO.
• Opera did not plan to pay cash dividends in the foreseeable future and intended to retain earnings for growth.
• The filing disclosed no material off-balance-sheet arrangements and no legal proceedings that management believed were likely to have a material adverse effect.

Principal Investor Verification Items

• Verify the sustainability of revenue growth and the extent to which advertising growth, retail revenue, and related-party or non-recurring activity contributed to 2018 results.
• Assess concentration and renewal risk under the Google and Yandex search agreements, which extend to 2020 or beyond under specified renewal provisions.
• Review the quality and collectability of receivables, particularly the US$4.3 million due from Opay and other related-party balances.
• Monitor the performance, credit losses, regulatory status, and funding needs of the OKash and broader fintech operations.
• Evaluate the impairment sensitivity of the US$421.6 million goodwill balance, particularly to revenue growth, operating expense ratios, and discount rates.
• Track remediation of the material weakness in internal controls before the company becomes subject to additional Sarbanes-Oxley reporting requirements.
• Consider governance and related-party risks arising from the chairman and CEO’s approximately 65.1% voting power and the company’s controlled-company status.
• Review the effect of IFRS 16 adoption in 2019, which the filing estimated would increase assets by approximately US$15.0 million and lease liabilities by approximately US$15.0 million at January 1, 2019.