Serving 321.7 million average monthly active users, with cash flow generation and net income of $6 million, Opera will become a must-follow stock after the IPO. With that, the fact that it is a controlled entity and is incorporated in Cayman will not be appreciated.
Source: Prospectus
The underwriters are remarkable banks. Check the image below:
Source: Prospectus
Business Growth
Incorporated in Cayman Islands and headquartered in Oslo, Norway, Opera is said to be one of the leading browser providers and a relevant player in the field of integrated AI-driven digital content discovery and recommendation platforms.
Why is Opera poised to grow? With the current high growth of online content consumption, the company seems to be very well positioned to capitalize on the demand of highly personalized experiences enabled by AI algorithms and big data.
With that, the company also comes to the market with an established global brand and serving 321.7 million average MAUs in three months ended March 31, 2018. In addition, recent launch of Opera News seems to be pushing user growth up. 90.2 million average MAUs accessed Opera News in a period of three months ended March 31, 2018, which represents a dramatic increase from 9.1 million average MAUs for the same period in 2017.
Source: Prospectus
Is this an innovative business model? Is Opera not only a web-browser? Yes, Opera provides web-browsing services, but this activity is becoming revolutionary with the new AI and big data technologies. The following lines are critical to understand how the business is transforming:
��The browsers of today are transforming from web-browsing utilities into smarter products providing users with faster, easier and more personalized access to internet content. As technologies such as AI and big data analytics advance, consumers expect their online experiences to be increasingly customized, interactive and engaging. As a result, consumers are turning to mobile apps that deliver more personalized content discovery, enabled by big data and AI technologies.�� Source: Prospectus
How is the money made? Opera obtains revenues through agreements with search partners and partners that deliver services and advertisements to our users.
The prospectus provides little information on the partners, but it seems obvious that Google (NASDAQ:GOOG), Baidu (NASDAQ:BIDU), Bing, Yandex N.V. (NASDAQ:YNDX) and Yahoo are among them. Check the following lines for further information on some business partners:
Source: Prospectus
Who are the competitors? The competitors are big corporations like Google, Apple (NASDAQ:AAPL), or Microsoft (NASDAQ:MSFT). Opera notes in the prospectus that unlike some competitors, it primarily focuses on markets outside the United States.
Source: Prospectus
With that information, please check the image below provided by StatCounter. Note that Opera is leader in some countries in Africa:
Source: StatCounter
The following is the worldwide usage of each browser:
Source: StatCounter
Employees
The company is not at all small in terms of number of employees. As of March 31, 2018, it has 410 employees with 67.8% working in R&D. The following lines provide more information in this regard:
Source: Prospectus
The company leases facilities in Oslo, Norway, but also in many other locations such as the U.K., the U.S., France, South Africa, China among other countries. Check the following text for further information:
Source: Prospectus
Acquisitions and Business Structure
On November 3, 2016, Kunhoo Software LLC acquired the web browser and consumer business of Opera. As a result of the transaction, the company is now owned by a parent company located in Cayman Islands. Investors need to understand that the shares sold will be that of a company incorporated in Cayman. The image below showing the business structure seems important:
Source: Prospectus
Does it really matter that the company is headquartered in Cayman? Shareholder rights in Cayman are very different from those in the United States. This means that class actions against the Board of Directors or the management may not really work in Cayman. Additionally, judges in the U.S. will not be able to enforce actions against the directors of Opera. Investors in the United States need to be fully aware of this fact. Read the following lines for further information:
Source: Prospectus
Assets: Goodwill and Intangibles represent 84% of the total amount of assets
The acquisition that took place in 2016 is quite relevant since the resulting goodwill from the transaction is large. With $636 million in total assets, the company reported, as of December 31, 2017, $118 million and $421 million in intangible assets and goodwill respectively. Have a look at the list of assets shown in the prospectus:
Source: Prospectus
The following lines provide further details on the origin of the goodwill:
Source: Prospectus
The goodwill can represent a serious risk for shareholders. Take into account that the company has to check the value of the goodwill each year. If this value is impaired, the total amount of assets will diminish, which could lead to massive share price declines.
On the contrary, the goodwill could also represent an opportunity. Kunhoo bought Opera expecting to modify and transform the company. The goodwill registered by Kunhoo shows the positive expectations about this business. If the management can transform the company, the goodwill could be converted into more revenue growth and asset growth.
Small Amount of Liabilities
Readers will appreciate small amount of liabilities of Opera, only $52 million. Check the image below:
Source: Prospectus
With that, the contractual obligations of Opera do not seem significant. The company will only need to pay $16.6 million in total contractual commitments:
Source: Prospectus
Revenue Growth and Profitable Company
As of December 31, 2017, the company reported operating revenues of $128 million, operating profit of $10.2 million, and net income of $6 million. The following is the income statement provided in the prospectus:
Source: Prospectus
The fact that the company was acquired in 2016 makes following revenue growth a bit difficult. With that, the prospectus reads that the consolidated revenue grew by 20.1% in 2017 on a pro forma consolidated basis during 2016:
Source: Prospectus
Positive CFO, Positive EBITDA
It is also very beneficial that the company reported positive CFO of $11.6 million as of December 31, 2017.
Source: Prospectus
Additionally, the adjusted EBITDA was equal to $34 million in 2017:
Source: Prospectus
With that, FCF does not seem that significant. Deducting $7 million in capital expenditures, I get a free cash flow of $4.6 million for the year ended December 31, 2017. The following information was provided about the capex in the prospectus:
Source: Prospectus
Use of Proceeds
It is another beneficial feature that the proceeds from the IPO will not be used to repay debt, or anything similar. With that, the investors will not like that the amount of information about the use of proceeds was not significant:
Source: Prospectus
In addition, Opera did not provide information on when it will need to raise more capital. The following lines provide information in this regard:
Source: Prospectus
Shareholders
The following is the list of shareholders provided in the prospectus. Please note that some members of the management own large amount of shares:
Source: Prospectus
With this information in mind, the company is a controlled entity, which is another serious risk for the shareholders. Investors need to know that the Board of Directors could decide to act in the interest of the large shareholders, which may go against the benefit of minority shareholders. Read the following lines in this regard:
Source: Prospectus
Conclusion
With very decent revenue growth and a business model in a process of transformation, Opera could be a revolutionary company if the big data becomes as important as it is expected.
The fact that Opera is a controlled entity, its large goodwill and its incorporation in Cayman may not please shareholders. However, the company��s financial situation, its profit and the lack of debt are very tempting.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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