Opera Q3 2023 Earnings Call Transcript

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October 26, 2023

There are 7 speakers on the call.

Operator

Welcome to the Opera Limited Third Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's call is being recorded. I would now like to turn the call over to your speaker today, Matt Wolfson, Head of Investor Relations, please begin.

Speaker 1

Thank you for joining us. As usual, I have with me today our Co CEO, Song Lin our CFO, Frode Jacobsen. Before I hand the call over 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. 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.

Speaker 1

You may refer to the Safe Harbor statement in the company's earnings release for details. Our commentary today will also include non IFRS financial measures, including adjusted EBITDA, which are different from our consolidated statements that are prepared and presented based on IFRS. We believe that the use of our non IFRS financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends. These measures should not be measured in isolation or as a substitute for financial information Prepared in accordance with IFRS, we have also posted unaudited quarterly historical financial results of Opera on our Investor Relations website. We'll be live posting highlights from the call from our Twitter account at investoropera.

Speaker 1

So please follow along there during the call and in the future. With that, Let me turn the call over to our Co CEO, Song Lin, who will cover our Q3 operational highlights and strategy, and then Frode will discuss our financials and expectations going forward. Song has called this morning and if his voice gives out, I will step in and finish his prepared remarks if necessary. Song?

Speaker 2

Yes, sure. Thank you, Matt. So, yes, I'm going to call, so I hope my voice doesn't come into safety. But anyway, thanks, everyone, for joining us today. We are very proud to announce our short order results with both revenue and Adjusted EBITDA exceeded the high end of our prior guidance ranges, and our business and product lineup Have been stronger and more strategic than ever.

Speaker 2

So in the Q4, we generated $102,600,000 revenue Compared to the 98,000,000 to 1000000 we have guided, that marks our 11th What's even more exciting is that the over performance was fueled by an accelerating business strength We're in the quarter adding to the trajectory and potential of results ahead. As you will see, our first guidance ranges For the year and Q4 now even begin above the prior high end of ranges For both revenue and adjusted EBITDA. So the health of our revenue over performance is visible in our adjusted EBITDA rates Coming in at $23,800,000 23 percent margin compared to the $18,500,000 to $20,500,000 we have guided. Profit over performance was, in other words, even stronger than the revenue over performance fueled by Product driven strength leading to lower marketing spend than expected. So overall, we continue to credit our financial Thanks to our ongoing focus of growing the highest value users combined with careful cost management.

Speaker 2

The share of our user base that our Western users continued to increase in the quarter, which in turn contributed to an ARPU growth of 11% compared with the prior quarter, or 24% year over year to a new high of $1.31 Advertising revenue grew 24% compared to last year, representing 39% of Total revenue. The growth was driven by a healthy combination of increased total annual advertising revenue from our browsers, Which represents the majority of advertising revenue combined with the hunt online growth in our audience extension business. Search revenue grew 15% in the short quarter, all of which relate to our browsers, Also benefiting from our continued user growth in Western markets. So there are 3 business topics that I would like to focus on today. So I will start with ARIA, our internally developed browser AI.

Speaker 2

Even if we don't directly monetize it And even if it is holidays in creating the automated browser AI for users, Because ARIA is such a strategic area of focus for us that has the potential to greatly And the services that we can offer to our users. So past our initial success Bringing ARIA to our redesigned flagship browser, Opera 1 and to Opera for Android, we continued to roll it out to offer for ILS and offer GX in the Q3. And the first step enables a large segment of our units To take advantage of IRF's exciting new features, being an independent browser of all of us Also, the flexibility to work with a variety of partners in the GMAI space And does not look us into any one specific NAS language model or any specific source of information. ARIA is built up Opera's own composer architecture, which allows it to tap into various language models, Right over the SGBP model and to yellow live information from the web. This makes Its results both more up to date and accurate.

Speaker 2

Opera One also lets you do more With AI, we have less time. Few more technical skills and less effort. ARIA comes with a set of tools That allows you to easily refine your queries and create content with a set of predefined quotes. You can follow personalized Korea with the MyStyle feature that lets you train your browser AI to write like you. It's never been easier To write long pieces of text, from insightful reviews to eloquent e mails or thorough complaints Being able to effectively interact with AI is increasingly becoming an So, Ira has proven to be a hit with results And they are clearly enjoying the experience as evidenced by a mid-being increased resourcefulness and PageView's position.

Speaker 2

Still, we are only getting started and the world is only getting to get used to taking advantage We look forward to keeping you posted on our earlier milestones as We saw this growth in riskiness, awareness and capabilities. Today, we maintain ARIA indirectly, both in terms of We are tracking new results and increasing our user engagement, which in turn benefits our existing sites And advertising partnerships, there is no need to restructure those deals to benefit. Looking ahead, We are excited about how IRR's useful features can directly translate to non tangible informed accommodations And then since we talked about monetization, I welcome to our advertising technology, which I highlight since it is a key enabler of our revenue trajectory. So open products And in 2019, we have launched Opera Ads. Opera Ads is an online advertising platform that helps advertisers maximize the performance of the campaigns and increase engagement with the target audiences.

Speaker 2

So through real time bidding, the platform also connects with Partner inventories allowing our advertising partners to reach Internet in gross worldwide, including our 100 of millions of operators. Opera Ads empowers partners to achieve key performance indicators, Such as extended reach, prolonged audience retention, widespread brand recognition And a favorable return on ad spend. So as a result, Opera Ads channels to the world's largest advertisers, DSP's agencies and e commerce partners across the globe. To give you a sense of its reach, We now handle a volume of 3,800,000 ad requests per second and peak times, making us among 1 of the biggest That being said, as an Internet company, we have a very large user base to start with. We feel that we are still at a rather early stage of monetization and look for a nice growth trajectory ahead.

Speaker 2

And then finally, I will just come into gaming and we offer GX Browser. So our GX user base continues to impress, Up another 10% sequentially to 26,000,000 MAU during the Q4. The ARPU was up Thanks to our passionate team of gamers, engineers, designers and more, we have built a browser that delivers an amazing And unique experience on all fronts. Not only DARPA GX provides flagship features Such as CPU and RAM usage controllers, but we're in this year alone, we have introduced several new features that bring customization And integration abilities to an unparalleled level. This feature gives gamers And they are very influential and seamless, something to talk about as we build the brand.

Speaker 2

And the brand Our Board of GX is something we are very proud of. Our goal is to create the multi gaming brand and the center of our driving gaming ecosystem and community. So that's why Opera GX maintains 1 of the largest Discord server around, collaborates with Thousands of game consoles, including some of the biggest names in the space and provides GameMaker A multimillion downloaded app for indie game development, all in addition to giving gamers a platform by which they can play games. So Corporate GX Now has a very fast growing community of fans of Discord, Twitter and Facebook. Well, it is by itself becoming a category medium brand platform and an important channel for building awareness and stimulating our growth funnel.

Speaker 2

That is a huge achievement for the browser company. Finally, it is important to note that the vast majority of OpRegEx was R and D And so have only just begun to develop brand loyalty in which GX Please take a strong position. They are also the most tech savvy generation yet, We have big experience and activity for building resilient power line communities around near interest So while Game of Thrones are and tend to remain our key focus Our sentiment based offerings, we also see a broad opportunity from this strategy as well. So within content, We have tailored our AI based content recognition platform to dedicated apps for social dance, Great. Thanks for having a look at news.

Speaker 2

On the browser side, just now in September, we partnered with chess.com To put chess right into the browser, so with custom built for both desktop and mobile products, chess enthusiasts Can now enjoy the favorite game, Westworld. They are. In the Opera Special Browser, a chess dotcom item now resides In the sidebar of our customized version of our browser, so you can solve puzzles and battle your rivals While you browse the web, Opera for Android also got a chess scene microphone, complete with And technology lifelines in corporate history, putting us in a very strong position to continue So with that, let me turn the call over to Thrun.

Speaker 3

Thank you, Song. Starting with our financial results, We are very content to see how our product strength and growth strategy translate into yet another record quarter. Year over year growth rates for both search and advertising remain at the level we achieved in the prior quarter, which is well ahead of what we had guided. The fact that we saw a stronger than expected intra quarter acceleration from month to month pleased with the resilience of our growth model and the trajectory of our company even in a volatile macro environment. We continue to benefit from our user shift towards higher ARPU populations, whether geographic or as Song Lin talked about with gamers.

Speaker 3

The rotation of our user base has low monetized users churning out and higher monetized users coming in. As a result, we came in above the high end of our guidance at $102,600,000 in revenue or 20% year over year growth. On a constant currency basis, our year over year growth would have been about 5 percentage points higher or 25%. In terms of profitability, we benefited both by our revenue over performance And the fact that we did not fully utilize the buffer we had built into our marketing spend expectations. Consequently, adjusted EBITDA also exceeded the top end of guidance at CAD 23,800,000 or a 23% margin.

Speaker 3

We generated operating cash flows of $16,200,000 in the quarter And our free cash flow from operations was $13,400,000 The revenue strength within the quarter increased our accounts receivables, But that cash flow impact is a consequence we are happy to live with. During the quarter, We returned $53,000,000 to our shareholders. Our first regular dividend was 30 $6,000,000 of which $11,000,000 was cash to ADS holders and $25,000,000 was offset against our StarEx receivable. As a reminder, our remaining €32,000,000 receivable from the sale of Star X, which is presented separately on our balance sheet, We'll continue to reduce the cash component of upcoming dividends until it has been fully offset. In addition, we repurchased 1,240,000 ADSs for a total spend of $17,000,000 That translates to a recurring annual dividend yield of 6% on the repurchased ADSs benefiting all our shareholders over time.

Speaker 3

Finally, we are very pleased about the nearly 40% increase in the free float of our stock following the secondary offering conducted at the end of the quarter. As a result of our actions over the past 12 months, The free float has increased from 14% to 28%, and our stock is also far more liquid. Now turning to our updated guidance for the full year 2023 Q4. Throughout 2023, We have been able to grow faster and more cost effectively than planned at the start of the year, translating to both higher revenue and higher profitability. We approach the second half of the year with caution, but are pleased to observe a very strong trajectory even in a volatile macro picture.

Speaker 3

As a result, we are on track to exit 2023 in a great position or up 16% year over year at the midpoint and adjusted EBITDA of $22,000,000 to 24,000,000 or 21% margin at the midpoints. Both represent substantial lifts versus our previous implicit Q4 guidance, Increasing our guided year over year growth rate for Q4 by 6 percentage points And our adjusted EBITDA margin by 1.4 percentage points at the midpoints. Consequently, our full year revenue guidance is now $394,000,000 to $397,000,000 In its entirety above our prior range of €380,000,000 to €390,000,000 and representing 19% growth at the midpoint. Our full year adjusted EBITDA guidance is now $88,000,000 to $90,000,000 also in its entirety above our prior range of $80,000,000 to $84,000,000 and representing a 23% margin at the midpoints. Our cost expectations have remained consistent all year, but with less marketing spend than built into our guidance.

Speaker 3

We still expect Q4 to represent a year high in terms of marketing expenses and to exceed 30 1,000,000 of quarterly spend, though our full year marketing cost is now likely to come in Our expectations for the sum of cost of revenue items remain in the mid-20s in terms of percentage of revenue for the year, but will likely be up a couple of points versus Q3 in the seasonally strong 4th quarter. Cash compensation expense will likely return to around Q2 levels in Q4, and we maintain our expectation of a very modest annual increase for the year as a whole. All other OpEx items before adjusted EBITDA are also expected to Somewhat declined sequentially in the 4th quarter and to come in at about $32,000,000 for the year as a whole, in line with prior expectations. In conclusion, the Q3 falls nicely in line with our track record of achieving and exceeding our targets. As discussed in prior calls, our broader opportunity remains very attractive and very exciting, and we will continue to pursue it.

Speaker 3

We look forward to keeping you posted. So with that, I'll turn the call back to the operator for questions.

Operator

We'll take our first question from Mark Argento with Lake Street. Your line is open.

Speaker 4

Yes. Good morning, guys. Nice quarter. Just a couple of quick questions. Obviously, you saw some really nice growth and Strength in the ad business this quarter.

Speaker 4

As you think about the opportunity in the ad market, especially with GX It's growing as nicely. What do you see that kind of mix going forward of kind of ad versus search revenue? I think in the quarter ad revenue is almost 60 How should we think about that mix going forward?

Speaker 3

I can start. I think we continue to so we're very pleased with sort of the core strength of both revenue streams. Advertising revenue at some point passed 50%, now it's close to 60% of revenue And it's scaled even faster than search. And I think as a big picture, that is probably the trend that we would expect Sort of the near to midterm.

Speaker 4

And then just a quick follow-up there. In terms of the GX browser And the excuse me, the ARPU growth that you've seen on that product in particular, is that mostly domestic and Western markets or what's Still of the mix there and how are you seeing that ARPU move up as aggressively as it has?

Speaker 3

I think the GX user base is split between Western and developed markets, perhaps Somewhat more tilted to Western than the user base as a whole. But it taps into high value segments Also in emerging markets, which is participating in its strong ARPU, I think We've been pleased with the ARPU performance within both Western and non Western markets on the product. It still remains a bit under indexing in terms of ad monetization. So back to your first question, that's also an example of the lever

Speaker 4

Good. Just one last one for me. In terms of the marketing spend in the quarter came in a little below what you guys had anticipated. What's the kind of the key KPI you guys are keeping your eyes on there in terms of conversion rates or monetization rates That kind of have you either leaning in or leaning out that spend in any quarter?

Speaker 3

It's ROI based and to some extent also just our own capacity to drive Sort of the brand efforts that we do, so as Song talked about, for example, for GX, we have built a very sizable presence also in social media around the Present also in social media around the products and I think the combination of the branding activities and the more Tactical sort of distribution campaigns and distribution activities is very important for the best possible ROI on the spend. I'd say for Q3 as a quarter, we more or less came in as expected, which It was a bit below what we had guided in terms of spend just because we like to always maintain a buffer that I think we've also historically talked about.

Speaker 4

Great. Thank you.

Operator

Thank you. We will take our next question from Lance Vincenzo With TD Cowen, your line is open.

Speaker 5

Hi, thanks guys. Great quarter. A couple of questions here. The first, With respect to the focus on growing the highest value users, did you mention what proportion of your MAUs are in those markets Today and if could you repeat that? And then where do you think that that sort of split could ultimately go as we think out 3, 5, 10 years?

Speaker 3

Hey, Lance. Yes, so at least in our investor presentation, I'm not sure if it's updated online yet, But, you'll see the updated stats. So for now, Western users represent 16% of the user base, Up from 15% in the prior quarter. It's not such an excellent stat just because it typically moves with decimals. And then every couple of quarters maybe we've been adding a point.

Speaker 3

But it is up relative to the Q2 average. And I think you'll also see in the time line, so I think we The number of users over time and this year is unlike the past many years, We had a growth also from Q3 to Q4, where normally because of seasonality, Q3 Relative to Q2, it's quite flat.

Speaker 5

I mean, is the way to think about that though, I mean, 15%, 16%, regardless, those don't sound like big numbers. Does that suggest that there is a lot of headroom there for continued growth? I mean, do you see Is the target to get to, I don't know, 30%, 70% that kind of a split or where should we be thinking this

Speaker 3

We don't really have a very defined ceiling just because we still have the Perception that we remain still quite small company. You talk a bit about the sizing For Opera GX as well, so but looking ahead and also looking past for the past couple of years, Our strategy is to keep growing in Western markets. We continue to have very good momentum on that and to grow high value users Broadly, such as gamers, for example.

Speaker 5

Okay. On the marketing spend, so my question on marketing spend, Lower than expected, a little bit lower than our estimate. And just to what extent was that perhaps driven by Timing and maybe a decision to just sort of push some of the marketing spend from 3Q into 4Q. Is there any of that that we should be thinking about? Mean, I know you mentioned that you're going to be a little bit over SEK 30,000,000 in the Q4.

Speaker 5

I'm just wondering if that's a result of maybe some investments that got pushed?

Speaker 3

No, it's not really a timing item. When you look at the implicit marketing Guidance for the next quarter, it's the same to a bit down relative to what we had And our prior implicit Q4 guidance.

Speaker 5

Okay, great. And then last for me, you talked about the stronger than expected Acceleration within the quarter as you go month to month in this past quarter. And I'm just wondering, clearly, it sounds like products And technology at Opera had a lot to do with that. But was there perhaps also some improvement in the overall advertising backdrop That helped you or that was improving throughout the quarter as well or maybe the way to phrase it is, is the macro backdrop helping or hurting you these days and Which direction do you see that going?

Speaker 3

I mean, starting with the FX headwind That's worked against us for some time just due to the strength of the U. S. Dollar. I think we saw the headwind decline a little bit now, let's say, only 5 percentage points in the quarter, but it remains a headwind given our very global exposure For the ad market in particular, Song, I don't know if you want to comment on that?

Speaker 2

Yes, I will try. But like I said, my phone is not going anywhere. So but I would say, I think in general, we Good recovery of the traveling, which is very healthy in Q3. Travel is very strong and people like attracted to actually travel benefited from that, Especially also during the summertime, right, which are into Q3. I think we also see a fair e commerce Perhaps Q4, it's also going to be okay.

Speaker 2

So I think the last noticeable ones we see, I think the rest are No, I can answer any second.

Speaker 5

Great. Thanks guys. I appreciate the help.

Operator

We'll take our next question from Alicia Yat with Citigroup. Your line is open.

Speaker 6

Hi. Thank you. So good morning and good evening. Congratulations to the strong quarter and guidance. So I just wonder, I know ARIA is not directly monetized for now, but just wondering How much of the strong performance in the 3rd quarter are benefiting from the availability of ARIA to help the user engagement that also lead So any colors that you can either quantify or kind of qualitatively comment where ARIA It's contributing to some of that strong performance that you even see that month over month accelerating trends.

Speaker 6

So if any color you can share would be great. And then second, I was also wondering Given if this is also driven by the ad cap improvement, any preliminary color that you can share with us How would you expect the revenue growth to be for next year? Thank you.

Speaker 3

Do you want to comment on ARIA or

Speaker 2

Yes. Okay. So I can comment a bit, Irene. So yes, more like Super high level. I think I also discussed it in the script.

Speaker 2

So I would say the only effect of our run is mostly Visible in marketing, well, of course, partly I realize why we are spending less than we want to and get more emails Yes, we love to. So it's very positive. It's of course because AUREL has increased people's awareness that The app is very attractive. We love to see it. So it's quite similar as what we see on GX well.

Speaker 2

Because of gaming, it's a very different setting. And same applies are real when it comes to a generic well support for the SLA mobile. So that has been very helpful. That loan probably has already have some very positive consequence of how we can be more profitable In this quarter, so that's good. In the meanwhile, as discussed, I think we do see Track mode increase on the engagement, both on source volumes and others that we think will also have a monetizable impact.

Speaker 2

That I think, let me do spend more time also. Those are validation potentials, next we are working with partners.

Speaker 3

And then, Alicia, to answer maybe the second part of your question, I think It's still a bit too early to start giving guidance for 2024. So we'll hold that back until our next Call, but we believe that sort of the growth rate that we expect to be able to achieve in the Q4 is at least a nice Indication of the underlying speed of the business as it stands now.

Speaker 6

I see. Great. Thank you. Maybe just one last follow-up. The 4Q EBITDA guidance and the midpoint imply, which obviously is lower than the 1st 3 quarters That you already achieved.

Speaker 6

So I wonder is this is just more conservative as a normal practice or is it Some step up spending, because you mentioned the sales and marketing will be in the $30,000,000 quarterly run rate, right? So it doesn't seem there is any Kind of unexpected step up spending that you budgeted in for this quarter?

Speaker 3

Yes, correct. We've always And sort of the marketing spend to increase as the year progresses and as we build more scale in the total, let's say, machinery around our marketing activities. So we've guided to exceed $30,000,000 You'll come in $3,000,000 $4,000,000 $5,000,000 above that Once you add up what we have in the guidance and comparing that to an average spend per quarter year to date of below 27,000,000 Of course, we've maintained an average spend expectation for Q4, then the margin would be far higher.

Speaker 6

Okay. All right. Thank you.

Operator

Thank you. We have no further questions in the queue at this time. Will turn the program over to Song Lin for any additional or closing remarks.

Speaker 2

So sure. Thank you, guys. I think I'll just wrap it up. Well, thank you for all of your continued support and interest in Opera. So we are in so much potential for Opera, and we are going for it.

Speaker 2

We appreciate your time today and look forward to reporting on our progress And we'll next

Operator

You may disconnect at any time and have a wonderful day.

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