Opera Ltd Q3 FY2023 Earnings Call

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.

Thanks for joining us. As usual, I have with me today our Co-CEO, Song Lin; and our CFO, Frode Jacobsen. Before I hand the call over to Song, 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. 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 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. 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 quarterly historic financial results of Opera on our Investor Relations website. We will be live posting highlights from the call from our Twitter account, at Investor Opera, 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 third quarter operational highlights and strategy and then Frode will discuss our financials and expectations going forward. Song has a cold this morning and his voice might fade, I will step in and finish his prepared remarks if necessary. Song?

Yes. Sure. Thank you, Matt. I'm going to try to support my voice as best I can. But anyway, thanks, everyone, for joining us today. We are very proud to announce our third quarter results with both billed and adjusted EBITDA exceeding the high-end of our product line ranges. Our business and product line have been stronger and more strategic than ever. In the third quarter, we generated $102.6 million in revenue compared to the $98 million to $100 million we guided. This marks our levels of 20% top-line growth as well as the milestone of exceeding $100 million in quarterly revenue. What's even more exciting is that this performance was fueled by accelerating business strength during the quarter, adding to the trajectory and potential of results ahead. Our refreshed guidance range is full-year and Q4, now we can begin discussing the high-end of ranges for both revenue and adjusted EBITDA. The health of our revenue over-performance is visible in our adjusted EBITDA, coming in at $23.8 million, a 23% margin compared to the $18.5 million to $20.5 million we had guided. Profitability was even stronger than our revenue performance, fueled by product-driven strength leading to lower market expectations. Overall, we continue to credit our financial success to our ongoing focus on growing the highest-value users combined with effective cost management. The share of our user base that comprises our Western users continues to increase in the quarter, which in turn contributed to an ARPU growth of 11% when 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 O&O advertising revenue from our processes, which represents the majority of advertising revenue, combined with the underlying growth in our audience extension business. Search revenue grew 15% in the fourth quarter, all of which relates to our browsers and benefits from our continued user growth in Western markets. There are three business topics that I would like to focus on today: our AI initiatives, our advertising platforms, and finally, Opera GX browser. I'll start with Aria, our internally developed browser AI. Even if revenues from it are not fully monetized yet, it is increasing engagement and functional opportunities for users because Aria is such a strategic focus for us, with the potential to greatly expand the services we can offer. Our initial success in bringing Aria to our redesigned flagship browser Opera One and Opera for Android continues as we roll it out to Opera for iOS and Opera GX in the third quarter, allowing a large segment of our users to take advantage of Aria’s exciting new features. Being an independent browser, Opera One also has the flexibility to work with a variety of partners in the Gen AI space and does not lock us into any one specific large language model or any specific source of information. Aria is built on our Composer architecture, which allows it to tap into various language models, like the Opera AI GPT model and to develop real-time information from the web. This makes its results both more up-to-date and accurate. Opera One allows users to accomplish more using AI with less time, featuring technical scales and ease of use. Aria provides a set of tools that allows users to easily refine their ideas and create content with predefined options. We can guide Aria with prompts that let it replicate user-specific writing styles. It’s never been easier to write long pieces or insightful reviews, whether addressing concerns or showcasing unique writing styles. Effectively interacting with AI is quickly becoming an essential skill in life. Aria allows users to easily get what they are looking for, whether it’s social information or creating content. It has proven to drive results, and users clearly enjoy the experience as evidenced by increased search queries and page views. However, we are just getting started, and the market is still adapting to these new technologies. We look forward to keeping you posted on our progress as we expand the richness, awareness, and capabilities of Aria. Today, we see Aria positively impacting both user acquisition and user engagement, which in turn benefits our existing search and advertising partnerships. Looking ahead, we are excited about how AI Aria’s useful features can directly translate to monetized recommendations fueled by broadening contextual awareness. Next, I welcome you to our advertising technology, which I highlight as a key enabler of our revenue trajectory. Our products are used every day by hundreds of millions, and in turn, we have launched Opera Ads. Opera Ads is our online advertising platform that helps advertisers maximize the performance of their campaigns and increase engagement with their target audiences. Through real-time bidding, the platform connects with partner inventories, allowing our advertising partners to reach Internet users worldwide, particularly our hundreds of millions of Opera users. Opera Ads empowers partners to achieve key performance indicators such as extended reach, product recognition, widespread brand exposure, and a favorable return on investment. As a result, Opera Ads caters to the world's largest advertisers, DSPs, agencies, and partners across the globe. To give you a sense of its reach, we now handle 3.8 million requests at peak times, making us among the biggest players in terms of audience reach. That being said, we feel that we are still at a rather early stage of monetization and look forward to a strong growth trajectory ahead. Finally, I will mention the Opera GX browser. Our GX user base continues to impress, up another 10% sequentially to 26 million MAU during the third quarter. The ARPU was up 16% sequentially, or 23% year-over-year, now representing an annualized $3 for each user, making it our best monetized product. 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. Opera GX provides flagship features such as CPU and RAM controllers and we have recently introduced several new features, customization options, and integration capabilities. These features give gamers and their favorite influencers something to talk about as we strengthen the Opera GX brand. We are proud of the brand strength Opera GX has achieved. Our goal is to create a leading gaming brand that drives the gaming ecosystem and community. Opera GX maintains one of the largest active consumer bases, collaborating with top global gaming events and influencers. This includes partnerships with significant names in the gaming industry, as well as offering a platform for game developers. Opera GX now has a quickly growing community that is becoming a leader in the space. It is deeply ingrained in tech-savvy Gen Z culture and positions us well for future growth. While we will continue to focus on segment-based offerings, we see broader opportunities within our strategy. We have developed AI-based content recommendation tools for dedicated apps for super fans and hyper-local communities. On the browser side, we recently partnered with chess.com to integrate Chess Vault into our browser. With features for both desktop and mobile products, Chess is now fully integrated into the Opera GX experience. Overall, we believe we have the best product and technology lineup in Opera's history, putting us in a very strong position to continue delivering great new products and robust financial results as we look to 2024 and beyond. With that, let me turn the call over to Frode.

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 bodes well for our outlook, as you can see in our refreshed guidance today. All in all, we are very 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. The rotation of our user base has led to lower monetized users churning out and higher monetized users coming in. As a result, we came in above the high end of our guidance at $102.6 million in revenue, representing 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 from our revenue over-performance and the fact that we did not fully utilize the buffer we built into our marketing spend expectations. Consequently, adjusted EBITDA also exceeded the top end of guidance at $23.8 million, or a 23% margin. We generated operating cash flows of $16.2 million in the quarter, and our free cash flow from operations was $13.4 million. The revenue strength within the quarter increased our accounts receivables, and while there was a cash flow impact, we are happy to accept that. During the quarter, we returned $53 million to our shareholders. Our first regular dividend was $36 million, of which $11 million was cash to ADS holders and $25 million was offset against our Star X receivable. As a reminder, our remaining $32 million receivable from the sale of Star X, which is presented separately on our balance sheet, will continue to reduce the cash component of upcoming dividends until it has been fully offset. In addition, we repurchased 1.24 million ADSs for a total spend of $17 million. That translates to a recurring annual dividend yield of 6% on the repurchased ADSs, benefiting all our shareholders over time. Finally, we are 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 and the fourth quarter. 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. While we approach the second half of the year with caution, we are pleased to observe a strong trajectory in a volatile macro environment. As a result, we are on track to exit 2023 in a great position as we look to the future. For the fourth quarter, we guide revenue to $110 million to $113 million, representing a 16% year-over-year growth at the midpoint. We also anticipate adjusted EBITDA of $22 million to $24 million, or a 21% margin at the midpoint. 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 midpoint. Consequently, our full-year revenue guidance is now $394 million to $397 million in total, above our prior range of $380 million to $390 million and representing 19% growth at the midpoint. Our full-year adjusted EBITDA guidance is now $88 million to $90 million, also above our prior range of $80 million to $84 million, and representing a 23% margin at the midpoint. Our cost expectations have remained consistent throughout the year, but we will have less marketing spend than previously built into our guidance. We still expect Q4 to represent the highest quarterly marketing expenses, exceeding $30 million of spend, although our full-year marketing cost is now likely to come in below that of 2022, which is a great achievement considering our revenue growth. Our expectations for revenue-related costs remain in the mid-20s as a percentage of revenue for the year, but are likely to be up a couple of points versus Q3 in the seasonally strong fourth quarter. Cash compensation expense should return to around Q2 levels in Q4, and we maintain our expectation for a very modest annual increase for the year overall. All other operating expense items before adjusted EBITDA are also expected to somewhat decline sequentially in the fourth quarter, estimated at about $32 million for the year total in line with prior expectations. In conclusion, the third quarter aligns well with our track record of achieving and exceeding our targets. As discussed in previous calls, our broader opportunity remains very attractive and exciting, and we will continue to pursue it. We look forward to keeping you updated. Now, I'll turn the call back to the operator for questions.

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

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

I can start. So we're very pleased with the core strength of both revenue streams, with advertising revenue at some points exceeding 50%. Now it's close to 60% of revenue and scaling even faster than search. I think that is likely the trend for the near to midterm.

And then just a quick follow-up there. In terms of the GX browser and the ARPU growth that you're seeing on that product in particular, is that mostly domestic and Western markets? What’s the mix there? And how are you seeing that ARPU climb so aggressively?

The GX user base is split between Western and developed markets, with perhaps a bit more weight in Western markets than the user base as a whole. But it taps into high-value segments in both Western and emerging markets, contributing to its strong ARPU. We are pleased with the ARPU performance in both Western and non-Western markets for this product. There is still room for growth on the advertising monetization side.

Great. Just one last question for me. Regarding the marketing spend, it came in below your expectations. What key metrics are you monitoring regarding conversion rates or monetization rates that influence your marketing spend decisions?

It's ROI-based and depends on our capacity to manage brand efforts. As Song mentioned for GX, we’ve built a sizable presence in social media around the product. The combination of branding activities and tactical distribution campaigns is critical for achieving the best possible ROI. For Q3, we came in somewhat below what we had guided due to our desire to maintain a buffer.

Thank you. We will take our next question from Lance Vitanza with TD Cowen. Your line is open.

Hi. Thanks, guys. Great quarter. A couple of questions here. First, with respect to the focus on growing the highest value users, could you mention what proportion of your MAUs are in those markets today? And where do you think that split could ultimately go over the next few years?

Currently, Western users represent 16% of the user base, up from 15% in the prior quarter. It's a steady increase, typically moving incrementally. I think we will continue to grow in that segment over time, and we maintain our strategy to attract more high-value users, including gamers.

Could this suggest that there's significant growth potential? What sort of target should we be aiming for in the future?

We don’t have a defined ceiling, as we see ourselves as a relatively small company. We plan to persist in our growth in Western markets and maintain good momentum.

Regarding marketing spend, your spending came in a bit lower. Was this a timing decision, or should we anticipate some spending being shifted from Q3 to Q4?

It’s not a timing issue; the overall marketing guidance for Q4 remains consistent with our prior expectations.

Did you witness a stronger than expected acceleration, not just in user growth, but also in the advertising market? Is the macro backdrop supportive of your performance, or hindering it?

We have experienced some fluctuations. The strength of the US dollar has created a headwind for us, but we saw the impact lessen a little. In terms of the ad market, we have seen a recovery in travel and e-commerce, which positively affects our advertising performance.

In general, we observe good recovery in travel, which has been beneficial for our accounts, particularly during the summer. The e-commerce market has also shown improvement, which we expect will continue into Q4.

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

Hi. Thank you, and good morning and good evening. Congratulations on a strong quarter and guidance. I’m curious about Aria. While it's not directly monetized yet, how has it contributed to user engagement and monetization? Can you quantify or qualitatively comment on its impact?

Song Lin, do you want to comment on Aria?

Yes, I can provide some insights on Aria. At a high level, the effect of Aria is notably visible in marketing. Ultimately, Aria has raised awareness, drawing more users as it is attractive and differentiating. We have seen an increase in traffic and user engagement, which will contribute to monetization. We are currently evaluating its potential along with our partners.

Alicia, to answer the second part of your question, we believe it’s currently too early to provide guidance for 2024. We will maintain that until our next call, but the growth rate we expect in Q4 is an encouraging indication of the business's foundation.

One final follow-up on your Q4 EBITDA guidance. It appears lower than the previous quarters you've achieved. Is this a reflection of typical consolidation, or are you planning unexpected increased spending?

Yes, our marketing spend tends to increase as the year progresses. We've indicated that Q4 will exceed $30 million, but the average spending year-to-date has been just under $27 million. We’ll maintain a higher marketing spend this quarter, which reflects routine expectations.

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

Sure. Thank you, everyone. I would like to wrap it up by expressing our gratitude for your continued support and interest in Opera. There is immense potential for Opera, and we are fully committed to pursuing it. Thank you for your time today, and we look forward to reporting on our progress in the next call.

This concludes today's program. Thank you for your participation. You may disconnect at any time and have a wonderful day.