Earnings Call Transcript - OPRA Q4 2022

Operator, Operator

Welcome to the Opera Limited Fourth Quarter and Full Year 2022 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, Matt Wolfson, Head of Investor Relations. Please begin.

Matt Wolfson, Head of Investor Relations

Thank you for joining us. As usual, I have with me today 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. 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 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 considered in isolation or as a substitute for financial information prepared in accordance with IFRS. We've also posted unaudited quarterly historic financial results of Opera on our Investor Relations website. We'll be live tweeting highlights from the call, 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 operational highlights and strategy, and then Frode will discuss our financials and expectations going forward. Song?

Song Lin, Co-CEO

Yes, sure. Thanks, Matt, and thank you everyone for joining us today. We are very pleased to announce our record results of the fourth quarter, which well exceeded our previously issued guidance of both revenue and profitability. Revenue reached $96.3 million, an increase of 33% over the previous year. Adjusted EBITDA came in at $22.8 million or a 24% margin. Looking back, in the quarter and 2022 as a whole, we were able to exceed our revenue expectations as a result of better-than-anticipated monetization of both our browser and news user base, and faster-than-anticipated scaling of the Opera audience extension business. Combined with a predictable and carefully managed OpEx base, we have been able to convert our strong revenue trajectory to a strong profitability trajectory even ahead of our ambitions. So, to recap, the full year revenue was $331 million, with adjusted EBITDA of $68 million. Revenues grew 33%, while EBITDA was up 135%, as full year margins expanded from 12% to 21%. The impact of our ongoing focus on those users which provided the most value can best be seen in our annualized ARPU. Annualized ARPU was $1.18 in the fourth quarter, an increase of 12% from the third quarter and a 42% increase compared to last year. Advertising revenue grew 55% compared to last year, now representing 59% of total revenue. Our owned and operated sites continue to benefit from the continued shift in our user base towards developed markets with the greatest monetization potential. In addition, Opera's audience extension initiatives were a standout success, leveraging our high-performance infrastructure and first-party signals to reach the right audiences across partner inventories. These efforts, which really took off in 2022, are an excellent complement to our O&O advertising inventory. This segment has offered stable incremental margins and is shaping up to be a material component of our revenue and EBITDA growth. Search revenue grew 12% in the fourth quarter, which was also better than planned, driven by the growth of our PC footprint in Western markets, particularly North America. As a company, we are cost-conscious and operate a lean organization. So as a result, when revenues outperformed, as they did in 2022, we would see a corresponding increase in profitability. As we outlined in 2021, when we first embarked on our significant investment in our marketing and distribution channels, we believed that we would reap the results in 2022, and that is exactly what we achieved. And EBITDA margins expanded from 12% to 21%. But perhaps most importantly, now turning to our products and innovation focus. Opera as a company has more than a 25-year history of being at the forefront of browser innovation. We have built out a user base of more than 300 million users by always pushing the limits of what's possible on the web. The mass interest in generative AI tools and the often-impressive capabilities that these tools already have certainly marks the beginning of a new chapter in the evolution of not only the Internet but the knowledge base and economy at large. For Opera, that represents a huge opportunity, perhaps similar to the emergence of mobile web and smartphones. As an independent browser, we are firing on all cylinders to become the best gateway to an AI-powered web, building and rolling out new experiences in web browsing that not long ago seemed impossible to achieve. For instance, we are adding popular AI-generated content service to the browser sidebar. On top of that, the company is also working on augmenting the browsing experience with new features that will interact with these new generative AI-powered capabilities. Among the first features to be tested is the new, small but super useful Shorten button in the address bar that will be able to use AI to generate short summaries of any webpage or article. Not everyone may be aware that AI has been central to Opera News from the beginning more than five years ago to serve up stories and content relevant to our users in a personalized way. In 2023, we are going to ramp up our AI news effort. It will start with using AI to assist content creation. For instance, AI will be able to help summarize the top stories of the day and then generate short articles to keep users informed of local and national news. These stories will cover subjects such as sports, weather, crime reports, energy and fuel prices, and other information relevant to their lives. These features are being pushed out as we speak. We believe AI will soon be an indispensable tool in assisting people across industries. And with our experienced talent pool in that field, we are naturally very excited about the future. Both our search and advertising revenues also benefit from increased engagement, and we are seeing that across all of our products. In emerging markets, Opera Mini has benefited from the integration of real-time football scores, leading to increased frequency of use. And we're replicating this feature in South Asia with cricket. To celebrate the most recent World Cup in Q4, we have launched a campaign we called Shake and Win. That campaign pushed Opera Mini to the Number 1 position in the Google Play Store in several of our key countries in Africa while we are also replicating the success in Latin America in key countries like Brazil, with early success already in view. In terms of users, our total base was 324 million MAUs in the fourth quarter, a nice sequential increase. So, for the past years, we have repeated our focus on high-value users, often in western markets, but we have also distinguished between user opportunities in emerging markets. So, we have let less monetizable users churn out while focusing growth on acquiring fewer but higher-value users. We are very pleased to see our strategic growth more than offset reductions in less strategic areas, putting us in a great starting point toward 2023 and beyond. GX continues to grow its user base, particularly in developed markets. As we have announced in December, the gaming browser now has over 20 million MAUs. As we said before, despite being our best monetizing browser, with ARPU up 11% sequentially to $3.3, we are in the early stage of unlocking the full potential of GX, the gaming browser. We believe GX is at a perfect crossroads by being the most popular gaming browser and entry point for those users. It allows us to combine multiple next-generation technologies from building a decentralized hub through Web3 and blockchain to using AI to assist in game creation based on GameMaker Studio. It's a great example of new technologies from the past few years converging around a young audience base, creating a future that is incredibly exciting and has the potential to exceed everyone's imagination. So, with that, let me turn the call over to Frode for details.

Frode Jacobsen, CFO

Thanks, Song. On top of the operational color, I'll turn to the numbers. It was a great quarter, rounding up the year well ahead of our expectations. Q4 revenue came in as much as $5 million above the top end of our fourth quarter guidance at a record $96.3 million, representing 33% year-over-year growth. That is something we are really proud of, especially in light of the fact that we had already raised guidance after both Q2 and Q3 and in the face of ongoing macroeconomic challenges. Similar to last quarter, the outperformance primarily came from the continued growth of users in Western markets and the ongoing ramp in our audience extension business that simply scaled faster than we dared anticipate. Adjusted EBITDA was about $4 million above the top end of guidance coming in at $22.8 million or a 24% margin. Profitability benefited from our revenue over performance combined with continued cost discipline and OpEx coming in a bit below expectations. Cost of revenue scales with our audience extension-related advertising, but associated gross margins have been stable to even improving through 2022 resulting in material profitability contributions. During the quarter, we repurchased 0.6 million ADSs for $3.2 million under our regular buyback program. That comes in addition to our separately announced major buyback of 23.4 million ADS equivalents from a pre-IPO shareholder at $5.50 per ADS or $4.70 per ADS if comparing to the current share price, which is meant of our recent $0.80 dividend. For 2022 as a whole, we executed a total return of capital of $146 million, taking 26.7 million ADS equivalents off the market and effectively increasing each remaining share's relative ownership of Opera by about 30%. We have been taking advantage of our strong balance sheet to elevate the ROI for our investors. As of today, we still have over $30 million remaining under our current buyback authorization. In terms of cash generation, we had a straightforward quarter with working capital items netting out and operating cash flow coming in at $23.5 million, quite in line with adjusted EBITDA. Net of our stock repurchases in the quarter that amounted to $132 million, we ended the year with $118 million of cash and marketable securities. In addition, $13 million of other receivables were sales of marketable securities with settlement in the first days of the year leading to an underlying cash balance of $131 million as we started 2023. We were very pleased to issue a special $0.80 dividend earlier this year, which translates to a $71 million expense at the reduced share count and leaves us with a strong balance sheet of $60 million in cash before cash flows in 2023, as well as $59 million in remaining installments from the sale of Star X, and finally our stake in OPay as an asset held for sale, which increased from 6.4% to 9.5% following the immediate settlement of our receivable from the sale of Nanobank, as laid out in our press release. Now turning to our guidance for the full year 2023 and the first quarter. For the full year, we guide revenue to be between $370 million and $390 million, representing 15% year-over-year growth at the midpoint, with adjusted EBITDA guided between $71 million and $81 million, or 20% margin at the midpoint. In terms of cost expectations, we model cost of revenue items just above 20% of revenue, following the growth of our audience extension offering, and we maintain our previous expectation of around $30 million in average quarterly marketing costs. For both, we expect the trajectory to start below average in the beginning of the year and then move gradually higher. Cash compensation cost is expected to drop slightly into Q1, but increase year-over-year mainly from salary adjustments. And finally, all other OpEx items before adjusted EBITDA are expected to come in at a bit over $30 million combined for the year. For the first quarter, we guide revenue to be between $83 million and $85 million, 17% growth at the midpoint and reflecting the greater seasonality of our rapidly growing advertising business. We guide adjusted EBITDA to be between $17 million and $19 million, a 21% margin at the midpoint. In summary, 2022 was a record year for Opera, and we are thrilled with the operating and financial results. The outperformance we experienced coupled with our efforts to realize values and turn all focus to our core business has set us up for continued success in 2023 and beyond, and has allowed us to conduct major repurchases as well as pay our first dividend.

Operator, Operator

Thank you. We'll take our first question from Lance Vitanza with Cowen. Please go ahead.

Unidentified Analyst, Analyst

Good morning. This is Jonathan standing in for Lance. Congratulations on the strong quarter. My first question is about the user base growth of 324 million. Can you clarify where that growth originated in terms of region?

Frode Jacobsen, CFO

Hey, this is Frode here, I'll chime in. The Western markets is the key growing area for us, both in terms of users and in terms of revenue. But we did see growth across all regions revenue-wise from Q3 to Q4.

Unidentified Analyst, Analyst

Okay. Got it. And can we expect sequential increases in user base growth throughout '23 as well, or can we expect some level of decline as the year progresses?

Frode Jacobsen, CFO

We don't guide user base. I think it was a milestone to where our strategy of focusing on high-value users led to a growing total user base in the fourth quarter. Q4 is sort of a strong quarter in terms of engagement, time spent, and so on. So, I think I'd expect it to be quite stable. It could be a bit down in Q1 from seasonality, but I think the underlying trend of having washed out enough less strategic users such that the strategic growth offset this was is sort of the main theme we expect to continue, broadly speaking.

Unidentified Analyst, Analyst

Understood. And the last one for me. The GX browser, impressive growth there on an ARPU basis, right. And just wondering, at what margins do they come in? And what can we expect from the GX browser in '23 that will continue to improve revenue growth?

Frode Jacobsen, CFO

In terms of cost of revenue, on the browser side, it is very low. So, we consider more our marketing cost to be the cost of revenue and we try to optimize that so that on the margin, we still have a comfortable return on our marketing spend. Each incremental user, strictly speaking, has a very limited cost of revenue. In terms of 2023 expectations, Song, I think, he got kicked off or dropped off the call, but I don't think we'll guide specific numbers, but we are very excited about the product and the next versions of it. And so, we do expect the product to continue to grow both user-wise and also revenue on a per user basis.

Unidentified Analyst, Analyst

Understood. Okay. Thank you. Congrats, again. Sorry?

Song Lin, Co-CEO

Yes, this is Song Lin. I managed to rejoin the call, so it's not an issue. To reiterate what Frode has mentioned, we are experiencing strong user growth. Our new strategy focuses on attracting high ARPU users, which has contributed to this growth in total user numbers. We have observed significant user expansion in both GX and overall. Therefore, we are optimistic about the future. However, our emphasis will remain on targeting high ARPU users, and we have high expectations for GX this year.

Operator, Operator

And we'll take our next question from Mark Argento with Lake Street. Please go ahead.

Mark Argento, Analyst

Good morning, guys. Incredible quarter, nice work. Just wanted to drill down a little bit more on the AI opportunity in particular. What do you see ultimately is the probably the most logical business model using that technology? Is it to drive user growth of the browser? Is it a whole another standalone product you could potentially charge subscription to? Is it app-based model? Maybe you could at least give us some of your initial thoughts.

Song Lin, Co-CEO

Yes, this is Song Lin. To start, I believe the most significant impact we're anticipating is in user engagement, particularly in increasing user uptake. A good example is that we’ve noticed a substantial rise in user interest in the browser, even though it’s still early stages since our announcement. Previously, users would simply rely on the default system browser, which has always been our biggest challenge. However, with this new technology, we're observing a shift similar to the early days of mobile, where there's growing interest among users for a browser that offers a unique and differentiated experience. We see this as the most promising short-term potential, and it’s positively influencing our user base growth. Increased user growth is expected to lead to higher user engagement and potentially more monetization opportunities. Delving deeper, we believe this could have a significant impact on the entire ecosystem, far beyond just Opera. It may lean towards higher subscription models for premium partners, which would align with what we aim to achieve at Opera. Overall, we see upcoming changes in the industry as presenting more opportunities for companies like Opera, and we are quite excited about this.

Mark Argento, Analyst

Great. And then, one for Frode. Free cash flow generation has been strong, and you've been returning capital to shareholders. Regarding the guidance for 2023, with adjusted EBITDA projected between $71 million and $81 million, should we expect almost full conversion to free cash flow, or how should we assess free cash generation in 2023?

Frode Jacobsen, CFO

For 2022, we converted approximately 87% of our adjusted EBITDA to operating cash flow. The difference is mainly due to taxes paid, which were around $3.1 million for the year, and an increase in working capital items totaling about $6.6 million. While I am not providing guidance for 2023, I can point out that the growth in working capital accounted for roughly 28% of the revenue growth we observed from Q4 2021 to Q4 2022. This serves as a reasonable indication. Regarding taxes, our effective tax rate, when considering our profit and adding back the equity compensation cost, is about 18%, as the equity cost is not tax-deductible.

Mark Argento, Analyst

Okay, that's helpful. And then, did you mention $30 million in CapEx for 2023?

Frode Jacobsen, CFO

No, in the other operating items, so from like hosting, legal, travel, office costs, et cetera. So, the stuff that I commented on the cost of revenue items combined the marketing costs and the cash compensation cost, and then I just commented on the total for everything else prior to adjusted EBITDA and the P&L.

Mark Argento, Analyst

All right. That makes sense. And then, in terms of the focus incremental spend going forward, I'm assuming you're going to continue to target Western markets. It looks like where you're getting a lot of growth and a lot of extensions. Is that consistent in '23?

Frode Jacobsen, CFO

I believe that our strategy continues to be effective, and we still see significant growth potential. As mentioned by Song, there are also appealing opportunities and growth available in emerging markets. We are investing in those areas as well. However, we have improved our focus on monetizable users in those markets, which are indeed substantial, and we will maintain our global focus.

Mark Argento, Analyst

Great. Thanks, guys, and congrats again.

Frode Jacobsen, CFO

Thank you.

Operator, Operator

Thank you. We will take our next question from Alicia Yap with Citigroup. Please go ahead.

Alicia Yap, Analyst

Hi, thank you. Good morning, management. I appreciate you taking my questions and congratulations on the strong results and guidance. I have two questions. First, I wanted to follow up on your partnership with OpenAI regarding AIGC. I believe you touched on this earlier. I'm curious about the benefits you'll experience, particularly regarding increased user engagement. What kind of content do you think will improve your targeting efforts to reach users? Has this already been launched? Additionally, do you expect to see a more significant improvement in user engagement on the mobile app or the PC browser? That's my first question.

Song Lin, Co-CEO

Yes, of course. This is Song Lin. I'll address your question. There are generally two types of AI. The first is discriminative AI, which Opera uses and applies to news and content recommendations and other projects. The second is generative AI, which is currently popular. Moving forward, both will become increasingly important, and we will focus on both. Discriminative AI provides more relevant content, which is something we've been developing and has become more apparent recently. On the other hand, generative AI allows users to generate content tailored to their preferences. Essentially, one type of AI provides relevant content, while the other customizes it to the user's liking. Both will be significant in the future. It's still early in this stage, but it has shown to be quite appealing to users. For now, we are exploring more options, and there is a growing number of users engaging with these differentiating features, which is probably our biggest short-term benefit, along with increased time spent. This captures a high-level view of what to expect.

Alicia Yap, Analyst

Okay. So, do you expect that will be helping on increasing revenue opportunity within the share that you were already seeing it, or we will have to wait a little bit longer?

Song Lin, Co-CEO

Yes, it's a crucial question regarding the impact on revenue. At this stage, it's too early to determine. We haven't factored it into our forecasts or guidance, as we want to be cautious. However, if more users engage with our platform, it will naturally lead to increased revenue. It's still quite early, so we prefer not to speculate. Nonetheless, it presents an exciting opportunity for us.

Alicia Yap, Analyst

I see. Okay, great. Thanks, Song. For my second question, I believe the company mentioned in the press release regarding the EU sanction package from December '22 that you anticipated a $10 million headwind, correct? So, without that, can we reasonably assume that the midpoint of your guidance would have been 18% this year instead of 15%? Additionally, can you remind us how much negative headwind the company faced from Russia in total in 2022? I recall from the first quarter last year, around May, you indicated that the impact from Russia was about 10%, but you only saw about half of that effect, if I remember correctly. So, considering this impact, if the headwinds are not as severe, could we potentially see some upside in revenue?

Frode Jacobsen, CFO

Yes, I can start by addressing that. You are correct that adding back the $10 million would place the midpoint at 18%. Additionally, the overall situation leads us to adopt a more cautious approach to the guidance we provided. Therefore, while you are correct in your observation, the broader macroeconomic landscape is contributing incremental caution, though we haven't specified a number for that. As we discussed in relation to the guidance, regarding Russia and Eastern Europe, we did experience an impact last year, particularly due to currency fluctuations. Overall, we finished the year with a footprint in Eastern Europe that was quite similar to what we had at the beginning.

Alicia Yap, Analyst

I see. okay, all right. Well, thank you so much. Thank you.

Frode Jacobsen, CFO

Sure.

Operator, Operator

And there appears to be no further questions at this time, I will turn the call back over to Song Lin for any closing or additional remarks.

Song Lin, Co-CEO

Thank you all for being on the call. In 2022, we achieved positive results, and we're very excited about it. We believe that 2023 will be equally interesting, given the outperformance we've already seen alongside our efforts to create more value and focus on our core business, positioning Opera well for success in 2023. We truly appreciate the support from our employees and investors over the past year. We are looking forward to an exciting 2023 and can't wait to share more of our successes with you in the upcoming quarters. Thank you for your time, and I look forward to speaking with you again soon.

Operator, Operator

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.