Opera - Q3 2023

Transcript

Operator (participant)

Welcome to the Opera Limited third quarter 2023 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this period, you will need to press the star one on your telephone keypad. If you would like to remove yourself from the queue, please press the pound key. Please be advised that today's call is being recorded. Lastly, if you should require operator assistance, please press star zero. I would now like to turn the call over to your speaker today, 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, Lin Song, and our CFO, Frode Jacobsen. Before I hand the call over to Lin Song, I would like to remind everyone that in the conference call today, the company will be making statements about future results and expectations, which constitute forward-looking statements within the meanings 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 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, @investoropera, so please follow along there during the call and in the future. With that, let me turn the call over to our Co-CEO, Lin Song, 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 if his voice gives out, I will step in and finish his prepared remarks if necessary. Song?

Lin Song (Co-CEO)

Yeah, sure. Thank you, Matt. So, yeah, I've got a cold, so I hope my voice doesn't become too sexy. But anyway, thanks, everyone, for joining us today. We are very proud to announce our third quarter results, with both revenue and adjusted EBITDA exceeding the high end of our prior guidance ranges and our business and product lineup have been stronger and more strategic than ever. So in the third quarter, we generated $102.6 million revenue, compared to the $98 million-$100 million we had guided. That marks our eleventh consecutive quarter of 20%+ top-line growth, as well as the milestone of exceeding $100 million of quarterly revenue. What's even more exciting is that the overperformance was fueled by an accelerating business strength within the quarter, adding to the trajectory and potential of results ahead.

As you will see, our refreshed guidance ranges for the year and Q4 now even begin about the prior high end of ranges for both revenue and adjusted EBITDA. So the health of our revenue overperformance is visible in our adjusted EBITDA, which come in at $23.8 million, 23% margin, compared to the $18.5 million-$20.5 million we had guided. Profit overperformance was, in other words, even stronger than the revenue overperformance, fueled by product-driven strengths, leading to lower marketing than expected. So overall, we continue to credit our financial success to our ongoing focus of growing the highest value users, combined with careful cost management.

The share of our user base that our western users continue 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 59% of total revenue. The growth was fueled by a healthy combination of increased O&O advertising revenue from our browsers, which represents the majority of advertising revenue, combined with the underlying growth in our organic expansion business. Such revenue grew 13% in the third quarter, all of which relate to our browsers, also benefiting from our continued user growth in western markets. So there are three business topics that I would like to focus on today.

Our AI initiatives, our advertising platforms, and finally, the Opera GX browser. So I will start with Aria, our internally developed browser AI. Even if we don't directly monetize it, and even if it is only based in creating the ultimate browser AI for our users, because Aria is such a strategic area of focus for us, that has the potential to greatly expand the services that we can offer to our users. So after our initial success in bringing Aria to our redesigned flagship browser, Opera One, and to Opera for Android, we continued to roll it out to Opera for iOS and Opera GX in the third quarter. The first step enables a large segment of our users to take advantage of Aria's exciting new features.

Being an independent browser offers us also the flexibility to work with a variety of partners in the GenAI space, and does not lock us into any one specific large language model or any specific source of information. Aria is built on Opera's own composer architecture, which allows it to tap into various language models like OpenAI's GPT model, and to get a lot live information from the web. This makes its results both more up-to-date and accurate. Opera One also lets you do more with AI, with less time, fewer technical skills, and less effort. Aria comes with a set of tools that allow you to easily refine your queries and create content with a set of predefined prompts. You can follow personalized Aria with the My Style 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 emails or formal complaints, or in your unique style of writing. Being able to effectively interact with AI is quickly becoming an essential skill in life. Aria lets people easily and quickly get what they are looking for, whether it's in search of information or creating a piece of content. So Aria has proven to be a hit with users, and they are clearly enjoying the experience as evidenced by a net increase in the search queries and page views per session. Still, we are only getting started, and the world is only getting to get used to taking advantage of the new technology. We look forward to keeping you posted on our Aria milestones as we saw this growing richness, awareness, and capabilities.

Today, we monetize Aria indirectly, both in terms of attracting new users and increasing our user engagement, which in turn benefits our existing search and advertising partnerships. There is no need to restructure those deals to benefit. Looking ahead, we are excited about how Aria's useful features can directly translate to monetizable, informed recommendations, fueled by a broadening context awareness. And then since we talked about the monetization, I will come to our advertising technology, which I highlight since it is a key enabler of our revenue trajectory. So Opera products are used every day by hundreds of millions of engaged users, and in 2019, we have launched Opera Ads. Opera Ads is an online advertising platform that helps advertisers maximize the performance of their campaigns and increase engagement with their target audiences.

So through real-time bidding, the platform also connects with partner inventories, allowing our advertising partners to reach internet users worldwide, including our hundreds of millions of Opera users. 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 caters to the world's largest advertisers, DSPs, agencies, and e-commerce partners across the globe. To give you a sense of its reach, we now handle a volume of 3.8 million ad requests per second at peak times, making us among one of the biggest players in terms of audience reach. That being said, as an internet company with 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.

Then finally, I will just come to gaming and the Opera GX Browser. Our GX user base continues to impress, up another 10% sequentially to 26 million MAU during the fourth quarter. The ARPU was up 60% sequentially or 33% year-over-year, now and then annualized $3.29 per MAU, continuing to be our best monetizing 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. Not only that Opera GX provide flagship features such as CPU and RAM usage controllers, but we do this year long, we have introduced several new features that bring customization and integration abilities to a parallel level.

These features give gamers and their favorite influencers and streamers something to talk about as we build the brand. And the brand strength of Opera GX is something we are very proud of. Our goal is to create the multi-gaming brand and the center of a thriving gaming ecosystem and community. So that's why Opera GX maintains one of the largest Discord communities around, collaborates with thousands of gaming influencers, 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 on which they can play games. So Opera GX now has a very fast-growing community of fans on Discord, Twitter, and TikTok, where it is by itself becoming a category media brand platform and an important channel for building awareness and stimulating our growth funnel.

That is a huge achievement for a browser company. Finally, it is important to note that the vast majority of Opera GX users are Gen Z, and so have only just begun to develop brand loyalties in which GX is taking a strong position. They are also the most tech-savvy generation yet, with deep experience and activity for building resilient online communities around their interests across great distances. So while gamers are and stand to remain our key focus of segment-based offerings, we also see a broader opportunity from this strategy as well. So within content, we have a panel of AI-based content recommendation platform to dedicated apps for soccer fans, cricket fans, or hyperlocal news. On the browser side, just now in September, we partnered with Chess.com to put chess right into the browser.

So with custom builds for both desktop and mobile products, chess enthusiasts can now enjoy their favorite game wherever they are. In Opera's desktop browser, a Chess.com icon now resides in the sidebar of a 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-themed makeover, complete with chess-related articles, videos, and informational content. So overall, we believe we have the best product and technology lineup in Opera's history, putting us in a very strong position to continue to deliver great new products and strong financial results as we look to mid-term and beyond. So with that, let me turn it over to Frode.

Frode Jacobsen (CFO)

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 then talked about, with gamers. 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 $102.6 million 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 overperformance 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 $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, but that cash flow impact is a consequence we are happy to live with.

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 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, 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. 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. 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-$113 million, or up 16% year-over-year at the midpoint, and adjusted EBITDA of $22 million-$24 million, or 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-$397 million, in its entirety above our prior range of $380 million-$390 million, and representing 19% growth at the midpoint.

Our full-year adjusted EBITDA guidance is now $88 million-$90 million, also in its entirety above our prior range of $80 million-$84 million and representing a 23% margin at the midpoint. Our cost expectations have remained consistent all year, but with less marketing spend than built into our guidance. We still expect Q4 to represent the year high in terms of marketing expenses and to exceed $30 million of quarterly spend, though our full-year marketing cost is now likely to come in below full year 2022, a great achievement in the context of our revenue growth. 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 fourth 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 decline sequentially in the fourth quarter and to come in at about $32 million for the year as a whole, in line with prior expectations. In conclusion, the third quarter 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. We look forward to keeping you posted. So with that, I'll turn the call back to the operator for questions.

Operator (participant)

Thank you. As a reminder, to ask a question, please press the star one on your telephone keypad. To withdraw your question, please press the pound key. When posing your question, we ask that you please pick up your handset to allow optimal sound quality. We'll take our first question from Mark Argento with Lake Street. Your line is open.

Mark Argento (Co-Founder and President)

Yeah, good morning, guys. Nice, nice quarter. Just a couple of quick questions. Obviously, we saw some really nice growth and strength in the ad business this quarter. You know, 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 kind of ad versus search revenue? I think in the quarter, ad revenue is almost 60%. You know, how should we think about that mix going forward?

Frode Jacobsen (CFO)

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 for sort of the near to midterm.

Mark Argento (Co-Founder and President)

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

Frode Jacobsen (CFO)

I think, the GX user base is based 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 products. It still remains a bit under indexing in terms of ad monetization. So back to your first question, that's also an example of a lever for driving faster growth on the advertising side, looking at.

Mark Argento (Co-Founder and President)

Great. 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. You know, what's the kind of the key KPI you guys are keeping your eyes on there in terms of, you know, conversion rates or monetization rates, you know, that kind of have you either, you know, either leaning in or leaning out that spend in any kind of any quarter?

Frode Jacobsen (CFO)

It's ROI, 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 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 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.

Mark Argento (Co-Founder and President)

Great. Thank you.

Operator (participant)

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

Lance Vitanza (Managing Director and Senior Analyst)

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? Could you repeat that? And then, where do you think that that sort of split could ultimately go as we think out, you know, three, five, 10 years?

Frode Jacobsen (CFO)

Hey, Lance. Yeah, so I, at least in our investor presentation, I, I'm not sure if it's updated online yet, but, it, you'll see the updated stat. So for now, Western users represent 16% of the user base, up from 15% in, in the prior quarter. It's, we, it's not such an excellent stat just because, you know, it typically moves with decimals, and then every couple of quarters, maybe we've been adding a point, but it is up relative to the Q2 average.

I think you also see in the timeline, so I think 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 is quite flat.

Lance Vitanza (Managing Director and Senior Analyst)

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's a lot of headroom there for continued growth? I mean, do you see, you know, is the target to get to, I don't know, 30%, you know, seventy percent, that kind of a split, or, or where, where should we be thinking this could kind of go over time?

Frode Jacobsen (CFO)

We don't really have a very defined ceiling just because we still have the perception that we remain still a quite small company. We talked 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.

Lance Vitanza (Managing Director and Senior Analyst)

Okay, on the marketing spend, so my question on marketing spend, you know, 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 Q3 into Q4? Is there any of that that we should be thinking about? I mean, I know you mentioned that you're going to be a little bit over $30 million in the fourth quarter. I'm just wondering if that's a result of maybe some investments that got pushed.

Frode Jacobsen (CFO)

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 in our prior implicit Q4 guidance.

Lance Vitanza (Managing Director and Senior Analyst)

Okay, great. And then last for me, you talked about the stronger than expected acceleration, you know, within the quarter as you go month to month in this past quarter. And I'm just wondering, clearly, you know, it sounds like products and technology, you know, at Opera had a lot to do with that. But was there perhaps also some improvement in, you know, 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, which, which direction do you see that going?

Frode Jacobsen (CFO)

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?

Lin Song (Co-CEO)

Yeah, yeah, yeah, I'll try, but, my, like, sorry, this microphone is not going anywhere. So but I, I would say, I think in general, we see a good recovery of the traveling, which is very obvious in Q3. Travel is very strong, and people like, okay, trying to actually travel, so benefited from that, especially also during the summer time, right? Which, yeah, which turned into Q3. I think we also see a fair e-commerce towards the end of Q3. Like summer, e-commerce is a little bit late, but a little bit upfront, which give us, you know, confidence of perhaps Q4, it's also going to be going to be okay. So I think those are the ones noticeable ones we see. I think the rest are more like as they're expecting.

Lance Vitanza (Managing Director and Senior Analyst)

Great. Thanks, guys. I appreciate the help.

Operator (participant)

Once again, that is star and one, if you would like to ask a question. We'll take our next question from Alicia Yap with Citigroup. Your line is open.

Alicia Yap (Equity Research Analyst)

Hi, thank you. So good morning and good evening. Congratulations to the strong quarter and guidance. So I just wonder, you know, I know Aria is not directly monetized for now, but just wondering, how much of the strong performance in the third quarter are benefiting from the availability of Aria to help the user engagement that also lead to better monetization because of the increased time spent, or also increased the ad inventory or even the higher ECPM? So any colors that you can, either quantify or kind of qualitatively comment, where Aria is contributing to some of that strong performance that you even see that, month-over-month, accelerating trends. So if any color you can share would be great.

Second, I was also wondering, given if this is also driven by the ad tech improvement, any preliminary color that you can share with us, how would you expect the revenue growth to be for next year? Thank you.

Frode Jacobsen (CFO)

Song, do you want to comment on Aria, or?

Lin Song (Co-CEO)

Yeah, yeah. Okay. So I can comment a bit on Aria. So, yeah, more like super high level, I think, and we also discussed it in the script. So I would say the only effect of Aria is mostly visible in marketing, where, of course, you know, partly the reason why we are spending less than we want to and, you know, get more users than we want to, so it's very positive. It's of course because Aria has increased people's awareness that, you know, that which is very attractive, they want to see it. So, so it's quite similar as what we see on GX as well. Because of gaming, it's very differentiating. And same applies to Aria when it comes to a generic route. So those for this mobile, so that has been very helpful.

That alone probably has already have some very positive, very positive consequence of how we can, you know, be more profitable in this quarter, so that's good. In the long run, as discussed, I think we, we do see, track more increase on the user engagement, both on search volumes and others, that we think will also have a monetizable impact. But that, I think, when, when we do this, the more time also, those monetization potentials, which we are working with partners.

Frode Jacobsen (CFO)

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 of course, we believe that sort of the growth rate that we expect to be able to achieve in the fourth quarter is at least a nice indication of the underlying speed of the business as it stands now.

Alicia Yap (Equity Research Analyst)

Mm-hmm. I see. Great. Thank you. Maybe just one last follow-up. The Q4 EBITDA guidance and the midpoint imply, which obviously is lower than the first three quarters that you already achieved. So I wonder, is this 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 million quarterly run rate, so right. So it doesn't seem there is any kind of unexpected step-up spending that you budgeted in for this quarter.

Frode Jacobsen (CFO)

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

Alicia Yap (Equity Research Analyst)

Okay. All right. Thank you.

Operator (participant)

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

Lin Song (Co-CEO)

So sure. Thank you, guys. I think I'll just wrap it up. Well, we thank you for all of your continuing support and interest in Opera. So there is so much potential for Opera, and we are going for it. We appreciate your time today, and look forward to reporting our progress at the next quarter.

Operator (participant)

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