Opera Limited (NASDAQ:OPRA) Q3 2023 Earnings Call Transcript

Opera Limited (NASDAQ:OPRA) Q3 2023 Earnings Call Transcript October 26, 2023

Opera Limited beats earnings expectations. Reported EPS is $0.23, expectations were $0.15.

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. [Operator Instructions] Please be advised that today’s call is being recorded. [Operator Instructions] I would now like to turn the call over to your speaker today, Matt Wolfson, Head of Investor Relations. Please begin.

Matt Wolfson: 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 skids out, I will step in and finish his prepared remarks if necessary. Song?

Lin Song: Yes. Sure. Thank you, Matt. So yes, I’m going to call up my voice on coming to safety. But anyway, thanks, everyone, for joining us today. We are very proud to announce our third quarter results with both we have billed and adjusted EBITDA exceeding the high-end of our product lines ranges and our business and product line have been stronger and more strategic than ever. So in the third quarter, we generated $102.6 million revenue compared to the $98 million to $100 million, we have guide it that marks our levels [indiscernible] 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 power performance was fueled by accelerating business strength during the quarter, adding to the trajectory and potential of results ahead.

As you will see our refreshed guidance range is full year and Q4. Now, we can begin about the high-end of ranges for both revenue and adjusted EBITDA. So the health of our revenue over performance is visible in our adjusted EBITDA with coming at $23.8 million, a 23% margin compared to the $18.5 million to $20.5 million we have guided. Profit over performance was in otherwise, even stronger than the revenue over performance, fueled by product-driven strength leading to lower market than expected. So overall, we continue to credit our financial success to our ongoing focus of growing the highest value users combined with [indiscernible] 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% 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 skewed by a healthy combination of increased O&O advertising revenue from our process, 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 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 Opera GX browser. So I’ll start with Aria, our internally developed browser AI. Even if results directly monetize it and even if it is holidays increasing the [indiscernible] browser AI for 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 as our initial success bringing Aria to our redesigned flagship browser Opera One and Opera for android, we continue to roll it out to Opera for IOS and Opera GX in the third quarter. And the process that enables a large segment of our users to take advantage of Aria’s exciting new features. Being an independent browser Opera One also 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 build up offers our composer architecture, which allows it to tap into various language models, like Opera AI GPT model and to develop live information from the web. This makes its results both more up-to-date and accurate. Opera One also led to do more with AI with less time.

Still on technical scales and net echo [ph] Aria comes with a set of tools that allow you to easily refine your [indiscernible] and create content with the second predefined [Indiscernible]. We can follow process Aria with [indiscernible] that lets me train browser AI to write [indiscernible]. It’s never been easier to write long PCs [indiscernible] insightful reviews to [indiscernible] also complaints or unique style of writing, being able to effectively interact with AI is quickly becoming an essential scale in life. Aria match people easily and quickly get what they are looking for whether it’s social information or creating a piece of content. So Aira has proven to the heat wave results and they are clearly enjoying the experience as evidenced by increased search queries and pages views position.

Still, we are only getting started, and the world is only taken to get used to take advantage of the new technology. We really look forward to keeping you posted on our post as we saw this grow the richness, awareness and the capabilities. Today we maintained AI Aria indirectly both in terms of attracting new results and increasing our rework 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 AI Aria’s useful features can directly translate to monetize informed recommendations fueled by broadening context awareness. And then since we talked about monetization, I welcome to our advertising technology, which I highlight, so it is a key enabler of our revenue trajectory.

So open products are used every day by hundreds of millions of engagement you loss. And in turn I think we have months of Opera Ads. Offer ads present 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, product or the expectations, widespread brand revolution and a favorable return of accident. So as a result Opera Ads caters to the world’s largest advertisers, DSPs, agencies, and infamous partners across the globe.

To give you sales of its reach, we now handle volume of 3.8 million at request at peak times, making us among the biggest player in terms of audience reach. That being said, that in 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. And then finally, I will just [Indiscernible] and we offer GX browser. So 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 and the annualized $3 for the license per MAU continuing to be our best monetize product. Thanks to our passionate team of gamers, engineers, designers and more, they have built a browser delivers an amazing and unique experience on all fronts, not only they offer GX, provide flagship features such as CPU and RAM controllers, but we haven’t reach that long, we have introduced several new features, customization and integration abilities to parallel level.

These features give gamers and their favorite influence 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 market gaming brand and something that drives the gaming ecosystem and the community. So that’s why Opera GX maintains one of the largest this consumer route, collaborates with Kunhoo Global Gaming into results, including some of the biggest names in the space, and provided to game nature of multimillion downloaded app for — in the game development or in addition to giving gamers a platform by rate they can play games. So Opera GX now has a very fast-growing homologate of theater and people. Well, it is by itself becoming a category-leading brand platform.

And an important channel for building awareness and stimulating our growth follows. That is a huge achievement for the Browser Company. Finally, it is important to note that the vast majority offer Opera GX and Gen Z and so have only just begun to develop brand loyalties, and rates in GX are taking a strong position. They are also the most tech-savvy generation gift was discrete and activity for building resilient online communities around our interest across great distances. So while we are and plan 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 paid up our AI-based content recommendation platform to dedicated apps for super-fans, greater fans or hyper local communities.

On the Browser side, just now in September with partner base chase.com to put Chess vault [Ph] into the browser. So with half builds for both desktop and mobile products, Chess is a super app, and can now enjoy the service again whatever they are. The Opera GX browser chess is top item now resides in the sidebar of customized voting of our browser. So you can show panels and battery arrivals while you browse the web. Opera for Android also got Chess in complete with Chess-related articles, videos and informational content. So overall, we believe we have the best product and technology limits 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 2024 and beyond.

So with that, let me turn the call over to you now.

Frode Jacobsen: 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 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 have 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 as 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 to $113 million or up 16% year-over-year at the midpoint. And adjusted EBITDA of $22 million to $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 to $397 million in its entirety 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 in its entirety, above our prior range of $80 million to $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.

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Q&A Session

Operator: Thank you. [Operator Instructions] We’ll take our first question from Mark Argento with Lake Street. Your line is open.

Mark Argento: 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 kind of add versus search revenue? I think in the quarter, ad revenue is almost 60%. How should we think about that mix going forward?

Lin Song: I can start. I think we continue to — so we’re very pleased with the core strength of both revenue streams advertising revenue at some point past 50%. Now it’s close to 60% of revenue and a 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: 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? Or what’s kind of the mix there? And are you — how are you seeing that ARPU move up as aggressively as it has?

Frode Jacobsen: 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 under-indexing in terms of ad monetization. So back to your first question, that’s also an example of the lever for driving faster growth on the advertising side looking at.

Mark Argento: 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. 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.

Frode Jacobsen: 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 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. 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: Great. Thank you.

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

Lance Vitanza: 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 three, five, 10 years?