Opera Limited (NASDAQ:OPRA) Q4 2022 Earnings Call Transcript

Opera Limited (NASDAQ:OPRA) Q4 2022 Earnings Call Transcript February 27, 2023

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: 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 engaging ongoing — 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 @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, Song Lin, who will cover our operational highlights and strategy, and then Frode will discuss our financials and expectations going forward. Song?

Song Lin: 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 (ph), 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 (ph) 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 will 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 believe 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 important, now turning to our products and innovation focus. So, Opera as a company has a more than 25-year history of being at the forefront of browser innovation. We have built out more than 300 million user base 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, the economy and 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’s not very 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 all of you 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 also 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, again, are also replicating the success to 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 higher — high-value users, often in western markets, but also have 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 the GX, the gaming browser. We believe GX is at a perfect crossroad 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 assisting game creation based on GameMaker Studio. It’s a great example of (ph) new technologies from the past few years converging around a young audience base, creating a future that is super exciting and has the potential to exit everyone’s imagination.

So, with that, let me turn the call over to Frode for details.

Frode Jacobsen: 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 shares 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 leaving us with a strong balance sheet of $60 million in cash before cash flows in 2023, as well as $59 million in remaining instalments 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 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.

With that, I would like to turn the call back over to the operator for your questions.

See also 10 Most Promising Psychedelic Stocks and 12 Best Affordable Dividend Stocks to Buy.

Q&A Session

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

Unidentified Analyst: Hey, good morning. This is Jonathan on for Lance. Congrats on the strong quarter. Very good. My first question comes — is where did the user base growth, the 324 million, where did they come from in terms of region?

Frode Jacobsen: 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: Okay. Got it. And can we expect sequential increases in user base growth throughout ’23 as well, or can we expect like (ph) as the year progresses?

Frode Jacobsen: We don’t guide user base. I think it was a milestone to where our strategy of focusing on high-value users led to also a growing total user base in the fourth quarter. 4Q 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. 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 (ph) we expect to continue, broadly speaking.

Unidentified 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: In terms of cost of revenue, on the browser side, it is very low. So, we consider more our marketing cost to almost 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. But 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 about 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: Understood. Okay. Thank you. Congrats, again. Sorry?

Song Lin: Yes. Just comment that — yes, sorry, guys. This is Song Lin. I managed to crawl back to the call, so not a problem. But just to echo what Frode has been saying, right, so I think in general, we have been seeing a rather strong user growth, more like, I think the new strategy that we really (ph) is more like the, let’s say, high ARPU users in terms of total user number. But that’s just been that we have actually indeed seen a quite strong user growth, both for GX and also across the board. So, we’re quite optimistic about that. But again, the focus will be on the high ARPU users. And in that regard, we also have high expectations for GX this year.

Unidentified Analyst: Great. Thank you.

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