Opera Ltd

NASDAQ:OPRA

Earnings Call Analysis

Strong Q3 Growth Leads to Raised Guidance

The company surpassed expectations with $102.6 million in revenue, delivering a robust 20% year-over-year growth, or 25% on a constant currency basis. This success is credited to customer base shifts towards higher ARPU demographics and over-performing revenue, with adjusted EBITDA hitting $23.8 million at a 23% margin. The shift primarily involves gamers, signaling a strong product-market fit. Shareholder value was enhanced through a $53 million return, comprising dividends and share repurchase. Looking ahead, their Q4 guidance suggests revenues between $110-$113 million and adjusted EBITDA between $22-$24 million. This revision indicates a confident upward trajectory for full-year 2023 with projected revenues of $394-$397 million and adjusted EBITDA of $88-$90 million, both exceeding prior estimates.

Solid Quarter with Robust Revenue and User Base Shift

The company has delivered yet another record quarter with robust year-over-year growth matching previous quarters, well ahead of initial guidance. This consistency is a testament to the company's strong product lineup and strategic initiatives. Particularly, growth rates for search and advertising continue their strong trajectory, which resulted in better than expected revenue. This momentum is expected to persist as evidenced by the refreshed guidance. There's a strategic shift happening in the user base, with lower monetized users being replaced by higher-value ones, such as from Western markets or gaming demographics. This shift contributed to revenue topping the guidance, coming in at $102.6 million, marking a 20% year-over-year growth, or 25% on a constant currency basis. Cost control also played a significant role, especially as marketing expenses did not max out, leading to an impressive 23% adjusted EBITDA margin at $23.8 million.

Investor Return Initiatives and Liquidity Improvement

The company is actively returning capital to shareholders, marking this quarter with a $53 million return, including a $36 million dividend and $17 million through share repurchases. The free float of the stock has nearly doubled over the last year from 14% to 28%, enhancing the liquidity and making the company's shares a more attractive investment.

Raised Expectations for the Upcoming Quarters

Looking ahead, the company has raised its guidance for the full year 2023, suggesting improved growth rates and profitability. Fourth quarter revenue is expected to be between $110 million and $113 million, with adjusted EBITDA between $22 million and $24 million. The full year is projected to bring in $394 million to $397 million in revenue, representing a 19% growth, and an adjusted EBITDA of $88 million to $90 million. This guidance increase also signifies management confidence in maintaining growth amidst the volatile macroeconomic environment. In terms of expenses, consistent cost expectations are in place, with a potential increase in marketing expenses for Q4 but an overall annual marketing cost likely below that of 2022.

Strategic User Acquisition and Marketing Efficiency

The company continues its strategic push to grow high-value user demographics like gamers and users in Western markets, which now make up 16% of the user base. The marketing spend has been effective, with investments yielding positive returns while maintaining a buffer below the forecasted budget. The upcoming quarter's marketing strategy supports the company's branding and distribution campaigns with the expected ROI. Despite the stronger than expected intra-quarter acceleration, the company indicates no significant timing shifts in marketing expenditures.

Ad Market Dynamics and Product Innovation

Executives addressed questions about the macroeconomic backdrop's influence, including the effect of a strong U.S. dollar as a continuing headwind. However, there seems to be a recovery trend in several ad markets which may support future performance. Innovations like 'Aria' are contributing to improved user engagement and might lead to enhanced monetization options through increased ad inventory and engagement metrics. Detailed guidance for 2024 is forthcoming, as the company is focusing on the current growth trajectory, not yet ready to provide specific numbers for the next year.

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to the Opera Limited Third Quarter 2023 Earnings Call. [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.

[Matthew Wolfson, executive]

Thank you for joining us. As usual, I have with me today are Co-CEO, Song Lin; and our CFO, Frode Jacobsen. Before I hand the call over to Song Lin, 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 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 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 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 gives out, I will step in and finish his prepared remarks if necessary. Song?

[Lin Song, executive]

Yes, sure. Thank you, Matt. So yes, I'm on a cold so I hope my voice hasn't come in to safely. But anyway, thanks, everyone, for joining us today. We are very proud to announce our fourth quarter results with both [indiscernible] and adjusted EBITDA exceeding the high end of our product guidance ranges. And our business and product lineup has been stronger and more strategic than ever.

So in the South [indiscernible], we generated $102.6 million revenue. compared to the like $98 million to $100 million, we have tied it. That marks our 11 consecutive color of 20%-plus 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 during the quarter, adding to the trajectory and potential of results ahead. As you will see our refreshed guidance ranges for the year in Q4.

Now we can 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 coming at $23.8 million, a 23% margin compared to the $18.5 million to $20.5 million we have guided. Profit overperformance was in other words, even stronger than the revenue of our 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] management. The share of our user base that Western U.S. continued to increase in the quarter, which in turn contributed to a 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 39% of total revenue. The growth was filled 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 [indiscernible] business. SaaS revenue grew 15% in the third quarter, all of which related to our browsers, also benefiting from our continued user growth in western markets.

So there are 3 business topics that I would like to focus on today. Our AI initiatives of advising platforms and primary [indiscernible]. So I'll start with Aria, our internally developed browser AI. Even if we don't directly monetize it, and even if it is holidays increasing 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 services that we can [ comfort ] to our users. So after our initial success bringing Aria to our redesigned flagship browser Opera One and to Opera for android, we continue to roll it out to Opera for IOS and Opera GX in the third quarter. And the post [indiscernible] enables a large segment of our units to take advantage of RF exciting new features.

Being an independent browser Opera [indiscernible] 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 buildup offers our composer architecture, which allows it to tap into various language models like over ChatGPT model and to get live information from the web. This makes its results both more up-to-date and accurate.

Opera One also led to do more when the AI was less time. Still on technical scales and [indiscernible]. Aria comes with a set of tools that allow you to even [indiscernible] and create content with the second pre designed [indiscernible]. We can follow confident Aria with the [indiscernible] that lets me train [indiscernible] AI to write. It's never been to easier to write long pieces of text from insightful reviews to eloquent e-mails or strong complaints or unique style overwriting. Being able to effectively interact with AI is quickly becoming an essential scale in life. Aria massive easily and quite get what they are looking for, whether in such information or a piece of content. So Aria has proven to be a headway results, and they are clearly enjoying the experience as evidenced by mid increased resource [indiscernible] and page views position. Still we are only getting started. And the world is only given to get used to take advantage of the new technology.

We look forward to keeping you posted on our Aria milestones as the sole growth in richness, awareness and the capabilities. Today, we maintain Aria indirectly, both income of attracting new results and increasing our result engagement, which in turn benefits our existing results and advertising partnerships. There is no need to restructure those deals to benefit. Looking ahead, we are excited about how esports can directly translate to monetizable informed recommendations fueled by a broader context awareness. In essence we talked about monetization, and welcome to our advertising technology which I highlight since it is a key enabler of our revenue trajectory.

So open products are used every day by 100 million of engaged users. And in 2019, we have announced Opera Ads. Opera Ads is an online advertising platform that helps advertisers maximize the performance of their campaigns and increase engagement rate, the target audiences. So through rental bidding, the platform also connects with partner inventories, allowing our advertising partners to reach internet resource worldwide including our hundreds of million of operating [indiscernible]. Opera empowers partners to achieve key performance indicators such as extended reach, prolonged audience retention, widespread brand revolution and a favorable return to expend. So as a result Opera Ads [indiscernible] to the world's largest advertisers, DSPs agencies and formal partners across the globe.

To give you a sense of its reach, we now handle volume of 3.8 million at request concessions and peak times making us among the biggest playoffs in of orders reach. That being said, as the Internet company, we a very large user base to start with. We feel that we are still at a rather only stage of monetization and look for nice growth trajectory ahead.

And then finally, I will just come in to gaming and the Opera GX browser. So our GX user base continues to impress, up another 10% sequentially to 26 million MAU during the third quarter. Year ARPU was up 6% sequentially or 33% year-over-year now and the annualized [ $3.29 ] per continuing to be our best monetizing product. Thanks to our asset Tmall demos engine mills design loan mall, they have built a bra that delivers an amazing and unique experience are of fronts, not only Opera GX provide flagship features such as CPU and [indiscernible] controllers but we loan, we have introduced several new titillated customization and integration abilities to parallel level.

[indiscernible] give gamers and their average [indiscernible] streamers something to talk about as we build the brand and the brand strength of Opera GX, we are very proud of. Our goal is to create the market gaming brand and the center of driving gaming ecosystem and community. So that's why Opera GX maintains one of the largest this consumers around collaborates with thousands of gaming influencers, including some of the biggest names in the space, and provide game makers a multimillion dollar developing app for indie game development. In addition to giving gamers a platform or wage they can play games. So Opera GX now has a very fast-growing terminates of Facebook, Twitter and TikTok, it is by self becoming a category-leading brand platform. and an important channel for building awareness and stimulating our growth phone. That is a huge achievement for browser company.

Finally, it is important to note that the vast majority of our Opera GX, RGD and so have only just begun to develop brand loyalties in GX is taking a strong position. They are also the most tech savvy generation gift raising but experience and activity for building resilient online communities around our [indiscernible] across great distances. So while gamers understand to remain our key focus on segment-based offerings, we also see a broad opportunity from this strategy as well. So within content, we have paid our AI-based content recommendation platform to dedicated apps for [indiscernible] credit funds or hyperlocal. On the browser side, just now [indiscernible]. We partnered with chess.com to put chess into the browser. So with custom builds for both vessel and mobile products, chess [indiscernible] can now enjoy their favourite game are [indiscernible] so [indiscernible], a chest of items now reside in the sidebar of a customized version of our browser. So you can solve puzzles and battery arrivals 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 line in corporate history.

[ Fueling ] a very strong position to continue to deliver great new products and strong financial results as we look to me and beyond. So with that, let me turn the call over to Frode.

[Frode Jacobsen, executive]

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 Line talked about, with gamers. The rotation of our user base has low monetized users churning out and hire monetized users coming in. As a result, we came in above the high end of our guidance at $102.6 million 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 a 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 and 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]

[Operator Instructions] We'll take our first question from Mark Argento with Lake Street.

[Mark Argento, analyst]

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

[Frode Jacobsen, executive]

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 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, analyst]

And then just a quick follow-up there. In terms of the GX browser and the 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 are you -- how are you seeing that ARPU move up as aggressively as it has?

[Frode Jacobsen, executive]

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-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 ahead.

[Mark Argento, analyst]

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, executive]

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. I said, 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.

[Operator]

We will take our next question from Lance Vitanza with TD Cowen.

[Lance Vitanza, analyst]

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 -- and where do you think that, that sort of split could ultimately go as we think out 3, 5, 10 years?

[Frode Jacobsen, executive]

Yes, so at least in our investor presentation, I'm not sure if it's updated online yet, but you'll see the updated stats. So for now, Western users represent 16% of the user base, up from 15% in the prior quarter. It's not such an excellent step just because 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. And I think you'll also see in the time line. So I think we -- the number of users over time. And this year is unlike the past many years, we had a growth also from Q3 to Q4 were normally because of seasonality, Q3 relative to Q2 is quite flat.

[Lance Vitanza, 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 -- is the target to get to, I don't know, 30%, 70%, that kind of a split? Or where should we be thinking this could kind of go over time?

[Frode Jacobsen, executive]

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 upper 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, analyst]

Okay. On the marketing spend, so my question on marketing spend, do 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 3Q into 4Q. Is there any of 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, executive]

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, analyst]

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

[Frode Jacobsen, executive]

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, executive]

Yes, it's fine. But sorry my cold is not going anywhere. So -- but I would say, I think in general, we see a good recovery of [indiscernible], which is very trend is very strong, then people like macro travel or benefited from that, especially also during the summer time, right, which in Q3. I think we also see fair e-commerce towards the end of Q3 someone may give us covenants of past Q4. It's also going to be okay. So I think we'll not noticeable one we see. I think the rest are more like as we're expecting.

[Operator]

[Operator Instructions] We'll take our next question from Alicia Yap with Citigroup.

[Alicis a Yap, analyst]

Congratulations to the strong quarter and guidance. So I just wonder, I know Aria is not directly monetize for now, but just wondering how much of the strong performance in the third quarter are benefiting from availability of area that help the user engagement that also lead to better monetization because of the increased time or also increase the ad inventory or even the higher eCPM. So any color 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. And then second, I was also wondering given if this is also driven by the ad cap improvement? Any preliminary color that you can share with us how would you expect the revenue growth to be for next year?

[Frode Jacobsen, executive]

Song do you want to comment on Aria?

[Lin Song, executive]

Yes. Okay. So I can comment a bit on Aria. So we are more like super high level, I think, I also discussed in the [indiscernible] I would say the only effect of Aria is mostly visible in market. Well, of course, partly really why we spent less than we want to and give more loss on.So it's very positive is, of course, because Aria has increased people's awareness that [indiscernible] is very attractive, but all see it. So it's quite similar like we see on GX well. [indiscernible], it's a very differentiating and same applies Aria comes to leverage well. So those for this level also that has been very helpful. That loan probably has already had some very positive -- very positive consequence of how we can be more profitable in this quarter. So that's good. In a low role as discussed, I think -- we do see [indiscernible] increase the engagement, those are source volumes and others that we also have a monetizable impact, that I think we spent more time also to evaluation potential which we are working with partners.

[Frode Jacobsen, executive]

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.

[Alicis a Yap, analyst]

I see. Great. Maybe just one last follow-up. The 4Q EBITDA guidance and the mid point implied, which obviously is lower than the first 3 quarters that you already achieved. So I wonder if this is 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, right? So it doesn't seem there is any kind of unexpected step-up spending that you budgeted in for this quarter?

[Frode Jacobsen, executive]

Yes, 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. You come in $3 million, $4 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 of below $27 million. So of course, we've maintained an average spend expectation for Q4, then the margin would be far higher.

[Operator]

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

[Lin Song, executive]

Sure. Thank you, guys. I think I'll just wrap it up. 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 on our progress and the next junction.

[Operator]

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