Opera Ltd

NASDAQ:OPRA

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to the Opera Limited Third Quarter 2024 Earnings Call. At this time all participants are in listen only mode. After the speaker's 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, Matthew Wolfson, Head of Investor Relations. Please go ahead, sir.

[Matthew Wolfson, executive]

Thank you for joining us. This morning, I am joined by our Co-CEO, Song Lin; and our CFO, Frode Jacobsen. Before I hand over the call to Song Lin, I would like to remind you that some of the statements that we make today regarding our business, operations and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions. They are subject to a number of risks and uncertainties. Actual results could differ materially. Please refer to the safe harbor statement in our earnings press release and our Form 20-F, including the risk factors. We undertake no obligation to update any forward-looking statements. During this call, we will present both IFRS and non-IFRS financial measures. A reconciliation of non-IFRS to IFRS measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website located at investor.affra.com.



Our comments will be on year-over-year comparisons unless we state otherwise. With that, let me turn the conference call over to our Co-CEO, Song Lin, who will cover our third quarter operational highlights and strategy, and then Frode Jacobsen, who will discuss our financials and expectations going forward. Song?

[Lin Song, executive]

Sure. Thank you, Matt, and thanks to everyone joining us today for a business update and more color on our third quarter. As you can see from our financial results, we find ourselves in a great position. Our product lineup has never been better and continues to gain traction among the high ARPU users, and our efforts to broaden monetization is paying off. As a result, in the third quarter, revenue was $123 million, growing 20% year-over-year, which represents an acceleration from the 17% growth rate experienced in the first half of the year.



And once more, as you can tell from our updated guidance today, we think the growth rate may increase even further in the fourth quarter. Our annualized ARPU grew 27% year-over-year to a new record of $1.66. Adjusted EBITDA was $31 million, representing a margin of 25%. We are very proud that both revenue and adjusted EBITDA exceeded the high end of our third quarter guidance ranges. In terms of the year as a whole, we had a material upward adjustment of guidance after Q2. And now with Q3, we repeat that exercise. With the new range for revenue above the high end of the previously provided guidance range and the adjusted EBITDA guidance range also moves higher.



Advertising revenue was $77 million in the quarter, growing 26% year-over-year, which represents the highest rate of growth since 2022. Revenue outperformance was led in particular by the e-commerce and travel categories. Our e-commerce initiative benefited in particular from our PC browser monetization as well as our success in expanding our reach to new inventories through our Opera Ads platform. The total results of Q3 also gives us greater confidence in a continued step-up of monetization during the seasonally strong fourth quarter. Search revenue was $46 million in the quarter, up 13% year-over-year. This was a tad above our own expectations.



We have seen somewhat impact in July and August due to seasonality, but we're also pleased to see September returning to 15% annual growth. We remain cautiously optimistic that as an independent challenger in the browser space, we stand to benefit from increased search competition in key markets as we look ahead. I'd like to make a few comments on our user base also, which may not be directly visible as you look at our overall MAU figures. We continue to focus on the most valuable results globally, many of which are found in the Western markets.



Our overall Western market MAU count has been quite stable through the summer quarters. We keep directing our product development and marketing efforts towards the most active and valuable sub segments, leading to the increased engagement within the user base. A result of that is our ARPU growth in Western markets growing significantly faster than ARPU overall. This is also the main driver of our growth in marketing spend, higher value users, and higher average cost as opposed to being a pure volume game. Within the broader strength of the quarter, there are other trends worth spending a minute on.



As previously mentioned, we are seeing great momentum in retail. The strengths we called out over the summer continued into the back-to-school season. With the combination of our owned and operated properties and the Opera Ads audience extension platform, we offer our advertising partners a level of performance that is increasingly appreciated. We already observed how this momentum is carried over into the seasonally strongest fourth quarter with merchants positioning themselves for the shopping season.



The other trend to call out is travel, which was also strong in the third quarter. We benefited from the combination of more high-value users with a higher propensity to spend on travel, combined with the cost of vacations continuing to increase. This higher volume and higher prices translate into enhanced revenues from this category.



[indiscernible] before we last spoke in late August, we had introduced our refreshed Opera One for iOS browser. And at the time, we were excited about the new features and how favorably it compared to the default. We can now report that the inflow of new iOS users was up 33% year-over-year during the third quarter despite the new browsers only being available for less than half of the quarter. The growth was even more impressive in the EU where the inflow of new users was up 66% from August to September. We believe there is a lot of opportunity on this platform to further innovate the product and grow the user base.



Last week, we released Opera One R2, the newest version of our flagship browser for computers. We have made it even more powerful, and even more beautiful. Our AI assistant area is further integrated into the browser, being accessible directly from a browser shortcut as a way to lift AI features out of a dedicated chat box and into the core of the browser experience. Our collective web browsing habits are strong, and we believe that it is important to bring AI to where the users are.



As the browser, we play to our strengths, where our native AI Aria can distill the context of the page, assist in shopping or understand images. These features have matured in our developer version and are now live in our flagship version. Not making the fact that Opera users can now access Aria without logging in with the profile.



Next up for Opera One is the ability for Aria to manage Open Tabs like close or tabs playing video or organize Open Tabs into logical Tab Islands. Tab productivity has always been a key feature of Opera and Opera One R2 also comes with an innovative split screen view. This enables greater multitasking productivity, something which we think could be as game-changing as our initial pioneering of tabs. And our 2023 introduction of Tab Islands with the first version of Opera One, the list goes on.



We have also launched a concept called Tab Traces, which highlights your most recent tabs to quickly retrace your online journey and of course, still support the slight moving Tab Emojis, which turned out a user favorite as it really helps visualize [indiscernible] on an otherwise dense computer screen. We also introduced an enhanced music player decoupled from the side bar along with detachable video, meaning that you can continue browsing while viewing videos or participating in a video conference.



Opera GX are incredible gaming browser remains our fastest growing browser with over 1.8 million net new users in the quarter to 31.9 million MAUs. A 22% increase compared to last year. We were also able to increase our annualized ARPU to $3.68, a 12% increase year-over-year with GX ARPU in Western markets growing nearly twice as fast.



We recently announced a new multiyear sponsorship with Riot or League of Legends World. The largest esports events in the world that have been running from late September to early November. To give you a sense of its popularity, the world tournament attracted over [ 15 million ] total viewers last year, and League of Legends is the second most streamed game on Twitch. During the tournament, Opera GX users can download exclusive mods and content drops as well as physical items.



In addition, Opera GX is to be featured prominently in the tournament. It is a good example of how we seek to expand GX partnerships with content that resonates with gamers.



Last quarter, we commented on the partnership with TV show, The Voice. Today, I would invite all of the GX users to analyze your browser with the deadly host mode in partnership with Venom: The Last Dance. The most recent installment in that franchise which was released last weekend and be on the lookout for an Opera GX [indiscernible] in the movie. But all that is only the beginning.



The number of gamers is in the billions, and GX is a unique browser and ecosystem for this highly engaged segment. That's an opportunity that we will continue to cultivate. And within this current quarter, you will see us launch also the next generation of Opera GX.



I will leave the details and excitement to the upcoming launch, but I will say that we will not only continue to offer more features that gamers love but also take the experience beyond just one device to the next level. So stay tuned.



All-in-all, we are moving ahead at full speed and with excitement about our opportunities. Now it's all hands on deck for a busy Q4, and I look forward to keeping you posted on our progress.



With that, I'll turn it over to Frode to dive deeper into our third quarter results and our guidance for the remainder of the year.

[Frode Jacobsen, executive]

Thank you, Song. We are certainly keeping with the tradition to pair healthy operational development with attractive financials coming in even ahead of our latest expectations. The quarter set new records across our key financial metrics, revenue, adjusted EBITDA and cash flows.



Starting with revenue, we had guided for a modest sequential increase in our year-over-year revenue growth, though adding 3 percentage points to reach a 20% year-over-year growth rate, was well beyond our expectations and guidance range. On a constant currency basis, our growth would have been 6 percentage points higher or 26%. That trajectory, including initial e-commerce opportunities continuing to materialize on top of our continued focus on high value users sets the stage for a very nice update to our outlook on the fourth quarter, which I'll get back to shortly.



We kept our overall cost base in line with expectations, resulting in adjusted EBITDA also over performing well above the high end of our guidance range, and coming in at a 25% margin. With that, Q3 marks our 14th consecutive quarter as a rule of 40 company and yet another quarter of meeting or exceeding our guidance.



I've spoken before about the health and predictable nature of our revenue streams but also about our preference to be cautious when we guide among such rapid growth opportunities. We always try to strike a balance between reasonable expectations while keeping in mind that we operate in a highly dynamic and competitive environment.



Looking more closely at costs, the quarter evolved to a slightly different mix than anticipated, though as mentioned within the expected total of $92 million OpEx pre-adjusted EBITDA. Relative to the second quarter, we increased marketing costs by $3.5 million to $32.5 million, though our guidance had allowed for an even greater increase.



This was partially offset by cost of revenue items scaling with the revenue over performance and relative to revenue increased by about 0.5 percentage point beyond expectations, coming in at $33.1 million, driven by the acceleration within Opera Ads. Compensation cost was also somewhat higher due to increased bonus provisions in light of our performance, though it did decrease as a percentage of revenue as expected and came in at $19.1 million. All other OpEx items pre-adjusted EBITDA came in at $7.7 million, declining in line with expectations.



Our operating cash flow also came in at an all-time high with $34.9 million in the quarter, representing 113% of adjusted EBITDA and lifting the year-to-date conversion to 101%. As mentioned earlier, this metric is expected to normalize as the year progresses, and we expect that operating cash flow will ultimately represent about the same percentage of adjusted EBITDA in 2024 as we saw last year. Free cash flow from operations was $29.7 million or 97% of adjusted EBITDA. That resulted in a net increase in cash even within the quarter that we paid our semi-annual dividend that came with a $27.6 million cash expense, net of the $7.8 million offset from the remainder of our receivable related to the sale of Star X in 2022.



Year-to-date, we have converted 63% of adjusted EBITDA to free cash flow from operations or 86% if excluding the $19.1 million Q1 investment in our AI cluster in Iceland. This quarter, we are also launching a new non-IFRS metric, namely adjusted net income and the resulting adjusted earnings per ADS. This metric, most importantly, excludes P&L impacts of non-operational investments, equity-based compensation and the amortization of acquired intangible assets, net of tax effects. For clarity, I'll note that the acquired intangible assets relate to Opera itself from the privatization of our company in 2016.



We have observed various approaches to strip out such items to get to the underlying net profit per ADS and hope the metric will be a useful supplement when reviewing our financial results. Historical values are included in the Excel table that we published together with our quarterly reports. Then turning to our guidance for the fourth quarter and the resulting further increases in our full year view. As hinted earlier, the fact that revenue growth accelerated in Q3 with a manifestation of expanded monetization opportunities increases our confidence in a year-end well beyond what's been implied in our guidance to date. As mentioned last quarter, we have seen particular strength in the e-commerce vertical, and we are increasingly confident that such benefits will become even more pronounced during the holiday season in the final months of the year.



In parallel, we are increasing our expectations of the Q4 ramp-up in marketing activities following the release of Opera 1 R2 as well as the upcoming GX release. We want to take advantage of our strong underlying profitability to ensure that we are in a position to seize growth opportunities on the back of these releases and set ourselves up with good momentum into 2025, while still coming in ahead of expected profitability for 2024. For the fourth quarter, we guide revenue of $135 million to $138 million or 21% year-over-year growth at the midpoint. That represents an addition of $4 million versus the midpoint of our implicit prior Q4 guidance or adding 3.6 percentage points of growth.



We guide adjusted EBITDA of $30 million to $32 million or a 23% margin at the midpoint. Pre-adjusted EBITDA, our total OpEx is then implied at $105.5 million at the midpoint. We built in over $40 million of marketing spend. So this category represents about 2/3 of the $13 million sequential increase in our total costs, and we add just over 1 percentage point of cost of revenue items relative to revenue.



We expect compensation costs to modestly reduce in dollar amount and the total of other OpEx items, pre-adjusted EBITDA is expected to remain quite stable versus the third quarter, both then declining as a percentage of revenue. Our Q4 expectations translate to a full year revenue guidance of $470 million to $473 million or 19% growth at the midpoint with the range starting well above the high end of our prior guidance. Full year adjusted EBITDA guidance increases to $112 million to $114 million or 24% margin at the midpoint.



With this, we continue to expect a 40 basis point increase in our EBITDA margin for the year 2024 relative to 2023. Our guidance implies marketing costs remaining relatively stable as a percentage of revenue between the years. Cost of revenue items combined are expected to tick up relative to revenue, though this is then more than offset by compensation and other OpEx items reducing as percentage of revenue.



All in all, we expect to exit 2024 with a momentum ahead of even quite recent expectations, setting us up for an exciting continuation in the year and years to come. As a reminder, we report our fourth quarter results towards the end of February, and we look forward to providing the first look at our 2025 guidance at that time. For now, I'll wrap it up by pointing to our long streak as a Rule of 40 company and the fact that we will certainly work hard to stay in that terrain. With that, I'll turn the call back to the operator for questions.

[Operator]

[Operator Instructions] Our first question will come from Naved Khan with B. Riley Securities.

[Naved Khan, analyst]

Just a couple of questions from me, please. One, maybe just on this top line momentum that you're seeing driven by e-commerce. Can you just kind of give us a sense of how fast that e-commerce advertisement revenue stream is growing within the advertising bucket, if you can just give us a sense of that, that would be great. And also, how big can it be over time in terms of overall revenue?



The second question I had was about EBITDA for Q4. And it looks like you are increasing marketing spend in the fourth quarter. And you do have some, some sort of onetime kind of activities like the new browser launch and upcoming GX launch? Also maybe the League of Legends sponsorship. Can you just kind of talk about how much of the increase is associated with these versus just regular marketing?

[Frode Jacobsen, executive]

Sure, I mean, I can go first. So I would say on e-commerce, it's growing faster than the advertising overall growth rate. So it's continuing to increase as a percentage of our advertising mix. I think it's hard to quantify, but it is certainly becoming material. And yet, we're still in the early days of addressing the opportunity. In terms of the Q4 EBITDA number marketing implied, we have more or less shifted the, let's say, unused marketing budget of Q3 into Q4. It's a conscious decision since we just now came out with R2 in October and our new version of GX is also soon to come out and we want to be in a good position to take advantage of that, while at the same time, ending up with EBITDA for the year higher than what we had guided last.

[Naved Khan, analyst]

Understood and maybe just on the earlier response, Frode, about the e-commerce. How are the customers finding the opportunity and coming to Opera for it? Maybe just talk about if you look out a few years, maybe 2, 3 years, 5 years out, do you think e-commerce could be a majority of the advertising revenue or how should we be thinking about this opportunity?

[Lin Song, executive]

Yes. So it's Song Lin. I think I'll just try to answer that. So first of all, I think our e-commerce revenue is very strong just because almost all of them are performance-based, right? So unlike maybe some other advertisers, our revenue is almost purely based on the performance that eventually we bring to the advertisers and the fact that it's growing so fast is a good indication that they are very happy.



And then I think that was a result we actually see some major growth even further in Q4 where we're actually moving into the shopping season. So very comfortable about that. I think percentage-wise, I guess, it's almost a bit comes to classification of what you count as e-commerce, is not that but in general, I think what we see is that it is already a major revenue stream for Opera company as a whole, if we [indiscernible] out. So I think it can be meaningful and it also give us strong growth potential for us in the future. So that's why we are quite excited.

[Operator]

Our next question will come from Lance Vitanza with TD Cowen.

[Lance Vitanza, analyst]

Just a couple of questions. The first on the balance sheet, it looks like cash at the end of the period came in actually quite a bit ahead of where we had modeled. I know, obviously, your EBITDA was strong but I was wondering if there was anything kind of below the EBITDA line that may have favorably impacted your cash flow in the quarter. I don't know if taxes were lower than expected or if CapEx was lower than expected or if there's anything on the working capital.



Then the other question I had is with respect to the OPay stake, and I apologize if I missed this in the prepared remarks, but I'm wondering if there's any change in the valuation there. I haven't had a chance to get through all of the materials that you've disclosed. But if there's any change to the valuation there or any update on your thoughts around the potential monetization of that stake. I think you had it on the books at around $250 million recently. So obviously quite material.

[Frode Jacobsen, executive]

Yes, Lance, I'll answer that. There wasn't anything particular driving the strong cash other than the fact that we actually reduced our working capital by just over $4 million from Q2 to Q3. So that on top of adjusted EBITDA translates more or less to the operating cash flow. In terms of the OPay valuation, it's unchanged. We'll reassess it at year-end, but we've maintained the same value as we had in the prior quarters.

[Lance Vitanza, analyst]

Any sort of update or any thoughts on potential monetization of that asset?

[Frode Jacobsen, executive]

Same as before, it has performed well. We are not actively involved in its operations. So we essentially are a financial investor at this stage. We do plan to divest it either if we get an offer while the company is still private or post a future IPO.



Just to chime in, by the way, on the cash part or go back to the cash part of the question, you also asked about tax. We didn't really pay tax this quarter. So it's really 2Q and 4Q that are the taxpaying quarters. But I think as I indicated on the call, that will affect Q4 and I'd rather point to sort of the full year operating cash flow generation of last year and set the expectation that the percentage conversion from EBITDA to operating cash flow in 2024 will be about the same.

[Operator]

Our next question will come from Mark Argento with Lake Street.

[Mark Argento, analyst]

I just want to drill down a little bit on the AI opportunity. It looks like you guys relaunched a new browser Opera One R2. Just wanted to maybe dig in a little there in terms of the product road map, how you're thinking about the AI opportunity as things evolve here in the marketplace.

[Lin Song, executive]

Yes. So it's Song Lin. So yes, I think as we also mentioned in the prepared notes, so one of the major things that we do launch in the [Opera] is actually AI and Aria, our own assistant AI. Then we also see that we already launched it for about 1 week, but we also already see some big upticks on that. Then also if you compare quarter-to-quarter, like from where we are now, it's already, again, some major increase with some of them. So I think overall, quite excited. We are like without actually dig too deep into it.



I think essentially, we basically see AI as a long-term differentiator and then it will be there, it will be always with users. I think also is a very good medium that we can make use of it. Like you also see that we are also moving both on the UI and just to make it more immersive in the browser but also on media end, where I say last quarter, we lost a lot on the multimedia part of it, images and then we will have more things worked on also from this quarter, so quite excited. Then I think from the other angle, we will also actually do more on both local LLMs, but also how to make it activated through the cloud.



So essentially, I think AI will be super important. It will be indispensable for everyone but then we also took a long-term sustainable view because there's also many other things you have to be respect for, like how to make sure user privacy are well protected in a local scenario, how to make sure that we uphold the highest safety standard. So all those are into consideration when we are building our products. So again, very excited. I think we are definitely [indiscernible] of AI. It will be there a long time. It will be with everybody. It has already impacted everybody's life. It can be more. And we go there for the long run.

[Mark Argento, analyst]

Is there any thoughts around , you look at like the success that Perplexity is having almost kind of tweaking the whole kind of concept of browsing, almost kind of putting AI first and obviously being able to charge for a product like that. I think they're charging $20 a month, not too dissimilar to ChatGPT. Is there anything in the road map or potential subscription type product that you guys can launch just given the features that deep rich feature sets that you guys have built out?

[Lin Song, executive]

Yes. So that's a very good question, right? So I would almost say, I think in general, off, if you see in the past our historical track record, right? So I think in general, we are more in favor of how to make those AI products more accessible to everyone out there instead of prioritizing on charging or subscription base. I think that's actually also part of why we are also being careful in launching it in the right time. That's also why, for instance, we are now working on potentially cloud hosting, which of course is actually very manageable from our end, but still be able to maximize user engagement.



So yes, so I think all in all, my feeling that I think we will probably prioritize how to make this more accessible to the end users instead of purely subscription base, but we are contemplating all the aspects of it. We do also have subscription-based products like VPN. So it's not surprising. But I would say, at this point, our strength would probably be how to make sure it reaches the maximum audiences.



I think partly also because, yes, like route itself, we managed to make it quite a profitable product. So unlike some AI start-ups, we don't really need to maximize for revenue short term. I think that's also perhaps one of the strengths that we would have against some of the other start-ups, which they are just spending money. So that we are quite proud of.

[Operator]

Our next question will come from Eric Sheridan with Goldman Sachs.

[Unknown Analyst]

This is Alex on for Eric. Just want to dig into the iOS opportunity in Europe. Now that you've had a few months under your belt , more than a few months under your belt since the [ DMA ] went into effect, any color you can give on user retention rates, sort of browsing behavior, ARPU for the iOS users in Europe? And on the investment side for iOS, is it really just on marketing spend at this point? Or is there any sort of product development or other investments that you need to make in Europe to tackle the iOS opportunity?

[Lin Song, executive]

So yes, I think as we also addressed in the prepared notes, we are quite happy with the progress that we have in iOS. It has been growing significantly. It received our iOS as a whole, but I think we also particularly think about the inflow of users of users increased more than 60% that we see in Europe. So I think it's actually pretty much above what our expectation is before this summer, and we are also happy to see that this trend continues. So yes, so I think in Q4, we'll probably see stronger growth in iOS. We are very happy of how that has been received



Together with the new Opera launch of Opera One R2, which we are proud of, we will also have corresponding release on iOS accompany that because we also feel that there's also beautiful potential of combining many of those desktop users, which are already using Opera, but hopefully, a big portion of them also have the iOS phones. So we think that when that mature, it's also a good opportunity for us, both for iOS, but also potentially for GX Mobile. So that's what we are focused on in Q4. Again, very excited because if you look at our penetration in Western market, we still have a lot of growth potential, even if we just make sure that all the operators in Western market and PC are also using that on mobile, for instance. So quite excited about the opportunities.

[Operator]

[Operator Instructions] Our next question will come from Alicia Yap with Citi.

[Alicis a Yap, analyst]

I have one follow-up question. Would you please share with us latest user matures and feedback on Aria on Opera One .Also, would management share some initial view on the next year top line growth expectations and EBITDA trend? And any investment areas that we should be aware of?



[Audio Gap]

[Lin Song, executive]

I'm not sure if I hear you fully because the voice is a bit vague. But I guess you have asked about our Aria. I would say that we already like compared with Q3 to Q2, for instance, we already see some major uptake of Aria, it's probably well almost up to 50%.



So some major growth, very excited. But of course, we see that potentially will be even more growth in Q4, which is our focus because we have also decided now that it's the right time to make us even more easier to discover Aria and also to be able to use it without having to register account, for instance, and lease initially. So all those will probably have some major impact on the Aria usage, which we are very excited about and closely monitoring upon. Yes. So I think that's part we're quite excited. I have not heard the second part of the question.

[Frode Jacobsen, executive]

I can address that. It was about investments, as I understood it, in the fourth quarter. I think the key point we want to make there is that it will be in our core product portfolio. That's what we always do with ongoing development, of course, but now with new releases on both 2 of our very key products with Opera One and GX, our marketing budget will follow. So we guide for a substantial increase from Q3 to Q4 in marketing, still within sort of the original guidance of marketing spend for the year, but we've reserved budget for the fourth quarter and that opportunity.

[Operator]

It appears we have no further questions at this time. I'll now turn the program back over to Song Lin for any additional or closing remarks.

[Lin Song, executive]

Sure. So like again, thank you all for joining us today to cover some of the highlights from the third quarter. We have been looking forward to share these results with you and to update you on our trajectory for the rest of the year. We think the third quarter really demonstrates how we have navigated Opera into a position with continued and strong underlying growth and how we stand to gain from our focus on users with the highest ARPU potential and monetization areas that are truly scalable. We wish you a good rest of the day and look forward to reconnecting on our Q4 results.

[Operator]

Thank you ladies and gentlemen. This concludes today's event. You may now disconnect.