Truecaller AB

STO:TRUE B

Earnings Call Transcript 2022-Q3

[Operator]

Hello, and welcome to the Truecaller Webcast with Teleconference Q3, 2022. [Operator Instructions] Today, I am pleased to present CEO, Alan Mamedi; and CFO, Odd Bolin. Please go ahead, with your meeting.

[Alan Mamedi, executive]

Thank you. Hi, and welcome, everyone, who's listening in. I'm Alan Mamedi, and I'm the CEO and Co-Founder of Truecaller. With me, I have our CFO, Odd Bolin. We're very happy to announce our interim report for the third quarter of 2022.

I will start with presenting financial and business highlights, I will then provide an update on some of the exciting things we have released during the quarter. Odd will then walk you through our financial performance in more details. Finally, I will wrap it up with a summary of the quarter, and then we open up for Q&A.

So let's get started with the highlights of the quarter. We closed Q3 with an average of 331 million monthly active users, a 14% increase year-on-year. Average daily active users grew to 261 million, an increase of 15%. This means that our DAU to MAU to engagement remains strong at 79%.

Our net sales continues to grow. We closed the quarter at SEK 450 million, a 44% increase compared to the same quarter in 2021. Thanks to investments in our products and the growing problem our product solves, we've been able to grow our revenues, and we'll continue to do those investments and initiatives, which can further improve our effectiveness, and long term, I continue to see great growth potential for our services, and I'm pleased that we're in the strong position we are in compared to many other global tech companies.

We also had a strong adjusted EBITDA of SEK 181 million, which is an increase of 54% year-over-year and an adjusted EBITDA margin of 40.3%. We continue to have a very strong cash flow with SEK 162 million in net cash from operating activities in the quarter. During the quarter, we experienced a somewhat more cautious stance from some advertisers, which, for example, meant delayed investments.

Overall, the demand continued to be strong, but in certain regions, the weakened macro uncertainty could create spillover effects, and we cannot rule out that the increased uncertainty could, to some extent, impact our main markets. However, we're very proud to be a profitable, high-growth tech Company and intend to continue so with solid profitability, great margins and strong cash flow.

We continue to grow our user base across targeted regions and saw the highest growth rates in South America and Africa compared to the same period last year. India continues to be an important market for us, which saw the highest user growth in terms of absolute numbers this quarter.

On the product side, we launched a couple of exciting new things this quarter, including the global launch of our new iPhone app and our improved subscription offering with the integration of Truecaller Assistant, which is now available on Android and iOS for subscribers in the U.S. I will cover these in more details in the next few slides, but we're also very excited that Truecaller for Business continues to grow. We now have customers in 34 different countries, and we're proud to share that out of the 10 most valuable brands in India, 7 of them are now Truecaller for Business customers.

Our user base continues to grow. Majority of our user growth is driven by strong organic growth, but we are also seeing our investments in user acquisition, start to seed upcoming markets that are of strategic importance to us. We're also investing in staffing up the team that focuses on user growth. As we communicated earlier this week, we also appointed Ben Zhang, as Chief Business Officer. In this role, he will be responsible for all growth metrics.

We closed Q3 at an average of 331 million monthly active users, which is up by 40 million from the same period last year or a 14% increase. Our daily active user base is also growing at a healthy pace. We closed the quarter at an average of 261 million daily active users, which is a 15% increase from last year. We had a somewhat slower start this quarter when it comes to growth of new number of users, but during the last week of September, we started to see DAU and MAU growth ramping up. So we continue to see an overall healthy growth rate coming into the fourth quarter.

While we are starting to invest more heavily in driving user growth, we're proud that most of our user growth is still organic, as this demonstrates the growing relevance of our services. The effect from the preinstalled deals announced earlier this year is still small, as shipments can take some time, but KPIs from shipments may continue to look very promising.

Also, during the quarter, we saw a similar development in India, as we recently have seen in the EU, where the Indian competition authority look -- took decisions against Google, which clearly restricts them from pushing OEMs to favor Google's native applications. We anticipate that this, over the long term, will have a positive impact on our growth opportunity, especially on preloads. Lastly, we continue to see solid engagement, and in Q3, we had 79% of our monthly active users being active on a daily basis.

As a product-first company, we continuously invest in developing our offering to further improve the user experience. As usual, let's recap the product offering. There are 2 main areas, where we focus on from a product perspective, one is the consumer product, which is available on iPhone and Android. As mentioned, 331 million users use Truecaller every month. And we're proud to be the leading global platform for phone number verification. Consumers use our product in order to have a safer and more efficient calling and messaging experience. It's their go-to product for their communication needs.

The other side of this is our business product that we call Truecaller for Business, which allows businesses to verify through a KYC process and become verified businesses on our platform in order to increase trust in their communication with consumers, but also to prevent impersonation. They can also integrate their calling and messaging experience directly into our product, so that they can grow their business more efficiently through features like call reason and much more.

Now let's get into the highlights. As I mentioned earlier, Q3 was a very exciting quarter for us from a product development side. Some of the highlights this quarter include the global launch of our new and improved offering on iPhone. We also launched Truecaller Assistant to subscribers in the U.S. on both Android and iPhone. We believe that these 2 investments establish the foundation for future growth in terms of both iPhone users and paying users. We also continue to work on our core products through initiatives that improve the user experience across AI identity and our communication offering. We also further developed our ads and enterprise products, and I will go into details on all of these areas in the next few slides.

In late August, we launched a brand-new version of the iPhone app for users globally. The iOS app was completely rewritten and offers a fundamentally better experience from end-to-end. The revamped version provides a much faster, smoother search experience and significantly better caller ID functionality compared to previous versions of the app with up to 10x improved spam and business number identification. We've already begun to see significant improvements in metrics from iPhone users in comparison to the most recent version.

Key performance indicators such as daily active users on iPhone have increased by over 30% since the launch of the new app. The team's focus has been to build a great product, get engagement going and later focus on optimizing advertising -- the advertising side and premium offering on iPhone, which will be prioritized soon. Overall, we are very optimistic about growing our share of iPhone users in the coming years.

Next, we want to share an update about our new offering for our subscribers, Truecaller Assistant, but first, a short video that showcase the product.

[Presentation]

[Alan Mamedi, executive]

Thank you. Great. We acquired CallHero earlier this year and are very proud that we successfully completed a full integration of the assistance offering within months. The first version of Truecaller Assistant was launched to the premium subscribers on Android and iPhone in the U.S. at the end of Q3. We chose the U.S. as our first launch market due to the high volume of unwanted calls in the market, as well as American consumers familiarity with call screening and related services. Having that said, we're still in a very early stage, but excited about the future aftermarket.

Also, we are in the process of testing assistant in other markets ahead of our further expansion. But preliminary data since the assistant launch at the end of September indicates strong potential for the offering. We continue to focus on improving the assistant experience before investing in user acquisition and marketing activities. And so the adoption of this new feature has been all organic so far, but is expected to start in Q4.

The introduction of the digital assistant enabled by cloud telephone, it takes call screening to the next level. And we're looking forward to build more things around this technology in the future, such as virtual phone numbers and more, as the first product delivered from Truecaller's cloud telephony platform, Assistant establishes Truecaller's commitment to building out its capabilities and innovating further by leveraging such technologies.

We continue to develop our core offering in order to provide users with a smarter, safer and more efficient experience across their communication needs. We continue to invest in AI identity, our artificial intelligence and machine learning powered caller ID and spam detection capabilities. Some of the AI identity initiatives in the third quarter have resulted in significant improvements in data quality in strategic growth markets, including the U.S., India, Indonesia and Nigeria and Brazil, to name a few. A large majority of Truecaller search results globally are now powered by our proprietary AI algorithm in combination with [ user ] profiles. We continue to work towards building even better data quality at a global scale through contextual information to deliver more value to our users.

Now partly connected to that topic, an effort is ongoing in India to modernize outdated laws surrounding telecommunication and data protection. We hope that a decision will be made in 2023. We are in favor of this development and welcome initiative, the initiative, which is aimed at providing a modern full-spectrum framework focused on innovation and user security that manifests consumers' right to know, who's calling them. Based on the draft amendments available, we see no material negative impact on Truecaller's business model or earnings capacity.

I know that there is sometimes a concern in the market that GDPR-like regulations in India and other markets could hurt Truecaller, but I think the risk is exaggerated. Like we've mentioned before, the absolute majority of our caller ID lookups are powered by consent-based data, business data, spam data and now our AI-powered identity.

Back to the product again, we introduced community feedback engagement points in previous quarters, and these initiatives have begun to show strong traction. Community feedback not only drives user engagement, but also serves as a source of additional input to improving Truecaller's data quality in terms of accuracy in the identification and by identifying an unknown number, as spam, potential scam or a specific business. Community feedback is rapidly developing into a valuable asset for Truecaller.

Since introducing this initiative earlier this year, we have processed millions of comments, up and down votes and other survey responses from users. And in Q3 alone, tens of millions of caller name suggestions were provided by users in Q3 alone. To reward these user contributions and building a stronger community feeling, we also enriched user profiles. Now users can view their personal in-app statistics and see the value that Truecaller brings to their communication in real time.

Our advertising business continues to grow, driven by investments to improve our ad tech capabilities on both the supply and the demand side. On the supply side, we continue to collaborate with demand partners to test more innovative, performance-driven ad formats. Optimizations on the inventory side have helped us maximize yield per ad opportunity and efforts to improve render rates were also impactful, as we delivered our highest render rate ever this quarter.

On the demand side, we continue to strengthen our ability to provide best-in-class experience for a growing range of demand partners and advertisers. Investments in the third quarter to improve our independent tech stack include the introduction of our yield model to optimize third-party demand, as well as the development of the capability to execute performance ads through the Truecaller ad server. We also established an end-to-end demand side platform to extend our reach beyond the Truecaller ecosystem and widened the portfolio of use cases offered to advertisers.

From a third-party programmatic perspective, we continue to scale new partners and introduce new integration path in order to further strengthen the demand. And we're proud to be a chosen publisher for a wide range of leading brands across different industries. The improvements to the ad product that we made this quarter helped us to grow revenues despite the macro headwind that we have faced in some of our markets during the quarter. We still have numerous opportunities to increase the engagement in our app and continue to improve our ad platform to be able to display ads to our users more effectively. We will continue to make improvements that can help us to increase our revenue per user, even if the external macro environment becomes even more challenging.

Now on the Truecaller for Business. The demand for Truecaller's enterprise offering continues to grow at a strong pace. In the third quarter, Truecaller onboarded a number of notable brands in India across sectors, including Indigo, the largest airline in India and LG Electronic -- Electronics, which is one of the top 2 consumer electronic brands in the market. Our relevance to the players in the financial sector is also very apparent, as we added a number of leading banks and insurance providers to our client portfolio this quarter.

We also continue to expand Truecaller for Business in markets beyond India, most notably in South Africa, Kenya, Egypt and Peru. We continue to invest in Truecaller for Business from a commercial and operational perspective. We made substantial improvements to the Truecaller for Business website in order to provide an even more intuitive self-serve experience for both direct sales and resellers.

We also restructured our engagement model to introduce value-based pricing tiers in India. The new pricing model also encourages customers in all markets to commit to longer-term plans. We have seen great results from these enhancements. The number of Truecaller for Business customers transitioning into quarterly or semi-annual or annual plans continues to grow and the majority of new customers directly committed to 10-year plans in the third quarter. We believe this indicates the long-term value delivered by the enterprise offering.

We also made a number of investments to improve the business customer experience. We introduced a revamped analytics experience for business customers, who can now take advantage of an upgraded analytics dashboard that delivers better data visualization and also allows for automated reports -- report generation. The new analytics platform sets the foundation for more valuable intelligence that businesses can be reached higher levels of messages sent, delivered and read. B2C messaging is an interesting area for us, and we'll continue to make investments into this product of Truecaller for Business, and we're very excited about the opportunities with Tanla.

We continue to explore new use cases and develop more value-added services in addition to the core business offering. In previous quarters, we talked about early access programs, which allow selected customers to test new offerings in early stages of product development.

In third quarter, 2 initiatives from the early access program matured into fully commercialized products. Video Caller ID for Businesses enables companies to deliver customized videos when they call a customer, introducing a new visual element that helps reinforce their brand, as you see here on the slide.

Call Me Back enables users to show their interest in a business offering when they are not able to answer the phone and has already shown promising indicators of improving conversion rates. We continue to develop these offerings, as well as other initiatives in the pipeline with the early access program to deliver even more value for both businesses and end users.

Now over to Odd to talk about our financial performance.

[Odd Bolin, executive]

Thank you, Alan. Well, [ that is time ] to look a bit deeper into the financial performance this quarter. As usual, we start with our revenue development, which I'm happy to say, continues to be strong despite the challenging macroeconomic climate. We believe that growing our revenue by more than 40% with an EBITDA margin of 40%, considering the current macroeconomic headwinds facing many companies with digital advertising revenues validates our business concept and market position.

That the revenue growth rate has come down from the extraordinary levels we have seen in the past is expected and something we discussed already at the beginning of this year. The comps are getting substantially tougher due to the strong growth we have had during the last year, but in absolute figures, our revenue growth continues to be strong.

The revenue growth is mainly driven by continuing satisfactory developments in advertising. This is an effect of the sustained growth in the number of users in many different geographies, combined with the continued growth of revenue generating ad impressions per user. As Alan mentioned earlier, we also see continued positive trend for our B2B offering, Truecaller for Business, which is growing nicely both when it comes to customers, as well as revenue. And our subscription business has also stepped up and income is growing by almost 30% compared to last year.

During this quarter, we have noticed a slowdown in ad demand in the Middle East and Africa region, although demand in India and the rest of the world has continued to be quite solid. What we will do -- what we do see is an increased uncertainty among advertisers, which may result in investments being postponed. The underlying drivers for our growth in these markets are, however, unchanged. We are solving important problems with our -- which drives our user growth and digital advertising is still at a considerably less mature stage than investment markets.

There are also a few other external factors outside of our control that affects our business. Exchange rates, of course, as the Swedish krona has been losing value towards both [ iron ore ] and USD, we'll see a positive impact on our revenue, that we report in [ Swedish kronas ] and our profits. Since we are paid by partners like Google in Swedish krona and to some extent, U.S. dollars, we cannot quantify our actual currency exposure precisely, but we estimate that the currency effects have impacted our revenue growth by -- revenue growth rate by slightly more than 10 percentage points and strengthened our operating margin with slightly more than 1 percentage point.

On the other hand, from a comparison perspective, we had a negative impact during the quarter from the fact that the Indian Premier League, the cricket league contributed only to our second quarter revenue in 2022. While in 2021, it was spread over both Q2 and Q3, meaning that Q2 this year became relatively speaking, stronger in terms of growth, while Q3 became relatively speaking, weaker.

As Alan said, our ads machinery is getting increasingly efficient, and this quarter, we grew ads income by 40% compared to last year. The basis for increasing advertising revenues, as always, more users and increased use of our app. But in addition to that, the revenue increase continues to be driven by factors such as increased ad volume, improved prices, increased direct sales, more demand partners and an improved render rate. These are factors that we, to a considerable extent control, and we continue to make improvement to that product, which will help us grow revenue even if demand was to slow down due to macroeconomic factors.

In combination with us being active in markets, which have been generally less affected by the macro headwinds compared to the U.S. and Europe, this puts us in a good position to continue our growth even as the global economy faces challenges going forward. We cannot, of course, not rule out the risk that India and other markets that are important to us, will become more effective going forward, but we will certainly continue to be innovative and thereby increase the engagement in our app and continue to improve our ad platform to display ads to our users more effectively.

As mentioned on the last slide, we have a positive effect from FX and a negative impact from the Indian Premium League, when [ you're ] comparing quarters. If we were to exclude the Indian Premier League related income from Q2, we would have seen a growth from Q2 to Q3, which gives you an idea of the magnitude that IPL-related ads income had in the last quarter.

When looking at our subscriptions, you can see that we grew our revenue by 28% compared to last year, which is the highest growth rate we've had for a while. The growth in premium users exceeding the growth in monthly active users. We see growth coming from many different markets. During the quarter, we tested different premium entry plans in India, which showed promising results. And we will continue to roll out these tests to other markets in the fourth quarter.

Truecaller for Business is developing well with many new large enterprise clients. We are now present in 34 countries, and we continue to improve our capabilities. And as Alan said, more and more customers have longer relationships with us.We continue to improve our offering, and during the quarter, we launched more sophisticated price plans, which increased the opportunity to do upselling with more value-added services when the relationship evolves.

When it comes to sales channels, new customers were quite evenly spread between direct sales, resellers and inbounds and during the quarter, self-serve and assisted closures reach an all-time high, which increases our effectiveness in this segment.

Gross profit increased by 41% year-over-year, and our gross margin continues to be strong, but decreased by 1.7 points -- percentage points compared to Q3 last year and decreased somewhat more compared to the last quarters. The decrease has 2 main reasons. One is increased cost for service and hosting due to our larger user base. These costs do not scale linearly with the number of users, but rather stepwise.

And the second reason was increased cost transparency from advertising platforms that previously only reported net figures to us. We now get some explicit cost of goods sold figures, which decreases our gross margin somewhat. The effect in Q3 is based on the cumulative figures for the entire year since we have been [ given ] 2 similar inflows over the first half of the year. But consequently, the gross margin FX in the upcoming quarters will be smaller than what we see this quarter.

If we then turn to costs, we -- you have heard us talking about ramping up growth-focused investments. We have, however, increased these investments more slowly than we anticipated at the beginning of this year. We realized that we needed to focus more on building the right team and confidence to have capabilities internally to be able to get a good return on investment on the investments we do. We will continue to grow these investments based on a continuing analysis of both the strategic importance of seeding new markets and the return on investments we get in, in a shorter perspective.

I want to put out here -- I want to point out here that we will see increased marketing costs during the fourth quarter. We have always been clear about the fact that we believe that growth-focused investments are important for us long term. And in Q4, we intend to make a somewhat larger one-off investment, focused specifically on one, growing our presence in Tier 2 and Tier 3 cities and villages in India, where we see a very substantial potential; and 2, expand our user base in the U.S. based on the new iPhone app and the roll out of the Truecaller Assistant feature. I expect those investments to impact our operating margin by somewhere in the order of 5 percentage points in Q4. In 2023, quarterly marketing costs, on average, will get back and stay at the similar levels, as we've had in 2022 as a whole. Preloads our app on new smartphones continue to be an exciting opportunity for us and shipping a preloaded devices has started, but [ expect ] to ramp up during Q4 in 2023.

So this quarter is the first quarter, where we have a full quarterly impact from the incentive program that we launched in Q2 this year. A reminder here is that this year's program included restricted stock units, RSUs, which results in higher costs being booked in the profit and loss statement than warrants or options. However, these costs will not have -- will have no cash flow effect until 2024 at the earliest when we'll have to pay on social security fees for the value of the shares that are being given to our employees in Sweden at that time. The cost will also potentially be quite volatile depending on the share price development.

As you know from the last quarter, we, in our reporting breakout corporate tax rate and the Indian tax rate. This quarter, the tax rate was 23%, and I think it is reasonable to expect it -- that to increase to stay at this level or increase somewhat as we increase our profits in our India operations. The taxes we pay are based on our transfer pricing policy, of course. The purpose of the policy is to ensure that we pay tax in a correct manner from the perspective of both the Swedish and the Indian tax authorities. We've had this -- we've had this for a long time, and we've always paid our taxes due and we're not subject to any tax fraud investigation.

Adjusted EBITDA margin at 42.5% for the quarter. As I mentioned on the last slide, I would like -- would expect some one-off effects on the margin in Q4 related to the larger marketing investments we do. So that is worth keeping in mind.

Cash wise, we continue to underwrite cash at a good rate. This is the quarter -- this quarter we had a cash flow from operations of SEK 162 million. And we now have close to SEK 1.9 billion in cash and short-term investments. And also, we still have the SEK 400 million unused revolving credit facility. We continue to think this is an excellent position to be in at this point in time with a lot of macroeconomic uncertainty and falling valuations for tech companies that are not profitable and might have a tough time in raising capital.

We are, however, mindful about always optimizing our financial position in order to give our shareholders the best possible return on their investments. And in Q3, the Board decided to launch the repurchase program based on the decisions on the Annual General Meeting to give a buyback mandate of up to [ 5 total ]. We now have 1.4 million treasury shares, which have been bought back at an average price of SEK 36.6.

When we went in the silent period ahead of the Q3 report, we halted the repurchases in line with the rules for our repurchase program. From Monday, we again have the option to start buying back more shares to further optimize our cash and capital position. We also continuously scan the more customer base and distribution power.

We continue to deliver on our financial targets with a strong growth and solid profitability. And year-to-date, our net sales growth has been 80% and the year-to-date adjusted EBITDA margin is equals 43.7%. I think the targets are still valid and something we will continue to strive to outperform. But of course, there might be a variation between quarters.

With that, I will hand back to Alan, to wrap things up before we start the Q&A.

[Alan Mamedi, executive]

Thank you, Odd. Some concluding slides to wrap this up. I'm pleased to report this quarter that our business continues to develop positively. We have always been a product-first Company and always will be. We invested a lot in improving our core product offering. We're also incredibly excited about the launch of the new iPhone app and the Truecaller Assistant, as we see both of these as strategic investments that set the foundation for future growth. We continue to see stable, mostly organic user growth with the highest growth rates in South America and Africa, which are markets that we see, as important for us moving forward, and we saw improved growth late in Q3, which is encouraging coming into Q4.

We're proud that despite uncertain macroeconomic conditions, we have been able to deliver good results. We continue to deliver strong financial performance in terms of growth and profitability with growth in net sales of 44% year-on-year, combined with 40.3% adjusted EBITDA margin.

As stated in the beginning of the presentation, we've also started to see some effects of the [ depressed ] macro and cannot rule out that it will impact our main markets to a larger extent going forward.

On the other hand, we'll continue to grow the user base, and we still have a lot of levers to improve our offering across the board. For ads, we will continue to increase the effectiveness of our platform. For subscription, we have started to improve the offering, and we'll continue that path. And lastly, the growth journey for Truecaller for Business has just started, and we can continue to -- strong demand for the service, both in India and outside of India.

Lastly, we're proud to be in an incredible position with solid financial, strong cash flow and strong organic growth. This puts us in a different position compared to other global platforms that have a -- have to cut staff and initiated different kinds of cost-cutting programs. Our strong position and our continued growth means that we still will continue to invest in talent in a healthy manner. And even in a time of uncertainty, we will continue to take advantage of our strong position and find opportunities to continue growing.

It goes without saying that none of this would be possible without our users, the great partners that we work with and the phenomenal Truecaller team across the world.

And with that, we're happy to open up the floor for questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Predrag Savinovic at Carnegie.

[Predrag Savinovic, analyst]

So my first question is one you get every quarter, so apologies for that. But in terms of appetite, business momentum, customer behavior, market sentiment, all these things, you mentioned some potentially for the longer run or for 2023, but could you give any flavor on the start of the fourth quarter? And then also, you mentioned some positive seasonal effects into the second quarter, which created some headwinds into Q3. But are there any specific events of this character we should be aware of for the fourth quarter?

[Alan Mamedi, executive]

Should I start.

[Odd Bolin, executive]

Yes.

[Alan Mamedi, executive]

All right. Cool. Thanks for the question. I think so far, what we've seen is, in general, the economy is good in our markets. It's not on the same level, as we've seen in some parts of the Western world. But that uncertainty, of course, spreads, where people might put certain investments on pause for later during the year. We have so far seen a pretty good development, I would say, even though we do hear from that some are -- we do hear some softer sentiments. But I would say, in general, we are not seeing what other ad-based companies in the Western world are seeing, not on that scale.

[Predrag Savinovic, analyst]

And then on CPM, and I know this is not your main KPI, but still, what is your idea now of the price that you take compared to other similar platforms in India. And I know we've spoken before if we take Instagram, Pinterest, Facebook to these guys that they have rates several x higher than what Truecaller takes. And if there's still a big gap here, do you think we should expect to see price uplift as a continued driver over time?

[Alan Mamedi, executive]

I think, first of all, it's important to look at ads businesses with similar type of ad units, which are not like video based or in a content sort of like content products, where you digest ads in a different way. But if we look at peers with similar ad units, I would say we're still very much behind them, which means we do have a lot of room.

I think what is interesting and exciting to look at is how did we perform on CPM in India in Q3 compared to Q3 last year, where we actually grew with 15% even though we had IPL in Q3 last year. So that says a lot about the improvements that we have done, and we're on our way to improve that further. But we're nowhere close to where some of our peers are with [ over ] 20 years of experience building out their platforms. And I'm, of course, referring to the big ones. But we will get there.

[Odd Bolin, executive]

And to add to that, Predrag, we obviously don't have an exact measure of our pricing versus the pricing of people like Facebook or Google. But what we do see and what we have said and seen before is that they are, as you said, a number of x times higher than we are, we said 5 to 10x. Our CPM has only increased marginally as compared to that, so far. So the general conclusion is still the same. We are behind us, and we are in the process of catching up, but there's a lot more that we can do.

[Predrag Savinovic, analyst]

And just one final. You gave some information on the gross margin from hosting and from cumulating costs from our channel partner in this quarter. So it sounds as if the gross margin should improve again in Q4? And if that is true, could you help us or give us an idea of what kind of gross margin improvement we can expect in the fourth quarter?

[Odd Bolin, executive]

I think that is a bit too specific to talk about at this point. But what we did say at an early stage was that we expected our gross margin to stay above 75% and even between 75% and 80%, and that's where we are, and that's where we -- that's where we think we're going to stay. It did see -- we did see some gross margin improvements over the last year. That was due to the fact that more traffic was channeled through partners that didn't give us full transparency in terms of costs. But the basic conclusion that we draw almost -- already a year ago with the gross margin staying at or above 75% is still valid.

[Operator]

Our next question comes from the line of Akhil Dattani at JPMorgan.

[Akhil Dattani, analyst]

Can I start, please, with a question on your macro comment through your introduction. I guess I just wanted to understand a bit better exactly the things that you're seeing, also you've talked about postponed investment plans and general uncertainties. But I guess, I was trying to understand how that's really translating.

And I guess sort of the thing I'm trying to understand is whether this is just some cautionary comments from you or they actually seeing anything hard in your business. And the question really is that when we look at digital platforms in the developed world through the previous recessions, actually recessions actually help digital platforms gain market share because they were more effective tools for marketing advertising than traditional ad platforms. And obviously, if you look at your markets, in emerging markets, I'd assume digital penetration rates are still very, very low. So I guess it's really just to understand how are you thinking about these various moving parts? Is it just more [ rhetoric in ] commentary? Or do you expect this could genuinely impact and drive a slowdown in the business? Maybe I'll wait there, and then ask my next question afterwards.

[Alan Mamedi, executive]

Yes. think we have yet not seen any material impact of macroeconomical change in our markets, but we're highlighting that it's not impossible. It could happen. And that is based on that we've seen some companies, who are putting certain things on delay because they don't know what to expect. They just hear what's going on in the rest of the world. And that could, of course, spark some uncertainties.

Having that said, we should also remember that during times like this, when demand might go down, it actually creates opportunities for well-funded companies like ourselves to actually acquire customers much cheaper. And we saw that in -- during the early period of COVID in 2020, where we saw opportunities to purchase -- to acquire users much cheaper than previously. So I think there are opportunities that will rise. We are well funded to take those opportunities when they come. But we're not seeing these sort of material uncertainties that you've seen with some of the other companies. We are not there.

[Akhil Dattani, analyst]

The second one was just on this new Chief Business Officer appointment that you mentioned. I just wondered if that's a new role or whether it's just a change in the organization. And just if you could maybe give us a bit of a flavor of the reasons for doing that? Is there a change in focus or change in strategy? Is it with the iPhone? Just any sort of commentary on that would be very helpful.

[Alan Mamedi, executive]

Yes. It's a good question. So I would say previously or since the beginning, growth has always been under myself and my Co-Founder, Nami. And Ben has been working with us through his role at Sequoia for a couple of years. He was also part of helping us during the IPO process. And we realize that he has a very strong understanding for growth drivers, what metrics to look at. So he has a good [ nose ] for that basically. And we felt that there is an opportunity to bring someone in that can actually take things off our plates basically. So I see that this has a great opportunity to strengthen our bandwidth.

[Akhil Dattani, analyst]

And just a super quick last one. In your results release, you mentioned some discrepancy on customer number reporting from Google and that you've said you've sort of identified the problem and it should get addressed in Q4. I just wanted to understand, is this just purely an impact on the customer numbers, I think, I was saying it's like a [ 2 million ] impact, and there's no financial impact. Just if you could maybe just help us understand how we think about it is it just pure KPIs? Or does it have any other impact?

[Alan Mamedi, executive]

Yes. It's a good question. So we did find that there was a bug with a certain part of Android on a new version that was rolled out slowly to certain devices during the year. So it wasn't easy for us to actually to discover this early on. So we saw it later in the journey during the year. What it did mean was that certain logging events to know whether the user is active or not, were sort of [ not send ] to the service side. So the only thing that has been impacted is the DAU and MAU numbers to around 2 million.

[Operator]

Our next question comes from the line of Yemi Falana at Goldman Sachs.

[Yemi Falana, analyst]

The first one is on kind of the interaction and usage on the application. Clearly, your feature roll out has been strong, but you're continuing to drive ad monetization. So could you maybe talk about how ad engagement -- how engagement [ sorry ], and the platform has evolved through the year? How often are daily active users interacting with the app now relative to a year ago? Or perhaps maybe a time on app is a better metric, how has that evolved through the year?

[Alan Mamedi, executive]

Yes. Good question. I mean, it's a very broad question with a long answer, but I will try to keep it short. In general, all our engagement numbers have more or less gone up, some of them quite significantly. But in general, I think what we need to continue to do, and that obviously drives more ad impressions and more revenues. But our ambition is not to drive engagement up because we want to make more money. It's just a result of building a great product. And so all these engagement metrics has gone up the last year or 2.

Historically, I would say they have always gone up. But we know that there is much more to do on the engagement side. And this is all about building our products much better, making it cleaner, easier for people to use. And we've noticed that entering new markets means that we need to work a lot more on the onboarding part of the product, so that people know what to expect, what's the value proposition and the promise in a market.

Like India, for example, or South Africa or Nigeria, people know what they get when they download Truecaller. They don't really care about what we say. But the new markets that has a big difference on retention. So these are the things that we're focusing a lot on, I would say. And I'm looking forward to 2023 because I don't think our internal KPIs has been this clear before.

[Yemi Falana, analyst]

And then maybe a couple more. So on the subscription side, we saw a large rise in subscribers this quarter. Could you maybe talk about the dynamics there? I would expect consumers are less willing to subscribe with time just given the macroeconomic context. Are you pushing the product more aggressively? I know you mentioned some optimization that you're doing in India. Any color there would be great and how you expect that dynamic to evolve?

And then finally, maybe just on regulation. Clearly, as you've outlined, the -- this iteration of the Indian telecom regulation appears relatively benign in terms of the impact on your business. But on a forward-looking view, given you've got much kind of greater insight in terms of the regulatory direction than we do, do you see any risk that data-centric businesses like your own may be more costly to operate going forward? Any color on those points, would be really helpful.

[Alan Mamedi, executive]

All right. Thank you. So on the last question, I don't think so. I haven't seen any indications that would show that. But on the subscription side, and in fact, both consumer subscription and Truecaller for Business has -- we have not seen any signals at all that would show a certain uncertainty amongst individuals or businesses buying service from Truecaller that provides so much value. So we haven't really seen those signals yet.

One sort of data point we have is that early 2020 when COVID happened, we could definitely see how ads revenues started to soften because businesses were uncertain about what's going to happen in the world. But on the user subscription side, that actually just continued. It was basically as nothing had happened. And I think that's a really good data point for us internally to be aware of that long-term subscription is an important revenue stream, and we should invest more. But there are many factors around that, such as how people are used to paying for subscription services, which we cannot really control. But markets are maturing and people are getting used to paying more and more for premium functionalities.

[Operator]

Our next question comes from the line of Jesper von Koch of Redeye.

[Jesper Henrikson, analyst]

So I'll just start with some questions around the geographical development. So Middle East and Africa grew only by 9% year-on-year despite Africa being the fastest-growing region in terms of users together with South America. So could you just talk about like what is driving the weaker performance in the Middle East? Is it only the weak macro environment? Or is there anything else?

[Alan Mamedi, executive]

Yes. That's what we believe, yes.

[Odd Bolin, executive]

That it is macroeconomic.

[Jesper Henrikson, analyst]

And then, I mean, you went into it a little bit before, but could you also talk about like your progress on building an ecosystem in like the rest of the world and Middle East and Africa. I mean, considering that you're growing the user numbers well, but monetization hasn't really spurred, I mean, except the macroeconomic effect that we're seeing right now.

[Alan Mamedi, executive]

Sorry, the question is on advertisement or...

[Jesper Henrikson, analyst]

[indiscernible]. No. So your progress on like building an ecosystem in like the other regions, except for India?

[Odd Bolin, executive]

You mean a critical mass in the user base? Or when you say ecosystem, what do you mean...

[Jesper Henrikson, analyst]

Yes. I mean like you're away from like going from user growth to monetization basically?

[Odd Bolin, executive]

Well, we do monetize our customers everywhere as is our users. And we do also for Truecaller for Business have exposure to 34 different countries. So we are monetizing the user base in many, many different markets. What we usually look at is our penetration rate? How many -- how large percentage of the smartphone users in [ those ] particular market or the phone users or Truecaller users because that gives us a good indication on where we are on our growth trajectory, whether there's still is a need for seeding that market or whether it's primarily an organic growth market going forward.

Now of course, India is our largest market in absolute numbers, but it's not our largest market in terms of penetration ratio. We have other markets, where we have more -- a higher percentage of the users being Truecaller, a higher percentage of the smartphone or phone users being Truecaller users. So when you say ecosystem, if I interpret that way, I think we are -- we have come very far in many, many other markets outside of India.

[Alan Mamedi, executive]

I think just to add to that, of course, I do believe that having a stronger local presence with people on the ground, more people on the ground working with more agencies and so forth in those regions would probably help us grow those revenues. But at this point of time, we haven't really prioritized putting people on the ground there because the TAM on these markets are not on similar levels as in India, for example, where we feel it's worthwhile. But for next year, we're looking over these growth regions that we find exciting, where we also believe that we can improve our local presence. So that will come in the near future.

[Jesper Henrikson, analyst]

And then also about -- sorry...

[Odd Bolin, executive]

Did that answer your question?

[Jesper Henrikson, analyst]

Yes, it does. Fine.

[Odd Bolin, executive]

Okay. Good. Very good.

[Jesper Henrikson, analyst]

And so also about the daily number of ad impressions per DAU, that was like unchanged quarter-on-quarter and it's basically unchanged from the end of last year despite using that the render rate being at an all-time high. Is this like only because like the demand side has gone down? Or could you just talk about the dynamic?

[Alan Mamedi, executive]

No. I would say we control this on a day-to-day basis, and we optimize it based on demand and supply basically. So -- and it does -- it could be a high season like in Q2 with IPL and all, where demand is extremely high, but we might pull back on inventory, for example. So it's not super straightforward, to be frank. But we should also add that we haven't really introduced new ad units either, which we obviously could do that would increase fill rates or impressions and so forth. But we have seen -- I mean, during the last 12 months to 18 months, we have seen a growth on the inventory and the impression side through improvements that we've done. That's for sure.

[Operator]

And we have one further question on the phone, that's from the line of John Karidis of Numis.

[John Karidis, analyst]

I've got 3 as well, please. The first one is, I think Odd was a little bit too fast for me when he was talking about the impact of other operating costs on the fourth quarter and next year. Specifically for the fourth quarter, apart from the one-off spending that you talked about impacting the margin by 5 percentage points, other reasons why the margin quarter-on-quarter should be down by more than 5 percentage points for the fourth quarter?

And then secondly, as far as this issue is concerned, I'm sorry, but I completely missed about what you said we should expect about other operating costs in 2023 versus this year?

[Odd Bolin, executive]

All right. Well -- thanks for your question, John. But I didn't actually speak about other operating costs as such in 2023. What I said was that marketing costs in 2023 will be at a level that is similar on average to 2022. And I said that partly in order to reemphasize the fact that the investments we are making in India and the U.S. in the first quarter this year are one-off effects that will bring up our marketing costs quite substantially versus a normal quarter, so to speak.

What we will see, though, in 2023 is increased preload costs as more and more phones are being sent out to the buyers, the preload costs will increase, which is according to plan, but we do not expect marketing costs as such to be substantially different in 2023 as compared to 2022. We will see a further increase in user acquisition costs according to plan, but that is a fairly opportunistic cost factor for us. We only invest when we see that there is a need and a good return, but our plan is to increase our user acquisition costs somewhat also in 2023.

Apart from that, there is nothing in particular that we foresee will have much of an impact. We are still planning on growing our employee force somewhat over the year. But that is, of course, something that is, to a certain extent, depending on what we see in terms of macroeconomic climate. We're not going to grow our employee force just in order to do that, but we do that because we see a need -- when we see a need in our organization for more resources.

We still have an issue with finding the right people. We only focus on recruiting the very best people in their fields, and they're not easy to find. And that is putting a limit on what we can do in terms of recruitment. I hope that gives you some, some food for thought.

[John Karidis, analyst]

Yes. It does. The second question is we're sort of dancing around the issue of GDPR coming into effect or a version of that in India. And to-date, you've sort of said that -- sorry, first of all, I assume that the impact of that is that you'll have to sort of get rid of all the data that you have of non-users, if it's possible to confirm that, that will be the main impact. And if it is, just for the sake of argument, at least, I know you've said that their data is sort of mid-single percent of your entire data lake. What would happen to your business if tomorrow morning, you have to sort of wipe out this data that you have today, just so that we can get to the final stage of this argument or this discussion we're having, please?

[Alan Mamedi, executive]

Yes. Thanks for asking the question, John and being very clear about it. So first of all, there is nothing that indicates in the drafts that has been floating around that would be the case that we would have to delete anything. So I just want to make that clear.

What we've been talking about is if the -- if it would expand even further to that extent that we would have to delete, which is not the case. but if that would be the case, we've seen that in a market like India, only around 11% of the hits. So 9 out of 10 calls, we would still be able to identify with the data [ that ] would not be covered by such regulations, which means that users would actually not even notice anything.

[Odd Bolin, executive]

And just to add on that, we are obviously present in Europe. We are obviously present in both the market, where you are and where we are. And we have 0.5 million users in Sweden. We have never focused on the Swedish market, but we have 0.5 million users that are very happy with the service that we can give them. And we are obviously working within GDPR here. So I think that gives you a good indication that our service creates a fantastic value for users even in such a regulatory environment.

[John Karidis, analyst]

And then thirdly, regarding your treasury shares, I find it sort of quite intriguing that you're not canceling them. Could you sort of maybe enlarge a little bit on your thinking, please? And I appreciate that one day, if the stock is fairly valued, you might choose to use the most currency. But at what point do you say enough is enough, we have all these shares, let's cancel them now and therefore, reduce the share count.

[Odd Bolin, executive]

That's a -- it's an interesting question. You could say that at this point, I'm sorry, we are -- our can I...

[Alan Mamedi, executive]

I don't have any water, sorry.

[Odd Bolin, executive]

Can I have some water, please.

[Alan Mamedi, executive]

You're [ caught ] by surprise.

[Odd Bolin, executive]

No. We'll see -- hopefully it does. You can say that we are overcapitalized at this point with a [ 1.9 billion ] we have. We think that's a very good position to be in right now. But the repurchase program that we are running right now isn't really about making any fundamental changes to that capital structure that we have is more symbolic to be frank. We are -- we want to show everyone that the company, the board, the management thinks is a good time to buy shares. But of course, we wanted to be able to use those shares, as you indicate going forward, as a currency when doing potential M&As.

The mandate we have is 4%, 5% of the total outstanding shares. We are not close to that number as yet, at least. And I don't see any reason why we should change our thinking at this point and start canceling the shares because we still have -- there are still potential opportunities out there for us to make acquisitions or these shares could come in very handy.

[John Karidis, analyst]

Right. But don't you open yourself up to criticism that if you do use it as currency, you might be giving a sort of undervalued currency to the vendors of [ renewal ] of an acquisition target going forward, if you were to do it in a week or tomorrow?

[Alan Mamedi, executive]

I mean that would never happen, obviously. It depends on time and what we do, just having the flexibility and option, gives us more power to do what we want. We have money in the bank. We have shares as well. So there is a combination of things we can do. At some point, we might decide to cancel them, who knows. But at this point of time, we're keeping them because we believe they are undervalued.

[Operator]

And there are no further questions from the phones at this time. So I'll hand the floor back to our speakers.

[Alan Mamedi, executive]

Great. Thank you, and thank you, everyone, for listening in. We're extremely proud of a great quarter. We're excited about the future. And we look forward to see you at our next earning calls. Thank you.