Opera Ltd (OPRA) 2022 Q3 法說會逐字稿

Welcome to the Opera Limited Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. (Operator Instructions). I would now like to turn the call over to your speaker today, Matt Wolfson, Head of Investor Relations. Please begin.

Thank you for joining us. As usual, with me today are Co-CEO, Song Lin; and our CFO, Frode Jacobsen. Before I hand over the call to Song Lin, I would like to remind everyone that in the conference call today, the company will be making statements about 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 considered 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 will be live tweeting highlights from the call at investor offer. So please follow along there during the call and in the future.

With that, let me turn the conference call over to our co-CEO, Song Lin, who will cover our operational highlights and strategy, and then Frode, who will discuss our financials and expectations going forward.

So thank you, Matt. Sure. Excellent. So thank you, Matt, and thank you, everyone, for joining us today. Like again, I'm very happy to report our good third-quarter results with you today. Despite a [southern] global macroeconomic environment, we were able to generate record revenue and profitability. It is a duty indicator that our strategy of focusing our products on the highest value resource enabled growth even in a challenging environment. Our third-quarter revenue exceeded the high-end normal guidance range by over $2 million with a 25% EBITDA margin, exceeding the high-end of our EBITDA guidance by more than $4 million. We believe this momentum puts us in an excellent position as we enter the seasonally strong fourth quarter. Total revenue grew 28% year-over-year, driven by record revenue from both search and advertising.

Our strategic choice to focus on better monetization users, in particular in the U.S. and Europe has created an underlying tailwind that helps [sell] us from strong FX headwinds due to a strong U.S. dollar and pricing pressure in the market. This choice combined with the audience extension provided by our Opera Ads platform, resulting us striking well ahead of our expectations. For several quarters now, we have articulated our strategy of focusing on the highest value resource, which applies to both emerging markets as well as developed ones. This strategy continues to pay off for the first time. Annualized ARPU exceeded $1 up 13% sequentially to $1.06. Advertising revenue, up 41% compared to last year, now represents 58% of our total revenue. Our advertising business on our own and operated sites benefit from our high-value footprint filled in particular by the success of our gaming browser Opera GX. Audience extension is a natural supplement to our O&O advertising inventory. We believe that leveraging third-party inventory as a supplement to O&O is a very healthy combination, and we continue to generate stable margins and grow a meaningful EBITDA contribution from the Opera Ads platform.

On top of the advertising trajectory, such revenue showed also a healthy growth of 15%. This is last year. The growth in source revenue was primarily driven by our expanding PC footprint in North America. The revenue outperformance leads to greater than anticipated EBITDA. Also after stepping up our marketing expense in 2021 to attract higher value [dose], we have stabilized around the 2021 levels and driven leverage in our business model. We are demonstrating what we said and at the time that EBITDA margins would indeed expand in 2022. So we strongly believe there is a desire by users for teachers that the large system that deeper browser do not offer and as a result, are seeing strong demand for independent browser choice. Our gaming browser, GX is a good example of identifying large subsequent of users whose needs are not met and who seek a browser that better fit with both their needs and online personnels.

Over time, we believe that we can introduce other products that can find a user base and be successfully monetized. The GX browser now has over 18 million users with an annualized ARPU of $3 across PC and mobile, which is the highest monetization browser in our suite products. GX offers differentiated advertising proposition that we are starting to take advantage of as it is a strong engagement and discovery engine. These results typically seek out the advertising that we can solve them whether it's the latest trailer for our game or the release date of our fourth quarter [result], GX [browser] put it or front and center. We are also able to monetize GX beyond the just advertising with [filler links] to purchase gains, notable content, and in-game currency.

Our user growth continues to be strongest in the Americas. As our focus on monetizable users in emerging markets material, we are starting to see signs of user base, stabilization in these regions and significantly higher ARPU levels. During the quarter, we enabled our Web3 wallet for Opera Mini, bringing the wallet to potentially over tens of millions of users, a major event for both Opera and the industry more broadly. This is a long-term play but demonstrates the power of our engaged audience around the world. Opera is very proud to help millions of users get online and enable them with Web3. We also upgraded the Web3 wallet with a single SDK across our [profile] products to make further improvements faster and more cost-effective.

With that, I will hand the call over to Frode to discuss our financial results and outlook. So Frode?

Thanks, Song. As Song Lin pointed out, our quarterly business performance was well ahead of our expectations. Earlier in the year, we were pleased to maintain guidance after Q1 and the dramatic start of the year. And later, we're proud to raise it after Q2. Following this Q3 overperformance, we are yet again in a position to indicate even greater expectations for the fourth quarter and the year as a whole. Quarterly revenue came in at a record $85.3 million, which represented 28% year-over-year growth and a solid beat versus our previously issued guidance of $81 million to $83 million. This was achieved despite a major headwind, namely the strengthening U.S. dollar. On a constant currency basis, we estimate that our year-over-year growth would have been over 40%. The overperformance was mainly caused by 2 factors, not fully reflected in our expectations.

First, revenue from Eastern Europe remains more stable than anticipated, and our audience extension revenue continues to grow faster than anticipated. Adjusted EBITDA was $21.4 million or a 25% margin, substantially ahead of our $14 million to $17 million guidance. In addition to stronger revenue, we benefited from marketing expenses coming in below expectations. At the same time, the growth of our Opera Ads platform led to a couple percentage points more cost of revenue relative to what we had expected. In sum, the cost mix more than that out as Opera Ads has very limited other incremental costs. Then turning to capital allocation and returning cash to shareholders. Towards the end of the quarter, we announced that we had reached an agreement with 360, one of our pre-IPO investors to acquire its 23.4 million ADS equivalents, a 20.6% stake in Opera for $128.6 million.

This transaction closed earlier this month and 360 is no longer a shareholder and no longer represented on our Board of Directors. Following this transaction, each remaining share constitutes 26% more ownership of Opera than it did before. In terms of our 50 million open market buyback program launched earlier in 2022, we repurchased 900,000 ADSs for $4.4 million in the third quarter. Year-to-date, including shares, we have already repurchased during the fourth quarter, we have repurchased a total of 2.9 million ADSs for $14.7 million under this program. In sum, this leaves our total shares outstanding at $89.7 million ADS equivalents as of today.

In total, combining all our Opera market repurchases and the 360 transaction, we have repurchased more than 28% of ADS equivalents outstanding after our 2018 IPO and 2019 follow-on offering. And we continue to see a large disconnect between the intrinsic value of Opera and the value observed from the current trading in our stock, and I'll highlight a couple of factors worth noting in addition to our core business performance. As of September 30th, we held $201 million of cash and marketable securities, up from $187 million on June 30th. Our 360 payment is due in November, which will reduce this balance to $73 million before being lifted by the underlying cash flows of the fourth quarter. So that's the most relevant cash number to consider. On top, Opera has held investments in 3 private companies over the past years, OPay, Star X, and Nanobank.

Last year, we decided to initiate processes to realize our gains on those investments. We sold a 2.6% stake in OPay for $50 million in 2021, but still hold a remaining 6.4% stake in the company classified as held for sale. Earlier this year, we fully exited our investments in the other 2, Star X and Nanobank with payments to be made in installments. We have collected a total of $37 million on these 2 and the present value of payments still to be received is $168 million.

So in light of our total shares outstanding now being less than 90 million ADSs, combined with a resilient and growing business with expanded margins and a strong balance sheet of cash and financial assets. It is our opinion that Opera is substantially undervalued by the market. And as a result, we are happy to continue repurchasing our stock. Now moving to our guidance. Given the momentum in our business, we are raising both our revenue and adjusted EBITDA guidance.

Our full-year revenue guidance is now $323 million to $326 million, representing 29% year-over-year growth at the midpoint. We are also raising the adjusted EBITDA range to become $62 million to $64 million for the year. That represents a 19% margin at the midpoint. In other words, for both revenue and adjusted EBITDA, the low end of our updated guidance is above the high end of our previous guidance. For the fourth quarter, we expect revenue of $88 million to $91 million, representing 23% year-over-year growth at the midpoint and adjusted EBITDA to be $17 million to $19 million, a 20% margin at the midpoint.

In terms of cost expectations, we build in another 1 to 2 percentage points in cost of revenue, and we maintain our previous expectation of around $30 million in marketing costs, even though Q3 came in lower. Compensation cost is expected to be relatively stable while we build in a slight increase in other OpEx, following expected seasonality in corporate costs and general activity growth. Overall, I am very proud of our recent accomplishments, strategically, operationally, and ultimately, financially. We continue to execute on our strategy to grow users in high-ARPU markets and concentrate our efforts in emerging markets on the most monetizable users. In addition, we are well underway to focus our company around our core operations and leveraging our games to invest in our own stock through buybacks.

And with that, I will turn the call back over to the operator to take questions.

(Operator Instructions). And we'll take our first question from Lance Vitanza with Cowen.

This is Jonathan on for Lance. Congrats on the quarter. My first one is, it's great that revenue has such a strong performance despite the lower-than-expected marketing expense. Could you maybe share a little bit what were the primary drivers that led to lower marketing expense? And I know that we can expect same levels into the fourth quarter, but can we expect margin expense to also decrease into ‘23 or remain stable or maybe it would be higher?

Jonathan, thanks for your question. Overall, roughly, our marketing spend this year is roughly on par with what it was last year, which was -- represented a big step-up in marketing costs as we targeted our efforts towards Western markets. So which we are achieving this year is to maintain that spend level, not really grow it but then reap the benefits on the revenue side. So we're not yet giving guidance for next year, but at least that's an indication of the level that we are remaining at. And in terms of the next quarter, as I mentioned, we built in about $30 million of spend, so a bit less than we had this quarter. But that's what we think is most prudent to expect.

Okay. Got it. One more. The EBITDA performance is just amazing. It's growing just like you guys said it would in '21. And now with the accumulation of additional cash that the company will generate because of this, surely, the company is exploring at least investing into other [hoarding] opportunities. Or is this a time that it's prudent to hoard cash given the general outlook of global business?

I would say the most obvious potential that we have demonstrated through our actions have been to buy back our own stock, given how we've been priced. So we announced the most significant buyback we could have ever done in the quarter past with the exiting of 360 in addition to the buybacks rolling in the market. So at least we feel that cash has been put to very good use in terms of our other shareholders. And then, of course, we continue to run the profitable business, but I don't want to speculate in potential M&A. We're always open for good deals and as we have always been.

Okay. That makes sense. Congrats for the quarter again.

And we'll take our next question from Alicia Yap with Citi.

Congrats on the solid results and the guidance raise. I have 2 questions. First is how should we reconcile the discrepancy between what we saw from the slowdown of the ad revenue for some of the bigger U.S. platform company versus our really solid growth this quarter. And then based on your 4Q guidance, would that be fair to assume that both search and also the ad revenue might be decelerate a little bit from 3Q level? Or will search actually maintain quite steady and the deceleration has come from the ad revenue? And then my second question is any preliminary review on how we should think about the growth momentum for 2023. Can the 4Q growth momentum actually be a good indicator for us to read into 2023?

So maybe I’ll take it further. Yes. Okay. So maybe I'll just try to take this. So well, I think it's a different aspect of things. So for instance, in terms of [such], I guess, we are more than we say we will because we are, I guess, 15%, they are 4% year-over-year. I think that's more like a function of user growth, especially in key markets. So there are much bigger than us, of course, in terms of scale, but we are able to grow same users in Americas year-over-year. And that, of course, constitute the growth, which makes us better despite of the global headwinds. So I think -- so part of it is definitely because of the growth of the user base in key markets. While I would say for some other like ads, it's partly also related with this, of course, that we are growing our user base in key markets. But I would say the other part, of course, is also a fact of that I think, for the company our size, I think we're at the right size.

Well, I guess, as far as we find the right niche, we are big enough to make impact in tens of millions of dollars every quarter, unlike start-ups. But on the other hand, we are not, I guess, as big to the point where we cannot provide the macroeconomics, even if we are doing good. So I think we [see spots will] we are agile enough that as far we have good technology. We have good know-how. We have a good digital base. We are able to extend it. We are not that big like Google [Test] to be able to almost not able to combat that macroeconomics. So I think that's the rates both we're having now. But of course, I guess, we just need to continue to deliver and try very hard. That's my quick to take on that. I think you also asked questions about Q4. So I would say it'd be like this. I think – we always been [baffled] because just to me uncertainties. But we don't know, for instance, how bad the FX will be and also where we can't really predict how some of our partners will perform.

So I think it's always prudent to do predictions on some of the revenues because we are ultimately also depending on our ecosystem. So I think that's pretty much what we saw. It's less than what we see a strong, let's say, deceleration whatever, but more let just have to be prudent on that because of the macroeconomics. And then yes, I think it's more than that than anything else. Otherwise, I think we are in a good growth trajectory. But yes, we have to see how [Opera] play out. I guess the other factor, of course, is that we are ready now because [size] than before. So that also says that to go at 7% will be harder anyway. So I think it's that. I think it's a bit too early maybe to comment on next year because I think, in particular, because of our macroeconomics we also ready from, we are so far performing quite a bit better than the macro, and we hope we will continue the trend. But I think we need to see how Q4 goes. And then we can maybe have a better assessment of what we were achieving next year.

(Operator Instructions). We'll go next to Mark Argento with Lake Street.

(inaudible) next quarter, and congrats on the big stock repurchase. I just wanted to follow up a couple of things. Frode, when you think about cash generation of the business, can you just help us think about the conversion of adjusted EBITDA to free cash flow, what OpEx or other types of cash outflows are there? Just trying to hone in on a free cash flow number and a free cash flow yield for you guys.

If you look at 2021 and '22 year-to-date, take adjusted EBITDA less tax is actually paid. FRE – I mean operating cash flow amounts to about 90% of that. So I think that's a relatively logical rule of thumb in terms of what to expect. And then our tax rate tends to be about 20% of operating profit, if you add back stock-based comp. It's been a bit higher this quarter and prior because of foreign currency movements affecting tax assets ultimately presented in tax liabilities, but I guess those will be my suggested guideposts.

That's helpful. And then just lastly, can you talk a little bit about any variances from a geographic perspective, Europe versus, I know North America is smaller but growing fairly rapidly. Any color you want to give on where you're seeing some strength or areas of concern?

I think the headline of the quarter and I guess the year as a whole is that the strategy to focus on Europe or North America or really the Americas has proven to work really well for us. Good momentum in that. And as Song talked about from such a small position that we are able to drive really good growth or have been able to drive really good growth in a tough macro environment. So I think that's the main message. We benefited from – we benefit from both underlying ARPU growth and the geographic mix shift of our user base.

And there appears to be no further questions at this time. I'll turn the call back over to Song Lin for any additional and closing remarks.

Yes, sure. So again, thank you again for joining us, everyone. It was another [record caller], and we are excited about what is ahead of us as we enter what has historically been the strongest quarter of the year. And I'm also very proud of the hard work from all of my colleagues, allowing Opera to continue to outperform expectations. The operational excellence taken on with our strong balance sheet should create more opportunities in the quarters to come. We appreciate your time, and we look forward to speaking with you again in the future.

Thank you and this does conclude Opera Limited Third Quarter 2022 Earnings Call. You may now disconnect your lines at this time and have a wonderful day.