Opera Limited

Q4 2022 Earnings Conference Call

2/27/2023

spk01: Thank you for joining us. As usual, I have with me today our co-CEO, Song Lin, and our CFO, Berta Jacobson. Before I hand over the call to Song Lin, I would like to remind everyone that in the conference call today, the company will be making statements about its future results and expectations, which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Such statements are based on current expectations and how we perceive the current economic environment. and are inherently subject to economic, competitive, and other uncertainties and contingencies beyond the control of management. You should be cautioned that these statements are not guarantees of future performance. You may refer to the safe harbor statement and 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 or presented based on IFRS. We believe that the use of our non-IFRS financial measures provides an additional tool for investors to use in engaging and 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 historic financial results of Opera on our investor relations website. We'll be live tweeting highlights from the call at Investor Opera, so please follow along there, during the call, and in the future. With that, let me turn the call over to our co-CEO, Song Lin, who will cover our operational highlights and strategy, and then throw it over to discuss our financials and expectations going forward. Song?
spk04: Yeah, sure. Thanks, Matt. And thank you, everyone, for joining us today. We are very pleased to announce our record results of the fourth quarter, which well exceeded our previous issue guidance of both revenue and profitability. Revenue reached $96.3 million, an increase of 33% over the previous year. Adjusted EBITDA came in at $22.8 million, or a 24% margin. Looking back end of the quarter and 2022 as a whole, we were able to exceed our revenue expectations as a result of better than anticipated monetization of both our browser and new user base and faster than anticipated scaling of the Opera audience extension business. Combined with a predictable and carefully managed OPEX base, we have been able to convert our strong revenue trajectory to a strong profitability trajectory even ahead of our ambitions. So to recap, the four-year revenue was $331 million, with adjusted EBITDA of $68 million. Revenues grew 33%, while EBITDA was up 135%, as four-year margins expanded from 12% to 21%. The impact of our ongoing focus on those users which provide the most value can best be seen in our annualized APU. Annualized APU was $1.18 in the first quarter, an increase of 12% from the short quarter and a 42% increase compared to last year. Advertising revenue grew 55% compared to last year, now representing 59% of total revenue. Our owned and operated sites continue to benefit from the continued shift in our user base towards developed markets with the greatest monetization potential. In addition, Opera's audience extension initiatives were a standout success, leveraging our high-performance bid infrastructure and first-party signals to reach the right audiences across partner inventories. These efforts, which really took off in 2022, are an excellent complement to our O&O advertising inventory. This segment has offered stable incremental margins and is shaping up to be a material component of our revenue and EBITDA growth. Such revenue grew 12% in the fourth quarter, which was also better than planned, driven by the growth of our PC footprint in Western markets, particularly North America. As a company, we are cost-conscious and operate a lean organization. So as a result, when revenues outperform as we did in 2022, we will see a corresponding increase in profitability. As we outlined in 2021, when we first embarked on a significant investment in our marketing and distribution channels, we believed that we would reach the results in 2022. And that is exactly what we achieved. and EBITDA margins expanded from 12% to 21%. But perhaps most important, now turning to our products and innovation focus. So Opera as a company has a more than 25 year history of being at the forefront of browser innovation. We have built out more than 300 million user base by always pushing the limits of what's possible on the web. The mass interest in generative AI tools and the often impressive capabilities that these tools already have, certainly marks the beginning of a new chapter in the evolution of not only the internet, but the knowledge-based economy at large. For Opta, that represents a huge opportunity, perhaps similar to the emergence of mobile web and smartphones. As an independent browser, We are firing on all cylinders to become the best gateway to an AI-powered web, building and rolling out new expressions in web browsing that not very long ago seemed impossible to achieve. For instance, we are adding popular AI-generated content service to the browser sidebar. On top of that, the company is also working on augmenting the browsing experience with new features that will interact with these new generative AI-powered capabilities. Among the first features to be tested is a new, small, but super useful short-term button in the address bar that will be able to use AI to generate short summaries of any web page or article. Not all of you may be aware that AI has been central to open news from the beginning, more than five years ago. to solve up stories and content relevant to our users in a personalized way. In 2023, we are going to ramp up our AI news efforts. It will start with using AI to assist content creation. For instance, AI will be able to help summarize the top stories of the day and then generate short articles to keep users informed of local and national news. These stories will cover subjects such as sports, weather, climate reports, energy and fuel prices, and other information relevant to their lives. These features are being pushed out as we speak. We believe AI will soon be an indispensable tool in assisting people across industries. And with our experienced talent pool in that field, we are naturally very excited about the future. Both our social advertising revenues also benefit from increased engagement, and we are seeing that across all of our products. In emerging markets, Opera Mini has benefited from the integration of real-time football scores leading to increased frequency of use, and we are replicating this feature in South Asia with cricket. To celebrate the most recent workshop in Q4, we have launched also a campaign We called Shake and Win. The campaign pushed Opera Mini to the number one position in the Google Play Store in several of our key countries in Africa, while we, again, are also replicating Z6s to Latin America in key countries, like Brazil, with already in view. In terms of users, our total base was 324 million images in the first follow, a nice sequential increase. So for the past years, we have repeated our focus on high value users, often in Western markets, but also have distinguished between user opportunities in emerging markets. So we have let the best monetizable users show up while focusing growth on acquiring fuel, but higher value users. We are very pleased to see our strategic growth more than offset reductions in less strategic areas. putting us in a great starting point for 2023 and beyond. GH continues to grow its user base, particularly in developed markets. As we have announced in December, the gaming browser now has over 20 million images. As we said before, despite being our best monetizing browser, where they are up 11% sequentially to $3.3. We are in the early stage of unlocking the full potential of the GX gaming browser. We believe GX is at a perfect crossroad by being the most popular gaming browser and entry point for those users. It allows us to combine multiple next generation technologies from building a decentralized hub through Web3 and blockchain to using AI to assist in game creation with our Game Maker Studio. It's a great example of where we see multiple new technologies from the past few years converging around a young audience base, creating a future that is super exciting and has the potential to exceed everyone's imagination. So with that, Let me turn the call over to Frida for details.
spk03: Thanks, An. On top of the operational color, I'll turn to the numbers. It was a great quarter, rounding off the year well ahead of our expectations. Q4 revenue came in as much as $5 million above the top end of our fourth quarter guidance, at a record $96.3 million. representing 33% year-over-year growth. That is something we are really proud of, especially in light of the fact that we had already raised guidance after both Q2 and Q3 and in the face of ongoing macroeconomic challenges. Similar to last quarter, the Outperformance primarily came from the continued growth of users in Western markets and the ongoing ramp in our audience extension business that simply scaled faster than we dared anticipate. Adjusted EBITDA was about 4 million above the top end of guidance, coming in at 22.8 million, or a 24% margin. Profitability benefited from our revenue over performance combined with continued cost discipline and OPEX coming in a bit below expectations. Cost of revenue scales with our audience extension related advertising, but associated gross margins have been stable to even improving through 2022, resulting in material profitability contributions. During the quarter, we repurchased 0.6 million ADSs for $3.2 million under our regular buyback program. That comes in addition to our separately announced major buyback of 23.4 million ADS equivalents from a pre-IPO shareholder at 550 per ADS, or 470 per ADS if comparing to the current share price, which is met of our recent 80 cent dividend. For 2022 as a whole, we executed a total return of capital of $146 million taking 26.7 million ADS equivalents off the market and effectively increasing each remaining shares relative ownership of APRA by about 30%. We have been taking advantage of our strong balance sheet to elevate the ROI for our investors. As of today, we still have over $30 million remaining under our current buyback authorization. In terms of cash generation, we had a straightforward quarter with working capital items netting out and upgrading cash flow coming in at $23.5 million, quite in line with adjusted EBITDA. Net of our stock repurchases in the quarter that amounted to $132 million. We ended the year with $118 million of cash and marketable securities. In addition, 13 million of other receivables were sales of marketable securities with settlement in the first days of the year, leading to an underlying cash balance of 131 million as we started 2023. We were very pleased to issue a special $0.80 dividend earlier this year, which translates to a $71 million expense at the reduced share count, and leaving us with a strong balance sheet of $60 million cash before cash flows in 2023, as well as $59 million in remaining installments from the sale of Starex, And finally, our stake in OPEI as an asset held for sale, which increased from 6.4% to 9.5% following the immediate settlement of our receivable from the sale of NanoBank as laid out in our press release. Now, turning to our guidance for the full year 2023 and the first quarter. For the full year, we guide revenue to be between 370 and 390 million, representing 15% year-over-year growth at the midpoints, with adjusted EBITDA guided between 71 and 81 million, or 20% margin at the midpoints. In terms of cost expectations, we model cost of revenue items just above 20% of revenue following the growth of our audience extension offering, and we maintain our previous expectation of around $30 million in average quarterly marketing costs. For both, we expect the trajectory to start below average in the beginning of the year and then move gradually higher. Cash compensation cost is expected to drop slightly into Q1, but increase year over year, mainly from salary adjustments. And finally, all other optics items before adjusted EBITDA are expected to come in a bit over $30 million combined for the year. For the first quarter, we guide revenue to be between 83 and 85 million, 17% growth at the midpoint, and reflecting the greater seasonality of our rapidly growing advertising business. We guide adjusted EBITDA to be between 17 and 19 million, a 21% margin at the midpoints. In summary, 2022 was a record year for Opera, and we are thrilled with the operating and financial results. The outperformance we experienced, coupled with our efforts to realize values and turn all focus to our core business, has set us up for continued success in 2023 and beyond, and has allowed us to conduct major repurchases as well as pay our first dividend. With that, I would like to turn the call back over to the operator for your questions.
spk05: Thank you. And as a reminder, to ask a question, please press stars and the number one on your telephone keypad. To withdraw your question, please press the pound key. When posing your question, we ask that you please pick up your handset for optimal sound quality. We'll take our first question from Lance Vitanza with Cohen. Please go ahead.
spk02: Hey, good morning. This is Jonathan on for Lance. Congrats on the strong quarter. Very good. My first question comes is, where did the user base growth, the $324 million, where did it come from in terms of region?
spk03: Hey, this is Frodo here. I'll chime in. The Western markets is the key growing area for us, both in terms of users and in terms of revenue. But we did see growth across all regions revenue-wise from Q3 to Q4.
spk02: Okay, got it. And can we expect sequential increases in user-based growth Wow. 23 as well? Or can we expect, like, some of that as the year progresses?
spk03: We don't guide user base. I think it was a milestone to where our strategy of focusing on high-value users led to also a growing total user base in the fourth quarter. 4Q is sort of a strong quarter in terms of engagement, time spent, and so on. So I think I'd expect it to be quite stable. Could be a bit down in Q1 from seasonality, but I think the underlying trend of having washed out enough less strategic users such that the strategic growth offset it was sort of the main, that team we expect to continue, broadly speaking.
spk02: Understood. And the last one for me, the GX Browser, impressive growth there on our two phases, right? And I'm just wondering, at what margin do they come in, and what can we expect from the GX Browser in 23 that will continue to improve revenue growth?
spk03: In terms of cost of revenue, on the browser side, it is very low. So we consider more our marketing cost to almost be the cost of revenue, and we try to optimize that so that on the margin, we still have a comfortable return on our marketing spend. But each incremental user, strictly speaking, has very limited cost of revenue. In terms of 2023 expectations, Song, I think he got kicked off or dropped off the call, but I don't think we'll guide specific numbers, but we are very excited about the product, about the next versions of it, and so we do expect the product to continue to grow, both user-wise and also revenue on a per-user basis.
spk02: Understood. Okay, thank you. Congrats again. Sorry?
spk04: Yeah, just comment that, yeah, sorry guys, this is Sony. I'm mad to go back to the call, so not a problem, but just to echo what Frida has been saying, right? So I think in general, we have been seeing a rather strong user growth. More like, I think the new strategy that we're really focused on is more like the high-up users instead of the total user number, but The fact just being that we have actually indeed quite a strong user growth, both for GX and also across the board. So we're quite optimistic about that. But again, the focus will be on the high-up users. And in that regard, we also have high expectations for GX this year.
spk02: Great. Thank you.
spk05: And we'll take our next question from Mark Argento with Lake Street. Please go ahead.
spk00: Good morning, guys. Incredible quarter, nice work. Just wanted to drill down a little bit more on the AI opportunity in particular. What do you see ultimately as probably the most logical business model using that technology? Does it drive user growth of the browser? Is there a whole other standalone product you could potentially charge subscription to? Is it an ad-based model? Maybe you could at least give us some of your initial thoughts.
spk04: Yeah, I think this may be a comment to start with, and further can also chime in, especially for revenue. So I think for now, to be honest, I think the most distinctive impact, which we're hoping, is for user engagement, more like for driving the user uptake. So I think a good example being that, of course, where we actually do see, even if we just announced it, and maybe it's the early stage, we see that the user interest on the browser has actually increased quite a bit. Because originally, people were just looking for regular system people browser as always our biggest challenge, that they just use it. But technology, we actually see all of the same as in the early stage of mobile, as we quoted, that there's a lot more interest for people to actually looking for a good browser, which can be a very differentiated experience. And we think that is actually probably the biggest short-term potentials. And we see that it's definitely having impact on the user base. I mean, that's also why we see quite positive growth all the time. But then, of course, and then user growth will, of course, correspond with more user engagement and hopefully more monetization potentials. However, of course, going deeper, it will probably have an even more profound impact on the whole ecosystem. And that is almost beyond opera, right? But then for that, my guess would be that probably it will be perhaps nearly more towards, you know, maybe, like again, a higher paid model subscription or something along the lines for especially some of our partners. But then in line, that will be able to drill down into Opera. So I think we feel that there will be a lot of changes in the industry, and for a player like Opera, probably means more opportunity than anything else. So quite excited.
spk00: Great. And one for Frodo, um, obviously free cashflow generations been strong and you've been returning capital shareholders. When you think about the guidance for 2023, the 71 to 81 million and adjusted EBITDA, should we, you know, is this still like kind of a, almost a hundred percent flow through the free cashflow or how should we think about free cashflow generation in 2020? Um, well,
spk03: For 2022, I guess we converted about 87%. I looked at it just now of our adjusted EBITDA to operating cash flow. So the delta is the taxes paid of about 3.1 million in the year and growth of working capital items, about 6.6 million. I'm not guiding for 2023, but at least I can call out that the growth in working capital represented about 28% of the revenue growth we saw from Q421 to Q422. I think it's a relatively fair indication. And in terms of taxes, our effective tax rate, if you take our P&L, take our operating profit and add back the equity compensation costs, and look at taxes relative to that, since the equity cost is not tax deductible, then our effective tax rate is about 18%. That's helpful.
spk00: In terms of, did you say $30 million in CapEx for 2023?
spk03: And now in the other operating items, so from like hosting, legal, travel, office costs, et cetera. So the stuff that I commented on, the cost of revenue items combined, the marketing costs and the cash compensation costs, and then I just commented on the total for everything else prior to just the design of P&L.
spk00: All right. That makes sense. And then in terms of the focus of incremental spend going forward, I'm assuming you're going to continue to target Western markets. That looks like where you're getting a lot of growth and a lot of extension. Is that consistent in 23?
spk03: I think dollar-wise, I mean, that strategy remains. It's proven very successful for us, and we still see a lot of room to grow. And Song also talked about that there are definitely very attractive pockets and good growth to be had also in emerging markets. And so we have been – we are investing in that too, but we have gotten better at focusing on monetizable users there. So they are, of course, massive markets, and we will focus globally.
spk00: Great. Thanks, guys, and congrats again. Thank you.
spk05: And as a reminder, that is star and one for your questions. We will take our next question from Alicia with YAP with Citigroup. Please go ahead.
spk06: Hi, thank you. So, good morning, management. Thanks for taking my questions. Also, congrats on the strong results and the guidance. I have two questions. First is, I wanted to follow up on this, you know, your partnership with OpenAI on AIGC. I think you touched a little bit in the earlier question. I'm just wondering, you know, the benefit that you're going to see, one part of it is the higher user time span, right? And then what kind of content that you believe that would be improved on the targeting effort that you can reach out to the user? And so far, or has that been already launched? And then so far, is it more obvious that you see the improved in user engagement on the mobile version or on your PC browser? So that's the first question.
spk04: Yeah, so this is Sony, so I'll try to answer it. So it has to be like this, right? So I think it's, so first of all, just to comment that there's in general two kinds of AI, right? So one is the discriminative AI, which is actually what Opera Neo has been using. And it's also the one being used in news recommendation, content recommendation, and autopilot, for instance. And the other is the generative AI, which is what's been popular now. So I would say that moving forward, we probably will see both. becoming more and more relevant and with people having a bit more focus, right? So the first one, discriminative AI will be able to give you the more relevant content. I think that way already actually is always ongoing. People just perhaps didn't notice it, but then it's becoming much more visible, right? And then I think the generative AI are more like in the ground well, people will be able to see content with their own flavor. More like, you need to have a particular flavor of ways how you want to see the news or articles. You can, of course, always ask AI to give you a summary based on your flavor. So I think I would say that's more like one algorithm is to be able to give you the relevant content. The other is to turn the content into what you might like. So I think both are going to be very relevant. And like I said, it's still very early stage, but it's proven to be very clicking with also users' mentality. So I think for now, we're just going to explore other kind of options. And I think we're happy enough if there's more users to actually use us because of differentiating features. That's probably the biggest short-term gain. And also, for instance, longer time spent. So I guess that's a high-level capturing of what might come into view.
spk06: So do you expect that we'll be helping on increasing revenue opportunity within this year that you will already be seeing it, or we will have to wait a little bit longer?
spk04: Yeah, so I think it's a billion-dollar question, right? More like what's that impact on revenue? So I don't know. It's too hard to tell. I don't think we have actually budgeted it in our forecast or guidance because we should be prudent. But as I said, if there's more users using us, then of course, more naturally, that will drive to a higher revenue. It just is quite early, so we don't want to maybe guess on that. But I think it's a very interesting opportunity for us.
spk06: I see. Okay, great. Thanks. Second question, I think, you know, company comment on the press release about the EU sanction package that happened in December 22, so which you budgeted 10 million headwinds, right? So without that, is that fair for us to assume the midpoint of your guidance uh would have been 18 percent this year instead of the 15 percent right and then um also related to that is can you remind us um in 2022 how much exactly was the negative headwind that you experienced from russia in total because i remember um you know back in The first quarter last year, which is around May, you mentioned that the Russia, I'm not sure if I remember correctly, it was potentially about 10%, but you only see about half of that impact. What's that memory sound like? So then, you know, this whole impact, it is, when you budget that in, it means Would that mean potentially if it's not as strong having as they did, then we could actually see some upside on the revenue?
spk03: Yeah, I can begin commenting on it. So you are correct that adding back that 10 that we deducted directly would put the midpoint at 18%. And then I think on top of that, the situation at large, of course, also leads us to sort of add more conservative or cautious to the guidance that we put out there. So I would say directly correct, but also broadly speaking, the broader macro picture is also adding, I would say, incremental caution, but we haven't put a number on it, but as we come in connection with the guidance. And in terms of Russia and Eastern Europe, I would say we did see, of course, the impact last year as well. But then currency rates also fluctuated quite a bit. So broadly speaking, we ended the year with a relatively similar footprint in Eastern Europe as we had it at the beginning of the year.
spk06: I see. Okay. All right. Well, thank you so much. Thank you. Sure.
spk05: And there appears to be no further questions at this time. I will turn the call back over to Song Lin for any closing or additional remarks.
spk04: Sure. So again, I think thanks everyone for joining our conference call. You know, year 2022, we have been able to do with good results. We are very, very excited about it. We think that, you know, 2023 is also going to be very, very interesting. You know, both the outperformance we already experienced and coupled with our efforts. uh to realize more values and all focus into um you know into our core business has be able to put up in a good position for the 16th in 2023 um so yeah we are very thrilled about it and i was i would also like to possibly thanks uh all the you know both opera employees and also our investors uh the support that has been given to us uh in the past year and let's uh I have great excitement of your internet trade and looking forward to share more of our success with you in the coming quarters. I appreciate your time and look forward to speaking again in the future.
Disclaimer

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