Opera Limited

Thank you for joining us. As usual, I have with me today our co-CEO, Song Lin, and our CFO, Frodo Jacobson. Before I hand the call over to Song Lin, I would like to remind everyone that in the conference call today, the company will be making statements about future results and expectations, which constitute forward-looking statements within the meanings 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 on the company's earnings release for details. Our commentary today will also include non-IFRS financial measures, including adjusted EBITDA, which are different from our consolidated financial statements that are prepared and presented based on IFRS. We believe that the use of our non-IFRS financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends. These measures should not be measured in isolation or as a substitute for financial information prepared in accordance with IFRS. We have also posted unaudited quarterly historical financial results of APRA on our investor relations website. We'll be live posting highlights from the call from our Twitter account, at Investor Opera. So please follow along there during the call and in the future. With that, let me turn the call over to our co-CEO, Song Lin, who will cover our third quarter, operational highlights and strategy. And then Frodo will discuss our financials and expectations going forward. Song has a call this morning, and if his voice gives out, I will step in and finish his prepared remarks if necessary. Song?

Yeah, sure. Thank you, Matt. So, yeah, I'm going to call, so I hope my voice doesn't come in too sexy. But anyway, thanks, everyone, for joining us today. We are very proud to announce our so-called results. We both were built and adjusted data exceeding the high end of our prior items ranges. And our business and product lineup has been stronger and more strategic than ever. So in the south corner we generated 102.6 million revenue compared to the 98 to 100 million we have tied it. That marks our 11th consecutive quarter of 20% plus pipeline growth as well as the milestone of exceeding 100 million of quarterly revenue. What's even more exciting is that The overperformance was fueled by an accelerating business strength within the quarter, adding to the trajectory and potential of results ahead. As you will see, our refreshment guidance ranges for the year MQ4 now even begin above the prior high end of ranges for both revenue and adjusted EBITDA. So the household revenue overperformance is visible in our adjusted EBITDA which, coming in 23.8 million, 23% margin, compared to the 18.5 to 20.5 million we had tied it. Profit over performance was, in other words, even stronger than the revenue over performance, fueled by product-driven strengths leading to lower marketing spend than expected. So overall, we continue to credit our financial success to our ongoing focus of growing the highest-value users, combined with careful cost management. The share of our user base data Western users continue to increase in the quarter, which in turn contributed to an up-growth of 11% compared with the prior quarter, or 24% year-over-year, to a new high of $1.31. Advertising revenue grew 24% compared to last year, representing 79% of total revenue. The growth was fueled by a healthy combination of increased O&O advertising revenue from our browsers, which represents the majority of advertising revenue combined with the online growth in our audience extension business. Source revenue grew 15% in the source folder, all of which relate to our browsers. also benefiting from our continued user growth in Western markets. So there are three business topics that I would like to focus on today. Our AI initiatives, our advertising platforms, and finally the Opera GX browser. So I will start with Aria, our internally developed browser AI. Even if we don't directly monetize it, and even if it is only based in creating the ultimate browser AI for our users. Because ARIA is such a strategic area of focus for us that has the potential to greatly expand the services that we can offer to our users. So after our initial success bringing ARIA to our redesigned flagship browser, Opera 1, and to Opera for Android, we continued to roll it out to Opera for iOS and Opera for GX. in the third quarter. And the first step, this enables a large segment of our users to take advantage of RRF's exciting new features. Being an independent browser offers us also the flexibility to work with a variety of partners in the GMAI space and does not lock us into any one specific large language model or any specific source of information. ARIA is built up across our Composer architecture, which allows it to tap into various language models, like OpenAI's GPT model, and to gather live information from the web. This makes its results both more up-to-date and accurate. Also, one also lets you do more with AI with less time, fewer technical skills, and less effort. ARIA comes with a set of tools that allow you to easily refine your queries and create content with a set of predefined prompts. You can follow personalized ARIA with the My Style feature that lets you train your browser AI to write like you. It's never been easier to write long pieces of text, from insightful reviews to eloquent emails or spelling complaints, or in your unique style of writing. Being able to effectively interact with AI is quickly becoming an essential skill in life. ARIA lets people easily and quickly get to what they are looking for, whether it's in search of information or creating a piece of content. So ARIA has proven to be a hit with users, and they are clearly enjoying the experience as evidenced by a need in increasing search queries and page views sufficient. Still, we are only getting started, and the world is only getting to get used to taking advantage of the new technology. We look forward to keeping you posted on our ARIA milestones as we solve this growth in richness, awareness, and capabilities. Today, we monitor ARIA indirectly. both in terms of attracting new users and increasing our user engagement, which in turn benefits our existing search and advertising partnerships. There is no need to restructure those deals to benefit. Looking ahead, we are excited about how IRS useful features can directly translate to monetizable informed recommendations fueled by a broadening context awareness. And then since we talked about monetization, I will turn to our advertising technology, which I highlight, since it is a key enabler of our revenue trajectory. So Opera products are used every day by hundreds of millions of engaged users. And in 2019, we have launched Opera Ads. Opera Ads is an online advertising platform that helps advertisers maximize the performance of their campaigns and increase engagement with their target audiences. So through real-time bidding, the platform also connects with partner inventories, allowing our advertising partners to reach internet users worldwide, including our hundreds of millions of Opera users. Opera Ads empowers partners to achieve key performance indicators, such as extended reach, prolonged audience retention, widespread brand recognition, and a terrible return on ad spend. So as a result, Opera Ads caters to the world's largest advertisers, BSPs, agencies, and e-commerce partners across the globe. To give you a sense of its reach, we now handle a volume of 3.8 million ad requests per second and peak times, making us among one of the biggest players in terms of audience reach. That being said, as an internet company, we have a very large user base to start with. We feel that we are still at a rather early stage of monetization. And we look for a nice growth trajectory ahead. And then finally, I will just come to and we offer a GX browser. So our GX user base continues to impress, up another 10% sequentially. to 26 million MAU during the short quarter. The APU was up 60% sequentially or 33% year-over-year. Now, and then annualized, $3.29 per MAU, continuing to be our best monetizing product. Thanks to our passionate team of gamers, engineers, designers, and more, we have built a browser that delivers an amazing and unique experience on all fronts. Not only does Opera GX provide flagship features such as CPU and RAM usage controllers, But we have introduced several new features that bring customization and integration abilities to a parallel level. These features give gamers and their favorite influencer and streamers something to talk about as we build the brand. And the brand strength of Oracle GX is something we are very proud of. Our goal is to create a multi-gaming brand and the center of a thriving gaming ecosystem and community. So that's why OpenGX maintains one of the largest Discord servers around, collaborates with thousands of gaming influencers, including some of the biggest names in the space, and provides GameMaker a multi-million downloaded app for indie game development. All in addition to giving gamers a platform at which they can play games. So Opera GX now has a very fast-growing community of fans of Discord, Twitter, and TikTok. Well, it is by itself becoming a category-leading brand platform and an important channel for building awareness and stimulating our growth funnel. That is a huge achievement for a browser company. Finally, it is important to note that the vast majority of local GX users are Gen Z and so have only just begun to develop brand loyalties in which GX is taking a strong position. They are also the most tech-savvy generation yet with deep experience and activity for building resilient online communities. around their interests across great distances. So while demos are and tend to remain our key focus of sentiment-based offerings, we also see a broad opportunity from this strategy as well. So within content, we have a table of AI-based content recommendation platform to dedicated apps for social fans, creative fans, or hyperlocal news. On the browser side, just now in September, we partnered with chess.com to put chess what into the browser. So with custom builds for both desktop and mobile products, chess enthusiasts can now enjoy their favorite game wherever they are. We offer a desktop browser, a chess.com icon now resides in the sidebar of our customized version of our browser. so you can solve puzzles and battle your rivals while you browse the web. Opera for Android also got a chess-themed makeover, complete with chess-related articles, videos, and informational content. So overall, we believe we have the best product and technology in Opera history, putting us in a very strong position to continue to deliver great new products and strong financial results as we look to print before and beyond.

So with that, let me turn it over to Tula.

Thank you, Sang.

Starting with our financial results, we are very content to see how our product strength and growth strategy translate into yet another record quarter. Year-over-year growth rates for both search and advertising remain at the level we achieved in the prior quarter, which is well ahead of what we had guided. The fact that we saw a stronger-than-expected intra-quarter acceleration from month to month bodes well for our outlook, as you can see in our refreshed guidance today. All in all, we are very pleased with the resilience of our growth model and the trajectory of our company, even in a volatile macro environment. We continue to benefit from our user shift towards higher RP populations, whether geographic or, as Sung-Lin talked about, with gamers. The rotation of our user base has low monetized users churning out and higher monetized users coming in. As a result, we came in above the high end of our guidance at 102.6 million revenue, or 20% year-over-year growth. On a constant currency basis, our year-over-year growth would have been about 5 percentage points higher, or 25%. In terms of profitability, we benefited both by our revenue overperformance and the fact that we did not fully utilize the buffer we had built into our marketing spend expectations. Consequently, adjusted EBITDA also exceeded the top end of guidance at 23.8 million or a 23% margin. We generated operating cash flows of 16.2 million in the quarter, and our free cash flow from operations was 13.4 million. The revenue strength within the quarter increased our accounts receivables, but that cash flow impact is a consequence we are happy to live with. During the quarter, we returned $53 million to our shareholders. Our first regular dividend was 36 million, of which 11 million was cash to ADS holders, and 25 million was offset against our Star X receivable. As a reminder, our remaining 32 million receivable from the sale of Star X, which is presented separately on our balance sheet, will continue to reduce the cash component of upcoming dividends until it has been fully offset. In addition, we repurchased 1.24 million ADSs for a total spend of $17 million. That translates to a recurring annual dividend yield of 6% on the repurchased ADSs, benefiting all our shareholders over time. Finally, we are very pleased about the nearly 40% increase in the free float of our stock following the secondary offering conducted at the end of the quarter. As a result of our actions over the past 12 months, the free float has increased from 14% to 28%, and our stock is also far more liquid. Now, turning to our updated guidance for the full year 2023 and the fourth quarter. Throughout 2023, we have been able to grow faster and more cost effectively than planned at the start of the year, translating to both higher revenue and higher profitability. We approach the second half of the year with caution, but are pleased to observe a very strong trajectory, even in a volatile macro picture. As a result, we are on track to exit 2023 in a great position as we look to the future. For the fourth quarter, we guide revenue to 110 to 113 million, or up 16% year over year at the midpoints. And adjusted EBITDA of 22 to 24 million, or 21% margin at the midpoints. Both represent substantial lifts versus our previous implicit Q4 guidance, increasing our guided year-over-year growth rate for Q4 by 6 percentage points and our adjusted EBITDA margin by 1.4 percentage points at the midpoints. Consequently, our full-year revenue guidance is now 394 to 397 million, in its entirety above our prior range of 380 to 390 million. and representing 19% growth at the midpoints. Our full year adjusted EBITDA guidance is now 88 to 90 million, also in its entirety above our prior range of 80 to 84 million, and representing a 23% margin at the midpoints. Our cost expectations have remained consistent all year, but with less marketing spend than built into our guidance. We still expect Q4 to represent the year high in terms of marketing expenses and to exceed 30 million of quarterly spend, though our full year marketing cost is now likely to come in below full year 2022, a great achievement in the context of our revenue growth. Our expectations for the sum of cost of revenue items remain in the mid-20s in terms of percentage of revenue for the year, but will likely be up a couple of points versus Q3 in the seasonally strong fourth quarter. Cash compensation expense will likely return to around Q2 levels in Q4, and we maintain our expectation of a very modest annual increase for the year as a whole. All other OPEX items before adjusted EBITDA are also expected to somewhat decline sequentially in the fourth quarter and to come in at about 32 million for the year as a whole in line with prior expectations. In conclusion, the third quarter falls nicely in line with our track record of achieving and exceeding our targets. As discussed in prior calls, our broader opportunity remains very attractive and very exciting, and we will continue to pursue it. We look forward to keeping you posted, so with that, I'll turn the call back to the operator for questions.

Thank you. As a reminder, to ask a question, please press the star one on your telephone keypad. To withdraw your question, please press the pound key. When voicing your question, we ask that you please pick up your handset to allow optimal sound quality. We'll take our first question from Mark Argenta with Lake Street. Your line is open.

Yeah, good morning, guys. Nice quarter. Just a couple quick questions. Obviously, we saw some really nice growth and strength in the ad business this quarter. You know, as you think about the opportunity in the ad market, especially with GX growing as nicely, what do you see that kind of mix going forward of kind of ad versus search revenue? I think in the quarter, ad revenue is almost 60%. How should we think about that mix going forward?

I can start.

I think we continue to – so we're very pleased with sort of the core strength of both revenue streams. Advertising revenue at some point passed 50%. Now it's close to 60% of revenue. And it scaled even faster than search. And I think as a big picture, that is probably the trend that we would expect for sort of the near to midterm.

And then just a quick follow-up there. In terms of the GX browser and the ARPU growth that you've seen on that product in particular, Is that mostly domestic in Western markets, or what's kind of the mix there, and how are you seeing that ARPU move up as aggressively as it has?

I think the GX user base is the space between Western and developed markets, perhaps somewhat more tilted to Western than the user base as a whole. but it taps into high value segments also in emerging markets, which is participating in a strong ARPU. I think we've been pleased with the ARPU performance within both Western and non-Western markets on the products. It still remains a bit under indexing in terms of ad monetization. So back to your first question, that's also an example of a lever for driving faster growth on the advertising side looking ahead.

Just one last one for me. In terms of the marketing spend in the quarter came in a little below what you guys had anticipated. What's the key KPI you guys are keeping your eyes on there in terms of conversion rates or monetization rates that have you either leaning in or leaning out that spend in any quarter?

It's ROI-based and to some extent also just our own capacity to drive sort of the brand efforts that we do. So as Song talked about, for example, for GX, we have built a very sizable presence also in social media around the products. And I think the combination of branding activities and the more tactical sort of distribution campaigns and distribution activities is very important for the best possible ROI on the spend. For Q3 as a quarter, we more or less came in as expected, which was a bit below what we had guided in terms of spend, just because we like to always maintain a buffer that I think we've also historically talked about.

Great. Thank you.

Thank you. We will take our next question from Lance Vincenza with TD Cal, and your line's open.

Hi. Thanks, guys. Great quarter. A couple of questions here. The first, with respect to the focus on growing the highest value users, Did you mention what proportion of your MAUs are in those markets today? Could you repeat that? Where do you think that split could ultimately go as we think out three, five, 10 years?

Yeah, so at least in our investor presentation, I'm not sure if it's updated online yet, but you'll see the updated stats. So for now, Western users represent 16% of the user base, up from 15% in the prior quarter. It's not such an excellent stat just because, you know, it typically moves with decimals. And then every couple of quarters, maybe we've been adding a point. But it is up relative to the Q2 average. And I think you also see in the timeline. So I think the number of users over time and this year is unlike the past many years. We had a growth also from Q3 to Q4, where normally, because of seasonality, Q3 relative to Q2 is quite flat.

I mean, is the way to think about that, though, I mean, 15%, 16%, regardless, those don't sound like big numbers. Does that suggest that there is a lot of headroom there for continued growth? I mean, do you see... you know, is the target to get to, I don't know, 30%, you know, 70%, that kind of a split, or where should we be thinking this could kind of go over time?

We don't really have a very defined ceiling just because we still have the perception that we remain still a quite small company. We talk a bit about the sizing for Opera GX as well. So, but looking ahead and also Looking past for the past couple of years, our strategy is to keep growing in Western markets. We continue to have very good momentum on that and to grow high-value users broadly, such as gamers, for example.

Okay. On the marketing spend, my question on marketing spend, lower than expected, a little bit lower than our estimate. To what extent was that perhaps driven by timing and maybe a decision to just push some of the marketing spend from 3Q into 4Q? Is there any of that that we should be thinking about? I know you mentioned that you're going to be a little bit over $30 million in the fourth quarter. I'm just wondering if that's a result of maybe some investments that got pushed?

No, it's not really a timing item. When you look at the implicit marketing guidance for the next quarter, it's the same to a bit down relative to what we had in our prior implicit Q4 guidance.

Okay, great. And then last for me, you talked about the stronger-than-expected acceleration within the quarter as you go month-to-month in this past quarter. And I'm just wondering, clearly, it sounds like product and technology at Opera had a lot to do with that, but was there perhaps also some improvement in the overall advertising backdrop that helped you or that was improving throughout the quarter as well? Maybe the way to phrase it is, is the macro backdrop helping or hurting you these days? And which direction do you see that going?

I mean, starting with the FX headwind, that's worked against us for some time just due to the strength of the U.S. dollar. I think we saw the headwind decline a little bit. Now, let's say only five percentage points in the quarter. But it remains a headwind given our very global exposure. For the ad market in particular, Song, I don't know if you want to comment on that.

Yeah, I'll try. But my thought is that my thought is not going anywhere. But I would say, I think in general, we see a good recovery of traveling, which is very well built in Q3. Traveling is very strong. And people like to travel, so they benefit from that, especially also during the summer time, right, which is in Q3. I think we also see a fair e-commerce towards the end of Q3. Next time our e-commerce is going to be late, but no big time period, which gives us confidence of perhaps Q4. It's also going to be okay. So I think those are the most noticeable ones we see.

I think the rest are more like as expected.

Great. Thanks, guys. I appreciate the help.

and once again that is star and one if you would like to ask a question we'll take our next question from alicia yet with city group your line is open hi um thank you so good morning and good evening um congratulations to the strong quarter and guidance um so i just wonder um you know i know aria is not directly monetized for now but just wondering how much of the strong performance in the third quarter are benefiting from the availability of ARIA to help the user engagement that also lead to better monetization because of the increased time span or also increased inventory or even the higher ECPM. So any colors that you can either quantify or kind of qualitatively comment where ARIA is contributing to some of that strong performance that you even see that month-over-month accelerating trends. So any color you can share would be great. And then second, I was also wondering, given if this is also driven by the ad cap improvement, any preliminary color that you can share with us, how would you expect the revenue growth to be for next year? Thank you.

Song, do you want to comment on ARIA?

Yeah, OK. So I can comment on ARIA. Yeah, more like super high-level. I think I also discussed it in the script. So I would say the only effect of ARIA is mostly being able to market it. Well, of course, you know, partly I don't know why we are spending less than we want to and, you know, getting more emails than we want to. So it's very positive. It's, of course, because ARIA has increased people's awareness that, you know, that it is very attractive. They want to see it. So it's quite similar as what we see on TX as well. Because of gaming, it's very differentiating. And same applies to Unreal when it comes to engineering as well. So that has been very helpful. That alone probably has already had some very positive consequences of how we can be more profitable in this quarter. So that's good. In the long run, as discussed, I think We do see a trackable increase in engagement, both on source volumes and others, that we need to also have a monetizable impact.

That, I think, when we do this more time, also knows the monetization potentials, which we are working with partners.

And then, Alicia, to answer maybe the second part of your question, I think it's It's still a bit too early to start giving guidance for 2024. So we'll hold that back until our next call. But we believe that sort of the growth rate that we expect to be able to achieve in the fourth quarter is at least a nice indication of the underlying speed of the business as it stands now.

I see. Great. Thank you. Maybe just one last follow-up. The 4Q EBITDA guidance and the midpoint imply, which obviously is lower than the first three quarters, that you already achieved. So I wonder if this is just more conservative as a normal practice, or is it some step-up spending? Because you mentioned the sales and marketing will be in the $30 million quarterly run rate, right? So it doesn't seem there is any kind of unexpected step-up spending that you budgeted in for this quarter.

Yeah, correct. We've always had the marketing spend to increase as the year progresses and as we build and build more scale in the total, let's say, machinery around our marketing activities. So we've guided to exceed $30 million. You'll come in $3, $4, $5 million above that once you add up what we have in the guidance and comparing that to an average spend per quarter year to date of below $27 million. So, of course, if we maintained an average spend expectation for Q4, then the margin would be far higher.

Okay. All right. Thank you. Thank you. We have no further questions in the queue at this time. I will turn the program over to Songlin for any additional or closing remarks.

So, sure, thank you guys. I think I'll just wrap it up.

Thank you for all of your continued support and interest in OPERA. So much potential for OPERA and we're going for it. We appreciate your time today and look forward to reporting our progress and the next junction.