Opera Limited (NASDAQ:OPRA) Q1 2024 Earnings Call Transcript

Opera Limited (NASDAQ:OPRA) Q1 2024 Earnings Call Transcript April 25, 2024

Opera Limited misses on earnings expectations. Reported EPS is $0.19 EPS, expectations were $0.25. Opera Limited isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Opera Limited First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s call is being recorded. [Operator Instructions] I would now like to turn the call over to your speaker today, Matt Wolfson, Head of Investor Relations. Please go ahead.

Matt Wolfson: Thank you for joining us. As usual, I have with me today are Co-CEO, Song Lin, and our CFO, Frode Jacobsen. Before I hand the call over to Song, 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.

And 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 an unaudited quarterly historic financial results of Opera on our Investor Relations website. With that, let me turn the conference call over to our Co-CEO, Song Lin, who will cover our first quarter operational highlights and strategy, and then, Frode Jacobsen will discuss our financials and expectations going forward.

Song?

Song Lin: Thank you, Matt, and thanks to everyone joining us this morning to review our first quarter results. 2024 is already off to a strong start, with revenue of $102 million, driven once again by organic growth payout with cost discipline, resulting in $25 million of adjusted EBITDA, representing a margin of 24%. Both revenue and EBITDA exceeded the first quarter guidance that we outlined on our last quarterly call. Our user growth strategy remains focused on quality over quantity. We continue to see growth of users in rest of markets, GX users and other high-value users globally, offset by declines in low monetization mobile users in emerging markets. Annualized ARPU was $1.34 in the fourth quarter. It’s up of 24% year-over-year.

This was primarily driven by the growth of users in high ARPU markets as well as continued growth of Opera GX broadly, which consistently attracts highly monetizable users across markets. In the fourth quarter, search revenue was $43 million, up 14%. This category has consistently grown in the mid-teens and faster than broader search market, enabled by a continued focus on growing the highest value users. During the quarter, Google exercised its option only to extend our current search revenue partnership, a sign of the value of this relationship to both parties. In the fourth quarter, advertising revenue was $59 million, growing 21% year-over-year and representing 58% of total revenue. Advertising revenue continues to benefit from both our owned and operated, meaning our browsers, as well as our Opera Ads business.

There is a clear trend that the digital advertising industry has put more focus on high user intent events, be it the shortened journey of a user or the payment activity in association with a travel booking. Being a browser, we are best positioned to capture these interactions, giving results, help choices and suggestions at the right moment. This could be in the form of a product recommendation or a relevant page link with context aided by AI to help put everything into perspective. As a result, advertising revenue within the browser experienced the fastest year-over-year growth since the second quarter of 2021 when advertising revenue was still rebounding post the onset of the COVID pandemic. That’s a very direct example of our focus on high-value users translating into financial results.

As an independent browser, we are known for our continuous innovation and bringing exciting new features to our browsers. Opera One, which we launched last year, was a great success with the introduction of our browser AI, Aria. In addition, it came with build for UI design, whether it is a Tab Islands innovation or start page animations, benefiting from a robust engine enabling complex graphical operations in the UI AL to be separated out from background processes, ensuring the most elegant browsing experience possible. We see how such features and our strong browser brand drive adoption. When you don’t consider a new browser, we are more and more often considered and chosen. We remain encouraged by all the results of the recently implemented Digital Markets Act in the EU.

The DMA requires Apple to show a browser choice linked to iOS results in the region and report that for the choice screen in every EU country. Post implementation, we saw a 63% increase in new iOS users in the EU from February to March, still from a small base and with lots of work remaining ahead to fully seize the opportunity. We are very excited about this development and will increase our iOS investments now that the playing field is more level with other key regions potentially also opening up. We are starting from a modest base due to previous platform limitations, leading us to believe that the growth potential is substantial. Again, this reflects a general trend that people show an interest to move away from the boring system default browser to differentiated products that are tailored for particular audience and needs.

We believe that this trend will continue and even accelerate. Turning to our gaming browser, Opera GX. We have spoken about it repeatedly, but I think it’s a good example of bringing something truly differentiated to market and users loving it. In less than five years, Opera GX has reached 29.5 million users, up 6.1% versus the fourth quarter alone. In addition to consistently growing our user base, monetization of the GX user base continues to grow, reaching $3.49 in the first quarter, up 10% compared to a year ago, even as its geography footprint expands in non-listed markets. GX remains our highest monetizing browser both in developed and emerging markets where the regional differences in monetization is less than our other browsers. One of the most welcomed new features is GX Mods, which allows users to customize almost all aspects of the browser.

These Mods have a wide spectrum and are very creative. AAA gaming franchises can provide the GX Mods like those we just announced in association with Cyberpunk 2077, a very popular game with the Royal fan base. But also our users actively create Mods. For example, the background music can react in real time to the actions and needs of the users while using the browser based on their key strokes or moves of the mouse. The options are limitless. Users can also upload their Mods to the GX Store and share it with fellow gamers. Since the introduction of Mods a year ago, over 6,000 Mods have been created and shared by our users, and our Mods have been installed over 150 million times. That is a great testimony of how this functionality is appreciated by the gamer audience and the potential related to differentiation in the browser space, which in reality is still largely untapped.

I’m going to end on the continuation — the evolution of our embrace of AI. We continue to roll out new generic AI additions within the Opera browser. In the fourth quarter, we announced our AI features drop project, which gives users of our Opera One developer build access to our latest AI explorations. We drop new features as often and every few weeks, making us one of the fastest movers in the space. One highlight is the experimental support of one of 50 different local large language model variance from approximately 50 families of models which are not natively supported to be downloaded and can run locally on a user’s own computers within the browser. And in terms of speed, last week we added support for the latest Llama 3 model just one day after its release.

This step marks the first time local large language models can be easily accessed and managed from a major browser to a building feature. The local AI models are a complementary addition to Opera’s own Aria AI service, which epitomize our new fully green energy powered AI cloud store in Iceland that we announced in February and is now fully operational. It is indeed an interesting time for a browser with a massive user base and a brand for innovation. We are fascinated about all the changes happening around us and cannot wait to explore the path ahead. So now let me turn the call over to Frode to discuss the financials and guidance for the second quarter and 2024 in more detail. So Frode.

Frode Jacobsen: Thank you, Song. 2024 is off to a solid start with Q1 exceeding the guidance ranges we set just two months ago. Revenue grew 17% year-over-year, nicely ahead of the 15% mid-point growth we had guided. Net of continued FX headwinds, we saw an even stronger underlying constant currency revenue growth of 23% or 6 percentage points higher. Advertising remains our strongest growth driver, though search has also been performing ahead of the underlying market growth, clearly showing the benefit of our high ARPU user focus. In terms of costs, marketing costs came in slightly below expectations as did the other OpEx category. Salary costs came in as expected, while an investment in scaling new advertising revenue streams in our browsers drove up cost of revenue for the quarter.

In total, we managed cost to stay on budget, resulting in the revenue over performance translating to adjusted EBITDA over performance as well. Tax cost of $4.6 million was 19% of adjusted EBITDA, which was somewhat elevated mainly due to our tax assets, which reduced in USD value when local currencies weakened. Our cash generation was particularly strong in the quarter, with operating cash flow reaching as much as $31 million or 125% of adjusted EBITDA. This quarter, we made an all cash investment to establish our new AI data center, representing an unusual amount of CapEx for us, while we were still able to generate free cash flow from operations of $8 million or 33% of adjusted EBITDA. Cash generation fluctuates more than EBITDA from one quarter to the next and as the year progresses, our year-to-date cash conversion rates will stabilize similar to what we saw last year.

We paid our semi-annual dividend in January, $0.40 per ADS or $35 million total. Of the total, $25 million was offset against our Star X receivable and $10 million was paid in cash. The final $8 million of our Star X receivable will be cleared as part of our next recurring dividend payment, which we continue to expect for July same as last year. We remain committed to our dividend program viewing it as the best way to return cash to shareholders without impacting our free float or trading volumes. Having said that, as we’ve also demonstrated several times in the past, we continuously monitor for opportunities to generate ROI for our shareholders through buybacks when conditions favor that. Yesterday, we issued our 20-F for 2023 and I just want to highlight the one estimate update as part of the annual report relating to the fair value of our 9.4% ownership stake in OPay.

We ultimately set the year end 2023 valuation to $253 million, as opposed to $269 million initially estimated, which led to an updated Q4 valuation gain of $90 million, as opposed to a gain of $106 million. This is an estimate of an unrealized gain and you’ll see that the ownership stake is carried at the new value on our balance sheet, but it had no impact on our revenue, cash or other operating metrics. In keeping with our well established tradition to guide cautiously, we translate the over performance of Q1 to a 4 million lift of the low end of our full year revenue guidance, while leaving the high end as is. Our new revenue guidance becomes $454 million to $465 million, which results in the midpoint increasing from 15% to 16% full year growth.

In terms of adjusted EBITDA, our guided range was already quite narrow at $106 million to $110 million and we retain it based on the same logic. This maintains a 24% adjusted EBITDA margin expectation for the year as a whole. Overall, as only two months have passed since we issued our original guidance for the year, we prefer to progress further into the year before we fully extrapolate our trajectory. For the second quarter, we guide revenue of $107 million to $109 million, or 14% to 16% year-over-year growth. We guide adjusted EBITDA of $22 million to $25 million or a 22% margin at the midpoints. That translates to OpEx pre-adjusted EBITDA of $84.5 million at the midpoints, which includes a steady increase in marketing spend, annual salary adjustments effective in April and adding just over a percentage point of cost of revenue items relative to revenue.

Other OpEx items are expected at about the quarterly average of 2023. Our cost expectations for the year as a whole remain in line with our prior directional commentary, with marketing cost and cost of revenue ticking a bit up as a percentage of revenue, while compensation costs and other OpEx items ticking down, overall offsetting one another. All in all, we are off to a solid start of 2024 and excited to continue executing on our strategy. We’ll also participate at a number of upcoming investor conferences in May, which gives Matt and I a chance to meet up with many of you in person soon as well. With that, I’ll turn the call back to the operator for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question will come from Lance Vitanza with TD Cowen. Your line is now open.

Lance Vitanza: Hi. Thanks everyone and congratulations on the quarter guys. A lot to go through here, but maybe we could start with the DMA in Europe. I find this very exciting and you mentioned a 63% increase in new iOS users just from February to March. Now I understand it’s off of a very small base, but could you talk a little more about the opportunity there? Just how many iOS users are there in Europe and what’s Opera’s penetration like today? Where do we think that could realistically go over, let’s say, three to five years or whatever you think the right time frame is? And then also what are the odds that we see a similar kind of DMA framework? You did talk — I think Song you talked about you do see other markets potentially embracing this kind of a framework. What are your thoughts there in terms of the U.S. at some point? Thanks.

Song Lin: Yeah. So, it’s Song. I’ll just make few comment. It’s a big topic, right? So I think, number one, in general, we are very excited to see the trend because I think Europe, of course, is a key market, and there’s almost a leading role in many of those, I would say, the metal methods to make sure that there’s a bit more fair playing ground. So I think we’re happy that the EU has been taking this approach. And we are even more happy that it proves to everyone that there is effect. Because many times, we saw that there are some actions taken by government, nothing happens. And in this case, I think Apple — we are very happy about them as well, and the result is also quite satisfactory, I would say, probably more than many people though, right?

So I think that’s very encouraging. And like also just a comment that like we also see a general trend that those things also happening in other markets. I guess — I mean, I’m no expert on this, but I guess we all know that just last two weeks, I think the DOJ also has a case against Apple. Well, it’s of similar nature right in the U.S. And then some of the things are exactly the same. So we just saw that — I think there is a good chance that — more likely also from Apple point of view, I guess, if they already great open this up in one market, my feeling is that they have a whole open that it’s more natural also for them to open up worldwide, which then of course can make a real difference. Because only in the EU, of course, is still the limit, even though you saw already a very big start.

And then I think in terms of opportunity, like I think we all know that on the mobile space, I think Apple has pretty much — like especially if the segment in Section 2b, let’s say, performance of smartphones, which I think is also a case where DOJ has been using, then I think Apple almost has 70% of the total market, right, which means the high end of smartphones. And because of the term of limitations, that this is almost non-existent for any other browser players simply because Apple don’t almost allow it and don’t allow a browser engine, right? So we feel that now this almost opened a new ground that presumably 70% of those performance smartphones in the U.S., and I would say maybe 50%, 60% elsewhere, will have chance to be accessed by us and by other browser vendors, which can be very interesting playground.

And we have been able to show that on Android where everything is relatively level field, we are able to take a strong market shares, and we have high hope that it can also be replicated in iOS. So more like for now where the user base to start with on iOS, we have millions of users. But then, of course, compared with our total user base, which we announced to be 300 million, there’s still a big growth potential. So I think even though now, even though we see major growth, there are many things like many opportunities ahead, which can have meaningful impact on our revenues in the year to come. So I think that’s more like our general feelings. And while we are excited, but then of course it will be interesting to see how this develops in the next few months to come.

Lance Vitanza: And you did mention that there would be an increase, understandably, I would hope there would be an increase in your iOS investment spend. And I just wanted to check with Frode, is that presumably that was already kind of anticipated and so we think about the guidance that we sort of talked about for the budgeting and the marketing spend over the course of the — over the balance of the year, I should say. There’s no incremental upside to the guidance?

Frode Jacobsen: In terms of market expense, I would say, we already reflect the Western Markets Europe, North America that is where we spend the majority of our marketing spend, correlates with the revenue and where our revenue growth is really coming from as well. So even though it still represents only 17% of our total user base that is where we continue to investing in, as part of this strategy that we’ve been following for the past years.

Lance Vitanza: Okay. And then just on the GX browser, you called out some dilution in the monetization as GX expands in non-Western markets. I imagine that’s actually a good thing despite that. But I’m wondering, if you were to control for the geography, do you have a sense for what the year-on-year growth in monetization might have otherwise been? I think it was 10% overall, but kind of market by market so to speak or emerging market versus…

Frode Jacobsen: We typically don’t go into that level of detail, but overall I think for the company as a whole, I think we’d see an ARPU growth at about twice that. So I think that’s a good indication.

Lance Vitanza: And just again, just directionally, is the growth kind of comparable in each market or is, are you seeing monetization growth now greater or lesser in one market or the other?

Frode Jacobsen: I think we see across the regions that we are doing well on monetization growth and for GX in particular, I think we continue to advance on greater ad revenue drivers as it has historically been very search driven in isolation. It’s still not let’s say caught up to our other products in terms of mix between advertising and search, but we are progressing on that.

Lance Vitanza: Okay. Last question for me, Iceland, we talked about the economics quite a bit back in February, I think it was. And it seems like the pace of incremental CapEx investments is pretty well contained. Then we saw Meta announce another big increase in its CapEx budget. And so I’m just wondering, what are the chances that we start to see these big data center investments pop up more frequently quarter-to-quarter, year-to-year, etc.?

Frode Jacobsen: I don’t think I would expect any cash flow surprises there because even if we did want to expand it over time there is significant lead time on that.

Lance Vitanza: Okay. Thanks. I’ll get back in queue.

Operator: Thank you. Our next question will come from Mark Argento with Lake Street. Your line is now open.

Mark Argento: Hi. Good morning, guys. Congrats on a nice quarter. Just a couple of quick ones here. Anything to read into that kind of more accelerated timetable on the Google renewal? I know you guys had mentioned that, that they had triggered that. And then just wanted to touch on what’s outstanding right now on the buyback?

Frode Jacobsen: Frode here, I can begin. In terms of the buyback, we have fully consumed our most recent 50 million buyback plan. So, I think now it’s a bit watch and see, as we have historically always done and sticking with the tradition that when we announce something then we execute pretty quickly thereafter. In terms of the Google renewal, it was of course a nice gesture of them to renew it this early in the year, as they had the whole year and at least from my point of view, I think this is a nice recognition of the joint potentials that we also have with Google.

Mark Argento: That’s helpful. And then just quickly back on the browser, it sounds like GX continues to perform well in North America. You get — in terms of any uptake on the mobile side or on the desktop side, especially with more AI product or more AI technology rolling out, how do you see the non-GX browser as potentially a growth driver for you?

Song Lin: Yeah. It’s Song on. I’ll just comment. So yeah, I think as we also commented a bit that — I mean, first of all, of course, Opera One is the primarily AI focused browser now. And also, they are launching their latest AI features drop. It’s always on Opera One and Opera One developer build. So I think it’s — yeah, I think now it’s almost becoming one of the leading major browsers which have the fastest and all this access to all the AI technologies, which we are very proud of. So yeah, I think especially among key opinion leaders and others, that has already been established and definitely helpful to have growth in non-GX browsers. And then even more, I’ll comment that for instance, iOS, now one of the major officials, we have the broadcasting is actually they support AI which that’s the highest we’ve gone.

So I think all those that provide — yeah, we feel that is a good opportunities for us to grow. And especially if we can also capture the iOS opportunity because as you know, iOS are by definition becoming really a high segment. And those users are also typically quite conscious about the features that we can provide especially around AI. So I think it’s a very good playground. And even for GX, I just want to mention that GX also has a mobile version, and it’s also doing very well on iOS. And I think we’re also super happy that now there’s more opening up, it means we can do more. So yeah, quite positive about we feel in general.

Mark Argento: Great. That’s helpful. Thanks guys. Good luck for rest of the way.

Operator: Thank you. Our next question will come from Eric Sheridan with Goldman Sachs. Your line is now open.

Unidentified Participant: Hi. This is Alex on for Eric. Thanks for taking the question. Just a quick one on marketing spend. There’s been a lot of discussion broadly around the industry on elevated ad prices in developed markets and sort of competitive ad auctions. Obviously, that’s where you’re focused on adding users. Can you talk a little bit about what you’re seeing in the market and ad auctions, which digital ad channels are working well for you. How has ROAs trended in recent months? That would be really helpful. Thank you.

Song Lin: Yeah. It’s Song here. I will comment it, but maybe comment also from Frode as well. So I would say high level, I feel that we are rather competitive in marketing. I think it’s also positive about why we actually have a bit higher adjusted EBITDA as a result. I think the reason just because — if you look at — if you are more like a traditional ads bio where you typically buy just search ads, or you typically buy, say, native ads, then of course you are pretty limited, and you are always facing all of the competitions, right, that there’s not so much we can do. And I think for us, it’s a bit different that as a browser, especially digital browser, away from the starting point, don’t really rely heavy on this. It’s just because we will never be able to compete in that way.

So we, for instance, focus a lot more on the influencers that we work with other influencer and that features, and then we’ll get elastic. So I think those things actually enable us to be able to acquire users in that way. And actually maybe not so much affect it or impact it as much by those, I guess, movements in the pure ad or marketing spend space. So I think maybe that’s the biggest differentiation. However, it’s almost from a monetization point of view, I just want to comment that we actually see an interesting trend, right, that’s needed and just purely buying from social, whatever, is almost not as exciting because we saw that people — advertisers are actually exploring record so-called high user intent event, which means precise and the time user will take actions, right?

So when you go out to the web page, you want to buy something, you want something to show up. So that’s actually interesting trends, which not so much on marketing, but it actually has a benefit for us on advertisement, which we start to talk about, that now starting from this year, we saw a lot of other guys approaching us for potential cooperation. And we are working with some of the [indiscernible] on how to make sure we can put up ads at the right moment with high user intent, which is a very good context for a browser because as a browser, of course, we have good knowledge of what a user is doing at what time and so what kind of accommodation can give them. So I think that is actually one of the interesting trends that we discovered on the digital advertising space, which is definitely something are changing and we are very excited about it.

So yeah, so to this, I tried to comment at the same time.

Unidentified Participant: That’s helpful. Thank you.

Operator: Thank you. [Operator Instructions] Our next question comes from Naved Khan with B. Riley Securities. Your line is now open.

Naved Khan: Hi. Thanks a lot. So maybe just on the DMA implementation and the trends you saw, maybe you can provide some color on the existing base, if you were able to retain that. And then what are you seeing in terms of usage after people kind of set Opera as a default versus previously maybe not being a default? Let’s talk about that a little bit.

Song Lin: Yeah. It’s Song Lin here. I think, I was previously commenting that. Yeah. So I don’t think we have to disclose the separation of our iOS results. It’s not irrelevant. It’s merely in the range, so it’s still big. But as we also commented that for total, of course, it’s still small. But then even that, right, if you saw especially with incremental users, then there are also major uplifting on the existing active user base, which we are very happy about. And then I think what we see is that — yeah, so — and you are right in the sense that a lot of users are to set the default browser. So first of all, we do see a significant increase of default browser users, which is actually very common. Like in most other platforms, we saw a bigger portion of our users set browser to default.