Opera Limited (NASDAQ:OPRA) Q4 2023 Earnings Call Transcript
Opera Limited (NASDAQ:OPRA) Q4 2023 Earnings Call Transcript February 29, 2024
Opera Limited beats earnings expectations. Reported EPS is $1.43, expectations were $0.18. 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 Fourth Quarter and Full Year 2023 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 begin.
Matt Wolfson: 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 heavily 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 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 fourth quarter operational highlights and strategy and then Frode Jacobsen will discuss our expectations going forward.
Song?
Song Lin: Sure. Thanks, Matt. And thank you to everyone joining us this morning to review our fourth quarter results. We are excited to report yet another great quarter. Revenue of $113 million, driven by strong organic growth payout with cost discipline resulting in $28 million of adjusted EBITDA, well above our expectations. For the full year, revenue was $397 million and adjusted EBITDA was $94 million. The Q4 of 2023 built upon the strength we saw throughout the year. This time last year, we guided revenue growth of 15% for 2023 as a whole, with 20% EBITDA margin at the midpoint. Even after raising the midpoint of revenue and EBITDA guidance every quarter, we were able to consistently beat those expectations, ending the year with revenue up 20% and then adjusted EBITDA margin of 24%.
We are very pleased that we have been able to consistently deliver revenue outperformance, while spending less than anticipated on marketing and accelerating our margin expansion. This also highlights our ability to consistently attract new users, primarily through organic channels. We did not wave off from our strategy to focus on high ARPU users. As expected, we are starting to see signs that high ARPU user growth is offsetting lower ARPU user churn, [whilst] (ph) a slight increase in our total user base during Q4. Annualized ARPU grew to a record high $1.44 in the fourth quarter, up 22% year-over-year and 10% sequentially. This was primarily driven by high value users as well as Opera GX. 2024 will be more of the same with the goal of continuing to grow these users, both in Western markets as well as high value users in general.
Combining this focus on high value users coupled with the stronger product portfolio and ongoing efforts to continually improve monetization, puts us in a very exciting position. We are still a relatively small company with lots of potential remaining in the core browser business. During the quarter, advertising revenue was $68 million, growing 20% year-over-year. Advertising was strong for both our owned and operated inventory as well as Opera Ads. We saw particular strength in the retail vertical during the holiday period. Advertising now represents 60% of revenue. Search revenue was $45 million in the quarter, up 15%, which we are also very proud of, given the maturity of this revenue category. As we shift the mix of our user base towards higher monetization regions and user groups, we can generate search revenue growth well beyond the underlying market growth of search based monetization.
Last quarter, I outlined three core growth drivers, Generative AI and the work we are doing with Aria, advertising opportunities and finally, our gaming focus, [with] (ph) Opera GX. I want to give you a brief update on each and how they shape our focus for 2024. For several years, we have used AI to help power our news and content products to deliver relevant and customized content for our users. In 2023, we stepped up those efforts, specifically rolling out Aria, our browser AI. Aria has received great user feedback and provided another point of attention that supported our user growth in Western markets. Yet, we need to be mindful that the whole industry is still in the early stage of its potential. Users can benefit more from AI assistance than what they might consider themselves.
The muscle memory of routine is strong and many integration points within the industry need to be rebuilt. As we embark on the New Year, we continue to iterate and are very excited for this next chapter in the Aria story. We want to integrate Aria further into the browsing experience, assisting users to unlock more efficient gains whether it relates to the browsing of the web itself, obtaining or processing information, or content creation. As a browser and as an independent ecosystem player, we also have a unique opportunity to help users navigate the broader AI space and simplify their experience. On top, we see potential to help less tech savvy users take advantage of these technologies, while enjoying heightened levels of privacy and data protection.
In short, these opportunities are huge. Our reward for helping our users benefit from Aria is observable not only as part of user growth, but also within engagement and indirect and direct monetization opportunities, from non-monetizable links in [chat environments] (ph) to intelligent recommendations based on the browsing context. As you may have seen, we have announced that we are pairing our product development with a significant investment in our AI infrastructure with the launch of a new data center in Iceland. This data center will be green, energy-powered, and takes advantage of the Icelandic climate to reduce cooling costs. And in general, we pride ourselves on our efficient hosting setup, typically at one-tenth of the cost of solar panel providers.
And we're excited to expand our in-house hosting to the AI space. AI is processing intensive with energy and cooling being key OpEx factors, but less sensitive to latency variations in milliseconds. And such, Iceland is a great location for our first AI footprint, whereas our other data centers are typically located closer to our end users. Shifting to advertising, which remains a top priority given the potential we see to continue strengthening our monetization. As a browser company, we can leverage the closed-loop environment of the browser to capture interest and context. While remaining mindful of user privacy, we are able to create value and utility for the user throughout their online journey, unlike many advertising platforms which rely on third-party signals and cookies.
For example, when shopping online, we do not need to rely on third-party cookies to tell us which offers to display to the user, but rather can do so organically and the right moment in the user's shopping experience, such as discount codes when viewing the cart, where intent is at its highest. With the growth of high-value users, we are becoming an increasingly relevant party to even more potential advertisers. Typically, in the context of integrated functionality that both benefits our users and has the potential to drive sizable revenue for Opera, representing a significant opportunity as we're looking to 2024. Beyond our Opera inventory, Opera Ads has proven itself as a competitive player in the broader landscape, attracting advertisers based on our technical abilities to augment their targeting.
We will continue investing in that platform in 2024, which we will see good opportunities from e-commerce, gaming, and other high-intent user interactions in a programmatic way, coupled with advances in AI and algorithms, which we persist in pursuing. And then in terms of our focus on change, Opera GX continues its healthy growth trajectory. Our GX user base was 27.8 million in the [Technical Difficulty], adding 7% high-value users versus Q3 alone. On top of the user growth, annualized ARPU increased to $3.51 during the quarter, up 6% versus Q3. The compounding of user and app growth has brought Opera GX to become a product with almost $100 million annualized revenue run rate, demonstrating our ability to be relevant to a young and highly engaged user segment.
In terms of footprint, Brazil now follows the US as the second largest market of GX. We continue to observe that GX users in emerging markets monetize significantly below their users on other browsers, where the gap between Western and other users be narrowed among PC gamers in particular. We feel great about the prospects of Opera GX in 2024 with continued user growth and further monetization opportunities within this attractive user base. Our ability to invest in the footprint of GX is also ever-expanding alongside the growth of the product market. Beyond these three highlighted areas of opportunity, we also observed some exciting trends in the broader ecosystem. One is the opening up of iOS for now in Europe, a result of a continued evolution of the regulatory environment in the EU and other parts of the world.
Such regulatory measures to promote healthy competition is naturally a positive impulse to Opera and their independent player. Also, we are well positioned for the rebounding interest in fintech applications on Web3, where we continue to invest in technology and build use cases. Both of these carry strategic importance to Opera in the months and years to come. So now let me turn the call over to Frode to discuss the financials and 2024 guidance in more detail. Frode?
Frode Jacobsen: Thank you, Song. Q4 was a great quarter for us with a continuation of the strengths we've observed all year and a confirmation of our confidence as discussed when we raised Q4 guidance last quarter. Revenue in the quarter came in at the top of our guidance at 17% year-over-year growth. On a constant currency basis, our growth would have been about 4 percentage points higher or 21%. Our user base is growing in Western markets and PC browsers also grow high ARPU users in emerging markets due to the success of Opera GX. The decline of low monetized mobile users in emerging markets is offset by strong underlying ARPU growth, leading to revenue growth in both Western and non-Western regions for all products. Adjusted EBITDA came in well above our guidance, adding $3.8 million to the top of our prior range.
The overperformance was driven in particular by lower marketing spend than anticipated in our guidance and cost of revenue coming in about 1 percentage point lower than anticipated relative to revenue. On the other hand, we saw an increase in cost related to advisory services supporting our internal teams on SOX readiness, as well as the bad debt provision. Cash flows came in at the high end of expectations relative to adjusted EBITDA, with an 88% conversion to operating cash flow for the year as a whole and 77% conversion to free cash flow from operations for the year as a whole and both slightly stronger in the fourth quarter in isolation. Tax cost for the year was relatively modest at 7% of adjusted EBITDA. In 2023, we benefited from both the recognition of tax assets in relation to our share-based compensation in prior years, as well as FX movements between USD and local currencies in which our taxes are calculated and paid.
Our year-end balance sheet includes an updated fair value assessment of our investments in OPay. We value our stake at an estimated $269 million, up from $163 million before. This results in a significant non-cash accounting gain of $106 million in the fourth quarter. As noted in our press release, we've observed that the company more than quadrupled its user base during 2023 and saw an even higher uplift in daily usage, in turn driving strong revenue growth. The updated valuation also ties with the limited investments by a new OPay investor in late 2023, which subscribed at a $3 billion OPay valuation. We remain interested in selling our stake in OPay at the right time. We are also open to a later stage exit in connection with OPay eventually going public, according to its longer-term plans.
Our OPay stake stood at 9.44% as of year-end. We completed our most recent buyback program in the quarter, repurchasing 1.15 million ADSs at an average price of $11.27, totaling $13 million. We thereby fulfilled the $50 million buyback that was launched in early 2022 with a total of 6.1 million ADSs repurchased at an average cost of $8.17. We will continue to consider buybacks in a tactical manner to maximize value for our shareholders in the long run. Since 2020, we have repurchased 35.5 million ADSs equal to 30% of the shares outstanding at that time, at a cost of $228 million or $6.44 on average per ADS. When adjusting for dividends avoided, the average cost is even more attractive. However, as we look ahead, it is our recurring dividend program launched in 2023 and currently at $0.80 per ADS per year that is expected to be our main avenue of returning funds to our shareholders.
Now, turning to our first guidance for the full year 2024 and the first quarter. For 2024 as a whole, we are guiding revenue to $450 million to $465 million, representing 15% growth at the midpoint. The guidance assumes continued convergence between the growth rates of advertising and search, though further upside would more likely be fueled by advertising. We expect to continue our browser's growth trajectory with high ARPU users, and we expect continued expansion of Opera Ads. We guide adjusted EBITDA to $106 million to $110 million, representing a 24% margin at the midpoint. The EBITDA guidance is highly exposed to what marketing costs we assume, and this cost is also highly discretionary. In 2023, marketing costs came in at 28% of revenue versus about 32% in our original guidance for the year.
As a reminder, marketing cost was 35% of revenue in 2022 and even 48% of revenue in 2021. From a relatively low spend level at the start of 2023, we scaled our marketing activities quarter to quarter. We are encouraged by our ability to scale at attractive ROI. And as we look to 2024, we expect to continue the sequential trend as an investment in our growth trajectory, also beyond the current year, though starting the year with a Q1 spend more similar to Q4. In sum, this translates to a marketing spend expectation of just above $130 million or about 29% relative to revenue. Cost of revenue items combined represented 23% of revenue in 2023, scaling with the successful expansion of Opera Ads. Our guidance implies a modest continuation of the trend, adding about 1 percentage point relative to revenue for 2024 as a whole.
Similar to 2023, the percentage will start below the annual average and increase in subsequent quarters. For remaining cost expectations, both cash-based compensation costs and the sum of our other cost items prior to adjusted EBITDA are expected to grow year over year in the mid-single digits. And as a result, they're expected to drop about 2 percentage points relative to revenue combined. For the first quarter, we guide revenue to $99 million to $101 million or up 15% year-over-year at the midpoint, and adjusted EBITDA of $22.5 million to $24.5 million or a 24% margin at the midpoint. In conclusion, we've put behind us a year that's progressed ahead of our expectations, both in terms of revenue and profitability, and we are excited to embark on 2024.
We're only two months out from releasing Q1 by now, and we look forward to giving you more color on how 2024 is shaping up then. With that, I'll turn the call back to the operator for questions.
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