Opera Limited (OPRA) Earnings Call Transcript & Summary

Okay. So we'll keep going for our next one. Happy to have the team from Opera here at the conference this year. I'm going to have a fireside chat with Frode Jacobsen, CFO. Great to see you, and thanks for coming and being part of the conference this year.

Thanks for having us.

Okay. So for those new ones that are maybe less familiar with Opera, why don't we start with an overview of the platform and what you're trying to build from a product standpoint, and where the company is positioned over the medium to long term?

Okay. Big question.

Big question. Always start big and there will be no return.

I mean we -- so Opera is a Norwegian company. We've been around for 30 years next year. We make web browsers. So we essentially compete with the browsers that come with phones or PCs by default. We built a 300 million user base, about 300 million MAUs over the years. And maybe some other like info facts revenue wise. We've guided to exceed $460 million this year, so a 17% growth rate. We've guided EBITDA margin to 24%. So we're happily in that rule of 40 category for 3-plus years now. And then what part of your question, have I not answered yet?

I think that's a good way to maybe kick it off and start. I mean let's start with the user base before we go into anything. Why don't you give folks a sense of the demographics of the user base, the geographic concentration of the user base, just to people to level set on who uses your products, what do they look like and where are they in the world?

Yes. So 300 million, as mentioned. If I do geographic first, about $50 million are in Western markets, so meaning North America and Europe, and then about $250 million elsewhere. That 17%, that's the western part of the user base is more than half of our revenue. So it's by far the highest monetizing region. And then beyond geography, we focus on high ARPU potential users in general. So we've focused a lot on these regions lately, but also we have a browser made specifically for gamers that is obviously a super-engaged type of user base with a relatively high online spend. Demographics, I think our user base tends to be younger, can be tech savvy, can be that gamer category. But younger and tech, I think, are quite typical denominators.

And I can attest that my gaming teenage son is squarely in that base of users on the gaming side of the browser product. Longer term, how do you think that mix might change? When you look at the company as a snapshot today and you line it up against some of the strategic priorities for the company, what might that look like somewhere down the road? Or how might the priorities get reflected in a shifting mix in the business?

So I would say we talked about gamers now, that's about 10% of our user base, up from 0 or we didn't at least have an app or a browser made for gamers some years back. Western base has doubled in our base from like 8%, 9% to 17-ish percent now. And when we look at how we spend our marketing dollars to raise awareness because that's the battle, right. We deliver products that do something different than the standard. And then we have to make people aware that we exist. And that spend is focused on these categories predominantly. So I think the continued growth in what we will do, we'll keep investing in sort of those high ARPU potential use base as part of the user base.

One of the most interesting developments in the last sort of 6, 12 months has been the introduction of the Digital Markets Act in Europe. What you think about what that act and legislation might do to the competitive environment in Europe? Maybe refresh folks a little bit on how you're positioning yourself strategically and competitively to take advantage of the potential for more competition in the European Union more broadly on the back of the DMA?

Yes, sure. I mean, first, the DMA, maybe everyone here knows what it does, but it defines some companies as gatekeepers if you have sufficient power. And then in our case, it means the most recent change that's positive to us is that Apple and iOS is required to inform people that they can use a browser different than Safari and they can make a choice. Google has been doing that for some time in Europe, at least. I think to us, this is very -- we have been competing them for nearly 30 years against owners of operating systems. So of varying degrees, let's say, of openness. So we're -- we have gotten quite good at existing in that space and sort of competing, partnering and finding a niche that works and that we can grow from. But of course, any regulator, government sort of focus on steps that promote competition further, we are very excited about it. So in this case, Apple, they are tailoring to the requirements around them, et cetera, but to us, that now the some of the things that have happened means that iOS is a more -- is a platform that we want to invest in. Up until this year, it was really Android that was the focus of our user base on mobile, and of our total user base over $200 million are mobile users. So it's the biggest part of it, very Android-focused. So I think now on iOS, when -- at least in Europe by now, I hope it cascades to more regions. Users can set up iOS as their default browser was not possible earlier. Users are informed about it. And then we are still working on the ability to use our own technology like under the hood to render our websites, et cetera. But I think for us, we are quite excited about it. It means that we consider iOS a platform that we can invest in scaling, not an overnight kind of from one day to the next. But at least in Europe, then the mobile target population is twice as big as it was before because now we can also focus on iOS. And when we guide marketing spend, et cetera, we take that into account.

So maybe sticking with that last point you made right there. In terms of with competition opening up like this, how does it change your strategic focus in terms of where you want to invest, the levels you want to invest? And maybe help -- if you can share for folks what might be some of the early learnings as competition has opened up in terms of what that might mean for new users adopting your products?

Still quite early, I would say. And we saw a nice benefit. We talked a bit publicly about it too, about the inflow of new users on iOS, but that was without us doing anything. So we were a positive surprise that actually before really putting in the work on the product, we already see a positive impact of it, still from a small base, right. Because this is the platform where we had a few million users in the small part of the base. I think now we've launched our flagship browser on iOS that had happened after this. We plan to be more visible around iOS. We promote more on iOS to scale it. And then I think we are, of course, very pleased that the EU is doing this, and it's good for, we believe, European users to promote competition. Hoping it then cascades, right, to other geographies as well, such as this one.

Yes. Understood. Well, sticking with this geography or a minute, maybe we'll switch to Google Search and the partnership you've with them. Obviously, they went through a lot of anti-trust issues in Europe a number of years ago, and now they're going through a series of anti-trust issues here in the United States, but you have a partnership with Google on the search side. The search landscape does have the potential to change in the next few years. Why don't you walk us through the current relationship with Google today and how changes in the anti-trust landscape could impact that relationship medium to long term or open up more competition?

Yes. I mean, I would put it under the same general umbrella as the EU discussion that we just had. And so here, we have a DOJ wanting to promote competition among search players. And I mean for us, we send traffic to search players. It's like 40% of our revenue. More competition for that type of traffic. I mean, that is a positive. So that we like. Our relationship with Google though has been, I think, it's about 20 years, very long term, quite close partnership closer than maybe you'd think in terms of like product things and opportunities. We are a small player who can act quite fast. So, we integrate some of their technology in our products like Gemini on the AI assistant. So, I'm sure we'll talk about it and be seen as a fast mover essentially, I think also within Google.

Okay. Understood. Let's pivot to AI. That's obviously been one of the biggest themes around the conference. Maybe you could walk us through a little bit of what you've built around Aria AI integration with your flagship browser and what you're seeing from consumer adoption so far and how to think about some of the long-term strategy around AI?

Yes. We think that's a super exciting area as well. I guess a lot of people are saying that on this conference. But I can say -- so what we do, just to explain that is within the Opera browsers, there is an AI assistant called Aria, like an Opera piece, right, where we don't develop the underlying large language models. We work with open AI, and we work with Google for that. And then we have our own technical overhead layer that combines these models, pulls other sources, allows the AI assistant to be informed about the website that you're on, et cetera. So, you can have a contextualized good answer. And then for the user, that stuff is free. And so, the benefit we have compared to like a non-browser AI platform is that we are not a website, right. We are the tool used to get to those websites. So, we can exist on top of any website that can be proactive. It can remind you where I can summarize this or I can do this. It can -- you can have a conversation about the AI, about the website that you are on right there on that. So, we think as a concept, we are extremely excited about what we do on Aria. We talked quite a lot about it because we see that how these tools can make the web experience better for people like faster to process data, find data, even create things, right. But we also recognize it will take time. So, I think on the other end of it, like one of the lessons I think we have learned over the past year is that for users to change their habit that takes longer. So, what we see is that the people who start to use that assistance, they spend more time in our products. They even search more on Google, they show better retention. So, it's a great tool for us, but it's still -- the adoption is slower than what at least I had expected. It takes longer to build it up. And I noticed it even on myself that -- it's such a muscle memory, if I wonder something, I search for it. And then I think like, obviously, we even have our own AI assistant, so if I go and ask that just now, like we talked about the League of Legends game, right. And how many people watched that tournament -- excellent Aria. Like how many people watch that last year? Just to refresh my memory, and you get like all the stats. So, I think it's very useful, good to exist on top and something that will continue to be Aria's strategic importance to us.

Okay. Maybe just last one on AI, just to sort of follow it up. Earlier this year, you announced the green energy, AI data cluster in Iceland to support your AI ambitions. Can we talk a little bit about your current infrastructure footprint and how you see it evolving in an AI, maybe an AI first world?

I think we have data centers across the world. They are both in Europe, North America, both U.S. and Canada, Africa, Asia, et cetera, Singapore. So, setting up a NVIDIA like H100 based cluster in Iceland is not new to us. Here, we have the benefit that latency is slightly less critical compared to most like kind of cloud services. So, we could use Iceland with green, cheap electricity and cooling. I guess to just open the window. So, it's a good place to be. That allows us to run that in-house, just like we do with everything else like compression, own rendering, et cetera, at a fraction of the cost of what it costs to do it externally. So that's the logic. And then we've sort of created a starting point that we can scale within. We used cash for it just because we still -- we monetize the users, but it's still quite early days. So we wanted to just have that as a baseline. And then as that scales in the business case, we might probably wouldn't use our own cash if we would scale it.

Okay. You talked earlier about gaming as a vertical for you guys. Maybe talk a little bit about the long-term strategy with respect to GX, your gaming-focused browser. How to think about it as a tailwind for user growth, for monetization longer term? How do you think about that evolving against that broader landscape?

The GX space and the GX opportunity. I think for now, it's 10% of our user base. It's monetizing well above the average, even like-for-like PC browser to PC GX user is monetizing well ahead, even though we -- it under-indexes on for example, advertising revenue, just it's not so -- we haven't prioritized monetization as much on GX. It's just search in the beginning was 100% optimization, very simple and it's a plug-and-play and already the best one. I think ahead, we see -- I mean, there's 30 million Opera GX users out of hundreds of millions of potential gamer targets. So -- and what we see also is that product is ranked very high. People rated high. They use it for a long time, high engagement, et cetera. So, we can only sort of conclude that our focus here has to be to raise awareness of more gamers learn about this product. And so that's what we do. We invest in sort of building the brand, build raising awareness. We work with YouTube, influencers, League of Legends and type of partnerships, et cetera, to be visible and then to build a brand.

So, looking out over what might be the biggest growth driver, it's really just about top of funnel brand awareness, bottom funnel sort of usage adoption and sort of somewhere between driving overall awareness inside the gaming community of the opportunity.

Yes, making people are aware and then I think being present at that good time when people like, okay, I'll try that, right. So, okay I'll go through the -- import my bookmarks and change -- we give it a go. And we think we are doing well on that. The people that have gone through it, really like it. So, then we just have to spread that because 30 million amongst global gamers, it still feels like relatively early days for that product.

Okay. Maybe shifting to the investments in the margin side of the equation. When you think about balancing investments, delivering on certain levels of profitability, how do you think about striking a balance between those 2 making sure you get the right level of money invested in the growth side of the equation versus continuing to evolve and develop and improve the margin trajectory in the business over the medium to long term?

Always sort of an ongoing assessment. We do have the benefit that like nearly 30% of our revenue is spent on completely discretionary marketing cost, right. So that means that we do -- we actually have that ability to set, okay, how much do you invest in growth versus how do we optimize for the margin, et cetera? And then we try to just go by whatever is the best for the business long term, while still considering the need for profitability as if it was our own personal company. So, I think we tick up on EBITDA margins, but we still deliver 17% growth this year and very proud to be -- we convert EBITDA to cash flow in a pretty good manner in a quite transparent way for people to sort of follow and model on their own and proud to be a dividend-paying growth tech company because I realize there's not that many of us. So, to have a -- I guess our dividend yield is close to 6% on a 17% revenue growth kind of business. So yes, so that we are proud about. But okay, so always ongoing. I think when we look ahead, we do want to invest in growth. We will keep doing that, but kind of probably not unreasonable to expect sort of similar to as we entered this year that we commented that we expect margins to keep sort of expanding little by little on the net as a reasonable expectation relative to sort of economies of scale pulling it in one end and being in a super strategic point in time where the browser is so relevant and these AI opportunities and the gaming opportunities, it's just also a lot to go after investment-wise.

Okay. So just sticking with that last point there. When you think about your investment priorities currently, how you've articulated them, what would you say are the top 3 investment priorities that are garnering an additional dollar of capital inside the business?

I would highlight Western user bases in general. We are coming out with a new -- the new version of Opera One. It's called R2, you can try it and develop or build online, but that's coming out this fall. It's Opera GX as we just talked about, it's still early stage, super well monetized. And then I would say Opera iOS -- opportunities in iOS in Europe, in particular, to sort of use the momentum that we have there to sort of start building that base.

Okay. When you think about marketing investments in the business, how have the channels in which you've invested dollars on the marketing side evolved as a company over the last couple of years? What are your key learnings about which channels typically deliver higher ROI to you versus lower ROI? And how do you think about striking a balance to optimize for ROI in your marketing spend?

So I would say, how the spend evolves is, of course, we move more spend towards the areas that we want to grow in. So we want to focus on this higher ARPU. So even though Western is 17% of our user base, it's close to 70% of our marketing expenditure. So we do invest in that. That also has some consequences on the type of campaigns we run. So we do, I think, more than before brand building awareness raising because reaching the right audiences in the U.S. and key European countries, hundreds of influencers that we work with on a monthly basis. It's a sort of symbiosis, right. Because we give content makers something to talk about. Like it's a very quickly inflow of features into the products, et cetera, which can be interesting for them to cover. And then of course, we benefit from the awareness that generates and maybe less spend on OEMs and telcos or at least less percent of the total, I would say, because that's less relevant in Western markets.

Understood. Maybe turning next to capital allocation. You talked a little bit earlier about paying a dividend. When you talk about the priorities for your capital both investing in the business, potentially doing M&A or returning capital to shareholders. Talk a little bit about how your strategic imperatives around capital have evolved in the last couple of years and what your current priorities are in terms of striking balance around capital?

Yes. I think over the years, we have shown to be quite active. So we do generate good revenue, good profitability, et cetera. And I think we highlight that since 2020, we've used over $400 million on returning to shareholders, either through -- I guess we've done all. Like we've done a special dividend. We are doing a recurring dividend, and we've done buybacks both in the market and we bought out a pre-IPO shareholder. So I think we've been active on that front and sort of shown that we do all of them. We've talked about the recurring dividend as our main avenue of returning funds to shareholders now just because we look at the free float of the company. When we went public, we had a free float of 9%, and then by the end of 2020, like when I start my math there, it was 16% and now it's 28%. So it's sort of moving in the right direction. But then, of course, then I really liked when we bought back a pre-IPO shareholder, that was not part of the free float, and both there was a great deal and the free float in percent of the company just overnight increased.

Okay. So that's your priorities going forward. Okay. We've talked a lot about growth and where you want to take the platform over the medium to long term. And what the role the competition and opening up can play. Talk a little bit about the vision for the company and bring it all together. So we're sitting here second half of 2024, when you think about where the company is going over the next 12, 18, 24 months? Maybe put a finer point to bring the conversation home on key priorities for growth, how you're aligning investments against it and how to think about the vision from the leadership of the company of where you want to be and what you're sort of scaling after in terms of a long-term opportunity?

Okay. Also a broad question. So, I'll try to break it down as my head work. So finance-wise, just this year, we broke $400 million. So if I think about revenue and sort of we're on track to exceed the $0.5 billion of revenue milestone next year by a good margin. So I think that will be -- that will be a milestone for us. And while we take up on our margin picture as we expect, maybe more interesting on like the platform on our offering, I think both it will be a very active 12 months. We always feel that way. But also now, we feel that the product lineup we have and the partner lineup we have is the most exciting it's ever been. We feel that we benefit from like a broader industry appreciation of the browser, like you talked about the DOJ, like the appreciation of the value of the traffic that a browser in that case sends to a search engine, but that we also experience e-commerce, other types of verticals appreciating us, right. So I think the lineup we have on the product side with the new Opera One, the new array of functionalities, the Opera GX, partnership broadening. That, I think, will be if you think about what's important over the next 12 months, I think sort of these product releases to sort of still stay ahead of the curve and still have good reasons for people to switch away the system defaults and try Opera will be important. And then on the partnership side, like we talked a bit on our last earnings call about how e-commerce and other players sort of find us now to be big enough in key markets like the U.S. that we integrate directly and create sort of opportunities for us to drive high purchase intent traffic directly to a partner without any intermediaries and based on our own ability to see like who'd be in the market for a certain type of product or service, et cetera. I think that part of the offering is exciting both on its own because financially speaking, it's very attractive. And it's sort of how that can then again lead us to be able to scale even faster than what we have done. So the product, company-wise, it's 30 years. Next year, we're a year out of the 30th anniversary, and I think we'll measure our success that we still keep the team energized and like that hungry startup feeling that we do well at sort of letting people make their own Opera internally. So continued high energy, I hope to be able to report also a year from now.

All right. Well, that's all great stuff that we can think about in terms of coming over the next 12, 18, 24 months. Really enjoyed the conversation, and thanks for being part of the conference this year.

Sure. Thanks for having me.