Welcome to the Opera Limited Third Quarter 2022 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.

Matthew Wolfson - Head of Investor Relations

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 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 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 historical financial results of Opera on our Investor Relations website. We will be live tweeting highlights from the call @InvestorOpera, so please follow along there during the call and in the future.

With that, let me turn the conference call over to our Co-CEO, Song Lin, who will cover our operational highlights and strategy, and then Frode will discuss our financials and expectations going forward. Song?

Lin Song - Co-Chief Executive Officer

Thank you, Matt. Sure, excellent. So thank you, Matt, and thank you everyone for joining us today. Like, again, I'm very happy to report our good third quarter results with you today. Despite an uncertain global macroeconomic environment, we were able to generate record revenue and profitability. It is a good indicator that our strategy of focusing our product on the highest-value users has enabled growth even in a challenging environment.

Also, quarter revenue exceeded the high-end of our guidance range by over $2 million with 25% EBITDA margin exceeding the high-end of our EBITDA guidance by more than $4 million. We believe this momentum puts us in an excellent position as we enter the seasonally strong fourth quarter.

Total revenue grow 28% year-over-year, driven by record revenue from both search and advertising. Our strategic choice to focus on better monetization users in particular in the US and Europe has created an underlying tailwind that helps shield us from a strong FX headwinds due to a strong US dollar and pricing pressure in the market. This choice combined with the audience extension provided by our Opera Ads platform resulting us tracking well ahead of our expectations.

For several quarters now, we have articulated our strategy of focusing on the highest-value users, which applies to both emerging markets as well as developed ones. This strategy continues to pay all for the first time annualized ARPU exceeded the $1, up 14% sequentially to $1.06.

Advertising revenue, up 41% compared to last year now represents 58% of our total revenue. Our advertising business on our owned and operated sites benefits from our high-value footprint field, in particular by the success of our gaming browser, Opera GX. Audience extension is natural supplement to our O&O advertising inventory. We believe that leveraging third-party inventory as a supplement to O&O is a very healthy combination and will continue to generate the stable margins and grow a meaningful EBITDA contribution from the Opera Ads platform.

On top of the advertising trajectory, search revenue showed also healthy growth of 15%. This is last year. The growth in search revenue was primarily driven by our expanding PC footprint in North America. The revenue outperformance leads to greater than anticipated EBITDA. Also, after setting up our marketing expense in 2021 to attract the higher value results, we have stabilized around the 2021 levels and driven leverage in our business model. We are demonstrating what we said and at the time that EBITDA margins would indeed expand in 2022. So we strongly believe there is a desire by users for features that the larger system that default browsers do not offer and as a result are seeing strong demand for independent browsers of choice.

Our gaming browser, GX is a good example of identifying a larger subsequent of users whose needs are not met and who seek a browser that better fits with both their needs and online personas. Over time, we believe that we can introduce other products that can find a user base and be successfully monetized. The GX browser now has over 18 million users with an annualized ARPU of $3 across PC and mobile, which is the highest monetization browser in all pseudo products. GX offers the differentiated advertising proposition that we are starting to take advantage of as it is a strong engagement and discovery engine. These users typically seek out the advertising that we can solve them, whether it's the latest trailer for our game or the release date of our [Indecipherable] GX is going to puts it all front and center. We are also able to monetize GX beyond the just advertising with the filler links to purchase games, downloadable content, and in-game currency.

Our user growth continues to be strongest in the Americas. As our focus on monetizable users in emerging markets material, we are starting to see signs of user base stabilization in these regions and significantly higher up levels. During the quarter, we enabled our Web3 wallets for Opera Mini, bringing the wallet to potentially over tens of millions of users. A major event for both Opera and the industry more broadly. This is a long-term play, but demonstrates the power of our engaged audience around the world. Opera is very proud to help millions of users get aligned and enable them with Web3. We also upgraded the Web3 wallet with a single SDK across our [Indecipherable] products to make further improvements faster and more cost-effective.

With that, I will hand the call over to Frode to discuss our financial results and outlook. So, Frode?

Frode Jacobsen - Chief Financial Officer

Thanks, Song. As Song Lin pointed out, our quarterly business performance was well ahead of our expectations. Earlier in the year, we were pleased to maintain guidance after Q1 and the dramatic start of the year. And later, we're proud to raise it after Q2. Following this Q3 overperformance, we are yet again in a position to indicate even greater expectations for the fourth quarter and the year as a whole.

Quarterly revenue came in at a record $85.3 million, which represented 28% year-over-year growth and a solid beat versus our previously issued guidance of $81 million to $83 million. This was achieved despite a major headwind, namely the strengthening US dollar. On a constant currency basis, we estimate that our year-over-year growth would've been over 40%. The overperformance was mainly caused by two factors, not fully reflected in our expectations. First, revenue from Eastern Europe remains more stable than anticipated, and our audience extension revenue continues to grow faster than anticipated.

Adjusted EBITDA was $21.4 million or a 25% margin, substantially ahead of our $14 million to $17 million guidance. In addition to stronger revenue, we benefited from marketing expenses coming in below expectations. At the same time, the growth of our Opera Ads platform led to a couple percentage points more cost of revenue relative to what we had expected. In sum, the cost mix more than that's out as Opera Ads has very limited other incremental costs.

Then turning to capital allocation and returning cash to shareholders. Towards the end of the quarter, we announced that we had reached an agreement with 360, one of our pre-IPO investors to acquire its 23.4 million ADS equivalents is 20.6% stake in Opera for $128.6 million. This transaction closed earlier this month and 360 is no longer a shareholder and no longer represented on our Board of Directors.

Following this transaction, each remaining share constitutes 26% more ownership of Opera than it did before. In terms of our $50 million open market buyback program launched earlier in 2022, we repurchased 900,000 ADSs for $4.4 million in the third quarter.

Year-to-date, including shares we have already repurchased during the fourth quarter, we have repurchased a total of 2.9 million ADSs for $14.7 million under this program. In sum, this leaves our total shares outstanding at 89.7 million ADS equivalents as of today.

In total, combining all our open market repurchases and the 360 transaction, we have repurchased more than 28% of ADS equivalents outstanding after our 2018 IPO and 2019 follow-on offering. And we continue to see a large disconnect between the intrinsic value of Opera and the value observed from the current trading in our stock. And I'll highlight a couple of vectors worth noting in addition to our core business performance.

As of September 30th, we held $201 million of cash and marketable securities, up from $187 million on June 30th. Our 360 payment is due in November, which will reduce this balance to $73 million before being listed by the underlying cash flows of the fourth quarter. So that's the most relevant cash number to consider. On top, Opera has held investments in three private companies over the past years, OPay, Star X, and Nanobank.

Last year, we decided to initiate processes to realize our gains on those investments. We sold a 2.6% stake in OPay for $50 million in 2021, but still hold a remaining 6.4% stake in the company classified as held-for-sale. Earlier this year, we fully exited our investments in the other two, Star X and Nanobank with payments to be made in installments. We have collected a total of $37 million on these two and the present value of payments still to be received is $168 million.

So in light of our total shares outstanding now being less than 90 million ADSs combined with a resilient and growing business with expanded margins and a strong balance sheet of cash and financial assets, it is our opinion that Opera is substantially undervalued by the markets. And as a result, we are happy to continue repurchasing our stock.

Now, moving to our guidance. Given the momentum in our business, we are raising both our revenue and adjusted EBITDA guidance. Our full-year revenue guidance is now $323 million to $326 million, representing 29% year-over-year growth at the midpoint. We are also raising the adjusted EBITDA range to become $62 million to $64 million for the year. That represents a 19% margin at the midpoints. In other words, for both revenue and adjusted EBITDA, the low end of our updated guidance is above the high end of our previous guidance.

For the fourth quarter, we expect revenue of $88 million to $91 million, representing 23% year-over-year growth at the midpoint, and adjusted EBITDA to be $17 million to $19 million, a 20% margin at the midpoints. In terms of cost expectations, we build in another one to two percentage points in cost of revenue and we maintain our previous expectation of around $30 million in marketing cost, even though Q3 came in lower.

Compensation cost is expected to be relatively stable while we build in a slight increase in other opex following expected seasonality in corporate costs and general activity growth.

Overall, I'm very proud of our recent accomplishments, strategically, operationally, and ultimately, financially. We continue to execute on our strategy to grow users and high ARPU markets and concentrate our efforts in emerging markets on the most monetizable users. In addition, we are well underway to focus our company around our core operations and leveraging our games to invest in our own stock through buybacks.

And with that, I turn the call back over to the operator to take questions.

Question & Answers

Operator

Thank you. [Operator Instructions] And we'll take our first question from Lance Vitanza with Cowen. Please go ahead. Your line is open.

Jonathan - Cowen and Company - Analyst

Hi, good morning. This is Jonathan on for Lance. Congrats on a quarter. My first one is it's great that revenue has such a strong performance despite the lower-than-expected marketing expense. Could you maybe share a little bit what were the primary drivers that led to lower marketing expense? And I know that we can expect same levels into the fourth quarter, but can we expect marketing expense is also generally decreasing to '23 or remains stable and may be able to be higher?

Frode Jacobsen - Chief Financial Officer

Hey, Jonathan. Thanks for your question. I mean, overall roughly our marketing spend this year is roughly on par with what it was last year, which was represented a big step-up in marketing costs as we targeted our efforts towards Western markets. So what we are achieving this year is to maintain that spend level, not really grow it. But then reap the benefits on the revenue side. So we're not yet giving guidance for next year, but at least that's an indication of the level that we are remaining at.

And in terms of the next quarter, as I mentioned, we build in about $30 million of spend, so a bit less than we had this quarter. That's what we think is most prudent to expect.

Jonathan - Cowen and Company - Analyst

Okay, got it. One more. The EBITDA performance is just amazing, right? Like it's growing just like you guys said that it would in '21. And now with the accumulation of additional cash that the company will generate because of this, surely the company is exploring, at least investing into other growing opportunities, right? Or is this a time that it's putting to hoard cash, given the general outlook of global business?

Frode Jacobsen - Chief Financial Officer

I would say the most obvious potential that we have demonstrated through our actions have been to buy back our own stock, given how we've been priced. So we announced the most significant buyback we could have ever done in the quarter past with the exiting of 360 in addition to the buybacks rolling in the market. So at least we feel that that cash has been put to very good use in terms of our other shareholders. And then, of course, we continue to run the profitable business, but I don't want to speculate in potential M&A. We're all open for good deals and as we have always been.

Jonathan - Cowen and Company - Analyst

Okay, that makes sense. Thank you. Congrats on the quarter again.

Frode Jacobsen - Chief Financial Officer

Thanks.

Operator

And we'll take our next question from Alicia Yap with Citi. Please go ahead. Your line is open.

Alicia Yap - Citigroup - Analyst

Hi, thank you. Good morning and good evening. Thanks for taking my questions and congrats on the solid results and the guidance raise. I have two questions. First is how should we reconcile the discrepancy between what we saw from the slowdowns of the ads revenue for some of the bigger US platform company versus our really solid growth this quarter? And then based on your 4Q guidance, would that be fair to assume that both search and also the ad revenue might be decelerate a little bit from pre-Q level? Or will such actually maintain quite steady and the deceleration is come from the ad revenue?

And then my second question is any preliminary view on how we should think about the growth momentum for 2023? Can the 4Q growth momentum actually be a good indicator for us to lead into 2023? Thank you.

Lin Song - Co-Chief Executive Officer

Yeah. I think that - sure, maybe I'll take it, Frode. Yeah, okay. So like, hey, it's Song Lin. Maybe I'll just try to take this. So I mean, more like - I think it's a different aspect of things, right? So for instance, in terms of search, I guess we are more than say Google because we are, I guess, 15%. They are 4% year-over-year. I think that's more like a function of user growth, especially in key markets. So like they are much bigger than us, of course, in terms of scale, but we are able to grow say more users in Americas year-over-year. And that, of course, constitutes the growth, which makes us better despite of the global headwind.

So I think that - so part of it is definitely because of the growth of the user base in key markets. While I would say for some other like ads, it's partially also related with this, of course, that way I'm growing our user base in key markets. But I would say the other part, of course, is also a factor that I think we- for the company our size, I think we're at the right size. Well, I guess, as far as we're buying the right niche, we are big enough to make impact in terms of millions of dollars every quarter, unlike startups.

But on the other end, we are not, I guess, as big to the point where we cannot fight the macroeconomics, even if we are doing good. So I think while [Indecipherable] we are agile enough that as far we have good technology, we have good knowhow, we have good user base, we are able to extend it. We're not that big like Google or Facebook to be able to almost not able to come back that macroeconomics. So I think that's the kind of latest board we're having now. But of course, I guess, we just need to continue to deliver and try very hard. That's my quick take on that.

I think you also asked the questions about Q4. So I would say it would be like this. So I think, I mean, more like - we're always [Indecipherable] because just made ourselves in this right, we don't know, for instance, how bad the ethics will be and also where we can't really predict how some of our partners will perform. So I think it's always prudent to do predictions on some of the revenues because we are ultimately also dependent on our ecosystem.

So I think that's pretty much what we saw. It's less than what we see a strong, let's say, deceleration or whatever, but more let's just have to be prudent on that because of the macroeconomics. And then, yeah, I think it's more than that than anything else. Otherwise, I think we are in good growth trajectory. But yeah, we have to see how people play out. I guess that will of course that we are already at bigger size than before. So that also says that to grow with 10% will be harder anyway. So I think it's that.

I think it's a bit too early maybe to comment on next year because - I think in particular because of our macroeconomics. We're also worried from it. We are so far performing quite a bit better than macro and we hope we'll continue the trend. But I think we need to see how Q4 goes and then we can maybe have a better assessment of what we're achieving next year.

Alicia Yap - Citigroup - Analyst

Okay, great. Thank you, Song. Very helpful. Yeah.

Operator

[Operator Instructions] And we'll go next to Mark Argento with Lake Street. Please go ahead. Your line is open.

Mark Argento - Lake Street - Analyst

Hey, Song and Frode. Nice quarter and congrats on the big stock repurchase. Just wanted to follow-up a couple things. Frode, when you think about cash generation of the business, can you just help us kind of think about the conversion of adjusted EBITDA, the free cash flow? What kind of outbacks or other types of cash outflows are there? Just trying to kind of hone in on a free cash flow number and a free cash flow yield for you guys.

Frode Jacobsen - Chief Financial Officer

I mean, if you look at 2021 and '22 year-to-date, take adjusted EBITDA, less taxes actually paid. Free - I mean, operating cash flow amounted to about 90% of that. So I think that's a relatively logical rule of thumb in terms of what to expect. And then our tax rate tends to be about 20% of operating profit if you add back stock-based comp. It's been a bit higher this quarter and prior because of foreign currency movements affecting tax assets, ultimately, presented in tax liabilities. But I guess those would be my guide - suggested guideposts.

Mark Argento - Lake Street - Analyst

That's helpful. And then just lastly, can you talk a little bit about kind of any variances from a geographic perspective, Europe versus I know North America is smaller, but growing fairly rapidly? Any color you want to give on where you're seeing some strength or areas of concern?

Frode Jacobsen - Chief Financial Officer

I think the headline of the quarter and I guess the year as a whole is that the strategy to focus on Europe, North America, or really the Americas has proven to work really well for us. Good momentum in that and as Song talked about from such a small position that we are able to drive really good growth or have been able to drive really good growth in a tough macro environment. So I think that's the main message. We've benefited from - we benefit from both underlying ARPU growth and the geographic mix shift of our user base.

Mark Argento - Lake Street - Analyst

Great. Thanks, guys.

Frode Jacobsen - Chief Financial Officer

Thank you.

Operator

And there appears to be no further questions at this time. I'll turn the call back over to Song Lin for any additional and closing remarks.

Lin Song - Co-Chief Executive Officer

Yeah, sure. So like, again, thank you again for joining us, everyone. It was another record quarter and we're excited about what is ahead of us as we enter what has historically been the strongest quarter of the year. I'm also very proud of the hard work from all of my colleagues allowing Opera to continue to outperform expectations. The operational excellence taken together with our strong balance sheet should create more opportunities in the quarters to come. We appreciate your time and we look forward to speak with you again in the future.

Operator

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Q3 2022

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