We think the Q1 report was strong, especially in ads, which came in 9% above our expectations and managed to grow 5% y/y despite a 20% decrease in CPM levels compared to Q1 last year. We believe the company continues to do the right things while waiting for the advertising market to truly rebound by investing in its ad tech platform and initiating new growth initiatives in markets such as Africa, South America, and the US. On top of that, the company managed to increase users engagement, which is visible both in DAU/MAU and ad load figures, and the company revealed that the daily engagement numbers have increased by 50% y/y. This is crucial in Truecaller's pursuit of adding new high-value ad formats, including video ads with more than 10x the CPM of a normal banner ad.

Total revenue was SEK427m, an increase of 10% y/y. Adjusted EBITDA amounted to SEK151m, corresponding to a margin of 35%, 27% above our expectations.

In terms of the outlook, we did not get any pivotal view from the company regarding the underlying ad market; hence, we do not expect any material changes in ad prices throughout 2024 (except for seasonality patterns). From a short-term perspective, the company expects materially lower revenues from IPL compared to last year (SEK60m vs SEK120m last year). Also, considering IPL started in Q2 last year and Q1 this year, the IPL-related revenues in Q2 are expected to decrease some SEK80m this year compared to last year.

Ads revenues amounted to SEK318m, 5% y/y, and 9% above our expectations. A higher ad load explains the whole deviation.

Ads revenues are the product of daily active users (DAUs), CPM (cost per 1000 ad impressions), and daily ad impressions per DAU (DAIDAU). Below we walk through each of these. Note that CPM and DAIDAU together make up average revenue per user (ARPU). These are also interdependent, but nevertheless, we think it is worthwhile commenting on each of these separately as they indicate future potential.

Truecaller reached 383m monthly active users (MAUs) in the quarter. Of these, 71% come from India, 20% from Africa and the Middle East, and 9% from the Rest of the World (RoW). Sequential growth from all the regions was in line with Q4 and amounted to 2-3%. However, management states that the growth accelerated towards the end of the quarter. In total, MAU grew 11% y/y and 2.5% q/q. Truecaller reached 314m DAUs - 75% from India, 19% from Africa and the Middle East, and 7% from RoW. Nigeria, Colombia, and Chile stood out in terms of user growth and grew 30-50% compared to Q1 last year.

The DAU/MAU ratio provides color on the share of MAUs that use the Truecaller app daily. This ratio was 81.9% in the quarter, another all-time high.

For quite a while, MAUs have grown linearly by c8-10m per quarter. Also, the DAU/MAU ratio has been slowly expanding from c75% to more than 81% in recent years, see below.

CPM amounted to SEK0.75, -20% y/y, and -10% q/q, and missing our expectations by 5%. Typically when CPM is lower than we estimate, the ad load (DAIDAU) is higher, which was also the case in this quarter.

At first sight, a decline of 20% may seem surprisingly weak, considering that large advertising companies have witnessed strength in the ad market in recent quarters. However, this is especially true in the US, while the rest of the market is still relatively muted. In the downturn of the market, western markets led the market downwards, whereas eastern markets lagged. We suspect the same will be true as the market turns positive again. Hence, given Truecaller's exposure to India, the decline is rather in line with our expectations.

With that said, we had expected the IPL to have a more positive impact on ad prices as the league started already in Q1 compared to Q2 last year. Management commented that while the 2023 IPL season attracted a lot of new demand, the 2024 IPL season has in general seen a reduction in spend due to e.g. GST changes for gaming companies.

Long-term, CPM is likely to grow structurally from the move from physical to digital advertising, particularly in India. Additionally, should Truecaller increase penetration in more high-income markets, CPM would be very positively impacted. Besides, it is becoming increasingly clear that being a technology company with substantial ad revenues brings significant operational leverage when ad prices rise. Also, higher engagement should allow for more high-value ad formats. Therefore, should ad prices rebound in the Indian market, we expect Truecaller to experience high incremental margins, supporting earnings growth.

The main driver of the strong ARPU development between 2020 to 2023 was the increase in ad load, measured as daily ad impressions per DAU (DAIDAU).

DAIDAU landed at 14.8, implying an increase of 16% y/y and 15% above our estimates. Truecaller thinks it is not fair to look at CPM and DAIDAU separately since these are very dependent on each other and to instead look at average revenue per user (ARPU) as a whole. We agree on this for the short term but view them as important separate units in the long term. The increased DAIDAU indicates that user engagement has improved, which the company also stated in the report.

Our long-term view of the DAIDAU development is that this will be on par with the daily interactions with the app per DAU.

Putting together CPM and DAIDAU, we reach ARPU for the ads business. As we have seen in previous quarters (except for Q3 2023), DAIDAU tends to increase when CPM declines which also was the case in Q1.

Looking from today to 2026, we expect CPM and DAIDAU to drive Ads ARPU by similar magnitudes.

Revenues from Premium Subscriptions amounted to SEK58m, growing +26% y/y and +5% q/q. The underlying strength is caused by an increasing share of users opting for paid plans and users starting to choose more expensive versions. Truecaller states that the positive development comes from new AI features/cloud telephony features in premium plans. During the quarter, Truecaller launched Call Recording in India, and the company continues to see higher conversion and ARPU going forward. It has also maintained its investment in the US, which grew subscription revenues by +60% y/y in the quarter. US subscription users are typically worth 100x compared to a typical non-paying user for Truecaller. This equates cSEK100 per quarter and user, which speaks a clear language about the potential in gaining traction in this market.

Truecaller had 2.15m premium subscribers, equating to 0.69% of its DAUs. The number of premium subscribers increased by 15% compared to Q1 last year. The subscription ARPU (monthly) was SEK9.04, up from SEK5.75 in Q1 last year and SEK8.79 in the previous quarter.

Looking ahead, we see continued positive development from increased willingness to pay for new premium features. Long-term we believe a higher penetration of the Truecaller app in high-income markets can render a higher share of DAUs also being premium users.

The Truecaller for Business (TfB) segment reported revenues of SEK50m in the quarter, growing 44% y/y but 0% q/q. Q1 is typically a weaker season for TfB, and the flat sequential development was in line with expectations. In the quarter, the new offering in risk and fraud prevention has onboarded its first customer and started to generate revenues in late Q1.

The gross margin was 2pp better than our expectations, landing at 76%. The high number is partly caused by a significant share of COGS being fixed, so when revenues surprise positively, gross margin tend to do so too.

OPEX was SEK176m, +8% q/q and +24% y/y. This was SEK1m below our estimates. The increase was primarily due to higher growth investments which was communicated in conjunction with the Q4 report. Considering the acceleration in user growth towards the end of the quarter, and that most growth is coming in the markets in which the investments are made, we think it is clear that the investments are starting to bear fruit.

As long as the ads market remains weak, we expect OPEX to remain at low levels. However, given the new growth initiatives, we expect a small sequential uptick in the coming quarters. Last quarter, the company shared that it has started implementing an AI chatbot, which has reduced the workload related to supporting issues by 50%. This implementation should strengthen the business's scalability going forward.

Due to the non-cash-flow affecting costs, we argue that it’s better always to use underlying OPEX, which results in the adjusted EBITDA. Adjusted EBITDA amounted to SEK151m in the quarter, +1% y/y, equating to a 35% adjusted EBITDA margin.

Net cash flow from operating activities was SEK56m, down from SEK80m in Q1 last year. The decline is explained by a higher working capital build-up compared to last year. Q1 is usually a weaker cash-flow quarter for Truecaller due to negative working capital changes. This equates to a cash conversion (measured as operating cash flow divided by adjusted EBITDA) of 37%, down from 46% in Q1 2023.

Net cash flow was SEK-49m, mainly caused by Truecaller buying back shares totaling SEK75m in Q1.

Truecaller ends the quarter with net cash, incl. short-term interest-rate placements of SEK1,546m. Additionally, Truecaller has a loan facility of SEK500m to use for an eventual acquisition. Ahead of the AGM, Truecaller announced a new dividend policy, where approximately 25% of earnings should be distributed to shareholders, coupled with an extra one-time dividend. The total payout amounts to approximately SEK590m, which can be compared to the net income of SEK536m for the full year of 2023. In addition to the proposed dividend, the Board also proposes to cancel all repurchased B shares and request a new mandate to have the ability to buy back more shares after the AGM.

As we wrote in our recent research note, we view the new dividend policy positively, as we believe Truecaller currently holds excess cash. We are also aware that some investors prefer dividends over share buybacks, as evidenced by the share price surge following the announcement. However, we do not believe that the new dividend policy changes the overall strategy of the company, as a payout ratio of 25% still allows ample room for larger investments. This is especially true considering that we believe Truecaller could operate with a moderate net debt given its high cash conversion. With that said, the new proposal could also signal that the management sees limited opportunities for larger acquisitions, which aligns with our view. In that case, we believe the dividend also reduces risk while still allowing for smaller acquisitions, as we have seen in the past (such as Trustcheckr for TfB, etc.). Hence, although the management has demonstrated prudence in terms of M&A, we understand that the new dividend policy may change investors’ perception of the company.