Opera Ltd Q2 FY2022 Earnings Call

Welcome to the Opera Limited Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. Please be advised that today's call is being recorded. I would now like to turn the call over to your speaker today, Matt Wolfson, Head of Investor Relations. Please begin.

Thank you for joining us. As usual, with me today are Co-CEO, Song Lin; and our CFO, Frode Jacobsen. In addition, our Executive Vice President of Browsers, Kyristian Kolondra, who has joined us to shed more light on our segmented approach to the browser market and how we think about the GX browser and gaming opportunity in front of us. 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 entirely 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 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, followed by Kyristian; and finally, Frode will discuss our financials and expectations going forward. Song?

Sure. Thank you, Matt. This is Song, and thank you, everyone, for joining us today. Again, I'm very pleased to share our strong quarter results with you. Like any business, we are affected by a more challenging economic environment, including one in Europe, FX volatility and advertisers being more cautious, given the pressures on consumer spending. But Opera is still a relatively small player in a huge market with a lot of room to grow. Staying focused on our core growth strategy has proven to be very effective, and our performance demonstrates this again. Our results for the quarter were ahead or even at the high end of our guidance ranges. Our record revenue was a function of healthy growth in both our browsers and Opera News and our audience extension, delivering additional revenue for Opera to monetize our advertiser relationships and performance insights. In terms of adjusted EBITDA, our record revenue combined with lower-than-expected marketing spend has allowed us to deliver a margin of 21%, which is 5 full points higher than the 16% at the top of our guidance range. For some time, we have talked about how we focus on improving the quality and value of our user base, investing in products and markets that allow us to monetize at higher rates. Comparing our current user base to the second quarter of 2019, when we didn't have COVID yet and when the world was relatively more stable, we have increased our European user base by over 100% and our user base in the Americas by nearly 70%. Africa has been stable to slightly growing, while we have reduced some of our user base in Asia, mainly from South Asia, as we aim for higher ARPU and greater returns on our investments. So while our user base has decreased in size in total, our financial performance makes the rationale for growing audience in Europe and the Americas clear. Because over the same period, our annualized ARPU from browsers and Opera News has grown over 80%, leading to over 70% growth in revenue from our user base, and that's before considering our ad hoc audience extension. If you look at Opera search and advertising revenue overall, our combined revenue growth over these last three years has been 105% with a 27% CAGR. A key part of our strategy, and we've talked about this before in the context of what drives our product roadmap, is segmentation. Identifying how Opera can meet a specific set of needs for specific audiences that generic general market browsers cannot. This strategy also means that our products can and do successfully compete, where we are talking about browsers optimized for bandwidth constraints, developing market, mobile users, or PC gamers in Europe and the U.S. So Kyristian will talk about how we translate this segmentation into opportunity, shortly. Our strategy also has positive ripple effects on monetization. Think about advertising, for example, on our custom gaming browser Opera GX. We know that we have a highly engaged audience. We know our audience has a particular set of interests, and we can reach that audience with precision. We can also measure the results without having to rely on cookies or unique user IDs. It is an inherently efficient structure that advertisers appreciate. Our users appreciate it too because we are serving them advertising that they find highly relevant and, in some cases, would actually seek out, for example, a trade for upcoming video games. Further, because our advertising is contextual advertising, we do not need to collect as much data from our users, respecting their strong desire for privacy. Finally, our Opera Ads offering gives our performance advertisers access to a greater audience. This audience extension lets buyers acquire not just our owned and operated sites, but partner inventories with strong performance characteristics. From a profitability perspective, since there are no sales or marketing expenses associated with it, even at a relatively limited scale, we are already seeing nearly the same EBITDA margin here as in the rest of our business. So Opera is still in the early stages of executing against our long-term advertising strategy, but this quarter advertising revenue continued to grow, representing 55% of our overall revenue and 49% year-over-year growth compared to the same quarter of 2021. All-in-all, our products and initiatives continue to show great momentum, and we think the browser has never been more relevant than it is today. We are driving profitable growth, near robust consumer Internet business that has an exceptionally strong track record of weathering broader market challenges that are coming up today. While the public market has been slow to give us credit for our growth in revenue and profitability, for those listening today, I know I speak for everyone at Opera when I say, thank you for believing in our continued success. We work hard every day to seize our opportunities and continue the strong growth of Opera. So with that, I will hand the call over to Kyristian, who is our EVP of Browsers, the core products of our company. We wanted to take the opportunity to show some further reflections on how we approach the competitive landscape and, in particular, some of the opportunities we see around the GX browsers for gamers. So here, I'll hand over to Kyristian.

Thanks, Song Lin. Since this is my first earnings call, I'll introduce myself by saying my background is software engineering and product management, and I have spent the past 15-plus years as part of the Opera team. I lead our browser products overall with the main hub being Wroclaw, Poland, a university town and a great hub for talent, as well as in a couple of locations in Sweden and most recently Scotland. When we make our browsers, we don't mimic or imitate the big brain installed system defaults like Chrome and Safari, some of our competitors have. You can see what has happened to them. They lost significant market share, specifically among high-value users in desirable geographies. And we have taken more than our fair share of that drop, which we are naturally pleased with. The whole premise of being an alternative browser is to represent a real alternative. As Song Lin has said, Opera is the browser of choice for people who want to choose their browsers. So we do our best to be different. We lead with innovation and functionality as our selling points, which works quite well actually. That means promoting our technological advantages and features such as privacy and data-saving capabilities or any other productivity features that we've got. We continue to do our best, so people who care enough to try an alternative browser will choose Opera. A couple of years ago, we decided to take it to the next level and accelerate our growth by identifying attractive segments and then making browsers that really work for those people, such as GX for gamers. It's been a fantastic success and has enabled us to drive nearly 50% revenue growth from a major browser market over the past three years, comparing to the same normalized base that Song Lin just referenced. Our core product remains our flagship browser, but through clever architecture and tech work, we've been able to turn our tech base into building blocks that enable us to create and, even more importantly, to operate our specialized browsers in a very lean and efficient way. To summarize, we have a flagship browser part of innovation that you can't find elsewhere, with solid user engagement retention, and on top, we developed a way to use it in a very cost-effective way as the foundation for any segment browser we would like to launch, such as we did with Opera GX. In terms of what we have for Opera, I'd highlight two areas of focus. First, the creation of new versions of our browsers has only just begun with GX and our crypto browsers. We are already exploring other additional sub-segments of users, and we think our efforts there will be noticed and drive additional adoption, particularly in Western markets. We will announce these new segments and products in the future. And the second area, our existing gaming initiatives. Opera GX continues to exceed our expectations. We now have 14.5 million desktop users and 2.5 million mobile users, resulting in a year-over-year user growth of 78% for all of GX. Our gaming users also represent our highest ARPU users with an ARPU of $2.89, more than three times our company average. So that product alone is now on a run rate of $50 million revenue per year, a milestone we are very proud of. As I indicated earlier, we continue to improve our ability to monetize this highly specialized and highly engaged audience. We have started enabling more advertising inventory in GX, like we have in our flagship browser, basically increasing advertising and other non-search revenue in our gaming browser. We're also working on engagement in GX corner, which we eventually plan to monetize. We're offering innovative new features for our users, providing superior customization options, and are developing a set of offerings that will allow advertisers to better connect with our gaming audience. Just to stress, the GX audience is highly engaged and an extremely valuable one. These are not occasional gamers. These are hardcore gamers who play games a few hours a day, buy gaming hardware, and buy virtual currencies, showing up almost every day. We see it quickly becoming one of the biggest gamer audiences online, and this very active user base enables us to integrate with other segment players to create an even larger gaming ecosystem. But we also know that gaming is not the only highly engaged online audience, and we continue to invest in identifying new segments and developing products for those segments. To sum it up, it's really exciting times for us. We're very happy to drive Opera forward, and I'm excited about our plans here. We will continue to build great products, capture high-value users, and drive revenue growth. I hand over to Frode now, and then I'm around for the Q&A at the end in case anyone wants to double-click on any of these topics.

Thanks, Kyristian. As Song Lin pointed out, the quarterly business performance was well ahead of our expectations. Revenue came in at a record $77.8 million, which represented 29% year-over-year growth and a solid beat versus our previously issued guidance of $71 million to $74 million. The overperformance was mainly caused by two factors not built into our expectations. Revenue from Eastern Europe has remained more resilient than expected, and our ad tech platform delivered very strong results. Overall, while about 85% of our revenue remains the successful expansion of advertiser demand has grown faster and with better margins than we had thought. Operational expenses benefited predominantly from reduced marketing expenses, although some of that reduction was timing-related. While Opera continues to enjoy nice and profitable growth, we too take additional caution in our growth investments in light of the broader economic environment. Cost of revenue items came out at 15% of revenue, as expected, and compensation includes a step-up in our bonus provisions in light of our trajectory thus far. As a result, we generated an adjusted EBITDA of $16.6 million, substantially ahead of our $8 million to $12 million guidance range and representing a 21% margin. Then moving to our strategic investments, two former and one current. As you know, during the first half of the year, we divested our equity stakes in both Nanobank and StarMaker, or STAR X. Our stake in Star X was sold in April for $83.5 million, and we collected the first $28.4 million in the quarter according to the payment schedule. The remaining two installments are due at the end of 2023 and the end of 2024. Our stake in Nanobank was sold in March for $127.1 million, payable in eight quarterly installments of $15.9 million each. Today, we announced that we and the buyer have agreed to make certain modifications to the share transfer agreement. The buyer recently raised certain allegations related to the original agreement and requested to cancel the transaction. While we disputed those allegations, we determined that an amicable settlement of the matter on the new terms that we summarized in our press release was superior to an inherently uncertain outcome of litigation. This agreement allows us to move on and stay focused on our core business. We have collected the first installment of $8.5 million, and the total consideration of all installments is increased by $4.6 million to $131.7 million to compensate for the extended payment period. Our third and final strategic investment, OPay, remains classified as held for sale. As a reminder, that's a 6.4% stake in the company after we sold a 2.6% stake for $50 million last year. Moving to our $50 million buyback program. During the second quarter, we repurchased 1.26 million ADSs for $6.7 million, including the 570,000 ADSs repurchased in Q1 and another 600,000 to date in Q3. We've repurchased a total of 2.43 million ADSs for $12.7 million thus far. That leaves our total shares outstanding at 113.5 million ADS equivalents with over $37 million worth of repurchases still to be done. Given the seeming disconnect between the fundamental value of our company and its market pricing, we are very happy to have a good remaining runway on our buyback program. As of June 30, we held $187 million of cash and marketable securities, up from $182 million on March 31. Our operating cash flow was well below adjusted EBITDA this quarter, most importantly, because the reduced marketing spends in isolation translated to an $11 million reduction in accounts payable and a normalization of accounts receivable after receiving some early payments in Q1 and the revenue growth in Q2. Now moving to our guidance. Given the continued momentum in our business, we are raising our full-year revenue guidance to $313 million to $319 million, representing 26% year-over-year growth at the midpoint. We are also raising the lower end of our adjusted EBITDA range to $53 million to $60 million for the year. That represents an 18% margin at the midpoint and an increase of EBITDA dollars up 95% compared to 2021. For the third quarter, we expect revenue of $81 million to $83 million, representing 23% year-over-year growth at the midpoint, and adjusted EBITDA to be $14 million to $17 million.

On the cost side, we plan for higher marketing costs relative to Q2, and we expect the cost of revenue to kick up a couple of percentage points relative to revenue with the growth of our ad tech platform. We expect some reduction in salary costs, and overall other cost items are expected to be quite stable versus Q2. In sum, we are very pleased with these results in our strategic direction and we hope you found this call to be useful in conjunction with our release. I'll then turn the call back to the operator to take questions, and please feel free to take advantage of Kyristian being here today since he's not normally at these calls.

Our first question will come from Alicia Yap with Citigroup. Your line is now open.

Hi, thank you. Good evening, Management and thanks for taking my questions. Congrats on the really strong results. I have two questions. The first one is against this inflationary environment and also the macro weakness, yet you managed to raise the full year revenues and also the EBITDA guidance. Can you maybe help us explain a little bit on what drives such a divergence of your business performance versus the macro? Is that because of a low base from last year? Or is it because some of the reopening industry actually started to contribute to the higher ad demand? And also just wondering if any macro weakness that could potentially impact your ad business in the coming months? Maybe I’ll read out my second question as well. So it's for Kyristian. Kyristian, welcome and thank you. I think regarding the gaming business, I know you mentioned quite a lot on the performance on the GX performing. But I just have a broader question. Was there any reopening post-pandemic trend that you potentially could see for your gaming business? And also wondering if any slowdown that you see for the gaming business? Thank you.

Hi, Alicia, this is Frode. I'm back after being disconnected. I can start answering your first question. We've taken note of the broader economic environment, and we remain cautious. We run our business carefully. However, as a relatively small player, the opportunities we see are significant, allowing us not to be completely aligned with the overall market. This is a major reason why we continue to perform better than expected, maintaining our growth and raising our expectations for the upcoming quarters beyond what we initially anticipated.

And for GX for gaming, I can say that we actually already saw the end of remote learning and end of lockdowns that, of course, changed the behavior of gamers, not only gamers but all online users because people were no longer locked at their houses and so on. But I can only say that what we see is that we see continuous growth, and we see the gamer patterns more affected are by when school ends or starts than the pandemic. So we don't see for gamers. These are mostly Gen Z younger people; we don't see a real impact here.

Okay, all right. Great, thank you. Very helpful.

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

Hey, good morning, guys. Just a couple of quick ones. You mentioned that you saw a lower marketing spend in the quarter. Can you drill down into that a little bit for us, in particular, just juxtaposing that relative to the strong 31% growth you saw in North America?

Yes, this is Song Lin. Regarding the marketing spend being lower in Q2, it's primarily about us being smarter in identifying the right resources that deliver the highest return. We are largely on track for Q2, but the shift is due to our improved approach in securing the right resources at the right price, which has led to a higher ROI. In fact, our ROI may be even better than we initially anticipated. Additionally, as we approach the end of Q2 and enter summer, if spending does not prove to be efficient, we will choose not to spend. It's really about that consideration.

So this is the way a little bit. So you're saying that you saw the right ROI at one point, but then the market changed on you, so you pulled back a little bit. Is that what your...

Yes, to be more specific, at the beginning of the summer, we anticipated that returns would be lower in the following months. If we find that the return on investment isn't efficient enough, we choose not to proceed. For example, in Q3, we noticed that the situation improved, and all monetization activities resumed, making it a sensible time for us to invest. We observed narrower but higher returns, so we are more meticulous and strategic in acquiring users.

Great. Thank you.

Our next question will come from Lance Vitanza with Cowen. Your line is now open.

Hi, guys. Thanks for taking the questions, and congrats on a really nice quarter. Just to be clear, I mean, Opera is certainly outperforming the broader market. And I guess you're doing that despite exposure to Russia and Ukraine. So let me start there. You called that out on I think you said that relative to your guidance, part of the beat was that just you've seen less of an impact from that area than you had expected. Any thoughts on what that means for going forward? Do we think that, like similarly, do you feel like you have greater clarity on the impact going forward? Or does that remain as volatile as ever? Could we see that reverse potentially? Could you be too aggressive in your forecasting for the back half of the year regarding that area in particular?

Lance, thanks for that. Yes, last time in the context of the war in Europe, we indicated that we expected about a $4 million overall headwind per quarter for us. Indicating another sort of $12 million for the year as a whole. As mentioned, Eastern Europe did better than we thought. So I think the headwind we actually did observe in Q2 was about half that, about $2 million, and that's including the strengthening of the U.S. dollar relative to other global currencies, that we ultimately are revenue in. So right now, it's looking like the level of Q2 is continuing into the second half. Some of that's a $6 million revenue improvement for us. But we remain quite cautious and also how we were affected in our guidance because it is a very unpredictable situation.

Sure. Let me address the revenue per MAU. They've done a great job. I have a question regarding the 46% year-on-year increase; I can't imagine that trend will continue indefinitely. However, when I review the past eight quarters, it appears that revenue per MAU has consistently increased, both quarter-on-quarter and year-on-year. Is there any seasonality in that figure? Or is $0.94 the new baseline, with the third and fourth quarters potentially higher? How should we view those sequential quarterly trends for the rest of the year?

So maybe I can begin just from a numbers perspective. But Kyristian, please feel free to chime in. I think we have experienced very strong ARPU growth. As we look at the year past, so the year-ago quarter, it's driven by both like-for-like ARPU growth and the geographic mix composition of our user base, tilting it more towards Western, our developed markets. The second factor of geo mix was roughly twice as important as the like-for-like ARPU growth, but both are performing very well. When we focus our user base in emerging markets on the more monetizable users, then you have the impact of the reduction in some of these countries of the total use, but an increase in the revenue. Meaning that the resulting ARPU growth naturally becomes very strong. But it is a validation, we believe, of the strategy that we have pursued.

Turning to the capital allocation question, it's difficult to understand why the company's performance is strong yet the stock's performance has been disappointing. Why not adopt a more aggressive approach? While it's commendable that you've introduced a couple of million ADSs, I suspect that your actions are constrained by the underlying trading volume of the shares. If that's accurate, could you confirm? If so, what is your rationale for not considering a more ambitious move like a Dutch tender, where trading volume wouldn't be a limiting factor as it is with the current buyback?

I can confirm that the buyback program is limited by factors such as market capitalization and the average daily trading volume. Regarding our overall strategy, we do have a strong balance sheet, which is improving over time due to our operating results and the assets we have bought and sold. However, we have not made any decisions regarding new initiatives. If we do decide to take action, we will announce it clearly.

Okay. Thanks, guys.

It appears we have no further questions at this time. I'll now turn the program back over to Song Lin for any additional or closing remarks.

Yes, this is Song Lin here. So yes, I mean, thank you again for joining us. It was a great quarter. And we feel really good about lots to come with our content and gaming initiatives, with a very strong business lined up to contribute even further to our growth. So our strength in both our business and our balance sheet allows us to pursue our opportunities even in a difficult operating environment. So we appreciate your time, and we look forward to speaking with you again in the future.

Thank you. Ladies and gentlemen, this concludes today's event. You may now disconnect.