Opera Ltd Q1 FY2023 Earnings Call

Welcome to the Opera Limited First Quarter 2023 Earnings Call. All participants are currently in a listen-only mode. After the presentations, there will be a question-and-answer session. I would now like to turn the call over to Matt Wolfson, Head of Investor Relations. Please begin.

Thank you for joining us. As usual, I have with me today our 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 its 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 is 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. 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 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.

Yes, sure. Thanks, Matt. And thank you everyone for joining us today. We are very pleased to announce a very strong first quarter, which extended our previously issued guidance for both revenue and profitability. We maintain healthy momentum as we embark on the remainder of the year and feel great to also raise our 2023 guidance today. Our first quarter revenue reached 87.1 million, an increase of 22% over the previous year. Adjusted EBITDA was 21.7 million, 25% margin. The first quarter was very much a continuation of our solid execution and the trends we have communicated in the past. Specifically, focusing on those users who offer the greatest value and simultaneously growing our Opera Ads business to offer greater reach to our advertising partners beyond our own operated sites and apps. Over the past two years, we have been quite vocal in our strategy of focusing on those users with the greatest potential for monetization. The success of that strategy is apparent when looking at our ARPU, which has doubled over that two-year period. Analyzed ARPU was $1.08 in the first quarter, an increase of 30% compared to last year. With market spend coming in below plan combined with the normal seasonality, we saw our global user base dip slightly in the first quarter. We continue on our trajectory with the strong growth of high ARPU users in key products with an attractive ROI on our market spend leading to solid financial results. We have also begun new integrations with OEMs and partners to preload Opera as part of the OEM’s device system updates, creating a tailwind for potential user growth in the second half of the year. Advertising revenue grew 26% compared to last year, representing 56% of total revenue and continues to benefit from the underlying growth in our audience extension business on top of our own advertising. Such revenue grew 18% in the first quarter, driven by the growth of our PC footprint in Western markets, particularly in North America. Year-to-date, integration of the AI services has become a top priority for many popular consumer apps, and we set out to be among leaders within browsers and AI. After announcing our collaboration with OpenAI, Opera became among the first browsers to support popular services such as ChatGPT directly in our browser sidebar, as well as innovative AI prompts. This allows users to access and take advantage of generative AI services for the web content they are browsing. I would encourage all of you to download either Opera or Opera GX and enable the AI tools in the easy setup and try it for yourself. Moving forward, we plan to introduce new native AI services designed to augment web browsing for our users and further differentiate our products to drive engagement. Earlier this week, we opened up early access to Opera One, a completely redesigned browser tailored for AI services, where AI tools are enabled by default. Opera GX continues to grow its user base, adding another 80% sequentially to 22 million during the quarter, raising an analyzed ARPU of $3.17, an increase of 80% compared to the first quarter of 2022. GX also enjoys the highest engagement metrics across our products for gamers who have come to rely on GX. During the first quarter, the mobile user accounts with GX doubled compared to the previous quarter. These loyal accounts are among our most engaged users. Our objective continues to be to raise awareness around Opera GX and grow our highly engaged user base. Next month we are launching an influencer campaign with one of the world’s most popular YouTube stars as part of that. We recently announced that the live score features found directly in the browser for football and cricket has surpassed 50 million users less than six months after its introduction, which just speaks to the strength of our distribution. These users are incredibly engaged, and with future updates allowing even more personalization of the app, we expect this trend to only continue. In fact, our platform is consistently among the most popular destinations for sports-related content globally. Finally, we are also very excited to see the renewed attention currently being paid to the browser space by the broader tech ecosystem, including the press and investors as a key action point on the web with the ability to integrate services and functionality across websites to improve the end-user experience and productivity. Browsers are much more than commodity products. Opera has been improving that for decades. We are excited about this next chapter of AI-based productivity innovations, and we plan to be just as proud of our impact on that front as we are on our broader history in this space. With that, let me turn the call over to Frode.

Thank you, Song. On top of the operational color already provided, I will dive a bit further into the numbers. There is yet another very strong quarter for Opera. Q1 revenue came in two million above the high end of our guidance at 87.1, representing 22% year-over-year growth. As expected, we saw greater seasonality in our advertising revenues than in prior years, due to our successful scaling of third-party ad inventories, but we were positively surprised to see even stronger underlying growth than we had anticipated. Adjusted EBITDA came in almost three million above the top end of our guidance at 21.7 million or a 25% margin. Profitability benefited from our revenue overperformance, combined with continued cost discipline, with marketing expenses in particular coming in below expectations. During the quarter, we repurchased 370,000 ADSs for 2.5 million under our buyback program, translating to an average price of 6.66 per ADS. That leaves another 30 million remaining under our current buyback authorization from 2022, and we plan to take advantage of that in an opportunistic manner. In Q1, we also paid our first dividend of $0.80 per ADS for a total consideration of $71 million. In terms of cash generation, we generated a strong operating cash flow of 25.7 million in the quarter, and our free cash flow from operations, which is net of CapEx items and lease payments, was 23.3 million and ahead of adjusted EBITDA, given the benefit of reduced working capital after the seasonally strongest fourth quarter. Our balance sheet remains very healthy with 85 million in cash and no corporate debt. In addition, our receivable from the sale of Star X totals 57 million present value, and we value our 9.5% stake in OPay, which is classified as held-for-sale at 163 million. In total, that adds up to 305 million, which is a significant amount relative to our market cap. Now turning to our updated guidance for the full year 2023 and the second quarter. For the full year, we are raising our revenue guidance to 373 million to 390 million, up from 370 million to 390 million, that is 15% revenue growth at the midpoint, representing continued caution given the broader macroeconomic picture. For annual adjusted EBITDA, we lift our guidance range to be 77 million to 83 million, up from 71 million to 81 million, and we are presenting a 21% margin at the midpoint. The underlying cost expectations remain largely as discussed on our prior earnings call. We continue to expect cost of revenue items to come in just over 20% of revenue for the year as a whole, and we continue to build in close to $120 million of marketing expenses, even if we spent less than expected in the first quarter. Cash compensation expenses are expected to increase modestly relative to 2022, and all other operational items before adjusted EBITDA are expected to come in at a bit over $30 million for the year as a whole. For the second quarter, we guide revenue to 92 million to 94 million, which is 19% growth at the midpoint. We guide adjusted EBITDA to be 18 million to 20 million, translating to a 20% margin at the midpoint. In summary, we are off to a very healthy and better than expected start to 2023. We are on a strong track and look forward to keeping you posted in what we expect to be a very active year for Opera with continued high activity levels in a very dynamic market. So stay tuned. With that, I would like to turn the call back over to the operator for your questions.

Thank you. We will take our first question from Lance Vitanza with TD Cowen.

Good morning everyone. This is Jonathan on for Lance. My first question is so it is great to hear that Opera is working with OEMs to preload the Opera browser. Is this part of a Q3, Q4 event and how much of a revenue opportunity can this present? Is this embedded in guidance, and therefore, is a potential source of upside?

Yes. Maybe—I’m Song Lin here. I can provide a big picture. If I have some issues with hearing you, I guess you are asking about the OEM pre-installation. I would say more like, just to be descriptive, we see a trend with our partners and OEMs that they see the value of pre-installing the browser, especially a very good one like us. So we just take the opportunity to start the pre-installation, which, yes, will definitely contribute to our revenues, profits, and others, and users of course. So we see it as a very interesting trend where people recognize the value of browsers and see a company like us as a professional player in this space. I don’t think we have booked substantial revenues on these particular pre-installations because, of course, OEMs can take longer to actually implement and it is out of our control. So we don’t want to assume on that. But we can provide updates when that actually happens.

Got it. And none of that revenue opportunity is embedded in guidance just yet, right?

No, I would not say so.

Okay, great. Thanks. My next question is regarding AI, that has started to become a very trending topic. I just would like to hear a little bit more detail about the economics. What is the revenue opportunity, and what is the investment like?

Yes. It is Song Lin here again. I will try to answer that. So, yes, I guess that is a billion-dollar question that everybody is asking. I would say it is definitely beneficial to us in terms of user awareness and in gaining new users. So, that is very helpful. It actually involves a bit of marketing spend because you are essentially a browser. For now, it is definitely positive. We do see user engagement models increase; however, on the other end, the best business model around it is still to be explored. It definitely improves the whole browser experience for users who are more active and that will produce more revenue for us for sure. However, the question remains about how best to consolidate that into something profitable. I mean, by all calculations, you're likely to spend more, depending on choices. Either we can ask users to pay for it. For now, actually, the integration in the sidebar costs the users nothing, which is good, but we may in the future choose to have that natively integrated. We would incur costs there, but then predictably get that back through advertisements and partnerships. Exactly how we plan to do that is still a work in process, but we are relatively optimistic that it will be positive for us.

Understood, thank you. My last question is regarding the narrowing of the four-year guidance. With a strong performance in the first quarter, just wondering why not raise it as well? Is it maybe best to be somewhat cautious still, or just any thoughts behind that would be great.

Frode here. I can open— we would like to be cautious in setting expectations with our guidance. We came in ahead of Q1, but we have also observed that it is quite a volatile macro environment and there are a lot of moving parts with the companies that we relate to these days. So, we prefer to keep the high end stable. There is already good headroom between the midpoint and the top of our range, and for now, we lifted the full range on EBITDA instead.

And costs, we just guided two months ago.

Okay, thank you guys.

And we will take our next question from Mark Argento with Lake Street.

Just a couple of quick questions. One, going back to AI, could you dig in a little? Any initial utilization stats or anything anecdotal you are seeing with that integration to start with?

Yes, I would just say that we definitely see a lot of users of our browsers, which is partly because we have a very solid product and our previous stable instance of growth has been very fast. But in Q1, what we see is different this time in that our flagship browser is growing even faster than we expected for sure. We believe that is directly relevant to the whole AIGC discussion as more people realize that browsers can provide better differentiation. So I would say that is clearly what we see in Q1. We just launched Opera One a couple of days ago, and we are also launching something today. All of these are AI-related, right? So I think the pace will continue, and people will increasingly use it. We firmly believe AI is here to stay, and browsers will be key facilitators of those services and functionalities. Everything aligns. Additionally, we anticipate more action during this Q2 quarter. Hopefully, we can share more in the next quarterly release.

That is helpful. And then, Frode, just a couple of quick ones on the numbers. It sounded like there was a $2.4 million credit loss that ran through the income statement? Could you touch on that quickly?

Yes, sure. It is predominantly from one customer. It is very unusual for us. We typically have very low bad debt issues, but we took a provision for one customer, where of course we intend to pursue all efforts to collect, but we just didn’t want to be exposed.

Got it. And then you also mentioned marketing spend. You guys haven’t had to spend as much as you anticipated to generate the utilization or the revenue. Can you talk about that dynamic? Is it just a more favorable environment for buyers of ads, or what is going on that is allowing you to spend less on marketing?

I can go first. Yes, pricing is one factor. Year-over-year, it is approximately around a third. There has also been a lot of buzz around the browser space and around Opera, essentially a lot of indirect promotion of us, which has allowed us to spend less than what we had expected in the quarter. We still maintain our full-year marketing budget since, as Sam mentioned, we have a lot of products coming up that we want to promote.

Great. I appreciate it. Thanks guys. Nice quarter and good luck for the rest of this year.

Thanks.

Thank you. We will take our next question from Alicia Yap with Citigroup. Hi. Thank you.

Hi, thank you. Good evening, Song and Frode. Thanks for taking my questions. Congrats on the strong results. Two questions. First, on the upward revisions of the guidance, would it be fair to say it is mainly coming from the strong outperformance of the advertising revenue more than the search revenue? Second question is about AI and ChatGPT. I understand there is probably more limited data at this point, but can you elaborate on any metrics you've seen? Is it mostly around user times, or have you seen some improvement in terms of new user acquisition as well? Hierarchically, how do you see this translating into better ROI for advertisers over time? Lastly, regarding your new recommendations, which I think already has a lot of AI algorithms involved by applying ChatGPT, will that actually further improve your new recommendation targeting down the road? So if you can elaborate a little bit on that, it would be helpful. Thank you.

Hi, Alicia. I can at least open with the first part of your question on guidance. Yes, we saw in particular advertising coming in ahead of expectations in the first quarter. We expected seasonality, which we saw, but it performed better than we expected. So overall, that is a fair point. At the same time, we prefer to keep a bit of a wide range since we see that it has scaled quickly, and we want to ensure that we deliver relative to what we have guided. Now I’ll hand it over to Song for the metrics on AI and news.

Yes, sure. I will just say that for now, the direct impact we observe is a lot more user interest in both our browser and this translates to positive outcomes for us. In terms of user behaviors, yes, we see increased engagement when users actually utilize AI, and it is a very helpful tool. However, the sample size is relatively small because we have kept it limited to early access for some users. We’ll likely have a better stage to comment on it when we bring it to a larger audience, but we are quite optimistic about it. Regarding monetization, we have some ideas on potential pathways, but it is best to communicate that once we have it fully launched in the future. On the topic of news, I would say that our prediction algorithm for news is more decision-making AI than generative AI, so they are different branches. Nevertheless, we have utilized generative AI quite extensively, which will undeniably assist in generating content, commentary, opinions, and that will be significant for the industry as well. We are very optimistic about the potentials of generative AI, both in news and content in general, while recognizing that the pure predictive analytics have a different focus.

Alright. Thank you.

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

Sure. Thank you again everyone for your continuous support and interest in Opera. We believe we will once again set records for our revenue and profitability in 2023. We are benefiting from the hard work of our employees around the world, and I would like to personally thank them for their contributions. Looking ahead, I’m most excited about our gaming and AI-driven initiatives, and I look forward to sharing our success with you in the coming quarter. We appreciate your time and look forward to speaking with you again in the future.

This does conclude today’s program. Thank you for your participation. You may disconnect at any time.