Opera Ltd Q2 FY2023 Earnings Call

Thanks for joining us. As usual, I have with me today our Co-CEO, Song Lin, and our CFO, Frode Jacobsen. Before I hand the call over to Song, 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 are different from our consolidated financial statements that are prepared and presented based on IFRS. We believe that the use of 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 posting highlights from the call at Investor Opera, 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 second quarter operational highlights and strategy, and then Frode will discuss our financials and expectations going forward.

Sure. Thanks, Matt, and thank you everyone for joining us today. So we are very pleased to announce another very strong quarter, which exceeded our previously issued guidance for both revenue and profitability. The first half of the year is off to a great start and we are happy to be able to raise our 2023 guidance today. Second quarter revenue reaches $94.1 million, an increase of 21% over the previous year. This was our tenth consecutive quarter of over 20% top line growth. Adjusted EBITDA was $20.5 million, a 22% margin. The second quarter builds upon our previous successes and communicated strategy on focusing on growth in the Western markets with the potential for the greatest value. So to those of you who have been following the Opera story, this is nothing new. Annualized ARPU was $1.17 in the second quarter, an increase of 25% compared to last year and up 80% relative to the first quarter. While our total user base was relatively stable, we continued our user base mix shift towards higher ARPU users, with users in western markets representing 15% of the total user base. Advertising revenue grew 25% compared to last year, representing 57% of total revenue and continues to benefit from the underlying growth in our audience extension business on top of our owned and operated advertising. Search revenue grew 15% in the second quarter, driven by continued user growth in Western markets. Opera has a track record of innovating ahead of the browsers that come with operating systems and bringing new user-friendly technology to its browsers. With our long history of giving users direct access to the Internet's most in-demand platforms, we have expanded our existing AI program for our browsers, news, and gaming products, taking advantage of our own solutions as well as new and existing partnerships to ensure our users get the best technologies and solutions available. We first partnered with OpenAI, maker of ChatGPT, and our close collaboration has already yielded some impressive results. We have decided to go back to the drawing board and redesign our flagship desktop browser, reshaping the UX and UI to both improve the user experience and prepare the platform for current and upcoming AI features. With Opera One, we managed to create a powerful feature-rich browser that dynamically adapts to our users' needs, designed to embed all the current AI technologies and leave considerable room for more. We are excited about Opera One as a high-quality platform for the future of AI-enhanced web browsing. This redesigned browser was met with overwhelmingly positive feedback from both users and tech media. Opera One was the first of all browsers to include our browser AI, Aria, as a well-connected and current event-aware generative AI service, offered entirely for free. Aria marks the beginning of a new kind of browsing experience for Opera users. Aria allows users to collaborate with AI while browsing the web, generating text or codes or getting their product queries answered. Aria is based on Opera's own component infrastructure, which is connected to OpenAI ChatGPT technology. In addition, Aria is further enhanced by additional capabilities such as adding live results from the web. The component infrastructure is also easily scalable, allowing Aria to connect to multiple AI models, and in the future, we will expand by integrating further capabilities such as directing users to relevant services powered by our key partners for monetization. Aria is also available in our mobile browsers for Android and iOS, allowing users to enjoy AI-powered browsing on the go. It has proven to be a hit with users, and they are clearly enjoying the experience as evidenced by a lift in total time spent as well as increased search queries and page views. Opera is looking forward to developing more cutting-edge AI solutions, first bringing Aria to all our major platforms. Various projects are on the immediate horizon, but the bar continues to be set high as we strive to be the vendor of technological innovation. Opera GX continues to grow its user base, up another 9% sequentially to 24 million during the quarter with an annualized ARPU of $3.10, an increase of 7% compared to the second quarter of 2022. Monetization grows faster on PC than mobile, given greater western exposure on the PC side. In addition to being engaged with gamers, GX has a very attractive demographic, predominantly Gen Z. With Opera GX, we have enabled those gamers to differentiate themselves from others in a way their Internet experience matches both the look and feel of their broader setups and connects them directly to the services they use. For an online-native generation, this individualism extends from the physical world to a digital one, and we provide GX as a key part of that expression and experience. So in this call, we have added even more features to Opera GX with thousands of new modes and live wallpapers, and we think some of our users will appreciate the addition of AI to GX in time to help with their homework in the coming school year. The pace of innovation so far this year showcases our ability to react and take advantage of rapidly evolving technologies and offer unique browsing experiences to our users. As we move through the remainder of the year, you can expect this to continue with Aria coming to more browsers, new AI features and skills being rolled out, and GX continuing its growth as the leading browser for demanding gamers.

Thank you, Song. I'll then turn to some additional details on our numbers and capital returns within yet another strong quarter for Opera. Our Q2 revenue benefited from solid underlying growth of both advertising and search revenues despite FX headwinds. As a result, we came in just above the high end of our guidance at $94.1 million or 21% year-over-year growth. On an FX-neutral basis, our year-over-year growth would have been about 28%. We do observe examples of volatility amongst advertisers in the current macroeconomic picture, but our underlying user base mix shift towards higher ARPU users continues to benefit our trajectory even as Western users only represent 15% of our total user base. In line with our revenue performance, adjusted EBITDA also came in just above the top end of guidance at $20.5 million or a 22% margin. Overall, our cost categories came in according to our expectations with a slight shift from marketing expenses to cost of revenue items. We generated operating cash flow of $15.5 million in the quarter, which is net of $3.4 million tax prepayments. Free cash flow from operations, which subtracts CapEx items and lease payments from our operating cash flow, was $13.2 million. During the quarter, we launched a recurring dividend program. The annual dividend is $0.80 per ADS to be paid semi-annually. The record date for the first $0.40 payment was in June with payments in July. Our first recurring dividend amounted to $36 million in total, of which $11 million was paid in cash to ADS holders and $25 million was offset against our receivable from the sale of Star X. We did not repurchase any shares under our buyback program in the quarter. As previously communicated, further buybacks will be conducted in an opportunistic manner as we focus on dividends as our main avenue of capital returns. Finally, our balance sheet remains very healthy with $98 million of cash and no corporate debt. In addition, our receivable from the sale of Star X totals $32 million present value, which is presented net of the first dividend offset and which will continue to reduce our cash expense of dividends until it has been fully consumed. We continue to value our 9.5% stake in OPay at $163 million, presented as held for sale. In total, that adds up to $196 million of balance sheet value in addition to our cash position. Now turning to our updated guidance for the full year 2023 and the third quarter. Given our continued strong trajectory, we are yet again raising our guidance for the year on both revenue and adjusted EBITDA. We continue to reflect caution given the broader macroeconomic picture, but the core trajectory of Opera and our products and user base results in a net positive impulse to our outlook and ranges used. On full year revenue, we now guide $380 million to $390 million, up from our last range of $373 million to $390 million, which corresponds to 16% revenue growth at the midpoint. For annual adjusted EBITDA, we lift our guidance range to be $80 million to $84 million, up from $77 million to $83 million, representing a 21% margin at the midpoint. In terms of cost expectations, our commentary from prior quarters still stands. We expect marketing costs to be higher in the second half and build in a bit below $120 million for the year. Cost of revenue items will likely remain around current levels relative to revenue, resulting in a percentage in the low 20s. Cash compensation expense is still expected to increase modestly relative to 2022, and all other operational items before adjusted EBITDA remains expected to come in at just above $30 million for the year as a whole. For the third quarter, we guide revenue to $97 million to $100 million, which is a 15% growth at the midpoint. We guide adjusted EBITDA to $18.5 million to $20.5 million, translating to a 20% margin at the midpoint. Overall, and to conclude, we've never been more successful, and we are very pleased with our product lineup, roadmaps, and our growth strategy. We are also proud to combine healthy growth with healthy profit margins and cash flows and how that directly benefits our shareholders through our past major stock buybacks, a special dividend earlier this year, and most recently with the initiation of a recurring dividend. While it's certainly a period of near to midterm macro volatility, it is also one of the most exciting periods for Opera as a company with the emergence of new technologies and developments of new ways to better serve and engage with Internet users.

Good morning, guys, and nice quarter. Just wanted to drill down a little bit on your expectations for ARPU growth going forward. It looks like it was up a little bit here in the quarter, and you continue to kind of increase your exposure to the Western markets. Is that a sustainable trend? How do you think about ARPU growth in terms of your overall strategy trying to get more exposure to the West?

Hey, Mark. Thanks. I can begin in terms of our guidance. We continue to build in the trend of ARPU growth. We see our momentum in Western markets, and our growth there is happening across PC, GX, and mobile products. So that's an important driver for us. In addition, we have GX, which is indeed a success story, but I think it's still under-indexing on advertising relative to our classic PC browsers. It's just newer in its development. So we do see headroom there.

Great. And then in terms of the relaunch of Opera One and the AI, some of the embedded AI tools. Any trends you're seeing? Are you getting decent adoption, utilization of those tools? What's your goal for that product and the opportunity to mainstream that browser or the browser set?

Yeah. It's Song Lin. I'll try to answer. So we are quite encouraged by what we see, more among the users who have been using it. We have seen some very interesting trends because we know there are discussions about what the impact is going to be on the whole industry and user behavior. What we see at least, even from the early stages, are nice upward trends in both user engagement time spent and even search queries among others for the same group of users. So all the numbers are lifting, and we think it makes sense because it enables users to interact with AI and computers in a more natural way, thereby exposing them to more information. This is of course very relevant for us as a browser because at the end of the day, the browser is a gateway that allows users to discover more information. If AI can help with that, it makes sense that users will spend more time on it. So we are very positive. Another major interesting factor is that it serves as a differentiating aspect, allowing us to attract new users by clearly differentiating between Opera and other browsers, particularly with AI being a key component. All these play a very positive role in our strategy moving forward.

That's helpful. And then one more housekeeping question for Frode. Regarding the dividend, you are instituting a recurring dividend. The first $0.40 dividend you guys are netting that against the receivable, but then going forward, is it a full $0.40 dividend?

Yes. I think the Star X receivable was about $57 million before this dividend. As a reminder, we sold our stake in Star X to Kunlun, which is also the biggest shareholder in Opera, and that is why we use the offsetting mechanism. The first dividend, as a pre-IPO shareholder, their part of it would have been $25 million, reducing the Star X receivable to about $32 million at the end of the quarter. We will continue to issue a $0.40 per dividend issuance, so you'll see about a $25 million reduction until it has been fully consumed. It will last us into about mid-2024.

Got it. All right. That's helpful. When you carry it on the balance sheet as available for sale, what are your thoughts on that asset and its valuation?

In the first half, we had another look at it. We felt comfortable with the valuation we set back in March for year-end 2022. The company is doing well, and we're not in a rush to sell it. However, if there is an interested buyer, we also no longer play a strategic role for OPay in its operations, as our role was more important in the early days as a founding member.

Thanks, guys, and nice quarter. I have two questions. First, how much headroom do you think there is in this transition into the Western markets? You've reported about 47 million users in Western markets which works out to about a rough estimate of 8% penetration. Do you think that penetration rate could conceivably go to 16%, or is that too aggressive?

Yeah. It's Song Lin. I'll comment a bit, and Frode can also add. You are right that it is functioning in that way. Opera has a really strong European brand and a huge user base. So even in the Western world, it's only 15%. We feel there is still a lot of room to grow. We are in a very early stage of penetration, which is exciting.

Great. Thank you for that. The cash position of $98 million came in better than expected. Were there any other one-time items that favorably added to your cash position?

The cash flow of the quarter was very straightforward. The taxes contributed to the cash position, as the dividend issued in June was payable in July. Thus, that $11 million is included in the cash on June 30th.

I have another question. In the press release, what does it mean regarding share-based remuneration by Opera's majority shareholder?

Kunlun, as the biggest Opera shareholder, has issued grants consolidated holding more than 50% to some of our staff members. Although Opera has no expense with that, it is reflected in the fair value of grants awarded to Opera's employees for accounting purposes.

Understood. The guidance for Q3 indicates 15% revenue growth, but EBITDA seems not to be scaling. Was there a one-time adjustment in Q3 '22 numbers to consider?

The key change throughout the year is how we spend our marketing dollars. We will manage our total spend and expect to increase it in the second half due to scaling GX and launching Opera One.

We are highlighting the fact that we are ahead of our guidance. If we want, we can build up more user base to yield more revenue and profit in the future. That's why we feel optimistic. If we maintain a strong focus on evolving our product and winning more users, that will ultimately serve as the key to our success.

Are you feeling any pressure on longer-term EBITDA margin targets?

No, I think this is progressing well according to expectations. We feel comfortable about our operating levels.

Hi, thanks management for taking my questions. I have two questions. What level of incremental revenue opportunities can we expect from our embedded AI feature in the Opera browser in the next 12 to 18 months? Additionally, are there any expected investments related to AI that may affect our EBITDA trend?

The industry is still in the early stages. As a tech company, we feel that AI can give people access to more information conveniently, which translates to higher engagement. Our optimism is based on the evidence we see in early user interaction with AI. We're also working on potential monetization strategies to compensate for costs. For now, the model works positively but requires partner collaboration to tune how we can create further opportunities.

To wrap it up, thank you for your continued support and interest in Opera. We are encouraged by the early response to Aria and Opera One, and the success of Opera GX presents further opportunities as we scale our monetization. We appreciate your time and look forward to speaking with you again in the future.

This concludes today's program. Thank you for your participation. You may disconnect at any time and have a wonderful day.