Opera - Q1 2023

Transcript

Operator (participant)

Welcome to the Opera Limited First Quarter 2023 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this period, you will need to press star one on your telephone keypad. If you want to remove yourself from the queue, please press the pound key. Please be advised that today's call is being recorded. Lastly, if you should need operator assistance, please press star zero. I would now like to turn the call over to your speaker today, Matt Wolfson, Head of Investor Relations. Please begin.

Matt Wolfson (Head of Investor Relations)

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 future results and expectations, which constitute forward-looking statements within the meanings 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 prepare to present it 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 at Investor Opera. 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. Frode, who will discuss our financials and expectations going forward. Song?

Lin Song (CEO)

Yeah, sure. Thanks, Matt. Thank you everyone for joining us today. We are very pleased to announce a very strong first quarter, which exceeded our previously issued guidance for both revenue and profitability. We maintain a 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 at 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 owned and 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 marketing 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 marketing spend leading to solid financial results.

We have also begun new integrations with OEMs and partners to preload the Opera browser 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, continues to benefit from the underlying growth in our audience extension business on top of our O&O advertising. Search revenue grew 18% in the first quarter, driven by the growth of our PC footprint in Western markets, particularly North America. Year to date, integration of AI services has become a top priority for many popular consumer apps, we set out to be among the leaders within browsers and AI.

After announcing our collaboration with OpenAI, Opera became among the first browsers to have support for 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 the 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 for early access Opera One, a completely redesigned browser tailored for AI-assisted services, where AI tools are enabled by default.

Opera GX continues to grow its user base, up another 80% sequentially to 22 million during the quarter, with an annualized ARPU of $3.17, an increase of 80% compared to the first quarter of 2002. GX also enjoys the highest engagement metrics across our product portfolio, becoming a key part of the online lives of the gamers who have come to love GX. During the first quarter, the number of people with GX.me accounts doubled compared to the first quarter. These registered accounts are among our most loyal and 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 YouTubers as part of that.

We recently announced that the live score features found directly in the browser for football and cricket fans, has surpassed 50 million users less than six months after its introduction, which speaks to the strength of our distribution. These users are incredibly engaged. With future updates allowing even more personalization of the app, we expect this trend to only continue. In fact, Opera Football is consistently among the most popular destinations for football-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 the investors. As a key access point to 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 proving that since 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 of our broader history in this, space. With that, let me, turn the call over to Frode. Frode?

Frode Jacobsen (CFO)

Thank you, Song. On top of the operational color already provided, I'll dive a bit further into the numbers in this yet another very strong quarter for Opera. Q1 revenue came in $2 million above the high end of our guidance at $87.1 million, representing 22% year-over-year growth. As expected, we saw greater seasonality in our advertising revenue than in prior years due to our successful scaling of also third-party ad inventories. We were positively surprised to see even stronger underlying growth than we had anticipated. adjusted EBITDA came in almost $3 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 expense 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. 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. Our free cash flow from operations, which is net of CapEx items and lease payments, was $23.3 million, 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 of cash and no corporate debt. 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. That adds up to $305 million, which is a significant amount relative to our market cap. 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-$390 million, up from $370 million-$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-$83 million, up from $71 million-$81 million, and representing 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 spend less than expected in the first quarter. Cash compensation expense is expected to increase modestly relative to 2022, and all other OpEx items before adjusted EBITDA is 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-$94 million, which is 19% growth at the midpoint. We guide adjusted EBITDA to be $18 million-$20 million, translating to a 20% margin at the midpoint. In summary, we are off to a very healthy and better than expected start of 2023. We're on a strong track and look forward to keeping you posted in what we expect to be a very active year for Opera with a continued high activity level in a very dynamic market. Stay tuned. With that, I would like to turn the call back over to the operator for your questions.

Operator (participant)

Thank you. As a reminder to ask a question, please press star one on your telephone keypad. To withdraw your question, press the pound key. When posing your question, we ask that you please pick up your handset for optimal sound quality. We'll take our first question from Lance Vitanza with TD Cowen.

Speaker 6

Good morning, everyone. This is Jonathan on for Lance, reporter. My first question. It's great to hear that Opera is working with OEMs to preload the Opera browser. Is it more of a 3-Q or 4-Q event? How much of a revenue cell can we expect? Presumably, this isn't baked into guidance and therefore is a source of upside for your guidance when.

Lin Song (CEO)

Yeah. Maybe, Hey, it's Song here. I can at least, you know, give a big picture. I have some issues with hearing you, but I guess you're asking the question of the OEM, potentially, you know, pre-installation on the others. I would say more like just to be descriptive, we see a trend well with many of our partners and OEMs that they see the value of actually more actively pre-installation, the browser, especially a very good one like us. We just take the opportunity to start the pre-installation, which, yes, it will definitely be contributing to our revenues, you know, revenue profits and others, and users, of course. It's.

We see it more as a very interesting trend where, you know, people see the value of browser and see a company like us, professional players to actually be in this space as a reorganization. I don't think we have actually booked so many revenues or whatever on these particular pre-installations because, of course, OEMs can be, you know, it takes a quite longer time for them to actually be able to do that, some of it out of our control, so we don't want to assume on that. We can give updates when that actually happens.

Speaker 6

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

Lin Song (CEO)

No, I would not say so.

Speaker 6

Okay. Okay, great. Thanks. My next question is regarding AI. That's starting to become a very trending topic. Just would like to hear a little bit more detail about the economics. What is the revenue opportunity? What's the investment like?

Lin Song (CEO)

Hey, it's Song here again. I just will try to answer first through the pre-chat means. I guess that's a billion-dollar question, right, everybody's asking. I would say it'd be like this. It's definitely beneficial to us in terms of user awareness and in terms of getting new users, right? That's very helpful. It's actually reduce a bit our marketing spend because, you know, user just seek out browser, right? Because of it. For now it's definitely positive. We do also see that user engagement among us will increase. However, on the other end, you know, what's the best business model around it?

I would say it's still to be explored and more like it definitely improves the whole browser time spent and, you know, user are more active and thus we have more revenue for sure. However, you know, I think I understand your question that it is in general have a cost, part of it. Then, you know, people are trying to figure out what's the best way to get rid of all of it. I mean, the way I see it is that in general, by our calculation, you will, you know, you will probably have to spend, more like it depends on choice, right? Either we can ask a user to pay for it. For now, actually, the integration on the sidebar, user are paying for it. There's no extra cost for us, which is good.

We may, in the future, choose to actually have that directly natively integrated, where we will bear cost, but then we will predict to get that back by advertisements and by working with partners. Exactly how we plan to do that, it's still a work in process. I think we are relatively optimistic about it's going to be positive, to the whole, to us, at least.

Speaker 6

Understood. Thank you. My last question here is, you know, I can appreciate the narrowing of full year guidance, but with a strong performance in the first quarter, just wondering why not raise it as well? Is it maybe because you know, it's probably best to be somewhat cautious still or just any thought behind it would be great?

Frode Jacobsen (CFO)

Frode here. I can open. We'd like to be cautious in setting expectations with our guidance. We came in ahead of Q1. We also observed that it is a quite volatile macro environment and sort of the companies that we relate to with a lot of moving parts these days. We prefer to keep the high end stable. There's always already good headroom between the midpoint and the top of our range. For now we listed the full range on EBITDA instead.

Speaker 6

Okay. Got it.

Lin Song (CEO)

Yeah. plus, we just guided 2 months ago.

Speaker 6

Yep. Makes sense. Okay. Thank you, guys.

Operator (participant)

We'll take our next question from Mark Argento with Lake Street.

Mark Argento (Co-Founder and President)

Hey, Lin Song and Frode. Nice, nice quarter. Excuse me. Just a couple of quick questions. One, just going back to AI, you know, could you maybe dig in a little, just any initial, you know, kind of utilization stats or anything anecdotal there that you're seeing, you know, with that, with that integration, to start with?

Lin Song (CEO)

Yeah. Yeah, I would just say that we definitely see a lot of uptickings of our browsers, which, you know, which is partly because we do have a very solid product. More like as you know, previously, for instance, GX are growing very fast. In Q1, what we see is a bit different this time in that Opera Browser, our flagship browser is growing even more faster than we expected, for sure. We believe of course that is direct relevant to the whole AI discussion where people actually realize that browser can be very differentiating and we are actually doing that. I would say that's clearly what we see in Q1, and we just launched Opera One, you know, like two days ago.

We are also launching something today, I don't know if you noticed. All of those are AI related, right? I think the path will continue, and people will be more and more use of it. We definitely think AI is gonna stay, and we definitely think browser is gonna be a key component and as a carrier of those services and functionality, right? Everything clicks. We're also in the middle of very, very heavy launches. We probably will see more activities across this Q2 quarter, and hopefully we can share more in the next quarter release.

Mark Argento (Co-Founder and President)

That's helpful. Then Frode, just a couple quick ones on the numbers. I saw that there was a like a $2.4 million credit loss that ran through the income statement. Maybe just touch on that quick.

Frode Jacobsen (CFO)

Yeah, sure. Sure, Mark. It's predominantly from one customer. It's very unusual for us. We typically have very low bad debt issues. We took a provision for one customer, where of course we intend to pursue all approaches to get it collected, but we just didn't want the exposure.

Mark Argento (Co-Founder and President)

Got it. I think you also mentioned, you know, marketing spend. You guys haven't had to spend as much as you anticipate to kind of generate the utilization or the revenue. Maybe talk to the dynamic there. Is it, you know, is it just a more favorable environment for buyers of, you know, ads or what's going on that's allowing you guys to kind of consistently not have to get as aggressive with the marketing spend?

Frode Jacobsen (CFO)

I can go first. I would say, yeah, pricing is one factor. If you year-over-year, it's approximately around a third. There's also been a lot of buzz around the browser space, around Opera and essentially a lot of indirect promotion of us which just allowed us to spend less than what we had expected in the quarter. We still maintain our full year marketing budget, because as Song mentioned, we do have a lot of products coming up and into market and we want to take advantage of all marketing opportunities to raise awareness around those.

Lin Song (CEO)

Great. Appreciate it. Thanks, guys. Nice quarter and good luck the rest of the way this year.

Frode Jacobsen (CFO)

Thanks.

Operator (participant)

Thank you. Once again, if you would like to ask a question, please press star and one on your touch tone phone. We'll take our next question from Alicia Yap with Citigroup.

Alicia Yap (Equity Research Analyst)

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. Is that fair to say it is mainly coming from the stronger outperformance of the advertising revenue more than the search revenue? Second question is, I think follow-up on the AI, the ChatGPT. I know there's probably more limited data at this point, but if you can elaborate on any metrics that you have seen. Is that more on the user trends then you have already seen some improvement and also able to get more usage in terms of new user as well? Over time, I think you also mentioned on retail advertiser.

I would just wanted to think about how would we translate into a better ROI for advertiser over time. On top of it, for your newsfeed, your recommendation, which I think there's already quite a lot of, like, you know, kind of the AI algorithm in there. By applying ChatGPT, will that actually further improve your news recommendation targeting down the road? If you can elaborate a little bit on that will be helpful. Thank you.

Frode Jacobsen (CFO)

Hi, Alicia. I can at least open with the first part of your question on guidance. Yes, we did see in particular advertising come in ahead of expectations in the first quarter. We expected seasonality, which we saw, but it performed better than what we expected. Overall, I think fair point. At the same time, we do like to keep still a bit of a wide range, seeing that there's it has scaled very quickly and we want to make sure that we deliver well relative to what we have guided. Then I think I'll hand it over to Song for the metrics on AI and news versus AI.

Lin Song (CEO)

Yeah, sure. Sure, sure. Yeah. I'll just say that, for now the direct impact we see that there's just a lot more user interest, on both AI and browser, which is translated to a positive item for us. That is what we can see. I think, in terms of user behaviors, yes, we see that user definitely use... There's more engagement, when you actually use AI and it's a very helpful tool. You know, both in terms of user engagement and also, potentially retention among others. The only thing is that for now the sample size is still relatively small because we keep it into early access among others.

We feel probably we are at a better stage to comment on it when we actually brought that to a bigger audience. We are quite positive about it. Like I guess it's the same when it comes to monetization that we have some ideas of how potentially can be monetized. Like, again, it's better to comment on it when we actually have announced in the future. Maybe just the quick lines of news. I would say that first of all, of course, the prediction algorithm of news are rather decisive, decision-making AI instead of generative AI. It's a bit different than what ChatGPT has been about. It's two different branches.

On the other hand, it is quite relevant that we have already used generative AI as well, quite extensively in news clients, because it will definitely be helpful to, you know, help with generating of content, comments, opinions, flavors, and that will translate to the industry there as well, and we want to be more involved in. Again, very optimistic about the potentials of generative AI on also news and content in general. Even though the pure prediction on click part is actually more decision-making as.

Alicia Yap (Equity Research Analyst)

Okay. All right. Great. Thank you.

Operator (participant)

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.

Lin Song (CEO)

Sure. Again, thank you again, everyone, for your continued support and interest in Opera. We believe we will once again set the records for our revenue and profitability in 2023. We are seeing the benefit of the hard work of our employees also around the world and I would like to personally also thank them for their contributions. Looking ahead, I'm most excited about our gaming and also AI-driven initiatives, and look forward to share our successes with you in the coming quarters. We appreciate your time and look forward to speaking with you again in the future.

Operator (participant)

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