Opera Limited

Thank you for joining us today. With me today, I have our co-CEO, Song Lin, and our CFO, Frodo Jacobson. Before I hand the call over 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 and 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 our non-IFRS financial measures provide an additional tool for investors to use in evaluating ongoing operating trends and results. These measures should not be considered in isolation or as a substitute for financial information prepared in accordance with IFRS. We've also posted unordered supplemental information on our investor relations website that includes historical results of Opera and our Investee Nano Bank. On a personal note, this is my first earnings call since I joined Opera, and I just want to say how excited I am to have arrived in a thriving environment with a team I've already gotten to know well and that's shooting for value creation opportunities in several key areas. I'll do my best to keep everyone updated on where we are in the future direction of Opera. We will be live-tweeting highlights from the call at Investor Opera to 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, and then Frodo will finish up with financials and our expectations going forward. Song?

Song? Hi. Thanks, Matt. And, you know, great to have you on board. And then thanks, everyone, for joining us. I will say that Matt has picked up a good call and a very exciting time to host his first Opera investor call. We have delivered strong results for the call, exceeding the high end of our revenue guidance, with revenue up 87% year over year and up 17%. This is the already record high first call. So Frida will, of course, talk in detail about our numbers. But in general, offers revenue is nicely balanced between search and advertising, both of which continue to show strong growth. Further, not only is our core browsing business performing better than expected, but each of the multiple initiatives we've embarked on is taking root and showing great promise, whether that's expanding our reach in mobile and computers or into entirely new categories like gaming. And what's really satisfying is to see the success we are having as we introduce and scale products and services into new markets. On the mobile side, for example, we have open news, which continues to show great traction As you know, we have launched the product in African markets, and this year we started to scale it in U.S. and several European countries. In the United States, for instance, Open News is constantly in the top ten most downloaded news app on both Google Play and also the iOS App Store, ahead of many household legacy media names such as CNN and The New York Times. Another good example is Opera Football, or SOCA for those in America. It's a new content portal we just launched in June, powered by the same AI as our newest product. Even though it's a very short timeframe, it has already grown its audience to over 10 million people. So we expect even more growth with the stock of the premium league later this month. And, you know, hype. We talked about it briefly last call. It's our dedicated chat service built into the Opera Mini mobile web browser. We first launched it in Kenya earlier this year before expanding this to the rest of the continent and to the end of the corner. Up until now, we have had more than one million sign-ups already in this short period of time. For PCs, which we are always proud, we continue to invest in innovative new features that make the Opera Browser even better through improved performance, control, and privacy by incorporating popular features such as pinball support, which is a nice feature we just released, and also other smart things, such as the recent new solution we've added for better managing browser-based video conferences, which is becoming very handy when using, say, Google Conference, for instance. Further on, all the users have spent billions of dollars each year via e-commerce, and we are developing products that will provide value to our shoppers and incremental GMB for our partners. Our in-browser shopping and financial functionality continues to expand in select markets as we work with regulators and partners to ensure compliance and also provide users with an excellent experience. For instance, through our DeFi products, we are providing our Spanish users with the highest and the fastest cashback on their online shopping and we've already saw an approximate four times increase in facilitated e-commerce transactions in Spain from April to June. We will expand both our product offerings and markets sold in this space in the second half of the year. Another recent highlight, which I would like to talk about, is that not only are we providing very interesting functionality, but we have also won three Red Dot Design Awards for design quality and creative performance. Good product design is, of course, an important ingredient in creating a good user experience, and we really appreciated that recognition. We are also expanding our footprint in geographies, such as Europe and the U.S. In turn, we are seeing user growth in those markets, which translates into generally significantly higher opportunities for us. And this is also why our revenue are growing so fast in the quarter. In fact, certain material markets monetize end rates 10 times greater than some emerging markets. We think this trend will continue, creating another tailwind for Opera, as we benefit from the mixed shift in our user base, not only to the emerging market, but also a lot more now towards higher Apple consumers. Finally, in gaming, while we are expanding in both mobile and for computers, we could not be more pleased at the rollout of several key initiatives. Our gaming-specific browser, Opera GX, has now over 10 million active users since it was formally launched in June 2019. Even more interesting, Opera GX Mobile, which we just launched eight weeks ago, already has well over 1 million users. I should also say that we are seeing the bulk of the user growth in Europe and the U.S., which is, again, exciting for us just because users in those markets tend to generate significantly higher output. So to be driving user growth in the millions, well, we believe have a very positive impact on monetization and profit generating going forward. And plus, we continue to have big ambitions when it comes to our Game Maker Studio gaming platform. I've talked about it, not just the size of the gaming market, but also the direction we think it is evolving think about it, that if billions of consumers make and share pictures, movies, and music every day on thousands of platforms, there is no reason that online gaming with almost as many players and gaming role as a medium of connection, community, and entertainment will not also be adopted as a medium of expression and sharing. GameMaker Studio has already been downloaded millions of times And we believe the potential combination of the GX user base together with the GameMaker Studio gaming engine will build upon each other to provide a really strong, interesting gaming platform. I look forward to talk more about this as we continue to build on this portfolio in the second half of the year. So our core business is strong and growing. And each of our key initiatives is showing great traction, and we believe huge potential. Not just stepping back, we're asking people continue to shift more and more of their lives online, to shop, to walk, to connect and communicate, and especially to play. So being able to choose a browser that can be personalized to the way people lead their digital lives is an ever-strengthened value proposition in this context. So at Opera, we believe this is a long-term durable trend, one that was accelerated by the pandemic, and one we benefit from as the consumers want to be able to choose their browser, but also seeking functionality, privacy, content services, and also the ability to customize their online experiences. So, taken together, we believe there's a lot to be excited about at Opera, and we believe we can continue to expect sustained long-term growth. So, with this, I would like to turn to Frida, so that he can provide a more detailed discussion of both our performance during the call-out and also our outlook. So, hello to you, Frida.

Thanks, Heng-Lin. Our browser-plus strategy keeps delivering, And our financials follow. By offering products that resonate with users who want a more personalized browser experience, paired with content and gaming initiatives, we continue to achieve strong results as evidenced by revenue yet again exceeding the high end of our prior expectations and guidance. I'll recap the highlights and then provide our updated thoughts on guidance for the back half of the year. Revenue for the second quarter was 60.2 million and represents a new all-time high by a good margin. Our year-over-year growth rate was 87% and the sequential growth versus the prior quarter was 17%. We expect to continue to see sequential growth for the remainder of the year, which results in record revenue in each subsequent period. Our current revenue mix is split almost evenly between search and advertising. Specifically in the quarter, search was 29.8 million, accelerating to 69% year-over-year growth. This was driven by monetization gains for both PC and mobile browsers, as well as favorable comps due to COVID. Advertising was 28.9 million, accelerating to 128% year over year. This was driven by strong monetization from upper news and our mobile browsers. Keep in mind that COVID impacted advertising revenue in Q2 last year more than any other quarter. So while we naturally do not expect to continue at such annual growth rates, We do believe we have created a strong foundation for continued healthy growth for the remainder of this year and beyond. Finally, tech and other revenue was 1.5 million. Year-over-year, this revenue category has been reduced by half a million, although with almost no impact to profits, as the decline relates primarily to low-margin professional services to OPEI. As Songlin mentioned earlier, user growth was particularly strong in North America and Western Europe where users monetize at a much higher rate than other regions. We have been investing into this trend and believe it will serve as an additional tailwind to future growth as well. As we execute on our growth ambitions, we took marketing and distribution spend to a new high this quarter, 35.3 million. This is about 20 million higher than the average spend over the previous eight quarters. The increased marketing spend is primarily focused on growing news in Western markets, which have higher user acquisition costs and corresponding strong revenue potential. The investment is tracking well with positive ROI, and we continue to believe that this is money well spent. Our adjusted EBITDA came in at more or less break-even, as expected, at negative 1 million. Our net income for the quarter was 44.3 million, with profits this quarter predominantly driven by the partial realization of our investment in OPEI, as well as the step-up in valuation for the OPEI preference shares we retained. Our operating cash flow was positive at $6.3 million for the quarter. Combined with a partial monetization of our OPE investment, this increased our total cash and marketable securities by $58 million versus the prior quarter to a total of $201.3 million. Now, moving to our forward-looking commentary. As our core business continues to perform and grow ahead of expectations, our confidence in our outlook for the rest of the year increases. Further, we continue to believe that taking most of our underlying adjusted EBITDA growth and reinvesting it into our new initiatives is the right thing to do. When we initially set up guidance for the year, we commented that the more successful our growth initiatives, the more confident we would be in allowing our EBITDA to fall towards the lower end of our guidance. We are now raising both the lower and upper end of our 2021 revenue guidance for the second time, and expect 2021 revenue of 242 to 247 million, or 48% year-over-year growth at the midpoints. This represents record revenue for the second half of the year and the highest year-over-year growth for this period since going public. Correspondingly, for the full year, we narrow our adjusted EBITDA range to become 10 to 20 million, incorporating an increase of about 12 million to our expected marketing spend for the year. Such spend is success-based, and the positive results we see gives us confidence to lean further into it. In Q3, we expect revenue of 63 to 65 million, representing 51% year-over-year growth at the midpoints.

The third quarter revenue growth is fueled by continued strong results from revenue streams.

Adjusted EBITDA is expected to be around breakeven in the third quarter as we continue to invest aggressively in our new initiatives. Overall, Q2 was another strong quarter and we are very pleased with the first half of 2021. It's great to see the momentum across our businesses' investments in an even stronger growth trajectory. We are also pleased with our first realization of gains from our investments in adjacent companies and believe it also highlights the unrealized value of these holdings. We look forward to keeping you posted. So with that, we can now turn it over to the operator for questions.

Thank you. And as a reminder, to ask a question, please press star 1 on your telephone keypad. To withdraw your question, please press the pound key. We do ask that you please pick up your handset to allow optimal sound quality. We'll take our first question from Lance Vicenza. I'm sorry, Lance Vicenza with Cowan. Please go ahead.

Thank you. Thanks, operator. Thanks, everyone. Guys, congratulations on an excellent quarter. You know, when we were in the midst of the pandemic, you know, we saw this explosion in engagement, but unfortunately the advertisers had left the marketplace. So I think there was some concern, and I'll just speak for myself, that as we exited the pandemic, advertisers would return, but that engagement would also go back to its old levels and that opera would ultimately be no better off. The performance in the second quarter would seem to argue against that. I mean, advertisers are backing a big way. Opera has hung on to its increased user base. So is that a fair characterization? What is your outlook over the back half for MAUs and engagement levels? And do you think they will hold into 2022?

Hey, Lance, this is probably here. Thanks. Thanks for the question. I'll let Song comment, of course, on sort of the products and the trajectory that we are on. I would say, as you pointed out, when the pandemic hit, we were, of course, affected in the near term, but we have been talking about sort of this shift from offline to online and how that benefits a company like Opera with our ability to drive traffic And it's very pleasing to sort of see the fruition of sort of advertising returning at least more towards normal paired with the strengthened user base. And from a financial point of view, the impact of our good trajectory in both North America and Western Europe has obviously benefited us in terms of revenue growth. So we are now well beyond the levels that we were at prior to COVID. I looked at the average search and advertising revenue in the three quarters immediately prior to COVID as a relatively representative baseline, and our revenues in search and advertising are now 48% higher than that level.

Thank you. And so let me go on to the EBITDA side for a sec. So lower than we had modeled, but as you pointed out earlier, in line with guidance, you tightened the range for the full year, which I think you have said in the past would be something you would do if the marketplace opportunity was there. And I know you talked about the increase in the marketing spend and how you expect a positive ROI there. I'm also just wondering, are you seeing perhaps as some of the EBITDA move, is some of that reflecting inflationary cost pressures? Is there any sort of, you know, are you seeing higher unit costs? Or is it really just, no, this is really your decision to plow revenues back into the business to further build the revenue base? And then I guess just related to this, I might as well get this in there now too. In the past, you've discussed this sort of, you know, after the hypergrowth phase ends that you sort of, you know, you expect margins could be back in the 30%, you know, area, EBITDA margins as the business matures. And I'm just wondering if there's been any change to that sort of longer-term thinking. Thanks.

Sure. So putting marketing distribution aside as a discretionary spend and something that we tweak and fine-tune on a weekly basis, the remainder of OPEX is very much in line with the expectations from the beginning of the year, and as you can see, is relatively stable in the overall. So if that answers the question. So to us, this has been about we had at the beginning of the year and after the first quarter a pretty good idea about the number of people we would need and sort of the operating costs in terms of salary hosting and other parts of our business. and the underlying sort of product development and development in the new services that we are developing that is moving ahead as planned. And then it's the more tactical nature of when and how to drive awareness, marketing, and downloads that are affecting the OPEC space and how we ultimately view the EBITDA for the year.

Great. And then if I could just squeeze in one last question on the cash flow statement. it looks like cash flow from operations was actually positive 6 million despite the small, you know, despite breakeven EBITDA. So I'm just wondering if there was some sort of working capital stuff in there that we should expect to reverse in the back half of the year? Should we be modeling, you know, a more neutral or even perhaps a negative, you know, CFFO in the back half of the year?

As a starting point, I would say I tend to expect operating cash flow to be relatively similar to adjusted EBITDA. I think the positive cash flow we see is more a reflection of good collections that we had and a bit more of a catch-up, more than it being too forward-leaning. Having said that, of course, when we scale up our marketing and distribution spend, we do carry some payables into the next quarter.

Thanks, guys. That's really helpful. I appreciate it.

And once again, as a reminder, that is star and one for your questions. And we'll take our next question from Mark Argento with Blake Street. Please go ahead.

Good morning, guys, and a nice quarter as well. Just a couple of quick follow-ups on the kind of – when you think about ROI and the incremental spend, you know, what kind of, you know, payback period do you guys typically calculate, or how do you calculate kind of that return on elevated marketing spend?

Hi, Frodo here again.

For each campaign we run, so it's by product, geography, and the type of campaign, we're always looking at the ROI of the campaign. We are seeing an overall positive ROI on the initiatives that we are driving. There are, of course, product variances, and there are also geographic variances, and there are maturity variances in terms of learning as we go, but when we look at the big Big spend drivers in marketing. The biggest increase both relative to last year and relative to the last quarter was upper news, followed by the browser side, of course. We are seeing positive ROIs in all the key markets where all the bulk of the spend is happening. We're seeing, in terms of upper news, a payback time of within four quarters now in Western markets. And for the browser side, it's less than that. The difference is, of course, that on the browser side, we are growing from sort of more established product and more established user base. Whereas on the new side in Western markets, we are essentially establishing a new foothold and it does require investment to sort of get that flywheel off the ground. So we're actually very pleased with the returns that we have seen, even in that quite early stage of launching those products.

That's helpful, additional color. And Song Lin, you had mentioned in your prepared remarks, I believe, that you guys launched Opera Football app. It sounds like you already have 10 plus million users on that, which is pretty impressive. Do you anticipate more of these kind of thematic, you know, kind of products that leverage the core AI of the news app? Are you going to do more of those and how easy is that to monetize and sell that ad inventory?

Yeah, so that's a very good question. So I would say it's the same experience that we have also seen in the browser. For instance, we have a generic browser, and then we launched a GX for gaming, which is fantastic. I think it's more, I would say, reflecting a trend that we see that people are becoming more segmented, that they would actually, instead of appreciating a generic product, which is fine, that we actually see a great opportunity in those different segments. So we apply that in browser. It's a great success. And the same is what we applied for news, right? Like, you know, Opera Football is essentially a news service, right? It's just one category of news, but we find out that, you know, if we, you know, be more targeting, if we segment it out to, you know, dedicated content, you know, score and audiences, that's performed really well. So, yeah, so high-level, I would say, I think you are right, that we think it's a great trend. that the world is moving to, you know, more segmented, more targeted, more personalized product, and Opera Pro is definitely one of them. I mean, we have big confidence on that. It's a big success, even on a very short time frame. And I think, yes, I think moving forward, since we have that great base technology that is powered by news, I think we should be able to also provide even more segmented content coming forward.

Just one last one. You guys got over $200 million worth of cash now, and it doesn't seem like you're going to be burning any cash over the near term. Any incremental thoughts on uses for that amount of cash?

Yeah, we do have a very strong cash position with, as you said, over $200 million. in cash and marketable securities. And as we have demonstrated so far, we have been funding our growth initiatives by the underlying cash generation of a very profitable core business. So when we think about our priorities for cash, of course, they include the flexibility to seize growth opportunities in line with our strategy and the strengths that we have that we want to build on both in terms of organic opportunities, but also to be in a good position to make select acquisitions, such as the Yo-Yo Games one that we did at the beginning of this year. And then, in addition to that, as we've shown in the past, we have been happy to buy back our own stock, and there's always a trade-off there, obviously, in terms of preserving liquidity, but those are the two priorities.

Great. Thanks, guys. Appreciate it.

And we'll take our next question from Alicia Yap with Citi. Please go ahead.

Good morning, management. Thanks for taking my questions. This is Vicky Wei on behalf of Alicia Yap. So I have just one small follow-up question. So we see the top-line revenue guidance, and many people also comment about, let's say, the user habit shifting. But we wonder how is the Delta variant cases impact the business recovery momentum by regions? Because as we see from the third quarter revenue, it does not seem there is any impact on ad revenue spent by your advertisers. And would you please provide more color, let's say, by region? Thank you.

I would say overall, when COVID hit and as the recovery began, it affected emerging markets more than it did Western markets. The recovery was also faster in Europe, North America, for example, than in Africa. By now, Africa is the key emerging market strategic region for us. represents about the same share of total revenue as it did prior to the pandemic. So we have moved into a more normal state again in terms of that, and the rest of the mix is, as we have discussed, more driven by Western Europe and North America growing the user base there at very attractive manifestation levels.

Thank you. And once again, as a reminder, to ask a question that is star and 1 on your touch-down phone. We will pause to allow any further questions to queue. And there do appear to be no further questions at this time. I will turn the call back over to one phone for any closing remarks.

Sure. So, yeah, I guess, you know, thank you guys again for joining us today. We think it's a great quarter that we're able to deliver. But I think, you know, even bigger potential waiting for us. So, you know, appreciate your time and looking forward to speaking with you again.