Opera Limited

Thank you for joining us. As usual, I have with me today our co-CEO, Song Lin, and our CFO, Frodo Jacobson. 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 meetings 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 or 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 unordered quarterly historical financial results of opera on our investor relations website. We will be live tweeting 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 conference call over to our co-CEO, Song Lin, who will cover our operational highlights and strategy, and then Frodo, who will discuss our financials and expectations going forward. Song?

Yeah, sure. Thanks, Matt. And 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, a 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 APU, which has doubled over that two-year period. Analyzed APU was $1.08 in the first quarter. an increase of 30% compared to last year. With marketing spend coming in below plan, combined with normatismality, we saw our global user base dip slightly in the fourth column. We continue on our trajectory with a strong growth of high upper users in key products. With an attractive ROI, 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 OEMs 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 unknown advertising. Such 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, and 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. And 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 a 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 all the access Opera 1, a completely redesigned browser, tailored for AIGC 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 output of $3.17, an increase of 18% 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. And 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 strengths 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, 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 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 Frida. Frida?

Thank you, Tom. 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 APRA. 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. but 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 over performance 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, and we plan to take advantage of that in an opportunistic manner. In Q1, we also paid our first dividend of 80 cents 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 of cash and no corporate debt. In addition, our receivable from the sale of Starex totals $57 million present value, and we value our 9.5% stake in OPE, 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 to 390 million, up from 370 to 390 million, That is 15% revenue growth at the midpoint, but representing continued caution given the broader macroeconomic picture. For annual adjusted EBITDA, we lift our guidance range to be 77 to 83 million, up from 71 to 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 to 94 million, which is 19% growth at the midpoint. We got adjusted EBITDA to be 18 to 20 million, translating to a 20% margin at the midpoints. 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. So stay tuned. With that, I would like to turn the call back over to the operator for your questions.

Thank you. As a reminder, to ask a question, please press star 1 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 DeSanto with T.D. Cohen.

Good morning, everyone. This is Jonathan on for Lance. My first question is so it's great to hear that OPERA is working with OEMs to preload the OPERA browser. Is this part of a 3Q or 4Q event? And how much of a revenue tell when we assume this isn't based into guidance and therefore is a source of upside to pull your guidance when ?

Yeah, maybe, hey, Sony, 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 of models. So I would say more like just to be descriptive, we see a trend 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. And so we just take the opportunity to start the pre-installation, which, yes, it will definitely be contributing to our revenues among revenue profits and others, and the users, of course. So we see it more as a very interesting trend. where people see the value of the browser and see a company like us, professional players, to actually be in this space as an organization. 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 quite a long time for them to actually be able to do that. Some of it is out of our control, so we don't want to assume on that. But we can give updates when that actually happens.

Got it. And none of that opportunity, revenue opportunity is embedded in guidance just yet, right? No, I would not say so. Okay. Okay. Great. Thanks. My next question is regarding AI. That's starting to become a very trending topic and just would like to hear a little bit more detail about the economics. What is the revenue opportunity? What's the investment like?

Yeah, so, yeah, hey, it's only here again. I just will try to answer first. Frida, please chime in. So, yeah, I guess that's a billion-dollar question, right, about everybody's asking. So I would say it's a bit like this. It's definitely beneficial to us in terms of user awareness and in terms of getting new users, right? So that's very helpful. It's actually a bit of a marketing spend because, you know, users just seek out browser, right, because of it. So for now, it's definitely positive. And we do also see that user engagement amount will increase. However, on the other end, what's the best business model around it? I would say it's still to be explored. It definitely improves the whole browser time spent, and users are more active, and SaaS will have more revenue for sure. However, I think I understand your question that it is in general have a cost. And then, you know, people are trying to figure out what's the best way to get the revenue out 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, actually, users are paying for it. There's no extra cost for us, which is good. But we may, in the future, choose to actually have that directly natively integrated, well, we will bail costs, 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 the work in the process. But I think we are really optimistic about it's going to be positive to us at least.

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

Frodo here. I can open. We'd like to be cautious in setting expectations with our guidance We came in ahead of Q1, but 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. So we prefer to keep the high end stable. There's already good headroom between the midpoint and the top of our range. And for now, we listed the full range on EBITDA instead.

Okay. Got it.

And plus, we just guided two months ago.

Yep.

Okay.

Thank you, guys.

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

Hey, Songlin and Frodo, 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 kind of utilization stats or anything anecdotal there that you're seeing, you know, with that integration to start with?

Yeah, so, yeah, I would just say that we definitely see a lot of up-up-pickings of our browsers. which is positive, because we do have a very solid product. More like, as you know, previously, for instance, GFs are growing very fast. But in Q1, what we see is a bit different. I mean, our flagship browser is growing even faster than we expected, for sure. And we believe, of course, that is relevant to the whole AIGC discussion, where people actually realize that browsers can be very differentiating, and we are actually doing that. So I would say that's really what we see in Q1, and we just launched Opera 1, you know, like two days ago. And we are also launching something today. I don't know if you noticed. And all of these are AI-related, right? So I think the past will continue. People will be more and more use of it. We definitely think AI is going to stay. And we definitely think browsers are going to be a key component and as a carrier of those service and functionality, right? So everything clicks. But as well as very, very heavy long-chains, we probably will see more activities across this Q2 quarter, and hopefully we can show more in the next quarter of this.

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

Yeah, sure. It's predominantly from one customer. It's 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 approaches to get it collected, but we just didn't want the exposure.

Got it. And then you also mentioned 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 just a more favorable environment for buyers of 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?

I can go first. So I would say, yeah, pricing is one factor. 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 I 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.

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

Thanks.

Thank you. Once again, if you would like to ask a question, please press star and 1 on your touchtone phone. We'll take our next question from Alicia Yap with Citigroup.

Hi, thank you. Good evening, Song and Robbie. 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? And then second question is the, I mean, follow up on the AI, the chat GPT. I know there's probably more limited data at this point, but if you can elaborate any metrics that you have seen, is that more on the user time span you have already seen some improvement and also able to get more usage in terms of new user as well. And then over time, I think you also mentioned on this whole advertiser, but I just wanted to think about how would we translate into a better ROI for advertiser over time. And then on top of it, for your newsfeed, your recommendation, which I think is already quite a lot of, like, you know, kind of the AI algorithm in there. 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. So, 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. So overall, I think fair point. At the same time, we do like to keep still a bit of a wide range, seeing that seeing that it has scaled very quickly, and we want to make sure that we deliver well relative to what we have guided. And then I think I'll hand it over to Søren for the metrics on AI and news versus AI.

Yeah, sure. Sure, sure. Yeah, so 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. So that is what we can see. I think in terms of user behaviors, yes, we see that user definitely use more engagement. when you actually use AI, and it's a very helpful tool, both in terms of engagement and also potentially retention among others. The only thing is that, for now, the sample size is relatively small because we keep it into our access models. So we feel probably we're at a better stage to comment on it when we actually brought that to a bigger audience. But we are quite positive about it. And like I guess to be saying when it comes to monetization, that we have some ideas of how potentially it can be monetized. But like again, it's very common when we actually have it launched. in the future. And maybe just the quick lines of news. So I would say that, first of all, of course, the prediction algorithm of news are rather decision-making AI instead of generative AI. So it's a bit different than what ChatGPT has been about. So it's two different branches. On the other end, 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 help with the generating of comments, opinions, flavors. And that will translate to the industry there as well. And we want to be one of the only movement. So, again, very optimistic about the potentials of generative AI, also news and content in general, even though the pure prediction click part is actually more decision-making. Okay.

All right.

Great. 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. So, yeah, like 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.