Q2 2023 Opera Ltd Earnings Call

Participants

Frode Fleten Jacobsen; CFO; Opera Limited

Lin Song; Co-CEO & Director; Opera Limited

Matthew Wolfson; Head of IR; Opera Limited

Lance William Vitanza; MD & Cross-Capital Structure Analyst; TD Cowen, Research Division

Mark Nicholas Argento; Senior Research Analyst; Lake Street Capital Markets, LLC, Research Division

Unidentified Analyst

Presentation

Operator

Welcome to the Opera Limited Second Quarter 2023 Earnings Call. (Operator Instructions) Please be advised that today's call is being recorded. (Operator Instructions) I would now like to turn the call over to your speaker today, Matt Wolfson, Head of Investor Relations. Please go ahead.

Matthew Wolfson

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.

Lin Song

Thanks, Matt, and thank you everyone for joining us today. So we are very pleased to announce another very strong quarter, which exceeded our previous 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 above 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, while 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 O&O 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 make sure our users to get the best technologies and solutions available, we first partnered with Open AI, maker of the 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 all 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 new beginning of a new kind of browsing issuance for Opera users. Aria allows users to collaborate with AI while browsing the web, generating textual codes or getting their product queries answered. Aria is based on Opera's own composed infrastructure, which is connected to OpenAI's GPT technology. In addition, Aria is further enhanced by additional capabilities such as a live results from the web, the composed infrastructure is also easily scalable. It allows Aria to connect to multiple AI models and in the future will expand by integrating further capabilities such as directing users to relevant services powered by our key personnels 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 position. Opera is looking forward to developing more cutting edge AI solutions, faster bringing Aria to all our major platforms, Opera GX and the immediate horizon, but the bar continues to be set high as we strive to be in the vanguard 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 west 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 corner, 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 home work in the coming 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 to 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. With that, let me turn the call over to Frode.

Frode Fleten Jacobsen

Thank you, Song. I'll then turn to some additional details on our numbers and the capital returns within yet another strong quarter for Opera. Our Q2 revenue benefited from solid underlying growth of both advertising and search revenues in spite of 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 still 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 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 semiannually. 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 midpoints. 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 OpEx 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 15% growth at the midpoint. We guide adjusted EBITDA to $18.5 million to $20.5 million, translating to a 20% margin at the midpoints. Overall, and to conclude, we've obviously never been more successful, and we are very pleased with our product lineup, road maps 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 and a special dividend earlier this year and most recently with 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. So we'll do our best to fire on all cylinders as the year progresses and look forward to keeping you posted. So that's it for me, and I'll turn the call back over to the operator for questions.

Question and Answer Session

Operator

(Operator Instructions) We'll take our first question from Mark Argento with Lake Street.

Mark Nicholas Argento

Just wanted to drill down a little bit on your expectations for kind of 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? What kind of -- what do you guys -- how do you think about strategically about ARPU growth in terms of your overall strategy, trying to get more exposure to west.

Frode Fleten Jacobsen

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 actually across PC, GX and mobile products. So that's an important driver for us. And 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.

Mark Nicholas Argento

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 some decent adoption, utilization of those tools? What's your goal, I guess, for that product and the opportunity to kind of mainstream that browser or the browser set?

Lin Song

Yes, It's Song Lin here, I'll try to answer. So yes, I think as I mentioned, we are quite -- I mean, it's still early stage, but it is very encouraging for what we see, more like among the users who have been using it. We have seen that there are actually very interesting because we know that discussions about what the impact is going to be to the whole industry and user behavior level. So -- but we see this even from other stages are that before we actually introduce AI and afterwards, even for the same group of users, they are very nice upward turnings of the both the user engagement, time spent and even search queries among others, right? So all the numbers are lifting. And we think it makes sense because more like -- because it actually enables users to interact with AI and computer in a more natural way and in turn, of course, bring more exposure to all the informations.
And this is, of course, very relevant for us as a browser because at the end of the day, browser is a gateway, allow you to discover more information. And if AI can actually help that, it's very natural that you guys have to spend more time line, so we are very positive. And the other major, I would say, interesting factor, of course, is that is also a major differentiating part because what we saw is also that is actually -- whereas Opera One for instance, it's a very good tool to use it as a way to getting new users because now people also see that there are clearly more differentiation between Opera and Opera One with the preinstalled browsers on the PC, which is, of course, a very positive mega trend that people begin to get it more that the browser can actually play a difference and especially with AI. So all those are playing a very positive factor. But again, it's still early stage. So I think we'll see how this develops, and we will roll out probably more of the iterations of the AI just to make sure we are moving even faster.

Mark Nicholas Argento

That's helpful. And then one more, just kind of housekeeping question for Frode. In terms of the dividend, you guys are instituting a recurring dividend, the first installment, the first $0.40 dividend you guys are netting that against the receivable, but then going forward, is it a full $0.40 dividend? Or maybe just walk us through that.

Frode Fleten Jacobsen

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

Mark Nicholas Argento

Got it. All right. That's helpful. And then just last -- I know you carry it on the balance sheet as available for sale, I think, is a classification. Any additional thoughts on that asset at that stage and any kind of new valuation marks? When you guys think about what that business is worth? And more importantly, what do you do with that stake long term?

Frode Fleten Jacobsen

Yes. For the first half, we had another look at it. In general, we felt comfortable with the valuation that we set back in March, I believe, for year end '22. I think the company is doing well and it's proceeding. We're not in a rush to sell it per se. But if there is an interested buyer, we also no longer really play a strategic role for OPay in its operations. I think our role was more important in the early days as a founding member of the company. So then in terms of just our own simplification would be happy to sell it at the right price.

Operator

And we will take our next question from Lance Vitanza with TD Cowen.

Lance William Vitanza

And nice quarter. I have two questions. I guess the first is back on the idea of how much headroom you think you have in this transition into the western markets, which obviously is fueling the rapid growth that we've seen. So if I do the math right, it looks like you've got about 47 million users in the western markets, just 15% of the $316 million user base that you reported in the press release. So that works out to about rough numbers an estimated 8% penetration if I just divide that 47 million by the total population of the Western markets.
So I'm wondering, I imagine Opera, its goal isn't to be a real mass channel brand, but do you think that, where do we think that, that penetration rate could conceivably go over time? I mean is there an opportunity to double that to 16%? Or -- is that too aggressive or too conservative? How should we be thinking about where this could go over the longer term?

Lin Song

Yes. So yes, it's Song Lin, I'll comment on it and Frode can add to that. So no, I think you are right that I think it's functioning more like -- it's in a way, right? So possible, of course, Opera as really one of the biggest European brands, it's just the fact that we have such a huge user base, right? So which is positive as the total MAU, like not so many companies actually like us but so many who does. But I think you're also right that even though we have been growing and we have a big user base even in western world, it's still only 13%, right? So we feel that -- I agree with you that we feel there are still a lot of -- we do have to and very early stage of penetration, both for GX, for instance, which is always very high ARPU users wherever they are in, more like in other markets gamer are always very high ARPU. So we are very excited about this.
We think it's on the very beginning stage and also for products like Opera One followed by AI, for instance, it's a very, like again, that tailored for a very specific user base. And again, it's also in early stage. So -- so I think, yes, we still have a lot of room to grow. And the other comment, I guess, is just that, of course, be aware that even if those -- we still have a huge amount of users which are not in the area categorized by, let's say, western market, but of course, they are also have lots of potential, especially with AI, both for potential ARPU lifts and also for potentially that market is also evolving, right? So I would also say we are in a very nice mix of both we still have a lot of room to grow for the western market, we're still very early stage. But we are also in a very good position that with those emerging markets users mature we can also capture the right part of it. So I think from both ends, we are quite optimistic on this. And that's also why I think our #1 focus is still to keep evolving our product and get more users because in the end, that is always the key and provide all the basis.

Lance William Vitanza

Great. And then a couple of other questions, if I may. The next one is on the cash position, which at $98 million that came in a little bit better than our I think we were looking for $90 million. And so I'm just wondering, I know you mentioned there were no share repurchases. So that was part of the delta. I think we still -- we were still expecting maybe a couple of share repurchases in the quarter. But was there any other onetime items that sort of favorably added to your cash position in the quarter? Anything there that's worth calling out?

Frode Fleten Jacobsen

No, I would say the cash flow of the quarter was actually very straightforward. We sort of increase in AR and AP offsetting one another. Q2 and Q4 will be the same. Those are the taxpaying quarters. So there's a tax component in there, meaning that actually the conversion from adjusted EBITDA to cash flow is best in Q1 and Q3. So I think it followed our internal expectations. Keep in mind that the dividend that was issued in June was payable in July. So that $11 million is still included in the cash on June 30.

Lance William Vitanza

Okay. I had one other question. In the press release, it mentioned something on the noncash comp that I couldn't quite follow. Share-based remuneration includes grants made by Opera's majority shareholder -- made by Opera's majority shareholders. I wasn't quite sure what that meant. And it goes on to say that it represents an expense even though Opera has no obligation in connection with these grants and that they do not represent dilution for Opera's shareholders. I'm not sure that I've seen that before. Can you expand upon that for a minute?

Frode Fleten Jacobsen

Yes, sure, I'll do that. So Kunlun as the biggest Opera shareholder has issued grants in Kunlun, and they consolidate Opera holding more than 50% to some of our staff members. Opera has no expense with that. Once those grants vest and become exercise, they will not lead to any dilution for Opera shareholders. But at least in IFRS, which we present according to we are supposed to reflect the fair value of the grants that are awarded to Opera's employees, even though it has no practical implication for us.

Lance William Vitanza

Okay. Interesting. And then last question for me, if I'm looking at it -- so the guidance for the third quarter, the 15% revenue growth at the midpoint, that checks out, but then the EBITDA at around $19 million to $21 million. Didn't you report a little bit, I think EBITDA in the third quarter of '22 was $21 million. Is that right? And so I'm just trying to figure out, 15% growth, EBITDA is not really scaling, so was there something -- remind me, was there some sort of onetime good guy in the 3Q '22 numbers that we need to be sort of backing out of our math when we think about the year-on-year EBITDA comp?

Frode Fleten Jacobsen

I think the key thing is to look at our communication around expenses. And the biggest factor that changes throughout the year is when and how we spend our marketing dollars. So we have sort of maintained our expectation for our total spend and always communicated that it would be most or we would increase it in second half relative to first half, simply because of our scaling on GX and how that evolves and the launch of Opera One and sort of having that out in the market and learning the lessons before we take out the full potential on the marketing. So I would almost say the opposite that, I mean, we are increasing our adjusted EBITDA expectations quite meaningfully after the strong Q2 relative to what we had guided for the year before. So we actually feel very good about it. It's just a conscious decision about when in the year we spend the marketing and when we think we get the best return on that spend.

Lin Song

May be I'll add a little bit more. Same as Frode but on a positive note is also that, it's almost like we are almost calling well ahead of our guidance in the first half that we feel then, of course, if you want, we can have more user right of building up more user base because, of course, in the end of the day, that's well yield, even more revenue and profit in the future. So that's -- I think that's what we based on our guidance. But then, of course, at the end of the day, it is always reflective of -- what's the ROI profile and how we actually assist as well benefit from us in the long run but it's nice to actually be able to have that room.

Lance William Vitanza

Understood. Yes. And I guess then just to sort of put a final point on this, are you seeing anything that would make you feel that the sort of the longer-term EBITDA margin targets are under any pressure?

Frode Fleten Jacobsen

No, I think this is progressing well according to expectations and sort of we feel comfortable about the level that we operate on.

Operator

(Operator Instructions) Our next question from Alicia Yap with Citigroup.

Unidentified Analyst

This is Katrina (inaudible) from Citigroup asking on behalf of Alicia Yap. I have two questions. First, would management be able to provide some color on what level of incremental revenue opportunities we could expect to see coming out from our embedded AI feature in Opera browser in the next 12 to 18 months.
Second, are there any additional investments we expect to incur as related to the AI that will have some pressure in expenses and how will that be affecting our EBITDA trend going forward, if any?

Lin Song

Yes, sure. Sure. Yes, it's only, I think I'll just take that one and then Frode can also comment and add on any follow-ups. So Yes. I think like, again, the whole industry is still at very early stage, right? So it's almost a billion dollar question. But I think from what way observed -- like again. So as a tech company, it is a very -- both as a tech company, but also as almost entry point to the whole web, right? We feel that the very others use of the AI is just that it allows people to have access to more information in a more convenient way in general. And that we see directly translates to higher time spend and also more let's say, high ARPU events that we see. So I guess it's a function of just because they can -- it's easy for them to get accurate information and they start to consume it. So that has already been evident in the current users already that we have. We are very optimistic. So that is why that we baking already, right?
And then the other path, as I mentioned, is also bit that it also actually helps open up Opera in particular. So the fourth, I would say, is almost a bit industrial-wise, especially to want someone which is in our industry like a browser as entry. And then I guess the second benefit is more towards to Opera in particular because, of course, being a third party browser we're always trying to differentiate it. And now we just saw that with the coming of AI, we are, of course, the one of the browsers which are provides a native differentiating AI product for free to all the users. So that we see is very attractive and that we see that has already is very attractive in marketing and user acquisition and the further making user feel that browser is actually a very differentiating product. So that is very helpful for the new user acquisition.
And in comparison, for instance, we see that it's almost -- we're talking about maybe like -- maybe more a onetime difference of user engagement if user actually coming from the channel well, they actually see AI and come to us, right? It's much more active, almost a time difference between the user which come from normal channels. So that, of course, is very helpful and that is also well quite optimistic about development of Opera One. So I think those 2 factors for now are the major ones which is benefiting and make us wanting to spend more time also on integrating more AI products because there are a lot of potential to be gained from it, and we are quite positive about it.
But you're also right that there are also a cost factor related with it. So it's like, again, still very early stage. So yes, I think we're aware that there will always be cost factors in association. For now, it's still a very small percent, especially in comparison to say marketing cost. So it's still very net positive for us. But in the future, I think that is why we are working now already with some of the partners on potentially monetization because in (inaudible), of course, it's very nice to be able to associate monetization with it. I think that's also what we also mentioned a bit about we are not already trying to embed in many interesting links and many interesting information, which potentially monetize information on it and the on source of AI, which can, of course, directly leads to good monetization to compensate for potential cost of it. So for now, the model works, but again, it's still early stage, and we just need to work with our partners to further tune that to see how -- what kind of opportunity we can create. But I think we are standing positive about how this can grow, especially to company like us.

Operator

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

Lin Song

Yes. So like, again, as said, that -- I'll just wrap it up with thank you for all the continued support and interest in Opera. We are very encouraged by the early response to Aria and Opera One and what's more to come and also the success of Opera GX and opportunities of verticals more broadly and how we have been able to attract valuable users and scale our monetization. We appreciate your time, and we look forward to speaking with you again in the future.

Operator

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