Opera Q2 2023 Earnings Call Transcript

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August 24, 2023

There are 7 speakers on the call.

Operator

Welcome to the Opera Limited Second Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's call is being recorded. Lastly, I would now like to turn the call over to your speaker today, Matt Wolfson, Head of Investor Relations.

Operator

Please go

Speaker 1

ahead. Thanks for joining us. As usual, I have with me today our Co CEO, Song Lin and our CFO, Gerda Jacobsen. Before I hand the call over to Song, I would like to remind everyone that on 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.

Speaker 1

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 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.

Speaker 1

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 Q2 operational highlights and strategy and then further will discuss our financials and expectations going forward.

Speaker 2

Sure. Thanks, Matt, and thank you, everyone, for joining us today. So we are very pleased to announce another very strong quarter, which exceeded our previous issue 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. 2nd quarter revenue reached RMB94,100,000, an increase of 21% over the previous year.

Speaker 2

This was our 10th consecutive quarter of over 20 percent top line growth. Adjusted EBITDA was 20,500,000, 22% margin. The Q2 builds upon our previous successes and communicated strategy We are focusing on growth in the Western markets with the potential for the greatest value. So to those of you who have been following Z Opera story, this is nothing new. Annualized ARPU was $1.17 in the 2nd quarter, an increase of 25% compared to last year and up 80% Relative to the Q1, while our total user base was relatively stable, we continued our user base mix shift Towards higher ARPU users, WAN users in Western markets representing 15% of the total user base.

Speaker 2

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 and O advertising. Sauce revenue grew 15% in the 2nd quarter, driven by continued user growth in Western markets. Ofer 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 To make sure our users get the best technologies and solutions available, we first partnered with OpenAI, Mako of the CHF GPT and our close collaboration has already yielded some impressive results. We decided to go back to the drawing board and redesign our flagship vessel browser, reshaping the UX and UI To both improve the user experience and prepare the platform for current and upcoming AI features, With Opera 1, we managed to create a powerful, ctraced browser that dynamically adapts to our users' needs.

Speaker 2

Designed to embed all the current AI technologies and leave considerable room for more, We are excited about Opera 1 as a high quality platform for the future of AI enhanced web browsers. This redesigned browser was met with overwhelmingly positive feedback from both users and tech media. Opera 1 was the first of all browsers to include our browser AI area As well connected and current event aware, generative AI service offers entirely for free Aria marks the beginning of a new kind of browsing experience for Opera users. Aria allows You know to collaborate with AI while browsing the web, generating textual codes or getting their product queries answered. ARIA is based on Opera's own compolar infrastructure, which is connected to OpenAI's GPT technology.

Speaker 2

In addition, Avaya is further enhanced by additional capabilities such as adding live results from the web. The Composer infrastructure is also easily scalable. It allows ARIA to connect to multiple AI models and in the future Well, it stands by integrating further capabilities such as directing users to relevant services powered by our key partners For monetization, Arunya is also available in our mobile browsers for Android and iOS, allowing users to enjoy AI powered browsing It has proven to be a hit with Udose 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 patent edge AI solutions, faster bringing ARIA to all our major platforms WeizOppode GX on 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 $24,000,000 during the quarter with an annualized ARPU of $3.10, An increase of 7% compared to the Q2 of 2022. Monetization grows faster on PC than mobile Given greater Western exposure on the PC side, in addition to being engaged with gamers, GX has a very attractive demographic for dominantly Gen Z.

Speaker 2

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 setup and connect them directly to the services they use. For an online native generation, this individualism extends from the physical world to a digital world and we provide the GX as a key part of that expression and experience. So in this call, we have added even more features to offer GX We have thousands of new modes and live wallpapers, and we think some of our users will appreciate the addition of AI to GX in time 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 all users, as we move through the remainder of the year, you can expect this to continue with ARIA coming to more browsers, New AI features and skills being rolled out and GX continuing its growth as the leading browser for demanding gamers. With that, let me turn the call over to Frode.

Speaker 3

Thank you, Song. I'll then turn to some additional details on our numbers And capital returns within yet another strong quarter for Opera. Our Q2 revenue benefited from solid underlying growth of both advertising and search revenues in spite of FX headwinds. As a result, We came in just above the high end of our guidance at 94,100,000 or 21% year over year growth. On an FX neutral basis, our year over year growth would have been about 28%.

Speaker 3

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 $20,500,000 or a 22% margin. Overall, our cost categories Came in according to our expectations with a slight shift from marketing expenses to cost of revenue items. We generated operating cash flow of $15,500,000 in the quarter, which is net of $3,400,000 tax Prepayments. Free cash flow from operations, which subtract CapEx items and lease payments from our operating cash flow was $13,200,000 During the quarter, we launched A recurring dividend program, the annual dividend is $0.80 per ADS to be paid semi annually.

Speaker 3

The record date for the first $0.40 payment was in June With payment in July. Our first recurring dividend amounted to $36,000,000 in total, of which $11,000,000 was paid in cash to ADS holders and $25,000,000 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 and no corporate debt. In addition, our receivable from the sale of StarEx totals $32,000,000 present value, expense of dividends until it has been fully consumed.

Speaker 3

We continue to value our 9.5% They can outpay at $163,000,000 presented as held for sale. In total, that adds up to 196 guidance for the full year 2023 Q3. 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 $380,000,000 to 390,000,000 Up from our last range of $373,000,000 to $390,000,000 which corresponds to 16% revenue growth at the midpoint.

Speaker 3

For annual adjusted EBITDA, we list our guidance range to be $80,000,000 to $84,000,000 up From $77,000,000 to $83,000,000 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 $120,000,000 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 $30,000,000 for the year as a whole.

Speaker 3

For the Q3, we guide revenue to $97,000,000 to 100 1,000,000 which is 15% growth at the midpoint. We guide adjusted EBITDA to $18,500,000 to $20,500,000 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, roadmaps and our growth strategy. We are also proud to combine healthy growth With healthy profit margins and cash flows and how that directly benefits our shareholders Through our past major stock buybacks and a special dividend earlier this year and most recently with initiation of a recurring While it's certainly a period of near to mid term 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.

Speaker 3

So that's it for me and I'll turn the call back over to the operator for questions. Thank

Operator

We'll take our first question from Mark Argento With Lake Street, your line is open.

Speaker 4

Good morning, guys. And nice quarter. Just wanted to drill down a little bit on your expectations for Kind of ARPU growth going forward, 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 the West.

Speaker 3

Hey, Mark. Thanks. I can begin in terms of our guidance. We continue to build in the trend of ARPU growth. We see our momentum in Western markets and our growth there.

Speaker 3

It's 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.

Speaker 4

Great. And then in terms of the Because the relaunch of, APO 1 and the AI and some of the embedded AI tools, any trends you're Jane, 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 for the browser set.

Speaker 2

Yes. So it's Soni Ho, I'll try to answer. So yes, I think as 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 they are actually Very interesting, because we know that discussions about what the impact is going to be to the whole industry and user behavior variable. So What we see at least even from all stages are that before we actually introduced AI and afterwards, Even for the same group of users, there are very nice uploads of both the user engagement, time spent And even though it worries among others, right.

Speaker 2

So all the numbers are lifting. And we think it makes sense because it actually enable users to interact With AI and computer in a more natural way and in turn, of course, to bring more exposure to all the information. And this is, of course, very relevant for The browser because in the end of the day browser is a gateway, allow users to discover more information and if AI can actually help that, it's very natural You guys have to spend more time on it, so we are very positive. And the other major, I would say, interesting factor, of course, is that there is also a major differentiating part Because what we saw is also that it's actually going on for 1, for instance, it's a very good tool to use it as a way to Because now people also see that there are clearly more differentiation between Opera and Opera 1 with the pre installed process. On the PC, which is, of course, a very positive megatrend that people begin to get it more that browser can actually play a difference And especially with AI.

Speaker 2

So all those are playing a very positive factor there. But again, it's still on the stage. So I think we'll see closely see how this We will roll out probably more of the iterations of the AI just to make sure we are moving even faster.

Speaker 4

That's helpful. And then one more just kind of housekeeping question for Florida. In terms of the dividend, You guys are instituting a recurring dividend. The first installment for 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.

Speaker 3

Yes, I think that StarEx receivable was about $57,000,000 Before this dividend, just as a reminder, we sold STARX our stake in STARX to Kunlun, which is also the biggest shareholder in Opera, and that is why we use the offsetting mechanism. So the first Dividend, the debt as a pre IPO shareholder, their part of it would have been $25,000,000 And so that reduced the StarEx receivable to About $32,000,000 at the end of the quarter. And we'll see continue to see at $0.40 per Dividend issuance, you'll see about a $25,000,000 reduction in that until it has been consumed. So it will last us into About mid-twenty 24.

Speaker 4

Got it. All right. That's helpful. And then just last I know you carried on the balance sheet and it's available for sale, I think, as a classification. Any Additional thoughts on that asset at stake 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?

Speaker 3

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 2022, 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 OP 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, we'd be happy to sell it at the right price.

Speaker 4

Great. Appreciate it. Thanks guys.

Operator

And we will take our next question from Lance Vintenza with TD Cowen, your line is open.

Speaker 5

Thanks guys 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 47,000,000 users In the Western markets, just 15% of the 316,000,000 user base that you report in the press release. So that works out to about rough numbers and estimated 8% penetration if I just divide that 47,000,000 by the total population of the Western markets.

Speaker 5

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 18% or is that too aggressive or too conservative? How should we be thinking about where this could go over the longer term? Thanks.

Speaker 2

Yes. So, yes, it's only now I'll comment a bit and further I can also add, right. So, no, I think you are right that I think it's functioning more like it's It's in many way, right? So first of all, of course, Opera has really one of the biggest European brands. It's just the fact that we have such It was user base, right?

Speaker 2

So, which is positive as a total MAU, like not so many companies actually like us. We have so many of those. But I think you're also right that even though we have been growing and we have a big database 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 feel we are still in very early stage of penetration both For GX, for instance, which is always very high ARPU users wherever they are in, more like even in other markets, gamers are always very high We are very excited about it. We think it's on the very beginning stage and also for products like Opera 1 powered by AI for instance.

Speaker 2

It's a very like again, a payload for a very so basically the user base and again, it's also in the early stage. 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 results which are not in the area categorized by, Let's say Western market, but of course, they are also have also potentials, especially with AI, both for potential ARPU lift 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 are still at very early stage, but we are also in a very good position that when those emerging market And mature, we can also capture the right part of it.

Speaker 2

So I think from both angles, we are quite optimistic on this. And that's also why I think our number of focus It's still to keep evolving our product and the gift modules because in the end that would always be key and provide all the basis.

Speaker 5

Great. Thank you for that. And then, a couple of other questions, if I may. The next one is, on the cash position, Which at $98,000,000 that came in a little bit better than our I think we were looking $90,000,000 And so I'm just wondering, I know you mentioned there were no share repurchases. So that was part of the delta.

Speaker 5

I think we still We were still expecting maybe a couple of share repurchases in the quarter. But was there any other One time items that sort of favorably added to your cash position in the quarter, anything there that's worth calling out?

Speaker 3

No, I would say the cash flow of the quarter was actually very straightforward. I mean, it was sort of increase in AR and AP Offsetting one another, Q2 and Q4 will be the same. Those are the tax paying quarters. So there's a tax component in there, meaning that actually the conversion from adjusted EBITDA to cash flow It's best in Q1 and Q3. So I think it followed our internal expectations.

Speaker 3

Keep in mind that the Dividend that was issued in June was payable in July. So that $11,000,000 Still included in the cash on June 30.

Speaker 5

Okay. Thank you. I had one other question. In the press release, it mentioned something on the non cash comp that I couldn't quite follow. Share based remuneration includes grants made by Opera's majority Shareholder made by Opera's majority shareholder.

Speaker 5

Is that I wasn't quite sure what that meant. And it goes on to say that it represents 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?

Speaker 3

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 Best and become exercise.

Speaker 3

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.

Speaker 5

Okay, interesting. And then last question for me, if I'm looking at it, so the guidance for the Q3, The 15% revenue growth at the midpoint that checks out, but then the EBITDA Around $19,000,000 to $21,000,000 Didn't you report a little bit more? I think EBITDA in the Q3 of 2022 was $21,000,000 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 one time good guy in the 3Q 2022 numbers that we need to be sort of backing out of our math when we think about the year on year EBITDA comp?

Speaker 3

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 1 and sort of having that out in the market and learning the lessons before we Take out the full potential

Speaker 2

on the

Speaker 3

marketing. So I would almost say the opposite that, I mean, we are increasing our adjusted EBITDA 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

Speaker 2

A positive note is also that it's almost like we are almost probably well ahead of our guidance in the first half. And we feel that, of course, if we want, we can have more deal room, right, of building up more user base because, of course, in the end of the day, that will yield Even more revenue and profit in the future. So that's I think that's what we're basing our guidance. But then, of course, at the end of the day, it will always be protective of what's Our profile and how we actually assess this will benefit from us in the long run, but it's nice to actually be able to have that room.

Speaker 5

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?

Speaker 3

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

Speaker 5

Perfect. Okay. Thanks, guys.

Operator

We'll take our next question from Alicia Yap with Citigroup. Your line is open.

Speaker 6

Alicia Yap, I have two questions. First, would management be able to provide some color on what browser in the next 12 to 18 months? 2nd, are there any additional investment we expect To incur as related to the AI that will have some pressure in expenses and how will that be

Speaker 2

Yes, Sure, sure. Yes, it's only now. I think I'll just take that pause and then further can also comment on any follow ups. So Yes, I think like again, the whole industry is still at very early stage, right? So it's almost $1,000,000,000 question.

Speaker 2

But I think From what way observe at least that like again, so as a tech company, it is a very and tech both as a tech company, but also as almost entry point to the whole way, Right. We feel that the very obvious use of 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 spent and also more, let's say, high up events that we see. So I guess it's a function of just because they can it's easier for them to get accurate information and thus consume it. So that has already been evident in The current unit that we have, we are very optimistic. So that is one factor we can bake in already, Right.

Speaker 2

And then the other factor, as we mentioned, is also a bit that it also actually helps open up Opera in particular. So the first, I would say, is almost a bit industrial wide, especially towards someone which is in our industry like a browser at the entry. And then I guess the second benefit is more towards to Opera in particular because of course, be a third party biggest third party for us, so we're always Trying to and strive to differentiate it. And now we just saw that when the coming of AI, we are of course the 1 of the browsers, which app 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 Lee is very effective in marketing and user acquisition and the follow making user feel that Browser is actually a very differentiating product.

Speaker 2

So that we see is very helpful for the new user acquisition. And in comparison, For instance, we see that it's almost we're talking about maybe more than 100 like maybe more than one time difference of user engagement If you are actually coming from the channel where they actually see AI and come to us, right, it's much more active, almost a time difference Between the users which come from normal channels. So that of course is very helpful and that is also well quite optimistic About development of PROWAN. So I think those two factors for now are the major ones, which is benefiting and make us Waiting to spend more time also on integrating more AI products because there are lots of potential to be gained from it and we are quite positive about it. But you are also right that there are also a cost factor related with it.

Speaker 2

So it's like again still very early stage. So yes, I think we are aware that there will But in the future, I think that's also why we are working now already with some of the partners on potentially monetization because in the other day, of course, It's very nice to be able to associate the monetization with it. I think that's also what we also mentioned a bit about. We are now already trying to embed many interesting links and many interesting information, which potentially monetize information already on the answers of AI, Which can, of course, directly leads to a good monetization to compensate for potential cost of it. So for now, the model works.

Speaker 2

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 a company like us.

Speaker 6

Very helpful. I appreciate it. Thank you.

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.

Speaker 2

Yes. So like again, As said, I'll just wrap it up with a thank you for all the continued support and interest in Opera. We are very encouraged by the order response to ARIA and Opera 1 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.

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Earnings Conference Call
Opera Q2 2023
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