Welcome to the Opera Limited First 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. [Operator Instructions] I would now like to turn the call over to your speaker today, Matt Wolfson, Head of Investor Relations. Please begin..

Thank you for joining us. As usual, I have with me today our Co-CEO, Song Lin, and our CFO, Frode Jacobsen.

Before I hand over the call to Song Lin, I would like to remind everyone that, in the conference call today, the company will be making statements about 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 is 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 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 tweeting highlights from the call @InvestorOpera, 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 operational highlights and strategy, and then Frode will discuss our financials and expectations going forward. Song..

Yes, sure. Thanks, Matt. And thank you everyone for joining us today. We are very pleased to announce a very strong first quarter, which extended our previously issued guidance for both revenue and profitability. We maintain 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 and increase of 22% over the previous year. Adjusted EBITDA was 21.7 million, 25% margin. The first quarter was very much 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 own and operated sites and apps. Over the past two years, we have been quite vocal in our strategy of focusing on those users with the greatest potential for monetization.

The success of that strategy is apparent when looking at our ARPU, which has doubled over that two-year period. Analyzed ARPU was $1.08 in the first quarter, an increase of 30% compared to last year. With market spent coming in below plan combined with the normal seasonality, we saw our global user base deep slightly in the first quarter.

We continue on our trajectory with the strong growth of high ARPU users in key products with an attractive ROI on our market spend leading to solid financial results.

We have also begun new integrations with OEMs and partners to preload zero processor as part of the OEM’s device system updates, creating a tailwind for potential user growth in the second half of the year.

Advertising revenue grow, 26% compelled 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 or no advertising. Such revenue grow 18% in the first quarter, driven by the growth of our PC footprint in Western markets, particularly, North America.

Year-to-date, integration of the AI services has become a top priority for many popular consumer apps, and we set out to be among leaders within browsers and AI.

After announcing our collaboration with Open AI, Opera became among the first browsers to have support for popular services such as the Chat GBT directly in our browser side bar, 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 the either Opera or Opera GX and enable the AI tools in the easy setup and try it for yourself. Moving forward, we plan to introduce the new native AI services designed to augment web browsing for our users and further differentiate our products to drive engagement.

Earlier this week, we opened up for early access Opra One completely redesigned the browser tailored for AI GC services where AI tools are enabled by default. Offer GX continues to grow its user base, app another 80% sequentially to 22 million during the quarter raise an analyzed ARPU of $3.17, an increase of 80% compared to the first call of 202.

GX also enjoys the highest engagement metrics across our product for the failure becoming a key part of the online lives of the gamers who have come to Lab GX. During the first quarter, the mobile people with the GX ME accounts, doubled compared to GX --. These logistic accounts are among our most loyal and engage the users.

Our objective continues to be to raise awareness around Opra 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 YouTube boss, as part of that.

We are recently announced that the live score features found directly in the browser for football and credit funds, has surpassed 50 million users less than six months after its introduction, which just 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, our preferable is consistently among the most popular destinations for suitable related content globally. Finally, we are also very excited to see the renew detention.

Currently being paid to the browser space by the broader tech ecosystem, including the press and investors as a key actions 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.

Offer has been improving that since is 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 Frode. Frode..

Thank you, Song. On top of the operational color already provided. I will dive a bit further into the numbers and there is yet another very strong quarter for Opera. Q1 revenue came in two million above the high end of our guidance at 87.1 representing 22% year-over-year growth.

As expected, we saw greater seasonality in our advertising revenues 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 three 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 $0.80 per ADS for a total consideration of $71 million.

In terms of cash generation, we generated a strong operating cash flow of 25.7 million in the quarter, 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 Star X totals 57 million present value and we value our 9.5% stake in OPay, which is classified as held-for-sale at 163 million.

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 million to 390 million, up from 370 million 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 million to 83 million, up from 71 million to 81 million, and we are presenting 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 spent less than expected in the first quarter, cash compensation expense is expected to increase modestly relative to 2022, and all other ops items before adjusted EBITDA is expected to come in at a bit over $30 million for the year as a whole.

For the second quarter, we guide revenue to 92 million to 94 million, which is 19% growth at the midpoint. We guide adjusted EBITDA to be 18 million 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 are 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. [Operator Instructions] We will take our first question from Lance Vitanza with TD Cowen..

Good morning everyone. This is [Jonathan] (Ph) on for Lance. My first question is so it is great to hear that Opera is working with OEMs to preload the upper browser. Is this part of a 3Q, 4Q event and how much of a revenue tell when we this isn’t based into guidance and therefore it is a source of upside to pull your guidance when [Indiscernible]..

Yes. May maybe - hey, it is Song Lin here. I can end this give a big picture, if I have some issues with hearing you, but I guess you are asking the question of the OEM potentially pre installation.

So I would say more like just to be descriptive way we see a trend well with middle 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 users of course.

So it is - we see it more as a very interesting trend where people see the value of browser and see a company like us professional players to actually be in this space as a 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 they - it takes quite longer time for them to actually be able to do that, some of it, all 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 it is in - is embedded in guidance just yet, right?.

No, I would not say so..

Okay, great. Thanks. My next question is regarding AI, that start to become a very trending topic, and just would like to hear a little bit more detail about the economics.

What is the ever the revenue opportunity, what is the investment like?.

Yes. it is Song Lin here again. I just will try to answer post, through the - chime in. So, yes, I guess that is a billion dollar question right about everybody’s asking. So I would say it is a bit like this. It is a definitely beneficial to us in terms of user awareness and in terms of getting new users. So, that is very helpful.

It is actually videos, a bit of marketing spend because you are just browser, because of it. So for now it is definitely positive.

And we do also see that user engagement models will increase, however, on the other end, what is the best business model around it? I would say it is still to be explored and more like, it definitely improves the whole browser type and user have 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, people are trying to figure out what is the best way to get the revenue of it. I mean, the way I see it, that in general, by all calculation, you will probably have to spend more likely to depend on choice, either we can ask a user to pay for it.

For now, actually the integration sidebar actually user paying for it. There is 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 cost, but then we will predict to get that back by advertisements and by working with partners exactly how we plan to do that.

It is still the work in the process. But I think we are relatively optimistic about it is going to be positive to the whole to - us at least..

Understood, thank you. And my last question here is, I can’t 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 it is probably best to be somewhat cautious still, or just any thought behind that would be great..

Frode here, I can open - we would like to be cautious in setting expectations with our guidelines. 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 is already good head room between the midpoint and the top of our range and for now we lifted the full range on EBITDA instead..

And cost, we are just guided two miles ago..

Okay, thank you guys..

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

Just a couple of quick questions.

One, just going back to AI, could you maybe dig in a little, just any initial kind of utilization stats or anything anecdotal there that you are seeing with that integration to start with?.

Yes, I would just say that we definitely see a lot of uppers of our browsers, which is partly because we do have a very solid product more likely as previous staple instance, GF are growing very fast.

But in Q1, what we see is very - is a bit different this time in that of a browser or flagship browser is growing even faster than we expected for sure. And we believe, of course, that is the direct relevant to the whole AIGC discussion when people actually realize that browser can be very differentiating and we are actually doing that.

So I would say, that is clearly what we see in Q1. And we just launched over Opera One, 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 and people will be more and more use of it. We definitely think AI is going to stay.

And we definitely think browser is going to be a key component, and as a carrier of those surveys and the functionality, right? So everything clicks. But as well also, very, very heavy launching. We probably will see more activities across this Q2 quarter. And hopefully, we can share more in the next quarterly release..

That is helpful. And then, Frode, just a couple of quick ones on the numbers. It sounded that there was a like a $2.4 million credit loss and that ran through the income statement? Maybe just touch on that quick..

Yes, sure. It is predominantly from one customer. It is 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 just 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 more favorable environment for buyers of ads or what is going on that is 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, yes, pricing is one factor. Year-over-year, it is approximately around the third. There is 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 Sam mentioned, we do have a lot of products coming up and into the market and we want to take advantage of all marketing opportunities to raise awareness around those..

Great. I appreciate it. Thanks guys. Nice quarter and good luck for rest of this year..

Thanks..

Thank you. [Operator Instructions] We will take our next question from Alicia Yap with Citigroup. Hi. Thank you..

Hi, thank you. Good evening, Song and Frode. Thanks for taking my questions. Congrats on the strong results. Two questions. First, on the upward revisions of the guidance, is that fair to say, it is mainly coming from the strong outperformance of the advertising revenue more than the search revenue.

And then second questions is the - I didn’t follow-up on the AI, the ChatGPT. I know there is probably more limited data at this point, but if you can elaborate any metrics that you have seen is that more on the user times, then you have already seen some improvement and also able to get more usage in terms of new user as well.

And then overtime, 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 new sheet, your recommendation, which I think there is already quite a lot of, like kind of the AI algorithm in there by applying ChatGPT, will that actually further improve your new recommendation targeting, um, down the road. So if you can elaborate a little bit on that would be helpful. Thank you..

Hi, Alicia. I can at least, uh, 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 to 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 there is the - it has scaled very quickly and we want to make sure that we deliver while relative to what we have guided. And then I think I will hand over to Song for the metrics on AI and news versus AI..

Yes, sure. I will just say that for now, the direct impact we see that there is just a lot more user interest on both our browser, which is translated to 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 - there is more engagement when you actually use AI, and it is a very helpful tool. Both in terms of user engagement and also potentially retention of others. The only thing is that for now, the sample size is really small, because we keep it into all the access of others.

So we feel probably we had 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 it is the saying when it comes to monetization that we have some ideas of how potentially can be monetized.

But like again, it is better to communize 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 is a bit different than what - has been about.

So it is a different two different branches. On the other end, it is quite relevant that we have already used generative AI as well, quite extensively in your clients, because it will definitely be helpful to help the generating of contents, comments, opinions, flavors, and that will translate to the industry they are as well.

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..

Alright. 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, like, again, thank you again everyone for your continuous support and interest in Opera. We believe we will once again set the records for our revenue and profitability in 2023. We are asking the benefit of or 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 success with you in the coming quarter. We appreciate your time and look forward to speaking with you again in the future..

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