Opera Limited (NASDAQ: OPRA) Q1 2023 Earnings Call dated Apr. 27, 2023.
Corporate Participants:
Matthew Wolfson — Head of Investor Relations
Lin Song — Co-Chief Executive Officer
Frode Jacobsen — Chief Financial Officer
Analysts:
Jonathan — Cowen — Analyst
Mark Argento — Lake Street — Analyst
Alicia Yap — Citigroup — Analyst
Presentation:
Operator
Welcome to the Opera Limited First 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 begin.
Matthew Wolfson — Head of Investor Relations
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 future results and expectations which constitute forward-looking statements within the meanings 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 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 concerned in isolation or as a substitute for financial information prepared in accordance with IFRS.
We have also posted unaudited quarterly historical 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 conference call over to our Co-CEO, Song Lin, who will cover our operational highlights and strategy and then Frode, who will discuss our financials and expectations going forward. Song?
Lin Song — Co-Chief Executive Officer
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 the 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, an increase of 22% over the previous year, adjusted EBITDA was $21.7 million, a 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 owned and operated sites and apps.
Over the past two years, we have been quite vocal in our strategy, all focusing on those users with the greatest of potential for monetization. The success of that strategy is apparent when looking at our ARPU, which has doubled over that 2-year period. Annualized ARPU was $1.08 in the first quarter, an increase of 30% compared to last year. With the marketing spend coming in below plan combined with normal seasonality, we saw our global user base dip slightly in the first quarter, we continue on our trajectory with a strong growth of high ARPU users in key products with an attractive ROI on 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 subscription 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 O&O 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 our top priority for many popular consumer apps and we set out to be above 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, it’s the easy set up and try 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 early access Opera One, a completely redesigned browser, Payload 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 ARPU of $3.17, an increase of 80% compared to the first quarter of 2022. 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, all people with GX new 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 YouTube as part of that. We recently announced that the live go features are found directly in the browser for football and cricket fans has surpassed EUR50 million 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 post validation 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. Also, it has been proven that this 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 and that strong as we are of our broader history in this space.
With that let me turn the call over to Frode. Frode?
Frode Jacobsen — Chief Financial Officer
Thank you, Song. 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 Opera. 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 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 $3 million above the top-end of our guidance at $21.7 million or a 25% margin. Profitability benefited from our revenue overperformance 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 666 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 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 a $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 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 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’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.
Questions and Answers:
Operator
[Operator Instructions] We’ll take our first question from Lance Vitanza with TD Cowen.
Jonathan — Cowen — Analyst
Good morning, everyone. This is Jonathan on for Lance. Congratulations on the first quarter. My first question is — so, it’s great to hear that Opera is working with OEMs to preload the Opera browser. For the 3Q or 4Q events, how much of our revenue tailwind we expect. Presumably, this isn’t baked into guidance and therefore is a source of upside to full year guidance when [Technical Issues].
Lin Song — Co-Chief Executive Officer
Yeah, maybe — hey, Jonathan, I can give a big picture. I have some issues with hearing you, but I guess you’re asking the question of the OEM potentially pre-installation [Indecipherable]. So, I would say, well, I can just too be descriptive. We see a trend, well, with many of our partners and OEMs that they see the value of actually more actively pre-installation the browser, especially 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 — revenue profits and all those and end users of course. So, we’ll 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 an organization.
I don’t think we have actually booked so many revenues on this particular pre-installations because, of course, OEMs can be — it takes quite a longer time for them to actually be able to do that, some of it out of our control. So, we don’t want to assume on that, but we can give update when that actually happens.
Jonathan — Cowen — Analyst
Got it, and none of that opportunity — revenue opportunity is embedded in guidance, just see that right?
Lin Song — Co-Chief Executive Officer
No. I would not say so.
Jonathan — Cowen — Analyst
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?
Lin Song — Co-Chief Executive Officer
Yeah, so yeah. Hey, it’s Song here again. I just will try to answer for the [Indecipherable]. So, yeah, I guess that’s a billion dollar question right now everybody is asking. I would say it would like this, it’s a definitely beneficial to us in terms of user wellness and in terms of getting new users, right. So, that’s very helpful. It’s actually [Technical Issues] bit on marketing spend because you just take on browser, right, because of it. So, for now, it’s definitely positive. And we do also see that user engagement that will increase. However, on the other hand, what’s the best business model around it. I would say it’s still to be explored — it definitely improves whole browser type spend and users are more active and start to have more revenue for sure.
However, I think I understand your question that it is in general have a cost entitlement and then people are trying to think what’s the best way to get the revenue out of it. I mean, the way I see it at, in general, by all calculation, you will you will probably have to spend — more likely to depend on choice, right. Either we can ask the user to pay it for now. Actually, the integration on the side actually user pay for it, there’s no extra cost for us, which is good, but we may in the future choose to actually have that directly [Indecipherable] we’ll bear cost, but then we will predict to get that back by advertisements and by [Indecipherable] exactly how we’re trying to do that, it’s still the work in the process. But I think you are relatively optimistic about it’s going to be positive to the whole — to us.
Jonathan — Cowen — Analyst
Thank you. And my last question here is, I can appreciate the narrowing of full-year guidance, but with strong performance in the first quarter, just wondering why not raise it as well or is that maybe because it’s probably best to be somewhat cautious still or just any thought behind that will be great?
Frode Jacobsen — Chief Financial Officer
Frode here, I can open. We like to be cautious in setting expectations with our guidance. We came in ahead of Q1, but we also observe 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.
Jonathan — Cowen — Analyst
Okay, got it. Yeah.
Lin Song — Co-Chief Executive Officer
And plus we just guided two months ago.
Jonathan — Cowen — Analyst
Yeah. Okay. Thank you guys.
Operator
And we’ll take our next question from Mark Argento with Lake Street.
Mark Argento — Lake Street — Analyst
Hi, Song Lin and Frode. Nice quarter. Excuse me. Just a couple of quick questions. One is going back to AI. Could you maybe dig in a little just any initial kind of utilization stats or anything anecdotal there that you’re seeing with that integration to start with?
Lin Song — Co-Chief Executive Officer
Yeah, so, yeah, I would just say that we definitely see a lot of [Indecipherable] of our browsers, which is partially because we do have a very solid product, more like adding no privileges there for instance, GX is growing very fast, but in Q1, what they see — what we see is — it’s a bit different in finding that our browser, our flagship browser is growing more faster than we expected for sure. And we believe, of course, that is directly relevant to the whole discussion when people actually realize that browser can be very differentiating and we’re actually doing that.
So, I would say that’s clearly what we see in Q1 and where we just launched Opera One, like two days ago, and we are also launching something today, I don’t know you can notice. And all of those are AI related, so I think the fast will continue and people will be more and more use of it. We definitely think AI is going to stay and with everything, browser is going to be a key component as a carrier of [Indecipherable] functionality, right. So everything clicks, but as well, so you need to do very, very heavy launches, we probably won’t see more activities across this Q2 quarter and hopefully we can share more in the next quarterly release.
Mark Argento — Lake Street — Analyst
That’s helpful and then Frode, just a couple quick ones on the numbers. We saw that there was like a $2.4 million credit loss that ran through the income statement. Maybe just touch on that quick.
Frode Jacobsen — Chief Financial Officer
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 collect them, but we just didn’t want the exposure.
Mark Argento — Lake Street — Analyst
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?
Frode Jacobsen — Chief Financial Officer
I can go first. So, I would say, yeah, pricing is one factor. Year-over-year, it’s approximately around the third. There’s also been a lot of buzz around the browser space around upfront 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 Song mentioned, we do have a lot of products coming up into market and we want to take advantage of all marketing opportunities to raise awareness around us.
Mark Argento — Lake Street — Analyst
Great. I appreciate it. Thanks, guys, nice quarter and good luck for rest of the way this year.
Frode Jacobsen — Chief Financial Officer
Thanks.
Operator
Thank you. [Operator Instructions] We’ll take our next question from Alicia Yap with Citigroup.
Alicia Yap — Citigroup — Analyst
Hi, and 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 question is I think follow-up on the AI, the ChatGPT. I know there’s probably more limited data at this point, but if you can elaborate on any metrics that you have seen. Is that more on the user to understand you have already seen some improvement and also able to get more usage and the new user as well. And then overtime, I think you also mentioned on the total advertiser, but I just wanted to think about how we translate into a better ROI for advertisers overtime? On top of it for your news feed, your recommendation, which I think 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 down the road? So, if you can elaborate a little bit on that will be helpful. Thank you.
Frode Jacobsen — Chief Financial Officer
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 expect 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 it as still a bit improvised range, seeing that there’s — it has scaled very quickly and we want to make sure that we deliver relative to what we have guided. And I think I’ll hand it over to Song for the metrics on AI and News versus AI.
Lin Song — Co-Chief Executive Officer
Yeah, sure. Yeah, so, I would just say that for the direct impact we see that there’s just lot more user interest on both AI and browser, which has 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, would actually use AI and it’s a very helpful tool both in terms of user engagement and also potentially retention on [Indecipherable], the only thing is that, for now, the central size is relatively small because we keep into early access among others. So, we feel probably we’re at a better stage to combine it when we actually brought that to a bigger audience, but we are quite positive about it. And like. I guess, it the same when it comes to monetization that we have some ideas on how it potentially can be monetized, but like again it’s [Indecipherable] actually have announced in the future.
And maybe just a quick lines of news, so, I would say that. First of all, of course, the prediction that where the 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 a different — two different branches. On the other hand, 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 know help generating all comments, opinions, [Indecipherable] and that will translate the industry there as well and we’re going to be [Indecipherable] involvement. So again, very optimistic about the potentials of generative AI, also news and content in general. Even though the pure prediction on click part is actually more decision making AI.
Alicia Yap — Citigroup — Analyst
All right. Great. Thank you.
Operator
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.
Lin Song — Co-Chief Executive Officer
Sure, so yeah, like again, thank you again everyone for your continued support and interest in Opera. We believe we will once again set records for revenue and profitability in 2023. We’re asking the benefit of the hard work of our employees also around the world and I would like to thank them for their contributions. Looking ahead, I am 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.
Operator
[Operator Closing Remarks]