Opera Limited (NASDAQ:OPRA) Q4 2022 Earnings Call dated Feb. 27, 2023.
Corporate Participants:
Matthew Wolfson — Head of Investor Relations
Lin Song — Co-Chief Executive Officer
Frode Jacobsen — Chief Financial Officer
Analysts:
Jonnathan Navarrete — Cowen — Analyst
Mark Argento — Lake Street — Analyst
Alicia Yap — Citigroup — Analyst
Presentation:
Operator
Welcome to the Opera Limited Fourth Quarter and Full-Year 2022 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] Please be advised that today’s call is being recorded. [Operator Instructions]
I would now like to turn the call over to your speaker 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 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 our non-IFRS financial measures provides an additional tool for investors to use in engaging on — 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?
Lin Song — Co-Chief Executive Officer
Yeah, sure. Thanks, Matt, and thank you, everyone, for joining us today. We are very pleased to announce our record results of the fourth quarter, which well exceeded our previously issued guidance of both revenue and profitability.
Revenue reached $96.3 million, an increase of 33% over the previous year. Adjusted EBITDA came in at $22.8 million or a 24% margin. Looking back end of the quarter and 2022 as a whole, we were able to exceed our revenue expectations as a result of better-than-anticipated monetization of both our browser and news user base, and faster-than-anticipated scaling of the Opera audience extension business. Combined with a predictable and carefully managed opex base, we have been able to convert our strong revenue trajectory to a strong profitability trajectory even ahead of our ambitions.
So to recap, the full-year revenue was $331 million with adjusted EBITDA of $68 million. Revenues grew 33%, while EBITDA was up 135% as full-year margins expanded from 12% to 21%.
The impact of our ongoing focus on news users, which provided the most value, can best be seen in our annualized ARPU. Annualized ARPU was $1.18 in the fourth quarter, an increase of 12% from the third quarter and a 42% increase compared to last year. Advertising revenue grew 55% compared to last year, now representing 59% of total revenue.
Our owned and operated sites continue to benefit from the continued shift in our user base towards developed markets with the greatest monetization potential. In addition, Opera’s audience expansion initiatives were a standout success, leveraging our high-performance leading infrastructure and first-party signals to reach the right audiences across partner inventories. These efforts, which really took off in 2022, are an excellent complement to our O&O advertising inventory. This segment has offered the stable incremental margins and is shaping up to be a material component of our revenue and EBITDA growth.
Search revenue grew 12% in the fourth quarter, which was also better than planned, driven by the growth of our PC footprint in western markets, particularly North America.
As a company, we are cost conscious and operate a lean organization. So as a result, when revenues outperform, as they did in 2022, we will see a corresponding increase in profitability. As we outlined in 2021, when we posted back on a significant investment in our marketing and distribution channels, we believe that we would reap the results in 2022, and that is exactly what we achieved. And EBITDA margins expanded from 12% to 21%. That’s perhaps most important.
Now turning to our products and innovation focus. So, Opera as a company has a — more than 25-year history of being at the forefront of browser innovation. We have built out more than 300 million user base by always pushing the limits of what’s possible on the web. The mass interest in generative AI tools and the often impressive capabilities that this[Phonetic] to us already have certainly marks the beginning of a new chapter in the evolution of not only the Internet, but the knowledge base economy and large. For Opera, that represents a huge opportunity, perhaps similar to the emergence of mobile web and smartphones.
As an independent browser, we are firing on all cylinders to become the best gateway to an AI-powered web, building and rolling out new experiences in web browsing that’s not very long ago seemed impossible to achieve. For instance, we are adding popular AI-generated content service to the browser sidebar. On top of that, the Company is also working on augmenting the browsing experience with new features that will interact with these new generative AI-powered capabilities. Among the first features to be tested is a new, small, but super useful, shorten button in the address bar that will be able to use AI to generate short summaries of any webpage or article.
Not all of you may be aware that AI has been central to Opera News from the beginning more than five years ago to sum up stories and content relevant to users in a personalized way. In 2023, we are going to ramp up our AI news efforts. It will start with using AI to assist content creation. For instance, AI will be able to help summarize the top stories of the day and then generate short articles to keep users informed of local and national news. These stories will cover subjects such as sports, weather, crime report, energy and fuel prices, and other information relevant to their lives. These features are being pushed out as we speak.
We believe AI will soon be an indispensable tool in assisting people across industries. And with our experienced talent pool in that field, we are naturally very excited about the future.
Both our search and advertising revenues also benefited from increased engagement, and we are seeing that across all of our products. In emerging markets, Opera Mini has benefited from the integration of real-time football scores, leading to increased frequency of use, and we are replicating this feature in South Asia with cricket. To celebrate the most recent World Cup in Q4, we have launched also a campaign we call Shake and Win. The campaign pushed Opera Mini to the Number 1 position in the Google Play Store in several of our key countries in Africa, while we again are also replicating the success to Latin America in key countries like Brazil, with all the success already in view.
In terms of users, our total base was 324 million MAUs in the fourth quarter, a nice sequential increase. So for the past years, we have repeated our focus on high-value users often in western markets, but also have distinguished between user opportunities in emerging markets. So we have let the less monetizable users out, while focusing growth on acquiring fewer, but higher-value users. We are very pleased to see our strategic growth more than offset reductions in less strategic areas, putting us in a great starting point for 2023 and beyond.
GX continues to grow its user base, particularly in developed markets. As we have announced in December, the gaming browser now has over 20 million MAUs. As we said before, despite being our best monetizing browser, where the ARPU up 11% sequentially to $3.3, we are in the early stage of unlocking the full potential of the GX gaming browser. We believe GX is at a profit crossroad[Phonetic] by being the most popular gaming browser and entry point for those users. It allows us to combine multiple next-generation technologies from building a decentralized hub through Web 3 and blockchain to using AI to assist in game creation with our GameMaker Studio. It’s a great example of well-received marketable new technologies from the past few years, converging around a young audience base, creating a future that is super exciting, and has the potential to exceed everyone’s imagination.
So with that, let me turn the call over to Frode for details.
Frode Jacobsen — Chief Financial Officer
Thanks, Song. On top of the operational color, I’ll turn to the numbers. It was a great quarter, rounding out the year well ahead of our expectations. Q4 revenue came in as much as $5 million above the top end of our fourth quarter guidance at a record $96.3 million, representing 33% year-over-year growth. That is something we are really proud of, especially in light of the fact that we had already raised guidance after both Q2 and Q3, and in the face of ongoing macroeconomic challenges.
Similar to last quarter, the outperformance primarily came from the continued growth of users in western markets and the ongoing ramp in our audience extension business that simply scaled faster than we did anticipate.
Adjusted EBITDA was about $4 million above the top end of guidance coming in at $22.8 million or a 24% margin. Profitability benefited from our revenue overperformance, combined with continued cost discipline and opex coming in a bit below expectations. Cost of revenue scales with our audience extension-related advertising, but associated gross margins have been stable to even improving through 2022, resulting in material profitability contributions.
During the quarter, we repurchased 0.6 million ADSs for $3.2 million under our regular buyback program. That comes in addition to our separately announced major buyback of 23.4 million ADS equivalents from a pre-IPO shareholder at $5.50 per ADS or $4.70 per ADS if comparing to the current share price, which is net of our recent $0.80 dividend.
For 2022 as a whole, we executed a total return of capital of $146 million, taking 26.7 million ADS equivalents of the market and effectively increasing each remaining shares’ relative ownership of Opera by about 30%. We have been taking advantage of our strong balance sheet to elevate the ROI for our investors. As of today, we still have over $30 million remaining under our current buyback authorization.
In terms of cash generation, we had a straightforward quarter with working capital items netting out and operating cash flow coming in at $23.5 million, quite in line with adjusted EBITDA. Net of our stock repurchases in the quarter that amounted to $132 million, we ended the year with $118 million of cash and marketable securities. In addition, $13 million of other receivables were sales of marketable securities with settlement in the first days of the year, leading to an underlying cash balance of $131 million as we started 2023.
We were very pleased to issue a special $0.80 dividend earlier this year, which translates to a $71 million expense at the reduced share count and leaving us with a strong balance sheet of $60 million in cash before cash flows in 2023 as well as $59 million in remaining installments from the sale of Star X and finally, our stake in OPay as an asset held for sale which increased from 6.4% to 9.5% following the immediate settlement of our receivable from the sale of Nanobank as laid out in our press release.
Now turning to our guidance for the full-year 2023 and the first quarter. For the full year, we guide revenue to be between $370 million and $390 million, representing 15% year-over-year growth at the midpoint with adjusted EBITDA guided between $71 million and $81 million or 20% margin at the midpoint.
In terms of cost expectations, we model cost of revenue items just above 20% of revenue following the growth of our audience extension offering, and we maintain our previous expectation of around $30 million in average quarterly marketing costs. For both, we expect the trajectory to start below average in the beginning of the year and then move gradually higher.
Cash compensation cost is expected to drop slightly into Q1, but increase year-over-year, mainly from salary adjustments. And finally, all other opex items before adjusted EBITDA are expected to come in a bit over $30 million combined for the year.
For the first quarter, we guide revenue to be between $83 million and $85 million, 17% growth at the midpoint and reflecting the greater seasonality of our rapidly growing advertising business. We guide adjusted EBITDA to be between $17 million and $19 million, a 21% margin at the midpoint.
In summary, 2022 was a record year for Opera, and we are thrilled with the operating and financial results. The outperformance we experienced, coupled with our efforts to realize values and turn all focus to our core business, has set us up for continued success in 2023 and beyond, and has allowed us to conduct major repurchases as well as pay our first dividend.
With that, I would like to turn the call back over to the operator for your questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] We’ll take our first question from Lance Vitanza with Cowen. Please go ahead.
Jonnathan Navarrete — Cowen — Analyst
Hey, good morning. This is Jonnathan on for Lance. Congrats on the strong quarter. Very good. My first question comes — is, where did the user base growth, the 324 million, where did it come from in terms of region?
Frode Jacobsen — Chief Financial Officer
Hi, this is Frode here. I’ll chime in. The western market is the key growing area for us both in terms of users and in terms of revenue, but we did see growth across all regions revenue-wise from Q3 to Q4.
Jonnathan Navarrete — Cowen — Analyst
Okay. Got it. And can we expect sequential increases in user base growth throughout ’23 as well? Or can we expect like similar result as the year progresses?
Frode Jacobsen — Chief Financial Officer
We don’t guide user base. I think it was a milestone to where our strategy of focusing on high-value users led to also a growing total user base in the fourth quarter. 4Q is sort of a strong quarter in terms of engagement, time spent and so on. So I think I’d expect it to be quite stable, could be a bit down in Q1 from seasonality. But I think the underlying trend of having washed out less strategic users such that the strategic growth offset was sort of the main best theme we expect to continue broadly speaking.
Jonnathan Navarrete — Cowen — Analyst
Understood. And the last one for me. The GX browser, impressive growth there on an ARPU basis, right? And just wondering, at what margins do they come in? And what can we expect from the GX browser in ’23 that will continue to improve revenue growth?
Frode Jacobsen — Chief Financial Officer
In terms of cost of revenue, on the browser side, it is very low. So we consider more our marketing cost to almost be the cost of revenue, and we try to optimize that so that on the margin, we still have a comfortable return on our marketing spend. But each incremental user, strictly speaking, has very limited cost of revenue.
In terms of 2023 expectations, Song, I think he got kicked off or dropped off the call, but I don’t think we’ll guide specific numbers. But we are very excited about the products, about the next versions of it. And so we do expect the product to continue to grow, both user-wise and also revenue on a per-user basis.
Jonnathan Navarrete — Cowen — Analyst
Understood. Okay. Thank you. Congrats, again. Sorry…
Lin Song — Co-Chief Executive Officer
Yeah. Just a comment that — yeah, sorry, guys. This is Song Lin. I’m [Indecipherable] to go back to the call, so not a problem, but just to echo what Frode been saying, right? So I think in general, we have been seeing a rather strong user growth. More like — I think the new strategy that would really hold on more like the, let’s say, high ARPU users in terms of total user number. But that’s just been that we have actually indeed see quite a strong user growth, both for GX and also across the board. So we’re quite optimistic about that. But again, the focus will be on the high ARPU users. And in that regard, we also have high expectations for GX this year.
Jonnathan Navarrete — Cowen — Analyst
Great. Thank you.
Operator
And we’ll take our next question from Mark Argento with Lake Street. Please go ahead.
Mark Argento — Lake Street — Analyst
Good morning, guys. Incredible quarter. Nice work. I just wanted to drill down a little bit more on the AI opportunity in particular. What do you see ultimately is probably the most logical business model using that technology? Does it drive user growth of the browser? Is it a whole another stand-alone product you can potentially charge subscription to? Is that base model? Maybe you could at least give us some of your initial thoughts.
Lin Song — Co-Chief Executive Officer
Yeah. I think — this is Song Lin, maybe I’ll just comment a bit to start with and Frode can also chime in especially for revenue. So I think for now, to be honest, I think the most distinctive impact which we’re hoping is for user engagement, right? [Indecipherable] driving the user uptake. So I think a good example in that, of course, we actually do see, even if we just announced it and maybe it’s the early stage, we see that user interest on the browser has actually increased quite a bit because already people are just looking for regular system default browser, as always, our biggest challenge, right, that they just use it.
But [Technical Issues] technology, we actually see ultimately the same as the early state of mobile, right, as we quoted, that there’s a lot more interest for people to actually looking for good browser, which can deliver a very differentiated experience. And we think that is actually probably the biggest short-term potential. And we see that is definitely having an impact on the user base. I mean, that’s also why we see quite positive growth already. But then, of course, like — and then user growth will, of course, corresponds with more user engagement and hopefully more monetization potentials.
However, of course, going deeper, it will probably have even more profound impact on the whole ecosystem, and that is almost beyond Opera, right? But then for that, my guess would be that probably it will be perhaps nearly more towards may be like, again, higher paid model subscription or something along the lines for especially some of our partners, but then in line that we’ll be able to drill down into Opera. So I think we feel that there will going to be a lot of changes in the industry. And for a player like Opera, probably means more opportunity than anything else. So quite excited.
Mark Argento — Lake Street — Analyst
Great. And one for Frode. Obviously, free cash flow generation has been strong. You’ve been returning capital to shareholders. When you think about the guidance for 2023, the $71 million to $81 million in adjusted EBITDA, should we — is there still kind of almost 100% flow through to free cash flow? Or how should we think about free cash flow generation in 2023?
Frode Jacobsen — Chief Financial Officer
Well, for 2022, I guess we converted about 87%, I looked at it just now, of our adjusted EBITDA to operating cash flow. So the delta is taxes paid of about $3.1 million in the year and growth of working capital items about $6.6 million. I wouldn’t — I’m not guiding for 2023, but at least I can call out that the growth in working capital represented about 28% of the revenue growth we saw from Q4 ’21 to Q4 ’22. I think it’s a relatively fair indication. And in terms of taxes, our effective tax rate, if you take our P&L, take our operating profit and add back the equity compensation costs and look at taxes relative to that since the equity cost is not tax-deductible, then our effective tax rate is about 18%.
Mark Argento — Lake Street — Analyst
All right. That’s helpful. And then when — in terms of — did you say $30 million in opex or, excuse me, in capex for 2023?
Frode Jacobsen — Chief Financial Officer
No, in the other operating items, so from like hosting, legal, travel, office costs, etc. So the stuff that I commented on the cost of revenue items combined the marketing costs and the cash compensation costs. And then I just commented on the total for everything else prior to adjusted EBITDA in the P&L.
Mark Argento — Lake Street — Analyst
All right. That makes sense. And then in terms of the focus of incremental spend going forward, I’m assuming you’re going to continue to target western markets. It looks like where you’re getting a lot of growth and a lot of extension. Is that consistent in ’23?
Frode Jacobsen — Chief Financial Officer
I think dollar-wise, that — I mean, that strategy remains. It’s proven very successful for us, and we still see a lot of room to grow. As Song also talked about that there are definitely very attractive pockets and good growth to be had also in emerging markets. And so we have been — we are investing in that, too, but we have gotten better at focusing on monetizable users there. So that — they are, of course, massive markets, and we will focus globally.
Mark Argento — Lake Street — Analyst
Great. Thanks, guys. And congrats again.
Frode Jacobsen — Chief Financial Officer
Thank you.
Operator
[Operator Instructions] We will take our next question from Alicia Yap with Citigroup. Please go ahead.
Alicia Yap — Citigroup — Analyst
Hi and thank you. So, good morning, management. Thanks for taking my questions. Also, congrats on the strong results and the guidance. I have two questions. First is, wanted to follow up on the — your partnership with OpenAI on AIGC. I think you touched a little bit in the earlier question. I’m just wondering the benefit that you’re going to see, one part of it is the higher user time spend, right? And then what kind of content that you believe that would be improved on the targeting efforts that you can reach out to the user?
And so far — or has that is already launched? And then so far, is it more obvious that you see the improvement[Phonetic] in user engagement on the mobile version or on your PC browser? So that’s the first question.
Lin Song — Co-Chief Executive Officer
Yeah. Sure. This is Song Lin. So, I’ll try to answer it. So it has to be like this, right? So I think it’s — so first just to comment that, there’s, in general, two kinds of AI, right? So one is the discriminative AI, which is actually what Opera user has been using, and it’s also the one being used in user recommendation, content recommendation and autopilots for instance. And the other is the generative AI, which is what’s been popular now.
So I would say that we’re — moving forward, we probably see both becoming more and more relevant and we’ll see will have a little bit more focus, right? So the first one, discriminative AI will be able to give you the more relevant content. I think that we already — actually it’s always ongoing. People are just — perhaps didn’t notice it, but then it’s becoming much more visible, right? And then like, I think, the generative AI are more like in the ground where people will be able to counter with their own flavor, right? More like you one — you need a use case, for instance, to do that. If they have a particular flavor of ways how do you want to see the news articles, you can, of course, always ask AI to give you a summary based on your flavor, right?
So I think I would say that’s more like one algorithm is to be able to give you the relevant content, the other is turn the content into what you might like. So I think both are going to be very relevant. Like I said, it’s still very early stage, but that’s proven to be very clicking with also users’ mentality, right? So I think for now, we’re just going to explore all those kind of options. And I think we are just happy enough if there’s more users to actually use us because of differentiating features. That’s probably the biggest short-term gain, and also, for instance, longer time spent. So, I guess that’s a high-level capturing of what might come into view.
Alicia Yap — Citigroup — Analyst
So do you expect that we’ll be helping on increasing revenue opportunity within this year that you were already seeing it? Or we will have to wait a little bit longer?
Lin Song — Co-Chief Executive Officer
Yeah. So I think it’s a billion-dollar question, right, more like will[Phonetic] that impact on revenue. So I don’t know, it’s too early to tell. I think we — I don’t think we have actually budgeted it in our forecast or guidance, because we should be prudent. But as I said, if there’s more users using us, then, of course, more naturally, had that to drive to higher revenue. It’s just quite early. So we don’t want to maybe guess on that. But I think it’s a very interesting opportunity for us.
Alicia Yap — Citigroup — Analyst
I see. Okay, great. Thanks, Song. Second question, I think Company comment on the press release about the EU sanction package that happened in December ’22, so — which you budgeted a $10 million headwind, right? So without that, is that fair for us to assume the midpoint of your guidance would have been 18% this year instead of the 15%, right? And then also related to that is, can you remind us in 2022, how much exactly was the negative headwind that you experienced from Russia in total?
Because I remember back in the first quarter last year, which is around May, you mentioned that the Russia — I’m not sure if I remember correctly, it was potentially about 10%, but you only see about half of that impact will start, if memory sounds right. So then this whole impact, it is when you budget that in, if it means — would that mean potentially if it’s not as strong headwinds have been as they, then we could actually see some upside on the revenue?
Frode Jacobsen — Chief Financial Officer
Yeah, I can begin commenting on it. So you are correct that adding back the 10% that we deducted directly will put the midpoint at 18%. And then I think on top of that, the situation at large, of course, also leads us to sort of add more conservative — or cautious to the guidance that we put out there. So as I would say, directly correct, but also broadly speaking, the broader macro picture is also adding, I would say, incremental caution. But we haven’t put a number on it, but — as we come in connection with the guidance.
In terms of the Russia and Eastern Europe, I would say we did see, of course, the impact last year as well, but then currency rates also fluctuated quite a bit. So broadly speaking, we ended the year with a relatively similar footprint in Eastern Europe as we had it at the beginning of the year.
Alicia Yap — Citigroup — Analyst
I see. Okay. All right. Well, thank you so much. Thank you.
Frode Jacobsen — Chief Financial Officer
Sure.
Operator
And there appears to be no further questions at this time. I will turn the call back over to Song Lin for any closing or additional remarks.
Lin Song — Co-Chief Executive Officer
Sure. So again, I thank — thanks everyone for joining our conference call. In year 2022, we have been able to do with good results. We are very, very excited about it. We think that 2023 is also going to be very, very interesting. Both the outperformance we already experienced and coupled with our efforts to realize more values and all focus into our core business has been able to put up in a good position for succeeding in the 2023.
So yeah, we are very thrilled about it. And I would also like to put many thanks all the — both Opera employees and also our investors the support that has been given to us in the past year, and let’s have a great excitement of year 2023 and looking forward to share more of our success with you in the coming quarters. I appreciate your time, and look forward to speaking again in the future.
Operator
[Operator Closing Remarks]