Welcome to the Opera Limited Second Quarter 2021 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the call over to your speaker today, Matt Wilson, Head of Investor Relations. Please begin.

Matthew Wilson - Head of Investor Relations

Thank you for joining us today. With me today, I have our co-CEO, Song Lin; and our CFO, Frode Jacobsen. Before I hand the call over 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 provide an additional tool for investors to use in evaluating ongoing operating trends and results. 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 supplemental information on our Investor Relations website that includes historical results of Opera and our Investee Nanobank.

On a personal note, this is my first earnings call since I joined Opera. I just want to say how excited I am to arrive in a thriving environment with the team I've already gotten to know well and they're shooting for value creation opportunities in several key areas. I'll do my best to keep everyone updated on where we are in the future direction of Opera.

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 will finish up with financials and our expectations going forward. Song?

Lin Song - Co-Chief Executive Officer

Sure. Thanks, Matt, and great to have you onboard. And then thanks, everyone, for joining us. I will say that Matt has picked up a good quarter and a very exciting time to host his first Opera investor call. We have delivered strong results for the quarter, exceeding the high end of our revenue guidance, with revenue up 87% year-over-year and up 17%. This is the already record high first quarter. So further, we'll of course talk in detail about our numbers. But in general, Opera's revenue is nicely balanced between search and advertising, both of which continue to show strong growth.

Further, not only is our core browsing business performing better than expected, but each of the multiple initiatives we're being backed on is taking root and showing great promise, whether that's expanding our reach in mobile and computers or into entirely new categories like gaming. And what's really satisfying is to see the success we are having as we introduce and scale products and services into new markets.

On the mobile side, for example, we have Opera News, which continues to show great traction. As you know, we have launched the product in African markets. And this year, we started to scale it in U.S. and several European countries. In the United States, for instance, Opera News is constantly in the top-10 most downloaded news app on both Google Play and also the iOS app store ahead of many household legacy media names such as CNN and The New York Times.

Another good example is Opera Football or Soccer for those in America. It's a new content portal we just launched in June, powered by the same AI as our news product. Even though it's a very short time frame, it has already grown its audience to over 10 million people. So we expect even more growth with the start of the Premier League later this month.

And Hype, we talked about it briefly last quarter, it's our dedicated chat service built into the Opera Mini mobile web browser. We first launched it in Kenya earlier this year before expanding this to the rest of the continent and the end of the quarter. Up until now, we have had more than 1 million signing ups already in this short period of time.

For PCs, which we are always proud, we continue to invest in innovative new features that makes the Opera browser even better through improved performance, control and privacy by incorporating popular features such pinboard support, which is a nice feature we just released and also other smart things such as the recent new solution we've added for better managing browser-based video conferences which becoming very handy when using say Google Conference for instance.

Further on, Opera users has spent billions of dollars each year via e-commerce, and we are developing products that will provide value to our shoppers and incremental GMV for our partners. Our in-browser shopping and financial functionality continues to expand in select markets as we work with regulators and partners to ensure compliance and also provide users with a excellent experience. For instance, through our Dify products, we are providing our Spanish users with the highest and the fastest cashback on their online shopping, and we've already saw an approximately 4 times increase in facilitated e-commerce transactions in Spain from April to June. We will expand both our product offerings and markets served in this space in the second half of the year.

Another recent highlight which I would like to talk about is that not only we're providing very interesting functionality, but we have also won three Red Dot Design Awards for design quality and creative performance. Good product design is, of course, an important ingredient in creating a good user experience, and we really appreciated that recognition.

We are also expanding our footprint in geographies such as Europe and the U.S. In turn we are seeing user growth in those markets, which translates into generally significantly higher ARPU opportunities for us. And this is also why our revenue are growing so fast in the quarter. In fact, sorted material markets monetize end rates 10 times greater than some emerging markets. We think this trend will continue, creating another tailwind for Opera as we benefit from the mix shift in our user base, not only to emerging market, but also a lot more now towards higher ARPU consumers.

Finally, in gaming, while we are expanding in both mobile and for computers, we could not be more pleased at the rollout of several key initiatives. Our gaming-specific browser Opera GX has now over 10 million active users since it was formally launched in June 2019. Even more interesting, Opera GX Mobile, which we just launched eight weeks ago already has well over 1 million users.

I should also say that we are seeing the data digital growth in Europe and the U.S., which is, again, exciting for us just because users in those markets tend to generate significantly higher ARPU. So to be driving user growth in the millions, well, we believe have a very positive impact on monetization and profit-generating going forward.

And plus, we continue to have big ambitions when it comes to our GameMaker Studio gaming platform. I've talked about it, not just the size of the gaming market, but also the direction we think it is evolving. Think about it that if billion consumers make and share TV shows, movies and music every day, on downloadable platforms, there is no reason that online gaming with almost as many players and gaming role as a medium of connection, community and entertainment will not also be adopted as a medium of expression and sharing.

GameMaker Studio has already been downloaded millions of times, and we believe the potential combination of the GX user base together with the GameMaker Studio gaming engine will build upon each other to provide a really strong, interesting gaming platform. I look forward to talk more about this as we continue to build on this portfolio in the second half of the year. So our core business is strong and growing, and each of our key initiatives is showing great traction and we believe huge potential.

Now just stepping back, we are seeing people continue to shift more and more of their lives online, to shop, to work, to connect and communicate and especially to play. So being able to choose a browser that can be personalized to the way people meet their digital lives is an ever strengthened value proposition in this context. So at Opera, we believe this is a long-term durable trend, one that was accelerated by the pandemic. And while we benefit from as the consumers want to be able to choose their browser, but also seeking functionality, privacy, content services and also the ability to customize their online experiences.

So taken together, we believe there is a lot to be excited about at Opera, and we believe we can continue to expect sustained long-term growth.

So with this, I would like to turn to Frode, so that he can provide a more detailed discussion of both our performance during the quarter and also our outlook. So over to you, Frode.

Frode Jacobsen - Chief Financial Officer

Thanks, Song Lin. Our browser-plus strategy keeps delivering and our financials follow. By offering products that resonates with users who want a more personalized browser experience, paired with content and gaming initiatives, we continue to achieve strong results, as evidenced by revenue, yet again, exceeding the high end of our prior expectations and guidance. I'll recap the highlights and then provide our updated thoughts on guidance for the back half of the year.

Revenue for the second quarter was $60.2 million and represents a new all-time high by a good margin. Our year-over-year growth rate was 87% and the sequential growth versus the prior quarter was 17%. We expect to continue to see sequential growth for the remainder of the year, which results in record revenue in each subsequent period.

Our current revenue mix is split almost evenly between search and advertising. Specifically in the quarter, search was $29.8 million, accelerating to 69% year-over-year growth. This was driven by monetization gains for both PC and mobile browsers as well as favorable comps due to COVID.

Advertising was $28.9 million, accelerating to 128% year-over-year. This was driven by strong monetization from Opera News and our mobile browsers. Keep in mind that COVID impacted advertising revenue in Q2 last year more than any other quarter. So while we naturally do not expect to continue at such annual growth rates, we do believe we have created a strong foundation for continued healthy growth for the remainder of this year and beyond.

Finally, tech and other revenue was $1.5 million. Year-over-year, this revenue category has been reduced by $0.5 million although with almost no impact to profits as the decline relates primarily to low-margin professional services to OPay.

As Song Lin mentioned earlier, user growth was particularly strong in North America and Western Europe, where users monetize at a much higher rate than other regions. We have been investing into this trend and believe it will serve as an additional tailwind to future growth as well. As we execute on our growth ambitions, we took marketing and distribution spend to a new high this quarter, $35.3 million. This is about $20 million higher than the average spend over the previous 8 quarters. The increased marketing spend is primarily focused on growing news in western markets, which have higher user acquisition costs and corresponding strong revenue potential. The investment is tracking well with positive ROI, and we continue to believe that this is money well spent. Our adjusted EBITDA came in at more or less breakeven as expected at negative $1 million.

Our net income for the quarter was $44.3 million, with profits this quarter predominantly driven by the partial realization of our investment in OPay as well as the step-up in valuation for the OPay preference shares we retained. Our operating cash flow was positive at $6.3 million for the quarter. Combined with the partial monetization of our OPay investment, this increased our total cash and marketable securities by $58 million versus the prior quarter to a total of $201.3 million.

Now moving to our forward-looking commentary. As our core business continues to perform and grow ahead of expectations, our confidence in our outlook for the rest of the year increases. Further, we continue to believe that taking most of our underlying adjusted EBITDA growth and reinvesting it into our new initiatives is the right thing to do. When we initially set up guidance for the year, we commented that the more successful our growth initiatives, the more confident we would be in allowing our EBITDA to fall towards the lower end of our guidance.

We are now raising both the lower and upper end of our 2021 revenue guidance for the second time and expect 2021 revenue of $242 million to $247 million, or 48% year-over-year growth at the midpoint. This represents record revenue for the second half of the year and the highest year-over-year growth for this period since going public. Correspondingly, for the full year, we narrow our adjusted EBITDA range to become $10 million to $20 million, incorporating an increase of about $12 million to our expected marketing spend for the year. Such spend is success-based, and the positive results we see gives us confidence to lean further into it.

In Q3, we expect revenue of $63 million to $65 million, representing 51% year-over-year growth at the midpoint. The third quarter revenue growth is fueled by continued strong results from revenue streams. Adjusted EBITDA is expected to be around breakeven in the third quarter as we continue to invest aggressively in our new initiatives.

Overall, Q2 was another strong quarter, and we are very pleased with the first half of 2021. [Technical Issues] It's great to see the momentum across our businesses, investments and an even stronger growth trajectory. We are also pleased with our first realization of gains from our investments in adjacent companies and believe it also highlights the unrealized value of these holdings. We look forward to keeping you posted.

So with that, we can now turn it over to the operator for questions.

Question & Answers

Operator

Thank you. [Operator Instructions] We'll take our first question from Lance Vitanza with Cowen. Please go ahead.

Lance Vitanza - Cowen - Analyst

Thank you. Thanks, operator. Thanks, everyone. Guys, congratulations on an excellent quarter. We were in the midst of the pandemic, we saw this explosion in engagement. But unfortunately, the advertisers had left the marketplace. So I think there was some concern, and I'll just speak for myself, that as we exited the pandemic advertisers would return, but that engagement would also go back to its old levels and that Opera would ultimately be no better off. The performance in the second quarter would seem to argue against that. I mean, advertisers are back in a big way, Opera has hung on to its increased user base. So is that a fair characterization? What is your outlook over the back half for MAUs and engagement levels? And do you think they will hold into 2022?

Frode Jacobsen - Chief Financial Officer

Hey Lance, this is Frode here. Thanks for the question. I'll let Song comment, of course, on sort of the products and the trajectory that we are on. I will say, as you pointed out, when the pandemic hit, we were, of course, affected in the near term, but we have been talking about sort of this shift from offline to online and how that benefits a company like Opera and our - with our ability to drive traffic. And it's very pleasing to sort of see the provision of sort of advertising returning at least more towards normal, paired with the strengthened user base. And from a financial point of view, the geographic - the impact of our good trajectory in both North America and Western Europe has obviously benefited us in terms of revenue growth.

So we are now well beyond the levels that we were at prior to COVID. I looked at the average search and advertising revenue in the three quarters immediately prior to COVID as a relatively representative baseline. And our revenues in search and advertising are now 48% higher than that level.

Lance Vitanza - Cowen - Analyst

Thank you. And so let me go on to the EBITDA side first half. So lower than we had modeled, but as you pointed out earlier, in line with guidance, you tightened the range for the full year, which I think you have said in the past would be something you would do if the marketplace opportunity was there. So - and I know you talked about the increase in the marketing spend and how you expect a positive ROI there. But I'm also just wondering, are you seeing perhaps some of the EBITDA move? Is some of that reflecting inflationary cost pressures? Is there any sort of - are you seeing higher unit costs? Or is it really just no? This is really your decision to plow revenues back into the business to further build the revenue base? And then I guess just related to this, I might as well get this in there now too. In the past, you've discussed the sort of after the hyper growth phase and that you sort of - you expect margins could be back in the 30% area, EBITDA margins as the business matures. And I'm just wondering if there's been any change to that sort of longer-term thinking? Thanks.

Frode Jacobsen - Chief Financial Officer

Sure. So putting marketing and distribution aside as a discretionary spend and something that we tweak and fine-tune on a weekly basis, the remainder of opex is very much in line with the expectations from the beginning of the year. And as you can see is relatively stable in the overall. So if that answers the question.

So this is - to us, this has been about we had at the beginning of the year. And after the first quarter, a pretty good idea about the number of people we would need sort of the - and sort of the operating costs in terms of salary, hosting and other parts of our business. And the underlying sort of product development and development in the new services that we are developing, that is moving ahead as planned. And then it's the more tactical nature of when and how to drive awareness, marketing and downloads that are affecting the opex base and how we ultimately view the EBITDA for the year.

Lance Vitanza - Cowen - Analyst

Great. And then if I could just squeeze in one last question on the cash flow statement. It looks like cash flow from operations was actually positive $6 million despite the small - despite breakeven EBITDA. So I'm just wondering if there were some sort of working capital stuff in there that we should expect to reverse in the back half of the year, should we be modeling a more neutral or even perhaps a negative CFFO in the back half of the year?

Frode Jacobsen - Chief Financial Officer

So at the starting point, I would say I tend to expect operating cash flow to be relatively similar to adjusted EBITDA. I think the positive cash flow we see is more a reflection of good collections that we had and a bit more of a catch-up more than its being to forward leaning. Having said that, of course, when we scale up our marketing and distribution spend, we do carry some payables into the next quarter.

Lance Vitanza - Cowen - Analyst

Thanks, guys. That's really helpful. I appreciate it.

Operator

[Operator Instructions] And we'll take our next question from Mark Argento with Lake Street. Please go ahead.

Mark Argento - Lake Street - Analyst

Good morning, guys, and a nice quarter as well. Just a couple of quick follow-ups on the kind of - you're thinking about ROI and the incremental spend, what kind of payback period you guys typically calculate? Or how do you calculate kind of that return on elevated marketing spend?

Frode Jacobsen - Chief Financial Officer

Hi, Frode here again. So for each campaign, we run those by product, geography and the type of campaign. We're always looking at the ROI of the campaign. We are seeing an overall positive ROI on the initiatives that we are driving. There are, of course, product variances, and there are also geographic variances, and there are maturity variances in terms of learning as we go. But when we look at the big spend drivers in marketing, the biggest increase both relative to last year and relative to the last quarter, was up for News, followed by the browser side of course.

We are seeing positive ROIs in all the key markets where all the bulk of the spend is happening. We're seeing - in terms of Opera News, the payback time of within four quarters now in western markets. And for the browser side, it's less than that. The difference is, of course, that on the browser side, we are growing from sort of more established product and more established user base, whereas on the News side in western markets, we are essentially establishing a new foothold. And it does require investment to sort of get that flywheel off the ground. So we're actually very pleased with the returns that we have seen, even in that quite early stage of launching those products.

Mark Argento - Lake Street - Analyst

Great. That's helpful additional color. And Song Lin, you had mentioned in your prepared remarks I believe that you guys launched Opera Football app. It sounds like you already have 10-plus million users on that, which is pretty impressive. Do you anticipate more of these kind of thematic kind of products that leverage the core AI, the news app? Are you going to do more of those? And how easy is that to monetize and sell that ad inventory?

Lin Song - Co-Chief Executive Officer

Yes. So that's a very good question. So I would say it's the same experience that we have also seen in the browser, right, for instance, we have a generic browser, and then we launched the GX for gaming, which is fantastic. I think it's more, I would say, reflecting the trends that we see that people like the - people are becoming more segmented, that they would actually - instead of appreciating a generic product, which is fine, that we actually see a great opportunity in those different segments, right? So we apply that in browser to great success. And the same is what we applied for News, right? Like Opera Football is essentially a news service, right? It is one category of news. So we find out that if we be more targeting if a segment is out to dedicated content, score and audiences is actually performing really well. So yes, so high level, I would say, I think you are right that - we think it's a great trend that the world is moving to more segmented, more targeted, more personalized products and Opera Football is definitely one of them. I mean we have big confidence on that. It's a big, sustained development, very short time frame. And I think, yes, I think moving forward, since we have that great base technology that is powered by News, I think we should be able to also provide even more segmented content coming forward.

Mark Argento - Lake Street - Analyst

Thanks, Song. And then just one last one. You guys got over $200 million I think worth of cash now and it doesn't seem like you're going to be burning any cash over the near term. Any incremental thoughts on uses for that amount of cash?

Frode Jacobsen - Chief Financial Officer

Yes. We do have a very strong cash position with, as you said, over $200 million in cash and marketable securities. And as we have demonstrated so far, we have been funding our growth initiatives by the underlying cash generation of a very profitable core business. So when we think about our priorities for cash, of course they include the flexibility to seize growth opportunities in line with our strategy and the strengths that we have that we want to build on, both in terms of organic opportunities, but also to be in a good position to make select acquisitions such as YoYo Games, one that we did at the beginning of this year. And then in addition to that, as we've shown in the past, we have been happy to buy back our own stock, and there's always a trade-off there, obviously, in terms of preserving liquidity, but those are the two priorities.

Mark Argento - Lake Street - Analyst

Great. Thanks, guys. Appreciate it.

Operator

And we'll take our next question from Alicia Yap with Citi. Please go ahead.

Vicky Wei - Citi - Analyst

Good morning, management. Thanks for taking my questions. This is Vicky Wei on behalf of Alicia Yap. So I have just one small follow-up question. So we see the top line revenue guidance and management also comment about, let's say, the user be heavy shifting. But we wonder how is the Delta variant cases impact the business recovery momentum by region? Because as we see from the third quarter revenue, it does not seem there is any impact on app revenue spend by your advertisers. And would you please provide more color let's say by region? Thank you.

Frode Jacobsen - Chief Financial Officer

I would say overall, when COVID hit and as the recovery began, it affected emerging markets more than it did western markets. The recovery was also faster in Europe, North America, for example, than in Africa. By now, Africa as the key emerging market strategic region for us represents about the same share of total revenue as it did prior to the pandemic. So we have moved into a more normal state again with - in terms of that. And the rest of the mix is, as we have discussed, more driven by Western Europe and North America growing the user base there at very attractive monetization levels.

Vicky Wei - Citi - Analyst

Thank you.

Operator

[Operator Instructions] And there appear to be no further questions at this time. I will turn the call back over to Lin Song for any closing remarks.

Lin Song - Co-Chief Executive Officer

Sure. So yes, I guess, thank you guys again for joining us today. We think it's a great quarter that we are able to deliver. And - but I think even bigger potential waiting for us. So appreciate your time, and looking forward to speaking with you again.

Operator

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