Welcome to the Opera Limited First Quarter 2022 Earnings Call. [Operator Instructions] Please be advised that the 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 go ahead.

Matthew Wolfson - Head of Investor Relations

Thank you for joining us. With me today, I have our Co-CEO, Song Lin; and our CFO, Frode Jacobsen. Before I hand the - 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 safe harbor statement in the company's earnings results 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 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 historical financial results of Opera on our Investor Relations website.

We'll be live tweeting highlights from the call at InvestorOpera. So please follow along there during the call and in the future. With that, let me turn the call - turn the conference call over to Co-CEO Song Lin, who will cover our operational highlights and strategy, and then Frode, who will discuss our financials and expectations going forward.

Lin Song - Co-CEO

Sure. Thanks Matt. So thank you everyone for joining us today. We're excited to report another strong quarter that come in above our expectations, both in terms of revenue and adjusted EBITDA with new momentum and scale we have achieved during 2021, continuing to payoff. Our revenue has growth of 39% was supported by a 20% growth in search revenue, largely filled by strengths in western markets and the acceleration of advertising revenue grows to 64% year-over-year, now representing 54% of total revenue.

Our advertising revenue benefits from the same underline trends and search, though it is magnified as [indecipherable] monetize only through advertising and additionally, we can leverage third-party inventory, as we serve our advertisers through the Opera Ads as tech platforms. We continue our strategy all focusing on users in high ARPU markets and those users, which we believe are mostly engaged providing us with ample monetization opportunities. As a result of the strategy, ARPU grow 54% year-over-year on an annualized basis, which greatly offset the 9% reduction in our overall user base, as we selectively run our marketing initiatives.

Our user base in the U.S., the rest of the Americas, and in Europe continued the growth trajectory from 2021 while key products like GX and Opera News have been very successful. And we saw revenue growth across every region, except for more impacted Eastern Europe. We see our strong results as a clear validation of our focus on developing and delivering differentiated products that appeal to valuable users in every geographies. The combination of both a western and then emerging market user base represents a pretty compelling mix. We are able to generate immediate and meaningful incremental revenue on newer products while benefiting from the underlying growth of online services in emerging markets.

So in this context, I'm confident that Opera's core product offering will have increasing strategic value while we can't see the future, one thing we are certain of is that our digital future will be defined by increasing user personalization. Opera's DNA as an independent browsing company has always been in differentiating ourselves through technology innovation. We have zero lead [Phonetic] developed and launched products and services that meets the needs of specific use cases and specific user segments, whether that's integrated communications, commerce, gaming, news or privacy and security, Opera has a history of objective success in building the browsers of choice for people who actively chose their browsers.

The trend is stronger and more clear than ever. One example is gaming. Not long ago, we launched our GX browser, specifically designed for gamers. As of this caller, we have over 2 million mobile and 14 million PC users, a sequential increase of roughly 15% and almost doubled from a year ago. The Opera project is higher than for any other product and $2.70 on annualized basis, and beyond with GX browser, our game maker studio now has over 500,000 developers and GX games has over 1 million monthly active users. And while Opera for GX is more than three times than the Opera as a whole its revenue mix contains only a fraction of advertising relative to search, when compelled to our other process.

Later this year, we will begin to introduce tailored advertising in GX, as well as other economic models to empower both game developers and game [indecipherable] while we are cautious on the near term financial impact, we're expected to ramp over the course of the year. This is a common thread amongst all our products. We identify a use case with clear value, we launch and scale it, and then we tap into both existing and new monetization structures. As we look ahead, there are clear applications for our model also as it is relates to multiple aspects of Web3 trends.

Opera News continues to grow in higher monetization regions and we're particularly pleased with how the product is now also taking a meaningful foot holder in Brazil. In terms of vertical focus to domains, based on the same core technology football remains the most popular, but over the past 12 months, we have also introduced other verticals such as cricket and basketball, as well as generic news and sports sites. So in total, these services have more than 10 million users.

We are using that same AI driven news engine to begin aggregating related, related to gaming in our GX browser, as well as our plans to introduce a section for relevant content in Web3 browser, as the one-stop-shop for news, market data and trend analysis. These are examples of the constant improvements we introduce to ensure that our users have the best disruptions in addition to enhanced search features, integrated personalized Speed Dials and our new VPN Pro feature as security and privacy are becoming crucial concerns in online interactions. And while our Web3 browser is being rolled out in developer version, we are starting to bring Web3 into all of our products, starting with market share wallet, tech stack across both mobile and desktop browsers. Please stay tuned for updates here.

We are also ensuring that we have the right tools to maximize our ability to monetize our audiences and in particular, continue to improve our advertising tech stack. Earlier, I noted that our advertising revenues continue to grow as a percent of overall revenue and raise the improvements, where continue to make in our advertiser business to leverage our advertiser demands and non-native inventory, combined with the increasing audiences we are building in higher value markets. That's a trend we expect to continue.

So all in all, we are internally focused on our core businesses, given the opportunities we see ahead. Since we lastly spoke during our fourth call results, we have also sold our equity stakes in both Nanobank and StarMaker. The decision to monetize those financial investments was a desire to remain laser focused on our core business and the opportunities we are seeing in front of us. Recently, we were presented with opportunities to take sales and locking gains for shareholders liquid assets in a volatile market and so we chose to act.

Our CFO Frode will detail the results, but the resulting cash payments to Opera over the next years will offer us significant operational flexibility. So again, our products and initiatives continue to show great momentum and waiting Web3 browser has never been more relevant than it is today. We have a very exciting time ahead of us in Opera.

And with that, let me turn to Frode.

Frode Jacobsen - Chief Financial Officer

Thanks, Song Lin. Starting with revenue, which came in at $71.6 million for the quarter. This was ahead of our expectations and the previously issued $67 million to $70 million guidance. And of course, it was particularly strong in light of the headwinds associated with the war in Ukraine and how that in turn affects regional monetization and has strengthened the U.S. dollar relative to other currencies in which we ultimately generate most of our revenue.

We estimate that the war were resulted in a $2 million revenue headwind in the first quarter, predominantly due to changes in exchange rates as the underlying impact had less time to materialize and only affected the later parts of the quarter. The reason we still exceeded guidance in Q1 and are able to maintain our pre-war guidance for the year as a whole is the core machinery of Opera's business performing ahead of expectations.

Operational expenses came in largely according to expectations resulting in adjusted EBITDA of $7.3 million, also exceeding the top of our guidance range. Recently, you have seen us divest our former ownership stakes in both Nanobank and StarMaker, allowing us to realize about $70 million of value creation or over a $110 million in the aggregate loan including our partial sale in opening last year.

A common question I receive is, what we intend to do with the cash, ahead of collecting any proceeds from the sales of Nanobank and StarMaker, our cash and marketable securities already stands at $182 million, taking together with the $215 million, we will collect them the sales. This adds up to nearly $400 million, which has indeed a significant amount relative to our current market cap. In addition, we still hold a 6.34% [Phonetic] ownership stake in OPay, but in line with our decision to focus our attention on our core business these shares are also classified as held for sale.

All in all, this makes for some interesting calculations of our implied enterprise value and trading multiples. For now, we have a $50 million buyback program in place of which we've utilized $3 million by repurchasing 569,000 shares in Q1. We consider our buybacks to be an excellent contributor to ROI for our shareholders. In terms of the broader perspective, we have chosen to prioritize our efforts on the realization of our investment gain with less sense of urgency in terms of committing the resulting proceeds.

The dominating value-creation potential of Opera is in our core business, and the opportunities we can see from our very strategic position. And having a strong balance sheet in this context only adds to our flexibility to drive investor returns. In terms of quarterly operating cash flow, we generated $13.5 million, which essentially represented our adjusted EBITDA combined with a slight reduction in our working capital.

Now moving to our guidance, we are maintaining our full-year revenue guidance of $300 million to $310 million, a 22% increase at the midpoint. We continue to expect adjusted EBITDA to be between $50 million to $60 million, representing an 18% margin at the midpoint, and an increase of 90% compared to 2021.

We expect the quarterly headwinds from Russia's invasion of Ukraine to approximately double from the $2 million in the first quarter, and represents around $12 million in headwind for the remainder of the year, bringing the total impact to about $14 million or just below 5% of the midpoint of our guidance. However, the strong underlying performance in our core business is expected to offset those effects, and we consider this a very healthy indication also when looking beyond the current year.

For the second quarter, we expect revenue of $71 million to $74 million, representing 21% year-over-year growth at the midpoint. Relative to Q1, we assumed a stable to declining cost base overall. Cash compensation is expected to increase about 15%, following team growth and salary adjustments, and cost of revenue items combined are expected to increase to represent approximately 15% of total revenue. This is expected to be offset by reduced marketing spend and a slight net reduction within the other cost items. As a result, we expect $8 million to $12 million of adjusted EBITDA in Q2.

Overall and in sum, we are very pleased with these results and our strategic direction. There was a lot to cover today, but I hope you found this call to be useful in conjunction with our release, and we're now happy to move to questions.

Question & Answers

Operator

[Operator Instructions] We'll take our first question from Lance Vitanza with Cowen.

Lance Vitanza - Analyst - Analyst

Hi, guys. Thanks and congratulations on a strong quarter. I guess I have two basic questions for you. The first is on the Russia-Ukraine situation in beyond the human tragedy. I'm just wondering if you could help us think through the revenue implications in a little bit more granularity and I appreciate the guidance that you gave for sort of the total impact. But on the one hand, I just want to try to understand how this is playing out on the one hand, we have presumably displaced Ukrainians on the other hand, we have Russian population that is presumably economically bankrupt due to global sanctions. And then there is the currency or exchange rate impact. I suppose it's the latter two problems that are more relevant from the standpoint of Opera's business, is that right? And could you quantify or maybe just talk in percentage terms how each of these specific issues kind of add up to the revenue drag numbers that you talked about during your prepared remarks.

Frode Jacobsen - Chief Financial Officer

Hey, Lance, Frode here. So you are right. In the first quarter, as I mentioned, that was essentially a foreign currency translation just from the strengthening of the U.S. dollar. And as best as we can estimate, looking at the remainder of the year, the FX impact and let's say the underlying business impact, it will be about the same size. So I mentioned about $12 million for the remainder of the year, about half and half FX versus business impact.

Lance Vitanza - Analyst - Analyst

Okay. So are you still doing business in Russia and are there any thoughts of suspending operations there until the conflict is resolved? In other words, until Russia rejoins the global community?

Frode Jacobsen - Chief Financial Officer

Song can probably also chime in here. We do continue to offer our products in Russia. We've spent a lot of time thinking about it, obviously, it's very close to our home in terms of being in the region Polish, Swedish, European footprint but - so it became what's the right thing to do kind of position and limiting information both availability seems like the wrong step to take. So that's how we thought about it.

Lance Vitanza - Analyst - Analyst

And then that - you've given us a base case in your outlook for Q2 and for the full year, how should we think about a realistic down case? Is the stress test to simply take the 10% of the revenues that you've said come from the region, is the stress test to simply take that revenue out of the equation full stop? Or if we were to that would there be any cost removal that would go away or is that too conservative way to look at? And again, I'm trying to get to something that if things get worse, as opposed to meet your forecast.

Frode Jacobsen - Chief Financial Officer

I mean, we do build into our forecast that things will get worse, right? So correct as you say, there was an opening expectation of representing around 10% of our revenue this year. Probably with a 25% to 30% margin on that, because we do, of course also invest in our user base across both European and Eastern European markets. So, there's costs associated with the two but as of now, we don't see the scenario going to zero unfold. So we consider what we presented today as the most realistic expectation.

Lance Vitanza - Analyst - Analyst

Okay, thanks. Let me turn to something a little bit more hopeful. The divestitures of Nanobank and StarMaker and the partial monetization of OPay, you've obviously gone a long way towards streamlining the business, streamlining the story and obviously you talked about how you're classifying the remaining OPay stake, it's held for sale. Could you discuss maybe the timeline for potential monetization of that, the remaining stake and remind us what's the book value of that stake? I think you might have called it out in your prepared remarks but I missed it.

Frode Jacobsen - Chief Financial Officer

To begin with the latter, I think it's about $84 million, $85 million that we have on our books from OPay. We can double check later. In terms of timeline when we classify something as held for sale, the implicit expectation is within 12 months. So within 2022 is the implicit expectation.

Lance Vitanza - Analyst - Analyst

And then just lastly, for me, then you started to sort of walk through the math on the call. I was actually going to be my question, but if I start with a $600 million market cap. Is there a $150 million ADSs at about $520 million share, I get to a 600 million at each market cap. I back out the cash, I back out the PV. If I even just if I use the PV of the stake, right, as opposed to the sales rather that you saw. And then I take out the book value, right, of the OPay stake. I'm getting to like about $150 million implied for valuation for the browser business. And I'm just - am I doing that correctly? I mean, that just seems too low or wondering if you have any comments.

Frode Jacobsen - Chief Financial Officer

As far we're trading at like 0.34 - 6.34% revenue and we are like 1.5 times adjusted EBITDA of 2022, something like that, 1.6 or 1.7 maybe.

Lance Vitanza - Analyst - Analyst

I mean, at the rate you're going, your EBITDA margin is going to be higher than your revenue multiple.

Frode Jacobsen - Chief Financial Officer

Yeah.

Lance Vitanza - Analyst - Analyst

Yeah, thanks guys for taking the questions. I'll get back in queue.

Frode Jacobsen - Chief Financial Officer

Sure. Thanks, Lance.

Operator

Thank you. Our next question will come from Mark Argento with Lake Street.

Mark Argento - Lake Street - Analyst

Hey, good morning, guys. Just a quick question on, you can dovetail on a little bit with the capitalization and the strategy going forward. So you have the model, and then you have the core browser business, and then you'd leverage that in other technology areas. Just going forward, how do you think about deploying capital and the strategy? You anticipated a similar type of strategy. It could be investing to base are best or maybe doing something more substantial and buying larger, more established businesses.

Frode Jacobsen - Chief Financial Officer

Hey, Mark. It is a broad question to comment on it. I think the investments that we had that we [indecipherable] Opera we have left, we are proud of them because like you mentioned, to a great deal, we were able to create that value for Opera by participating in these companies, co-founding, etc. And so it is a good example of how the browser business that we have is a strategic asset that we can launch products and services from. Of course, we focus mostly on what we do internally with Opera News and our gaming initiatives but these were some specific opportunities we had in earlier years that have done well for us. I think when we look ahead, we are definitely more focused on what we can create internally and as part of Opera and I don't see the same situations of participating in the launch of separate companies. I don't have an indication that there are opportunities in that space right now so it's more of an internal focus.

Mark Argento - Lake Street - Analyst

Great. And just one follow-up in terms of as we monetizing stakes, and so that incremental of $211 million and so, do you need a tax effect that at all? Or is that actual that net cash you guys should receive after you collect all the proceeds?

Frode Jacobsen - Chief Financial Officer

There's no tax on that. So these are entities, essentially shares that we sold, which is not a taxable gain.

Mark Argento - Lake Street - Analyst

Great. I appreciate it. We've been locked, and I know it's been a difficult environment for you guys, just given your exposure to Russia, so best of luck actually going forward.

Frode Jacobsen - Chief Financial Officer

Thank you.

Operator

[Operator Instructions] Our next question will come from Alicia Yap with Citibank.

Alicia Yap - Citibank - Analyst

Hi. Thank you. Good evening or good morning management. Thanks for taking my question and also congrats on the solid results despite having some headwinds in Europe. I have a couple of questions. First of all, I think you mentioned about impact from Russia came in, also we reiterate the guidance and all that. But I'm just wondering, has there been any impact on other advertisers [indecipherable] especially the advertisers that are based in Europe soon, like in the region. And will they be actually become more cautious on spending their dollars? So that's the first question.

And then second question I also wanted to follow-up on the use of the cash, with the incoming cash that you have received or will receive. How should we think about any future plans on the cash use? Would there be any special cash dividend or would you plan on some acquisition targets that fit into your search and advertising business? And then maybe as you expand into the GX browser which you're doing very well, will you also be interested in acquiring some game studio, for example? Thank you.

Lin Song - Co-CEO

Yeah. Sure. So it's Song Lin and I'll also try to answer a bit, so I guess for your first question all advertiser sentiments, I guess is what we see is that - I think in general we feel the advertisers in Europe are still quite strong the way we see it. The only impact is more towards maybe the exchange rates that of course, with the Europe actually being a bit weaker compared with U.S. And then if you mail that U.S. of course, that's more the impact which we are talking about. But yes, high level, we feel that do what we can see, it's still going strong and that's what indication of why we have keeps to go, the strong and exceeding guidance. And we also keeps all for your guidance. All those that we have to keep a closer look to see how that changes and be saying, yeah, you're either reduce, so that will ever general high level over the Beijing. And then I guess Frode has already pretty much answer the bit about the cash path.

I think to us the importance is to demonstrate that these are passive investment that has to be able to bring lapse good value. And then we're also able to bring that into cash. So I guess it's more I can maybe clear demonstration of the walk that I'd be down which I'm bringing value to the to the company. And so hopefully it will be more easier for the investment community to be able to see it. Way - like other than that, I think it's fair to say, this will give us more flexibility to be able to invest into a more strategy stuff that the we are focusing on online game or gaming for instance. I guess we wouldn't mind if there is a potential target or anything to acquire, but we don't have anything. And this end and we're just happy that it give us some flexibility.

Alicia Yap - Citibank - Analyst

Thank you, Song. I understand, especially at this moment, you may not have - identified a specific target, but I guess I'm just wondering maybe you can help us from a little bit what you're thinking about the strategy or what - if you look at your business, after kind of, like, adjusting all these kind of - the non-core and then focusing on the search and the advertising, as we look into the next few years, what are things that you feel your business needs to be further strengthened, right?

Lin Song - Co-CEO

Okay. So yeah.

Alicia Yap - Citibank - Analyst

And then, also the region that you feel you wanted to explore into or you have opportunity to explore into. Yeah. Thank you.

Lin Song - Co-CEO

Sure, sure. Yeah. So it's a very relevant question. So I would say a high level possible our GX gaming field orders there is growing very fast and is also in line with perhaps offers overall strategy to provide post mates the browser for particular segments and initiatives gamers. So I'm quite certain that they will continue to deliver and expand. On the gaming sector both in terms of growing our - continue to grow our GX user base, but also in growing our gaming platform and also, organic engines. And if along the way we have to work with more gaming partners or gaming company those studios and provide better economies we will do it. So, I think we're actually quite proud and also confident that we're able to make a difference there, that like, yeah.

I think you will see probably more announcements product wise in the latter part of this year. And then I think on top of that, it's more like something a like maybe we could almost say continuation obviously strategy that we feel they're similar verticals that we could make a difference, we mentioned Web3 for instance, we do getting there, we think it can be passed as important as gaming, and or even more, right? So, there's a huge potential than we will also invest our at de-risk into it, in end of the day where our tech company, we have very good in tech, not really other. So, I think hopefully, we should be able to also create some of those similar, very attractive, customized products, which will be appealing to the end-users.

So, I think this is really what we are thinking about. We have not really spent our time on thinking about the acquisition quite often that's what I mean. And because to us it's - yeah, it's very important we have to win by our technology, and as the rest, of course, if there's some good candidate. Like the case when we buy it - when we bought - when we have bought game maker engines, that of course, if there will be a company, you'd - probably we should buy. We should do it, but that's not the focus, I guess. The focus is still to win by technology, and by innovation.

Alicia Yap - Citibank - Analyst

I see. Okay. Thank you, Song.

Lin Song - Co-CEO

Sure. Thank you.

Operator

Thank you. This concludes today's Q&A. I would now like to turn the call back over to Song Lin for closing remarks.

Lin Song - Co-CEO

Sure. So like again, thank you again for joining us today. It's just an exciting time for Opera. As always, I think we were able to demonstrate that our core browser is good business to get always all content and the gaming initiatives that integrates and ways - even more numerous growth in revenue still to come. And now I think we were able to also demonstrate we have strong cash balance and also good visibility now about those cash payments from our divestitures, which will give us much more visibility about our access trends at a company. So we hope - we will continue to deliver above expectations. So with that we appreciate your time and we way look forward to speaking with you again in the future.

Operator

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