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.

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 ongoing -- 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've also posted unaudited quarterly historic financial results of Opera on our Investor Relations website. We'll be live tweeting highlights from the call @InvestorOpera, so please follow along there during the call and in the future. With that, let me turn the call over to our Co-CEO, Song Lin, who will cover our operational highlights and strategy, and then Frode will discuss our financials and expectations going forward. Song?

Yes, sure. Thanks, Matt, and thank you everyone for joining us today. We are very pleased to announce 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, in 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%] (ph), while EBITDA was up 135%, as full year margins expanded from 12% to 21%. The impact of our ongoing focus on those 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 extension initiatives were a standout success, leveraging our high-performance [leading] (ph) 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 stable incremental margins and…

Thanks, Song. On top of the operational color, I'll turn to the numbers. It was a great quarter, rounding up 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 dared 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 over performance 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 meant 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 off 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…

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

Hey, good morning. This is Jonathan 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 they come from in terms of region?

Hey, this is Frode here, I'll chime in. The Western markets 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.

Okay. Got it. And can we expect sequential increases in user base growth throughout '23 as well, or can we expect like [some level of deduct] (ph) as the year progresses?

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 enough less strategic users such that the strategic growth offset. This was -- is sort of the main [best theme] (ph) we expect to continue, broadly speaking.

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?

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 a 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 product 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.

Understood. Okay. Thank you. Congrats, again. Sorry?

Yes. Just comment that -- yes, sorry, guys. This is Song Lin. I managed to crawl back to the call, so not a problem. But just to echo what Frode has 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 we really [put on] (ph) is 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 seen a quite 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.

Great. Thank you.

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

Good morning, guys. Incredible quarter, nice work. Just wanted to drill down a little bit more on the AI opportunity in particular. What do you see ultimately is the -- probably the most logical business model using that technology? Is it to drive user growth of the browser? Is it a whole another standalone product you could potentially charge subscription, too? Is it [app] (ph) based model? Maybe you could at least give us some of your initial thoughts.

Yes. 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, more like for driving the user uptake. So, I think, a good example being that, of course, where we actually do see, even if we were just announced it and it maybe early stage, we see that user interest on the browser has actually increased quite a bit. Because, originally people just looking for regular system default browser, as always, our biggest challenge, right, that they just use it. But now [Technical Difficulty] technology, we actually see, obviously, the same as the early stage of mobile, right, as we called it, 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 impact on the user base. I mean that's also why we see a quite positive growth audience. But then, of course, like -- and then user growth will, of course, correspond 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 the nearly more towards maybe like again higher paid model subscription or something along the lines for especially some more partners, but then in line that will be able to drill down into Opera. So, I think we feel that if there were going to be a lot of changes in the industry and for player like Opera probably means more opportunity than anything else. So quite excited.

Great. And then, 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 generation in 2023?

Well, for 2022, I guess we converted about 87%, I looked at just now, of our adjusted EBITDA to operating cash flow. So, the delta is the 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 that'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 cost and look at taxes relative to that, since the equity cost is not tax-deductible, then our effective tax rate is about 18%.

Okay, that's helpful. And then, in terms of -- did you say $30 million in OpEx -- excuse me in CapEx for 2023?

No, in the other operating items, so from like hosting, legal, travel, office costs, et cetera. So, the stuff that I commented on the cost of revenue items combined the marketing costs and the cash compensation cost, and then I just commented on the total for everything else prior to adjusted EBITDA and the P&L.

All right. That makes sense. And then, in terms of the focus 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 extensions. Is that consistent in '23?

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, 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.

Great. Thanks, guys, and congrats again.

Thank you.

[Operator Instructions] We will take our next question from Alicia Yap with Citigroup. Please go ahead.

Hi, 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 this, 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 spent, 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's already launched? And then, so far, is that more obvious that you'll see that improve in user engagement on the mobile version or on your PC browser? So that's the first question.

Yes, sure. This is Song Lin. So, I'll try to answer it. So, actually, it's like this, right. So, I think it's -- so first of all, just a comment that there's in general two kinds of AI, right? So, one is the discriminative AI, which is actually what Opera has been using, and it's also the one being used in news recommendation, content recommendation, and other pilots, for instance. And the other is the generative AI, which is what's been popular now. So, I would say that moving forward, we'll probably see both becoming more and more relevant, and the [two will have] (ph) a bit more focus, right? So, the first one, discriminative AI, will be able to give you more relevant contents. I think that we already -- actually it's always ongoing. People 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 see content with their own flavor, right, more like one -- you need [indiscernible] to do that. You can have a particular flavor of ways how do you want to see the news or articles, you cannot, 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 as I said, it's still very early stage. But as that's proven to be very clicking with also users' mentality, right. So, I think for now, we're just going to explore other kind of options. And I think what is happening now is there is more user to actually use that because of differentiating features, that's probably the biggest short-term gain, and also, for instance, the longer-time spent. So, I guess that's a high-level capturing of what might come into view.

Okay. So, do you expect that will be helping on increasing revenue opportunity within the share that you were already seeing it, or we will have to wait a little bit longer?

Yes. So, I think it's a billion-dollar question, right, more like what's that impact on the revenue? So, I don't know, it's too early to tell. I think -- I don't think we have actually budgeted it in our forecast or guidance, because we should be prudent. But as I said, right, if there's more users using us, then, of course, more naturally, that will 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.

I see. Okay, great. Thanks, Song. Second question, I think company's comment on the press release about the EU sanction package that happened in December, '22, so -- which you budgeted $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 [indiscernible] if memory serves right. So then, this whole impact, it is when you budget that in, is it -- would that mean, potentially, if it's not as strong headwinds as they were, then we could actually see some upside on the revenue?

Yes. I can begin commenting on it. So, you are correct that adding back the $10 million that, if we deduct directly, would 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, I would say, directly correct and -- 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 commented on in connection with the guidance. In terms of Russia and Eastern Europe, I would say, we did see, of course, the impact last year as well within 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 at the beginning of the year.

I see. okay, all right. Well, thank you so much. Thank you.

Sure.

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.

Sure. So again, I think thanks everyone for joining our conference call. Year 2022, we have been able to do with good results. We're 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 Opera in a good position for success in 2023. So yes, we are very excited about it. And I would also like to possibly thanks all the -- both Opera employees and also our investors, the support that have been given to us in the past year. And let's have great excitement of year 2023 and looking forward to share more of our success with you in the coming quarters. Appreciate your time and look forward to speaking again in the future.

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.