Zedge Inc

AMEX:ZDGE

Earnings Call Analysis

Zedge reports steady growth and focuses on innovative product developments.

In Q1 of fiscal 2025, Zedge experienced a 1.6% increase in revenue, totaling $7.2 million. Subscription revenue rose by 21%, driven by an 8% growth in subscribers, while the Zedge Premium gross transaction value surged 62% year-over-year. Despite setbacks in advertising revenue due to technical issues, ARPMAU improved by 22%, indicating strong user engagement. The company plans to use its $20 million cash reserves for new initiatives and a $5 million share repurchase. Looking ahead, Zedge aims to leverage generative AI for user engagement while focusing on cost efficiency to maintain EBITDA positivity this fiscal year.

Navigating Challenges in Q1 2025

Zedge entered fiscal Q1 2025 with the intent to innovate and improve operational efficiencies. Despite a challenging quarter, they reported a modest total revenue of $7.2 million, a 1.6% increase year-over-year. This growth was influenced by hurdles in advertising and a transition period at GuruShots. Jonathan Reich, the CEO, mentioned that while the quarter was tough, notable progress in critical business areas enhances their long-term outlook.

Success in Subscription Revenues

A standout performance was noted in subscription services, with revenues climbing by 21% year-over-year. This was supported by an increase in total subscribers, up 8%. Particularly strong growth was seen in Lifetime subscriptions, which was attributed to enhanced user features and targeting strategies. For iOS users, revenue growth exceeded 60%, highlighting the substantial potential remaining in this segment.

Record Growth in Zedge Premium

Zedge Premium experienced a remarkable gross transaction value surge of 62% compared to the previous year, hitting approximately $700,000 for the quarter. This growth was tied to the success of digital products like Parallax 3D wallpapers and the new pAInt 2.0 feature, both of which cater to rising consumer demand for personalized, interactive content.

Challenges and Adjusted Strategies

The overall top-line growth faced setbacks due to advertising revenue decline, driven by coding issues and integration challenges with new ad partners. Zedge has adopted a more conservative stance towards paid user acquisition, focusing on maximizing returns on ad spend rather than sheer revenue growth. However, they believe that these operational challenges have been resolved but will continue to monitor closely to avoid future setbacks.

Emojipedia's Stellar Performance

Emojipedia's financials showed impressive results, with a 33% annual revenue increase, marking its highest quarterly performance. With ongoing improvements like the AI emojigenerator, Emojipedia is innovating to maintain its competitive edge and further expand its user base.

Opportunities for Enhancement in GuruShots

GuruShots continues to face challenges, reporting a 32% revenue decline attributed to shifts in strategy aimed at increasing user acquisition through new features. Initiatives like the new onboarding experience and mission-driven gameplay are being put in place to motivate user engagement. Although this had a short-term revenue impact, long-term prospects remain positive as these changes help build a more sustainable player base.

Forward Guidance and Expectations

Zedge has expressed confidence in exiting the first quarter with positive results for the remainder of fiscal 2025. They anticipate Q2 to be seasonally strong with growth in revenues and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Jonathan Reich states a commitment to maintaining an EBITDA positive trajectory going forward.

Strategic Financial Management

In terms of liquidity, Zedge concluded the quarter with over $20 million in cash and initiated a $5 million share repurchase program, signaling confidence in their financial health. This strategic financial management positions Zedge well for long-term shareholder value.

Driving Innovation and Market Growth

Looking forward, Zedge plans to harness generative AI to refine user engagement strategies and further expand product offerings, including audio personalization features scheduled for rollout in the first half of FY 2025. The focus on facilitating creativity among users aligns with their broader vision of leveraging technology for enhanced user experiences.

Earnings Call Transcript 2025-Q1

[Operator]

Good day, and welcome to Zedge's Earnings Conference Call for the First Quarter Fiscal 2025 Results. [Operator Instructions] I will now turn the call over to Brian Siegel. Sir, the floor is yours.

[Brian Siegel, executive]

Thank you, operator. During today's call, Jonathan Reich, Zedge's Chief Executive Officer; and Yi Tsai, Zedge's Chief Financial Officer, will discuss Zedge's financial and operational results that were reported today.

Any forward-looking statements made during this conference call during the prepared remarks, or in the question-and-answer session, whether general or specific in nature, are subject to risks and uncertainties that may cause actual results in the future to differ materially from those discussed on today's call.

These risks and uncertainties include, but are not limited to, specific risks and uncertainties disclosed in Zedge's periodic SEC filings. Zedge assumes no obligation to update any forward-looking statements or to update the factors that may cause actual results to differ materially from those that they forecast.

Please note that our earnings release is available on the Investor Relations page of the Zedge website and has also been filed on Form 8-K with the SEC. Finally, on this call, we will use non-GAAP measures. Examples include non-GAAP EPS, non-GAAP net income and adjusted EBITDA. Please see our earnings release for an explanation of our use of these non-GAAP measures.

Now I'd like to turn the call over to Jonathan.

[Jonathan Reich, executive]

Good morning. Thank you, Brian, and thank you for all joining us today. We entered fiscal 2025 with an eye toward driving innovation, improving operational efficiencies and positioning Zedge for sustainable long-term growth. Although the quarter presented some challenges, the positive momentum across key areas of our portfolio and the advancements we've made reaffirm our confidence in our ability to deliver strong results over the course of the fiscal year.

The Zedge Marketplace continues to lead the charge in our ecosystem. Subscription revenue grew 21% year-over-year, bolstered by accelerated growth in Lifetime subscriptions, which contributed to an 8% increase in overall subscriber counts. Zedge Premium was also a highlight during the quarter with gross transaction value, or GTV, surging 62% year-over-year due to a combination of performance of our Parallax 3D wallpapers, rewarded video CPM optimizations and the launch of pAInt 2.0 which introduced powerful new creation capabilities, including image to image and real-time photo editing and AI enhancements.

These innovative products demonstrate the growing demand for personalized, interactive AI-powered digital experiences. Another notable achievement this quarter was the 22% increase in average revenue per monthly active user or ARPMAU, reflecting our success in attracting users with higher-value profiles. For example, on iOS, revenue grew more than 60% year-over-year underscoring the untapped potential of this higher ARPMAU platform. With continued enhancements and targeted marketing, we see significant room for further growth on iOS. While advertising revenue was negatively impacted from challenges, including a temporary bug that was resolved before the end of the quarter, delays with an ad partners testing regime and integration complexities associated with adding a new ad mediation platform to our stack, we remain positive about the environment.

In addition, we took a more conservative approach to paid user acquisition, prioritizing higher returns on ad spend or ROAS over rapidly scaling revenue. Emojipedia delivered exceptional performance in Q1, with revenue up 33% year-over-year, achieving its highest ever quarterly results. Today, Emojipedia generates 100% of its revenue from advertising.

And our world-class ad operations team's continuous optimization of the ad stack continues paying off. This success also reaffirms Emojipedia's role as a revenue-generating powerhouse within our portfolio and validates our original acquisition thesis. On Cyber Monday, Emojipedia expanded its Emoji Playground with the beta launch of its AI emojigenerator, marking another milestone in our strategy to transform Emojipedia into an interactive and creative platform. Users can now design their own custom emojis, making this a very personal experience and allowing them to make their creative dreams a reality. This is in keeping with our goal of turning consumers into creators.

Although it's too early to report on the engagement metrics, we believe this feature along with the upcoming redesign of the website are critical to expanding Emojipedia's user base and deepening engagement with existing users.

GuruShots remains a work in progress, and we are taking decisive steps to improve its growth trajectory. Our strategy focuses on attracting new users and converting them into recurring paying players. To date, we introduced a fun and comprehensive onboarding experience to draw new users into the gameplay with ease and migrated to a coin-based in-game economy to enable more possibilities to reward and monetize players.

We also launched missions, a set of tasks, that players need to complete to earn rewards. Taken together, these initiatives have yielded encouraging results, improving new player engagement and retention. Over the course of the past week, we started to debut duels, a fast-paced real-time player versus player game mechanic that adds an exciting competitive layer to GuruShots. We believe this enhancement will also drive further engagement from all players, including new legacy and even those who may not even been drawn solely to the game's traditional format.

Although the transition has come with a drag on near-term revenue, we are optimistic about the long-term potential of these efforts. By aligning our product roadmap with robust marketing initiatives and leveraging live Ops strategies, we aim to widen the top of the funnel, bring in new users and unlock revenue growth.

As we look to the rest of fiscal 2025, our focus is on leveraging generative AI to transform users into creators and drive growth across all business units. The next phase of our AI roadmap includes the introduction of an AI audio generator for the Zedge marketplace, which we believe represents an exciting opportunity to attract new users and deepen engagement with existing ones.

Audio personalization is an emerging trend in AI, and we aim to further enable our users to become creators with this feature. In fiscal year '25 we are also focusing on transforming our technology development infrastructure to support faster and more efficient development of new apps and products. By building a modular and scalable platform, we aim to streamline the creation process, allowing components to be repurposed or adapted across multiple projects with ease.

This approach not only enhances efficiency and reduces costs, but also enables us to operate with greater agility. With this foundation, we can quickly prototype, test and refine new ideas ensuring we prioritize initiatives that demonstrate strong potential for returns. This dynamic framework empowers us to pivot or scale efforts as needed, driving sustainable and profitable growth over the long term.

Beyond product innovation, our marketing team remains a critical driver of revenue growth. The team is accelerating ROAS positive user acquisition, particularly in well-developed economies where we see strong monetization potential. Our continued success with iOS users is a testament to this strategy.

For Emojipedia, we believe the continued expansion of the Emoji Playground and the anticipated website redesign will sustain its reputation as the premier destination for all emoji enthusiasts worldwide and enable further revenue growth. GuruShots, meanwhile, is at a pivotal stage. By focusing on features that drive new user growth and effectively monetizing those users, we are laying the groundwork for sustainable growth.

Finally, we remain committed to developing new products to fuel long-term growth. Initiatives like WishCraft and AI Art Master exemplify our ability to innovate rapidly and iterate on promising ideas. These projects and others in development position us to uncover new opportunities that can drive incremental wins and breakthrough successes. From a financial standpoint, we continue to prioritize smart capital allocation.

With over $20 million in cash and cash equivalents, a strong balance sheet and the authorization of a $5 million share repurchase program, we are well positioned to deliver long-term shareholder value.

In summary, while the first quarter presented some challenges, particularly on the top line, the progress we've made across key areas of our business underscores our ability to innovate, adapt and execute. We remain confident in our strategy and excited about the opportunities ahead, wishing all a very happy holiday season with health and peace.

With that, I'll now turn over the call to Yi to discuss our financials in more detail. Yi?

[Yi Tsai, executive]

Thank you, Jonathan. Total revenue in the first quarter was $7.2 million, up 1.6% from last year, mainly due to the advertising challenges we faced in the quarter that Jonathan mentioned and the continued transition at GuruShots.

Subscription revenue was up 21% for the quarter and our net active subscriber trend continued to improve and was up nearly 8% year-over-year and sequentially for the sixth straight quarter our higher-value iOS subscription and value-added Zedge Plus offering for Android are not only seeing organic growth but they also continue to replace lower cost legacy subscription, which only removed ad.

Zedge Premium GTV achieved another quarterly revenue record at roughly $700,000, up 62% versus last year. Despite the advertising challenges ARPMAU still grew 22% year-over-year to $0.077. Unfortunately, revenue growth was mostly offset by the year-on-year revenue decline for GuruShots, which is reported under goods and services of 32% in the quarter.

Given the strategy to prioritize new player acquisition, these declines were anticipated, but we are cautiously optimistic based on the early positive returns from the new future releases that the business will return to growth soon. Cost of revenue was 6% of revenue for the quarter, roughly flat year-over-year on an absolute basis. SG&A increased by 24% to $6.8 million during the quarter. This increase was mainly driven by marketing expenses related to higher paid user. In general, as we scale, we expect to see operating leverage rebound. Additionally, our subscription model has higher near-term expenses as revenue and costs don't align. This is especially the case for lifetime subscription, which also carry a higher platform fee than an annual subscription.

As platform fee expands immediately while revenue is recognized over 2.5 years, although with a 100% operating margin. [ GAAP ] loss from operations was $0.5 million for the quarter compared to income from operations of $0.3 million last year. GAAP net loss and loss per share for the quarter were $0.3 million and $0.02 compared to breakeven last year. On a non-GAAP basis, we will break even compared to non-GAAP net income and EPS of $0.5 million and $0.04 in the prior year.

Adjusted EBITDA for the quarter was $0.3 million versus $1.5 million in the prior year. Now that D&A decreased 51% or nearly $400,000 versus last year due to the impairment of intangibles in Q2 of fiscal 2024. From a liquidity standpoint, we added a little cash to our balance sheet and finished the quarter with over $20 million in cash and cash equivalents.

During the quarter, the Board authorized a new $5 million share repurchase program after fully completing the prior approved buyback. We expect to commence repurchasing under a new program in December.

Thank you for listening to our first quarter earnings call, and I look forward to speaking with you again on our second quarter call in mid-March. Operator, back to you for Q&A.

[Operator]

[Operator Instructions] Our first question is coming from Allen Klee with Maxim Group.

[Allen Klee, analyst]

In your 10-K for last quarter for July, you had broken out for GuruShots the monthly active players for the 3 months ending July 31 was $4.5 million, and average revenue per monthly active payer was like $52.50. Do you know what -- where those numbers are today for this quarter.

[Jonathan Reich, executive]

Allen, I'm sorry, it's Jonathan. I'm overseas and my line got dropped temporarily. Can you repeat the question, please?

[Allen Klee, analyst]

Yes. Do we know for the quarter what the month we -- for GuruShots, what the monthly active payers were for the quarter?

[Jonathan Reich, executive]

If I recall, we have not shared that number in the past. So we will speak off-line and get back to you on that.

[Allen Klee, analyst]

Okay. So then how should we think about in terms of maybe what the drag that GuruShots is having on your overall results today? And like given that what's the ballpark revenue that you think GuruShots would need for be cash flow positive? Or is there a certain -- if you get to a certain point, does it make sense to maybe shut it down? How do you think about those things?

[Jonathan Reich, executive]

Sure. We do not, at this point, believe that there is a good rationale to shutting GuruShots down. We are in, as I've said during the call, in a transformation. And that involves the steps that we are and have taken over the course of the last, give or take 6 months coupled with improvement in our marketing investment and there are additional actions that we have planned in terms of increasing engagement, opening -- actually opening the top of the funnel, increasing engagement and ultimately, translating that into revenue.

As I've said, the trend line is with each of the changes that we have made is pointing in the right direction, and we are going to continue down that path. Of course, we're doing that being mindful of minimizing that cash burn. And we believe that we will see improvement of that over the course of the fiscal year.

[Allen Klee, analyst]

Okay. You mentioned in the press release that there was some coding issues that impacted the results in the quarter that you subsequently resolved. Is there a way to quantify what type of impact that had?

[Jonathan Reich, executive]

So we have quantified it internally. All 3 of those items that were mentioned -- the coding issue an advertiser took longer in terms of testing our platform for incremental value in terms of their spend and the addition of a new mediation platform in our mix had impacted us. We, again, have not shared that number publicly. But suffice it to say that those issues are all in the rearview mirror. We unearthed the coding bug. We have successfully proven ourselves to that third-party advertiser and they are spending on our platform. And the second mediation partner that we're using has been implemented now and is working well.

[Allen Klee, analyst]

That's great.

[Jonathan Reich, executive]

So to be more specific, those in our opinion, were onetime items. Unfortunately, it was sort of a perfect storm with all 3 of them hitting in the same quarter, but they have been resolved. And we are not continuing to struggle because of those items.

[Allen Klee, analyst]

Okay. Do you plan to manage your SG&A to think about the bottom line and try to remain adjusted EBITDA positive based on...

[Jonathan Reich, executive]

Yes. The answer to that is a resounding yes. And I feel that we will be back in EBITDA positive territory for the remainder of this fiscal year. The only -- or I shouldn't say the only -- if we saw some incredible growth opportunity, which would require us to scale marketing spend materially in order to current customer today that will generate multiples of that over some reasonable time period that would put us into EBITDA negative territory, but that would, in our opinion, be a good investment.

However, based upon just standard business. Our goal is to see that we are managing the company to be EBITDA positive. That is a -- that is a critical KPI that we monitor on a regular basis and are very, very committed to seeing that we achieved.

[Allen Klee, analyst]

Okay. Very good. In terms of 2 items you mentioned that are in beta, Wishcraft and AI Art Master. Any kind of update on how you're feeling about them moving them out of beta?

[Jonathan Reich, executive]

Yes. At this point, we are going to continue to keep them in beta. We are being very diligent about investing resources in the areas of the business that are producing revenue today and that we are able to continue to improve upon.

And the beta testing that -- or not the beta testing, but the apps that are in beta are being put to a rigorous stress test, if you will, to ensure that when we go from beta to full production that we have a clear set of data demonstrating that these can scale and generate the proper returns that we anticipate. We don't want to get something out early just to find out that we should have better optimized and make sure that any investment that we make in terms of marketing ultimately delivers a positive return for us.

[Allen Klee, analyst]

Got it. In terms of subscriptions, which was a bright spot, 2 things. You highlighted iOS is doing well. I'm not sure if you broke out how much iOS is of total subscriptions, but also a lifetime subscription, can you explain to me -- two things on life times. One, why it's a good thing because you get more money up front for it over the time. But then -- but then you don't get the recurring -- if they keep signing up over time, once it 2.5 years, or whatever.

And how you think about that? And then a could you just explain again the idea you're taking the costs upfront, but like with the lifetime subscription and you're taking the cost upfront but then you're not going to make more money in the future to offset that? Or maybe you can just help me understand it.

[Jonathan Reich, executive]

Sure. So with any subscription, any subscriber that we have, we take a look at, whether it be monthly, annual and so on and so forth. And we are able to, with fairly good position, determine what the average lifetime value of a subscriber is. And because as an example, if someone signs up for a monthly subscription today, it does not mean that they will renew that subscription into perpetuity. If all customers did, then your point is absolutely correct.

However, when taking a look at the blended average, we're able to come up with what the lifetime of the subscriber is. And then we have the ability to offer a -- 1 price for lifetime and amortize it over that window of time, which we consider to be a value for customers. They feel that they are getting more knowing that pay once, and I have this forever. And the cost of maintaining that customer post the term of that lifetime is de minimis within the overall cost structure of our business. So we view that as being a benefit from both a user acquisition perspective as well as from a revenue and cash perspective?

[Allen Klee, analyst]

Okay. In terms of monthly average users, could you comment on the trend? And what are the things that you're working on, you think could maybe have the impact or just start turning that around?

[Jonathan Reich, executive]

Sure. So it's monthly active users. If I had to look back over the course of the last year, I would say that we have been more discerning in terms of focusing our efforts on monthly active users that are going to generate a better return for us. What will contribute to helping us improve that number? Number 1 is our marketing efforts. There has been a very strong push to focus on Tier 1 users and our acquisition costs and the associated ROAS are in a good place and scaling that. But scaling that in a fashion which is rational, so that we can demonstrate that these users are profitable to us.

And then the other piece is ultimately seeing to the product enhancements that we invest in are ones which will bring users back on a recurring basis. That is one of the impetuses behind pAInt and specifically pAInt 2.0, where we have expanded from text-to-image to image-to-image to take a photo in real time and enhance it with AI features and so on and so forth. And then in the first half of 2025 we are going to be rolling out audio AI features, which we, again, believe will help us in terms of seeing to it that our monthly active users are engaging with us on a more frequent basis, if you will.

[Allen Klee, analyst]

Okay. Did you buy back any stock during the quarter?

[Jonathan Reich, executive]

This quarter, we did not buy stock back. We were in a closed quarter because of the period of time between our annual and the close of although we do have a $5 million plan in place and when the window opens, I'm confident that we will be back in the market buying stock.

[Allen Klee, analyst]

For the -- okay, for your outlook, you've mentioned next quarter is your seasonally strong quarter. Is there -- do you have any commentary on like do you think you be able to grow revenue or what you're thinking about adjusted EBITDA?

[Jonathan Reich, executive]

So as you know, we've not provided projections. But suffice it to say that we are comfortable that Q2 has been growing at a nice clip, whether it be advertising revenue subscriptions and the like as well as Zedge Premium. And GuruShots is the same story that we had discussed during the call. And the actions that we're taking in GuruShots are slowly but surely beginning to have an impact on the growth trajectory of that business.

[Allen Klee, analyst]

One of the things that you excel at is your advertising rates for monthly active users. I know it's hard to forecast, but what would you say are kind of the key factors on how you can maybe continue the strength in those rates or potentially improve them?

[Jonathan Reich, executive]

So of course, the economy holding up is not within our purview, but strong economy, coupled with the notion that advertising revenue in the world of mobile continues to be a growing market.

One of the steps that we had taken this quarter was adding an additional mediation partner to our mix in order to optimize the inventory that we have based upon having 2 mediation partners, some -- 1 does better in certain types of ad units, the other does better in different types of ad units. And then there's the ongoing daily incessant optimization that we undertake in terms of squeezing out the highest CPMs that we can for our inventory and that is just standard practice buyouts.

And the additional pieces, how do we optimize between our advertising and availing users of some of the value adds in the AI arena, if you will, and seeing to it that we are inserting rewarded ad units at the right place, rewarded ad units carry a very attractive CPM with them and doing so in a fashion where it does not become a drag to the user experience, but rather it is value exchange, where the user will say, yes, I'll watch this 30-second ad in exchange for the value that you are providing me.

And then finally, ongoing testing new partners, looking for new ad product integrations, that we have not thought of that have not been available in the market and testing to see if those will improve ARPMAU accordingly.

[Allen Klee, analyst]

Okay. Maybe my last question, is Zedge Premium, where the gross transaction value was up like 62% year-over-year. What would you attribute that to? And what new things are you looking to add to related to that.

[Jonathan Reich, executive]

Sure. So it's primarily due to, I guess, the following: One is we continue to make the platform attractive to artists, and we make sure that we are operating a platform in a fashion which is efficient in order to squeeze the greatest margin available in our business.

So if the platform is not attracted to artists, then that becomes very, very difficult, assuming that the platform, which we believe is attractive to artists then just continuing to optimize and operate that platform efficiently. Those are the ingredients that I would focus on.

And in terms of how do we continue to do that. There are some new potential product opportunities that we are in the midst of investing in. And when I say investing in, I mean being able to test, come up with an MVP, a minimally viable product to indeed demonstrate that yes, this works. In the past year, I think you know that we've expanded and we've grown with respect to video wallpapers and parallax wallpapers and the like and sort of incremental product improvements with new types of content is an ingredient that goes into that mix, allowing for more opportunity to sell additional products to our audience.

We also have started to avail users with the ability of buying content online, not only through the app, and that will also be something that we expect to continue to invest in, in the upcoming quarters.

[Operator]

[Operator Instructions] As we have no further questions, this concludes our question-and-answer session and conference call. Thank you for attending today's presentation, and you may now disconnect.