Zedge Inc

AMEX:ZDGE

Earnings Call Analysis

Zedge's Mixed Q2 Results with Subscriber Gains

Zedge's Q2 saw a 10.7% decline in monthly users to 28.8 million, with total revenue rising 11% to $7.8 million, driven by a subscription revenue jump of 24%. Digital goods took a 26% hit, mainly due to Apple's privacy rules. Despite an operating loss of $11.9 million due to a significant write-off, Zedge reported a non-GAAP net income of $0.5 million. The firm cleared a $2 million loan, bolstering its liquidity position to over $18.1 million in cash equivalents.

Continued Growth Amid Challenges

Amidst a complex mix of geopolitical, macroeconomic, and industry-specific challenges, the company has delivered an 11% year-over-year increase in second-quarter revenues, indicating resilience and a strategic approach geared towards sustainable long-term growth. The notable growth driver is the Zedge marketplace, where ad revenue saw an 18% surge compared with the previous year, powered by substantial improvements to content monetization among other enhancements. Furthermore, the Zedge Plus subscription offering exhibited a 24% revenue boost, despite a relatively flat subscriber count. Zedge Premium also contributed with a 21% revenue uptick due to backend optimizations.

Strong Performance in Key Metrics

The average revenue per monthly active user (ARPMAU) reached a new high of $0.072, a remarkable 37% growth from the prior year. This surge was not only on Android but also on iOS, where revenue from the Zedge marketplace impressively increased by 46% sequentially. Even at the midpoint of the current third quarter, these positive trends appear to be maintained, offering a promising outlook.

The Complication of Impairment Charges

Despite strong operational performance, the company recognized an $11.9 million write-down related to the acquisition of GuruShots. This decision stemmed from a discrepancy between the current performance and the carrying value on the books, acknowledged as a non-cash timing event that does not diminish the strategic potential of the investment. Moving forward, the company intends to supplement its financial reporting with non-GAAP net income and non-GAAP diluted EPS as new metrics.

A Mixed Picture in Engagement and Services

The monthly active user (MAU) count for the Zedge marketplace experienced a 10.7% decrease year-over-year to 28.8 million. This downturn was observed across both well-developed and emerging markets, hinting at broader user engagement issues. Additionally, digital goods and services revenue, primarily from GuruShots, declined by 26% as it continued to grapple with external challenges like Apple's ATT framework and global economic pressures. However, subscription revenue countered this with a 24% rise and Zedge Premium's Gross Transaction Value (GTV) climbed 23% to a record $540,000, signaling health in the company's evolving revenue streams.

Financials Reflect a Growth and Investment Duality

The income statement portrays a dual narrative, with the company fostering growth in its operating business while absorbing a significant impairment loss. The cost of revenue presenting a 27% decline exemplifies efficient management, yet the GAAP loss from operations at $11.9 million, compared to last year's income of $1.5 million, largely reflects the non-operational impact of the write-down. Contrastingly, non-GAAP measures present a more nuanced picture of the underlying performance, with non-GAAP net income at $0.5 million and non-GAAP EPS at $0.04, albeit slightly down from the previous year.

Liquidity Remains Strong

Despite the recording of a net loss, the company's financial health is not compromised, evident from a robust liquidity position with $18.1 million in cash and equivalents. The repayment of a $2 million bank loan this quarter further solidifies the company’s balance sheet, providing financial flexibility for future endeavors.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and welcome to Zedge's Earnings Conference Call for the Second Fiscal Quarter 2024 Results. [Operator Instructions]

I will now turn the call over to your host, Brian Siegel. The floor is yours.

[Brian Siegel, executive]

Thank you, operator. In today's presentation, Jonathan Reich, Zedge's Chief Executive Officer; and Yi Tsai, Zedge's Chief Financial Officer, will discuss Zedge's financial and operating results that we 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 the reports Zedge periodically files with the SEC. 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. The earnings release has also been filed on Form 8-K with the SEC.

I would like to turn the call over to Jonathan.

[Jonathan Reich, executive]

Good morning. Thank you, Brian, and thank you all for joining us today. I will begin by briefly reviewing our second quarter results, demonstrating how our fiscal year 2023 investments have positioned us for sustainable long-term growth. Q2 revenue increased 11% from last year as we continue managing the geopolitical macroeconomic and industry-specific challenges spanning the landscape.

One of the big stories this past quarter was continued momentum at the Zedge marketplace. Ad revenue was up 18% from last year.

Zedge Plus, our marketplace subscription offering, delivered exciting results with revenue increasing 24% from last year, with small net subscriber gains sequentially and less than 1% net subscriber loss year-over-year, and Zedge Premium revenue driven by several improvements to content monetization and other back-end front-to-end items was up 21%.

These factors fueled a 37% increase in the average revenue per monthly active user or ARPMAU, to a record $0.072 and this strength was not just on Android as iOS revenue for the Zedge marketplace was up an impressive 46% sequentially. I should add that many of these trends are holding up at the halfway point of our fiscal third quarter.

At the beginning of this fiscal year, we said building a full stack marketing team would be our key corporate-wide initiative similar to what we accomplished with data and analytics in fiscal 2023. We're well on our way here and our efforts are starting to bear fruit, especially for the Zedge marketplace.

Another important story this quarter relates to maturing our product development organization to drive innovation, accelerate product diversification and consolidate resources to ensure long-term success.

To that end, we have assembled an all-star team of seasoned gaming experts, who are alumni of the leading mobile gaming publishers and have turned them loose on GuruShots. Their mandate is to unleash the growth that was core to our investment thesis at the time of the acquisition. This team is already sprinting, having overhauled the product road map with 4 major focus areas.

The first is feature development, which hasn't been given the attention it deserves since the acquisition. In the past, successful new features would yield a 10% to 30% jump in revenues with little or no downside when they did it to take hold. The updated product road map is full of new features designed to drive revenue and make GuruShots more accessible to an even broader audience.

Next, our decision to focus on innovation will allow us to drive user growth by investing our marketing dollars more efficiently. Specifically, we will better couple GuruShot's UA spend with feature releases. In January, we introduced Turbo, a feature that expands the gameplay and improves game resource consumption. To date, it has yielded a 15% increase in average daily revenue, giving me confidence that we are on the right track.

Additionally, we are about to release another new feature, flash challenges, a short-duration photo challenge that limits the number of participants per challenge and provides even more opportunities for users to win. We believe that this dynamic will drive up engagement and make GuruShots more accessible to a broader set of players, both existing and new.

In parallel, the team is reinventing the game economy by converting to a coin-based economy, supporting multiple currencies and foregoing the existing economy, which we believe is too rigid and limited in terms of the number of ways players can earn and spend in-game resources. This change will open an array of customer value adds.

For example, we will be able to reward all players with game currency and manage resource consumption in a fashion that optimizes further coin purchases. Creating a comprehensive and inviting onboarding funnel is also a key focus area for the GuruShots game.

In short, onboarding will enable newbies to immediately experience gameplay in a simplified manner with a limited number of competitors, increasing the chances of winning. The funnel will allow players to progress with more features and increased complexity based on individual performance enabling skill-based user segmentation, which will be a win for the user base.

I want to add that we believe these efforts taken in concert with one another will help us deliver growth, which was one of the key thesis of the acquisition. GuruShots is the leading photo competition game and more than 150 million photos have been used to play the game.

Photography continues growing exponentially due to the ubiquity of mobile phones and with the advent of AI enhancements, high-quality pictures are within everyone's reach. The gameplay is fun, and it touches on the human inter psyche, where people like to have fun, compete and win.

With all the opportunities we have in the pipeline, I think we are at a turning point. and I look forward to sharing details as they unfold.

Moving to the Zedge marketplace. Our success in growing advertising revenue in recent quarters stems from our continuous optimization efforts, combined with highly effective paid UA programs driving positive ROAS in 90 days or less. Additionally, over the past 2 quarters, we began improving our iOS monetization stack by optimizing ads and rolling out Zedge+ for iOS, which along with pAInt, contributed to strong iOS revenue growth. Overall, the iOS ecosystem remains a largely untapped opportunity for us, and we continuously look at ways, most recently, AI, to unlock it and capitalize on our brand to drive growth.

Emojipedia had another good quarter. Our previous investments in website redesign, localization and technology upgrades continue to pay off and lay the foundation for the next phase of growth, with new features and content expected to be rolled out in the quarters to come.

Taken together, we continue to believe that we have never been in a better position to create sustainable, long-term profitable growth given the combination of market opportunity, our current product portfolio and road map, our marketing prowess, data capabilities, tech stack and most importantly, our team.

Furthermore, we are not just talking about AI. We have already integrated it throughout our business, including product, technology and marketing.

Now I would like to turn the call over to Yi, who will review our financial results. Yi?

[Yi Tsai, executive]

Thank you, Jonathan. As you saw in our earnings release, GAAP requires us to take a one-time $11.9 million noncash write-down of GuruShots intangible assets. It's important to underscore that this was a noncash event dictated by timing, as current performance did not align with the carrying value on our books.

As Jonathan indicated, we still believe that with time, we will unlock growth and achieve the strategic goals that we invested when we acquired GuruShots. Additionally, this write-down does not reflect the valuable gamification experience with secure, benefiting the rest of our business. As a result of the strength related to valuation over the past year, we have added non-GAAP net income and non-GAAP diluted EPS as new metrics that we plan to report going forward. The reconciliation for GAAP to non-GAAP is available in our earnings release from this morning.

Monthly active user or underscore that this was a noncash event dictated by timing as current performance did not align with the carrying value on our books. .

As Jonathan indicated, we still believe that with time, we will unlock growth and achieve the strategic goals that we invested when we acquired GuruShots. Additionally, this write-down does not reflect the valuable gamification experience with secure, benefiting the rest of our business. As a result of the strength related to valuation over the past year, we have added non-GAAP net income and non-GAAP diluted EPS as new metrics that we plan to report going forward. The reconciliation for GAAP to non-GAAP is available in our earnings release from this morning.

Monthly active user or underscore that this was a noncash event dictated by timing as current performance did not align with the carrying value on our books. .

As Jonathan indicated, we still believe that with time, we will unlock growth and achieve the strategic goals that we invested when we acquired GuruShots. Additionally, this write-down does not reflect the valuable gamification experience with secure, benefiting the rest of our business. As a result of the strength related to valuation over the past year, we have added non-GAAP net income and non-GAAP diluted EPS as new metrics that we plan to report going forward. The reconciliation for GAAP to non-GAAP is available in our earnings release from this morning.

Monthly active user or MAU, for the Zedge marketplace decreased 10.7% from a year ago to $28.8 million. MAU in well developed markets and emerging markets were down 15.6% and 9.2%, respectively. Total revenue in the second quarter was $7.8 million, up 11% from last year.

Digital goods and services, which encompasses revenue from GuruShots, came in at $0.9 million, down 26% from last year. Similar to Q1, GuruShots' revenue was again negatively impacted by Apple's ATT framework, macroeconomic issues and the geopolitical situations.

Subscription revenue for the second quarter was up 24% versus last year. Additionally, this metric was up sequentially for the third straight quarter as our net active subscriber trend improved and higher value IOS subscription and our new value-added Zedge+ offering for Android replaced lower-cost legacy subscription, which only remove ads.

Zedge Premium Gross Transaction value or GTV grew 23% from last year to a record $540,000, reflecting higher price per advertising impression and incremental revenue generally from pAInt, which offset modest decline in other content sales.

ARPMAU was a record $0.072, up 37% year-over-year, reflecting stability in ad pricing and the positive impact of our new iOS and Android subscription.

Cost of revenue declined by 27% and was 5.9% of revenue. [ HDNA ] increased by 11% to $6.5 million. GAAP loss from operations, including the impact of the $11.9 million write-off, was $11.9 million, versus income from operations of $1.5 million last year.

GAAP net loss and loss per share for Q2 was $9.2 million and $0.66 versus income and EPS of $1.6 million and $0.11, respectively, in the prior year. Non-GAAP net income and non-GAAP diluted EPS for the quarter were $0.5 million and $0.04 versus $0.8 million and $0.06 in the prior year, respectively.

Adjusted EBITDA was $1.5 million versus $1.4 million in the prior [Technical Difficulty] from a liquidity standpoint, we remain in a strong cash position with over $18.1 million in cash and cash equivalents. Now that we pay down the $2 million in outstanding bank loan during the quarter.

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

[Operator]

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

[Allen Klee, analyst]

Congratulations on the strong revenue growth. My first question is you had record advertising rates. It's -- but it's also your seasonally strongest quarter, I think. So when we parse out how to think about maybe to some degree, what effect is seasonal versus other stuff?

[Jonathan Reich, executive]

Allen, thanks so much for your comments. And as I mentioned in my earlier summary of the quarter, we're actually seeing that our halfway through the quarter, numbers are holding up. So that is due to a combination of factors, both feature-wise, ad tech-wise or ad stack-wise as well as, I guess, some secular features or some secular factors. So it's a little bit hard to sort of parse that out because by contrast, typically, our Q3 is our weakest quarter from an ad revenue perspective in light of post-season drop-off and ad budgets and so on and so forth.

[Allen Klee, analyst]

That's great. And then just in terms of the marketplace, I think you said that pAInt and there's greater functionality on the web and gross transactional value sold was up like 23%. Is there a way to think about what the key drivers are of growth in marketplace and things that you're doing to keep this going?

[Jonathan Reich, executive]

Sure. Just to be more specific, are you talking about Zedge Premium or are you talking about the overall marketplace, which includes not only licensed content, but also user-generated content?

[Allen Klee, analyst]

For both.

[Jonathan Reich, executive]

Well, when you take a look at Zedge Premium, which is the licensed content area, we continue to iterate tune, optimize. And as a result, you're seeing the improvements there. We are also now beginning to think about what can Zedge -- what can Zedge Premium look like with the expansion across web. And in terms of the overall Zedge app or global Zedge marketplace, it's a function of continually adding and optimizing features that we have as well as improving the user experience. There is work that can be done on the user experience. One of the areas that we're beginning to look into now relates to onboarding.

In the past, we've talked about recommendations and the content that's served up to users. How does that impact the user experience? And then projects around improving engagement and retention. So in totality, each of those contributes to the results that we reported today. And then separate and apart from that, as I mentioned, the work that we had done last year in terms of overhauling the Zedge+ subscription on Android and rolling out Zedge+ subscription on iOS for the first time has also yielded very positive results for us.

[Allen Klee, analyst]

Just so we understand it, there's Zedge+ is the Zedge marketplace subscription. Can you also get another different type of subscription just for being ad-free? Or are they the same? And then your paid subscribers were flat sequentially. Do you think that, that number can continue to grow sequentially?

[Jonathan Reich, executive]

So Zedge+ is our subscription offering. Our subscription offering has bundled together several value adds. One of those value adds is ad-free, as you described it, but then there are additional value adds in there, whether it be bots that can be used for creating AI images as an example. And [ insofar ] as potential growth of number of subscribers. Our aspiration is clearly to see to it that, that subscription number grows over time.

And there is ongoing work with respect to how to make that subscription offering, whether it be on Android or on iOS, even more attractive.

If I were to provide a metaphor when you think about Amazon. So Amazon has overnight delivery, but they also offer a wealth of other value adds, whether it be content, whether it be storage and so on and so forth. And as I said, as a metaphor, that is the work that we are heavily invested in, in terms of seeing to it that we can continue to make the subscription offering even more attractive than what exists today.

And going back to the overhaul that we have introduced in 2023, that was an improvement in terms of those value adds, making that subscription offering more attractive and ultimately bringing in new subscribers.

[Allen Klee, analyst]

In terms of Emojipedia, I don't know if you provided any numbers in terms of did it grow over year-over-year or the results -- I'm not sure if you're able to provide revenue? Also, you said there are new actions you'd like to add. You mentioned some things like Emoji mashups and emoticons and -- I'm probably saying around kaomojis. Could you just tell me what mashups and kaomojis are?

[Jonathan Reich, executive]

Sure. So these are new content, just to keep it simple. These are new content forms. But by way of example, when today one renders a smiley emoji, they can either have a smiley face in yellow and so on and so forth or they can type a colon and a close parenthesis. That is a contract. So there are the text strings that connote various messages, and that is a potential direction for us to add as a new content vertical within Emojipedia and that's one of many.

In terms of numbers, I'm going to hand off to Yi to answer your question.

[Yi Tsai, executive]

Allen, so in Emojipedia, the second quarter growth was not as great as we had hopeful, but if you look at the 6 months, we still grew that 27%. For 3 months ended January, we only grew about 8%.

[Allen Klee, analyst]

And then one of the areas that I think you mentioned as a priority is monthly [indiscernible] monthly active users. It was up slightly sequentially, which is encouraging. Could you maybe just highlight some of the key things you're focused on to get that number to start growing again?

[Jonathan Reich, executive]

Sure. So we have a couple of activities that are taking place. We put together what I'll call a task force of rank-and-file Zedge employees without management participation that are working on various feature enhancements, new features and potentially complementary products that would unlock growth.

And then separately, we are also looking at ways of reimagining the Zedge app or benefiting from the installed base that we have to help fuel additional growth, whether that be through product marketing, incentive plans, influencer type of -- and referral plans.

And then, of course, separate and apart from that user acquisition investments and all of those taken together, we are hoping that we can reverse that trend and see to it that we unlock what we believe to be a promising growth opportunity.

[Yi Tsai, executive]

Allen, I would just like to add. Sorry, I would just like to -- as we mentioned, even though our active subscribers stayed flat at 648,000, but we are replacing lower value subscription with a higher value from the lifetime subscription as well as [ annual ] subscription. So although the active subscribers remained the same, but our revenue base was much higher.

[Allen Klee, analyst]

Yes, that's a good point. Then on GuruShots, a couple of questions. My personal experience, and I'm a bad example, not being that savvy in this stuff. But it's hard to be a newbie. So when you first get on, it seems difficult to know-how to engage and it tells you, you can't engage in a bunch of things until you get to a certain level. So maybe what you're doing to change that? And then also could you talk a little about what the Turbo feature, what that actually is and the new feature you're going to add? And then why multiple virtual currencies should help you out?

[Jonathan Reich, executive]

Thank you, Allen, and point very well taken with respect to onboarding. As you had said, a newbie that downloads GuruShots today is immediately immersed in the full game, they enter into a competition, they can be competing against up to 7,000 other photographers that are in that competition with a dashboard that has a lot of numbers and features to it. So a user has to be exceptionally loyal and very, very insistent on saying, they're going to figure this thing out.

Overall, onboarding will allow for us to simplify the gameplay, such that we get users into that funnel immediately, which opens up the top of the funnel, hopefully expands the potential player base and also allows for folks that may think that they are not good photographers making this accessible to them.

And then with progression as users begin to master skills and so on and so forth, they will then gain exposure to additional features that contribute to making the game play more competitive and fun and so on and so forth.

In addition to that, the onboarding will have an element to it that makes the game more or, I guess, shorter in duration. So a typical photo challenge today in GuruShots can range in duration from 1 to several days. The notion of going through that onboarding feature will be to decrease that to -- it could be 30 minutes, it could be an hour, it could be 2 hours and so on and so forth.

With respect to changing the economy. The economy today is a rigid economy. There are 3 game resources that users can benefit from while playing the game. And the way to access those game resources is through a hard in-app purchase event. If you buy resource A, it does not have any relevance to resource B or C.

To master the game, you really need to have a portfolio of those 3 resources and migrating to a coin-based economy, which has multiple currencies, allows for a lot more flexibility and it also allows for us to reward every player in the game. Meaning if you are playing the game today and you don't come in first, second or third place, that means you don't feel that great about yourself.

Even though you may have come in fourth, which is 6,996 in terms of your ranking, our ability will be with this new coin-based economy to see to it that with every player, even the player that ranks the lowest of those 7,000, will be able to get a reward and ultimately use that reward in one way, shape, form or another or use those rewards in order to potentially gain an edge with respect to game resources.

As I mentioned during my comments, we've made changes to the product team. And the product team is now very, very well resourced with a community of product managers that come out of some of the most well-known global gaming companies that have experience not only in gaming, design, user experience, user interface, but also in gaming economies. And what can be done in order to optimize those economies ultimately leading to better revenue generation as well as contributing to improving user engagement and user retention.

In totality, our hope and expectation is that taken together, that will unlock the growth that we believe is inherent in this asset. In terms of the new features, the new features most immediately are around offering what I will call mini game battles for users that are already in the middle of the game and then -- and now beginning to expand that to just being a stand-alone short-term limited number of competitors' type of battle, again, allowing for this to be a quick win for users to get that dopamine flow and feel like, well, they're competing in real time without having to wait for an extended period of time in order to ultimately win a battle.

And in addition to that, also decreasing the number of people that they're competing against, therefore, increasing the chances that they can actually win and gain that accolade accordingly. Does that answer your question?

[Allen Klee, analyst]

Yes. That was very thorough. Just some updates on AI Art Master? Can you provide an update on that?

[Jonathan Reich, executive]

Sure. So AI Art Master remains in soft launch. We made the decision to keep it in soft launch, while we are hard at work at unlocking the growth in the core GuruShots game, and we continue to gather data. Our plan currently is that when we get to GuruShots' trajectory in the direction that we believe will allow for this growth, that we will then refocus efforts and resources on AI Art Master. We just don't want to spread ourselves so thinly that we're not progressing the GuruShots game and that as we evolve, it will take time to launch this AI Art Master game as we iterate and so on and so forth.

So focusing on getting one thing done really, really well and then progressing to the next thing, which would be AI Art Master. AI Art Master now is at a point where we are able to monitor the data. That data is going to be exceptionally valuable in terms of helping guide what our future direction is with that game and how it evolves.

[Allen Klee, analyst]

And then I'm guessing a similar answer answered on the past call, you talked about potentially launching a hybrid casual game. Is that kind of in the same status or...

[Jonathan Reich, executive]

AI Art Master is in that hybrid casual category. Those are not separate and distinct from one another.

[Allen Klee, analyst]

Okay, got it. Okay. And then a question on financials. The jump in SG&A for the quarter, is the way to look at that -- to what degree do we think of that as like kind of that this is a seasonally strong quarter versus some of the other things you've talked about of perhaps paid acquisition or some of the new -- well -- and you brought on some more people. So I'm trying to get a sense of how much of it is maybe seasonal versus kind of a new run rate for SG&A?

[Jonathan Reich, executive]

Sure. I would actually reframe that a little bit. SG&A includes marketing in it. So there are 2 components of that number. One is actual money that we have spent on paid user acquisition. And as I said in the past, in order to scale paid user acquisition, when looking at budgets, there's going to be the steady state of this platform. This particular campaign works, we continue investing in it, but there is obviously a ceiling there.

And then there is what we'll call test budgets where you try a new platform, you try new creators and stuff like that. And some of that stuff works, some of that does not. You need both components in order to scale paid user acquisition. But then there is also the fee that we pay to whether it be Apple or Google when we bring on a subscriber or when a user makes an in-app purchase.

So those 2 components taken together contributed materially to the increase in SG&A. And the way I sort of look at it is, if we're successful in growing our subscriber base, If we're successful in generating more in-app purchases, SG&A goes up, that's actually a good reason for SG&A to go up as opposed to we're not managing our expense for infrastructure properly by way of contrast.

Yi, do you have anything that you want to add to that?

[Yi Tsai, executive]

Yes. I will only add, Allen, our SG&A remains quite stable and our net compensation expansion is actually in line with last year. So the order increase in SG&A, Jonathan mentioned, is in the marketing spend and also the platform we see. One of the downside when you rolled out lifetime subscriptions from Google Play's point of view, this is one is done. So they treat as a in-app purchase. So we pay a 30% fee rather than a regular subscription, which is at a 15% fee. So as a result, our platform fees went up by virtue of our rolling out lifetime subscription on [indiscernible]

[Operator]

This does conclude our question-and-answer session and the conference call. Thank you for attending today's presentation. You may now disconnect.