Zedge, Inc. (AMEX:ZDGE) Q2 2023 Earnings Call Transcript

Zedge, Inc. (AMEX:ZDGE) Q2 2023 Earnings Call Transcript March 15, 2023

Operator: Good afternoon and welcome to Zedge’s Earnings Conference Call for the Second Fiscal 2023 Quarterly Results. During management’s prepared remarks, all participants will be in a listen-only mode. After today’s presentation by Zedge’s management, there will be an opportunity to ask questions. I will now turn the call over to Brian Siegel.

Brian Siegel: 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 operational results for its second quarter 2023 ended on January 31st, 2023. 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 that 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 now like to turn the conference over to Jonathan.

Jonathan Reich: Good afternoon. Thank you, Brian and thank you all for joining us today. I’m going to start by briefly reviewing our second quarter results, which were generally in line with our expectations. Q2 revenue increased 1% from last year. The combination of geopolitical, economic, and industry-specific challenges resulted in lighter advertising spend compared to past years and lower discretionary spend by consumers. Additionally, GuruShots like most iOS apps, whose growth depends on paid user acquisition has suffered because of Apple’s App Transparency Tracking Framework or ATT for short, making paid iOS user acquisition less efficient and more expensive. While Apple’s release of its SCAD Network 4.0 in late 2022 is meant to alleviate some of this turmoil, it is taking time for various ecosystem providers to integrate this successfully into their tech stacks.

Adding to the turbulent market is the decline in mobile phone sales in 2022 to the lowest levels in nearly a decade. Mobile phone sales are a growth factor for the Zedge marketplace. Nevertheless, I am encouraged that the holiday season, which encompassed the first two months of the quarter was better than we expected heading into the quarter and MAU actually increased sequentially for the first quarter to over $32 million. Given this overall backdrop, we are focusing on the areas that are within our control, and have taken or are taking steps to ensure we don’t lose money over the near-term, while positioning the company for sustainable and profitable growth when the environment improves. To accomplish this, we have implemented a cost reduction plan and are totaling annualized savings of more than $2.5 million.

Additionally, we have narrowed our product focus as follows; for the Zedge marketplace, our top priorities are iterating with pAInt, our generative AI wallpaper maker to improve take rates and engagement; overhauling customer onboarding; and upgrading our subscription offering Zedge Plus with value adds, while also introducing a subscription offering for iOS users. We will also continue scaling paid user acquisition on Android as the ROI justifies the investment. Expanding on our plans for pAInt. The world is experiencing an explosion in AI-generated arc and Zedge wants to be a part of this. Our goal is to transform our consumers into creators. pAInt enables us to tap into what we call the creator effect, a dynamic that benefits from the pride of ownership that creators have when they make art.

In addition, this effect carries with it a desire to share with others, which can contribute to bringing new users to Zedge. To achieve this, we are improving the onboarding experience to get more users into the creation funnel early on in their engagement process, while also iterating with the business model to minimize friction and encourage growth. Turning to GuruShots, we continue advancing the product with the launch of the Battles feature. Battles provides a casual gaming experience that enables newbies to start competing in short duration photo competitions that are limited in size and built on a coin-based economy. We expect this new feature will open the top of the funnel, making the game accessible and relevant to a broader audience who hopefully will become hooked and transform into long-term players.

We released the beta version of Battles into the market last week and will iterate and fine-tune as needed. As you know, the GuruShots Photo Games growth strategy heavily depends on paid user acquisition. Unfortunately, acquiring profitable iOS users has become markedly more difficult due to Apple’s ATT framework, which severely limits the information an advertiser can secure about prospective purchasers. In my opinion, this has had a monumental impact on the contraction of the gaming sector over the last year. That said, we are doing our best to diversify by testing alternative acquisition channels in order to help drive new ROI-positive players to the game. In addition, through our experience developing the Battles feature and the explosive growth in the AI generative arts sector, we saw an opportunity to develop a standalone casual game, which had a recent soft launch.

This game is expected to harness the fast paced growth in generative AI art and we will test and iterate on it in the coming months. Turning to Emojipedia. We are now seeing the fruits of the changes we made during calendar 2022, which are yielding the high margin growth we expected when we acquired the company. We plan to release more new features in the coming months. We are very excited about the success of the changes we’ve made over the past year and believe they can drive high double-digit, low triple-digit growth rates with attractive gross margins in fiscal 2023. I want to thank our investors, Board members, partners, and employees for your continued support. In summary, we are and will continue doing our best to build long-term sustainable value and effectively address the challenges that we are facing over the near-term.

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

Photo by Austin Distel on Unsplash

Yi Tsai: Thank you, Jonathan. Moving to our second quarter results, now, defined as the number of unique users that opened our Zedge app during the last 30 day of the period, decreased 11% from a year ago to 32 million. Now, in well-developed market was down 13% and the emerging markets were down nearly 11%. Europe, which contributed to both metrics continued to suffer from the Russian invasion of Ukraine, inflation, and the energy crisis, which continue to play a significant role in this quarter’s MAU decline. Total revenue in the second quarter was $7 million, a 1% increase from last year. Digital goods and services revenue came in at $1.2 million. Similar to Q1, GuruShots’ revenue was negatively impacted by condition in Europe and app was limitation on user data.

Subscription revenue was down 8%, driven by a 14% decrease in active subscriber. Zedge Premium GTV increased 1% to $440,000, reflecting revenue from AI pAInt, which offset decline in NFP sales. Again, while we are impacted by the winter, we believe our strategy provide us with a differentiated offering that will result in more significant growth over time. ARPMAU was 0.052, a decrease of 13% year-over-year. Operating expenses increased significantly related to both the investment in GuruShots, higher investment in paid user acquisition, on Android for the Zedge Marketplace and higher D&A from acquisition, but were partially offset by a $1.8 million contract expense related to a reduction in the fair value of contingent consideration related to GuruShots acquisition.

Net income was $1.6 million and reported diluted earnings per share was $0.11. Diluted share count was 14.3 million. Adjusted EBITDA was $1.4 million versus $3.9 million in the prior year period. From a liquidity standpoint, we remain in a strong net cash position with over $17 billion in cash and cash equivalents. Note that we don’t have any direct exposure to SVB, Republic National, or Signature Bank. Moving to our stock repurchase program, we repurchased 318,000 Class B share during the second quarter at an average price of approximately $2.14 per share. We have repurchased 442,000 Class B shares since inception of the buyback in September 2022. Thank you for listening to our second quarter earnings call. And I look forward to speaking with you again on the next call.

Operator, back to you for Q&A.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. Thank you. First question comes from Allen Klee with Maxim Group. Please go ahead.

Allen Klee: Yes, good afternoon. You talked about GuruShots. When you originally did the acquisition, you had some potential commitments of how much you were going to spend on user acquisition spend, I think $5.3 million in year one, subject to getting good returns on that. Are you changing the plan of how much you’ll be spending?

Jonathan Reich: So Allen, this is Jonathan. We have until the end of March to spend $5 million, although we are not spending that amount of money. And we have found that when trying to ramp up user acquisition spend, the return on ad spend has declined. As I mentioned during my comments in large part, that is due to a combination of the App Transparency Tracking System, a framework that Apple had released and is causing major, major issues throughout the industry. As well as the macroeconomic and geopolitical risks that we are all experiencing on a global basis.

Allen Klee: Okay. That makes sense. Could you — I may have missed it. Did you disclose how much GuruShots contributed during the quarter? And I also heard you say that you thought that Apple was going to be rolling out something else in the future, which might help in terms of your ability to market. Could you review what that is? Thank you.

Jonathan Reich: Sure. I’ll address the second question first and for the numbers, I’ll hand over to Yi. Apple has — I think it was in November 2022, started to roll out their SCAD 4.0 ad network, if you will, and essentially prior to that rollout, the window in which advertiser was able to collect information about a user that has downloaded and installed their app was limited to one day time. And SCAD 4.0 opens up that window to three and potentially seven days with a little bit less accuracy. Although Apple had released SCAD 4.0 back in November, there’s a lot of work that the entire ecosystem needs to undertake in order to comply with and integrate into that technology stack. And that is slowly, but surely unfolding in the industry, although it is not complete.

Our hope and expectation is that with access to more information over a slightly wider period of time that advertising efficiency will kick-in allowing for publishers to better acquire customers that align with the particulars of what they’re optimizing against. Yi, do you want to handle the financial breakout between GuruShots and other revenue sources?

Yi Tsai: Yes, sure. Hi, Allen. So, GuruShots contributed $1.25 million on the topline. On the income loss from operation, it shows that they have been $5,000 loss from operation, mainly because we had about $1.8 million contract expenses that helped reduce the loss from operations.

Jonathan Reich: Does that answer your question Allen?

Allen Klee: Yes. Thank you. I heard you guys mentioned that you developed a casual game that you’re doing a soft launch on for that’s a generative AI art, could you just expand on that a little bit?

Jonathan Reich: Sure. The notion around this is to have competitions around creating generative AI art. And if you will — if you were to take GuruShots, specifically the addition of GuruShots, Battles and as opposed to focusing on amateur photographers, which is a more limited audience, but open up that funnel to really anyone that can prompt, anyone that can type a character string in around a particular competition. That is what we envision. There will be set of in-game resources that is more — those game — we will have more in-game resources and we imagine that from monetization perspective that this will open the door for monetization through a combination of advertising as well as in-app purchases of particular game resources.