Zedge, Inc. (AMEX:ZDGE) Q2 2024 Earnings Call Transcript

Zedge, Inc. (AMEX:ZDGE) Q2 2024 Earnings Call Transcript March 15, 2024

Zedge, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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: 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: 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: 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 [ph] 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 [indiscernible]. 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.

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Q&A Session

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

Allen Klee: 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: 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: 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: 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: For both.

Jonathan Reich: 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: 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: 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 — and so far [ph] 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: 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: 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: 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: 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?