Zedge, Inc. (AMEX:ZDGE) Q3 2023 Earnings Call Transcript

Zedge, Inc. (AMEX:ZDGE) Q3 2023 Earnings Call Transcript June 12, 2023

Zedge, Inc. beats earnings expectations. Reported EPS is $0.07, expectations were $-0.03.

Operator: Good afternoon and welcome to Zedge’s Earnings Conference Call for the Third Fiscal 2023 Quarterly Results. During management’s prepared remarks, all participants will be in a listen-only mode. [Operator Instructions] After today’s presentation by Zedge’s management, there will be an opportunity to ask questions. [Operator Instructions] 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 operating 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 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 like to turn the call 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 third quarter results, which were generally in line with our expectations. Q3 revenue increased 8% from last year. While there were still challenges related to the combination of geopolitical, economic and industry-specific issues, we saw some early signs of stabilization in advertising with a year-over-year declines in advertising revenue decreasing to 6% in Q3 from 19% in Q2. The combination of Emojipedia delivering high double-digit growth and Zedge App’s monthly active user base or MAU remaining roughly flat on both a sequential and year-over-year basis were the primary drivers behind this performance.

The headwinds have taken their greatest toll on GuruShots. As I discussed last quarter, the mobile gaming industry is still struggling with effectively overcoming Apple’s App Transparency Tracking framework or ATT, which reduces an advertiser’s ability to precisely identify and target prospective customers, resulting in lower ad performance and increased cost, yet there is light at the end of the tunnel as the ecosystem nears the stable adoption of solutions including SKAN 4.0 and the increasing use of AI to improve audience targeting that should result in improved return on ad spend or ROAS. Let me provide some more granular detail about our major product initiatives. For Zedge, we are iterating with pAInt, our generative AI wallpaper maker to improve take rates and engagement.

Photo by Jonas Leupe on Unsplash

This includes investments in onboarding, product marketing and the core product. At the same time, we’ve revamped Zedge Plus, our subscription offering by bundling in-app currency that users can paint with as well as used to purchase other premium content. The subscription overall was rolled out in mid-May and we are currently seeing a 50% increase in free trials on android. In addition, we also introduced subscriptions on iOS and the initial demand is exceeding our expectations. If this trend continues, it will add incremental revenue and cash to our financial statements. Over the course of the next several months we will optimize the pricing and are hopeful that these steps will result in returning to subscriber growth. And finally, we are continuing to scale paid user acquisition for the Zedge App on Android where we’ve had success in generating ROAS that justifies the investment.

Turning to GuruShots, over the next couple of weeks, we expect to release the Battles gameplay feature, which brings a hybrid-casual gaming experience that enables newbies to start competing in short-duration photo competitions that are limited in size. Battles is expected to open the top of the funnel, making the GuruShots game more accessible and relevant to a broader audience who will hopefully become hooked and transform into long-term players. In addition, we are in soft launch with AI Art Master, a new game that harnesses the Battles game mechanic and taps into the explosive growth in the AI generative art sector. As with the rest of our portfolio, we will closely monitor KPIs including retention, engagement, session length, and the like and then iterate to improve performance.

Our goal is to expand the launch into other markets this summer. Although user acquisition for GuruShots is still challenging, we are expecting improvements as the industry continues adjusting to the post ATT world. Aside from the improvements and new features we’re introducing to make our games more attractive to a broader base of players, we are also keen on benefiting from the advances that the market is making with SKAN 4.0, which is Apple’s framework to help advertisers measure the effectiveness of their ad campaigns on iOS devices, as well as the increasing use of AI to more effectively target specific audiences. In addition, we are also advancing the economy and testing an advertising layer. Taken all together, we expect that ROAS will return to acceptable levels justifying further UA spend.

We also know that heavy hitters like Facebook and Google are hard at work tuning their models to provide publishers with a sustainable solution that delivers profitable UA spend. We are monitoring developments closely, testing, speaking with other publishers, and keeping our ear close to the ground so that we can invest wisely. We also have focused on the AI space with the introduction of AI Art Master because of the potential that organic marketing brings to the table. Recall, the Zedge app has garnered most of its 600 million plus total installs by way of organic channels. Even so, given the change in the market environment and near-term expectations since we acquired GuruShots, we were obligated by accounting standards to take a one-time, non-cash, write-down of $8.7 million this quarter, relating to goodwill which negatively impacted our operating income.

Yi will address this further in his comments. Turning to Emojipedia, this business is firing on all cylinders, exhibiting an impressive growth of 90% year over year in Q3. The improvements we’ve made to the user experience, ad stack and multi-language support have been really paying off, and there is more to come. In July, we will celebrate the 10th anniversary of World Emoji Day with a redesign of the website and further upgrades to the offering that we believe will drive continued outperformance for this business. In closing, we saw some encouraging signs in our business in Q3, even in the face of a difficult environment. Our team is passionate about executing effectively, driving innovation, increasing revenue, and reducing costs, despite the numerous obstacles that the tech industry, particularly the mobile app sector, is currently confronting.

Throughout the past few quarters, we have successfully bolstered our team with experienced professionals in product development, engineering, data analysis, and management. These individuals are diligently working towards unleashing the full potential of Zedge. With cautious optimism, I believe that these investments will generate significant value for our shareholders, just as we have already begun to accomplish with Emojipedia. I want to thank you our investors, board members, partners, and employees for your continued support. Now I would like to call over to Yi who will review our financial results. Yi?

Yi Tsai: Thank you, Jonathan. Moving to our third quarter results. MAU, defined as the number of unique users that opened our Zedge app during the last 30 days of the period, decreased 0.3% from a year ago to 32 million. MAU in well-developed markets was down 6.7% and emerging markets were up 1.6% driven by strength in Latin America. Europe, which contributes to both metrics, continues to suffer from the Russian invasion of Ukraine, inflation and the energy crisis. Total revenue in the third quarter was $6.7 million, an 8% increase from last year. Digital goods and services, which encompasses revenue from GuruShots, came in at $1.1 million. Similar to Q2, GuruShots’ revenue was negatively impacted by Apple’s ATT framework, macroeconomic issues and the geopolitical situation.

Subscription revenue was down 8.6% driven by a 12% decrease in active subscribers. As Jonathan mentioned, we are now starting to see signs of a rebound with the new subscription offers that we rolled out over the past several weeks. Zedge Premium’s GTV was flat at $410,000, reflecting incremental revenue generated from pAInt, which offset modest declines in other content sales. Average revenue per monthly active user, or ARPMAU was $0.053, an increase of 1.5% year-over-year. Operating expenses increased, primarily due to the inclusion of GuruShots and an increase in paid user acquisition for the Zedge App on Android. Beyond our normal operating expenses, we also took a one-time $8.7 million non-cash goodwill impairment charge in Q3 that impacted operating expenses.

In accordance with accounting standards, we usually perform our annual goodwill impairment test in Q4. However, in light of the sustained decline in our stock price, we performed an interim impairment test in Q3, and concluded that the carrying value of GuruShots exceeded its fair value resulting in this one-time charge. Please note, this is an accounting treatment and does not reflect our view on the potential for GuruShots. Net loss, including the $8.7 million one-time charge, was $7.7 million and reported loss per share was $0.55 cents. Adjusted EBITDA was $1.7 million, versus $2.9 million in the prior year period. From a liquidity standpoint, we remain in a strong net cash position with over $18 million in cash and cash equivalents. Moving to our stock repurchase program, we repurchased 239,000 Class B shares during the quarter at a weighted average price of approximately $1.95 per share.

In total, as of the end of Q3, we have repurchased 681,000 Class B shares since inception of the buyback in October 2021. Thank you for listening to our third quarter earnings call, and I look forward to speaking with you again on the next call. Operator, back to you for Q&A.

Allen Klee: Good afternoon. Congratulations on your discipline to continue to run the business cash flow positive in difficult times. My first question is related to GuruShots. Your — you had when you originally bought it, you’ve discussed some planned increased marketing spend. How do you — talk about the amount of marketing spend that you’re putting towards it, and how you feel those dollars would be — if you’re getting where you think you’ll get a good return on that? And how we should be monitoring Battle and Learn and also maybe — also moving, putting pictures on Zedge marketplace. Thank you.

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Q&A Session

Jonathan Reich: Thank you, Allen. Marketing spend is a function of return on ad spend. So for every dollar that we spend on user acquisition, we have data from historical cohorts that we can compare in terms of the efficiency of that spend. And as discussed in my comments, with the resettling of the user acquisition space, post ATT, we’ve seen a decline in performance. Therefore, we are being exceptionally careful about waiting for new solutions to come out that will yield better return on ad spend. We are constantly testing, we are constantly investing in our infrastructure to improve the return on ad spend. And in addition to that, as mentioned earlier, we are investing in the product in order to open up new sources of revenue and new customer bases, that can generate that revenue, ultimately to yield a better ROI from the product.

We believe that as the industry continues to develop and find an effective way to target customers, while preserving privacy according to the guidelines and rules that Apple has built into its ecosystem, that we will benefit from the advancements and be able to put money to work in terms of identifying those prospective customers, and scaling from there accordingly. In terms of Battles, as I mentioned, we are in the midst of releasing that in beta. And the goal with Battles is for us to open up more of the top of the funnel to engage users that are newbies that need to understand what GuruShots is, and the intention is to provide a more contained less heavily intensive game experience for these users to sample the GuruShots game. And then as they continue to enjoy Battles, we would then begin to bring them into the overall GuruShots competitive realm, if you will.

Allen Klee: Okay, great. And the process of — for pictures that people are submitting with GuruShots into competitions to move some of those pictures into being sold on your marketplace. Now what’s the status of that.

Jonathan Reich: So we’ve done some initial testing there. There’s products work that needs to take place in order to avail that as a seamless, very easy to accomplish business goal, and that is still under development. Separately, and apart from that, we’ve talked about the notion of using some of the GuruShots expertise in gamification, to add gamification elements to the Zedge App and that is also something we are investing in. And I hope that fast forwarding the next quarter or so, some of that will be fully available in the Zedge ringtone and wallpaper app.

Allen Klee: Okay. Thank you. In terms of you mentioned that your monthly active users was close to like you had held it pretty stable, which in this environment is a positive. What would you attribute that to?

Jonathan Reich: A combination of several factors. First of all, continued focus on seeing to it that our product is enjoyable, offers value, and is easy to use. And in addition to that, we’ve also been ramping up our user acquisition spend for the ringtone and wallpaper app specifically focused on Android. And we’ve seen attractive return on ad spend for that investment. That is one of the movers to the growth that we’ve experienced, particularly in Latin America. And we will continue to invest in paid user acquisition as long as the ROI is there to justify that investment.

Allen Klee: Okay, great. What would — you’ve been able to hold up your advertising rates despite a market where I imagine most other companies are seeing down numbers? What do you attribute that to?