Zedge, Inc. (AMEX:ZDGE) Q4 2022 Earnings Call Transcript

Zedge, Inc. (AMEX:ZDGE) Q4 2022 Earnings Call Transcript November 15, 2022

Operator: Good day. And welcome to Zedge’s Earnings Conference Call for the Fourth Quarter and Full Year Fiscal 2022 Results. During management’s prepared remarks, all participants will be in listen-only mode . 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 the fourth quarter and full year ended on July 31, 2022. 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 files periodically with the SEC.

Zedge assumes no obligation to update any forward-looking statements or to update the factors that may cause the 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 Web site. The earnings release has also been filed on Form 8-K with the SEC. I would like to now turn over the conference over to Jonathan. Jonathan?

Photo by Erik Mclean on Unsplash

Jonathan Reich: Good morning. Thank you, Brian. And thank you all for joining us today. I’m going to start by briefly reviewing our fourth quarter and fiscal 2022 results. Revenue increased 41% and 36%, respectively. Both GuruShots and Emojipedia were primary drivers of both the year-over-year and sequential quarterly growth. Ex-GuruShots and Emojipedia, revenue was up by 22%, driven primarily by advertising. As I mentioned in earlier calls, we are investing in scaling GuruShots and don’t expect it to be profitable for another 18 to 24 months. Even so, on a fully consolidated basis, Zedge remained profitable during the fourth quarter, although, less so than last year, once you exclude the one-time accounting gains. On a positive note, for the Zedge App, total installs increased 11% in 2022 from the end of 2021.

ARPMAU, that is average revenue per monthly active user, increased 17% and Zedge Premium gross transaction value, or GTV, grew by 23% in the fourth quarter and 60% for the year. MAU for the Zedge App declined across well developed and emerging markets, finishing the year at 32 million. Yi will provide more financial details in his section. Now I will share an update on our strategic priorities moving forward. Our leading products are the GuruShots photography game and Zedge’s freemium digital content marketplace, which today offers mobile phone wallpapers, video wallpapers, ringtones and notification sounds. In total, our products served over 40 million users in July. Our company is positioned at the intersection of two major growth trends in consumer tech: casual gaming and the creator economy.

Today, most smartphone users have become amateur content creators, sharing their photos, illustrations, memes and videos to express themselves and gain social validation. In addition, they value friendly competition and garner popularity and recognition from their online community. Many of these creators are talented enough to attract a meaningful following and monetize their content. This is what’s known as the creator economy, a market that has grown massively over the last five years. Prior to the GuruShots acquisition this past April, our core product was the Zedge App, which served 32 million MAU in July 2022. We monetized these customers with a combination of advertising, subscriptions, and in-app purchases of Zedge tokens, our virtual currency.

Zedge Premium offers artists the ability to sell their creations directly to our customers. In December of 2021, we expanded the opportunity for Zedge Premium artists by introducing €˜NFTs Made Easy’, which provides non-crypto experts with an easy-to-use eco-friendly platform to tokenize and sell their art to our customers for Zedge tokens. We’ve been somewhat insulated from the effects of the crypto winter that is currently challenging the NFT market, as our offering focuses on making NFTs affordable and easy to obtain for mainstream consumers. GuruShots is a category killer that fuses photography with gaming, enabling amateur photographers, essentially anyone with a smartphone, to compete in a wide variety of contests across iOS, Android and the web, that showcase their photos.

The game mechanics include progressively more difficult competitions with successful players mastering their skills and then continuing to the next level until ultimately earning the coveted Guru title. Players can compete individually or join together as a team. The game includes community features, leaderboards and chat functionality, which create a sense of belonging, inspiration and competition. The penetration rates leave a lot of room for growth as we estimate that 30 million to 40 million photo enthusiasts regularly use their smartphones to take and publicly share high quality photos and who would be interested in participating in photo contests every month. We also acquired Emojipedia, a profitable Web site that is the go to source for all things emoji, in August of 2021.

Over the past year, we have redesigned the Emojipedia Web site, localized it into 18 languages beyond English, and have started to recognize the benefits associated with overhauling the ad stack. Zedge is building a strategic flywheel that leverages the synergies of a gaming and marketplace dynamic across our portfolio, engaging communities of consumers with content that provides value across a multitude of online and mobile platforms, including social networks, messaging and gaming. This approach connects creators with friendly competition, community and commerce. One of the critical foundations needed to accomplish this formidable goal is easy access to accurate data that can be used to make informed decisions about all aspects of our business, including marketing, product design and usage, content serving, et cetera.

To this end, we created a dedicated data leadership role and recently hired a head of data to oversee and direct all data initiatives, including data collection, cleansing, analytics, model building and deployment. Organizing all of these efforts in one group enables us to progress with a unified approach that is expected to drive improved monetization, marketing, product development, data science and business intelligence. We have also committed meaningful dollars to marketing, specifically paid user acquisition and re-engagement campaigns. We are scaling up while also benefiting from the data that guides our decisions. The changes to user privacy rules that have unfolded in the industry over the past 18 months or so require us to analyze all aspects of the marketing funnel with granularity in order to optimize the return on investment.

We are developing our capabilities in this domain companywide in order to deliver profitable customers to Zedge’s marketplace and GuruShots. Good marketing is a function of many ingredients and depends on good data. As such, our success is tied to coupling these initiatives. Another marketing focus is enabling GuruShots’ artists to sell their awesome images in our premium marketplace. We expect to introduce phase one of this crossover later this month and evolve from there, eventually offering sales not only from within the Zedge App but also on the web. Every month GuruShots players upload around a million photos to the platform. We are excited about the monetization opportunity that this creates for GuruShots’ players, who will be able to make money from their content that they create for gameplay.

In just about six months, we are delivering on a synergy that we identified when making this transformative acquisition. Talking about synergies, we started a cross-pollination process loaning various members of our Zedge App team to GuruShots, to both accelerate GuruShots initiatives and acquire gamification expertise, as we expect to apply these learnings to the Zedge App. This also allows us to control SG&A better as we want to continue running the company profitably. From a product perspective, we have several promising developments that are either in the midst of being introduced or are to be rolled out in the next several weeks. Starting with GuruShots, we have three major initiatives underway. The first relates to customer onboarding.

Over the past several months, we revamped the onboarding process and recently had a breakthrough with respect to converting users into paying players. Our new onboarding ramp has yielded a more than 35% rise in converting installs to first-time paying players, which is a key gauge of measuring the success of driving users to paying players that generate revenue and a positive return on ad spend, otherwise known as ROAS. It goes without saying, the time will tell if these increases are sustainable, but if they are, they speak to some of the early benefits associated with overhauling our data organization. Next, we are about to introduce a feature that our players have been asking for, mainly a Learn feature, which is a TikTok-style feed of short form and engaging educational videos that focus on providing tips and techniques for improving one’s photographs, created by expert photographers.

Depending on how this unfolds, we may be able to use it as a mechanism to introduce a subscription based offering and/or advertising support, providing additional incremental revenue and diversifying monetization. Finally, we’ve been testing Battles, which offers a quick way for newbies to start competing in simplified photo competitions that are short, limited in size and built on a coin-based economy. We expect that Battles will allow us to drive more users into gameplay, increase engagement, advance our game economy and ultimately drive more revenue. Moving to the Zedge App, we initiated a comprehensive 360-degree user experience review to identify shortcomings that chip away at engagement, retention and lifetime value. If we successfully close these gaps, we expect to benefit from improvements, not only in the aforementioned KPIs but also in improving our already strong user ratings and reviews, which would unleash improved placement in Google Play’s algorithm and ultimately drive more user installs.

As mentioned earlier, we continue enhancing Zedge Premium and specifically the NFTs Made Easy platform. As we evolve the offering, we will add features, including drop dates, trading, the ability to use crypto as a payment type and opening the platform up to more types of content and artists. Additionally, we expect more well recognized artists to distribute their content in our marketplace, as Banksy and Micha Klein have already done. Turning to Emojipedia. We now support 19 different languages. Going forward, we will focus on two areas: optimizing the ad stack and expanding the products offering, potentially with a native mobile app version. Finally, we are down the road in evaluating the viability of new content and products in addition to the ones we’ve discussed today.

Stay tuned for more information on this in the upcoming quarters. The GuruShots acquisition will alter our financial projections, given the growth investments we expect to make. Furthermore, like many digital businesses, our business is experiencing pressure due to global economic uncertainty, geopolitical risk, especially resulting from Russia’s invasion of Ukraine, energy shortages, inflation and rising interest rates. As such, we are remaining cautious with our outlook. That said, we still expect revenue growth in fiscal 2023 on a consolidated basis, while remaining profitable. Next week, we are going to celebrate Thanksgiving. Living in a free and democratic country gives us much to be thankful for. I would like to use this opportunity to thank our investors for your continued support.

I also want to thank our employees for their commitment and hardwork, especially in light of the GuruShots acquisition. Finally, I’d like to underscore how highly we think of our colleagues at GuruShots. We’ve had a great start to our relationship and we are excited to work together to increase the shareholder value over time. Now, I would like to turn the call over to Yi, who will review our financial results. Yi?

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Yi Tsai: Thank you, Jonathan. I want to remind those on our call that our fiscal year ended July 31st. Please note that Q4 was the first in which we recorded a full quarter of GuruShots’ results. Moving to our fourth quarter results. MAU, defined as the number of unique users that opened our Zedge App in the last 30 days of the period, decreased 7% to 32 million for Q4 2022. MAU in well developed market was down 14% and in emerging markets, nearly 5%. Europe, which contributes to both metric, was hit especially hard by the Russian invasion and the energy crisis, and its economic impact played a more significant role in this quarter’s decline. Total revenue in full quarter was $7.4 million, a 41% increase from last year, as revenue showed growth but weaker user number and overall economic environment led to restrained growth.

This quarter, we added gaming revenue as a line item in our press release financial, which today makes up in-app purchase from GuruShots totaling $1.4 million in the quarter. Similar to other parts of our business, GuruShots’ revenue was negatively impacted by the situation in Europe. Subscription revenue was down nearly 4% as we are starting to see the impact of reduced active subscribers numbers. Other revenue, which mainly include Emojipedia and Zedge Premium, increased primary from the addition of Emojipedia this year. However, Zedge Premium continued to show attractive growth rate off a smaller base. Zedge Premium’s gross transaction value or GTV, that is the total sales volume transacted through our marketplace, increased 23% to , reflecting increased sales and ASP.

Active subscriptions were down 8% versus last year, as new subscriptions sale did not offset churn. Overall, average revenue per monthly active user, or ARPMAU was $0.058, an increase of 17% year-over-year, driven by better advertising performance and higher revenue from Zedge Premium. This year, operating expenses, excluding one time items, increased by 110% due mainly to the acquisition of GuruShots. However, we did have a one-time noncash item in the full quarter, $4 million contract operating expenses to revalue the GuruShots earnout based on the updated gross assumption. This was classified on the income statement as a change in fair value or contingent consideration. Excluding this contra5t expense, other income would have decreased by 62%, leading to an operating margin of 11.4% versus 42.2% last year.

Provision for income taxes was $216,000 this quarter versus a benefit from income tax expense of $56,000 last year. Our effective income tax rate was 4.6% for Q4 fiscal 2022, much lower than the statutory rate, primarily due to the $4 million one-time benefit discussed above. The effective income tax rate was negative 2.3% last year, primarily due to the release of a valuation allowance against deferred tax assets. Reported diluted EPS was $0.31, however, excluding the $4 million one-time benefit just mentioned, diluted EPS would have been $0.4 versus $0.17 last year. Diluted share count was $14.7 million. Adjusted EBITDA was $2.2 million this year versus $2.9 million last year. Our adjusted EBITDA margin was 30% this year versus 55% last year.

Note that we excluded the $4 million one-time benefit and $600,000 in stock comp expense from our adjusted EBITDA calculation. From a liquidity standpoint, we remain in a strong net cash position with over $17 million in cash and cash equivalents. On that note, in late October, we made a risk management decision to put in place an $11 million loan facility, made up of a term loan and a revolving line of credit. We felt this move was prudent given the uncertain economic environment. As part of the agreement, we drew down $2 million of the term loan at closing. We believe that our strong financial performance over the last several years, combined with our future business prospects, contributed to our ability to secure a facility of this size.

We view this as a positive, especially in light of the challenging fiscal landscape. This move will enhance our cash balance and the facility will give us additional flexibility to accelerate growth when appropriate. We also announced a share repurchase program during the fourth quarter. As of November 10, 2022, we repurchased 160,000 shares. Thank you for listening to our fourth quarter earnings call, and I look forward to speaking with you again on the next call. Operator, back to you for Q&A.

Q&A Session

Operator: The first question comes from Allen Klee from Maxim Group.

Allen Klee: Good morning, and congrats on all the stuff you’re doing. Could we start with average revenue per monthly active user, that being up around almost 17%? That was surprising to me, considering what we’re hearing from other people out there? What was the driver behind that?

Jonathan Reich: The driver behind that is again, what we’ve talked about quarter-over-quarter, which is almost a nonstop maniacal perspective to optimizing our ad tech stack. As you recall, we migrated from MoPub to AppLovin as our mediation platform in, I guess, March of 2022. And when we had undergone that process, we had done testing across other platforms, and AppLovin was proving to outperform. And since then we have continued to improve the entire flow so that we can ultimately deliver this sort of performance.

Allen Klee: And then in terms of the monthly active users, how do you think about kind of on a sequential basis. Is there any way you can think about when that might stabilize kind of, or what the factors that will get you there?

Jonathan Reich: So if I recall correctly, on a sequential basis, Q3 to Q4 we were we were basically flat quarter-over-quarter. And where we are investing our efforts is really around two areas. One is around feature development that we believe can help us in terms of turning that quarter, corner, if you will. And then the other is around in taking advantage of paid channels for both user acquisition and ultimately, reengagement, and doing so within the context of driving profitable users to engage and reengage with the app. I think that we will be able to talk about this with greater clarity when we report Q1 earnings between now and then there’s some new features that are coming out, and we might have some early indications as to what impact that is having.

But ultimately, aside from those new features, as you know, we had introduced social and community features into the app later than expected due to the resources we had to invest in the AppLovin migration, and we are seeing that that investment early stage is also having a positive impact. We have a lot of work to do there in order to get more users to enroll and engage in the funnel, but that will also potentially be a contributor to reversing that trend.

Allen Klee: And for GuruShots, so it’s great what you talked about the 35% increase of converting to first time payers? Can you talk a little about how you think about the process of how that might continue and also the integrating of the ability to sell the pictures on Premium?

Jonathan Reich: The GuruShots game is fairly sophisticated gameplay, and there is a rather steep learning curve that users face when they start engaging with the game. So as mentioned, we have a new feature called Battles that is shortly to be rolled out. And the notion around Battles is to provide immediate gameplay to a limited customer base in a short period of time. So by way of comparison, let’s say a typical photo competition will last 48 hours and is open to the entire universe of players, you can have several thousand players that are competing. And for a new user, that’s a fairly steep learning curve that they have to undertake in order to ultimately win a competition. By contrast with Battles, Battles will be short in duration, could be five minutes, 10 minutes, and will be capped in terms of the number of players, as well as what’s needed in order to ultimately prevail.