Zedge, Inc. (ZDGE) Q1 2022 Earnings Call Transcript

Good afternoon, and welcome to Zedge’s First Quarter 2022 Earnings Conference Call. 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. 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 first fiscal quarter that ended in October 31, 2021. Any forward-looking statements made during this conference call, either in 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 the actual results to differ materially from those which the Company anticipates. These risks and uncertainties include, but are not limited to, specific risks and uncertainties disclosed in the reports that Zedge files periodically with the U.S. Securities and Exchange Commission. Zedge assumes no obligation either to update any forward-looking statements that they have made or may make or to update the factors that may cause the actual results to differ materially from those that they forecast. Please note that the Zedge earnings release is available on the Investor Relations page of the Zedge website. The earnings release has also been filed on a Form 8-K with the SEC. I would now like to turn the conference over to Mr. Jonathan Reich.

Thank you, operator, and thank you all for joining us today. Good afternoon. Welcome to Zedge’s earnings conference call for the first quarter of fiscal year 2022 ended October 31, 2021. I’m Jonathan Reich, CEO of Zedge. And with me is our Chief Financial Officer, Yi Tsai, who will provide additional insight into our financial performance. We will then be happy to take your questions. For those of you that are new to the Zedge story or haven’t followed us in a while, we own a portfolio of leading digital consumer brands that served 43 million users around the globe in October 2021. Our portfolio consists of Zedge Ringtones and Wallpapers, the leading mobile app used for mobile phone personalization, social content, and fandom art; Zedge Premium, a marketplace for artists, celebrities, and emerging creators to market their digital content to Zedge’s users; Emojipedia, the leading source of all things emoji; and Shortz, a mobile entertainment app currently in beta, focused on short-form storytelling. We possess deep expertise in monetizing our digital real estate whether through advertising, subscriptions, or content sales. Our products appeal to a wide range of customer segments globally, and we have a strong user base in North America and Europe as well as in emerging markets, including India in particular. We topped our record fiscal 2021 in the first quarter, surpassing $6 million in revenue for the first time while reporting revenue growth of 60%, a 43% operating margin, $2.1 million in net income, $3 million in EBITDA, and GAAP EPS growth of 64% to $0.14. We closed the quarter with over $27 million of cash on our balance sheet and almost no debt. Advertising revenue remained robust as we continue to optimize our ad stack to drive higher prices received for every 1,000 advertising impressions, known as CPMs. Subscription revenue and active subscriptions increased 48% and 25%, respectively, versus last year. After a pause last quarter, we were pleased to see subscriptions return to modest growth. Given our acquisition of Emojipedia at the beginning of fiscal 2022, in our release today we clarified that monthly active users, or MAU, and average revenue per monthly active user, or ARPMAU, are KPIs that have always referred only to the Zedge mobile app and neither include the Shortz beta nor Emojipedia, the latter of which today is desktop or mobile web only. Note, the underlying data is unchanged from what we have been reporting. MAU increased 6% with emerging markets up 11%, driven mainly by continued demand in India. Developed markets remained a challenge with MAU declining in the high single digits. Despite this, ARPMAU increased 47% versus last year. Now I’d like to update you on the strategic priorities I outlined on our last earnings call. To start with, growing our customer base and improving engagement, particularly in well-developed markets. During the fiscal first quarter, we began rolling out social and community features starting with giving our users the ability to follow artists they find interesting. We are also continuing to use machine learning algorithms to improve content discovery. As the year unfolds, we expect to add more social and community features while also beginning to focus on search and user onboarding. In addition to these efforts, we are ramping up paid user acquisition campaigns and will continue to expand this effort as long as it proves accretive. Next, we continue to invest in the parts of the business that offer optionality. Zedge Premium is a big part of this opportunity. Tomorrow, we expect to start rolling out our NFT offering, called NFTs Made Easy, in the Zedge Premium marketplace for both Android and iOS. Our approach to NFTs allows Zedge Premium artists to create and sell NFTs to our users without being cryptocurrency experts. Our users can purchase NFTs in the same manner as they have always purchased any item in Zedge Premium, mainly by buying and spending Zedge tokens, our existing virtual currency, which are available in the Zedge app through in-app purchases. NFTs Made Easy possesses disruptive potential because we've simplified the process for artists to self-publish, mint, and sell their NFTs. We do not charge minting or gas fees to artists, and they are paid in their local currency. For consumers, it is just as easy. NFTs are purchased with Zedge tokens as in-app purchases through the Android Play or Apple App stores in their local currency. Cryptocurrency knowledge and wallets are not needed. At launch, we are starting with video wallpapers from a select group of artists and over time we expect to expand across different content categories and make this functionality available to all Zedge Premium artists. We also expect to enable additional capabilities such as limited editions, drop dates, auctions, and trading. Stay tuned for further announcements in 2022. In summary, we are beyond excited about the potential for NFTs Made Easy in the Zedge Premium marketplace and believe this will not only bring more artists to the platform, but it will also increase Zedge Premium's GTV and revenue while making us more relevant on iOS. Without trying to temper our excitement for the product, I want to set expectations for investors. Revenue from NFTs is not likely to be material from the get-go. We expect it will take time to take hold and ramp as we fill out the offering and bring in new artists. Plus, it will likely be most relevant to users in well-developed markets, where we are working to increase engagement. While there are no material operational updates about Zedge+ subscriptions or the Shortz beta, we remain committed to enhancing both of these offerings and will keep you apprised when there is news to share about their progress. We are also in the process of further unlocking Emojipedia's value by translating the site into languages other than English while also exploring the possibility of a native mobile app. And finally, there's M&A, where we are continuing to look for symbiotic opportunities that can benefit from access to our large customer base, our expertise in monetization, our technical know-how, and our skill in managing a complex platform, among other benefits. In closing, we had an outstanding first fiscal quarter of 2022, and believe we are still in the early innings of reaching our growth potential. Similar to last year, we are not updating guidance at present and still expect top line growth of 25% to 30% with continued net income growth, strong operating margins and cash flow, and strong EBITDA growth. Before handing the call over to Yi, I want to thank you, our investors, for your support. I also want to remind everyone that our success is a direct outcome of the outstanding team of talented and dedicated professionals who work at Zedge and who go above and beyond to execute our vision. Thank you and Happy Holidays. Now, I am going to turn the call over to Yi, who will provide details about our financial performance.

Thank you, Jonathan. I want to start by reminding those on the call that our fiscal year ends July 31st. Moving to our first-quarter results. MAU, defined as the number of unique users that opened our Zedge app during the last 30 days of the period, increased 5.6% to 34.2 million during October versus 32.4 million in October 2020. Emerging markets MAU expanded by 11.2% while well-developed markets MAU contracted by 8.5%. Total revenue in the fourth quarter increased 60% from last year to $6 million. This year we benefited from our ongoing work to improve our ad operations. Subscription revenues were up 48% from last year, still demonstrating strong growth. Zedge Premium's Gross Transaction Volume, or GTV - that is the total sales volume transacted through our marketplace - was about $330,000, up 58% compared to the year-ago quarter. As Jonathan indicated, this is a key focus for us going forward as we believe the potential of the marketplace is still substantially untapped and will benefit significantly from our new NFT platform. Active subscriptions were up 25% versus last year and returned to sequential growth versus the prior quarter. The slowdown in net subscription growth was basically due to the number of new subscriptions added being offset by our churn rate, which has remained a constant percentage even as we grew to a higher base number of subscriptions. This is a common problem for consumer subscriptions as the subscriber base gets larger, and as Jonathan mentioned, we are taking steps to re-accelerate sequential growth in these numbers. Overall, ARPMAU was $5.03, an increase of 47% year-over-year, driven by the combination of better advertising performance and higher-paid subscription numbers versus last year. Operating margin increased to 43% versus 29% last year, reflecting the continued revenue growth and strong operating leverage inherent in our business. Net income and diluted EPS were $2.1 million and $0.14, respectively, versus net income of $1 million and EPS of $0.08 in the prior year. We grew EPS substantially despite diluted average shares outstanding for the first quarter of about 15 million compared to 12.5 million shares from a year ago. EBITDA was $3 million, versus $1.4 million last year. From a liquidity standpoint, we remain in a strong net cash position with almost no debt and over $27 million in cash and cash equivalents, a $21 million increase from last year and up over $2 million sequentially. As Jonathan mentioned, similar to last year, we will update our full-year guidance when we report our second-quarter earnings. The following is just a reminder of what we said on our Q4 call last month. We said we are initially targeting revenue growth of 25% to 30% for the year and due to all of the new initiatives and feature releases, we said seasonality, which usually peaks in our second fiscal quarter, may not be typical this year and internally, we are modeling sequential revenue growth each quarter. We also said that despite the increased level of investment, we believe we should continue to report operating margins of at least 40% for the year. For modeling purposes, we said our expected tax rate would be 21%, as we used all of our domestic NOLs in fiscal 2021. I also suggested using 15 million to 15.4 million shares for calculating diluted EPS. Given the increases in the last two items, most significantly the tax rate, we said we expect a drag on EPS growth in fiscal 2022, but we anticipated continued net income growth with strong cash flow and EBITDA growth. For EBITDA, we said we were targeting a growth rate that is slightly higher than our revenue guidance. Thank you for listening to our first-quarter earnings call. And I hope that each of you remains safe this holiday season. I look forward to speaking with you again on the next call. Operator, back to you for Q&A.

We will now begin the question-and-answer session. At this time, we will pause momentarily to assemble our roster. The first question is coming from Allen Klee of Maxim Group. Your line is live.

Good evening, and congratulations on strong results. You beat me on the top and bottom line. As I look through what caused that, advertising was very strong. Your average revenue per monthly active user increased there, which was a surprise for me. Can you touch a little on what was behind that? And how do you think about if that's got legs to it? Thank you.

Thank you, Allen. It's Jonathan. I appreciate the compliments and those compliments really go to the entire team. I think we've gone through this repeatedly in the past. We dedicate a lot of time and effort to optimizing our advertising stack, and that is exactly what played a role in this quarter. Certainly, there has been a trend in the market with rising CPMs that we are benefiting from. But from everything that we know, it's not simply just being in the right place at the right time. It is a matter of being in the right place at the right time and then working hard in order to optimize the ARPMAU that you refer to. And in terms of legs to it, what we've said repeatedly over the course of the last seven or eight quarters has been that we are continuously investing in optimizing our ad inventory. That involves not only investing in technology, but also investing in resources, design, and various demand partners, seeing which ones are working and the best way of taking advantage of the demand portfolio is our best way of generating the ARPMAU that we have benefited from for the last several quarters. I hope that answers your question.

That's helpful. Thank you. And then in terms of your user base, we still have this trend of growing in emerging markets while declining in developed ones. What do you have behind what's causing the strength in emerging markets and India specifically? And second, regarding developed markets, I know you're looking at a couple of things with Apple and maybe the NFTs. Could you go into a little more detail on what the strategy is to try to grow the developed user base? Thank you.

Sure. With respect to growth in the emerging markets generally and more specifically concerning India, our offering is compelling. As you know, we've got a range of freemium content, so content that people can download without having to pay for that content. That is a draw, particularly in markets where discretionary income is not as plentiful as it is in well-developed markets. Insofar as the developed markets, we have several initiatives underway to improve engagement and increase the customer base. Some of those include community features that we started to roll out, such as the Follow Me feature that allows users to follow artists they like and receive messages whenever they release new content. This draws users to re-engage with the app. As we improve engagement, more users are coming back into the app, which generates revenue from advertising and hopefully also from premium content sales. Regarding NFTs, as I mentioned earlier, we believe NFTs provide a needed utility for our artists' community, something which we expect will attract new artists as well because we have crafted our NFT offering, which we call NFTs Made Easy, in a straightforward manner whereby neither creators nor consumers need to have crypto experience to purchase those NFTs. Our hope is that with time, this will also help drive demand and grow our user base. Specifically for iOS, we are offering these NFTs across both Android and iOS, which we hope will additionally contribute to iOS growth. We're also improving search and content discovery, utilizing machine learning to customize content feeds for users based on their particular tastes and usage patterns. Those are just a handful of items, but in totality, we hope to reinvigorate growth in the well-developed markets.

Okay. And for the NFTs, I noticed on your app today that there were NFTs there. I wanted to understand that a little more in terms of how sellers get paid, similarly to how they are paid for selling wallpaper or ringtones. How is the secondary market for the NFT handled? Where is it secured? If someone purchases an NFT, where are they holding it, so that they can feel comfortable that it won't get stolen?

Great questions. The way one purchases an NFT is by using Zedge tokens, which we sell through in-app purchases. The artist will select the price they want to charge for that NFT, and then the end-user needs to purchase the necessary number of tokens to complete the transaction. This is all done in local fiat currency through the app. For example, if an NFT is priced at $10, the user would purchase $10 worth of Zedge tokens to secure that NFT. In terms of where the NFT is secured, we are working with a third-party technology provider specialized in securing this on the blockchain. As for entering the secondary market, there is currently the ability to do so, though it's a manual process. Over time, we expect that to become easier, potentially even within the app. I previously mentioned supporting trading, auctions, and drop dates, all of which are on the roadmap, ideally for the 2022 calendar year.

Fantastic. I was also using your Shortz app today, and noticed over the year, you've significantly increased the number of categories and genres. I saw some audio on there. Could you talk about how well your experimentation is going?

Sure. During calendar year 2021, I've previously discussed our work in refining the Shortz product, including gaining insights from analytics on content consumption, popularity, demographics, and so on. We’ve increased our efforts in tagging and expanded the different verticals suitable for a variety of customers. We're also gaining a better understanding of usage patterns and consumption concerning audio. We have no updates on where we stand compared to last time we reported fiscal year 2021, other than to say we continue to work along that path, looking for the optimal methods to expand this business and enhance content experiences for users, which should result in recurring usage and ongoing growth.

Great. In terms of your marketplace, you highlighted that as a priority this year. What could the opportunity be? How should we think about that?

We are not providing specific growth numbers for the marketplace. However, there has been significant growth in the creator economy, particularly with NFTs. Considering we have approximately 35 million monthly active users globally, our goal is to leverage the infrastructure improvements made over the last 12 to 18 months. We overhauled our content management system, unified accounts, and are working on our recommendation engine. We aim to make users aware of existing content categories while attracting new artists due to our large user base and straightforward terms and conditions. We are also looking to explore new content genres beyond wallpapers, video wallpapers, ringtones, and notification sounds. These are the aspects we are evaluating at this time while also expanding the universe of artists monetizing on our platform.

Thank you. My last question, how did the quarter perform relative to your internal expectations? What surprised you on the upside or downside?

We haven't shared quarterly budget numbers in the past, and I don't expect we will do so. All I can say is that we've been working hard to take advantage of the opportunities that arise. Our team is dedicated to meeting or beating our budgetary numbers. If gaps occur, we work to understand their causes and how to close them. I previously mentioned that we've hired product managers in calendar year 2021, and having dedicated product managers with P&L responsibility has significantly benefited us in getting answers earlier. This allows us to implement corrective actions quickly when needed.

Thank you very much. I think your company is a great example of how to build a successful mobile ecosystem and consider all these different ways to monetize a larger user base. It's very impressive what you've done. Thank you.

Thank you, Allen. Your words are very much appreciated. Wishing you a happy holiday season and good health.

Thank you. Your next question is coming from Brian Warner. Your line is live.

Oh, I'm sorry. I might have been muted. Can you hear me?

Yes, you're coming through.

Okay. Hi guys, congratulations, and happy holidays and warm wishes to all of you. Two questions. Can you discuss anything you've done to date on paid customer acquisition, particularly domestically? What has the experience been? If you haven't done much, can you provide thoughts on how you plan to approach that? And second, can you give us any color on what the advertising revenues or yields are from subscribers in lesser-developed countries versus developed countries? I'm sure there's a huge disparity, but any insight would be helpful. Thanks.

Thanks for the compliment, Brian. I'm glad to hear from you. Regarding paid user acquisition, we are starting to scale our efforts. We're focused on acquiring customers across various platforms that yield a positive ROI. For successful platforms, we're aiming to expand our spend, and for those yielding negative ROI, we will conduct further tests. We closely monitor our investment criteria, ensuring we generate insight and knowledge regarding customer monetization. When we acquire a customer, we analyze their potential revenue from advertising, premium sales, and conversion to subscriptions over time to ensure we generate positive ROI. Regarding your second question, we haven't shared that level of detail concerning revenue from advertising versus subscription or the disparity between developed and developing countries. We will hold off on providing specifics today.

Okay, fair enough. Thanks very much and good luck.

Thank you.

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