Zedge, Inc. (ZDGE) Q4 2023 Earnings Call Transcript

Good afternoon and welcome to Zedge's Earnings Conference Call for the Fiscal Fourth Quarter and End of Year 2023 Results. I will now turn the call over to Brian Siegel. You may begin.

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 that Zedge periodically filed 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 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.

Good afternoon. Thank you, Brian, and thank you all for joining us today. I will start by briefly reviewing our fourth quarter results, which were generally in line with our expectations. Q4 revenue decreased 10% from last year. While we encountered challenges stemming from the combination of geopolitical, economic, and industry-specific issues, we observed ongoing stabilization in advertising, with ad revenue remaining flat sequentially, even during the traditionally weaker Q4 period. Furthermore, in Q4 of fiscal year 2022, we had a one-time $4 million accounting benefit, skewing year-over-year earnings comparisons. Other positive highlights from the quarter included 7% sequential growth in subscription revenue as our new iOS and overhauled Android offerings contributed to positive momentum. Additionally, Zedge Premium's gross transaction value, or GTV, was up 14% year-over-year and down $26,000 sequentially, benefiting from paying users of pAInt, our generative AI wallpaper maker. All of this led to higher gross margin and sequential growth. Finally, Emojipedia continued to build on its momentum throughout the year with revenue up nearly 70% versus last year. Every year, we pick at least one company-wide area of focus to overhaul. In fiscal year '23, we addressed data and analytics, and I'm happy to report that we achieved our goal of democratizing data. The improvements we made in our product, marketing, monetization, finance, and executive teams allowed us to access accurate and granular data more quickly and run experiments in concert with one another to make data-driven decisions more easily. As a part of this overhaul, we expanded our data team, and we are now very well positioned for continued evolution in a world that is increasingly dependent on data supremacy. In fiscal 2024, we are committed to building a full stack marketing team with capabilities spanning user acquisition, branding, creative creation, marketing analytics and reporting, competitive research, content marketing, app store and search engine optimization, and reengagement marketing. Though we already possess many of these skills, we're now bulking up in areas we haven't previously invested in. Furthermore, we are also using AI in our workflow to scale quickly and efficiently. In light of the significant change that has occurred in the mobile app marketing space with Apple's IDFA deprecation and the upcoming rollout of Google's privacy sandbox across Android, it has become imperative for app developers like us to excel in many marketing disciplines. We expect to increase our investment in paid user acquisition and enhance our expertise in all areas of the marketing staff to generate attractive return on ad spend or ROAS efficiently. From a product perspective, we have multiple initiatives to enhance existing products and further diversify our portfolio. From the Zedge marketplace, we will focus on expanding pAInt, our generative AI wallpaper maker. Our key priorities include the global rollout of pAInt, which may unleash high-growth opportunities, especially in markets where we are an early entrant. We also plan to offer pAInt on our website, enabling users to create all types of images, not just wallpapers. I want to underscore that our current iteration of pAInt opens new opportunities in the iOS ecosystem, allowing us to compete on equal footing in light of Apple openly welcoming this new technology. Finally, in the second half of this year, we expect to introduce a stand-alone Gen AI app that will offer many more capabilities and, with time, encompass more than just images. Beyond iOS and Android, we plan to revamp our website, enabling users to access pAInt to create all types of images, not just wallpapers. We will also test a print-on-demand capability so that users can bring their creations into the real world. I mentioned Zedge Plus, our Zedge marketplace subscription offering earlier. I'm excited because prospective subscribers are responding well to the overhaul evidenced by our subscription revenue going up sequentially. With ongoing investments not only in marketing but also in testing subscription value adds and a variety of pricing SKUs, we hope to return to subscriber growth sooner rather than later. Turning to GuruShots; not unlike what we initially experienced with Emojipedia, GuruShots is taking more time to scale than we would prefer, yet we remain confident in its long-term prospects. Although the gaming sector has faced global and economic challenges, the thorniest issue relates to Apple's app transparency tracking framework, which severely limits the information that app marketers can secure to target prospective customers. Although Apple released Scan Network 4.0 in order to enable growth with improved attribution tracking capabilities, the impact will be limited until major platforms like Meta are successful in embedding this into their tech stack. In the meantime, we are taking a two-pronged approach to stabilizing GuruShots and positioning it for growth. First, we focused on product innovation by rolling out Battles, a new hybrid casual gameplay feature for users to start competing in fast-paced, short-duration photo competitions that are limited in size. Battles is important and will help make the GuruShots game more accessible and relevant to a broader audience, hopefully converting users into long-term players. In addition, we are evolving with a token-based economy and will start introducing advertising-supported experiences in early calendar 2024. Second, we are working closely with both Google and Meta to adapt and expand ROAS-positive paid user acquisition by optimizing against several inputs, including creatives. This will take time and resources as their algorithms optimize for relevant customers. Suffice it to say, we are monitoring developments closely, testing, speaking with other publishers, and keeping our ear close to the ground to invest wisely. We are building on Emojipedia's fiscal 2023 success with continued innovation and plan to test features like emoji translations and mashups along with new content verticals like emoticons, print-on-demand merchandising, and hyper-casual emoji games and quizzes. Beyond our three core product groups, we have soft launched AI Art Master in five countries and currently plan to expand globally over the next several months. We believe AI Art Master, a hybrid casual Gen AI game that enables users to create impressive content to compete against other players in fun fast-paced competitions, has the potential to be our fourth core product. AI Art Master capitalizes on GuruShots' mobile gaming expertise and the hottest tech trend, Gen AI, positioning AI Art Master at the center of the explosive growth that both the Gen AI and gaming sectors are experiencing. Taken together, we 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 roadmap, 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 products, technology, and marketing. Additionally, we have a relatively untapped opportunity in the mobile gaming sector with GuruShots and AI Art Master that are based on our acquisition of GuruShots in 2022. Before closing, I want to underscore that Zedge is fortunate to have GuruShots as a member of our family. As you know, GuruShots is headquartered in Tel Aviv, and Zedge stands firmly with Israel. We are appalled by Hamas' barbaric behavior, and our hearts go out to the victims of Hamas' heinous attack and the victims' families and friends. I want to thank our employees and remain humbled by their courage and commitment, especially in the face of terrorism, rocket fire, army mobilizations, school closings, and the like. Now, I would like to turn the call over to Yi, who will review our financial results. Yi?

Thank you, Jonathan. Starting with our fourth quarter results. Now for the Zedge marketplace defined as the number of unique users that opened the Zedge app during the last 30 days of the period. Decreased 3.4% from a year ago to $30.9 million. Now in well-developed markets and emerging markets were down 6.8% and 2.4%, respectively. Europe, which contributes to both metrics, continues to suffer from the Russian invasion of Ukraine and inflation. Total revenue in the fourth quarter was $6.6 million, down 10% from last year. Digital goods and services, which encompasses revenue from GuruShots, came in at $1 million, down 29% from last year. Similar to Q3, GuruShots' revenue was negatively impacted by Apple's ATT framework, macroeconomic issues, and the geopolitical situation. Subscription revenue for the quarter was down 3% versus last year. However, this metric was up sequentially as our active subscriber trend improved and higher-value iOS attrition and our new value-added Zedge Plus offering for Android replaced lower-cost legacy subscriptions which only removed ads. Net premium GDV grew 14.3% from last year to $384,000, reflecting incremental revenue generally from pAInt, which offset a modest decline in other content sales. Average revenue per monthly active user saw a decrease of 5.5% year-over-year. Still, this metric was up 4% sequentially, reflecting stability in ad pricing and a positive impact of our new iOS and Android subscriptions. After backing out the one-time $4 million accounting benefit in Q4 of last year, operating expenses were flat year-over-year at $5.1 million. GAAP net income for Q4 was $0.2 million and EPS was $0.01. Adjusted EBITDA was $1.6 million versus $2.2 million in the prior year period. From a liquidity standpoint, we remain in a strong cash position with over $80 million in cash and cash equivalents and only $2 million in bank loans. We repurchased 72,000 Class B shares during the quarter at a weighted average price of $1.98 per share. In total, we bought back roughly 759,000 of our Class B stock during fiscal 2023. Thank you for listening to our fourth quarter earnings call, and I look forward to speaking with you again on the next call in mid-December. Operator, back to you for Q&A.

Thank you. We will now begin the question-and-answer session. Our first question is coming from Allen Klee from Maxim Group.

Our thoughts are with your employees at GuruShots. I wanted to start with Apple's pricing rules now and the actions that big sites like Facebook are using. How do you think about how this is going to play out in terms of the potential timing of the effectiveness of the advertising to improve over time?

Allen, thank you for your thoughts. We appreciate that. In terms of timing, that's, I think, the $64,000 question but the $64 million question. As far as we're concerned, until platforms like Meta or Facebook have fully implemented a working version of Scan 4.0, it is going to be complicated to scale effective advertising without having new data to drive better marketing decisions. I think that you know that Meta rolled out a version of Scan 4.0 for probably around 1.5 months, 2 months ago and then quickly had to reverse Beta. Reading between the lines, it was likely not yet ready for prime time. And I can only imagine that this is amongst one of the highest priorities for their business. Having said that, and as I described during the call, we are using other mechanisms to optimize, whether it be rapidly and materially increasing the number of creatives that we have, using all sorts of different creative styles. For example, UGC videos or promotional videos and things of that sort. Coupled with spending based upon where we are seeing an appropriate return on ad spend. I can assure you that as soon as Facebook or Meta is ready to implement this at scale, we will jump on that opportunity and capitalize on the introduction of Scan 4.0. I also think it's important to mention that we have become, what I will call, managed account customers of both Meta and Google, meaning that there are dedicated account managers with subject matter expertise overseeing our accounts, working closely with our team in terms of helping us expand the marketing initiatives that we have in an ROI-positive fashion. I would just underscore, in light of the downsizing that Meta has undertaken this year, I view that as indicative of how interested they are in our business and how we can scale with them. I hope that answers your question.

That was great. You mentioned a lot of initiatives for fiscal '24. What would you say are the top ones that you think would potentially have an impact on '24 and '25 financials?

Sure. Let's take a look at each of the business units. The flagship Zedge wallpaper business unit, we are really investing a tremendous amount of effort in improving our subscription offering. As you know, the financials associated with subscriptions are very attractive. Not only is the profit margin attractive but we also receive the cash upfront. Just the notion of having rolled out an iOS subscription is having a meaningful impact. I would note that in the U.S., the price point for an iOS subscription is around $20 per customer compared to Android, which is around $5 for an annual subscription. So very significant increase. But it's more than simply price testing and coming up with a price that resonates with users; it's also the value adds, and there is a considerable amount of work being done there in addition to marketing efforts. In respect to the flagship as well, we are continuing to invest in pAInt, which is our Gen AI wallpaper maker, rolling that out on a global basis. We may see accelerated growth there in markets where we are early. Many of the Gen AI apps today in this space use a subscription business model which doesn't necessarily align well with many of the markets outside of the United States, Canada, U.K., and Australia as an example. So when you get into the emerging markets, the notion of subscriptions is less palatable. So there's a lot of work going on in terms of making this available and continuing to improve the experience. We may have some early mover advantage if we're successful there. Additionally, I'll mention that we're also working on a stand-alone AI app; the notion is to have an app which is not only wallpaper-driven but image-driven and other content that has a much more intuitive user interface and allows us to market the notion of Gen AI as opposed to that being a feature within our app. Furthermore, the introduction of pAInt to our website should be available in the next couple of weeks. So a lot of effort is going into that. Moving to GuruShots, two main drivers are in the GuruShots game itself; the introduction of Battles and using Battles as a mechanism to improve engagement as well as attract and open up the top of the funnel to bring in customers who might want to get a sense for what competitions are like, with a much lower and easier barrier in terms of learning curve. That is what is happening there with the hybrid casual experience. Additionally, we continue to believe that will unlock growth for us. Lastly, the brand-new AI Art Master game, which is 100% hybrid casual and taps into the growth of not only Gen AI but also growth in the gaming space. So looking over the next two fiscal years, we are working to deliver that promise to the market and to our investors. Finally, for Emojipedia, we have seen substantial revenue growth year-over-year, and our ability to continue to add functionality and broaden the focus of Emojipedia to new content types and introduce enhancers, for example, POB, can continue to drive incremental growth in that business unit.

Thank you. In terms of last quarter, you mentioned that you were initiating a $2.5 million to $3 million cost-cutting initiative or that's what the benefit you would get annually, I think. Has that happened already? Or any update on that?

Sure. We had announced this not last quarter, but I think it was a couple of quarters ago. And yes, we acted on that, including a host of different initiatives from SaaS infrastructure to staffing. As you know, we've got employees in various regions of the world, different price points, to our marketing investment, and so on. We have acted on that and will continue to be mindful. Ultimately, we want to ensure that our cash position continues to grow and that we're not getting too far ahead of ourselves in terms of expanding the initiatives or seeing SG&A grow at an unsustainable pace. I want to underscore that when taking a look at SG&A, to remember that it includes both our marketing expense and the percentage that Google or Apple retains when a user spends money on their platform. So SG&A is expected to grow, but that is tied to marketing, and that growth can be expanded or contracted based on ROAS. It's also worth mentioning that marketing today is much different than it was three or four years ago due to privacy changes, whether with Apple or soon to be with Google's Privacy Sandbox. This means it will take longer to achieve recurring results that we can evaluate with confidence. However, as I mentioned in my recorded remarks, we have prioritized building out a full stack marketing team to address both paid user acquisition expertise and areas such as app store optimization and content marketing. This is essential for our growing success.

For fiscal '24, I think historically, the first quarter is a seasonally slower quarter. Would you agree that’s most likely? Maybe talk about just the seasonality, how that typically plays out in the quarters? And is there anything you wanted to comment on financial outlook or goals for fiscal '24?

Sure. We've historically not provided projections. I will say that seasonality, given we have a large percentage of revenue from advertising, is tied to ad spend typically occurring during the holiday season. Therefore, our fiscal Q2, which is November, December, January, tends to be the strongest quarter of the year. After that, we usually see a downturn as we enter calendar Q2. Although we're technically a month off, generally, seasonality for ad spend aligns with what happens in a typical ad-driven business. That pattern generally holds but isn’t infallible. We are fortunate because we do have diversification, which includes subscriptions. That subscription revenue, as you know, is amortized over the life of that subscription. Going back to my earlier comment, our ability to continue our successful overhaul of the Android offering and the newly introduced iOS subscription is critical to diversifying revenue and insulating ourselves from those fluctuations.

One of the other things you mentioned as an initiative for fiscal '24 is building out your marketing capabilities. Could you maybe just expand a little more on that?

Sure. Prior to the acquisition of GuruShots, Zedge's growth was primarily driven by organic installs, where we surpassed over 600 million installs globally. The acquisition of GuruShots introduced a new marketing dimension where, in the mobile gaming space, paid user acquisition is a key growth driver. In tandem with that, we had begun to invest in paid user acquisition for our flagship Zedge marketplace. We have expanded this investment over time and believe it offers an attractive return on ad spend. The Zedge marketplace's paid user acquisition has a different profile than GuruShots. To be successful in our marketing investment, we have many different areas to refine and invest in. As mentioned earlier, the plan includes building out a seller user acquisition team focused on both paid and organic channels, and aligned with fiscal 2023's goal of strengthening data and analytics. Accordingly, we need accurate reporting to make informed advertising or user acquisition decisions. This includes investing in app store optimization, search engine optimization, messaging, reengagement marketing, content marketing and leveraging tech solutions that provide additional insights or facilitate content creation. These enhancements are critical for our growth strategy.

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