Zedge, Inc. Q1 FY2024 Earnings Call

Good afternoon and welcome to Zedge’s Earnings Conference Call for the First Fiscal Quarter 2024 Results. During the management's prepared remarks, all participants will be in listen-only mode. After today's presentation by Zedge’s management, there will be an opportunity to ask questions. I will now turn the call over to 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. The forward-looking statements made during this conference call, whether general or specific in nature, are subject to risks and uncertainties that may cause actual results 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 the factors that may cause actual results to differ materially from those they forecast. Our earnings release is available on the investor relations page on the Zedge website and 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 first-quarter results, which are primarily encouraging and are a consequence of the investments we made in fiscal year 2023, which we expect will continue driving sustainable, profitable, long-term growth. Q1 revenue increased 3% from last year as we continued to manage geopolitical, macroeconomic, and industry-specific challenges. Despite these challenges, ad revenue grew following four quarters of decline. The uptick was driven by Zedge Marketplace's improved performance and Emojipedia, which was up 62%. Zedge Plus, our Zedge Marketplace subscription offering, delivered exciting results, with revenue up 10% from last year and showing sequential active subscriber growth for the second quarter in a row after six sequential quarterly declines. These factors led to record ARPMAU and 35% Zedge premium GTV year-over-year growth. Last quarter, we announced our commitment to building a full-stack marketing team with capabilities spanning user acquisition, branding, creative execution, marketing, analytics, reporting, competitive research, content marketing, app store and search engine optimization, and re-engagement marketing. Along those lines, we recently hired a seasoned head of user acquisition who is scaling our marketing investments to deliver positive return on ad spend growth. I'm now going to provide an update about each of our business units and/or products. Paint is now more than a generative AI wallpaper maker and continues to be a primary focus of the Zedge marketplace. Take a look at what we have accomplished since our last call seven weeks ago. First, we have made paint available globally and are testing different regional business models to scale this feature. Next, we launched the beta version of paint for mobile web, which enables users to create all types of images, not only wallpapers, and seamlessly integrated it with print-on-demand functionality. This feature allows customers to purchase merchandise like t-shirts, pillows, coffee mugs, and more, printed with their art. If this goes well, we believe the Zedge website can fuel incremental growth, especially as we evolve the paint offering. Turning to Zedge Plus, our subscription offering, we overhauled the Android offering in late fiscal year 2023, resulting in the second consecutive quarter of sequential revenue growth. Almost in parallel, we introduced Zedge Plus for iOS, which has been an early bright spot in driving subscription growth. Overall, the iOS ecosystem is an untapped opportunity for us and has delivered attractive growth rates over the past two quarters, driven not only by the Zedge Plus subscription offering but also by better optimization of our ad inventory and growth from paint. We remain committed to continuing to grow iOS, and generative AI may be key to unlocking this potential. While Emojipedia had another strong quarter, we believe there is more to come with continued product innovation. Our previous investments in the website redesign, localization, and technology upgrades are paying off. In fact, in November, Emojipedia recorded its best revenue month ever. With that success, we are now focused on testing new features such as emoji text translations and mashup emoji designs, as well as introducing new content verticals like emoticons, and print-on-demand merchandising to name a few. Some of these will start rolling out in Q2 while others will become available later in the fiscal year. As mentioned last quarter, GuruShots had initially been the case with Emojipedia, experiencing a revenue downtrend, with growth taking longer to actualize than originally anticipated at the time of the transaction. Much of this relates to Apple's ATT framework, which has severely limited the information that app marketers can collect to target prospective customers. Although Apple released SCAD Network 4.0 to enable growth with improved attribution tracking capabilities, its impact will be limited until major platforms like Meta successfully embed this into their tech stack. In the meantime, we are taking a two-pronged approach to stabilize GuruShots and position it for growth. First, we've focused on product innovation by recently 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 now available to 5% of GuruShots' global user base. Our product team closely monitors all of the relevant KPIs to tune and refine the experience and optimize engagement, retention, and in-game economy. We expect to make the feature available to a much larger audience over the next several weeks and believe that Battles will ultimately assist in making the GuruShots game more accessible and relevant to a broader addressable market. We believe this feature will also avail an advertising-supported monetization strategy. Second, we are expanding our user acquisition efforts to deliver ROAS-positive users. This strategy benefits from the data overhaul we undertook last year. Beyond the core game, we continue developing AI Art Master, a new hybrid casual game that leverages generative AI and gameplay where users compete against each other in fun, fast-paced competitions. AI Art Master is currently in soft launch in five countries and can potentially be a fourth core product for us. We are improving the game by analyzing the usage data and targeting a broader rollout over the next several quarters. 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, roadmap, 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. I wish everyone a happy holiday season, and I would like to turn the call over to Yi, who will review our financial results.

Thank you, Jonathan. Now, for the Zedge marketplace, defined as the number of unique users that open the Zedge app during the last 30 days of the period, decreased 10.7% from a year ago to 28.5 million. In the well-developed market and emerging markets, these figures were down 13.1% and 10% respectively. Total revenue in the first quarter was $7.1 million, up 3% from last year. Digital goods and services, which encompass revenue from GuruShots, came in at $0.9 million, down 29% from last year. Similar to Q4, GuruShots' revenue was again negatively impacted by Apple's ATT framework, macroeconomic issues, and the geopolitical situation. Subscription revenue for the quarter was up 10% versus last year, with sequential improvements in net active subscriber trends, as higher-value iOS subscriptions and the new Zedge Plus offering for Android replaced lower-cost legacy subscriptions, which had only removed ads. Zedge premium GTV grew 35% from last year to $421,000, reflecting incremental revenue generated from paint, which offset much decline in auto content sales. Advertisement per monthly active user, or AMAU, was $0.63, up 17% year-over-year, reflecting stability in ad pricing and the positive impact of our new iOS and Android subscriptions. Cost of revenue declined by 23% and was 6.9% of revenue. SG&A declined by 5.6% to $5.5 million. GAAP income from operations returned to the black, increasing by $0.5 million to $0.3 million. GAAP net income and EPS for Q1 were new, showing improvement from a net loss and loss per share of $0.1 million and $0.01 last year. This quarter, FX and income tax expense swings negatively impacted GAAP net income by $143,000 and $271,000 respectively versus last year. Adjusted EBITDA was $1.5 million versus $1 million in the prior year. From a liquidity standpoint, we remain in a strong cash position with over $18.7 million in cash and cash equivalents and only $2 million in bank loans at the end of the quarter. Note that on November 15, after the quarter ended, we paid down the $2 million in bank loan and had a remaining cash balance of approximately $16.7 million. Additionally, we reached an agreement with GuruShots' product owners, and we will not make any earnout payments related to our purchase of the company.

We will now begin the question-and-answer session. The first question comes from Allen Klee with Maxim Group. Please proceed.

Allen, are you on mute?

Allen, can you hear us?

He dropped out of the queue.

Guys, can you hear me now?

We can hear you, Allen. Thank you.

Hi, I'm sorry about that. Starting off, despite monthly active users declining, you've been executing on everything to really deepen my top and bottom line numbers. I wanted to ask a question to start with on monthly active users. Some of that is macro, some of that’s industry. Just on that one point, what would you say you're working on that could potentially start to stabilize that?

Hi, Allen, it's Jonathan. Thanks so much for the kind words. In terms of MAU and stabilizing and potentially even growing that number, literally everything that we have in our product roadmap is focused on improving that number. The marketing efforts that we have, both with respect to organic and paid marketing initiatives, are focused on improving that number. Everything that we have talked about today, as well as our future product growth, is tied to improving that monthly active user base. I just want to point out as well that we're just slightly below 30 million monthly active users. The number is still a very significant number. There aren't that many apps that I am aware of that have that sort of massive penetration. We are certainly shooting to resume growth with that number in the upcoming quarters.

Yes, I would note that some industry research is saying that after smartphone sales being down for around two years, it looks like they may start stabilizing and grow next year, which maybe that will help just that backdrop also?

Yes.

So you talk about GuruShots and waiting on Apple's privacy rules and waiting for the big sites like Facebook to implement what Apple has done. What are you hearing about the timing for that and when that might become effective?

We speak to Facebook regularly. They had rolled out a scan for implementation several months ago and had to quickly roll that back. There's no question of a doubt this is a high-priority item for them, but really that question is best geared for the folks over at Meta. Having said that, we have undertaken several initiatives in order to assist in scaling our page user acquisition initiatives, including creative, and massively increasing the number of creatives, creative themes, and designs. We are also taking advantage of a new product feature that Facebook rolled out known as AEM, Aggregated Event Measurement, which is meant to improve performance by aggregating data from both the app or mobile space and web space. We believe this is having a positive impact in terms of helping us scale. So those two items together, coupled with some internal work that we are in the process of undertaking in conjunction with our data team that is analyzing funnel events that we believe can be targeted against, are all tools that are being used to help us get there. But once GAD4 does come out, we are chomping at the bit to include that in our marketing stack to increase whether it be first-time depositors, users, and the like.

Thank you. It sounds like you have good momentum with paint, where that's getting rolled out. Can you talk a little about how you think about the adoption rate for that? Thank you.

Sure. As mentioned in my earlier comments, we've now made paint available on a global basis. Our offering does not require a user to purchase tokens or subscribe to a service, but rather they can essentially paint through watching rewarded videos. We are optimizing our store listing while maintaining our leadership position in terms of mobile phone personalization. We are also using marketing automation to convert users from being consumers into actual creators. Separate from all that, we are working on a standalone gen AI app that we hope to release in the first couple of months of the 2024 calendar year. Having a standalone fully dedicated app focused on gen AI will allow us to market in ways that really free us of any focus that we have on personalization and shift focus around generative AI. This is how we think about this evolving space, and we are excited about where this space can eventually lead, proceeding with a rational and deliberate growth plan to be in better control of our destiny.

Excellent. For AI Art Master, when you are launching a new game, how do you think about marketing strategy to try to get it to accelerate and ramp up? How are you thinking about the marketing to make that happen? Thanks.

There are many components that go into that. We are investing in the AI Art Master website, which has continued to improve its rankings in search engine optimization. This will assist in terms of driving organic growth when the game is introduced into more countries and eventually rolled out globally. Additionally, we've been doing some light paid user acquisition campaigns in the markets where the game is in soft launch. Certainly, paid user acquisition will be significant for this business. We will also be marketing the game to our user base, comprising around 30 million monthly active users, who are engaged with casual hybrid casual type mobile games. We have a whole set of initiatives around App Store optimization to ensure we benefit from the hypergrowth that generative AI is currently experiencing.

Thank you. Emojipedia has been a home run. I didn't catch everything you said about some of the new features you are looking to roll out. Could you just go over that again? Thank you.

Sure. We're looking at an emoji translator, where you can type in a field of text and have that text rendered in a string of emojis. We're also adding new content types like emoticons. We are testing a print-on-demand capability where users can design products. Our vision extends to offering emoticons, as well as mashup emoji designs, where users can take two emojis and join them together for a new visual. There is also the consideration of a subscription tier for the Emojipedia service that we would want to test.

That's very helpful. I'll throw in a financial question. You're not giving specific guidance, but any commentary on how seasonality and maybe any financial metrics that you're prioritizing?

Well, our business is heavily weighted towards advertising revenue. Historically, Q2, which extends into November, December, and January, is our strongest quarter of the year, and there's no reason to believe that will be different this year. In terms of financial KPIs, we are always looking at our cash, quick ratio, and ARPMAU as being critical to our financial health, allowing us to have ample runway to continue to grow the business and seize opportunities.

That's great. So I'm probably going to say this wrong, but the average revenue per monthly active user was up 17%. A lot of things go into that, and subscriptions definitely helped. What do you see as the key elements that can impact the direction that moves in going forward?

Yes, our product involves not only our ad stack and how we monetize our inventory but also our subscription offering. The growth in subscriptions has been sustained for two quarters. The introduction of subscriptions on iOS has been exciting, as they are at higher price points compared to Android. Along with the Zedge premium marketplace, where we allow artists to sell licensed content, all these elements influence average revenue per monthly active user.

Okay, great. That's it for my questions. Thank you very much. Congratulations on a strong quarter.

Thank you.

We have no further questions in the queue. This concludes our question-and-answer session and conference call. Thank you for attending today's presentation. You may now disconnect.