Zedge, Inc. Q3 FY2024 Earnings Call

Good afternoon. Welcome to Zedge’s Earnings Conference Call for the Third Fiscal Quarter 2024 Results. During 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 operational 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 now like to turn the conference over to Jonathan.

Thank you, Brian. And thank you all for joining us today. I will start by briefly reviewing our third quarter results, which continued to show the positive impact of our investments in FY ’23 to set Zedge up for sustainable, long-term growth. After my remarks, Yi will provide a deeper dive into the quarter. Q3 revenue increased 14% from last year as we continued managing the geopolitical, macroeconomic, and industry-specific challenges spanning the landscape. The Zedge Marketplace was the driver of this performance, with ad revenue up 20% from last year and Zedge+, our marketplace subscription offering, boosting revenue by 35%, including the first jump in net subscriber gains in over seven quarters. Additionally, Zedge Premium's GTV, or gross transaction value, was up 44%, primarily driven by improvements to content and monetization. These factors resulted in average revenue per monthly active user, or ARPMAU, jumping 39% to a record $0.074. Let’s turn to our strategic priorities for the fourth quarter and the beginning of fiscal 2025. As you recall, one of our goals for this year was to build a full-stack marketing team. We’ve achieved much of our goal, as the core team now has dedicated SEO, ASO, user acquisition, and creative resources that are focused on unlocking growth. Going into fiscal ’25, we expect to address influencer marketing and also invest in product marketing. Furthermore, the additions and upgrades that we’ve made to our product development organization are resulting in innovation and product diversification while also driving cost efficiencies that we expect to propel revenue and profit growth in the years to come. Take Generative AI. We introduced pAInt in 2023 and, since January 2024 alone, our users have created close to 14 million wallpapers. pAInt led to the development of a standalone Gen AI creation app, WishCraft, which is currently in beta with select invited users. Additionally, we introduced a print-on-demand capability, enabling AI creators to print their art on home décor, tees, hoodies, and the like. We are also in the midst of expanding the Zedge Marketplace's AI capabilities, which will provide users with fun, exciting, and easy ways to transform themselves into creators, beyond the app itself, so that users can apply the same techniques to items from their personal photo libraries. At GuruShots, we forked the game’s codebase, enabling us to inexpensively develop AI Art Master, a hybrid casual game that remains in soft launch while we focus on returning GuruShots to growth. These initiatives are aside from the operational benefits that we are realizing by embedding AI into many aspects of our operations including marketing, coding, and analysis. Emojipedia didn’t perform as well as in past quarters, which we primarily attribute to an issue relating to the website redesign not yielding the outcome we expected. After identifying the issue, we promptly remedied it. In addition, we are looking forward to releasing several new, exciting features ahead of this year’s celebration of World Emoji Day on July 17th. Moving to GuruShots, where the mandate is to unleash the growth that was core to our investment thesis at the time of the acquisition. As previously reported, our upgraded team is heavily focused on feature development, which hadn’t received the attention it deserved since the acquisition. The updated product roadmap is full of innovative new features designed to drive the 10% to 30% revenue growth that successful new feature introductions delivered in the past, by making GuruShots more accessible to a broader audience. Additionally, by innovating and tying marketing dollars to new features, we are being more efficient with our ad spend. Currently, we rolled out a new onboarding experience to 25% of our Android audience, which is already monetizing better than the legacy experience. While it is too early to know if this is scalable or sustainable over the mid and long term, it does give reason for optimism. By creating an outstanding onboarding experience, we enable newbies to immerse themselves in gameplay in a seamless, intuitive, and simplified manner. Furthermore, we have capped the number of participants in each onboarding challenge in order to increase a player’s chances of winning. The funnel will introduce more features and complexity as the player progresses in the game, enabling skill-based user segmentation, which ultimately creates a more fun experience for everyone. We are also poised to overhaul the game’s economy. The release of our new multi-currency, coin-based economy is imminent, and we believe that it will be crucial in adding and retaining new users by opening up significant opportunities for more players to earn and spend in-game resources. By enabling more value-adds for players, we can manage resource consumption to optimize coin purchases further while making the game even more captivating and fun. While our focus is on attracting new users, switching to a new economy will potentially introduce some volatility from existing players who may be averse to change. Despite falling short of the initial expectations we had for GuruShots at the time of the acquisition, GuruShots remains the leading photo competition game available on the market with more than 170 million photos that have been in active GuruShots competitions. Photography in general continues growing exponentially due to the ubiquity of mobile phones, and with the advent of AI enhancement tools, high-quality pictures are within everyone’s reach. With all the innovation opportunities in the pipeline, I believe we are approaching a turning point for this business, and I look forward to sharing details as they unfold in Q4 and fiscal 2025. In summary, I believe we are on the right path to accelerate revenue growth and profits, and we are just beginning to realize the potential in each of our products. When combined with our stock’s low valuation and our active buyback, I believe we are well-positioned to deliver shareholder value in the quarters and years to come. Now, I would like to turn the call over to Yi, who will review our financial results.

Thank you, Jonathan. Total revenue in the third quarter was $7.7 million, up 14% from last year. This growth comes despite decreases in MAU, which came in at $27.7 million for the month of April. Digital goods and services, which encompasses revenue from GuruShots, came in at $0.9 million, down 20% from last year. GuruShots’ revenue continues to be negatively impacted by Apple’s ATT framework, macroeconomic issues, and geopolitical unrest. Subscription revenue was up 35% versus last year. This metric was up sequentially for the fourth straight quarter as our net active subscriber trends continued to improve, and our higher-value iOS subscriptions and value-added Zedge+ offering for Android replaced lower-cost legacy subscriptions, which only removed ads. Zedge Premium's GTV, which came in at a record $590,000, grew 45% from last year. ARPMAU was a record $0.074, up 40% year-over-year, reflecting stability in ad pricing and the positive impact of our new iOS and Android subscriptions. Cost of revenue declined by 9% and was 5.9% of revenue. SG&A increased by 35% to $6.8 million. This increase was driven mainly by marketing expenses related to an increase in paid user acquisition, which is helping to drive growth. As we scale, we expect to see operating leverage rebound. Additionally, the higher marketing expense reflects the growth in subscription revenue, which means we receive cash upfront but also pay higher upfront fees to Google and Apple. Note that revenue on these subscriptions is recognized over the life of the subscription but at a 100% operating margin. GAAP loss from operations was $0.1 million versus a loss from operations of $8.4 million last year. Last year’s loss included an $8.7 million non-cash accounting write-down related to acquisitions. GAAP Net income and EPS were $0.1 million and $0.01, versus a loss and loss per share of $7.7 million and $0.55, respectively, in the prior year. Last year’s loss reflected the tax-adjusted non-cash accounting write-off for acquisitions I just mentioned. Non-GAAP net income and non-GAAP diluted EPS for the quarter increased 60% and 54% to $0.5 million and $0.03 versus $0.3 million and $0.02 in the prior year, respectively. Adjusted EBITDA was $0.9 million versus $1.7 million in the prior year. Note that D&A decreased 35% versus last year primarily due to the impairment loss on intangible assets recorded in Q2. From a liquidity standpoint, we added nearly $2 million in cash to our balance sheet and finished the quarter with $19.9 million in cash and cash equivalents. We also bought back 60,000 shares of stock, as average daily trading volumes were lower, and our buyback parameters were fixed ahead of the closed window period. When our window opens up in a few days, we plan to more aggressively buy back stock in the market. Thank you for listening to our third-quarter earnings call, and I look forward to speaking with you again on our year-end call in October.

The first question comes from Allen Klee with Maxim Group. Please proceed.

Yes, good afternoon. For GuruShots, could you clarify what the revenue was for GuruShots in the quarter?

Sorry, Allen. It's $0.9 million.

That's what I thought I heard. And that shows up in the digital goods and services, right?

Correct.

Okay, so within GuruShots, I mean, you're doing really well pretty much everywhere else. I’m trying to understand a little, like new features that you said could cause a 10% to 30% jump in revenue. What is the plan for adding these new features?

Great question, Allen. Earlier in the call, I mentioned that we are focusing on three key areas. The first is onboarding, which is the experience new users have when they first download the app and start playing. We have introduced a new onboarding experience in beta to 25% of our Android audience. We are seeing that deeper engagement events are driving more revenue for us. Deeper events refer to a user who downloads the app, participates in a competition, and then continues to engage in subsequent competitions. We plan to optimize the onboarding process, which we believe will help us achieve two goals: attracting more users to play the game regularly and retaining those users, thereby increasing revenue as I mentioned earlier. The second area involves changes to our economy. Currently, we have a resource-based economy driven by users making in-app purchases for specific game resources. We expect to introduce a new coin-based economy with multiple currencies later this month. This will allow for various possibilities. For instance, a new user who may struggle initially can be rewarded with different currencies, keeping them motivated and allowing them to spend these currencies on game resources. The more they invest in resources, the more likely they are to replenish their currencies and make additional purchases. The third focus will come after we fine-tune the economy and onboarding process, which involves improving progression dynamics. Some users find themselves stuck at certain levels for extended periods, even if they remain active. Our focus will be on progression mechanics to help these users advance to the next level. We can create competitions targeting these users to encourage them to progress. This mechanics improvement will begin once we complete the onboarding rollout and optimize our game economy. As mentioned, we currently have 25% of the onboarding available for our Android users, and the new game economy will launch in June. I hope I've explained that clearly, and I'm happy to take any further questions.

Are there any new features that you'll be adding in the next three months?

Onboarding is being viewed as a feature-driven experience. When a new user downloads the app for the first time and does not go through the new onboarding experience, they encounter a complex user interface that requires a significant amount of learning. The purpose of onboarding is to gradually introduce complexity to the gameplay, allowing users to engage in competition while having limited access to features that they will eventually unlock as they become more proficient. Therefore, we consider this an enhancement to features rather than a new addition, such as a new in-game resource.

Okay, great. Thank you. And you mentioned that SG&A, incremental SG&A is going into some paid marketing. Could you talk a little about where that paid marketing, what the focus is of the areas that you're trying to gain customers from?

Sure, so the paid marketing is for the meantime primarily focused on user acquisition for both Zedge and for GuruShots. And the focus there is not simply paid user acquisition, but it is focused around paid user acquisition tied to return on ad spend, as well as aligning our paid marketing spend with feature releases and improvements in the app. So when you take a look at the Zedge app, it is a utility, has a lower lifetime value than GuruShots, and engagement is not as frequent. Therefore, we target a faster payback period for that app, give or take somewhere around 90 days. So we spend a dollar on user acquisition today. Then we want to know that we are whole in around 90 days. With GuruShots, it is a longer payback period. Lifetime value is much higher when compared to Zedge, ringtones and wallpapers. And specific to GuruShots, because of the exercise that we have on onboarding and in the game economy, we are really trying to time the expansion of our marketing investment with the maturation of onboarding and the economy rollout.

Okay, that makes sense. And then, advertising has been very strong. Subscriptions are pretty solid. Could you maybe just comment a little on, I guess, advertising rates go up with subscriptions and you have more in the bundle with subscriptions now than you had in the past, so there's more value. And you're also rolling it out to iOS users. Are those the main things? Are there any other things that you should also be thinking about?

We have enhanced our subscription offerings and are actively seeking additional value to include. Over time, we expect to see even more value bundled into the subscription. We are also optimizing our subscription plans by testing various durations, including one-week, two-week, one-month, annual, and lifetime subscriptions, as well as experimenting with localized options. For instance, the subscription pricing will vary significantly between India and the United States, and we are localizing the experience to ensure that our messaging is tailored to convert users into subscribers effectively. When considered together, these efforts contribute to our growth, which is reflected in the numbers we shared with you today.

That's great. And I know you gave some information on pAInt, with good grading kind of a creator economy. How do we think about like the amount that people are using? Does it seem like the percent of people that are using pAInt that there's still a lot of opportunity for that to grow?

I mean our perspective is that our marketplace, the premium marketplace I should say, is a growth opportunity for us. We do have several initiatives underway now that we are investing in in order to unlock incremental growth and see to it that as a part of the overall revenue pie that we have, that premium content is a larger portion of that pie. So there will be continued investments there. And as you mentioned, GTV had grown nicely due to several initiatives that we had delivered on in this past quarter.

Okay. And for Emojipedia, you mentioned there was a little bit of a step back on a website redesign. Do you view that as kind of a temporary thing, or how are you thinking about that?

We do view that as a temporary thing. And the approach that we had taken, we had tested and I guess at scale things did not ultimately reflect what our testing had indicated. So when we saw that the numbers were diverging, we pulled back. And in terms of new initiatives for Emojipedia, there are a whole set of initiatives around rolling out new product features, capabilities, and so on and so forth that will begin to come off the assembly line between now and the end of the calendar year.

Okay, great. Well that's it for me. Thank you so much.

Thank you.

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