Zedge, Inc. (AMEX:ZDGE) Q1 2023 Earnings Call Transcript

Zedge, Inc. (AMEX:ZDGE) Q1 2023 Earnings Call Transcript December 14, 2022

Operator: Good afternoon, and welcome to Zedge’s Earnings Conference Call for the First Fiscal 2023 Quarterly Results. 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. 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 its first fiscal quarter 2023 ended October 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 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.

Jonathan Reich: Good afternoon. Thank you, Brian. And thank you all for joining us today. I’m going to start by briefly reviewing our first quarter results, which were generally in line with our expectations, as Q1 has historically been seasonally weaker ahead of the holidays. Q1 revenue increased 15% from last year. The most significant driver is attributable to the addition of GuruShots. However, the combination of global economic uncertainty, geo-political risk, inflation and rising interest rates resulted in lighter advertising spend when compared to years past. Aside from that, there was also an anomaly in our Q1, as some advertisers tried optimizing their user acquisition campaigns by testing new usage attributes, ultimately resulting in lower ad spend in the Zedge App.

The good news is that spending trends improved at the end of the quarter but were too late to offset the earlier declines. As discussed previously, we are reinvesting our profits into GuruShots and other new growth initiatives while still aiming to remain profitable and cash flow positive. Specific to GuruShots, we have been diversifying paid user acquisition by adding new platforms to the mix and optimizing performance across each platform. The expansion to new platforms relates to the challenges associated with Apple making it more difficult for app developers to gain detailed information about their user attributes and harder to track performance for marketing and advertising purposes. On a consolidated basis we reported operating, GAAP net, and per share losses in Q1.

For those new to Zedge, I’d like to start with a brief discussion of our business and strategy. Zedge sits at the intersection of two major growth trends in consumer tech, casual gaming and the creator economy. To capitalize on this, Zedge is building a strategic flywheel that leverages synergies across our portfolio; and engages communities through our content marketplace 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. Our leading products are the GuruShots photography game and Zedge’s digital content marketplace, which today offers mobile phone wallpapers, video wallpapers, ringtones, and notification sounds through a freemium model, subscriptions and in-app purchases.

In total, our products served roughly 40 million users in October. Today, most smartphone users have become amateur content creators, sharing their photos, illustrations, memes, and videos. Technology like DALL-E spurs people’s creative needs and now enables consumers to simply type a description of something that they envision and create an excellent image rendition. This bespoke content allows people 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 significant following and monetize their content. This is known as the €œcreator economy,€ a market that has grown massively over the last five years.

Before acquiring GuruShots, our core offering was the Zedge marketplace which served 32 million monthly active users in October 2022. We monetize these customers with advertising, subscriptions, and in-app purchases of Zedge tokens, our virtual currency. Despite being a more mature product, we still see significant opportunities to drive long-term growth and profits. One potential growth opportunity lies in allowing artists to sell their content directly to our 32 million users. To this end, about a year-ago, we introduced €˜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. This enhancement has helped drive higher gross transaction value, or GTV, while also contributing to higher ARPMAU.

Although the industry is grappling with the effects of a €˜crypto-winter,’ we still believe there is a fundamental need for the benefits of limited edition digital goods this technology innovation brings to the table. We will continue to proceed cautiously as to how we execute in this domain. Bottom line, €˜NFTs Made Easy’ is built for the mainstream and provides for provenance, which is a win for both creators and consumers. In the coming quarters, we see several opportunities to grow GTV. These include adding new content verticals and expanding €˜NFTs Made Easy’ by offering auctions, payments in cryptocurrency and trading directly within the Zedge app. In addition, and as announced on Monday, we just started realizing one of the synergies we identified when we acquired GuruShots, mainly the ability for GuruShots players to sell their photographs in the Zedge App.

We also believe we can drive MAU growth in the Zedge App. Marketing is crucial, and I will discuss our plans in more detail in a few minutes. Making it easy to find and create new, relevant content is another way to drive user growth. Earlier this month, we introduced pAInt, an AI image generator in the Zedge App. Users can now make exceptionally high-quality images simply by typing descriptive phrases and the AI algorithm generates art based on those phrases. We believe this feature has significant potential to drive user growth, ARPMAU, and overall engagement in the Zedge app. We are encouraged by the early interest, as over the first weeks following its release, users generated over 150,000 images with pAInt. Initially, we limited the rollout to a subset of developed countries, but we anticipate opening it up further over time.

Our goal is to use pAInt to both grow our user base and improve engagement. Moving to GuruShots, 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 showcases 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 much room for growth, as we estimate 30 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.

From a product perspective, we have several promising developments that are being scaled up. The first relates to customer onboarding. Over the past several months, we revamped the onboarding process to better convert new players into paying players. As a result, our new onboarding ramp yielded a more than 35% rise in converting installs to first-time paying players in the Android app, which is a key gauge of measuring return on ad spend, or €˜ROAS.’ Next, we recently introduced ‘Learn,€˜ which offers users TikTok-style, short-form instructional videos to improve their photographic technique. When surveying our users, nearly 70% said they would engage with this content regularly. We are evaluating the different ways we can monetize €˜Learn,’ including introducing a subscription-based offering.

Finally, we’re still 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 convert more users into players early on, increase engagement, advance our game economy and ultimately drive more revenue. Turning to Emojipedia, we now support 19 different languages. Going forward, we will focus on optimizing the ad stack and expanding the product offering, potentially with a native mobile app version. We are very excited about the changes we’ve made over the past year and believe they can drive high double-digit, low triple-digit growth rates, with very high gross margins, in fiscal 2023.

Looking across all our properties, we have committed meaningful dollars to marketing, a new focus for our company, to drive user and player growth and improve engagement. We are investing in paid user acquisition and customer re-engagement campaigns and building all the infrastructure needed to do this profitably. The additions to our data team are already bearing fruit, not only with respect to marketing but across the entire organization. Finally, we are down the road in evaluating the viability of new content products in addition to the ones we’ve discussed today. pAInt was an example of this. Stay tuned for more information on this in the coming quarters. Before handing it off to Yi, I would like to thank our investors, Board members, partners, and employees for your continued support.

2022 has been a momentous year with a marked increase in geo-political, economic and industry-specific risk. However, it has also opened our business to new and exciting opportunities. We are and will continue doing our best to build long-term, sustainable value and effectively address the challenges that we are facing. I wish each of you a peaceful, healthy, and safe holiday season. 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 the call that our Q1 fiscal 2023 ended October 31. 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, decreased 7% to 32 million. MAU in well-developed markets was down 16% and emerging markets nearly 4%. Europe, which contributes to both metrics, was hit especially hard by the Russian invasion of Ukraine and the energy crisis, which continued to play a significant role in this quarter’s MAU decline. Total revenue in the first quarter was $6.9 million, a 14.5% increase from last year. The temporary decline in ad buying that Jonathan discussed, combined with lower MAU led to a decrease in year-over-year advertising revenue for the first time since Q1 2021.

Gaming revenue came in at $1.3 million. Similar to Q4 of fiscal 2022, GuruShots’ revenue was negatively impacted by the situation in Europe. Since this business is still in its investment mode, we believe that the new features, marketing and advertising strategies will ultimately drive solid growth in our gaming revenue. Subscription revenue was down 7%; however we are working on improving the value of the offering in order to return to growth in the quarters to come. Other revenue, which mainly consists of Emojipedia, Zedge Premium and the amortization of AppLovin’s integration bonus, increased by 45%. Zedge Premium’s GTV decreased 5% to $310,000, reflecting lower volume and ASPs for NFTs. Again, while we are impacted by the crypto winter, we believe our strategy somewhat insulates us from the broader NFT market challenges, while also providing us with a differentiated offering that we believe will return to growth.

Active subscriptions were down 12% versus last year, as new subscription sales did not offset churn. Despite the decreases in other metrics, ARPMAU was $0.54 an increase of 1% year-over-year. Operating expense increased significantly related to the both the investment in GuruShots and a $150,000 decrease in the fair value of contingent consideration related to its acquisition, leading to an operating loss of $201,000. Net loss was $169,000 and reported diluted loss per share was $0.01, share count was 14.3 million. Adjusted EBITDA was $1 million for Q1 2023, versus $3.3 million in the prior year period, and our adjusted EBITDA margin was 14% in Q1 2023 versus 55% a year-ago period. From a liquidity standpoint, we remain in a strong net cash position with over $18 million in cash and cash equivalents.

As we mentioned on our last call, we gained access to an $11 million credit line and had to draw down a $2 million term loan, which showed up on our balance sheet this quarter. Moving to our stock repurchase program, between September 23, 2022, when we started buyback activity, and December 9, 2022, we repurchased 261,000 shares of our Class B common stock. Thank you for listening to our first 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: Thank you. We will now begin the question-and-answer session. Your first question is coming from Allen Klee. Allen your line is live.

Allen Klee: Yes. Good afternoon. First question is on monthly active users. From a sequential basis going forward, what will be the key elements that will cause this to just potentially stabilize and start growing?

Jonathan Reich: Hey, Allen. How are you? Yes. So there are a couple of initiatives that are contributing to that. First of all, from quarter-to-quarter on a sequential basis, our monthly active user count was basically flat. There is obviously some variation in terms of the various geographies, whether it’s well developed or emerging market. But in all, it was in aggregate, I’m saying it was basically flat. Having said that, several different contributors. One is, as we’ve talked about for the last couple of quarters, features that will drive users to download and install the app and to reengage with the app. So most recently, we rolled out pAInt, which is our AI wallpaper generator. And as you know from following the press, there’s been a tremendous amount of pent-up demand for tools like this.

My Zedge, where we’ve added social and community features that contribute to users coming back more regularly in order to see what either their friends or artists or fans and so on and so forth are adding to the app. Those would be two examples of features that will drive that. Secondly is marketing efforts, and that includes paid user acquisition, where we have been scaling up over the course of the last, give or take six to 12 months. And then that is coupled with reengagement campaigns, where we market to users that have the Zedge app installed on their phone to drive them back into the app because of content or features that we have added to the app accordingly.

Allen Klee: Okay. Excellent. And then on, Jon, the kind of your advertising revenues, you were able to €“ the statistic for that of the €“ I’m forgetting average revenue per monthly active user. That held up year-over-year it seemed like despite what you mentioned of some advertisers going away, but you feel like that could kind of I guess, come back potentially next quarter? Do you think it would more normalize? Or how do you think about that?

Jonathan Reich: Yes. So it’s difficult to provide clarity there. And the complication here is that depending on what one reads in the trade press. There is certainly some downward pressure on advertising budgets and the like, but there are also pockets of growth. More recently, I think I came across an article yesterday saying that mobile advertising spend in calendar year 2023 will decline compared to years past, where CAGR over the course of the last five years or so has been, if I recall correctly, north of 15% a year. But with the economic uncertainty in the overall market, analysts are expecting that, that will decline. As you know, we invest a tremendous amount in optimizing our inventory, and we will continue to do that. But I can’t say with certainty whether or not that industry-wide trend will be something that has a material impact on our business. Too early in the fiscal year for me to answer that with clarity.

Allen Klee: Yes. I mean, in my model, I’m assuming that your average monthly advertising revenue per user is going to decline over 10% year-over-year. So hopefully, I factor that in, but we’ll see. Nobody knows. So then €“ so with pAInt, it sounded like the initial reception of pAInt has been exceptionally strong. This is a €“ just so I understand, it’s a free product today, but the net benefit to you is more engagement? Or how do you think about how that evolves?