Zedge Inc. (ZDGE) Q1 2021 Earnings Call Transcript

Zedge Inc. (NYSE: ZDGE) Q1 2021 earnings call dated Dec. 10, 2020

Corporate Participants:

Jonathan Reich — Chief Executive Officer

Yi Tsai — Chief Financial Officer and Treasurer

Analysts:

Allen Klee — National Securities — Analyst

Presentation:

Operator

Good afternoon and welcome to Zedge’s First Quarter 2021 Earnings Conference Call. During management’s prepared remarks, all participants will be in a listen-only mode. [Operator Instructions] 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 three month period that ended on October 31st, 2020. 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 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 to update any forward-looking statements that they have made or may make or to update the factors that may cause 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.

Jonathan Reich — Chief Executive Officer

Thank you, operator and thank you all for joining us today. Good afternoon. Welcome to Zedge’s first quarter fiscal year 2021 earnings conference call. I’m Jonathan Reich, Chief Executive Officer of Zedge and with me is our Chief Financial Officer, Yi Tsai, who will provide additional insights into our financial performance. Q1 was an outstanding quarter for Zedge as we eclipsed previous highs for revenue, which was up 85% year-over-year, operating income, operating margin, net income, earnings per share, cash flow from operations, and EBITDA amongst other metrics. The initiatives we have invested in over the past five quarters are bearing fruit as demonstrated by the continued progress we make in monetizing our 32 million plus users during the quarter.

That said, we believe there is ample opportunity to continue increasing both revenue and users moving forward. For those of you that are new to the story, Zedge is a leading app developer focusing on mobile phone personalization and entertainment. Our heritage is rooted in being one of the leading providers of mobile personalization content focused on offering consumers a rich array of high quality wallpapers, video wallpapers, ringtones, and notification sounds.

Our flagship app, ZEDGE Wallpapers & Ringtones is all about personal identity and acts as a popular hub for self-expression for millions seeking mobile phone personalization, social content, and fandom art. To date, the app has surpassed 465 million organic installs and currently has 32 million monthly active users of which around 30% are located in well-developed markets. The app generates revenue from a combination of advertising, paid subscriptions, and our Zedge Premium Marketplace, which enables content creators ranging from world-class celebrities to emerging artists to display and market their digital content and sell it to our users.

Moving to our results, we reported record revenue in the first quarter and attribute the growth primarily to higher paid subscriptions and improvements to our ad stack. Paid subscribers, an important growth driver, grew by 214% year-over-year. Subscriptions are valuable for two reasons: first, they provide us with a recurring revenue stream, which yields some level of predictability in the business, and second, they have a higher margin when compared to ad supported users.

Renewals are even more profitable as the fees we pay Google dropped by 50% in year two. Ad revenue also experienced robust growth due to several factors including improvements we’ve made in optimizing our inventory, MAU growth, and the seasonal improvement in CPMs which are what advertisers pay us for every 1,000 impressions. Over the next couple of months, we expect to focus on developing regionalized ad experiences, which should yield incremental revenue as well as expanding the number of demand partners that are able to bid on our inventory on a per impression basis.

Looking to the future, I want to highlight the investments we are making to drive further user growth in fiscal 2021 and beyond. With the recent release of our new content management system, which now houses all content both user generated and premium, we can start working on critical enhancements including social and community features, overhauling user accounts, personalized content fees and even improving on personalized widgets and app icons in iOS 14.

Taken together, we expect these investments to positively impact user growth, usage, and retention particularly in well-developed markets. In addition, we expect to enhance our paid subscription offering which may include unique content or unique value-added features, which should make the offering more attractive to a broader set of users.

We believe that Zedge Premium offers great potential beyond the world of mobile personalization content. We’re wrapping our heads around how to evolve the platform and make it relevant to a broader swathe of users including fandom communities and stock photo customers. If we execute well, we can become a coveted destination for a broader cross-section of creators that wants to monetize their content even if it isn’t directly related to wallpapers and ringtones.

As we look past fiscal 2021, we see optionality in two areas. The first is new product introductions. For example, in fiscal 2020, we entered the entertainment genre with the beta roll out of a new standalone entertainment app, Shortz by Zedge with a Z at the end. Shortz is all about serialized short-form fiction. Today, our Shortz app offers a rich catalog of short stories rendered in a text messaging like format. We believe user interest in the short-form serialized fiction space remains high and we will continue to focus on enhancing our Shortz beta by offering both ad supported and a la carte variants as well as testing Shortzcasts [Phonetic], our high-quality, short-form podcasts of these stories. We envision having clarity about whether Shortz progresses to a full-blown product offering over the next four or five quarters.

The second relates to penetration of Apple’s ecosystem. Historically, Apple has shied away from the mobile phone personalization vertical. However, with the introduction of iOS 14, they opened the door for limited customization functionality, specifically with widgets and app icons. We are committed to embedding these into our products over the next several months in order to benefit from the iPhone refresh cycle. Depending on the demand for this content, there is the potential to move the needle longer-term, not to mention the potential that Apple evolves it’s thinking and embraces this vertical in a meaningful way. We want to be in a position to capitalize on that if it comes about.

In closing, while Q1 was outstanding, we are not resting on our laurels and believe there is great potential for our business going forward. Q2, which we expect to benefit from year-end advertising spend, is already off to a strong start. We are still targeting revenue growth for the full year to be at least 20% with profitability and positive cash flow from operations and EBITDA in each quarter.

We could not have achieved these results without the efforts and dedication of our employees. Thank you and keep up the good work. As for our loyal users, please continue to look for product updates in the months to come. Now, I’m going to turn the call over to Yi who will provide details about our financial performance. Wishing all a happy, healthy, and safe holiday season. Thank you.

Yi Tsai — Chief Financial Officer and Treasurer

Thank you, Jonathan. I wanted to start by reminding those on the call that our fiscal year ends July 31st. I also want to point out some changes we are making to the metrics we report to investors to improve transparency. This quarter we added EBITDA and operating margin to our earnings release table including comparison for historical trend from last year. I also want to remind everyone that our fiscal Q1 and Q2 tend to be seasonally stronger while Q3 tends to be the seasonal low.

Moving to the first quarter results, monthly active user or MAU defined as the number of unique users that opened our app during the last 30 days of the period increased 9.1% to 32.4 million during October [Phonetic] 2020 from 29.7 million in October [Phonetic] 2019 and was up slightly from the end of Q4 of fiscal 2020. Emerging markets showed strong double-digit growth while well-developed markets continued to contract.

As Jonathan mentioned, we are actively taking steps to enhance our offering for users in well-developed markets to spur both MAU growth and higher growth rates for Zedge Premium. Total revenue in Q1 increased 85% to $3.8 million compared to the year ago quarter. The main driver was subscription growth, optimization of our ad waterfall, and an increase in advertising rates.

Zedge Premium growth transaction value or GTV, that is the total sales volume transacted through our marketplace was $208,000 in Q1, up 8% compared to the year ago quarter and 10% compared to last quarter. As Jonathan indicated, we want to position Zedge Premium as a growth driver in the quarters to come. Paid subscribers exceeded 600,000 at the end of the quarter, a 205% increase year-over-year and 21% on a sequential basis.

As you’ll recall, when a new user approaches subscription or a freemium user converts into a paid subscriber, we pay a 30% fee to Google, which shows up in our SG&A as a marketing expense. However, if a subscriber, whether monthly or annual, renew their subscription after 12 months, the Google fees drop to 15%. We continue to see annual renewal rates surpassing 40%, which is generally considered to be strong performance within the industry. Overall, ARPMAU was a record $0.036, an increase of 73% year-over-year and 28% sequentially. The year-over-year improvement is primarily attributable to revenue growth in paid subscription and the advertising benefit discussed earlier.

Our operating margin increased to 29% versus negative 37% last year and positive 14% in Q4. This reflects strong cost containment and higher subscription revenue as G&A only increased 3% versus last year. Net income and diluted earnings per share was $1 million and $0.08 respectively versus a net loss of $800,000 and the loss per share of $0.08 in the prior year. This quarter, we are instituting EBITDA as a metric that we will report. In Q1, EBITDA was $1.4 million, up $1.7 million from last year.

We remain in a strong position in terms of liquidity. As of October 31st, we have $6.3 million in cash and cash equivalents, a $1.2 million sequential increase and a $4.6 [Phonetic] million increase compared to a year ago. The increase in cash over Q4 was driven primarily by positive operating cash flow and we have now generated positive cash flow from operation for five consecutive quarters. Zedge has almost no outstanding debt while maintaining access to a revolving credit facility of up to $2 million, if needed.

In late November, we filed as shelf registration to raise up to $20 million. We filed this registration to provide opportunistic financial flexibility should we identify organic or inorganic investment opportunities or to further fortify our already strong balance sheet. Along this line, we put in place an at-the-market offering, also known as a ATM offering, to sell up to $5 million in stock directly into the market as conditions warrant.

Finally, as Jonathan said earlier, looking at our business in fiscal 2021, we are targeting top line growth rate in excess of 20%, continuing positive cash flow from operation, and profitability on both a quarterly and full-year basis. I hope that each of you remains safe and I look forward to speaking with you again on the next call. Operator, back to you for Q&A.

Questions and Answers:

Operator

[Operator Instructions] We will go first to Allen Klee at National Securities.

Allen Klee — National Securities — Analyst

Good afternoon and congratulations on the strong results. My first question relates to what you said about your new content management system and you can work on developing social personalization and others that you believe will improve user retention. Could you talk about how you think about the timing of this and maybe give us a little bit of some examples and a pathway of how you’re thinking about rolling this out?

Jonathan Reich — Chief Executive Officer

Hi, Allen. Thanks so much. Appreciate the compliment. Sure, so briefly as described, our content management system now houses all of our content whether it’s premium content or user generated content under one roof and we have started to QA that in the field. I expect that it will be available to the entire user base before the end of fiscal Q2 and that’s the point of departure where we will be able to start introducing — working on introducing some of these future enhancements and in a sense, one of the things that our product has lacked is that more community type of experience and the goal there is to slowly but surely on an incremental basis begin to roll out features such as being able to you know later on being able to potentially comment, being able to collect, being able to share, and being able to follow as feature sets that we think will resonate with our user base and those will begin to appear in the app during the second half of the fiscal year.

Allen Klee — National Securities — Analyst

And just a follow-up, the net benefit of that, that you see is that you’ll have a more engaged consumer. So there’ll be more retention, more viewership, which should improve advertising revenue. Is that the way that I should think of this?

Jonathan Reich — Chief Executive Officer

Yeah, so the expectation is that, that will certainly help in terms of driving engagement and retention, but we also believe that it will begin to impact user growth because the artists that are within Zedge Premium will point to users and sort of say, hey, you can engage with me in Zedge at the following location and so on and so forth and we know that users just generally speaking from the social space when they have the ability to connect more closely with the influencer, that helps in terms of propelling that user growth and then all of the other items that flow from that.

In terms of the monetization aspect, we expect that it will certainly help in terms of incremental ad revenue, but we also see there being upside with respect to revenue generated from the premium marketplace as users are retained better and as they engage more when artists release new creations, that’s another potential buying opportunity. So those are the two most obvious areas where we believe that revenue can be positively impacted.

Allen Klee — National Securities — Analyst

Thank you. My next question is you talked about steps to grow the developed country monthly active users and I guess what you just said would relate to that and also what you’re talking about with Apple, are those the two main things and then how do we think about when we might hopefully see this in the numbers?

Jonathan Reich — Chief Executive Officer

Sure, so our focus for user growth is very much on the well-developed economies and the reason for that ties back to higher advertising rates, more discretionary income and so on and so forth, but insofar as the emerging markets, we are essentially developing customized skews, if you will, that will have a different user experience insofar as monetization. So we may play with the ad stack in many of these emerging markets and our expectation is that that will contribute incremental income, but those changes are happening on an incremental basis.

So, slowly but surely, they are making it into the revenue stream and as we achieve success, then we really roll that out to the entire region or to the entire world depending on what the change is. So by way of example, when we began to test header bidding and we saw that it was working, we continued to roll that out on a global basis. With respect to the regional changes, we may say, hey, let’s have a following experience in one region, a different experience in a different region, but limit that experience specific to that region based upon the user experience that we’re trying to maintain or achieve whether it’d be in that region or another region accordingly.

Allen Klee — National Securities — Analyst

Okay, you mentioned there is seasonality in the CPM and the third — this quarter you just had and next quarter will be the strong ones. Is there a rule of thumb to think about kind of how that — how to think about that over the four quarters?

Jonathan Reich — Chief Executive Officer

Sure, so typically our fiscal Q2 is the strongest quarter of the year because it is the November, December, January quarter and as we all know, advertising in November and December is typically a big budget number for retail. So, by contrast, going into January, advertising budgets are cut, people are not prone to spending a ton of money because they’ve already spent their holiday cash. So what we find is that Q2 by contrast is a weaker quarter.

We’ll begin to then see some recovery in Q3 and then in Q4 which — or I should say we will begin to see some — we’ll see that Q3 begins to nose down, Q4 begins to flatten out and then Q1, which is August, September, October begins to tick up as the back-to-school, back-to-work dynamic begins to set in. So in brief and I’m sorry that I confused the quarters, Q1 and Q2 fiscal year are typically stronger than Q3 and Q4. Of the four quarters, usually Q3 is the one which has the most significant weakness associated with it.

Allen Klee — National Securities — Analyst

Thank you.

Operator

[Operator Closing Remarks]