Zedge - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 revenue declined 10.2% year-over-year to $6.979M as industry CPMs fell amid TikTok’s temporary U.S. withdrawal; GAAP net loss narrowed to $(1.679)M and adjusted EBITDA was $(0.1)M.
• Subscription revenue rose 13.3% to $1.2M with active subscriptions up 22% to 791K and ARPMAU up ~9% to $0.078, offsetting part of the ad softness; Zedge Premium GTV grew 26.5% to $0.68M.
• Management launched a restructuring (22% workforce reduction) targeting ~$4M annualized savings (~$1M/quarter run-rate starting Q3) and flagged improving ad demand as TikTok re-entered app stores; free cash flow was $0.6M and buybacks totaled ~245K shares in Q2.
• No formal numeric guidance; directional outlook calls for improved adjusted EBITDA and free cash flow in H2, continued AI feature rollouts (AI audio), and ongoing repurchases; consensus comparison is omitted due to unavailable S&P Global estimates data today.

What Went Well and What Went Wrong

What Went Well

• Strong subscription momentum: +13.3% revenue to $1.2M, active subscriptions +22% to 791K, ARPMAU up ~9% to $0.078; CEO highlighted “material growth in revenue from rewarded video” and pAInt/Parallax features driving higher CPMs.
• Zedge Premium progress: GTV rose 26.5% to $0.68M; call detailed rewarded video conversion and pAInt 2.0 traction with engagement metrics surging YoY in February.
• Cost actions and capital allocation: Announced two-phase restructuring expected to save ~$4M annually and repurchased ~245K shares; management expects improved adjusted EBITDA and stronger free cash flow in H2.

What Went Wrong

• Advertising headwinds: Ad revenue fell 14.3% YoY to $4.7M due to TikTok’s pullback and lower MAUs, pressuring CPMs across the market; management cited industry-wide demand erosion.
• GuruShots drag: Digital goods/services revenue down 33.0% YoY to $0.6M; management discussed reduced marketing and a plan to revamp “GuruShots 2.0” after restructuring.
• Margin compression: Operating margin fell to -31.8% (from -153.5% last year, affected by prior impairments), with SG&A up on higher paid UA and restructuring/impairment charges in Q2.

Transcript

Operator (participant)

Good day and welcome to Zedge's Earnings Conference Call for the Second Quarter of Fiscal 2025 Results. During management's prepared remarks, all participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation by Zedge's management, there will be an opportunity to ask questions. To ask a question, please press star, then one on your touch-tone phone. To withdraw your question, please press star, two. I will now turn the call over to Brian Siegel.

Brian Siegel (Head of Investor Relations)

Thank you, Operator. During today's call, 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 calls. These risks and uncertainties include, but are not limited to, specific risks and uncertainties disclosed in Zedge's periodic SEC filings. 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, and it has also been filed on Form 8-K with the SEC. Finally, on this call, we will use non-GAAP measures. Examples include non-GAAP EPS, non-GAAP net income, and adjusted EBITDA. Please see our earnings release for an explanation of our use of these non-GAAP measures. Now I'd like to turn the call over to Jonathan.

Jonathan Reich (CEO)

Thank you, Brian. Good afternoon, everyone, and thank you for joining us today to discuss Zedge's Second Quarter Fiscal 2025 Results. This quarter presented a challenging macro environment negatively impacting ad revenue. For the most part, the unclear regulatory status of a TikTok ban resulted in TikTok pulling back on user acquisition spend, which had a ripple effect across the industry on companies where ad spend is an important revenue driver. Both Apple and Google removed TikTok from their storefronts for close to a month. With less demand from a high bidder, CPMs fell across the industry, although our optimization efforts did enable our overall CPMs to rise versus last year, helping offset the lower demand and lower MAU sets.

While total revenue declined 10% year over year to $7 million, TikTok's return to the Apple and Google app stores in fiscal Q3 is yielding encouraging results even while we await a final outcome about TikTok's future in the U.S. The other key event during the quarter was our announced restructuring in order to improve operational efficiency, profitability, and free cash flow. Overall, between our restructuring and other items, we expect to reduce our annualized expense run rate by approximately $4 million, primarily related to a 22% reduction in our global workforce driven by cuts to the GuruShots team and the closure of our Norway office. Taken together, this will yield annualized cost savings of approximately $3 million in compensation-related and other expenses and $1.2 million in savings resulting from the expiration of the retention bonus payments owed to GuruShots employees under the terms of the April 2022 acquisition.

Our financials will start reflecting these savings in Q3 and culminate in Q4. The impetus in undertaking the restructuring was to improve efficiency, enhance our ability to invest in growth opportunities, and position Zedge for sustainable profitability. In addition, we expect that this will help us in generating free cash flow. I also want to underscore that we acted decisively to mitigate the impact of TikTok's mandated withdrawal from the market by focusing efforts on areas under our control, such as further optimizing our ad inventory. For example, this quarter we added new demand partners and a new ad unit. With these continual optimizations, we are enhancing engagement-driven monetization strategies and strengthening our subscription and premium offerings. Our quarterly subscription revenue growth remained strong, increasing 13% year-over-year, reflecting our success in effectively monetizing our user base.

We continue to reap the benefits of our revamped subscription offering and upselling legacy subscribers to higher value plans, which helped drive a 22% increase in active subscribers. This quarter, we not only experienced an uptick in subscriptions from well-developed markets but also from emerging markets, which points to our ability to iterate until achieving success. Zedge Premium continued to see strong momentum, with GTV growing 27% year over year. Our relentless efforts to optimize monetization continue to pay off. For example, the work we've done with rewarded video has made this category a powerful monetization channel for increasing Zedge Premium's GTV. Rewarded video usage grew nearly 40%, with very impressive low double-digit conversion rates, effectively activating a new segment of purchasers of smaller volumes of Zedge credits and expanding the overall ecosystem.

The launch of Paint 2.0 on iOS in September and Android in October was also significant to our GenAI strategy, introducing powerful new creation capabilities including image-to-image and real-time photo editing. Paint has gained significant traction over the past year, with increasing engagement metrics from a low single-digit percentage of Zedge Marketplace's daily users to a low double-digit percentage more recently. Engagement metrics specific to Paint surged more than 100% year over year in February, further underscoring its growing popularity. Let's not forget that GenAI is still early in consumer market adoption, and we offer a great product for an attractive price. In the coming quarters, we are going to further expand the Zedge Marketplace's GenAI capabilities by offering an AI audio creator.

This expansion represents a significant opportunity to further engage with users in an emerging and growing vertical, with the goal of converting our consumers into creators by empowering them with an easy way to make awesome ringtones, sound effects, and personalized audio clips. By diversifying our AI-driven offerings, we aim to tap into the growing demand for customizable audio content while opening new monetization opportunities. While GuruShots faced continued challenges in Q2, our late January restructuring plan will help lower costs and drive the business toward break-even as we revamp the unit for growth. Fortunately, there was only a slight sequential revenue decline when compared to Q1. Looking beyond the cost structure improvements we made, we are early in the process for reimagining GuruShots 2.0 and looking at everything from gameplay to content generation to monetization and more to unlock value from this asset.

Once the strategy and roadmap are solidified over the next few quarters, we will begin to allocate investment based on key milestones to enhance engagement and long-term revenue potential. Emojipedia's results were roughly flat compared to last year. On a positive note, the introduction of Emojipedia's first AI feature, an AI emoji generator monetized with rewarded videos, has been encouraging. Users can now design their own custom emojis, allowing them to easily make their creative dreams a reality. This is in keeping with our goal of turning consumers into creators. Additionally, we plan to continue to expand the emoji sandbox over time with new content and features. Finally, we are in the process of redesigning the emojipedia.org website to a more modern, user-friendly experience, which we believe will drive further engagement. Looking ahead, we are cautiously optimistic that the worst of the ad revenue decline is behind us.

While TikTok is back in the market at this time, like the rest of the industry, we will continue to monitor the situation and adjust if the situation is resolved in an adverse manner. That said, we are excited by the potential of the roadmap for all of our products. We continue to believe our stock is significantly undervalued based on multiple valuation metrics, and we expect to continue actively buying back shares under our existing $5 million authorization. With that, I'll now turn the call over to Yi to discuss our financials in more detail. Yi.

Yi Tsai (CFO)

Thank you, Jonathan. Total revenue in the second quarter was $7 million, down 10% from last year, mainly due to the advertising headwind the industry is facing in the quarter that Jonathan mentioned and the continued challenges at GuruShots. Second quarter subscription revenue was up 13% from last year, and our net active subscriber growth rate continued to improve and was up 22% year over year and sequentially for the seventh straight quarter. Our higher-value iOS subscription and value-added Zedge Plus offering for Android are not only seeing organic growth, but they also continue to outpace churn, which is mainly replacing lower-cost legacy subscriptions, which only remove ads. Zedge Premium's GTV achieved roughly $700,000, up 27% versus last year, as the combination of our feature and content offering and monetization expertise continues to drive attractive growth.

Despite the pressure on advertising, ARPMAU still grew 9% year over year to $0.078. GuruShots, which is reported under digital goods and services revenue, remains a challenge, down 33% from last year, but only 4% sequentially. We expect the year-over-year count to start to improve in our fourth quarter and into 2026. Cost of revenue was 6.4% for the quarter, roughly flat year over year on an absolute basis. SG&A increased by 9% to $7.1 million during the quarter. This increase was mainly driven by marketing expenses related to higher paid user acquisition at the Zedge Marketplace, and our subscription model has higher near-term expenses as the timing of revenue and cost don't align. This is especially the case for a lifetime subscription, which also carries a higher platform fee than an annual subscription.

For example, for a lifetime subscription, platform fees are expensed immediately while revenue is recognized over 2.5 years, leaving us with a 100% operating margin after the initial purchase and helping improve operating margin levels as we scale. We had restructuring charges of $500,000 and non-cash asset impairment charges of $800,000 during the quarter related to our announced restructuring activity in late January and early February. Last year, we had asset impairment charges of $12 million related to writing down the GuruShots acquisition, which has now been fully written down. We currently expect to take a total of approximately $1.1 million in additional restructuring and non-cash asset impairment charges during our third and fourth fiscal quarter. GAAP loss from operation was $2.2 million for the quarter, compared to $12 million last year.

GAAP net loss and loss per share for the quarter were $1.7 million and $0.12, compared to $9.2 million and $0.66, respectively, last year. Non-GAAP net loss and loss per share were $0.2 million and $0.01, compared to non-GAAP net income and EPS of $0.5 million and $0.04 in the prior year. Cash flow from operation was $0.7 million, and free cash flow was $0.6 million for the quarter. While both were down from last year, we believe this should start to improve in the third and fourth quarters as our restructuring savings start to impact the bottom line. Adjusted EBITDA for the quarter was negative $0.1 million versus positive $1.5 million in the prior year, knowing that D&A decreased 58% or over $400,000 compared to last year due to the impairment of intangible.

From a liquidity standpoint, we finished the quarter with over $20 million in cash and cash equivalents. During the quarter, we bought back 245,000 shares under our 5 million share repurchase program that was announced in Q1. Thank you for listening to our second quarter earning call, and I look forward to speaking with you again on our third quarter call in mid-June. Operator, back to you for Q&A.

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the star keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble a roster. The first question today is coming from Alan Klee from Maxim Group. Alan, your line is live.

Allen Klee (Analyst)

Yes, hi. Good afternoon. Could you—I missed when you said what you expected the restructuring charges to be in your third and fourth fiscal quarters. Could you repeat that, please?

Yi Tsai (CFO)

Hi, Alan. Because of the accounting rule, we can't really accrue certain severance and termination benefits until it's been communicated to the impacted employee. That occurred in February, which falls in Q3. Additionally, we are looking into certain impairments related to our office space in Trondheim. Those costs will be recorded in either Q3 or Q4 as we look for sub-tenanting and how we negotiate with our current landlord. I hope that answers your question.

Allen Klee (Analyst)

Yeah. So you're targeting around $3.9-$4.1 million annualized cost savings. That's compared to the prior twelve. What does that compare to of the base? Then second, do you have a sense of how much of that shows up in—that's annualized, but how much of the amount you might see in fiscal third quarter and how much in fiscal fourth quarter?

Yi Tsai (CFO)

I mean, the cost savings is annualized, so approximately about $1 million per quarter, Alan.

Allen Klee (Analyst)

Will it be fully at that run rate for the third quarter, or will it be at that run rate in the fourth quarter or sometime next year? When do you think it'll be at that $1 million savings?

Yi Tsai (CFO)

Yeah. From third quarter, we should start seeing that $1 million run rate for quarterly savings before you factor in the additional restructuring charges.

Allen Klee (Analyst)

Will you see the full one million, do you think, in the third quarter, or do you think you won't quite be there yet in the third quarter?

Yi Tsai (CFO)

We will see that full $1 million in the third quarter because current impacted employees, they're still on the payroll, but they will be offset against the restructuring charges, which is not part of the normalized SG&A expenses, if you will.

Allen Klee (Analyst)

Okay. Thank you. Just in terms of the business, just when you were talking about TikTok, you said you have some sense that it's starting to improve. Maybe I wanted to ask your average revenue per—I don't even know if I'm going to say it right—per monthly active user. That metric looked like it held up for the quarter, but is that because of things like subscriptions and marketplace spending getting blended into it, or why? I'm talking about sequentially, but what's the rationale? Why is that?

Yi Tsai (CFO)

Yeah. We had a decline in advertising revenue, but it was partially offset by the growth in subscription revenue and also from Zedge Premium. Remember, the average revenue per monthly user, it will be a lower base because we have a lower amount. Sequentially, our ARPMAU is still higher compared to last year or sequentially.

Allen Klee (Analyst)

Okay. For GuruShots, help me understand again. Right now, you've, I guess, allocated a good amount of the cost cutting related to it. How do you think—are you still trying to do some initiatives to increase the top of the funnel and the engagement and usage of new users, or what's the status with that?

Jonathan Reich (CEO)

Yeah. I'm Jonathan. In GuruShots, we have the existing GuruShots game as we know it today, and the focus is on optimizing revenue performance and, with reduced ad spend, bringing in new users with a very attractive ROAS profile. Separate and apart from that, we are now in ideation/planning stage for what GuruShots 2.0 will be and how we will be able to improve the game materially, built on modern infrastructure, in order to realize and recognize the value that we believe that the game carries with it. We are not, as of yet, doing any development work on GuruShots 2.0. When I say development work, I mean coding and stuff like that.

We're now in ideation phase, game design phase, and thinking about where we can bring the game such that we can ultimately make a presentation to the board and have a recommendation as to what should come next in terms of that part of the business.

Allen Klee (Analyst)

Okay. In the past, the last quarter, you mentioned WishCraft and AI Art Master were in beta. Is there any change in that, or what's happening there?

Jonathan Reich (CEO)

Those are still in beta. Obviously, with the restructuring, there's not a tremendous amount of effort being invested in those. I believe that sometime between now and the end of Q3, we will make a decision as to what we're going to move forward with or what we might just say like, "Hey, no sense in moving forward on this one," and move on to some other project. We're not there yet.

Allen Klee (Analyst)

Okay. Similarly with AI audio, I think I heard you say something like looking to launch that maybe in the next couple of quarters. Any thoughts on that?

Jonathan Reich (CEO)

AI audio is we are expecting to add an AI audio feature to the Zedge Marketplace in the Paint suite in the next couple of months. I hope that that will actually be in Q3. If not in Q3, it will be the beginning of Q4. That will not be a separate app. That will just be part of our AI suite of solutions, adding a new vista, which is outside of the realm of visual and entering us into the realm of audio.

Allen Klee (Analyst)

Okay. Got it. If I step back and I think about your company, I think you get very high marks over time with what you've done on monetizing advertising. The challenges have come from GuruShots and monthly active users. It sounds like—I mean, tell me if I'm wrong—but GuruShots, you're downsizing and then addressing. Monthly active users, how do you think about, just in general, that and some of its macros, some of the—I don't know what it is. Just how do you think about getting that to start to grow?

Jonathan Reich (CEO)

Yeah. I think that there are a couple of pieces in motion there. One is continued product innovation and resilience in terms of how we invest in the product and how we get users to engage with new features and the like. Another feature relates to subscriptions, whereby we monetize better with subscriptions and subscribers. There's a funnel there in terms of what happens second year, third year, and lifetime. As you know, we've discussed the growth that we've had with lifetime subscriptions and so on and so forth. Holistically, our perspective is try to continue to build with new features and monetize those features well, optimize the segment of prospective subscribers, and try to get lifetime subscribers. For those users that don't subscribe, optimize our ad inventory to generate the greatest ROI. That's in the Zedge Marketplace.

In terms of—oh, I should certainly mention investment in paid user acquisition to complement the strong organic growth that we have for the Zedge Marketplace. We have been doing that successfully. When it comes to GuruShots, part of the reason that we have undertaken the restructuring relates to the notion of giving us runway in order to redesign and then come out with something that we think will strike the chord and spark the growth that we believe is achievable. That will also be a function of not only product but also investment in marketing. As I indicated earlier, we have scaled back considerably in terms of our marketing spend for GuruShots, yielding a much more attractive ROAS profile.

We're keeping fire powder in the keg such that when GuruShots 2.0 comes to fruition, that we have the money to invest and to grow that user profile and that user base profitably.

Allen Klee (Analyst)

Thank you.

Jonathan Reich (CEO)

I hope that answers your question.

Allen Klee (Analyst)

Yes. Thank you. You mentioned lifetime subscriptions and pushing to grow them. Does there at some point become an issue if you just do lifetime subscriptions that you start to lose subscription revenue because everyone's signed up for the lifetime? I mean, you get the benefit in the short term, but how do you think about that?

Jonathan Reich (CEO)

That's a great question. Remember, we have a very, very large set of users that are coming into Zedge on a regular basis, new users, that is. The way that we think about it is really segmenting based upon where we see the best possible outcome for any particular user. I think with the robust organic growth coupled with the paid user acquisition that we invest in, we have room to maneuver there. It's not binary. It's not like we only have lifetime subscription, and if you don't sign up for it, you can't use the app. Remember, we've got multiple tiers. We've got subscriptions. Within subscriptions, we've got annual subscription, monthly subscription, lifetime subscription. We have the free tier, and we have features that are available by a user interacting with a rewarded video.

There is a pretty wide range of paths that we can steer users down in order to yield the best possible outcome per segment, if you will.

Allen Klee (Analyst)

Okay. Thank you. I'm not sure if I heard what you guys said right. You made some commentary that you expected improvement in advertising from what you've seen so far in the next quarter. I don't know if you went this far. Let me ask. The quarter you just reported, I think, is your seasonally strong quarter. The next quarter, I believe, is normally seasonally not as strong. Did you make a comment that you think your fiscal 3Q revenue would be above fiscal 2Q, or am I extrapolating something you didn't say?

Jonathan Reich (CEO)

No. You are extrapolating. What we've said is we think that the challenge imposed with the inavailability of TikTok for basically around a month is behind us. TikTok being back in the market has the impact of increasing CPMs, and that is what we are experiencing. Coupled with that, TikTok being back in the market also helps us on the paid user acquisition side because there are more platforms, so supply-demand dynamics kick in and are benefiting us. Seasonally, you are correct. Our fiscal Q2 quarter is the strongest quarter. Although it's with some optimizations we've done with our ad inventory, from what we can see, the downside pressure that existed when TikTok wasn't around is in the rearview mirror.

From a political perspective, my understanding is that the 75-day window has been extended, which I guess could point to the outcome that President Trump is trying to achieve, and that is finding an appropriate buyer to keep TikTok alive and well in the US.

Allen Klee (Analyst)

Okay. Thank you.

Jonathan Reich (CEO)

Sure.

Allen Klee (Analyst)

I'm trying to—okay. Those are my questions. Thank you so much.

Operator (participant)

Thank you. If there are any other questions at this time, please press star one on your phone. There are no other questions at this time. That concludes our question-and-answer session and conference call. You may disconnect your lines at this time. Thank you for your participation.