Zedge - Q3 2024

Transcript

Operator (participant)

Good afternoon, and 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. 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. 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. 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 Zedge periodically files with the SEC, which 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 on the Zedge website.

The earnings release has also been filed on Form 8-K with the SEC. I would like to turn the call over to Jonathan.

Jonathan Reich (CEO)

Thank you, Brian, and thank you all for joining us today. I will start by briefly reviewing our third quarter results, which continue to show the positive impact of our investments in fiscal year 2023 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 up by 35%, including the first jump in net subscriber gains in over 7 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 2025, 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 decor, tees, hoodies, and the like. We are also in the midst of expanding 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 code base, 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 seventeenth. 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 10%-30% revenue growth. That successful new feature intros 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 a new multicurrency, 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 in 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 stocks flow 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.

Yi Tsai (CFO)

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's revenue continues to be negatively impacted by Apple's ATT frameworks, 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 trend continued to improve. And our higher value iOS subscription and value-added Zedge+ offering for Android replaced lower cost legacy subscription, 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 reflect the growth in subscription revenue, which mean we receive cash upfront, but also pay a higher upfront fee to Google and Apple.

Note that revenue on this subscription is recognized over the life of the subscription, but at 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 acquisition. 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 acquisition 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 volume was lower, and our buyback parameter was 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. Operator, back to you for Q&A.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing those keys. To withdraw your question, please press star two. At this time, we will pause momentarily to assemble our roster. The first question comes from Allen Klee with Maxim Group. Please proceed.

Allen Klee (Managing Director and Senior Equity Research Analyst)

Yes, good afternoon. For GuruShots, could you, I, I'm not sure if I caught, what, what was the revenue for GuruShots in the quarter?

Yi Tsai (CFO)

Sorry, Alan, it's $0.9 million.

Allen Klee (Managing Director and Senior Equity Research Analyst)

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

Yi Tsai (CFO)

Correct.

Allen Klee (Managing Director and Senior Equity Research Analyst)

Okay. So within GuruShots, I mean, this is the one you're doing, you're hitting, 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%-30% jump in revenue. What is the plan for adding these new features?

Jonathan Reich (CEO)

Great question, Alan. So during the earlier part of the call, I'd mentioned we've got essentially three major areas that we are working on. First is onboarding, and that is the experience that a new user will have when they download the app for the first time, and start playing. We've rolled out a new onboarding experience in beta to 25% of our Android audience, and what we're seeing is that deeper funnel events are generating more revenue for us. Deeper funnel events, meaning a user that downloads the app, joins a competition, and then continues to second, third, fourth, and fifth competition, by way of example.

That onboarding process is one which we will optimize, and if we are successful in that endeavor, we believe that we will accomplish two goals. One is that we will attract more users to actively begin playing the game on a recurring basis. And number two is that we will retain those users, thus generating more revenue, as I described a couple of minutes ago. Secondary of changes with respect to our economy. Today, the economy is a resource-based economy, which is fueled by a user making an in-app purchase for a specific game resource. We expect that later this month, we are going to begin, or not begin, but we will turn on a brand-new economy, which will be a coin-based economy that has multiple currencies.

That opens up the door for many different possibilities, but by way of example, you have a new user, they begin playing the game. They haven't done super well because they're really trying to acclimate themselves and assimilate all the information that's being thrown before them. Nonetheless, we have the ability of rewarding them with different currencies in order to keep them motivated and ultimately allow for them to spend those currencies on game resources. The more that they spend on game resources, then the likelihood is that they will want to replenish their currency and make more purchases. And that, like I said, is expected to be rolled out this month.

And then the third area of focus, which will take place after we've tuned the economy and the onboarding process, will be a progression dynamic. So today, we have users that get stuck. They get stuck at a certain level, and they can be stuck there for very, very long even though they are active players. Progression analysis or progression mechanics is really the focus that we will have in order to help those users progress to the next level based upon where they are struggling. So you can imagine that we have a set of users that get stuck at a certain level, and in a certain sense, they don't know how to progress to the next level.

We can then create competitions around that segment of users that will ultimately translate into those users being able to graduate and, you know, continue moving up the totem pole, if you will. So that progression mechanic piece, or mechanics piece, will begin to be focused on after we've completed the full rollout of onboarding, coupled with game economy optimization. And with respect to onboarding and game economy, like I said, we've got 25% of the onboarding available to our Android user base today. And the game economy will be rolled out. The new game economy will be rolled out, we expect, during the month of June. A lot of detail there. I hope that I was clear in that.

If you have any further questions, would love to hear them.

Allen Klee (Managing Director and Senior Equity Research Analyst)

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

Jonathan Reich (CEO)

Well, onboarding is... You know, I don't know what you mean by feature, but onboarding is, we're viewing that as being a feature-driven experience. If a new user downloads the app today and is not in the new onboarding experience, they are faced with a very, very complex user interface, which they need to master. There's a steep learning curve there. The notion of onboarding is to incrementally add complexity to the gameplay, with the goal of initially getting the user into a competition with access to fewer of the bells and whistles that they eventually will gain access to as they master the gameplay.

So we are describing that as, you know, a feature enhancement as opposed to some, let's call it, new feature, like, a new in-game resource or something like that.

Allen Klee (Managing Director and Senior Equity Research Analyst)

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

Jonathan Reich (CEO)

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, you know, not as frequent. Therefore, we target a faster payback period, for that ad spend, give or take, somewhere around 90 days.

So we spend $1 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, you know, much higher when compared to Zedge Ringtones and Wallpapers. Specific to GuruShots, because of the exercise that we have in 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.

Allen Klee (Managing Director and Senior Equity Research Analyst)

Okay, that makes sense. And then, so I—you probably can't answer this, but your monthly active users, and it's thinking about, like, getting that number to stabilize, is it? And any thoughts on where you think that these actions will get that to kind of stabilize and then inflect positively?

Jonathan Reich (CEO)

Sure. So I, I can't give you timing on that. I can tell you that, specific to Zedge Ringtones and Wallpapers, there is a lot of time and effort going into how do we grow this user base? What are the features that we are adding? How do we use product marketing in order to keep users engaged, and so on and so forth. It is a very high priority, and significant area of focus for literally everyone in the company. The product team is constantly looking at ways in which we can not only retain users, but grow that user base as well.

That will continue to be, you know, a major focus of pretty much all investment that we have in terms of the Zedge ringtone and wallpaper market, if you will.

Allen Klee (Managing Director and Senior Equity Research Analyst)

That's great. Then, advertising's 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, or are there any other things that we should also be thinking about?

Jonathan Reich (CEO)

So, so we are not only, not only have we bulked up on the subscription offer and we continue to look for additional value adds, and I think that over time, we, we will see additional value adds bundled into the subscription. But we are also optimizing with different types of subscription plans, testing one-week subscription, testing two-week subscriptions, testing one-month subscriptions, testing annual subscriptions, testing lifetime subscriptions, as well as testing subscriptions on a more localized basis. So not only testing pricing on a localized basis, obviously, the cost of the subscription in, you know, India would be significantly different than what cost of the subscription would be in the United States.

But also, localizing the experience, so that the messaging that's used to draw, or to convert a user into subscriber is, is highly, highly localized. So, taken in, in concert with one another, we, we continue to see that growth, and, you know, that is apparent in the numbers that, you know, we shared with you today.

Allen Klee (Managing Director and Senior Equity Research Analyst)

That's great. And I know you gave some information on pAInt. It looks good, creating 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?

Jonathan Reich (CEO)

I mean, our perspective is that our marketplace is 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, you know, 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've mentioned, you know, GTV had grown nicely due to several initiatives that we had delivered on in this past quarter.

Allen Klee (Managing Director and Senior Equity Research Analyst)

Okay. 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, how are you thinking about that?

Jonathan Reich (CEO)

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.

Allen Klee (Managing Director and Senior Equity Research Analyst)

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

Jonathan Reich (CEO)

Thank you.

Operator (participant)

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