Zedge, Inc. (ZDGE) on Q1 2022 Results - Earnings Call Transcript
Operator: Good afternoon, and welcome to the Zedge’s First Quarter 2022 Earnings Conference Call. 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. 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 first fiscal quarter that ended in October 31, 2021. 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 the 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 either to update any forward-looking statements that they have made or may make or to update the factors that may cause the 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: Thank you, operator, and thank you all for joining us today. Good afternoon. Welcome to Zedge’s earnings conference call for the first quarter of fiscal year 2022 ended October 31, 2021. I’m Jonathan Reich, CEO of Zedge. And with me is our Chief Financial Officer, Yi Tsai, who will provide additional insight into our financial performance. We will then be happy to take your questions. For those of you that are new to the Zedge story or haven’t followed us in a while, we own a portfolio of leading digital consumer brands that served 43 million users around the globe in October 2021. Our portfolio consists of Zedge Ringtones and Wallpapers, the leading mobile app used for mobile phone personalization, social content, and fandom art; Zedge Premium, a marketplace for artists, celebrities, and emerging creators to market their digital content to Zedge’s users; Emojipedia, the leading source of all things emoji; and Shortz, a mobile entertainment app currently in beta, focused on short-form storytelling. We possess deep expertise in monetizing our digital real estate whether through advertising, subscriptions, or content sales. Our products appeal to a wide range of customer segments globally, and we have a strong user base in North America and Europe as well as in emerging markets, including India, in particular. We topped our record fiscal 2021 in the first quarter, surpassing $6 million in revenue for the first time while reporting revenue growth of 60%, a 43% operating margin, $2.1 million in net income, $3 million in EBITDA, and GAAP EPS growth of 64% to $0.14. We closed the quarter with over $27 million of cash on our balance sheet and almost no debt. Advertising revenue remained robust as we continue to optimize our ad stack to drive higher prices received for every 1,000 advertising impressions, known as CPMs. Subscription revenue and active subscriptions increased 48% and 25%, respectively, versus last year. After a pause last quarter, we were pleased to see subscriptions return to modest growth. Given our acquisition of Emojipedia at the beginning of fiscal 2022, in our release today we clarified that monthly active users, or MAU, and average revenue per monthly active user, or ARPMAU, are KPIs that have always referred only to the Zedge mobile app and neither include the Shortz beta nor Emojipedia, the latter of which today is desktop or mobile web only. Note, the underlying data is unchanged from what we have been reporting. MAU increased 6% with emerging markets up 11%, driven mainly by continued demand in India. Developed markets remained a challenge with MAU declining in the high single digits. Despite this, ARPMAU increased 47% versus last year. Now I’d like to update you on the strategic priorities I outlined on our last earnings call. To start with, growing our customer base and improving engagement, particularly in well-developed markets. During the fiscal first quarter, we began rolling out social and community features starting with giving our users the ability to follow artists they find interesting. We are also continuing to use machine learning algorithms to improve content discovery. As the year unfolds, we expect to add more social and community features while also starting to focus on search and user on-boarding. In addition to these efforts, we are ramping up paid user acquisition campaigns and will continue to expand this effort as long as it proves accretive. Next, we continue to invest in the parts of the business that offer optionality. Zedge Premium is a big part of this opportunity. Tomorrow, we expect to start rolling out our NFT offering, called NFTs Made Easy, in the Zedge Premium marketplace for both Android and iOS. Our approach to NFTs allows Zedge Premium artists to create and sell NFTs to our users without being cryptocurrency experts. Our users are able to purchase NFTs in the same manner as they have always purchased any item in Zedge Premium, mainly by buying and spending Zedge tokens, our existing virtual currency, which are available in the Zedge app through in-app purchases. NFTs Made Easy have disruptive potential because we've simplified the process for artists to self-publish mint and sell their NFTs. We do not charge minting or gas fees to artists and they are paid in their local currency. For consumers it is just as easy. NFTs are purchased with Zedge tokens as in-app purchases through the Android Play or Apple App stores in their local currency. Cryptocurrency knowledge and wallets are not needed. At launch, we are starting with video wallpapers from a select group of artists and over time we expect to expand across different content categories and make this functionality available to all Zedge Premium artists. We also expect to enable additional capabilities such as limited editions, drop dates, auctions and trading. Stay tuned for further announcements in 2022. In summary, we are beyond excited by the potential for NFTs Made Easy in the Zedge Premium marketplace and believe this will not only bring more artists to the platform, but it will also increase Zedge Premium's GTV and revenue while making us more relevant on iOS. Without trying to temper our excitement for the product, I want to set expectations for investors. Revenue from NFTs is not likely to be material from the get-go. We expect it will take time to take hold and ramp as we fill out the offering and bring in new artists. Plus, it will likely be most relevant to users in well-developed markets, where we are working to increase engagement. While there are no material operational updates about Zedge+ subscriptions or the Shortz beta, we remain committed to enhancing both of these offerings and will keep you apprised when there is news to share about their progress. We are also in the process of further unlocking Emojipedia's value by translating the site into languages other than English while also exploring the possibility of a native mobile app. And finally, there's M&A, where we are continuing to look for symbiotic opportunities that can benefit from access to our large customer base, our expertise in monetization, our technical know-how, and our skill in managing a complex platform, among other benefits. In closing, we had an outstanding first fiscal quarter of 2022, and believe we are still in the early innings of reaching our growth potential. Similar to last year, we are not updating guidance at present and still expect top line growth of 25% to 30% with continued net income growth, strong operating margins and cash flow, and strong EBITDA growth. Before handing the call over to Yi, I want to thank you, our investors, for your support. I also want to remind everyone that our success is a direct outcome of the outstanding team of talented and dedicated professionals who work at Zedge and who go above and beyond to execute our vision. Thank you and Happy Holidays. Now, I am going to turn the call over to Yi, who will provide details about our financial performance.
Yi Tsai: Thank you, Jonathan. I want to start by reminding those on the call that our fiscal year ends July 31st. 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, increased 5.6% to $34.2 million during October versus $32.4 million in October 2020. Emerging markets MAU expanded by 11.2% while well developed markets MAU contracted by 8.5%. Total revenue in the fourth quarter increased 60% from last year to $6 million. This year we benefitted from our on-going work to improve our ad operations. Subscription revenues were up 48% from last year, still demonstrating strong growth. Zedge Premium's Gross Transaction Volume, or GTV - that is the total sales volume transacted through our marketplace - was about $330,000, up 58% compared to the year-ago quarter. As Jonathan indicated, this is a key focus for us going forward as we believe the potential of the marketplace is still substantially untapped and will benefit significantly from our new NFT platform. Active subscriptions were up 25% versus last year and returned to sequential growth versus the prior quarter. The slowdown in net subscription growth was basically due to the number of new subscriptions added being offset by our churn rate, which has remained a constant percentage even as we grew to a higher base number of subscriptions. This is a common problem for consumer subscriptions as the subscriber base gets larger, and as Jonathan mentioned, we are taking steps to re-accelerate sequential growth in these numbers. Overall, ARPMAU, was $5.03 an increase of 47% year-over-year, driven by the combination of better advertising performance and higher-paid subscription numbers versus last year. Operating margin increased to 43% versus 29% last year, reflecting the continued revenue growth and strong operating leverage inherent in our business. Net income and diluted EPS were $2.1 million and $0.14, respectively, versus net income of $1 million and EPS of $0.08 in the prior year. We grew EPS substantially despite diluted average shares outstanding for the first quarter of about 15 million compared to 12.5 million shares from a year ago. EBITDA was $3 million, versus $1.4 million last year. From a liquidity standpoint, we remain in a strong net cash position with almost no debt and over $27 million in cash and cash equivalents, a $21 million increase from last year and up over 2 million sequentially. As Jonathan mentioned, similar to last year, we will update our full-year guidance when we report our second quarter earnings. The following is just a reminder of what we said on our Q4 call last month. We said we are initially targeting revenue growth of 25% to 30% for the year and due to all of the new initiatives and feature releases, we said seasonality, which usually peaks in our second fiscal quarter, may not be typical this year and internally, we are modeling sequential revenue growth each quarter. We also said that despite the increased level of investment, we believe we should continue to report operating margins of at least 40% for the year. For modeling purposes, we said our expected tax rate would be 21%, as we used all of our domestic NOLs in fiscal 2021. I also suggested using 15 million to 15.4 million shares for calculating diluted EPS. Given the increases in the last two items, most significantly the tax rate, we said we expect a drag on EPS growth in fiscal 2022, but we anticipated continued net income growth with strong cash flow and EBITDA growth. For EBITDA we said we were targeting a growth rate that is slightly higher than our revenue guidance. Thank you for listening to our first quarter earnings call. And I hope that each of you remains safe this holiday season. I look forward to speaking with you again on the next call. Operator, back to you for Q&A.
Operator: We will now begin the question-and-answer session. At this time, we will pause momentarily to assemble our roster. The first question is coming from Allen Klee from Maxim Group. Your line is live.
Allen Klee: Good evening, and congratulations on strong results beat me on the top and bottom line. As I look through what caused that advertising was very strong. Your average revenue per monthly active user to increase there was a surprise for me how strong it was? Could you touch a little on what was behind that? And how you think about if that's some got legs to it? Thank you.
Jonathan Reich: Thank you, Allen. It's Jonathan. I appreciate the compliments and those compliments really go to the entire team. I think we've gone through this repeatedly in the past. We dedicate a lot of time and effort to optimizing our advertising stack, and that is exactly what does it play in this quarter. Certainly, there has been a trend in the market with rising CPMs that we are benefiting from. But from everything that we know, it's not simply just being in the right place at the right time. But it is a matter of being in the right place at the right time. And then, working hard in order to optimize the ARPMAU that you refer to. And in terms of legs to it, well, what we've said repeatedly over the course of the last seven quarters, eight quarters or so has been that we are continuously investing in optimizing our ad inventory. And that involves not only investing in technology, but also investing in resources, investing in design, investing in various demand partners and seeing which ones are working, and what the best way of taking advantage of the portfolio of demand partners are our best way of taking advantage of the demand of portfolio partners is in order to generate the ARPMAU that we have benefited from for the last several quarters. I hope that answers your question.
Allen Klee: That's helpful. Thank you. And then in terms of your user base, we still have this trend of growing, emerging, declining, developed. Two questions related to that. What do you have behind - what's behind the strength in emerging and India you called out? And second. In terms of developed, I know you're looking at a couple of things with Apple and maybe the NFTs. Could you go into a little bit of more of what the strategy is to try to grow the developed users? Thank you.
Jonathan Reich: Sure. So with respect to growth in the emerging markets generally and more specifically with respect to India. Our offering is compelling. Certainly, as you know, we've got a array of freemium content, so content that people can download without having to pay for that content. And that is a draw particularly in markets, where discretionary income is not as plentiful as it is in the well developed markets. Insofar as the developed markets, we have several initiatives underway in order to improve engagement and increase the customer base. Some of those that we've talked about include community features, which we started to roll out, such as the Follow Me feature that there's an artist that you like, you can follow them and any time they release new content, they will be able to message you. And that is a draw for users to reengage with the app. Of course, as we improve engagement, that means that more users are coming back into the app. And when users in an app, we are generating revenue from advertising and hopefully, also generating revenue from the sale of premium content. NFTs, as I said earlier, this is the philosophy that we have that NFTs is that it's a needed utility for our artists community, something which we expect will bring in new artists as well, because we have crafted our NFT offering, which we call NFTs Made Easy in a really, really simple fashion, such that neither creators nor consumers need to have crypto experience or technology experience in order to purchase those NFTs. And our hope is that with time that that will also help drive demand for our product and drive the user base. And specific to iOS, we are offering these NFTs across both Android and iOS. And our hope is that that will be an additional factor that can drive iOS growth for us, which is taking advantage of the optionality associated with our brand and this product. We also have work going on in terms of improving search and content discovery. I think I mentioned using the benefits of machine learning in order to customize content feeds for users based upon their particular tastes and preferences and usage patterns and content consumption, and so on and so forth. So there - those are just a handful of items. But taken in totality, our hope is that we can begin to turn the corner and reinvigorate growth in the well developed markets, if you will.
Allen Klee: Okay. And for the NFTs. So I was playing on your app today and I noticed there were NFTs there. And I just wanted to understand that a little bit more in terms of you get paid the same way as you get paid as, as kind of on the like, if you're somebody selling the wallpaper, or ringtone and how about like the secondary market for the NFT? How is that handled? And where is the -- where is it secured? If somebody purchases an NFT, where are they holding it, so that they can be comfortable that that it's going to be there and not get stolen?
Jonathan Reich: Great questions. So the way that one purchases an NFT is by using Zedge tokens, which we sell through an app purchases, obviously, the artist will select the price that they want to charge for that NFT. And then an end user will need to purchase the number of tokens needed in order to transact that purchase or sale, if you will. And that's all done through in-app purchases in local fiat currency. So I as an end user see NFTs that I really like. Let's just for argument's sake, say that it's $10, I would then go in and purchase $10 worth of lead tokens. And I would then be able to secure that NFT. In terms of where's it secured? We're working with a third party technology provider that has specialized in securing this on the blockchain and in terms of being able to go to secondary markets at launch there is the ability to do that, although it's a very manual process. But we expect that over time as we evolve this product, that that will become easier to accomplish. And that it will also be something that can be done even within App. So I think I mentioned our ability to support a trading and auctions and drop dates, and so on and so forth, are all on the roadmap, hopefully, in 2022, calendar year.
Allen Klee: Fantastic. I was also using your shorts app today. And I noticed over the year, you've significantly increased the amount of categories genres. I saw some audio on there. Could you talk about how well your experimentation is going?
Jonathan Reich: Sure. So on previous conference calls, I've talked a little bit about what we've done in shorts. Let's say during calendar year 2021, or there's been a lot of work in our refining the product, our ability to really understand what's happening from an analytics perspective from everything, including content consumption, popularity, demographic, and so on and so forth. And that work continues to unfold. We're, as you'd said, we've done a lot of work in terms of tagging, and in terms of expanding the different verticals, if you will, that would be appropriate for an array of different customers. And we've also taken a more significant step in terms of understanding usage patterns and consumption patterns with respect to audio. We have no updates, with respect to where we were, when we reported fiscal year 2021, a couple of weeks ago, other than to say that we're continuing along that path, and looking for the optimal way in order to expand this business and deliver a great content experience to users, which will result in recurring usage and on-going growth.
Allen Klee: Great. In terms of your marketplace, you kind of highlighted that as an area of have a real priority this year, and what the opportunity can be, could you what could the opportunity be? How should we think about that?
Jonathan Reich: Sure, so as you know, we were not in a breaking out particular or are providing particular growth numbers for the marketplace. But there has been tremendous growth overall in the creator economy. Certainly NFP is playing to that. And considering that we've got give or take 35 million monthly active users globally. Our goal is to see to it that we take advantage of a lot of the infrastructure spend that we had made over the course of the last 12 months to 18 months. As you recall, we had overhauled our content management system. We've overhauled unified accounts, things of that sort, we're working on our recommendation engine, etcetera, etcetera. And the idea is that we want to avail users of not only existing content categories that we have today, draw in new artists, because we have this massive user base and our T's and C's are very straightforward. The platform is very easy to use if you're a creator. But we also want to begin to think about new content genres that extend beyond simply being wallpapers, video wallpapers, ring tones, and notification towns. So those are all the things that we are thinking about at this point in time and concurrently looking to expand the universe of artists that monetize on our platform.
Allen Klee: Thank you. My last question, how did the quarter perform relative to your internal expectations? And what surprised you on the day to day upside or downside?
Jonathan Reich: Yes, so we haven't shared quarterly budget numbers or anything of that sort in the past. And I don't expect that we are going to. All I can say is that, we have been really working hard to see to it, that we can feel the balls as those opportunities begin to avail themselves. And the team is very, very much dedicated to seeing to it that we are, meeting our budgetary numbers, if not beating them. And if there are gaps, we're really doing our best in order to understand what the cause of the gap is, and how to close that gap to the best of our ability. I think I'd mentioned on previous calls, we took the liberty of hiring product managers in calendar year 2021. And having dedicated product managers who have responsibility for P&L really has been beneficial in terms of getting answers earlier on. So if corrective action is needed or if prospective action is needed in order to take advantage of an opportunity, that we're in a position to do that. Not that it's easy, but certainly something that results from having more dedicated product managers is, is having that level of granularity so that we can act and hopefully act quickly in order to see to it that gaps are closed, if and when they appear.
Allen Klee: Thank you very much. I mean, I think your company is really a great example of how to do a successful mobile ecosystem and, and how to think about all these different ways to monetize a larger user base. So it's very impressive what you've done. Thank you.
Jonathan Reich: Thank you, Allen, your words are very times really appreciated. And wishing you very happy holiday season and good health.
Allen Klee: You too.
Operator: Thank you. Your next question is coming from Brian Warner . Your line is live. Brian Warner, your line is live.
Unidentified Analyst: Oh, I'm sorry. I might have been muted. Can you hear me?
Operator: Yes, you're coming through?
Unidentified Analyst: Okay. Hi guys, congratulations. And, and happy holiday and warm wishes to all of you. It's a good year. Two questions. Can you talk about anything you've done to date on paid customer acquisition, particularly domestically? And sort of what the experience might have been? And if you haven't really done anything yet, can you give us a sense of so that how are you going to attack that? And, and I know it's early, but what you might send on that? And second question. Can you just give us any color on what the advertising revenues or yields are from subscribers in lesser developed countries versus developed countries? I'm sure it's a huge disparity, but you can give us any color that might be helpful? Thanks.
Jonathan Reich: Thanks for the compliment Brian, and hope you're doing well as well. In terms of paid user acquisition, what we are doing is we are beginning to scale out. We are very much focused on trying to acquire customers across various platforms, where we will see a positive ROI from those customers. And where we see that the numbers are panning out, then we're trying to scale those numbers up. In terms of dollar spend, we have not shared with the market or investors what the budget is, but suffice it to say that we are looking at -- looking very closely at each of the areas in which we are investing, testing and then analysing. And the platforms and the the criteria by which we're going out and acquiring as customers for the ones that are generating that positive ROI, we are expanding, and for the ones that are not generating positive ROI, we will test a little bit more. But if we see that the gap is so significant on the ROI side, then we will not pursue to those platforms. We have, and continue to work hard to make sure that we have the insight and the knowledge so that we can see what these ultimate customers ultimately produce. And when you think about this, let's just say we go out and acquire a customer. And that's through a download in a, in a well developed market, we're also looking at well for that cohort of users, how much money are they generating from advertising? How much money are they generating from premium sales, and how many of those users potentially convert into subscribers? So taking a look at that entire portfolio of people potential monetization is what's going into our analysis, and then taking a look at that over some period of time, so that we have a comfort level that, after that period of time, we will be whole and then from that point going forward, we will actually generate positive ROI. In terms of your second question. We have not shared that level of granularity in terms of revenue from advertising versus from subscription and what the order of magnitude difference between the two is. And I think we're going to hold off on getting into details about that this evening.
Unidentified Analyst: Okay, fair enough. Thanks very much and good luck.
Jonathan Reich: Thank you.
Operator: This concludes our question and answer session and conference call. Thank you for attending today's presentation. You may now disconnect.
