Zedge, Inc. (ZDGE) on Q1 2021 Results - Earnings Call Transcript
Operator: Good afternoon. Welcome to Zedge’s First Quarter 2021 Earnings Conference Call. During managements prepared remarks all participants will be in a listen-only mode. 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 31, 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.
Jonathan Reich: 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 made 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 newer 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 and Ringtones, is all about personal identity, and act 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 drop by 50% in year two.
Yi Tsai: Thank you, Jonathan. I want to start by reminding those on the call that our fiscal year ends July 31. 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 tables, including comparisons for historical trends 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 2020 from 29.7 million in October 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 offerings for users in well-developed markets to spur both MAU growth and higher growth rates for Zedge Premium.
Operator: Thank you. We will go first to Allen Klee at National Securities.
Allen Klee: 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, can you talk about how you think about the timing of this? And maybe give us a little bit of some examples on a pathway of how you're thinking about rolling this out?
Jonathan Reich: 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 and introducing some of these feature 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 like, 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, you know, appear in the app, you know, during the second half of the fiscal year.
Allen Klee: And just to 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 revenues, is that the way that I should think of this?
Jonathan Reich: 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 you know 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 social space, when they have the ability to connect more closely with the influencer, that, you know, helps in terms of propelling that user growth, and then all of the other items that flow from that.
Allen Klee: 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: 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. Insofar as the emerging markets, we are essentially developing customized, SKUs, if you will, that will have a different user experience, insofar as monetization. So, we may play with the app 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 a revenue stream. And as we achieve success, then we really roll that out to the entire region or 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 continue 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 be in that region or another region accordingly.
Allen Klee: Okay. You mentioned there's seasonality in the CPM and 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: 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 typically, is typically a, you know, a big, you know, budget number for, you know, retail. So, by contrast, going into January advertising budgets are cut people are, you know, not prone to spending a ton of money because, you know, 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 we'll begin to see some – we'll see the Q3 begins to nose down. Q4 begins to flatten out and then Q1, which is August, September, October begins to pick up as the back to school back to work dynamics 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: Thank you.
Operator: And now we'll conclude our question-and-answer session and conference call. We thank you for attending today's presentation. You may now disconnect.
