Zedge, Inc. (ZDGE) on Q2 2021 Results - Earnings Call Transcript
Operator: Good afternoon, and welcome to Zedge's Second Quarter 2021 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 three months period that ended on January 31, 2021. Any forward-looking statements made during this conference call, either in 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 either 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.
Jonathan Reich: Thank you, operator, and thank you all for joining us today. Good afternoon. Welcome to Zedge's second quarter fiscal year 2021 earnings conference call. I'm Jonathan Reich, CEO of Zedge, and with me is our Chief Financial Officer, Yi Tsai, who will provide additional insights into our financial performance. Q2 was another record quarter for Zedge. We surpassed $5 million in revenue for the first time ever, an increase of more than a 100% when compared to the year ago quarter and also reported new highs for operating income, operating margin, net income, EPS, cash flow from operations and EBITDA. Operationally, we completed the long awaited migration to our new content management system, which is delivering encouraging results earlier than anticipated. And we rolled out app icons on iOS. Taken as a whole, we are well positioned for what we hope to be a strong second half of our fiscal year. 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 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 482 million organic installs and currently has 35 million monthly active users or MAU. 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 second quarter performance, we continued to optimizing our ad inventory benefiting from both MAU growth and seasonal strength in ad pricing. Active subscriptions also performed well with 102,000 net additions, and second year renewal rate of approximately 45%. As you may recall, we earned a higher margin for year two renewals as Google's fee drops by 50%. We need to continue to provide the content and user experience to maintain these strong renewal rates, which we expect will fluctuate over time. Turning to product. We completed the rollout of our new content management system in December. This milestone opened the door for us to start introducing new features and enhancements that we expect will improve engagement and retention, especially in well-developed markets, including overhaul and user accounts, social and community features and search and discovery. These will be tested and rolled out iteratively. Currently, we're focused on re-imagining our user accounts, the foundation needed for many of these initiatives.
Yi Tsai: Thank you, Jonathan. I want to start by reminding those on the call that our fiscal year ends July 31st and that our fiscal Q1 and Q2 tend to be seasonally stronger, while Q3 tends to be the seasonal low typically with incremental sequential improvement in Q4. Additionally, we introduced the term "Active Subscriptions" to replace "Paid Subscriptions" as a metric this quarter due to a change in calculation used by Google Play that now includes account hold, which is a subscription status that begins when a user's form of payment fails and the three-day grace period has ended without payment resolution. The account hold period lasts for up to 30 days with the aim to reduce cancellation rate. Moving to the second quarter results. Monthly active users, or MAU, defined with a number of unique users they open our app during the last 30-day of the period increased 3.2% to $35.4 million during January 2021 from $34.3 million in January 2020 and was up 9.3% sequentially. Emerging markets showed strong double-digit growth, while well-developed markets continued to contract, however, in the lower rates than when compared to all four quarters in fiscal 2020. As Jonathan touched on, 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 second quarter increased 101% to $5.3 million compared to the year ago quarter. The main drivers were subscription growth, optimization of ad waterfall and an increase in advertising rates relating to year-end ad budget. Zedge Premium gross transaction value or GTV that is a total sales volume transacted through our market with $211,000 in Q2, up 7.1% compared to the year ago quarter. As Jonathan indicated, we want to position Zedge Premium as a growth driver in the quarters to come. And the introduction of users account and additional feature will be key to accelerating growth rates.
Operator: Your first question is coming from Allen Klee with Maxim Group. Your line is live.
Allen Klee: Good afternoon and congratulations on very strong results. Starting with advertising, your – the rate that you provided for the quarter of $4.049 is by far the highest you've ever had, and I know it's their seasonality in there. And it's also affected by increase in subscribers. But to what extent are we at like a higher level of advertising monetization in terms of rates based on everything that you've done to make things better? Thank you.
Jonathan Reich: Hi, Allen, it's Jonathan. I'm not sure I understand your question when you say whether we're at a higher rate, one more time?
Allen Klee: I'm just trying to understand to what extent you feel the changes you've made have your advertising rates kind of at a higher level?
Jonathan Reich: So, the changes that we've made have resulted in generating more revenue per monthly active user. And we are benefiting from changes that we've made, both pre-migration and that is pre-CMS migration that we talked about earlier as well as post-CMS migration. Does that answer your question?
Allen Klee: Sure. Could you maybe to follow up on that and for the operator, just want to make sure the call doesn't end after two questions? Could you talk about all about what CMS is and what that does for you?
Jonathan Reich: Sure. Our CMS, our content management system, is the part of the platform that manages all of the content that we have in the app. As we've shared with investors, we had a major investment in rebuilding our content management system from the ground up, such that it would house both our user-generated content and our premium content together. And that project was completed in December and opens the door for us to go out and begin rolling out new features and enhancements, such as social features, community features and so on and so forth that we expect will positively impact engagement and retention. Those will be rolled out incrementally after we've completed the overhaul of our whole user account setup, which is underway and which we hope to complete by the end of fiscal year Q3, which is at the end of April. And then those new features will start to roll out. Incrementally, obviously, the better of a job that we do in terms of improving engagement and retention translates into more revenue from our customer base.
Allen Klee: Great. And then could you expand a little on what you said about the focus on improving with your well-developed – in well-developed countries and what you're doing with Apple now and the traction that you're seeing there?
Jonathan Reich: Absolutely. So as we've said, one of our goals is to take our well-developed country user base and put that back on the growth trajectory. And many of the features and enhancements that we are investing in are ones, which we believe will help reverse that trend. Moving to Apple. As you know, with the introduction of iOS 14, Apple opened up the door, a crack, to the whole personalization vertical. And just by way of background, mobile phone personalization is highly available on Android, being that it's been baked into their operating system. And it's very easy to change a wallpaper or a ring tone. With our app, you just preview what it is that you like and you press set and you're done. That's much more complex in the Apple ecosystem.
Allen Klee: Got it. Thank you. With short, very encouraging that you have the ad-supported model, can you give us any metrics in terms of what that has done just in terms of amount of usage or any type of metrics?
Jonathan Reich: Well, it's really early, Allen. As I've mentioned, we just rolled out ad supported shorts last week, but from the very, very preliminary data. What we have seen is that there is more engagement and that specifically, day two retention has improved. We'd be premature in terms of really getting into mounds and mounds of data. I think that we need to give this some more time before we can report back to shareholders with respect to what the overall impact is, both short- and long-term.
Allen Klee: Okay. And Shortcastz, that sounds pretty exciting. How is that going to be set up in terms of the options of monetizing and the format of it? And what you think the potential is?
Jonathan Reich: Sure. That's a great question. And to be honest with you, we have not made any decisions about how to monetize that as of yet. Our first goal is to understand how users engage with these high- quality mini podcasts, if you will, of the content. And then based upon that, we can use that data to make an informed decision about how we can monetize. With that being said, there are many different possibilities. There's a possibility for having audio ads in there. There's a possibility for bundling that into subscriptions, making subscriptions more valuable. There's also a possibility with the user base being interested in this in syndicating across third-party platforms, by way of example Spotify, or an Apple podcast or things of that sort. But really long story short, still too early to answer the question with great degrees of clarity, we need to see what engagement is like, and then proceed from there.
Allen Klee: Thanks. And then I think I know the answer to this, but I just think it would be helpful if you mention this on the call. Because I think your stock had gotten hit during the quarter when there was some news of Google changing some of their – what data could be tracked and privacy rules related to that. Could you explain, like if that has an impact on you? Or if not, why that is?
Jonathan Reich: Our stock had – well, I don't know about our stock, our user base had been hit back in late August, 2019, early September 2019 because of some buggy code at a third-party advertiser had in their SDK. That's the software that allows our app to communicate with that advertiser's platform. And we were temporarily banned from the Google Play store until that problem was fixed. Overall, with respect to privacy, we are clearly very sensitive to making sure that we protect our users' privacy. And I should mention as well that unlike many other of apps that will have challenges associated with Apple's decision to remove IDFA, which is the way by which information is collected about users and shared with advertising networks, we really are not going to see a material impact of that because of a small amount of – relatively small amount of Apple users that we have.
Allen Klee: Thank you. And then just touching on the seasonality, we know that – I think the next quarter is the seasonally slowest, and you did mention that you will have tough comps in the fourth quarter. But is there a way to think about maybe directionally, the magnitude of the seasonality in the third and fourth quarter?
Jonathan Reich: Yes. If you look back historically, there has been a fall off. And I don't have the numbers in front of me, but anywhere, it's from 10% to 20% seems directionally correct when looking back at previous quarters. I can't tell you whether or not that will continue to be the case this year. But for the purpose of modeling, it's most likely okay to look at that and see how that affects your model. Yi, do you have anything that you want to add to that.
Yi Tsai: No. I think you summed up well. I mean when we got hit with COVID, our daily revenue was down to $20,000. And we recovered slowly from $20,000 to $30,000 to $40,000 to $50,000 to $60,000. So we, hopefully, we can maintain a $60,000 – or $50,000 daily revenue level.
Allen Klee: Great. And then your monthly active users, which was 35,400, which, was it maybe your…
Jonathan Reich:
Allen Klee: Yes, yes. I'm sorry. Sorry about that. So you're hitting kind of a high on that, while I mean the close to a high of what you've ever had, while this isn't the strongest time of the economy we've ever had. So what would you attribute that to?
Jonathan Reich: Sure. So I would say that there are a couple of things. As you know, we have been making improvements in the app. There's also been growth in the emerging in the emerging markets. One country that screams out in that capacity is India, where we've seen very, very material growth over time. And as you recall, we've had litigation. We were in litigation with an Indian company which we ultimately prevailed with. And as a result of that, our app was suddenly made available throughout the entire country. Prior to that, the plaintiffs in the case had successfully seem to it that the department – Indian Department of Telecommunications was able to block our app and that block was removed, and we've seen some really, really nice growth in India since then. And then I would say as well, there has been, as is well aware throughout the entire digital market, an increase in the use of mobile apps because of COVID and stay-at-home orders. Where we have likely suffered to some extent, though, is with respect to phone sales, our new phone sales in retail locations because of the slowdown in retail sales due to COVID. And our hope is that as we begin exiting this COVID tunnel and retail sales begin to resume and get restored that we will be able to benefit from that simply due to the fact that one of the user patterns that is very common when the new – when the user buys the new phones, they want to personalize it. And as such, they will come to Zedge, download the app and partake of the content.
Allen Klee: That’s great. My last question, just could you tell me if you happen to know what your share count is kind of as of now?
Jonathan Reich: Yi, correct me if I'm wrong, but I believe it somewhere is around $13.5 million.
Yi Tsai: That is correct.
Allen Klee: Fantastic. Well, congratulations on excellent execution. Thank you so much.
Jonathan Reich: Thank you.
Operator: We have no further questions from the lines. This concludes our question-and-answer session and conference call. Thank you for attending today's presentation. You may now disconnect.
