Zedge, Inc.
Q1 2020 Earnings Call Transcript

Published: 10 Dec 2019

[Operator:]

Good afternoon. And welcome to Zedge’s First Quarter 2020 Earnings Conference Call. During management’s prepared remarks, all participants will be in a listen-only mode [Operator Instructions]. After today's presentation by Zedge's management, there will be an opportunity to ask questions [Operator Instructions].In today's presentation, Elliot Gibber, Zedge's Interim Chief Executive Officer and Jonathan Reich, Zedge's Chief Financial Officer and Chief Operating Officer, will discuss Zedge's financial and operational results for the three-month period that ended on October 31, 2019.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.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 Zedge's earnings release is available on the Investor Relations page of the Zedge Web site. The earnings release has also been filed on Form 8-K with the SEC.I would now like to turn the conference over to Mr. Elliot Gibber. Sir, the floor is yours.

[Elliot Gibber:]

Thank you, operator. And thank you all for joining us today.I am Elliot Gibber, interim-CEO of Zedge. Welcome to Zedge’s first quarter fiscal 2020 earnings conference call, recapping the three months ended October 31, 2019. Joining me today is Jonathan Reich, our Chief Financial and Chief Operating Officer, who will provide additional insight into the numbers that we reported earlier this afternoon.Although I’m early on in my new position as interim CEO, I benefit from a long-term relationship with the company, having served as a board member from January 2018 until I resigned from that position last month to take on my current role. My history with Zedge has given me the opportunity to learn the business and work closely with executive management.I’d like to take this opportunity to update you about some of the progress we’ve made in our goal to become cash flow positive in fiscal 2020 while continuing to invest in new and innovative products that extend our value proposition beyond mobile phone personalization.I’ll start by focusing on revenue. We continue to experience formidable growth in paid subscriptions. As of the end of November, we had approximately 225 thousand paid subscribers starting from a base of zero at the beginning of calendar 2019. This has generated approximately $1 million of gross revenue through November 30, 2019. The team initiated a project to unlock more value from users in emerging markets that has contributed in excess of $25 thousand in revenue per month with additional improvements expected. We have some additional opportunities with the same goal that we are exploring and expect to start seeing benefits in early calendar 2020.I think it’s important to note that revenue increased on a sequential quarter basis even with the temporary suspension from Google and decline in overall MAU as well as continued decline in MAU from developed economies. This points to the progress of unlocking greater value from our customers.While on the topic of the Google suspension – I can’t comment about whether we will be made whole, but want to say that we are in the midst of a process and recouping our loss and mitigating any long-term impact, which are priorities for us.With respect to cost cutting – we have begun to recognize the benefits associated with the expense reduction initiatives discussed last quarter. Payroll and discretionary spend have both come down and our cash burn has declined on both a sequential and year over year basis. Loss from operation was $745 thousand for the first quarter, backing out depreciation and amortization cost and severance, it would have been a loss of $104 thousand, an improvement in that metric of 63% year-over-year and 79% quarter-over-quarter. At the same time, we continue looking for better and smarter ways to run the business to contribute to our goal of becoming cash flow positive.I’m excited that we released Shortz for Android users in major English-speaking markets in late November. Shortz is a new app that extends our value proposition into the world of entertainment by offering serialized, short-form fiction delivered in a text-message format. We were able to develop and deliver this product to the market in approximately three months – a remarkably short period of time for such a complex undertaking - because of the investments we’ve made in modernizing our infrastructure and publishing platform. I congratulate the team for delivering a great product, quickly!Next up for Shortz is the introduction of the iOS version which is expected in the coming weeks. Offering Shortz to iPhone users is a great opportunity for Zedge because it’s the first time that we will offer a product that we expect to be equally viable for both iPhone and Android users. Of course, it goes without saying that we will iterate on improving the experience based on the usage and other data that we will gather and analyze. As with any new product, we will optimize and perfect the offering, incrementally, based on what we observe and learn now that the product is live.We have opted for a freemium subscription model for Shortz. Potential users will be able to sample the first chapter of the story for free. If they like the experience, they will be given an opportunity to sign up for a paid weekly, monthly, or annual subscription. As you can tell, I am excited about the potential for Shortz but don’t want to get ahead of myself. Suffice it to say that the team appreciates that any future investments need to be justified by results and analytics.I know that many of you have asked about our hiring a permanent CEO. Frankly, I view this as being one of my key responsibilities and hope to initiate a search process guided by the Board in early 2020. Before doing so, I need to be empowered with understanding what Zedge needs for long-term success which is my current focus. I look forward to keeping you, our investors, informed of our progress in the upcoming months.Now, I am going to turn the call over to Jonathan Reich who will provide an overview of the quarter’s financial results. Thank you.

[Jonathan Reich:]

Thank you, Elliot. My remarks today will focus on our key operational and financial results for the first quarter of our fiscal year 2020 – the three months ended October 31, 2019.For a comprehensive and detailed discussion of our results, please read our earnings release issued earlier today and our Form 10-Q, which we expect to file with the SEC next week.Following my comments, we will open the call to any questions you may have.Monthly active users, or MAU, that is, the number of unique users that opened our app during the last thirty days of the quarter, decreased 14.2% to 29.7 million during October 2019 from 34.6 million in the corresponding period a year ago and by 12.2% on a sequential quarter basis. As you recall, in late September, Google temporarily removed our app from the Google Play store as a result of buggy code in a standard technology integration with one of our third-party advertising partners. Upon learning about the problem, we promptly mitigated it by removing the problematic code. However, during the three-day suspension, Google sent a notification to all users that had the problematic version of the app on their phone recommending that they uninstall it.This accounts for much of the drop of 28.4% and 4.6% in MAU in well-developed and emerging markets respectively, from Q1 of fiscal 2019. On a sequential quarter basis, the declines were 15.1% and10.7%. We haven’t been able to assess what type of users, highly valuable or less valuable, uninstalled the app resulting in the decline in MAU, but as Elliot said, mitigating the damage from the suspension is one of our key focuses.Total revenue in the first quarter declined 14.6% compared to the year-ago quarter and increased by 4.3% from the previous quarter to $2.0 million. On a year-over-year basis, revenue was negatively impacted by the shift in MAU from well-developed markets, which command higher advertising rates, to emerging markets, which do not monetize as well. In addition, nearly half of the year-over-year decline can be attributed to the loss of service revenue from managing ad operations for a third-party mobile app publisher which terminated on June 1, 2019. On a sequential quarter basis, we benefitted from our renewed focus on improving monetization. To this end, we reconfigured our ad stack resulting in higher eCPMs, improved monetization in emerging markets and continued driving paid subscriptions which resulted in 69,000 incremental subscribers prepaying $341,000 in gross revenue which has a higher margin when compared to ad supported revenue.Zedge Premium’s Gross Transaction Volume, or GTV - that is the total sales volume transacting through the platform - was $192 thousand in Q1 compared to $41 thousand a year ago and $167 thousand last quarter. We are likely going to see a short- to mid-term decline in GTV and associated Zedge Premium revenue due to the recent redesign of our app’s homepage which prioritizes Shortz promotion ahead of Zedge Premium. However, we expect to offset the revenue impact due to an anticipated increase in advertising revenue resulting from more inventory being available on the new homepage. Of course, this is separate and distinct from any revenue generated from Shortz. Also, it’s important to note that we still intend to invest in and grow Zedge Premium and we will address this as the year unfolds.Overall, average revenue per monthly active user generated from our apps – or ARPMAU – remained flat at two-point one cents year-over-year and increased 11.1% sequentially. The improvement is attributable to the actions we’ve taken to further optimize our ad stack, better monetize users in emerging markets and the contribution from paid subscriptions.Our direct cost of revenue in Q1 was $329 thousand or 16% of revenue, a decline from $350 thousand – which represented 15% of revenue - in the year-ago quarter and from $348 thousand or 18% of revenue in the previous sequential quarter. The year-over-year 6.1% decline primarily reflects the savings attributable to our migrating to a cloud based infrastructure. As the current fiscal year continues to unfold, we expect that direct cost of revenue will continue to decline due to continued changes we are making in our infrastructure.SG&A in the first quarter was $1.9 million, a 15.8% decrease compared to the year-ago quarter and a 9.0% decrease compared to the prior sequential quarter. The decrease primarily relates to lower compensation costs, recruiting fees, legal expenses and auditing fees offset by higher marketing costs associated with the 30% we pay to Google for each paid subscriber, severance payments and content acquisition expense associated with Shortz. After backing out one-time expenses for all periods, SG&A would have been $1.87 million, a 19.2% and 11.2% decline when compared to the year ago quarter and sequential quarter, respectively.Loss from operations in the first quarter was $745 thousand compared to $581 thousand in the year-ago period and $939 thousand in the previous sequential quarter.Our loss per share increased to 8 cents from 7 cents in the year-ago quarter and decreased from 12 cents last quarter.At October 31st, we reported $1.7 million in cash and cash equivalents compared to $3.6 million a year earlier and $1.6 million at July 31st. Zedge has no outstanding debt. We also have access to a revolving credit facility of up to $2.5 million from Western Alliance Bank if needed.On December 9th, we filed a shelf registration with the Securities and Exchange Commission enabling us to raise up to $5 million in capital. As we’ve mentioned in the past, based on market conditions, we want to be in a position to raise a portion of this amount in fiscal year 2020 if we feel there is a good opportunity to accelerate the growth of the business.I’ll close by reiterating that overall Q1 was generally a good quarter for us. We began seeing positive results from the fundamental changes we’ve made in our monetization stack, the continued investment in paid-subscriptions, the ongoing cost reduction initiatives and our release of Shortz which will extend our value beyond the world of mobile phone personalization. We accomplished all of this while committing to doing what we can to become cash flow positive later in the fiscal year. We will continue to look at ways in which we can resume user growth in well-developed markets with our flagship product and explore new product opportunities that align well with our brand and current user base.Wishing all a happy and healthy holiday season.Back to you operator for Q&A.Thank you. The floor is now open for questions [Operator Instructions]. And it appears, we have no questions at this time [Operator Instructions]. Ladies and gentlemen, that does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time, and have a wonderful holiday.