Zedge, Inc.
Q1 2018 Earnings Call Transcript

Published: 13 Dec 2017

[Operator:]

Good afternoon and welcome to the Zedge's First Quarter Fiscal 2018 Earnings Conference Call. During management's prepared remarks all participants will be in 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, Tom Arnoy, Zedge's Co-Founder and 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 3 month period ended October 31, 2017. 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 & 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 Web site. The earnings release has also been filed on a Form 8-K with the SEC. This call is being recorded. I would now like to turn the conference over to Mr. Arnoy. [Technical Difficulty] Mr. Arnoy, you may begin your remarks.

[Tom Arnoy:]

Thank you, operator, and thank you all for joining us today. I am Tom Arnoy, Co-founder and CEO of Zedge. Welcome to Zedge's first quarter 2018 earnings conference call, recapping the three months ended October 31, 2017. Joining me today is Jonathan Reich, our Chief Financial and Chief Operating Officer who will provide additional insights into the numbers that we reported earlier this afternoon. I am happy to report that this was a solid quarter for Zedge. Monthly active users, revenue and average revenue per monthly active user were on the uptick, validating our focus on improving both the core user experience and monetization. We not only closed the Freeform deal but, building on that momentum, earlier today we announced the beta launch of Zedge Premium, our marketplace. As previously announced, we implemented a set of cost cutting initiatives, and are now beginning to benefit from those savings. We attribute a large part of our success to changing our internal organization. Scaling a fast growing company has been challenging. We've evolved with a more decentralized structure made up of self-managed and autonomous teams including product managers, designers and engineers focusing on specific goals and objectives such as growth, user journey, monetization, and marketplace. This change has resulted in greater efficiency and productivity, and has been a significant contributor to our growth. The credit for successfully making this change over the last 12 months goes to our employees who have rallied together and embraced the new approach without missing a beat, and I would be remiss if I failed to acknowledge their outstanding performance. Earlier today we announced the beta launch on iOS of Zedge Premium, our marketplace offering, which we announced earlier today. Although we see great long-term potential, I want to set expectations and point out that it will take time to iterate and develop Zedge Premium for maximum success. What are we building? A place where artists can monetize their high quality, premium content by making it available to our 33 million monthly users. This content may include videos, social content, augmented reality 3D models and full music tracks in addition to wallpapers, icons, widgets, ringtones and notification sounds. Zedge will provide creators with control over how users unlock and acquire the artist's content including rewarded advertising experiences, bundling with merchandise purchase -- think print on demand -- virtual currency and in-app purchases. Zedge will share revenue with the artists who will also expand their reach. The idea is to give artists a rich set of tools that they can use to make money while pleasing their fans. In addition, Zedge will promote the artists with in-app promotion and across our social channels. Artist participation will be by invite to start with, but over time we envision a self-serve platform. In addition to improving monetization of our user base, our expectation is that growth of the marketplace will result in user growth for Zedge. In a certain sense, we are outsourcing marketing to the artists that participate in Zedge Premium. So why did we launch on iOS if most of our users are on Android? Recall that we're in beta mode currently. iOS allows us to move fast, test, iterate and perfect before introducing the product to the bulk of our customers. We want to manage the risk and aim for the best outcome possible. There are many unknowns at this point and having the ability to learn is a necessity. In addition, we believe that using iOS as our launch pad opens the door for new opportunity on this important platform where we have faced challenges. Before continuing I want to underscore that Zedge Premium is very early in its development and that investors shouldn't expect overnight success. We are doing our best to build a long-term and valuable solution that meets the needs of both creators and users. One, which solves a problem, capitalizes on our strengths and assists in making Zedge relevant to new customer segments. This is an iterative process and needs to unfold in a disciplined manner. Finally, I'd like to highlight that we've started benefiting from the cost cutting initiatives that we announced last quarter. Although our loss from operations increased in Q1, much of that was attributable to one-time charges associated with the Freeform acquihire and a restructuring charge related to workforce reduction. When backing these out our loss from operations totaled $177,000. We have started working on Phase II of our infrastructure rebuild and hope to have this completed during the course of the current fiscal year. The anticipated resulting savings, along with the others that we already implemented, will allow us to continue investing in the growth drivers for our business. In closing, Q1 was a good quarter for Zedge and we believe that there is more good news coming. We remain committed to improving the customer journey, growing revenue and developing Zedge Premium in a cost conscious and sustainable fashion. Wishing all a happy and healthy holiday season. Now, I am going to turn the call over to Jonathan Reich for a discussion of the quarter's financial results. Thank you.

[Jonathan Reich:]

Thank you, Tom. My remarks today will focus on our key operational and financial results for the first quarter of our fiscal year 2018. 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 by December 15, 2017. Following my comments, we will open the call to any questions you may have. Throughout my remarks, the first quarter refers to August through October 2017. Monthly active users, or MAU, that is, the number of unique users that opened our app during the last thirty days of the quarter, increased 5.7% to 33.4 million during October 2017 from 31.6 million in the corresponding period a year ago and 5.4% from 31.7 million in the previous quarter. I'm happy to report that, for the first time since October 2015, MAU expanded across all regions, globally, with particularly strong growth in emerging markets. Total revenue in the first quarter increased 11.6% compared to the year ago quarter and 4.4% from the previous quarter to $2.7 million. The increase was primarily related to the mid-quarter introduction of new ad units in our Android app and MAU growth, and to a lesser extent, by the core improvements we have been making in the app's user interface and design. Overall, average revenue per monthly active user generated from our apps or ARPMAU increased by close to 10% year-over-year to $0.0256 from $0.0233. This is the fourth consecutive quarter that we have grown ARPMAU a key performance indicator for our business. Our direct cost of revenue as a percentage of revenue decreased to 14% from 15.4% when compared to the year ago quarter and from 15% when compared to the previous quarter. The year-over-year decline reflects the savings that we have started realizing from our deployed upgraded backend, which has allowed us to lower our hosting costs coupled with a higher revenue base. In dollar terms, direct cost of revenue increased by 1.4% or $4,000 on a year-over-year basis and declined by $9,000 on a sequential basis. SG&A in the first quarter was $2.97 million, a 69.3% increase compared to $1.76 million in the year ago quarter and a 32.3% increase from $2.25 million in the prior quarter. The year-over-year increase primarily relates to higher payroll resulting from growing headcount to 69 from 59; and one-time costs including the $465,000 spent on the Freeform acquihire of which $242,000 was paid in stock; and a restructuring charge of $191,000 in connection with the workforce reduction announced in October. We expect to generate $1.5 million to $2 million in savings from the reduction in workforce, lower infrastructure costs and tighter discretionary spend initiatives we announced during last quarter's conference call. A portion of these savings will be invested in building Zedge Premium. I should also point out that, in October 2016, we benefited from a one-time tax credit of approximately $200,000 in Norway, which lowered SG&A by the same amount in Q1 of fiscal 2017. Excluding those non-recurring items, SG&A would have been $2.32 million in Q1 2018 compared to $1.96 million in Q1 2017, an increase of $360,000 or 18.4%. Loss from operations in the first quarter was $833,000 compared to $113,000 of operating income in the year ago period and a loss of $264,000 last quarter. When backing out for one-time costs, including the Freeform transaction and severance, loss from operations would have been $177,000. Our loss per diluted share increased to $0.08 from a gain of $0.02 per share in the year ago quarter and a loss of $0.02 last quarter. In the year ago quarter we reported earnings per diluted share of $0.02. At October, we reported $4.2 million in cash and cash equivalents compared to $6 million a year earlier. Our working capital or current assets less current liabilities was $4.2 million compared to $6.2 million a year ago and $5.1 million last quarter. Zedge currently has no debt. Depending on the success and adoption of Zedge Premium, other commercial opportunities and/or M&A prospects, we may seek to raise capital through debt or equity financing. To wrap up, we are pleased by the progress we've made this quarter demonstrated by our growth in MAU and revenue as well as the quick launch of the Zedge Premium beta. I would like to wish all a happy, healthy, safe and joyous holiday season. Operator, back to you for Q&A.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Kevin Dede with H.C. Wainwright. Please go ahead.

[Kevin Dede:]

Thanks for taking my questions Tom and Jon. I was wondering how you expect the business model to work for the Zedge Premium platform. I mean how are artists attracted and paid?

[Tom Arnoy:]

Hi. This is Tom. Yes. So, we are using many different payment mechanisms, right? But you are asking about like how we attract the artists? Tom will try to answer the question.

[Jonathan Reich:]

Hey, Kevin. How are you? It's Jonathan.

[Kevin Dede:]

Hi, Jonathan. Thanks.

[Jonathan Reich:]

What we are adopting is a conventional marketplace model, where we will have a rev share with the artists. The artist keeping more or less 70% of revenues and we earning 30% of net revenues I should say. And as Tom had mentioned in his comments, there will be various unlock mechanisms by which we are able to generate revenue, which means that we keep to a core value proposition essentially allowing users to gain access to the content without necessarily having to make a hard cash payment. Of course, we are going to test within that purchases as well and in addition to that virtual currency but we want to keep to our core value proposition and by way of example, if a user wants to download a ringtone or wallpaper, they maybe required to watch a video or provided email address, we would generate revenue off of that and then share that revenue in that 70

[Kevin Dede:]

Yes. It helps a lot Jonathan. So, how are you going to collect that initial group of artists?

[Jonathan Reich:]

Sure. So, to start out with, participation and this was in the press release that we had released this morning is by invite only. And we have a team that is working on attracting more talent. So, we've got some talent scout specifically part of the Freeform acquisition included their talent scout separate and apart from that we will be using the platform itself in order to publicize the marketplace, attract new users. And finally, as Tom had said during his call, the beauty of the marketplace from our vantage point is that -- in a sense it gives us the ability to outsource marketing to the actual market participants based upon what we have learned and what the Freeform folks have learned over time. We don't need all participants all artists in the marketplace to be super successful rather, we need a cross section of artists to be successful and that will create buzz and also allow for new artists to learn up about the platform with the promise of being able to monetize their content which is what they accustomed to. So, that is what we envision. Of course, we will react based upon where we see success, and then, continue to grow from there.

[Tom Arnoy:]

Let me just add to that. Like remember that Zedge has been a distribution platform for UG content, user generated content for a very long time. So we already have a lot of users that are part of creative communities and we also anticipate that things like that these guys will spread -- after spreading the work and we will be able to see some of these artists contacting us asking questions around this.

[Kevin Dede:]

So how long will you run beta and then when you go alive, how long do you think revenues become meaningful that you might report them separately or what's your expectation on that side?

[Tom Arnoy:]

We don't know, right? We just don't know. There is a lot of testing and failing. We have started getting some initial numbers now. But, we can't say -- like it's impossible to say really. So that's why we try to lower the expectations here because like it's very, very hard to say when we actually start getting material from that.

[Kevin Dede:]

Okay. Fair enough. But, what's your expectation Tom on the length of the beta program?

[Tom Arnoy:]

I can't say. Like the beta or not, like we are testing and failing, right, like and then the -- we are going to test soon on Android as well, but we are not going to have this go out of beta. We need to communicate to our users as well this is something that we are testing. We can't go -- be too aggressive, roll out to 100% of our end users over night because that's too risky to -- for the current business.

[Kevin Dede:]

Okay. Fair enough. Thank you. So, the higher expense level recognized in the quarter is that something to expect going forward save the cost associated with the deal?

[Jonathan Reich:]

Yes. So, Kevin as we had announced last quarter, starting November 1, which was the beginning of Q2 for us. We implemented several cost reduction items that we anticipate will total between $1 million and $1.5 million to $2 million in annual cost savings that was comprised of a reduction in workforce. Savings that we are benefiting from in terms of the new infrastructure that we implemented, and then, some additional discretionary management or cost management if you will. We expect to take a portion of that and reinvest that in developing the marketplace. And we are doing our best in order to ensure that we can achieve financial metrics that will be inline with our growth. Obviously, and I said this in my comments, if we see that there is a tremendous opportunity based upon the marketplace or other commercial initiatives that we have underway we actually may need to be in a position to go out and raise capital whether it be through debt or equity. But, barring something that is spectacular, our goal is ultimately to see to it that we are minimizing cash burn and ultimately that we are profitable.

[Kevin Dede:]

Okay. Thank you very much Jonathan, appreciate it. Thank you, Tom. And congrats on the launch.

[Jonathan Reich:]

Thanks Kevin.

[Operator:]

The next question is from Brian Warner with Performance Capital. Please go ahead.

[Brian Warner:]

Ho, guys. Thanks for taking my question. Just one, I think Tom said in prepared remarks that you hope to complete phase 2 of the rebuild in 2018, can you just give a little color on what you speaking out there?

[Tom Arnoy:]

I was referring to the infrastructure rebuild. So remember like over the last year, we have been focusing on or rebuilding our backend systems and infrastructure and we are going to continue doing that. And we expect to save costs from that and also like also position for moving past there on a more modern better infrastructure in general.

[Brian Warner:]

So, there will be some incremental user enhancements?

[Tom Arnoy:]

No. So, we will just continue. We are done with phase 1, which was like a pretty big backend we designed and reengineered our backend. But, now we are focusing on a little bit deeper on the infrastructure in general and I think the key word here is like moving things to the cloud more.

[Brian Warner:]

I see. Thank you.

[Operator:]

[Operator Instructions] At this time, I'm showing no further questions. So, I would like to conclude the question-and-answer session as well as today's conference. We thank you for attending today's presentation and you may now disconnect.