Zedge, Inc.
Q2 2018 Earnings Call Transcript

Published: 13 Mar 2018

[Operator:]

Good day and welcome to Zedge's Second Quarter Fiscal 2018 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, 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 three-month period ended January 31, 2018. 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 website. The earnings release has also been filed on a Form 8-K with the SEC. Please note this call is being recorded. I would now like to turn the conference over to Mr. Arnoy.

[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 second quarter 2018 earnings conference call, recapping the three months ended January 31, 2018. 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. As a result of the dedication and hard work of our employees, our disciplined focus on the core user experience and our continued investment in monetization, Zedge delivered another good quarter. We witnessed growth in key indicators, including monthly active users, revenue, average revenue per monthly active user, session time, and sessions per user. We also successfully launched Zedge Premium, our marketplace, on iOS. We did this with a smaller workforce and a new decentralized organizational structure. Let me take the next couple of minutes to update you on the status of Zedge Premium, our newly launched marketplace. Zedge Premium is where artists can monetize their content by making it available to our millions of monthly active users. Currently, this content includes not only wallpapers, ringtones, and notification sounds, but also videos, augmented reality 3D models, physical merchandise like tees and phone cases. In the future it will include even more. One of the nice things about Zedge Premium, is that we keep to our core value proposition allowing users to acquire the content without requiring them to pay in cash. Users can unlock the content by watching a video, purchasing physical merchandise or by spending virtual coins. The revenue that is generated is then shared between the artist and Zedge. In Q2, we launched the beta of Zedge Premium on iOS. Only around 10% of our MAU are iPhone users, and in version 1.0, we deliberately limited the number of artists and the volume of content. As such, the initial numbers were small. Yet, the learning and trends are significant. To start with, we were happy to see conversion rates, that is, customers taking an action to unlock content, tracked better than expected. Furthermore, we continue to iterate and optimize and the trend line continues improving. In addition, even with a basically steady number of customers going into Zedge Premium, daily gross revenue and revenue per user continues to improve. It is going to be interesting to see how these trends unfold on Android and what impact, if any, Zedge Premium will have on the flagship portion of the app. The next phase of growth will be tied to allowing any artist to join the marketplace. The enabler for this will be a self-serve platform which is currently under development. Our goal is to rollout a simplified version of this before the summer and iterate from there. Of course, there are other priorities around marketing to artists and end users. Bearing in mind that we are all about long tail contents, finding the content that you want easily, having a wealth of creators with tons of content that is easy to find becomes an imperative, which leads me to another point. Zedge Premium may avail the opportunity for us to establish ourselves as the place to go for all things personal extending our utility beyond the handset. We are certainly aiming for this and our ongoing maturation will validate our positioning. Let me focus on a different quarterly achievement, mainly MAU growth. It all starts with our strong market position as reported by Apptopia, an app store intelligence provider, which reported that Zedge was amongst the 2017 worldwide download leaders. Our strong position in the market is also confirmed by AppAnnie, another app store intelligence provider. Zedge was downloaded over 80 million times on iTunes App Store and Google Play Store in 2017. Specific to MAU and as stated in the earnings release, we ended January with 35.5 million MAU, a 6.3% increase from last quarter with the overwhelming majority of the growth was in the emerging markets. Although, we are proud of this achievement, it highlights our need to drive growth in well-developed economies. To this end, we have several initiatives underway. Our growth team is focusing on a multitude of projects centered on SEO, search engine optimization; ASO, app store optimization, app store listings, app indexing, and social marketing. In addition, we look at Zedge Premium as a new growth driver and are investing resources to make this a reality. Our goal is to have the artists promote their content to their fans, which will drive them to Zedge. Finally, we are testing new content types and monitoring what moves the needle. All that doesn’t mean that we don’t benefit from our growth in emerging markets. Much of this is attributable to our well-recognized brand and the availability of Android devices, which are available at price points suitable for these markets. In order to further capitalize on this market segment, Google solicited us to participate in their Android GO initiative. Android GO is a lightweight version of the operating system optimized for entry-level devices. We released Zedge for Android GO and expect to benefit from the focus that Google and the handset manufacturers are investing in this segment. In summary, Q2 was a good quarter and we remain committed to the focused path that we adopted last year. We believe that it is the best way to continue unlocking value for our customers and shareholders. 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 second 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 March 19, 2018. Following my comments, we will open the call to any questions you may have. Throughout my remarks, the second quarter refers to November 2017 through January 2018. Monthly active users, or MAU, that is, the number of unique users that opened our app during the last 30 days of the quarter, increased 6.3% to 35.5 million during January 2018 from 33.4 million in both the corresponding period a year ago and the previous quarter. The overwhelming majority of the quarter-over-quarter growth occurred in emerging markets in contrast to well-developed economies where growth was fairly flat. As Tom discussed, we are working on initiatives targeted to each region to increase MAU. Total revenue in the second quarter increased 18.4% compared to the year ago quarter and 14.5% from the previous quarter to $3 million. The increase was primarily a result of initiatives we implemented recently that improved our app’s core user experience, including the introduction of sideswipe and improved content discovery mechanisms, which resulted in longer session times and overall engagement that positively impacted monetization. Overall, average revenue per monthly active user generated from our apps, or ARPMAU increased 15.2% year-over-year and 6.6% quarter-over-quarter to $0.0273. I am proud to report that this is the sixth consecutive quarter that we have increased ARPMAU a key performance indicator for our business. Our direct cost of revenue decreased to $356,000 or 11.7% of revenue, a decline from $412,000 and 16% of revenue in the year ago quarter and from $372,000 and 14% of revenue in the previous quarter. The year-over-year declines reflect the savings attributable to our newly deployed backend and the redesign of our infrastructure, which has allowed us to lower our hosting costs, coupled with a higher revenue base. SG&A in the second quarter was $2.59 million, an 11.8% increase compared to the year ago quarter and a 13% decrease in the prior quarter. The year-over-year increase primarily relates to costs associated with the Freeform acquihire, the launch of Zedge Premium, severance and, to a lesser extent, foreign exchange exposure that we have in light of the majority of our payroll being in Norwegian Kroner. Excluding the spend on Freeform and Zedge Premium, SG&A declined year-over-year as we implemented significant cost cutting measures. Loss from operations in the second quarter was $122,000 compared to $338,000 in the year ago period and a loss of $842,000 last quarter. When backing out for one-time severance costs, income from operations would have been $52,000. Our loss per share decreased to $0.02 from $0.03 per share in the year ago quarter and a loss of $0.08 last quarter. At January 31, we reported $4.2 million in cash and cash equivalents compared to $5.6 million a year earlier and $4.2 million last quarter. Our working capital or current assets less current liabilities was $4.3 million compared to $5.8 million a year ago and $4.2 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. In closing, Q2 delivered continued improvements in user growth and monetization as well as the initial rollout of Zedge Premium on Android. We remain focused on investing in the core user experience, trying new monetization techniques, scaling Zedge Premium, and acquiring more users. We look forward to sharing our progress with you accordingly. Operator, back to you for Q&A.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Brian Warner of Brick Incorporated. Please go ahead.

[Brian Warner:]

Hi, guys. Thanks for taking my question. Actually two questions. You made some changes in your types of ads and perhaps volume of ads in the last quarter or two. And I'm wondering what do you learned with that experience in terms of sort of the tradeoff between ads and engagement among your user base? And then the second question, whether you can sort of quantify what you're likely to spend for the year on Zedge Premium?

[Jonathan Reich:]

Hey, Brian. How are you? Thanks so much for reaching out. Well, let’s take each question individually. With respect to ads, really part of our daily activities is taking look at our ad mix and constantly looking for different types of ads that may provide a better user experience and include monetization. So the short answer is yes. By way of example, as you know we introduced sideswipe around two quarters ago into the app and then within sideswipe there are what are known is native ads and that was implemented and it’s working to our advantage. We have other ads that we are testing. We talked about earlier testing rewarded ad experiences. We're using rewarded ads in the marketplace accordingly, so that's really common fare for us. And as the app continues to develop, I'm sure that you will see new ad units implemented when we have determined that the overall experience is one which is positive. In terms of the second question in the investments for Zedge Premium. Kind of hard to give you a number today. We are investing based upon where we see the growth and where we see results. But suffice it to say that we will continue to invest in it. And as we've said in the past when we announced the cost cutting initiatives at the end of Q1, we said that those would generate cost savings of somewhat between $1.5 million to $2 million in an annual basis and that we would reinvest the portion or all of that in building out Zedge Premium. So that continues to be the plan and we will be able to delve into that in greater detail in upcoming conference calls.

[Brian Warner:]

Fair enough. Thanks very much.

[Operator:]

The next question comes from Joe Boskovich of Old West Investment Management. Please go ahead.

[Joseph Boskovich:]

Yes. Good morning, guys. I had a few questions, if that's okay. First off, congrats on what I thought was an excellent quarter. For your increase in monthly active users and for your increase in revenue per monthly active user, can you give any clarity on the breakdown of those metrics as it relates to your iOS user base versus your Android user base?

[Jonathan Reich:]

Hey, Joe. Good morning. Thanks for getting up so early to be on the call. Yes, we're not yet at this point where we want to break that out and understand that as you know only around 10% of our users today are Android with the introduction of Zedge Premium, which has really been constructed to be user friendly on iOS, remains to be seen whether or not that does translate into driving more iOS users. But if it does, those numbers are going to change. So I don't think that we really look at that number yet as being something, which is meaningful to the overall story.

[Joseph Boskovich:]

Okay. Perfect.

[Tom Arnoy:]

Yes. This is Tom. I just wanted to – I believe Jonathan you said that 10% is Android, I believe you meant 10% is iOS, so just to correct that.

[Joseph Boskovich:]

Okay. Second, as it relates to your Zedge Premium rollout. I noticed that your original rollout on iOS included various illustrators and photographers, a handful of musicians like G-Eazy and a few augmented reality figures. It appears that all new introductions to the marketplace since the launch our illustrators and photographers. Does this suggest that those are the content types having most success and how are you thinking about introducing other content types like new music or other video?

[Tom Arnoy:]

Yes. Hi, Joe. This is Tom. Clearly, we need to focus on the core value prop of our products like most of our users they come to Zedge for personalization content, then primarily wallpapers and ringtones, and clearly to sort of acquire sort of like their intentions, to grab their attention, we need to offer that content. But we do believe that there is a complimentary content that fits well with this content. And while we’re exploring some of the kind of like more content types such as like augmented reality 3D models, we believe that certainly like a video is something that has a great fit together with our content. We do see that a lot of our users not only used our product for personalizing phones, but also for entertainment purposes and for getting content that is shared in a more social way. And we are exploring more around, how can we add complementary content to give our users more entertainment value and something that will hopefully also not only increase revenue, but also maybe than increase frequency of use and overall engagement. So we're very open on these things, but we are like laser-focused on a core value prop. The users come to Zedge primarily to get personalization content as we’re trying to grab their attention on other content types.

[Joseph Boskovich:]

Yes. Great. It makes a lot of sense. And then last, in past conference calls, you guys have talked about Zedge Collections. Is Zedge Collections still an active effort and if it is can you talk more about those efforts?

[Tom Arnoy:]

Sure, Joe. So Zedge Collections are certainly an active effort. And I would say if you bring up the level, anything having to do with branded, content, professional creators and the like. All of that content fits very well into Zedge Collections, and Zedge Premium is really a flavor Zedge Collections. In the past we have approached Zedge Collections, which really dedicated to brands and specifically pitching Hollywood for advertising dollars, but Zedge Collections today encompasses not only that, but also the content that you see in Zedge Premium. With that being said, we have generated insertion orders. Aid insertion orders from studios that have used [indiscernible] testing grounds for Zedge Collections. We've also modified the offering such that we are selling not only the actual collection, but also selling video views at scale. And we are now beginning to focus on pitching to the U.S. studios. We know from past experience that this is a lengthy and arduous process. The studios have their standard fare of investment where they have to be, so they have to be in [IMDb Europe and Bingo] or Facebook and the like. And after they've allocated that spend, the majors, it's typically a lengthy process to get them to try new platforms. Yet we remain excited by the prospect that we have a great deal of offer to them. And I think that as the year unfolds, we will be able to determine whether our hypothesis actually turns into reality or if we need to revisit that hypothesis and redirect the potentially other verticals. Is that answers your question?

[Joseph Boskovich:]

Yes. Yes, it does. Thank you very much. And that's it for me. So thank you. Congrats again on a great quarter.

[Tom Arnoy:]

Thank you. End of Q&A

[Operator:]

[Operator Instructions] This concludes our question-and-answer session and conference call. Thank you for attending today's presentation. You may now disconnect.