Zedge, Inc.
Q4 2018 Earnings Call Transcript

Published: 24 Oct 2018

[Operator:]

Good afternoon, and welcome to Zedge’s Fourth Quarter and Full 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 and full fiscal year ending on July 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 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. 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’m Tom Arnoy, Co-Founder and CEO of Zedge. Welcome to Zedge’s fourth quarter and full fiscal year 2018 earnings conference call, recapping the three and 12 months ended July 31, 2018. Joining me today is Jonathan Reich, our Chief Financial and Chief Operating Officer, who will provide insight into the numbers that we reported earlier this afternoon. Fiscal year 2018 was comprised of some major undertakings, more subtle, but mission-critical initiatives, coupled with fluctuation in the monthly active user base and continued negative shift in the geographic concentration of our users, resulting in moderate year-over-year revenue growth. Most significantly, we started rolling out Zedge Premium, our marketplace for digital content, which now includes print on demand capabilities, after completing the Freeform Acquihire in September 2017. We continued overhauling our infrastructure and content serving engine in order to better scale, with greater flexibility, at a lower cost. We also continued working on improving the user experience in order to improve engagement and frequency of use. Much of this entailed upfront costs, with the benefits to be realized over time. Separate from those investments in our future, there is no doubt that we did not grow as rapidly as we would have liked to. This recognition forced us to take a hard look at what we must do better to grow the business and I would like to share our plan with you. We have learned that continued growth requires us to be more to our users than mobile phone personalization. While we have a strong position in phone personalization and a very loyal audience, our goal is to expand and be the “everything you” destination that users turn to when looking for digital content that expresses their essence, individuality, and taste. How do we accomplish this? A major part of our plan focuses on what we call co-creation or enabling easy and fun of ways for users to enhance and add a personal touch to content and let them use this content beyond just phone personalization. For example, we recently rolled out sticker functionality, where users can add digital stickers to our huge image library. As a user, you can select from a library of stickers or even create your own stickers from your photo album. We expect this to extend session time and draw users back into Zedge more often. Taking into account what we experienced with stickers, we plan to offer other co-creation elements including effects and filters. We have also started making the social posting and sharing experience, a more prominent part of the user interface. We’re educating customers that they can use the content for more than phone personalization. For example, they can use their personalized content in messaging or in their social feeds. Zedge Premium continues evolving nicely. Around 20% of MAU enter Zedge Premium, which represents a 211% increase between April and September. Our goal is to see at least 65% of MAU enter Zedge Premium. It’s important to note that due to rapid product iteration, we haven’t yet promoted or optimized Zedge Premium in earnest, but are still experiencing solid growth. Although the percentage of MAU that unlock premium content and generate revenue for the artist is also healthy. It is still premature to provide guidance around where we think that number will settle over time. From a product perspective, we’re doing our best to establish Zedge Premium as a must-to-have for top-tier talent looking for an immersive and engaging way to connect with fans. Over the past several months, we’ve been a part of some important music launches for artists, including Lil Wayne, Paul McCartney, Nicki Minaj, and G-Eazy. These leaders recognize that we offer something unique with mass market appeal. For the first time, we started offering a truly premium experience with the introduction of video wallpapers and soon to be premium stickers to add to our flagship offering of free wallpapers and ringtones. As users are accustomed to purchasing this higher-end premium content, we are hoping to see a meaningful positive impact. We also soft-launched our artist’s portal, a self-serve platform that enables artists to market in Zedge Premium. This platform allows artists to upload, promote and manage their storefronts. It also provides analytics and financial reporting. There is a robust roadmap for Zedge Premium and we are doing our best to iterate intelligently in real time. Before Jonathan reviews our quarterly numbers, I want to underscore that, even though we’re unhappy with the slower than expected growth and the continued shift in our geographic makeup, we are not sitting idly. We are racing to get ahead of the curve and unlock the value of our close to 35 million monthly active users in a responsible fashion. We look to Zedge Premium to scale and, together with our focus on co-creation and sharing, to see us becoming the “everything you” place for users looking for digital content that expresses their being. We have a strong position in the market and a large and loyal audience. I believe we have a great plan for inspiring users to engage with Zedge more often. Now, I’m 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, Tom. My remarks today will focus on our key operational and financial results for the fourth quarter and full fiscal year 2018, recapping the three and 12 months ended July 31, 2018. For a comprehensive and detailed discussion of our results, please read our earnings release issued earlier today and our Form 10-K, which we expect to file with the SEC by the end of October. 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 30 days of the quarter, increased 9.8% to 34.8 million during July 2018 from 31.7 million in the corresponding period a year ago and by 1.8% on a sequential quarter-over-quarter basis. The year-over-year MAU improvement reflects year-over-year growth of 27.2% in the emerging markets, coupled with an 8.1% decline in the well-developed countries. As Tom mentioned, we are committing our resources to the initiatives that we believe can make us more relevant to a broader set of prospective customers. Total revenue in the fourth quarter was $2.6 million, a 1.3% and 1.1% improvement, respectively, when compared to the year ago and the most recent sequential quarters. Although MAU grew, both year-over-year and quarter-over-quarter in the emerging markets, it also declined in the well-developed markets, which command higher advertising rates negatively impacting revenue expansion. Revenue in fiscal year 2018 increased 8% to $10.8 million, compared to $10 million in 2017, primarily as a result of initiatives implemented in fiscal 2018 to improve our app’s core user experience, including the introduction of sideswipe and improved content recommendations, which, among other things, contributed to improvements in MAU and engagement during the first-half of fiscal 2018. Additionally, we launched new Android ad units in Q1 of fiscal 2018 that increased revenues due to superior monetization and the number of ad impressions viewed per user. Revenue was also positively impacted by an increase in revenue from our managing advertising operations for a third-party mobile app publisher and other monetization mechanisms put in place during fiscal year 2018. In Q4, overall average revenue per monthly active user generated from our apps, or ARPMAU, decreased by 9.4% to $0.0231 when compared to the same period a year earlier, but increased 4.1% sequentially. As stated earlier, the majority of the decrease is attributable to the shift in our geographic user mix, coupled with lower advertising rates in the emerging markets. Our direct cost of revenue as a percentage of revenue was 16% in the fourth quarter, compared to 15%, both a year ago and last quarter. The increase relates to the temporary need of simultaneously running portions of our infrastructure across two different back-end vendors, while we complete our migration project. This is a one-time cost and will reverse itself as we discontinue one of the providers later this year. SG&A in the fourth quarter declined 18.6% to $1.8 million when compared to the year-ago quarter and 16.7% when compared to the prior sequential quarter. The year-over-year decline primarily relates to a decline in headcount, tighter discretionary spend, and a one-time benefit from reversing vacation and audit accruals totaling approximately $360,000. When comparing fiscal 2018 to fiscal 2017, SG&A increased by $1.1 million, including $439,000 of expenses incurred in connection with the Freeform Acquihire, the related development of Zedge Premium, ongoing investment in Zedge Premium and severance costs of $372,000 associated with the workforce reduction that took place at the end of Q1 2018, which were partially offset by the cost savings from the workforce reduction and the discontinuation of certain administrative functions previously provided by IDT pursuant to the Transition Services Agreement. Higher SaaS expenses, higher stock-based compensation, placement fees related to the new hires for the development of Zedge Premium, as well as a relatively weaker U.S. dollar also contributed in part to the significant rise in SG&A in fiscal 2018. Income from operations in the fourth quarter was $5,000, compared to a loss of $264,000 in the same period a year earlier. On a sequential basis, income from operations increased $344,000 in Q4, primarily due to a one-time benefit gained from reversing accrued vacation and audit fees totaling approximately $360,000 dollars. Our loss per share was $0.03, compared to a loss of $0.02 in the year-ago quarter and $0.03 in the most recent sequential quarter. At July 31, we reported $3.4 million in cash and cash equivalents, compared to $4.6 million a year earlier and $4.3 million at the end of the sequential quarter. Our working capital or current assets less current liabilities was $4.1 million, compared to $5.1 million at July 31, 2017. Zedge has no outstanding debt. In September, we renewed our loan and security agreement with Western Alliance Bank for a revolving credit facility of up to $2.5 million at substantially the same terms and conditions as the original agreement except for the minimum interest rate, which has been raised to 5% from 3.5% in light of the rising interest rate environment. I would now like to provide a brief update about three things. First, the cost-cutting initiatives that we announced at the end of Q1 yielded approximately $800,000 in savings through the end of Q4 2018 inclusive of natural employee attrition. We have fallen a little behind schedule with respect to our infrastructure migration and are working to close that gap. Second, as Tom mentioned, Zedge Premium is experiencing participation rates of approximately 20%. Our goal is to surpass participation rates of 65% in 2019. In addition, we are at the point where we can start diversifying our monetization stack beyond advertising and are focused on initiatives like selling premium content and promoting print on demand capabilities. As you recall, Zedge Premium’s terms call for Zedge to earn 30% of net revenues. If we scale well, these new revenue sources will over time help us become less dependent on advertising. Finally, we are up and running in Vilnius, which will allow us to focus development efforts in a market that is rich with talent at a significantly lower cost per person compared to the U.S. as an example. To wrap up, we are working to quickly become the “everything you” of personalization and expand our relevance beyond phone personalization alone. We believe that our core offering, Zedge Premium and other new initiatives will drive our progress and make us relevant to both new, former and existing users. If we are directionally correct, these initiatives will propel growth and value in the quarters to come. This concludes my remarks. Now, Tom and I will be happy to take your questions. Operator, back to you for Q&A.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Joe Boskovich with Old West Investment Management.

[Joseph Boskovich:]

Hey, guys, how are you doing?

[Jonathan Reich:]

Hey, Joe, how are you?

[Joseph Boskovich:]

I’m doing well. Thanks.

[Tom Arnoy:]

Hi, Joe.

[Joseph Boskovich:]

Hi, Tom. So a couple of questions. I think, Zedge Premium is really exciting. And I see that you’ve added a ton of content over the past six months or so. And, Tom, you mentioned that you can’t give guidance on certain measures yet. And I understand that you can’t yet determine what percentage of monthly active users you believe will unlock artist content in the future. But can you guys give us, I guess, particular examples of what user engagement will look like for people on Premium, maybe one or two examples?

[Tom Arnoy:]

I don’t want to go into specific artists, obviously. But I can say on a general note that, like artists and brands we promote on the homepage, on the app consistently garner, I mean, in the MAU 10 million impressions in a week. We at least have 1 million users breaking through to engage with the contents, and how many users are going to download the individual content items, very much depends on if and how the material is monetized independents of – like a category really, priced items generally has even [indiscernible] in single digits and while over 30% of visitors usually done with items behind reward really is. And three items, of course, they see in higher percentages. So I hope that answered your question, but clearly…

[Joseph Boskovich:]

Yes, yes.

[Tom Arnoy:]

Yes.

[Joseph Boskovich:]

I think, that was helpful. So you mentioned the free items and that you see higher, I guess, user engagement there and that’s obviously I understand that. So earlier you talked about the musicians on Zedge Premium now. So I see that you have the virtual marketplace, as you mentioned for Lil Wayne and Nicki Minaj and Paul McCartney, I saw that you have betting experience on there now. What – I’ve seen where several of these artists, right, whether it’s Lil Wayne or Nicki Minaj have posted on their Facebook pages and their Linkedin pages drawing their fans to Zedge to unlock white wallpapers on other content. Are you seeing from featuring those items and then the artists discussing it on social media, are you seeing some of their fans in turn come to Zedge and then increased monthly active users in those instances?

[Tom Arnoy:]

We are certainly seeing fans coming to Zedge. And in general, the engagements, we’re very happy to see the engagements with that content.

[Joseph Boskovich:]

Okay, great. That’s it from me. Thank you.

[Operator:]

[Operator Instructions] Thank you. This concludes our question-and-answer session and conference call. Thank you for attending today’s presentation. You may now disconnect, and have a wonderful day.