Zedge, Inc.
Q1 2019 Earnings Call Transcript

Published: 12 Dec 2018

[Operator:]

Good afternoon, and welcome to Zedge’s First Quarter 2019 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 ending on October 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 US 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 on 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 am Tom Arnoy, Co-Founder and CEO of Zedge. Welcome to Zedge’s first quarter 2019 earnings conference call, recapping the three months ended October 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. I’d like to take this opportunity to update you about some key elements of our business. In Q1, we introduced new functionality, including stickers that empowers users with the ability to modify the images in our catalogue, making them more personal, what we call co-creation. We have also enhanced the ability to post and share the co-created content with friends across social and messaging platforms, including Facebook, Instagram, Twitter, and WhatsApp. Over the past month, we see that users that co-create and share, which represent around 5% of ARPMAU are experiencing session times of approximately 10% higher than an average user. Our data also points to an improvement in frequency of use for these users. We are encouraged by the potential this points to. We consider that these are early stage features that we haven’t optimized and truly marketed as of yet. Our team is focused on iterating and amplifying these features to further improve session time, the frequency of use, and retention by making them a core part of the engagement funnel in order to expand the audience of users that make this a normal part of their journey. Q1 was a momentous period for Zedge Premium which delivered encouraging metrics for this business vertical. Participation and conversion rates are strong for this early stage in the venture and continue trending in the right direction. By the end of December, all users will see Zedge Premium content upon app startup. Later in the year, we hope to converge all content, both premium and user-generated, together. This change will essentially push the participation rate of Zedge Premium to 100% of our active users. As such, we will no longer focus on this metric. Q1 was the first quarter in which Android users had full access to our, to-date, most successful premium content type, video wallpapers. We see that users are acquiring this content, either through outright purchase or by watching rewarded videos or completing online surveys. Each of these unlock mechanisms generates revenue for our artists and for Zedge. Gross transaction value, or GTV, that is the total sales volume transacting through the platform, totaled $41,000 this quarter. Although as of yet immaterial in the overall business, I think it’s important to focus on where this can head. To offer some perspective, at the end of the quarter, we had just over 250, by invite-only, artists on the platform primarily monetizing with the lowest unit pricing mechanism available, mainly rewarded advertisements. Even so, we surpassed 2.3 million monetizable transactions during the quarter. We accomplished this, even though we didn’t have a self-serve platform enabling any artist globally to sign up, didn’t offer a broad array of monetization mechanisms for users to acquire the content, only had a fraction of artists offering higher value content, like video wallpapers, and didn’t focus on marketing Zedge Premium to new or existing users. Even with a barebones offering we still surpassed $41,000 in GTV during the quarter. As we continue maturing the platform, we believe that there is material upside in-store for the business. We are offering a highly engaging user experience, which should be highly attractive to both brands and content creators looking to market and monetize their content. Next steps include supporting new content verticals that focus on rich, high value content, increasing the monetization mechanisms and unit pricing that brands and artists use to sell their creations, promote our recently announced self-serve platform to the creative community to introduce scale and diversity, and make Zedge the destination for digital “everything you” content that is relevant for not only mobile phone personalization but for use in their digital social life We are going to roll out premium stickers in Zedge Premium later this month. We are dedicating more resources to developing and promoting print-on-demand capabilities. Finally, although it's still early in Q2, we continue to increase GTV and total monetizable transactions and we experienced close to 60,000 monetizable transactions in Zedge Premium on the Saturday of Thanksgiving Day weekend. As you know over the past two years, we have experienced a shift in our regional customer make-up with MAU increasing in the emerging markets and decreasing in the well-developed markets. Reversing this trend is a priority for us. We have several initiatives in play that will take time to yield fruits, including improving search and content recommendations, gamifying the app, amplifying the role that Zedge Premium artists can have on driving new users into the platform and achieving our mission of becoming the “everything you” platform. Additionally, we have started investing resources in marketing the various benefits that we offer to both artists, existing and prospective users. I’m happy to report that our new development center in Lithuania is scaling nicely. By January, we expect to have eight well-qualified hires spread across two different product teams. We are dedicated to successfully integrating these teams into the overall organization and have made good process to-date. This will allow us to scale faster, react more quickly, and provide access to a rich supply of qualified professionals. In summary, we’re pleased with our new initiatives and the promise of solid returns on our investments. The trend lines are attractive. We are investing in projects that we expect will make us more relevant to new prospective users. 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, Tom. My remarks today will focus on our key operational and financial results for the first quarter of our fiscal year 2019, the three months ended October 31, 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 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 preceding 30 days, increased 3.6% to 34.6 million at the end of the quarter from 33.4 million in the corresponding period a year ago and decreased 0.5% from 34.8 million in the previous sequential quarter. Year-over-year growth in emerging markets was 18.8% offset by a decline of 12.6% in well-developed markets. On a sequential basis, we experienced a decline in well-developed markets of 3.2% and an increase of 1.3% in emerging markets. As Tom discussed, we are working on initiatives targeted to improve MAU growth and our geographic makeup. Total revenue in the first quarter declined 10.5% compared to the year-ago quarter and decreased by 7.7% from the previous quarter to $2.4 million. Revenue was impacted by the decline in MAU in well-developed economies, which command higher advertising rates when compared to those offered in emerging markets. Zedge Premium’s Gross Transaction Volume that is the total sales volume transacting through the platform was $41 thousand in Q1 compared to zero a year ago. GTV run-rate tripled over the course of the quarter. This growth was the outcome of introducing video wallpapers on Android. As Tom mentioned, we are in the early stages of promoting Zedge Premium to our users and improving its monetization funnel. Accordingly, as we continue adding new content verticals, more prominently promote and feature premium content and introduce new monetization schemes, we expect continued and consistent growth from Zedge Premium. Overall, average revenue per monthly active user generated from our apps -- or ARPMAU declined by 17.9% year-over-year and 9.1% quarter-over-quarter to o $0.0210. Our direct cost of revenue decreased to $350,000 or 15% of revenue, a decline from $372,000 which represented 14% of revenue in the year-ago quarter and from $412,000 and 16% of revenue in the previous quarter. The year-over-year 5.9% decline reflects the savings attributable to our backend cloud migration. We are in the midst of the next phase of our infrastructure overhaul which should result in additional cost savings. SG&A in the first quarter was $2.3 million, a 22.3% decrease compared to the year-ago quarter and a 26.3% increase compared to the prior quarter. The year-over-year decrease primarily relates to the costs associated with the Freeform transaction and severance costs incurred in the year ago quarter. Excluding these two items, SG&A would have been flat year-over-year. The sequential quarter-over-quarter increase relates to the one-time reversal of accrued vacation and accrued accounting fees we made in Q4 2018 as well as the investments we’re making in Zedge Premium where we completed building out our US-based team. As you know, the US is a high priced labor market. Excluding the reversal of accrued vacation and accrued accounting fees, SG&A increased 5% quarter-over-quarter. Loss from operations in the first quarter was $581,000 compared to $842,000 in the year-ago period and income of $5,000 last quarter when we realized a non-recurring benefit from over accruals relating to vacation and auditing fees. Excluding this benefit, we would have had a loss from operations of $355,000 last quarter. Our loss per share decreased to $0.07 from $0.08 per share in the year-ago quarter and $0.03 last quarter. At October 31st, we reported $3.6 million in cash and cash equivalents compared to $4.2 million a year earlier and $3.4 million at July 31st. Our working capital or current assets less current liabilities was $3 million compared to $4.2 million a year ago and $4.1 million last quarter, primarily attributable to the net loss incurred during the period as well as the investment in software development and in TreSensa. Zedge currently has no debt. Depending on the success and the 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, in Q1, we started offering a limited amount of truly premium content and focusing on monetization of Zedge Premium. We also witnessed encouraging results from our launch of sticker functionality in the flagship portion of the app. We are working to reverse the attrition of our user base in well-developed markets but it will take time for our efforts to have a meaningful impact. Finally, our development center in Lithuania is hard at work on accelerating some of the initiatives that will help us in better monetizing Zedge Premium. Wishing all a happy and healthy holiday season. Back to you operator for Q&A.

[Operator:]

This concludes our question-and-answer session and conference call. Thank you for attending today’s presentation. You may now disconnect.