Zedge, Inc.
Q2 2019 Earnings Call Transcript

Published: 14 Mar 2019

[Operator:]

Good afternoon and welcome to Zedge’s Second Quarter 2019 Earnings Conference Call. During management’s prepared remarks, all participants will be in a listen-only mode. [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 that ended on January 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 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. Tom 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 fiscal 2019 earnings conference call recapping the 3 months ended January 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. I am excited to share with you that, over the past 60 days, we have been aggressively testing our first foray into subscription-based revenue. Specifically, we started offering our U.S. users the ability of removing unsolicited ads from the app for a fee. We are encouraged by the results that we have seen to-date. In short, the initial response rate to our Ad Free offering indicates that a decent segment of our app users are willing to subscribe and pay a fee to remove the advertising from the app. Ad Free delivers materially more revenue per subscribing user and materially higher average lifetime value when compared to our existing ad-based model. The subscription model is attractive, because it provides recurring revenue and with time and with more data, we will be able to predict revenue growth coming from subscription renewals. We also believe that building a large base of paying subscribers will represent a valuable asset for the company. We have a long way ahead of us in terms of realizing the potential of this model and are currently focused on rolling out this value-added feature to all users globally. In parallel, we are optimizing pricing, renewal duration and other variables, including discounting and product funding. I am very upbeat about the potential for this opportunity and I am personally leading its charge. If the data continues to track the early results as we scale the offering, it will not only be a boon for revenues, but also open a door for user growth in well-developed economies and higher revenue per user in emerging markets where we have experienced solid growth. How you may ask? In short, the subscription model creates an opportunity for us to start investing in paid user acquisition campaigns that yield a positive ROI, similar to what mobile gaming publishers do. It also allows us to enable new monetization elements into the app which are derivative of the subscription model. I also wanted to share another development that is underway. As you know, we launched Zedge Premium, our marketplace for digital creators, in early calendar 2018. Since launch, Zedge Premium existed as its own vertical within our product. We launched in this fashion in order to minimize potential risk to our base offerings, allow for quick feature iteration and efficiently develop our ecosystem. With the launch completed, we are hard at work converging our Core and Premium channels together into one unified offering. Think about it, Zedge is all about content and users are most excited when they find the content that is relevant to them. At this point, there no longer is a need to separate content based on its source. Other compelling reasons for the convergence include the ability to simplify our technology stack and more rapidly avail a broader swath of users to existing and new content verticals. To that end, we expect to test video, audio and even editorial based content that will facilitate our goal of being the ‘everything you’ destination for digital content that is relevant to more than mobile phone personalization. I encourage you to follow these developments as they are introduced into the app in the upcoming months. Let me now provide color around some other key events that unfolded in Q2. We continued refining our stickers offering by introducing filters, improving our marketing of this feature to our users, introducing new sticker packs and rolling out Premium sticker packs. As indicated last quarter, users that enter the co-create and share funnel, experience longer session times and improved frequency of use. This segment represented around 10% of our MAU at the end of Q2 and is still growing. Zedge Premium grew nicely, finishing the quarter with more than 5.7 million monetizable platform transactions and $117,000 in gross transaction value that is the total sales volume transacting through the platform. This is about 3x Q1’s GTV. Conversion rates, that is the percentage of daily active users that monetize in our marketplace, are holding up well and we are heavily focused on introducing higher priced items into the mix in order to boost revenue and artist payouts. We started rolling out premium sticker packs and are investing in making print on demand a more material part of our revenue mix. We now have more than 400 artists on the platform and, with the introduction of our 1 click artist license agreement in January we have started to test with paid artist recruitment campaigns. In addition, we have retooled our artist pages making them more informative, improved search, and made video wallpapers easier to use. We continue to face a challenge in the shift in our regional customer make-up with MAU increasing in emerging markets and decreasing in well-developed economies. We have, and continue to attack the erosion from several angles, and believe that the introduction of subscription-based revenue may help spark user growth in well-developed economies. We are building a team of user acquisition experts schooled in both organic and paid acquisition channels. Additionally, we continue to believe that ongoing investment in the core user experience, coupled with offering new content verticals, will result in restoring growth in well-developed economies. However, this will take time to be impactful. In closing, we’re excited by the opportunity that a subscription-based model avails to us in terms of both revenue and potential user growth. We’re also happy with the benefits that Zedge Premium brings to the table and its progress to date. While we continue struggling with the decline in our customer base in well-developed economies, we are engaged in a multi-pronged effort to combat that trend, including continually improving the core user experience, investing in user acquisition and testing new content verticals. 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 second quarter of our fiscal year 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 by March 18, 2019. Following my comments, we will open the call to any questions you may have. Throughout my remarks, the second quarter refers to November 2018 through January 2019 and comparisons are to the corresponding period in 2017 through 2018 or our first quarter which was August through October 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 3.4% to 36.7 million during January 2019 from 35.5 million in the corresponding period a year ago and increased 6% from 34.6 million in the previous sequential quarter. Year-over-year growth in the emerging markets was 16.3% offset by a decline of 11.8% in well-developed markets. On a sequential basis, we experienced an increase in well-developed markets of 1.8% and an increase of 8.9% in emerging markets. As Tom discussed, we are working on various initiatives targeted to improve MAU growth and the geographic makeup of our user base. If the initial results from our Ad Free offering continue to hold up, we expect to invest in user acquisition campaigns with a positive ROI that will initially be targeted toward more developed economies. Total revenue in the second quarter decreased 15.5% compared to the year ago quarter and increased 8.1% from the previous quarter to $2.57 million. The year-over-year decrease was primarily a result of the decline in MAU in well-developed economies, which command higher advertising rates when compared to those offered in emerging markets and the sequential increase is primarily a result of seasonal factors as we tend to experience higher CPMs during the holiday season. Overall, average revenue per monthly active users generated from our apps, or ARPMAU, decreased 21.3% year-over-year, but increased 2.3% quarter-over-quarter to $0.0215 primarily as a result of seasonality. Zedge Premium’s gross transaction volume, or GTV, that is the total sales volume transacting through the platform, was $118,000 compared to less than $2,000 a year ago and $41,000 last quarter. GTV nearly tripled in Q2 compared to Q1. This growth was primarily the outcome of prominently promoting Zedge Premium content in the app without material marketing spend. Our direct cost of revenue decreased to $328,000 or 12.8% of revenue, a decline from $356,000, which was 11.7% of revenue in the year ago quarter and from $350,000 and 15% of revenue in the previous quarter. The year-over-year declines reflect the savings attributable to our cloud migration and continued focus on lowering our infrastructure costs. SG&A in the second quarter was $2.16 million, a 16.4% decrease compared to the year ago quarter and a 6.4% decrease from the prior quarter. The year-over-year decrease primarily relates to efficiencies gained from lowering overall compensation and the closing of our Canadian branch office. Loss from operations in the second quarter was $246,000 compared to $122,000 in the year ago quarter and $581,000 last quarter. Our loss per share remained flat compared to the year ago quarter at $0.02 per share and improved from a loss of $0.07 per share last quarter. At January 31, we reported $2.7 million in cash and cash equivalents compared to $4.2 million a year earlier and $3.6 million last quarter. Zedge currently has no debt. Depending on the success and adoption of Zedge Premium and other initiatives that we have underway, potential commercial opportunities and/or acquisition prospects, we may seek to raise capital through debt or equity financing. In closing, Q2 witnessed solid growth in Zedge Premium and very early and encouraging results from our Ad Free subscription offer. We believe that we will be able to capitalize on these achievements to spur user growth and generate new revenue streams and will share our progress with you accordingly. Back to you, operator for Q&A.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Thank you. And we’ll take our first question from Josh Goltry from Maxim Group.

[Josh Goltry:]

Hey guys, how are you? It’s interesting to hear about the new subscription business that’s on the horizon. I’m just wondering if you’ve thought about a pricing model for that business yet?

[Tom Arnoy:]

Hi, Josh, this is Tom, okay.

[Josh Goltry:]

Hi, Tom. How are you?

[Tom Arnoy:]

Yes, I’m not sure if I understood the question.

[Josh Goltry:]

So, I’m saying, so the new subscription business that you want to start, right, do you have a pricing model for that subscription yet, so, what are you going to charge a user for that?

[Tom Arnoy:]

Yes, if you go to the apps now and try it on Android, you will see the current offering and then the pricing. We – clearly part of the strategy is testing various price points and combos and doing various testing and optimization on that, so that’s something we’re working on every day, something we’ve done and something we’ve been doing, yes.

[Josh Goltry:]

I thought it wasn’t launched yet, but okay, got it. And I was wondering if you had any color on when you think revenue from emerging market is going to start the, meaning well enough to contribute at a revenue growth, because you’ve declined few quarters in a row, so I’m just wondering when you think that may shift?

[Tom Arnoy:]

Yes, it’s too early to say, it’s not to say anything about that now as part of the subscription strategy and also when it comes to Zedge Premium. We clearly hope that it will help us increase the average revenue per user in emerging markets and in the countries where we don’t see the same levels of advertising revenue as for instance in the U.S., but clearly that’s what we truly hope for and work for with subscription and other things, but I’m afraid to comment anything on that now.

[Josh Goltry:]

Okay, that’s fine. Do you have any potential long-term agreements with advertisers or not as of yet?

[Tom Arnoy:]

Yes, Jonathan, do you want to comment on that?

[Jonathan Reich:]

We do not have long-term agreements with advertisers. If you refer to our 10-K, you’ll see that approximately 80% plus of our revenue is generated from the three major exchanges controlled by Google, Facebook and Twitter. And as I think we do not really do a lot of direct sales to advertisers themselves. Our monetization is primarily through programmatic platforms.

[Josh Goltry:]

Got it. I’m just curious. Okay. So, in terms of emerging markets, which one or which ones do you think present the largest ad revenue opportunity?

[Jonathan Reich:]

Yes, I think that it’s a really different question going back to your question about unlocking value in the emerging markets. As we go down the path of this matrix, where we’ve now started to introduce subscription, as you know we’ve had the marketplace where there the ability to purchase coin packs and buy the content in there or go through rewarded advertising experiences, and as we roll out new content verticals, some of which Tom had alluded to, that combination will steer us in terms of how do we unlock the value from that customer base. Typically speaking, CPMs in those markets are materially less than they are in the well-developed markets.

[Josh Goltry:]

Right.

[Jonathan Reich:]

And what we’re really gunning towards is unleashing the right monetization formula for those markets while not losing focus on our need to grow the Tier 1 markets. I think Tom had mentioned in his comments that if the beta continues to support what we’ve seen to-date with the roll-out of our subscription model that, that will open the door for us to invest in paid user acquisition campaigns that carry a positive ROI with them. And we expect that we will optimize between the various monetization mechanisms that we have available to us across both the emerging and well-developed markets. In closing though, I’d like to say one other point. A lot of our ability to offer these new pricing mechanisms and new content verticals stems from the FreeForm acquisition that we’ve made a year and a half ago. A lot of what happened in terms of building the marketplace revolves around building infrastructure that can support many different types of new content verticals and multiple pricing or multiple monetization layers. So, that is something that aside from just the pure marketplace that’s user facing and GTV, that is something that has opened up the opportunity for us to engage with users in a much different fashion than what we have done historically, which has been primarily around fully ad supported business model.

[Josh Goltry:]

Great. And just a couple more. So, of the current user base, how many of the 36.7 million MAUs are from emerging markets?

[Jonathan Reich:]

Yes, let’s take a look at it from a different vantage point, approximately 25% of our user base is in North America.

[Josh Goltry:]

Okay, that’s helpful. Awesome. And so I think in your [Q], you said the 92% of Zedge’s MAUs are supported by Android. Is – could you provide any insight on why iOS hasn’t been as prevalent amongst your user base?

[Tom Arnoy:]

Sure. Let me, I can comment on that. So, if you take a look at it historically, our entry into the market was mostly around ringtones and wallpapers, but ringtones, the new iOS and Apple ecosystem does not allow users to set ringtones within or – in the apps in iOS. And we haven’t been able to – it’s impossible for us to create the same product as we have done on Android and iOS, it’s harder to create some of that – give the same type of experience for users, also including on that on wallpapers and some other things. On top of that, Apple also have policies related to user generated content, et cetera. So, I think with now – with the marketplace and licensed content and new content verticals, we do believe that we can build a product that can grow organically on iOS. Clearly, there is a demand. People are searching for Zedge like people want Zedge, people – you have friends that use Zedge, but it is – it has been hard to build the same product as we have an Android in that ecosystem.

[Josh Goltry:]

Got it. Okay guys, thank you so much. I appreciate it.

[Operator:]

Thank you. [Operator Instructions] And there appear to be no further questions at this time. This concludes our question-and-answer session and conference call. Thank you for attending today’s presentation. You may now disconnect.