Zedge, Inc.
Q3 2019 Earnings Call Transcript

Published: 12 Jun 2019

[Operator:]

Good afternoon and welcome to Zedge’s Third 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 three-month period that ended April 30, 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 in 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 may 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 Zedge earnings release is available on the Investor Relations page of the Zedge website. The earnings release has also been filed on the Form 8-K with the SEC.I would now like to turn the conference over to Mr. Arnoy. Please go ahead, sir.

[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 third quarter fiscal 2019 earnings conference call, recapping the three months ended April 30, 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.Q3 was a challenging quarter for Zedge. Although we are upbeat about the opportunity that our new subscription-based product presents, many of our other initiatives to stimulate user and revenue growth haven’t yet panned out and the impact of the shift of our userbase from well-developed to emerging markets continues to have a negative drag on revenue which dropped 25% year-over-year.As we previously mentioned, in January, we started offering an ‘Ad Free’ subscription and we are investing time and resources to advance this initiative. During Q3, we scaled the ‘Ad Free’ subscription across all geographies and customers for the Android app. We started the quarter with around 1,000 subscribers, and ended April with close to 60,000 customers. These customers generate significantly more revenue than historical users where our revenue stream is solely ad-based. In addition, we benefit from the fact that these customers pre-pay for the service.Our current subscription offering is rudimentary, focusing solely on removing unsolicited advertisements from the app. Recently, we started optimizing by offering regionally based pricing which should improve conversion rates and corresponding revenue. In addition, starting this quarter, we will begin bundling content or other value-added services together with the subscription as well as initiating discounting strategies and re-targeting campaigns in order to drive further adoption not to mention test new marketing messages that may outperform our current promotion. All designed to increase subscription rates. Before moving on, I should add that we ended May with around 80,000 paying subscribers and this is before any impact from many of the improvements that are in the works.Yet, even with the potential from our subscription-based offering, we continue to be challenged by our userbase makeup shifting from well-developed markets to emerging markets. To date, the product enhancements and other efforts that we’ve made haven’t resulted in reversing this trend. We recognize that MAU growth is intimately tied to new users. Historically, we have benefitted from organic catalysts to secure new users. We believe that the current app eco-system compels us to proactively dedicate resources to formal user growth initiatives that may drive user growth across both organic and paid channels. We intend to invest some of the improved cash flow provided by subscription in paid user acquisition campaigns. When it comes to organic marketing, we expect to focus on a host of items including search engine optimization, app store optimization, new user conversion and onboarding, app indexing, and social media strategies as alternatives that can aid in sparking our growth. However, as we have seen with other efforts, we cannot predict the magnitude of the impact that these efforts will have in expanding our user base or reversing the geographic shift.One of the areas that we continue to believe will benefit us is Zedge Premium. Although the marketplace experienced slower growth in gross transaction value – or GTV - than last quarter, the primary reason for the slowdown relates to delays that we encountered in releasing personalized content feeds which will enable us to rationalize our display inventory targeting user segments with the content that is relevant to them. We are in the midst of mitigating the impact of these delays by rolling out new ways of exposing premium content to our users which should drive improvements in GTV.Our marketplace initiative is valuable because it enables us to tap into new content verticals where digital content creators can promote and monetize their content – enabling streamers to sell digital content in their streams, and new content types like music, short novels, podcasts, audio novels and books, video and more. For example, in Q3 we launched Limited Edition Content and are investing more to scale this feature. Clearly, there is a lot of work that needs to take place here.Earlier this month we executed a restructuring that we expect to improve efficiencies and lower costs. We consolidated resources and improved operations by concentrating marketing, product and technology development in two major hubs. Under this new structure, we are building full stack product teams that have the resources to act without dependencies outside of their team. As part of this initiative and as discussed last quarter, we are in the midst of unifying our offering in order to deliver a converged user experience where all content, licensed and user-generated, is logically and tastefully co-mingled together in order to provide a seamless and cohesive user experience. This necessary step will not only offer the benefits just described but also provide us with a platform where our product teams can quickly test and independently launch new products, content verticals, and services in a flexible and easy to manage fashion.In closing, although we continue struggling with the decline in our customer base in well-developed economies, in the short-term we are focusing on user growth initiatives while also investing more in scaling our subscription-based initiatives. I’d also like to point out the introduction of ‘Ad Free’ subscription underscores our belief that, when we offer users a new product or enhancement that resonates with them, we have the potential of seeing meaningful adoption and revenue generation. Moving beyond this we are simplifying our technology development in order to test and introduce new features and entertainment verticals quickly and efficiently.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 third 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 June 17, 2019.Following my comments, we will open the call to any questions you may have.Throughout my remarks, the ‘third quarter’ refers to February 2019 through April 2019 and comparisons are to the corresponding period in 2018 or our “second quarter” which was November 2018 through January 2019.Monthly active users, or MAU, that is, the number of unique users that opened our app during the last thirty days of the quarter, decreased 0.5% to 34 million during April 2019 from 34.2 million in the corresponding period a year ago and decreased 7.2% from 36.7 million in the previous sequential quarter. The sequential decline relates significantly to seasonal factors - specifically an outcome of the post-holiday season.Year-over-year growth in emerging markets was 12.1% offset by a decline of 16.6% in well-developed markets. On a sequential basis, we also experienced a decline of 11.4% and of 4.6% in emerging and well developed markets, respectively. As Tom discussed, we are allocating resources to both organic and paid user growth initiatives targeted to improve MAU growth and the geographic makeup of our user base.Our introduction of the ‘Ad Free’ subscription offering generated $26 thousand of revenue and $164 thousand in deferred revenue during the quarter. The bulk of the deferred revenue relates to customers that opted for an annual subscription which we amortize over the one-year subscription period. We exited the quarter with approximately 60 thousand ‘Ad Free’ subscribers starting from a base of close to 1,000 at the beginning of the quarter.Total revenue in the third quarter decreased by 25% compared to the year-ago quarter and by 26% from the previous quarter to $1.91 million. The decreases were 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. The sequential decrease was also impacted by lower post-holiday season ad spend.Overall, average revenue per MAU generated from our apps – or ARPMAU – decreased 25.3% year over year and 22.8% quarter over quarter to one point six six cents.Zedge Premium’s Gross Transaction Volume, or GTV, that is the total sales volume transacting through the platform, increased almost tenfold to $159 thousand compared to $15 thousand a year ago and by 34% compared to $118 thousand last quarter. We are in the midst of a project that will allow us to target specific customer segments with content that is relevant to them translating into more efficient use of our promotional inventory and yielding higher conversions and associated GTV. Additionally, we are working on ways to further expose premium content to users which should result in increasing GTV. We believe that our premium content offering will scale as we increase exposure and remain committed to this effort.Our direct cost of revenue decreased 6.8% to $353 thousand from $378 thousand in the year ago quarter and increased from $328 thousand or 7.4% sequentially. The year over year decline reflects the savings attributable to our cloud migration and continued focus on lowering our infrastructure costs. The quarter over quarter increase was a result of a one-time reclassification of costs related to a vendor from SaaS expenses to direct cost of revenue in third quarter and a credit from our cloud infrastructure provider relating to a billing error that they made in the second quarter.SG&A in the third quarter was $2.29 million, an increase of 4.3% compared to the year-ago quarter and 5.9% compared to the prior quarter. The bulk of this increase relates to staffing up our Lithuanian Innovation Center and the 30% fee retained by Google Play when customers subscribe to the ‘Ad Free’ service.Loss from operations in the third quarter was $1.12 million compared to $339 thousand in the year-ago quarter and $246 thousand last quarter. As announced in May, we executed a restructuring of our business earlier this month and unfortunately laid off 20% of our workforce. The plan will allow us to consolidate the bulk of our operations in three major centers, namely, New York, Trondheim, and Vilnius. On an annualized basis, we expect savings, before accounting for new hires, to total around $1.0 million and we do not anticipate any material one-time costs associated with this downsizing. I should point out that for the meantime we are holding back on adding incremental staff and when needed we plan on hiring in Europe where labor costs are lower than the US.Our loss per share was 12 cents compared to 3 cents from a year ago and 2 cents from last quarter.At April 30th, we reported $2.25 million in cash and cash equivalents compared to $4.27 million a year ago and $2.7 million last quarter. Zedge currently has no debt. Depending on the success and adoption of Zedge Premium, ‘Ad Free’ subscriptions and/or 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, Q3 was generally challenging for Zedge. We didn’t recognize many of the benefits that we expected from prior initiatives. However, early performance and the potential of a subscription-based model is good news. The recently announced downsizing, although painful to the Zedge family, will enable us to consolidate our resources and execute more efficiently. Our team is committed to continuing to search for ways to unlock the value by scaling our user base, testing new entertainment verticals that extend beyond mobile phone personalization and driving revenue. On that note, I will hand the call back to the operator for Q&A.We will now begin with the question-and-answer session. [Operator Instructions]

[Operator:]

We have no questions in the queue. This does conclude our question-and-answer session and the conference call. Thank you for attending today's presentation. You may now disconnect.