Zedge, Inc.
Q4 2019 Earnings Call Transcript

Published: 26 Oct 2019

[Operator:]

Good afternoon and welcome to Zedge’s Fourth Quarter and Full Fiscal 2019 Earnings Conference Call. During management’s prepared remarks, all participants will be in a listen-only mode. [Operator Instructions]In today's presentation 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 that ended July 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 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 the 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. Jonathan Reich. Please go ahead, sir.

[Jonathan Reich:]

Thank you, operator. And thank you all for joining us today. I am Jonathan Reich, Chief Financial Officer of Zedge. Welcome to Zedge’s fourth quarter and full fiscal-year 2019 earnings conference call, recapping the three and 12-months ended July 31, 2019. 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, I will open the call to any questions you may have. Since Michael Jonas assumed his role as interim-CEO in September, he has directed our management team to review all aspects of our business

[Bryan Suchanyc:]

Yes, thanks Jonathan. You reiterated a couple of times, which really piqued my interest, I know over the last couple of years you have been having a cash burn, and you mentioned several times about cash flow positive for the current fiscal. If you could just add a little bit more color on what do you see really driving that going from where we are? You've cut expenses, you've done all these things. We're trying different ideas. What do you think is going to put us over that hump to we can actually generate cash?

[Jonathan Reich:]

Hey, Brian, it’s Jonathan. Thanks for the question. So, I think that there are a couple of things that go into that equation. Number one, we are looking at ways to unlock new revenue opportunities. And as I mentioned on the call, or in the comments, even in – despite the mishap with Google, we are actually tracking where we were on a revenue basis prior to the issue, and we have several other initiatives underway to increase revenue, revenue from areas of the world, which have not monetized as well, ongoing opportunity in terms of growing subscriptions.As you know, reported, we in mid-October, we're at 170,000 paying subscribers, and those numbers continue to grow and improve. And then on the expense side, really making sure that we are minimizing expenses in areas where we can take things in-house and where we can better manage our business and justify that the investments that we're making in whether it’s infrastructure or tool sets or any of the other expense items are things, which are justifiable and will get help us in terms of achieving our goal of being cash flow positive in fiscal year 2020. It is no question or doubt for us, a very, very central focus. And we’ll continue along that path, so that we can have a company, which is profitable and is sustainable for the long-term.

[Bryan Suchanyc:]

Okay. I appreciate that. Thanks. And one last question. We kind of lost our foothold in the iOS market a few years back, never really seem to get back in there again. And you did mention something on the call about the iOS market. Maybe you can add a little bit more to that a little bit more detail and how you think we can grow the market share?

[Jonathan Reich:]

Sure, Bryan, that's a great question. I think that you will understand that mobile phone personalization is a core part of the Android operating system. And by contrast, Apple has never embraced that capability as being an easy seamless experience for their users, whether it's a matter of adding a ringtone to your phone or changing wallpaper, it's complex, cumbersome and complicated.Having said all of that, when looking at new opportunities, what we have been very, very discerning about is making sure that whatever opportunities we invest in are opportunities that are equally viable across both Android and iOS. By way of example, Shortz equally viable, the product interface, the content, the monetization model, is one which will exist equally across both platforms. And that taken in conjunction with the fact that, we still are popular iOS app or in the top 10 most popular entertainment apps in the iOS store in the U.S. for free entertainment apps and like.We think that, that will help us in terms of providing prospective customers with an opportunity to engage with a Zedge product that is viable and relevant to them. We think that if things pan out well, it can be a great growth opportunity, because this is a market, where you just take a look, over 90% of our users today are Android. If we can begin to unlock value from iOS, we think that it will pay for itself in spades.

[Bryan Suchanyc:]

And the last thing the chat, the Shortz stories, if you can add a little bit more detail how do you monetize that?

[Jonathan Reich:]

Yes, that's a great question. So, there is the immediate monetization opportunity and then there are, let us say some after some optionality on top of that. In terms of the immediate opportunity, we envision that we will offer a subscription-based service. We will offer users the ability to subscribe by week, by month, or by year. And if we can use our existing subscription-based service from Zedge, wallpapers and ring tones as an indicator, we think that we can see some solid traction there. And then the optionality pieces, this content is content, where it has applicability in other verticals, other venues, if you will.One can imagine that one of these stories does really well. Well, we can then offer that for ancillary production either for television, for Hollywood, for print, potentially in the game space and the like. And that is incremental revenue that we would benefit from, but we're not betting the house on that. We're really trying to offer this and go out to the market with a pretty straightforward value proposition to users one, which provides them with an entertainment capability that's snappable that they consume quickly.They can get their dopamine hit or happy paying a subscription for that. And in the event that any of that content goes viral, well, then we have the ability of going out and pursuing other monetization opportunities as we see fit. And I'll just close by saying, we – I'll just close by saying that, we also do not – have not built this around the notion of, hey, this has to be a grand slam in order for it to be valuable to the growth of our company. This is a business, where if we begin to feel some solid singles, it will move the revenue needle for us, and help unlock value from our customer base.

[Bryan Suchanyc:]

That’s all the questions that I had. Thanks.

[Jonathan Reich:]

Thanks.

[Operator:]

Thank you, Bryan. [Operator Instructions] We'll move on to Joe Boskovich with Old West Investment Management. Please go ahead. Your line is open.

[Joe Boskovich:]

Yes. Hi, Jonathan. Bryan asked most of my questions, but I guess to further elaborate on the Shortz. Why does the Zedge team feel that, that there's a great opportunity in that segment? And maybe describe what you mean by that a little bit more? What exactly is that segment?

[Jonathan Reich:]

Hi, Joe, thanks for the question. So, we view this genre as an emerging genre, one which aligns well with our existing user base. And there's so many different things that we feel can unlock me to value here. First of all, we think that this is an entertaining form of content, which is very, very well-positioned for any mobile phone user. We all know that the consumption of gaming or video content or entertainment content more generally on mobile phones is something, which is over-indexed and which our particular demographic has also been over-indexed for.But in addition to that, there are a set of features, which we're building into this, which we think lends to – lend themselves to creating this ongoing desire that needs to be met for consumers that begin engaging with this content. This is content, where short-form serialized, meaning that every chapter will end on a Cliffhanger. There will be some reason that you will want to read the next chapter that you will come back and that you will engage with the app more regularly.And on top of all of that, we believe that a key advantage that we come to the table with that many app developers do not have is an embedded customer base. And the ability to essentially market is to our embedded customer base in order to drive installs and subscriptions is something, which we view as really having a lot of value and one, which we would like to take advantage of. And I should mention that that's not limited strictly to users that are engaging with the Zedge app.At any given point in time, remember, we still see a lot of folks out there that are searching for Zedge or searching for content. The Zedge brand name is something, which has value associated with it. And when our hypothesis is, when users begin to see, oh, wow, Zedge released something new, let me try that out. That again is an advantage that a startup app that has no following, we’ll have to pay for by going out and doing paid user acquisition as opposed to being able to take advantage of the organic channels that we have available to us.To sum up, though, with respect to why we're excited about this genre. I think that most consumers that engage with entertainment content on their phone do so with the flexibility of knowing that they can get something that's a quick hit, but also lends itself to a longer-term type of experience. This genre very squarely fits into that and it's emerging. It also allows potentially for us to go out and offer this in other types of meetings, whether it’d be podcasting or potentially video down the road, depending on how it goes.So, it has a lot of optionality. And from a cost perspective, it's a lot less expensive to produce. Then by way of example, we went out and said, “Hey, we're going to begin offering video short-form or long form, which is typically much more expensive to go out and produce.” Does that answer your question?

[Joe Boskovich:]

Yes. Yes, no, that's great. And then, I guess, so this will – there will be two separate apps, right, so Zedge and then you'll feed this. Is the new approximately, is it called Shortz? What is that – what will that be called?

[Jonathan Reich:]

Yes, it will be called Shortz. I think the team is finalizing that, but it will be Shortz or short stories or something, but Shortz by Zedge. So, we will still take advantage of the Zedge branding, but highlight the Shortz piece, which is really what this is about.

[Joe Boskovich:]

All right, exciting. When will this new feature launch?

[Jonathan Reich:]

Sure. So, it's not a new feature, it's going to be standalone apps, both in Android and iOS. I expect that we will have an MVP, a minimally viable product launched in the market, most probably end of November, beginning of December. As of now, we will most try first roll out Android and then shortly thereafter, roll out, an iOS app. And I would say, phase one is really, we want to be very light in terms of what we're not looking to go and build with realm they want.We want to make sure that we are understanding how users are interacting with the app, whether they enjoy the content, whether they enjoy the experience, and then based upon empirical data, iterate and continue to improve from there.

[Joe Boskovich:]

Okay, great. And then I guess, in the core business, I – that's pretty exciting the subscription growth that you had. Do you see that subscription growth continuing based on trends you're currently seeing?

[Jonathan Reich:]

We are seeing that and we are just in the midst of beginning to test some new offers. So, we're talking about potentially bundling third-party services together, where you can offer this bundle for one in one equals three type of economics, whereby whatever these products are, if you were to buy them independently And you were to subscribe to Zedge independently, that would cost you more than buying the package.And we are also doing all sorts of tests in terms of what the marketing messages, images, localization, localized pricing and the like and there's going to be a lot of iterations of that over the upcoming months in order to really continue to grow that portion of the business.As I said earlier, subscribers to us are really valuable for a host of reasons. Certainly, because they prepay us, and the margin that we make from a subscriber is a much better margin than what we make typically from an advertising premium-based customer.

[Joe Boskovich:]

Great. Well, okay, I appreciate it.

[Jonathan Reich:]

Thank you, Joe.

[Operator:]

[Operator Instructions] We’ll move next to the line of Jeff Benton, Private Investor. Please go ahead, Jeff. Your line is open.

[Unidentified Analyst:]

Yes. Hi, thanks for taking my call. I have a couple of questions about Shortz. Can you speak a little bit about the market who else is – are there – who are you competing against? Has anybody tried this process before? What do you think your advantages are in this space? Because it seems like you're hanging a lot of your hat in terms of getting to cash flow positive and earnings positive on that?

[Jonathan Reich:]

Sure, Jeff. Let me answer your question as follows. I think it's a perfectly valid question. And let me start by saying that, in terms of our budgeting process, we have not attributed revenue in fiscal year 2020 to Shortz. We have assumed all the costs. So, I just wanted to be clear about that upfront. And that's why I said earlier, our fiscal 2020 budget has been built conservatively.So, just for the spirit of full disclosure, we’re not banking on Shortz to be this – revenue contributor in fiscal year 2020. There are several apps in the marketplace today that are offering this type of content or content experience. And I don't know if you're familiar with a private company by the name of what pad they have an app in the marketplace called [Path]. There's a company by the name of [indiscernible], there's another company by the name of [Yarn].Fundamentally, we believe that we've got several advantages. Certainly, we've got an embedded customer base. And we believe that that's going to be very valuable in terms of really getting this product right and then driving subscriptions and a user base accordingly.Secondly, we have been very selective in terms of working with the right content creators. This is a new content genre. And we've been very selective in terms of making sure that we're doing our best to bring on creators that really have an understanding of the genre, understanding of the demographic, and so on and so forth.Third is, as we've indicated earlier, we've got a global footprint. And that has been really great in terms of driving monthly active users. But on the flip side, we have not monetized our users in the emerging markets, as well as we otherwise would have liked to. And that's a function of advertising rates being lower in those countries. We believe that if we begin to offer other entertainment type of experiences to those customers, that that may open up a revenue stream, which is valuable to us. But again, I want to reiterate, we have not built in any revenue contribution from Shortz in our fiscal 2020 budget. Does that help answer your question?

[Unidentified Analyst:]

That does. So, I guess, I've been – I’m looking at a quarterly revenue decreases and stuff like that, I'm trying to figure out how you're – where you're going to get this all turned around? I thought maybe Shortz was part of that process, but…?

[Jonathan Reich:]

Yes, sure. So, there are several things going on as we speak. By a way of example, take a look at the emerging markets. We have recently started testing some ways by which we can better monetize those emerging markets and early indication. Early indication is that, we will unlock value in those markets, which we have not been able to do up until now.Number two, the subscription-based service, as you know, indicated, we started January with zero subscribers, mid-October, we're already at 170,000 paying subscribers and there is ongoing investments in that, both in terms of marketing, bundling, discounting, localization and so on and so forth.Number three is, our bread and butter, which is advertising. We've been improving in terms of the average revenue per monthly active user and with some new optimizations in our ad tech stack. We're beginning to see the fruits of that flavor accordingly.So, when you take all of those together, we believe that will contribute, in addition to really making sure that we're doing a much better job in terms of potential expenses that we can cut back on. Recall as well that we have been building out our presence in Lithuania over the course of the last year or so. Cost of labor there is less than it is in Norway. And we're now beginning to see the benefit of that accordingly.Of course, our employee base, both in Norway and Lithuania is very, very important to us. But we needed to find a mechanism by which we could continue to invest in the company, find employees that were readily available, which was a little bit more complicated in Norway and at a rate, which was attractive and affordable. Nonetheless, the employee base in both countries is critical to us. And we are benefiting from having opened up our innovation center in Lithuania strictly from a cost perspective.

[Unidentified Analyst:]

Alright. Thank you very much. [Indiscernible]

[Operator:]

[Operator Instructions] Oh, and we do have a follow-up. We'll take another question from the line of Joe Boskovich. Please go ahead, sir.

[Joe Boskovich:]

Yes. Hi, Jonathan. One more question. So, I’m just trying to think about the Zedge ecosystem the right way. So, we have the core offering when Zedge originally spun off, which was the wallpapers and ring tones. And it seems like there's kind of three breakout businesses within Zedge, right? You have Zedge Premium, which is the marketplace for artists to monetize, then you have the subscription, and now you kind of have this third breakout business in Shortz.So, Shortz sounds exciting and I'm hopeful for that. Subscription, if I'm not mistaken, this is the second quarter you’ve reported subscription. It seems like the growth there is phenomenal with that 116% growth. Now, in terms of the other, I guess, breakout business Zedge Premium, I – looking back at my notes, it looks like you had 41,000 revenue in Q1 and then that grew 300% to 117,000, then you grew 35%, the next quarter 159,000 and then [66% growth].What is your – what is the plan for, I guess, further growing the gross transaction value at Zedge Premium? Because I mean, obviously, it's still appears that that's a growth business, but the growth has cooled a little bit from that, that 300% growth early on?

[Jonathan Reich:]

Sure, Joe. So, really good question. And I want to start by saying that Zedge Premium to us is very, very important and critical to our business. Before answering your question, I want to highlight something, which investors would not know of Shortz. When we had moved forward to roll-out our marketplace, we had to build from scratch a set of infrastructures, an entire back-end reporting system, a content management system, a publishing platform or self-publishing platform, analytics, business intelligence tools, and so on and so forth.And that core foundation is really key to our ability to get Shortz out into the marketplace pretty quickly. And just by frame of reference, we only started to do work on Shortz after, I guess, mid-August. So, we're talking that, within a period of three months, more or less, we will have started from scratch and having an MVP in the marketplace with both iOS and Android. And that has been built off of this foundation that has been used to propel our premium business.Now, going back specifically to your question about, well, what are we doing in order to thrive GTV to grow the Premium business. So, we have several things that are going on. Number one is, we have a set of initiatives to understand and better monetize within the marketplace today.As you know, there is a heavy waiting towards using rewarded video. So, watch a video in exchange for that. There will be a piece of content that you can acquire, being that advertising has a very low rate on a unit basis. So, that's what CPMs are about cost per thousand. That's where advertising is sold. We feel that it's important for us to find other ways. Think about that tokens in the like in which we can test hard pricing of the content that's in there. And there are a set of tests that we have undertaken and that are unfolding in order to achieve that goal.Number two is, continuing to market to the creative community that will benefit from Zedge Premium. We've had many interesting learnings over the course of the look – over the past year. And I would say, it is core. What we have found is, the unknown and very experimental artists, artists that has some really cool content, but is not a brand name. Those are the guys that are really scaling well within Zedge Premium.And what we want to do is make sure that we can bring artists into the platform with a revenue proposition that will scale for them over time. And that's why we feel that a lot of the work needs to be around monetization first. And then once we've closed or once we have further improved that then we can go out and begin a marketing campaign.And then finally, I would say, we do have a limited amount of resources. We had made a firm decision that we wanted to pursue something that was not strictly limited to advertising. We wanted to diversify our revenue base with new monetization layers. And that's potentially resulted in us peeling away some resources in the short-term from our marketplace initiative in order to prioritize Shortz, although in fiscal year 2020, as we solve or better solve the monetization item, then I think that we're going to begin to see further growth there into the fiscal year.

[Joe Boskovich:]

Great. I appreciate it. Thanks for the commentary.

[Jonathan Reich:]

Sure.

[Operator:]

Thank you for the follow-up, Joe. [Operator Instructions] I’m seeing no signals from the audience. Ladies and gentlemen, on behalf of the Zedge leadership team, I'd like to thank you all for joining us today. This does conclude today's meeting. You may now disconnect your lines, and we hope that you enjoy the rest of your day.