Zedge, Inc.
Q3 2017 Earnings Call Transcript

Published: 14 Jun 2017

[Operator:]

Good afternoon everyone and welcome to Zedge’s Third Quarter Fiscal Year 2017 Earnings Conference Call. During management’s prepared remarks, all participants will be in a listen-only mode. [Operator Instructions] And after today’s presentation, 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 months period ended April 30, 2017. Any forward-looking statements made during this conference call, either in the prepared remarks or in the Q&A 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 & 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 cause these actual results to differ materially from those that they forecast. Please note that Zedge earnings release is available on the Investor Relations page of Zedge’s website and the earnings release has also been filed on Form 8-K with the SEC. And I would now like to turn the conference over to Mr. Arnoy. Please go ahead.

[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 third quarter 2017 earnings conference call, recapping three months ended April 30 2017. Joining me today is Jonathan Reich, our Chief Financial and Chief Operating Officer who will provide insight into the numbers that we reported earlier today. June 1st marked our first anniversary as an independent public company. During our initial conference call, I committed to you, our investors that I would be forthright about the business and express our expectations and challenges. This afternoon, I’d like to share some trends facing our business and discuss what we are doing about them. From a macro perspective on a year over year basis, both our revenues and monthly active user base or MAU have remained fairly flat. Peeling back the onion, we’ve experienced solid MAU growth in emerging markets while contracting in well developed economies. At the same time, our average revenue per monthly active user from apps or ARPMAU has improved across both, well-developed economies and emerging markets. This growth is impressive, considering that we’ve been able to expand the revenue per user, even when facing a decline in users in more valuable geographies. Furthermore, considering our competitive position in the personalization space, we believe that we are well-positioned for continued growth. I should also add that Android users account for the bulk of these results as we continue to recover on iOS after Apple removed us from the iTunes App Store in early 2016. We have taken stock of these trends and have narrowed our focus to concentrate on projects that will put MAU back on a growth trajectory in the most valuable markets, so that we can monetize more effectively. If we can deliver on this strategy, we expect to yield impressive revenue growth due to the expanding ARPMAU trends we have experienced in these markets. In addition, we have streamlined operations in order to accelerate these developments and release to market priority projects designed to achieve our goals. Our team is concentrating on improving core functionality and user experience which will positively impact user growth, engagement and retention. I’d like to highlight some of these investments. To start, we are reworking Search which currently generates close to 100 million queries monthly. The makeover provides more relevant results with an improved user interface that renders the constant in an engaging way. Recently, we launched a whole new way for users to discover content by offering inspirational, text mix [ph] together by color, categories and trending searches. We have also taken advantage of artificial intelligence to offer real time recommendations that are both timely and contextually relevant. These recommendations are based on meaningful signals including personal interests, preferences, events and occasions. We have already started to see positive impact from some of these investments and hope these will increase over the coming months. Many of these projects sound elementary, which is precisely the point. We need to focus on the core value proposition and functionality to make sure that our products align with the expectations of our users. When we do, users will return more often and engage more deeply. It’s a virtuous cycle and we are committed to doing a better job of taking advantage of it. As discussed last quarter, our strategic focus on content is critical to enhancing user acquisition, engagement and retention, leading to an increase in revenues. To this end, I am pleased to announce that we rolled out an open beta of our entirely new content publishing platform earlier today. It goes without saying that content creators are the fuel that drives our leadership position. They are the strongest and most effective evangelists of our platform and contents. In all candor, we need to do better job of embracing this community to make them feel welcome and appreciate it. A core means to achieve this is to overhaul our content upload tool and content management system which was only available from the desktop. With the introduction of our new publishing platform, creators will now be able to easily upload their art directly from their mobile devices and will be able to upload from their desktops far more easily. This will result in a more welcoming and friendly experience, open a door for new contributors, improve loyalty among the creator community and aware our consumers of great and timely contents. It will also have a positive effect on user growth because contributors market their creations to their friends and followers. The flip side of where to focus is the de-prioritizing of projects that have value but only with expanding MAU. We have temporarily reallocated some of the resources dedicated to developing collections, which we previously referred to our stories. Yes, we continue investing in growing our portfolio of Hollywood releases and we are successful in expanding our marketing relationships to both the U.S. and Europe this past quarter. We are still excited by the opportunity for collections and remain confident that it will generate revenue in calendar year 2017. Let me move on to iOS. It’s been around a year since we reentered the iTune store with a wallpaper only app. In late 2016, we rolled out a free ringtones app. And in late April of this year, we launched our Premium Ringtones and Marimba Remixes, featuring chart toping remixes from artists. The app enables users to purchase and set these ringtones directly from within the app. Although this steps haven’t returned our user base and revenues to pre-2016 levels, we remain committed to the Apple existence. [Ph] Early indications related to the Premium Ringtone app leave us with two priorities, first, scale the user base organically; second, grow the content catalog. We are doing both of these and expect to share more details with you the next quarter. Shifting to Zedge Wallpapers. We launched several powerful app updates that have had an exceptional impact on our rating. Our current version has a 5-star rating compared to 3 stars previously. This should benefit us in organic user acquisition, as users will be more likely to install our app when seeing the positive reviews that should increase rankings in the app store, giving us more visibility with potential customers. With continued focus and improvements, we believe that we can continue to unlock significant value with our iOS offerings. In wrapping up, I want to stress my conviction that we can resume a growth trajectory in MAU and revenue by continuing to focus on excellence in product, content and user experience. Now, I am going to turn the call over to Jonathan Reich for a discussion 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 2017. 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 14, 2017. Following my comments, we will open the call to any questions you may have. Throughout my remarks the third quarter refers to February through April 2017, and the second quarter refers to November 2016 through January 2017. 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 by 0.1% to 31.7 million during April 2017 from 31.6 million in the corresponding period a year-ago. On a sequential basis, MAU was impacted by seasonality and as expected declined 5.1%. The year-over-year MAU increase reflects strong growth in emerging markets, partially offset by an 11% decline in users from well-developed countries. As Tom mentioned, we do not downplay the import of this trend and are highly focused on streamlining operations and executing our projects that we expect will drive user growth in the high-value geographies in order to increase our revenues. Total revenue in the third quarter declined $1.7% compared to the year-ago quarter, and 1.6% from the prior year quarter to $2.5 million. The year-over-year revenue decline was due to a combination of factors including but not limited to the removal of our app from the iTunes stores in early 2016, reduced investments in the game channel where we monetized on a cost per install basis, decline in revenues from our desktop and mobile websites which became less relevant with the adoption of our smartphone apps, and a drop in revenue from managing and optimizing a third-party’s advertising inventory. However, I want to point out that revenue generated from our Android app increased by close to 6% year-over-year, and was basically flat sequentially. We are proud of this, especially considering seasonal advertising trends typically resulting in lighter budgets in the January through March period and the impact that the decrease in MAU from well-developed markets had on the apps revenue contribution. Revenue derived from our Android app constituted over 90% of Zedge’s aggregate revenue in the third quarter. Overall, average revenue per monthly active user generated from our apps or ARPMAU increased by close to 1% year-over-year and 5.1% sequentially to $0.0294%. The year-over-year and sequential increases in ARPMAU were primarily achieved through the introduction of a new higher value Android ad unit in March 2017 and the addition of direct advertising partners. Our direct cost of revenue as a percentage of revenue increased to 16% from 13% in the third quarter of fiscal 2016 and was unchanged compared to the prior sequential quarter. The year-over-year increase reflects investment to reduce content delivery latency, improved content filtering, and expand our addressable user base for push notifications and in-app messages. We believe that these investments are necessary to retain users and will lead to increased revenue in the future. SG&A in the third quarter was $2.2 million, a 16% increase compared to the year ago quarter and a 7% decrease compared to the prior quarter. The year-over-year increase primarily relates to increasing headcount to 64 from 55 and the costs associated with operating as a public company. Although, we increased headcount by nine people in past year, we don’t anticipate adding as many employees in the near to mid-term. It’s also important to note that the new hires are both driving the accelerated development of the projects that Tom highlighted in his comments and closing technology deficits in core areas with new enhancements and features like our mobile publishing platform that was rolled out in open beta earlier day. Our loss from operations in the third quarter narrowed to $193,000, compared to a loss of $339,000 in the second quarter. In the year ago quarter, we achieved income from operations $243,000. Our loss per share narrowed to $0.02 from $0.03 in the second quarter. In the year ago quarter, we reported earnings per diluted share of $0.04. Zedge’s balance sheet continues to be strong and liquid. At April 30th, we reported $5.1 million in cash and cash equivalents compared to $4 million a year earlier. Our working capital or current assets less current liabilities was $5.3 million, compared to $3.9 million at April 30, 2016. Zedge has no debt. To wrap up, we are pleased by the year-over-year increase in ARPMAU and are highly focused on efforts that will improve engagement and retention. As Tom discussed, we’ve implemented a comprehensive program intended to accelerate MAU and revenue growth by enhancing the quality, discoverability and relevancy of the contents we make available to our users, particularly those users in well-developed regions that command higher ad rates. That concludes my remarks. Now, Tom and I will be happy to take your questions. Operator, back to you for Q&A.

[Operator:]

Thank you, sir. We will begin the question and answer session. [Operator Instructions] And our first question of today is going to be John Rolfe with Argand Capital. Please go ahead you’re your question.

[John Rolfe:]

You provided some color on the year to year increase in SG&A as a function of the increased headcount. Can you just talk a little bit about the sequential decline in SG&, was that related to some of this refocusing of resources or what sort of was behind the decline quarter to quarter?

[Jonathan Reich:]

Sure, John. Thanks for asking the question. This is Jonathan. And that relates to initiatives such as content creation, where we began hearing back. But overall that is related to making sure that we’re hyper focused on the things that will move the lever in terms of growing monthly active users.

[John Rolfe:]

Okay, great. And I did notice, I mean you guys have sort of spoken a couple of times on the call about the need or the desire or the initiatives to get that monthly average users growing again. So, on the one hand, you’ve kind of acknowledged that; on the other hand, you said I believe that the sequential decline was expected given seasonal factors. And it does look like you had a similar decline in the year ago quarter, on a sequential basis. How should we be thinking about the trajectory of that MAU seasonally from quarter to quarter and were you guys disappointed with the decline or was it expected?

[Jonathan Reich:]

So, just to provide a little bit more color, overall, we did see that sequential decline. But, when you begin to take a look under the hood, as we’d indicated, the well-developed market that command higher ad rates, were the ones where we saw decline; and on the flip side, emerging markets, we actually saw the user base continue to grow. And I guess when we think about this on an ongoing basis, we do feel that the first quarter of the calendar year will typically be one where we see a fallback on user growth; the fourth quarter of the calendar year will actually be one where we see that user growth improve. And that is the seasonal effect having nothing to do with -- or having little to do per se with the activities in which we’re investing to overall drive growth in the well-developed economies.

[John Rolfe:]

I mean what is it? I understand the seasonality in terms of the average revenue and the fact that there is more robust ad budgets over the holiday quarter at the end of the calendar year. But what is the seasonal impact that’s driving better growth in the calendar fourth quarter and then the drop off of in the calendar first quarter?

[Jonathan Reich:]

Sure. So, there are several factors but one very obvious factor, in holiday present giving, people get a new phone, they’ll download an app, they’ll try it out, they’ll say hey great and then with time, they will say, you know what this isn’t really what I was looking for and that begins to tail off in the calendar first quarter.

[Operator:]

[Operator Instructions] And it looks like our next questioner today is going to be Andrew Walker with Rangeley Capital, please go ahead with your question.

[Andrew Walker:]

Hey, guys. Sorry, if I missed it; I got disconnected for a second. But, you launched a premium iPhone app at the end of the quarter. Can you give us a little color on how that kind of launch works in the quarter and what you’re seeing there, heading into this month?

[Tom Arnoy:]

Hi Andrew, this is Tom. Are you referring to the last release, the premium ringtone apps, the remixes app?

[Andrew Walker:]

Yes. That’s exactly what I’m talking about.

[Tom Arnoy:]

Okay. So, we have launched app. So, if you go and look at the approximately, it’s an app we are really proud of. It looks really good. It’s in our opinion, state of the art. We can still add more content to it, like it has somewhat limited content still but we’re working on that. However, the content is of great quality. A lot of remixed songs of famous artists and like really well known songs there. For us now, it’s all about scaling number of users and of course increasing the monetization per user or the -- but this is a process that takes time. We’re not going to spend material amounts of money on user acquisition where we really invest in getting organic growth in this app. And that is going to take some time but we had like a really good start. And does that answer your question?

[Andrew Walker:]

Kind of. I guess, two questions on it. So, on the content, right now it’s all Marimba Remixes; why don’t you kind of get normal songs and normal sounds on there? And the second question with you know, how much revenue is kind of generating at this point?

[Tom Arnoy:]

So, the last question first. We don’t want to provide that number yet; it’s still early. Regarding the first question, yes, people want all sorts of different content and we are exploring that too. We chose now to go down a themed path with Marimba Remixes. There’s a lot of demand for that content now. This has to do with how we position the app, how you communicate the value proposition, how you also catch like keywords et cetera, like in the App Store. We have many reasons why we chose this path. But of course we will, there are many possible paths from here, and it’s a learning, it’s a journey for us. And currently, if we succeed with this, then we can go down many other -- we can launch many different themes.

[Jonathan Reich:]

Andrew, just to set expectations, this is not -- this is still very early phase and revenue contribution is de minimis at this point. As Tom has said, in quarter four revenues increase; we’ve got to bring in users, then convert by making a purchase and selling it so forth.

[Andrew Walker:]

Okay. I would just say, having [indiscernible] I mean the obvious thing to get this more popular is adding more content. But if you think the Marimba Remixes are popular, I guess that’s one thing. Just kind of moving on, I think you guys get a lot of consumer data, I think you mentioned -- was it over 100 million searches per month? Have you explored any ways to modify that outside of advertising for the users to kind of selling that data?

[Jonathan Reich:]

Yes, we have explored ways in which we can monetize that. And as you can well appreciate, we need to be very, very careful there in order to make sure that we do not do something that will hurt our user base. We have seen a lot of activity in the data space overall. But there are whole host of purchases out there, some of them are very outstanding and some of them are little bit more sketchy. And we are beginning to generate a small amount of revenue from data but on a non-PII basis, making sure that we are limiting it until we have a comfort level that we can really scale that without ultimately hurting our core business. We don’t want to have a situation where we have a quick win with some data and users then begin to push back saying hey, what are doing with my data. And again just to reiterate, anything that we do in the data space is on a very anonymized basis so that we do not embrace that relationship that we have with users in terms of securing and maintaining their privacy.

[Andrew Walker:]

And then, just the last thing I would say, I think three quarter ago, the focus was on the set my ringtone app, two quarters ago the focus was on the stories app; now, we are starting to hear stories on the [indiscernible] and they are going back to kind of elementary type things and all that sounds nice, but this is a 10 year old company and as an investor it’s pretty concerning to hear these constant shifts. I would just say -- I don’t know what I am saying, but it’s just very concerning to see revenue flat line and the constant shifts in narrative. It will be nice to see the company just focus on the core app monetization and I guess elementary focus you guys mentioned?

[Tom Arnoy:]

I understand your comments, but we are a tech company. And we -- like things change all the time. We have to focus on the information and data we have at any given time. And remember, I believe we addressed this the last time as well. But set my ring tone was one feature, we highlighted. That we chose, not to pursue because it is -- it takes a lot of investment to get where we believe we need to be with that feature in order to succeed. So, we haven’t dropped it, we haven’t said we are not doing that, but it’s there like maybe we will do it. When it comes to collections or stories collections, we are still investing in that. And previously, we didn’t invest like a big percent of the resources in that product. We just wanted to address we are focusing back on like on a lot of the core stuffs and we are now stopping some development on collections and pursue -- start to get more deals in at this point. But we are not stopping doing it we’re just reducing the investment there, the activity a little bit. But I think it’s truly -- it’s natural for a company like Zedge from quarter-to-quarter move around resources because every day we get new data, new information that can have the influence on our decisions. And I would be surprised if these tests doesn’t happen in other tech companies.

[Andrew Walker:]

I don’t disagree with you, I’m not saying don’t do it which makes the most sense. But I’m just saying for a company every quarter to kind of shifting growth priorities and see this stalled out revenue growth at this level, stalled out MAUs at this level, it’s pretty concerning as an investor but it might be a conversation better taken offline. So, I will take it there. So thanks for taking the question.

[Jonathan Reich:]

Andrew, it’s Jonathan. I think if I were to do reframe this, I think that where we have not done as good of a job as we can do is actually in highlighting that our core app has and continues to be the investment which -- the asset I should say where we invest the most time in resources. In the previous conference calls, and maybe we are guilty of not articulating that well and maybe we’re also guilty of trying to share a vision of where we think this can go. But, I think that I would reframe your description to want to -- you don’t rightfully want to see that every quarter, hey, we have a new top priority and I agree with that. I think that in our previous conference calls, we have talked about features where we have tested and explored, but it’s not like we’ve taken 80% of the workforce and allocated them on something or invested their resources on something which has not won the favor that our users would like, rather we have a limited amount of resources that are dedicated to trying new things out, so that we can continue to evolve. And what we really have decided this quarter is as opposed to continuing to evolve collections with technical and development resources, we rather apply those technical and development resources for the most part to some of the core areas, which we would like to accelerate a little bit more quickly. But on the sales and marketing side, we are full steam ahead in terms of bringing in more partners, making sure that we are expanding our footprint. In previous quarters, we were only available pretty much in Canada with the studios; this past quarter, we have actually launched collections both in the U.S. and in Europe. And that continues to be their goal and objective ultimately to translate into a revenue producing contributor to our business. But, I think that in summary, we have not done as good of a job in terms of articulating the focus that we have on the core app and we need to do a better job of that going forward.

[Operator:]

And our next questioner today is going to be Brian Warner with Performance Capital. Please go ahead with your question.

[Brian Warner:]

Hi, guys. Couple of questions. On your efforts to improve and grow your ARPMAU, you sort of mentioned a couple of things. And I’m wondering, if you could just sort to talk in late terms about, which of those things can sort of move the lever the most? And if we’re trying to observe and watch and grade you, when should we begin to see the fruits of those things? And maybe you can marry it to what it might look like a few years out in terms of your vision. I know it’s a little vague, but I’ll leave it there.

[Tom Arnoy:]

Hi. This is Tom. First of all, I think we are already seeing the fruits of this, as we mentioned just now. We have added new ads formats and have different -- and we are constantly testing new things there. Again, the most important for us is focusing on making sure that we continue growth in user base, because that is the strongest driver on revenue. So, we’re balancing how much business is we’re investing and try new advertising formats. However, we are constantly trying new things and we are now exploring some really interesting things. I think, we expect to see results every quarter and then that’s really what the whole family has to work for. But generally, it is formats short-term; more long-term, we have addressed that we are working on collections. Hopefully that will bring like a new revenue stream and for sure also iOS. It’s still early, but we really hope that iOS will be a strong contributor to our revenue and to our average revenue per user moving forward.

[Operator:]

[Operator Instructions] There look to be no further questioners. So, this will conclude the question-and-answer session and today’s conference call. Thank you all for attending today’s presentation. And you may now disconnect your lines.