Zedge, Inc. (ZDGE) Q4 2022 Earnings Report, Transcript and Summary

Good day. And welcome to Zedge's Earnings Conference Call for the Fourth Quarter and Full Year Fiscal 2022 Results. During management's prepared remarks, all participants will be in listen-only mode [Operator Instructions]. I will now turn the call over to Brian Siegel.

Thank you, Operator. In today's presentation, Jonathan Reich, Zedge's Chief Executive Officer; and Yi Tsai, Zedge's Chief Financial Officer, will discuss Zedge's financial and operational results for the fourth quarter and full year ended on July 31, 2022. Any forward-looking statements made during this conference call during 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 in the future to differ materially from those discussed on today's call. These risks and uncertainties include, but are not limited to, specific risks and uncertainties disclosed in the reports that Zedge files periodically with the SEC. Zedge assumes no obligation to update any forward-looking statements or to update the factors that may cause the actual results to differ materially from those that they forecast. Please note that our earnings release is available on the Investor Relations page of the Zedge Web site. The earnings release has also been filed on Form 8-K with the SEC. I would like to now turn over the conference over to Jonathan. Jonathan?

Good morning. Thank you, Brian. And thank you all for joining us today. I'm going to start by briefly reviewing our fourth quarter and fiscal 2022 results. Revenue increased 41% and 36%, respectively. Both GuruShots and Emojipedia were primary drivers of both the year-over-year and sequential quarterly growth. Ex-GuruShots and Emojipedia, revenue was up by 22%, driven primarily by advertising. As I mentioned in earlier calls, we are investing in scaling GuruShots and don't expect it to be profitable for another 18 to 24 months. Even so, on a fully consolidated basis, Zedge remained profitable during the fourth quarter, although, less so than last year, once you exclude the one-time accounting gains. On a positive note, for the Zedge App, total installs increased 11% in 2022 from the end of 2021. ARPMAU, that is average revenue per monthly active user, increased 17% and Zedge Premium gross transaction value, or GTV, grew by 23% in the fourth quarter and 60% for the year. MAU for the Zedge App declined across well developed and emerging markets, finishing the year at 32 million. Yi will provide more financial details in his section. Now I will share an update on our strategic priorities moving forward. Our leading products are the GuruShots photography game and Zedge's freemium digital content marketplace, which today offers mobile phone wallpapers, video wallpapers, ringtones and notification sounds. In total, our products served over 40 million users in July. Our company is positioned at the intersection of two major growth trends in consumer tech: casual gaming and the creator economy. Today, most smartphone users have become amateur content creators, sharing their photos, illustrations, memes and videos to express themselves and gain social validation. In addition, they value friendly competition and garner popularity and recognition from their online community. Many of these creators are talented enough to attract a meaningful following and monetize their content. This is what’s known as the creator economy, a market that has grown massively over the last five years. Prior to the GuruShots acquisition this past April, our core product was the Zedge App, which served 32 million MAU in July 2022. We monetized these customers with a combination of advertising, subscriptions, and in-app purchases of Zedge tokens, our virtual currency. Zedge Premium offers artists the ability to sell their creations directly to our customers. In December of 2021, we expanded the opportunity for Zedge Premium artists by introducing ‘NFTs Made Easy’, which provides non-crypto experts with an easy-to-use eco-friendly platform to tokenize and sell their art to our customers for Zedge tokens. We’ve been somewhat insulated from the effects of the crypto winter that is currently challenging the NFT market, as our offering focuses on making NFTs affordable and easy to obtain for mainstream consumers. GuruShots is a category killer that fuses photography with gaming, enabling amateur photographers, essentially anyone with a smartphone, to compete in a wide variety of contests across iOS, Android and the web, that showcase their photos. The game mechanics include progressively more difficult competitions with successful players mastering their skills and then continuing to the next level until ultimately earning the coveted Guru title. Players can compete individually or join together as a team. The game includes community features, leaderboards and chat functionality, which create a sense of belonging, inspiration and competition. The penetration rates leave a lot of room for growth as we estimate that 30 million to 40 million photo enthusiasts regularly use their smartphones to take and publicly share high quality photos and who would be interested in participating in photo contests every month. We also acquired Emojipedia, a profitable Web site that is the go to source for all things emoji, in August of 2021. Over the past year, we have redesigned the Emojipedia Web site, localized it into 18 languages beyond English, and have started to recognize the benefits associated with overhauling the ad stack. Zedge is building a strategic flywheel that leverages the synergies of a gaming and marketplace dynamic across our portfolio, engaging communities of consumers with content that provides value across a multitude of online and mobile platforms, including social networks, messaging and gaming. This approach connects creators with friendly competition, community and commerce. One of the critical foundations needed to accomplish this formidable goal is easy access to accurate data that can be used to make informed decisions about all aspects of our business, including marketing, product design and usage, content serving, et cetera. To this end, we created a dedicated data leadership role and recently hired a head of data to oversee and direct all data initiatives, including data collection, cleansing, analytics, model building and deployment. Organizing all of these efforts in one group enables us to progress with a unified approach that is expected to drive improved monetization, marketing, product development, data science and business intelligence. We have also committed meaningful dollars to marketing, specifically paid user acquisition and re-engagement campaigns. We are scaling up while also benefiting from the data that guides our decisions. The changes to user privacy rules that have unfolded in the industry over the past 18 months or so require us to analyze all aspects of the marketing funnel with granularity in order to optimize the return on investment. We are developing our capabilities in this domain companywide in order to deliver profitable customers to Zedge's marketplace and GuruShots. Good marketing is a function of many ingredients and depends on good data. As such, our success is tied to coupling these initiatives. Another marketing focus is enabling GuruShots' artists to sell their awesome images in our premium marketplace. We expect to introduce phase one of this crossover later this month and evolve from there, eventually offering sales not only from within the Zedge App but also on the web. Every month GuruShots players upload around a million photos to the platform. We are excited about the monetization opportunity that this creates for GuruShots’ players, who will be able to make money from their content that they create for gameplay. In just about six months, we are delivering on a synergy that we identified when making this transformative acquisition. Talking about synergies, we started a cross-pollination process loaning various members of our Zedge App team to GuruShots, to both accelerate GuruShots initiatives and acquire gamification expertise, as we expect to apply these learnings to the Zedge App. This also allows us to control SG&A better as we want to continue running the company profitably. From a product perspective, we have several promising developments that are either in the midst of being introduced or are to be rolled out in the next several weeks. Starting with GuruShots, we have three major initiatives underway. The first relates to customer onboarding. Over the past several months, we revamped the onboarding process and recently had a breakthrough with respect to converting users into paying players. Our new onboarding ramp has yielded a more than 35% rise in converting installs to first-time paying players, which is a key gauge of measuring the success of driving users to paying players that generate revenue and a positive return on ad spend, otherwise known as ROAS. It goes without saying, the time will tell if these increases are sustainable, but if they are, they speak to some of the early benefits associated with overhauling our data organization. Next, we are about to introduce a feature that our players have been asking for, mainly a Learn feature, which is a TikTok-style feed of short form and engaging educational videos that focus on providing tips and techniques for improving one’s photographs, created by expert photographers. Depending on how this unfolds, we may be able to use it as a mechanism to introduce a subscription based offering and/or advertising support, providing additional incremental revenue and diversifying monetization. Finally, we’ve been testing Battles, which offers a quick way for newbies to start competing in simplified photo competitions that are short, limited in size and built on a coin-based economy. We expect that Battles will allow us to drive more users into gameplay, increase engagement, advance our game economy and ultimately drive more revenue. Moving to the Zedge App, we initiated a comprehensive 360-degree user experience review to identify shortcomings that chip away at engagement, retention and lifetime value. If we successfully close these gaps, we expect to benefit from improvements, not only in the aforementioned KPIs but also in improving our already strong user ratings and reviews, which would unleash improved placement in Google Play’s algorithm and ultimately drive more user installs. As mentioned earlier, we continue enhancing Zedge Premium and specifically the NFTs Made Easy platform. As we evolve the offering, we will add features, including drop dates, trading, the ability to use crypto as a payment type and opening the platform up to more types of content and artists. Additionally, we expect more well recognized artists to distribute their content in our marketplace, as Banksy and Micha Klein have already done. Turning to Emojipedia. We now support 19 different languages. Going forward, we will focus on two areas: optimizing the ad stack and expanding the products offering, potentially with a native mobile app version. Finally, we are down the road in evaluating the viability of new content and products in addition to the ones we’ve discussed today. Stay tuned for more information on this in the upcoming quarters. The GuruShots acquisition will alter our financial projections, given the growth investments we expect to make. Furthermore, like many digital businesses, our business is experiencing pressure due to global economic uncertainty, geopolitical risk, especially resulting from Russia’s invasion of Ukraine, energy shortages, inflation and rising interest rates. As such, we are remaining cautious with our outlook. That said, we still expect revenue growth in fiscal 2023 on a consolidated basis, while remaining profitable. Next week, we are going to celebrate Thanksgiving. Living in a free and democratic country gives us much to be thankful for. I would like to use this opportunity to thank our investors for your continued support. I also want to thank our employees for their commitment and hardwork, especially in light of the GuruShots acquisition. Finally, I’d like to underscore how highly we think of our colleagues at GuruShots. We’ve had a great start to our relationship and we are excited to work together to increase the shareholder value over time. Now, I would like to turn the call over to Yi, who will review our financial results. Yi?

Thank you, Jonathan. I want to remind those on our call that our fiscal year ended July 31st. Please note that Q4 was the first in which we recorded a full quarter of GuruShots' results. Moving to our fourth quarter results. MAU, defined as the number of unique users that opened our Zedge App in the last 30 days of the period, decreased 7% to 32 million for Q4 2022. MAU in well developed market was down 14% and in emerging markets, nearly 5%. Europe, which contributes to both metric, was hit especially hard by the Russian invasion and the energy crisis, and its economic impact played a more significant role in this quarter's decline. Total revenue in full quarter was $7.4 million, a 41% increase from last year, as revenue showed growth but weaker user number and overall economic environment led to restrained growth. This quarter, we added gaming revenue as a line item in our press release financial, which today makes up in-app purchase from GuruShots totaling $1.4 million in the quarter. Similar to other parts of our business, GuruShots' revenue was negatively impacted by the situation in Europe. Subscription revenue was down nearly 4% as we are starting to see the impact of reduced active subscribers numbers. Other revenue, which mainly include Emojipedia and Zedge Premium, increased primary from the addition of Emojipedia this year. However, Zedge Premium continued to show attractive growth rate off a smaller base. Zedge Premium's gross transaction value or GTV, that is the total sales volume transacted through our marketplace, increased 23% to [$340,000], reflecting increased sales and ASP. Active subscriptions were down 8% versus last year, as new subscriptions sale did not offset churn. Overall, average revenue per monthly active user, or ARPMAU was $0.058, an increase of 17% year-over-year, driven by better advertising performance and higher revenue from Zedge Premium. This year, operating expenses, excluding one time items, increased by 110% due mainly to the acquisition of GuruShots. However, we did have a one-time noncash item in the full quarter, $4 million contract operating expenses to revalue the GuruShots earnout based on the updated gross assumption. This was classified on the income statement as a change in fair value or contingent consideration. Excluding this contra5t expense, other income would have decreased by 62%, leading to an operating margin of 11.4% versus 42.2% last year. Provision for income taxes was $216,000 this quarter versus a benefit from income tax expense of $56,000 last year. Our effective income tax rate was 4.6% for Q4 fiscal 2022, much lower than the statutory rate, primarily due to the $4 million one-time benefit discussed above. The effective income tax rate was negative 2.3% last year, primarily due to the release of a valuation allowance against deferred tax assets. Reported diluted EPS was $0.31, however, excluding the $4 million one-time benefit just mentioned, diluted EPS would have been $0.4 versus $0.17 last year. Diluted share count was $14.7 million. Adjusted EBITDA was $2.2 million this year versus $2.9 million last year. Our adjusted EBITDA margin was 30% this year versus 55% last year. Note that we excluded the $4 million one-time benefit and $600,000 in stock comp expense from our adjusted EBITDA calculation. From a liquidity standpoint, we remain in a strong net cash position with over $17 million in cash and cash equivalents. On that note, in late October, we made a risk management decision to put in place an $11 million loan facility, made up of a term loan and a revolving line of credit. We felt this move was prudent given the uncertain economic environment. As part of the agreement, we drew down $2 million of the term loan at closing. We believe that our strong financial performance over the last several years, combined with our future business prospects, contributed to our ability to secure a facility of this size. We view this as a positive, especially in light of the challenging fiscal landscape. This move will enhance our cash balance and the facility will give us additional flexibility to accelerate growth when appropriate. We also announced a share repurchase program during the fourth quarter. As of November 10, 2022, we repurchased 160,000 shares. Thank you for listening to our fourth quarter earnings call, and I look forward to speaking with you again on the next call. Operator, back to you for Q&A.

[Operator Instructions] The first question comes from Allen Klee from Maxim Group.

Good morning, and congrats on all the stuff you're doing. Could we start with average revenue per monthly active user, that being up around almost 17%? That was surprising to me, considering what we're hearing from other people out there? What was the driver behind that?

The driver behind that is again, what we've talked about quarter-over-quarter, which is almost a nonstop maniacal perspective to optimizing our ad tech stack. As you recall, we migrated from MoPub to AppLovin as our mediation platform in, I guess, March of 2022. And when we had undergone that process, we had done testing across other platforms, and AppLovin was proving to outperform. And since then we have continued to improve the entire flow so that we can ultimately deliver this sort of performance.

And then in terms of the monthly active users, how do you think about kind of on a sequential basis. Is there any way you can think about when that might stabilize kind of, or what the factors that will get you there?

So if I recall correctly, on a sequential basis, Q3 to Q4 we were we were basically flat quarter-over-quarter. And where we are investing our efforts is really around two areas. One is around feature development that we believe can help us in terms of turning that quarter, corner, if you will. And then the other is around in taking advantage of paid channels for both user acquisition and ultimately, reengagement, and doing so within the context of driving profitable users to engage and reengage with the app. I think that we will be able to talk about this with greater clarity when we report Q1 earnings between now and then there's some new features that are coming out, and we might have some early indications as to what impact that is having. But ultimately, aside from those new features, as you know, we had introduced social and community features into the app later than expected due to the resources we had to invest in the AppLovin migration, and we are seeing that that investment early stage is also having a positive impact. We have a lot of work to do there in order to get more users to enroll and engage in the [MyZedge] funnel, but that will also potentially be a contributor to reversing that trend.

And for GuruShots, so it’s great what you talked about the 35% increase of converting to first time payers? Can you talk a little about how you think about the process of how that might continue and also the integrating of the ability to sell the pictures on Premium?

The GuruShots game is fairly sophisticated gameplay, and there is a rather steep learning curve that users face when they start engaging with the game. So as mentioned, we have a new feature called Battles that is shortly to be rolled out. And the notion around Battles is to provide immediate gameplay to a limited customer base in a short period of time. So by way of comparison, let's say a typical photo competition will last 48 hours and is open to the entire universe of players, you can have several thousand players that are competing. And for a new user, that's a fairly steep learning curve that they have to undertake in order to ultimately win a competition. By contrast with Battles, Battles will be short in duration, could be five minutes, 10 minutes, and will be capped in terms of the number of players, as well as what's needed in order to ultimately prevail. And it will be much more of a real time type of experience. So the notion of bringing the gameplay and making it immediately accessible to users in a fashion, which provides for, let's call it, if not instant gratification near real time instant gratification, is something which we believe, coupled with the improved onboarding funnel, will contribute to making the game more accessible to a broader number of users that engage with the game. And finally, as we mentioned, we're improving the game economy. Battles will be the first iteration where we introduce a token based economy, which will allow for a lot more flexibility in terms of how users ultimately buy game resources and apply those game resources in order to win a particular battle. In many ways, Battles is a game which has deep strategy associated with it and making it more accessible. I don't want to say that we're turning it into a social game. But the notion of having a more social game type of like experience is core to what we believe will help drive growth and increase purchases and drive revenue and so on and so forth. Moving on to your second question. We expect to see, let's call it, Version 1.0 of the GuruShots into Zedge Premium funnel rolled out in the next couple of weeks. And the intent there is to take these high quality photographs that the GuruShots audience and community creates and avail them for monetization opportunities within our premium marketplace. There's a lot of iteration that will happen from version 1.0. But the notion ultimately is to see to it that it is as seamless of a process as one could possibly imagine. If we were to have done nothing then it would have meant, well, GuruShots player somehow knows Zedge, they have to open up an account in Zedge, they then have to get approved, they have to upload their content, they have to set pricing and so on and so forth, agree to a different set of terms and conditions, privacy policy, pretty laborious. The notion of creating a seamless funnel is one where we ultimately want to be in a position where we have a GuruShots player who say, hey, by the way, would you like to monetize, would you like to sell your content to Zedge's 32 million monthly active users? A player would say yes, and then the ultimate will be that it's on autopilot and they can ultimately begin to benefit. And then use that money that they earn to potentially spend more on the GuruShots game accordingly.

And then just an update on NFTs in terms of like -- well, two things, maybe Premium, what you've been doing. I know you've added some high profile artists, and maybe any update on kind of how NFTs has been tracking. And an update on, you said that the personalization and social items have been delayed a little because of focus on the ad stack. Could you just remind me on where that is in the process of happening and when that -- if it's already available or when that should be fully available?

So I'll start with the second one first. So yes, we rolled out some of those social community features. What I said was that the original expected delivery date had been pushed out, because we had to allocate our resources to complete the AppLovin migration. And although, they've been out there for a couple of months, we are seeing that for the user base that is opting in and taking advantage of them, that those users are actually -- we're seeing an improvement in all of their key performance indicators, whether it’d be retention engagement, monetization and so on and so forth. And what we're ginning to focus our efforts on is product marketing initiatives in order to bring more of our user base into that funnel that we call MyZedge, which has these social and community features. In terms of, the former question with respect to NFTs. So as we all know, the industry is in a deep state of crypto winter, FTX had, their announcement last week, and so on and so forth. I want to be very, very clear. Zedge is not in any way, shape or form, at risk. We are not a crypto provider, we have always taken a philosophy that there's this technology that provides for provenance, allows for limited edition capabilities, allows for true ownership of content. And we've not jumped on the hype train that existed during the crypto bubble, if you will. Having said that, we have seen a decline in NFT sales, recalling that our average price for NFT is not thousands of dollars and not hundreds of dollars, but typically double digit dollar price levels, it is something where our long term belief is this is technology, it's technology, which is benefits creators, it's technology which is of benefit to end users. And for it to scale and really to become commonplace, the need for an easy to use seamless solution is what it's all about. And that's how we have crafted NFTs Made eEasy. From an artist's perspective, an artist goes into the portal, they don't need to own a crypto wallet, they don't need to know anything about technology or how NFTs work. They simply toggle a switch and then they say that they want that particular piece of content to be minted as an NFT. They pick a price point, and they're done. And from an end user perspective, the end user uses fiat currency to make an in app purchase, buys some of our virtual Zedge tokens, those are not crypto tokens, they're just virtual currency that's used in our app and then they use those tokens in order to buy the non-fungible token, which is a video wallpaper or wallpaper, and soon to be other content types accordingly. So chances are that we are not growing as fast as we would like to just because of the fact that NFTs has gotten a bad name in the marketplace because of crypto winter. However, we're in this for the long haul. And the notion of being able to offer some of this functionality is something which is beneficial to this creator economy that we are a member of. And we will continue to offer that to our artists and ultimately to our consumers, so that they can have proof of ownership and take advantage of the content that is being offered in a tokenized fashion.

My last question, just in terms of your outlook. Just is there anything that you can provide of? It seems like the way to think about it is you're going to be reinvesting a lot of your revenues into some of the growth initiatives for your new businesses, so modest profitability in the next year. Is that the way to think about it or…

So I'd say as follows. Our goal is to see to it that we continue to run the company profitably on a consolidated basis. Profitability gives you runway, gives you optionality and so on and so forth. We are going to be in reinvesting profits to grow the assets that we have, in our portfolio. Obviously, we acquired GuruShots with an knowledge that they are not yet profitable. However, we also believe that GuruShots has great potential on a standalone basis, as well as through some of the synergies that it can bring to the table. And as I said earlier, we're here for the long haul. We are building a business, we're building a business that has two business units in it, and two business units which individually have great value, but also open up the door for a halo effect in terms of the synergies that we see available to us. And we think that the proper thing to do is to seize that opportunity and act in a fashion so that we can make this pie that much bigger based upon the assets that we have in our portfolio. And ones which most platforms, if they were to take what we have or take an individual piece of work we have, would not be able to tap into those synergies. So one feeds off of the other and we're going to continue to pursue that to make that a reality.

[Operator Instructions] And the next question is coming from Sanjay [Raigaya]. Sanjay is a Private Investor.

So I had two questions. Last year, there seem to be a lot of focus on the Shortz app. So I just wanted to ask about that and what the plans are for the app, and how to think about that moving forward? And the second question is, I'm having a hard time understanding the $2 million loan, given the cash position. And how does that play out as far as, you know if there is an overall concern about the macroeconomic environment, then why is money being spent buying back shares? And I'm just trying to reconcile all those information and how to think about it going forward?

Let me start with Shortz. As we said previously, when we acquired GuruShots, remember we made two acquisitions in fiscal 2022, Emojipedia and GuruShots. And our analysis pointed us into the process of saying, well, do we continue to invest in Shortz and digest these two acquisitions while still, at the same point in time, focusing on the ringtone and wallpaper business. And we made a decision to say, let's hold back on Shortz for now. We don't want to spread ourselves too thin. It will take resource and investment in order to scale that business. So Shortz is really backburner and we are not investing resources in continuing to evolve that product for the meantime. We have a lot of work cut out for us in terms of delivering on the strategic vision that we've described with respect to the Zedge and GuruShots businesses, both on a standalone basis and synergistically. In terms of the credit facility, so as described, the credit facility is, in total, an $11 million credit facility. There's a term components. And we, in order to secure this, we’re required to draw down $2 million. We think that the benefit of having extra powder in the keg that we can use in the event that there's a great opportunity in terms of growing the business organically. If we have great breakthroughs in certain areas is worth the risk in a overall market condition as we are faced with. And in terms of a buyback, we think that the stock is undervalued, it's as straightforward as that. So as you may recall, we had raised $15 million at an aftermarket offering. I think our average price for that was around $10 a share. So with the expectation or with the hope that our stock will appreciate over time, we think that it is valuable to take some of those shares out of the market. I hope that answers your question.

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