Zedge Q1 2022 Earnings Call Transcript

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December 12, 2021

There are 5 speakers on the call.

Operator

Good afternoon, and welcome to the ZEB's First Fiscal Quarter 2022 Earnings Conference Call. During management's prepared remarks, all participants will be in a listen only mode. Specialist by pressing the star key followed by 0. After today's presentation by Zedge's management, there will be an opportunity to ask questions. To ask a question, please press star then 1 on your touchtone.

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 1st fiscal quarter that ended in October 1st 2021. Any forward looking statements made during this conference call, either in prepared remarks or in the question and answer session, whether general or specific in nature, are subject to and uncertainties that may cause the actual results to differ materially from those which the company anticipates. These risks and uncertainties include, but are not limited to, specific and uncertainties disclosed in the reports that Zedge files periodically with the U. S. Securities and Exchange Commission.

Operator

Zedge assumes no obligation either to update and any forward looking statements that they have made or may make or to update the factors that may cause the actual results to differ materially from those that they forecast. Please note that the ZED's earnings release is available on the Investor Relations page of the ZED's website. The earnings release also that's been filed on a Form 8 ks with the SEC. I would now like to turn the conference over

Speaker 1

to Mr. Jonathan Reich. Thank you, operator, and thank you Call for joining us today. Good afternoon. Welcome to Zedge's earnings conference call for the Q1 fiscal year 20 22 ended October 31, 2021.

Speaker 1

I'm Jonathan Reich, CEO of Zedge, and with me is our Chief Financial Officer, Yi Tsai, who will provide additional insight into our financial performance. We will then be happy to take your questions. For those of you that are new to the Zedge story or haven't followed us in a while, we own a portfolio of leading digital consumer brands that served 43,000,000 users around the globe in October 2021. Our portfolio consists of Zedge ringtones and wallpapers, Conference Call, the leading mobile app used for mobile phone personalization, social content and fandom art. Zedge Premium, a marketplace for artists, celebrities and emerging creators to market their digital content to Zedge's users Emojipedia, the leading source of all things emoji and shorts, a mobile entertainment app currently in beta focused on short form storytelling.

Speaker 1

We possess deep segment globally and we have a strong user base in North America and Europe as well as in emerging markets including India in particular. We topped our record fiscal 2021 in the Q1, surpassing $6,000,000 in revenue for the first time, while reporting revenue growth of 60%, a 43% operating margin, dollars 2,100,000 in net income, $3,000,000 in EBITDA and GAAP EPS growth of 64% to $0.14 We closed the quarter with over $27,000,000 of cash on our balance sheet and almost no debt. Advertising revenue remains robust as we continue to optimize our add back to drive higher prices received for every 1,000 advertising impressions known as CPMs. Subscription revenue and active subscriptions increased 48% and 25%, respectively, versus last year. After a pause last quarter, We were pleased to see subscriptions return to modest growth.

Speaker 1

Given our acquisition of Emojipedia at the beginning of fiscal 2022. In our release today, we clarified that monthly active users or MAU and Average Revenue Per Monthly Active User or ARP MAU are KPIs that have always referred only to the Zedge mobile app and neither include the shorts beta nor emojipedia, the latter of which today is desktop or mobile web only. Note, the underlying data is unchanged from what we have been reporting. MAO increased 6% with emerging markets up 11%, driven mainly by continued demand in India. Developed markets remained a challenge with MAU declining in the high single digits.

Speaker 1

Despite this, ARC MAU increased 47% versus last year. Now I'd like to update you on the strategic priorities I outlined on our last earnings call. To start with, growing our customer base and improving engagements, particularly in well developed markets. During the fiscal Q1, we began rolling out social and community features, starting with giving our users the ability to follow artists they find interesting. We are also continuing to use machine learning algorithms to improve content discovery.

Speaker 1

As the year unfolds, we expect to add more social and community features, while also starting to focus on search and user onboarding. In addition to these efforts, we are ramping up paid user acquisition campaigns and we'll continue to expand this effort as long as it proves accretive. Next, we continue to invest in the parts of the business that offer optionality. Zedge Premium is a big part of this opportunity. Tomorrow, we expect to start rolling out our NFT offering called NFTs Made Easy in the Zedge Premium marketplace for both Android and iOS.

Speaker 1

Our approach to NFTs allows Zedge Premium Artists to create and sell NFTs to our users without being cryptocurrency experts. Our users are able to purchase NFTs in the same manner as they have always purchased any item in Zedge Premium, mainly by buying and spending Zedge tokens, our existing virtual currency, which are available in the Zedge app through in app purchases. NFTs made easy have disruptive potential because we've simplified the process for artists to self publish, mint and sell their NFTs. We do not charge minting or gas fees to artists and they are paid in their local currency. For consumers, it is just as easy.

Speaker 1

NFTs are purchased with Zedge tokens as in app purchases through the Android Play or Apple App Stores in their local currency. Cryptocurrency knowledge and wallets are not needed. At launch, we are starting with video wallpapers from a select group of artists, and over time, we expect to expand across different content categories and make this functionality available to all Zedge premium artists. We also expect to enable additional capabilities, such as limited editions, drop dates, auctions and trading. Stay tuned for further announcements in 2022.

Speaker 1

In summary, we are beyond excited by the potential for NFTs made easy in the Zedge Premium marketplace and believe This will not only bring more artists to the platform, but it will also increase Zedge Premium's GTV and revenue while making us more relevant on iOS. Without trying to temper our excitement for the product, I want to set expectations for investors. Revenue from NFTs is not likely to be material from the get go. We expect it will take time to take hold and ramp as we fill out the offering and bring in new artists. Plus, it will likely be most relevant to users in well developed markets where we are working to increase engagement.

Speaker 1

While there are no material operational updates about Zedge Plus subscriptions or the shorts beta, we remain committed to enhancing both of these offerings, and we'll keep you apprised when there is news to share about their progress. We are also in the process of further unlocking Emojipedia's value by translating the site into languages other than English, while also exploring the possibility of a native mobile app. And finally, there is M and A where we are continuing to look for symbiotic opportunities that can benefit from access to our large customer base, our expertise in monetization, our technical know how and our skill in managing a complex platform, among other benefits. In closing, We had an outstanding 1st fiscal quarter of 2022 and believe we are still in the early innings of reaching our growth potential. Similar to last year, we are not updating guidance at present and still expect top line growth of 25% to 30% with continued net income growth, strong operating margins and cash flow and strong EBITDA growth.

Speaker 1

Call. Before handing the call over to Yi, I want to thank you, our investors, for your support. I also want to remind everyone that our success is a direct outcome of the outstanding team of talented and dedicated professionals who work at Zedge and to go above and beyond to execute our vision. Thank you and happy holidays. Now I am going to turn the call over to Yi, who will provide details about our financial performance.

Speaker 2

Thank you, Jonathan. I want to start by reminding those on the call that our fiscal year ends July 31. Moving to our Q1 results, now defined as the number of unique users that opened our Zedge app during the last 30 days of the period increased 5.6 percent to $34,200,000 during October versus $32,400,000 in October 2020. The merchant market amount expanded by 11.2%, while well developed market now contracted by 8.5%. Total revenue in the Q1 increased 60% from last year to $6,000,000 This year, we benefited from our ongoing work to improve our ad operation.

Speaker 2

Subscription revenue was up 48% from last year, still demonstrating strong growth. Zedge Premium Growth transaction volume or GTV, that is the total sales volume transacted through our marketplace, was about $330,000 up 58% compared to the year ago quarter. As Jonathan indicated, this is the key focus for us going forward as we believe the potential of the marketplace is still substantially untapped and we will benefit 7.1% from our new NFT platform. Active subscription were up 25% versus last year and returned to sequential growth versus the prior quarter. The slowdown in net subscription growth was basically due to the number of new subscriptions added being offset by our churn rate, which has remained a constant percentage even as we grew to a higher base number of subscription.

Speaker 2

This is a common problem for consumer subscription as the subscriber base gets larger. And as Jonathan mentioned, we are taking steps to reaccelerate sequential growth in these numbers. Overall, aman was $0.053 an increase of 47% year over year, driven by the combination of better advertising performance and higher paid subscription number versus last year. Operating margin increased to 43% versus 29% last year, reflecting the continued revenue growth and strong operating leverage inherent in our business. Net income and diluted EPS were $2,100,000 $0.14 respectively versus net income of $1,000,000 and EPS of $0.08 in the prior year.

Speaker 2

We grew EPS substantially despite diluted average share outstanding for the Q4 of about 15,000,000 compared to 12,500,000 a share from a year ago. EBITDA was $3,000,000 versus $1,400,000 last year. From a liquidity standpoint, we remain in strong net cash position with almost no debt and over $27,000,000 in cash and cash equivalents, a $21,000,000 increase from last year and up over $2,000,000 sequentially. As Jonathan mentioned, Similar to last year, we will update our full year guidance when we report our Q2 earnings. The following is just a reminder of what we said on our Q4 call last month.

Speaker 2

We said that we initially targeting revenue growth of 25% to 30% for the year. And due to all the new initiatives and future releases, we said seasonality, which usually take in our second quarter, may not be typical this year and internally we are modeling sequential revenue growth each quarters. We also said that despite the increased level of investment, we believe we should continue to report operating margin of at least 40% for the year. For modeling purpose, we said our expected tax rate would be 21%. As we use all of our federal NOLs in fiscal 2021.

Speaker 2

I also suggested using 15 to 15,400,000 shares for calculating diluted EPS. Given the increases in the last two items, most Specifically, the tax rate, we say we expect a drag on EPS growth in fiscal 2022, We anticipated continued net income growth with strong cash flow and EBITDA growth. For EBITDA, we said we were targeting a growth rate that is slightly higher than our revenue guidance. Thank you for listening to our Q1 earnings call, and I hope that each one of you remain safe this holiday season. I look forward to speaking with you again on the next call.

Speaker 2

Operator, back to you for Q and A.

Operator

We We will now begin the question and answer session.

Speaker 3

Conference Call.

Operator

The first question is coming from Allen Klee from Maxim Group. Your line is live.

Speaker 4

Good evening and congratulations. Strong results beat me on the top and bottom line. Call. As I look through what caused that advertising was very strong, your average revenue per monthly active user, The increase there was a surprise for me how strong it was. Could you touch a little on what was behind that and how you think about if that's Got legs to it?

Speaker 4

Thank you.

Speaker 1

Thank you, Alan. It's Jonathan. Appreciate the compliments and No, those compliments really go to the entire team. I think we've gone through this repeatedly in the past. We dedicate a lot of time and effort to optimizing our advertising stack and That is exactly what is at play in this quarter.

Speaker 1

Certainly, there has been a trend in the market with rising CPMs that we are benefiting from. But from Everything that we know, it's not simply just being in the right place at the right time, but it is a matter of being in the right place at the right time and then working hard in order to optimize the ARP now that you referred to. And in terms of legs to it, well, what we've said repeatedly over the course of the last 7 quarters, 8 quarters or so has been that we are continuously investing in optimizing are ad inventory and that involves not only investing in technology, but also investing in resources, investing in design, investing in various demand partners and seeing which ones are working and what the best way of taking advantage of the portfolio of demand partners are The best way of taking advantage of the demand of portfolio partners is in order to generate the ARP now that we have benefited from for the last several quarters. I hope that answers your question.

Speaker 4

That's helpful. Thank you. And then in terms of your user base, We still have this trend of growing, emerging, declining, developed. Two questions related to that. What do you have behind what's behind the strength in emerging and India you called out?

Speaker 4

And second, In terms of developed, I know you're looking at a couple of things with Apple and maybe the NFTs. Could you go into a little bit of more of What the strategy is to try to grow the developed users? Thank you.

Speaker 1

Sure. So with respect to growth in the emerging markets generally and more specifically with respect to India. Our offering is compelling. Certainly, as you know, we've got an array of premium content, so content that people can download without having to pay for that content and that is a draw particularly in markets where discretionary income is not as plentiful as it is in the well developed markets. Insofar as the developed markets, We have several initiatives underway in order to improve engagement and increase the customer base.

Speaker 1

So some of those that we've talked about include community features, which we started to roll out, such as the follow me feature. If there's an artist that you like, you can follow them and any time They released new content. They will be able to message you and That is a draw for users to reengage with the app. Of course, as we improve engagement, that means that more users are coming back into the app and when a user is in an app, we are generating revenue from advertising and hopefully also generating revenue from the sale of premium content. NFTs, As I said earlier, this is the philosophy that we have about NFTs is that it's a needed utility for our artist community, something which we expect will bring in new artists as well because we have crafted our NFT offering, which we call NFTs made easy in a really, really simple fashion such that neither creators nor consumers need to have crypto experience or technology experience in order to purchase of those NFTs.

Speaker 1

And our hope is that with time that, that will also help drive demand for our product and drive the user base. And specific to iOS, we are offering these NFTs across both Android and iOS. And our hope is that, that will be an additional factor that can drive iOS growth for us, which is taking advantage of the optionality associated with our brand and this product. We also have work going on in terms of improving search and content discovery. I think I mentioned using the benefits of machine learning in order to customize content feeds for users based upon their particular tastes and preferences and usage patterns and content consumption and so on and so forth.

Speaker 1

So those are just a handful of items, but taken in totality, our hope is that we can begin to turn The corner and reinvigorate growth in the well developed markets, if you will.

Speaker 4

Okay. And for the so I was playing on your app today and I noticed there were NFTs there. And I just wanted to understand that a little bit more in terms of You get paid the same way as you get paid as kind of on the like if you're somebody selling the wallpaper or ringtone. And how about like the secondary market for the NFT? How is that handled?

Speaker 4

And where is the where is it secured? If somebody purchases an NFT, where are they holding it so that they can be comfortable that it's going to be there and not get stolen?

Speaker 1

Great questions. So the way that one purchases an NFT is by using Zedge tokens, which we sell through in app purchases. Obviously, the artist will select the price that they want to charge for that NFT and then An end user will need to purchase the number of tokens needed in order to transact that purchase or sale, if you will. And that's all done through in app purchases in local fiat currency. So I as an end user see an NFT that I really like.

Speaker 1

Let's just for argument's sake say that it's $10 I would then go in and purchased $10 worth of ZED tokens and I would then be able to to secure that NFT. In terms of where is it secured, we're working with a third party technology provider that has specialized in securing this on the blockchain. And in terms of being able to go to secondary markets at launch, There is the ability to do that, although it's a very manual process, but we expect that over time as we evolve this product that will become easier to accomplish and that it will also be something that can be done even within apps. So I think I had mentioned our ability to support trading and auctions and drop dates and so on and so forth are all on the roadmap, hopefully, in 2022 calendar year.

Speaker 4

Fantastic. I was also using your Shorts app today And I noticed over the year, you've significantly increased the amount of categories, genres. I saw some audio on there. Could you talk about how well your experimentation is going?

Speaker 1

Sure. So on previous conference calls, I've talked a little bit about what we've done in shorts, let's say, during calendar year 2021, where there's been a lot of work in our refining the product, Our ability to really understand what's happening from an analytics perspective, from everything including constant consumption, popularity, demographic and so on and so forth. And that work continues to unfold. We're as you'd said, we've done a lot of work in terms of tagging and in terms of expanding the different verticals, if you will, that would be appropriate for an array of different customers. And we've also taken a more significant step in terms of understanding usage patterns and consumption patterns with respect to audio.

Speaker 1

We have not no updates with respect to where we were when we reported fiscal year 2021 a couple of weeks ago, other than to say that we're continuing along that path and looking for the optimal way in order to expand this business and deliver a great content experience to users, which will result recurring usage and ongoing growth.

Speaker 4

Great. In terms of your marketplace, you kind of highlighted that as an area of a real priority this year and what the opportunity can be. Could you Call. What could the opportunity be? How should we think about that?

Speaker 1

Sure. So as you know, we were not breaking out particular or providing particular growth numbers for the marketplace. But there has been tremendous growth overall in the creator economy. Certainly, NFTs play into that. And considering that we've got give or take 35,000,000 monthly active users globally, Our goal is to see to it that we take advantage of a lot of the infrastructure spend that we had made over the course of the last 12, 18 months.

Speaker 1

As you recall, we had overhauled our content management system. We've overhauled unified accounts, things of that sort, we're working on our recommendation engine, etcetera, etcetera. And the idea is that we want to avail users of not only existing content categories that we have today, draw in new artists because we have this massive user base and our T's and C's are very straightforward. The platform is very easy to use if you're a creator. But we also want to begin to think about new content genres that extend beyond simply being wallpapers, video wallpapers, ringtones and notification sounds.

Speaker 1

So those are all the The thing is that we are thinking about at this point in time and concurrently looking to expand the universe of artists that monetized on our platform.

Speaker 4

Thank you. My last question, how did the quarter performed relative to your internal expectations and what surprised you on the maybe the upside or downside?

Speaker 1

Yes. So we haven't shared quarterly budget numbers or anything of that sort in the past and I don't expect that we are going to. All I can say is that We have been really working hard to see to it that we can feel the balls as those opportunities begin to avail themselves. And the team is very, very much dedicated to Seeing to it that we are meeting our budgetary numbers, if not beating them. And if there are gaps, We're really doing our best in order to understand what the cause of the gap is and how to close that gap to the best of our ability.

Speaker 1

I think I had mentioned on previous calls, we took the liberty of hiring product managers in calendar year 2021. And having dedicated product managers who have responsibility for P and L really has been beneficial in terms of getting answers earlier on. So if corrective action is needed or if prospective action is needed in order to take advantage of an opportunity that we're in a position to do that. Not that it's easy, but certainly something that results from Having more dedicated product managers is having that level of granularity so that we can act and hopefully act quickly in order to see to it that gaps are closed if and when they appear.

Speaker 4

Thank you very much. I mean, I think your company is really a great example of how to do a successful mobile ecosystem and how to think about all these different ways to monetize a larger user base. So it's Very impressive what you've done. Thank you.

Speaker 1

Thank you, Alan. Your words are very kind. It's really appreciated and wishing you very Happy holiday season and good health.

Speaker 4

You too.

Operator

Thank you. Your next question is coming from Brian Warner. Your line is live.

Speaker 3

I'm sorry. I might have been muted. Can you hear me?

Operator

Yes, you're coming through.

Speaker 3

Okay. And happy holiday and warm wishes to all of you. It's a good year. Two questions. Can you talk about anything you've done to date on paid customer acquisition, particularly domestically and So what the experience might have been and if you haven't really done anything yet, can you give us a sense of sort of how you're going to attack that and I know it's early, but what you might spend on that?

Speaker 3

And second question, can you just give us any color on what the advertising Revenues or yields are from subscribers in lesser developed countries versus developed countries. I mean, Sure, it's a huge disparity, but if you can give us any color, it might be helpful. Thanks.

Speaker 1

Thanks for the compliment, Brian, and hope you're doing well as well. In terms of paid user acquisition, What we are doing is we are beginning to scale out. We are very much focused on trying to acquire customers across various platforms where We will see a positive ROI from those customers. And where We see that the numbers are panning out, then we're trying to scale those numbers up. In terms of dollar spend, we have not shared with the market or investors what the budget is.

Speaker 1

But suffice it to say that We are looking very closely at Each of the areas in which we are investing, testing and then analyzing and The platforms and the criteria by which we're going out and acquiring those customers For the ones that are generating that positive ROI, we are expanding and for the ones that are not generating positive ROI, We will test a little bit more, but if we see that the gap is so significant on the ROI side, then we will not pursue those platforms. We have and continue to work hard to make sure that we have The insight and the knowledge so that we can see what these customers ultimately produce. And when you think about this, Let's just say we go out and acquire a customer and that's through a download in a well developed market. We're also looking at, well, for that cohort of users, How much money are they generating from advertising? How much money are they generating from premium sales?

Speaker 1

And how many of those users potentially convert into subscribers. So taking a look at that entire portfolio of potential monetization is what's going into our analysis. And then taking a look at that over some period of time, so that we have a comfort level that after that period of time, we will be whole and then from that point going forward, we will actually generate positive ROI. In terms of your second question, We have not shared that level of granularity in terms of revenue from advertising versus from description and what the quarter of magnitude difference between the two is. And I think we're going to hold off on getting into details about that this evening.

Speaker 3

Okay, fair enough. Thanks very much and good luck.

Speaker 1

Thank you.

Speaker 4

Call. Thank you.

Operator

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

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