Zedge Inc (ZDGE) 2016 Q4 法說會逐字稿

Good afternoon and welcome to Zedge's fourth-quarter and full FY16 earnings conference call.

(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 3-month and 12-month periods ended July 31, 2016.

Any forward-looking statements made during this conference call, either in the prepared remarks or 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 discussed in the reports that Zedge files periodically with the SEC. Zedge assumes no obligation either to update any forward-looking statements that they 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 under Form 8-K with the SEC. I would now like to turn the conference over to Mr. Arnoy.

Thank you, operator. Welcome to Zedge's earnings conference call for the fourth quarter and full FY16, the 3 and 12 months, respectively, ended July 31, 2016. Joining me on the call today is Jonathan Reich, our Chief Financial and Chief Operating Officer.

On today's call, I will provide you with an overview of some recent operational accomplishments and preview some of the exciting developments planned for the months ahead. Following my remarks, Jonathan will discuss financial results for the quarter and full year. Then, we will be happy to take your questions.

I'm pleased to start off by highlighting our recent rollout of both lock-screen wallpapers and home-screen widgets for Android phones. The lock screen is much more than a security feature. With a custom wallpaper, it becomes a window of expression, an important canvas for personal specialization, and a natural addition to our product portfolio, which now includes ringtones, notification sounds, alarms, wallpapers, app icons, and widgets.

We released wallpaper support for lock screens for Samsung phones earlier this quarter, and in the coming months, we will make this feature available for devices from other manufacturers. We also rolled out home-screen widgets, specifically starting with custom clock widgets, to many of our users. Depending on consumption, we will broaden our offering and release widgets for new content categories like calendars or weather.

With the introduction of these new features, we believe that we are the only Company to offer a complete suite of native home-screen personalization content compatible with most Android phones worldwide. This is important because the lock screen and home screen together comprise extremely valuable advertising real estate anywhere, and we can open this real estate to content providers seeking omni-presence on a user's device.

Industry research and our own data indicates that device owners interact with their home screens either through touches or listens on average 150 times per day, engaging their lock screens, app icons, ringtones, home-screen widgets, wallpapers, or notification sounds. This equates to around 55,000 yearly engagements per user, and given our MAU of 30 million plus, more than 1.5 trillion interactions [inter] annually. This speaks to the power of our platform and the potential of what we can do with it moving forward.

Furthermore, we are at the point where we now can offer Zedge's comprehensive personalization packages, centered around a specific motive. These packages, or Zedge Stories, as we refer to them, provide a canvas where a brand or artist can tell a story with their images, sound bites, icons, widgets, and even short-form video and editorial.

In addition, Zedge Stories are expected to provide m-commerce capabilities, allowing the brand to sell its goods or encourage its user to download their app. We are well on our way of developing Zedge Stories and it remains a high priority for FY17.

As part of building Stories, we have entered into a partnership in Canada where we have marketed the release of four feature films. Nerve, Now You See Me 2, Kubo and the Two Strings, and The Wild Life, using early iterations of Zedge Stories, which centered on wallpapers and app icons.

Let's move on to Snakk, an App that we have been developing that's used for finding and sending pictures like stickers, E-cards and memes across instant messaging platforms and social media. Since our last call, we have continued iterating, taking (inaudible) feedback and data from users in the five countries where the app is currently in beta for Android customers. This effort has helped us in shaping the products and rounding out the content library.

We continue to be excited by the results and have committed more resources to this product. Although we are targeting to release it globally before the end of 2016, we will not do so until we are satisfied that it's ready for primetime.

On a similar note, Set my Ringtone is still in need of work. As you can imagine, the functionality we are offering with this potentially viral feature is nuanced and complex. And we are not yet content that we have overcome all the challenges, mostly related to user experience. That isn't to say that we're not moving forward with the feature as much as it is to say that we remain committed to providing only high-quality experiences for our users and will not release new enhancements or products until we are satisfied with the results.

I'd like to move on to where we are with Apple. To start with, I'm bullish about our future on the iOS platform. Realizing Zedge's untapped iOS potential remains one of our top priorities. As we discussed during our last call, we were absent from the iTunes store from late January through late March 2016, at which time we rolled out a wallpapers-only version of the Zedge App for iOS.

Since then, we have focused on several iOS initiatives, including developing a new ringtone app and rolling out Snakk on I-message. During the next several weeks, we expect to introduce a new ringtone app for iOS subject to Apple's approval.

Separately, Snakk is now available in the new i-Message App Store, which launched earlier this month. Finally, we are working to build a relationship with Apple to help us achieve our goal of platform ubiquity, especially as we continue investing in the Apple [eco] system.

Before I turn the call over to Jonathan, I wanted to touch upon some important items related to our growth. As we described during our last call, global smartphone sales have slowed. No doubt, smartphones are here to stay, but the slowdown carries with it the need to regularly analyze our opportunities based upon how they will impact our future growth.

Furthermore, the app ecosystem continues to evolve, introducing new complexities that regularly impact our business. For example, Google's new Android Marshmallow operating system changed the app permission user flow. This change resulted in lowering user retention for us, as well as many other apps globally.

Headwinds like this and the iOS challenges discussed earlier were, in part, the catalyst behind our sequential quarter-over-quarter decline in MAU. We have addressed the Marshmallow issue and expect to soon release a new iOS ringtone App. I'm happy to report that MAU has ticked up since the early summer.

Returning to our priorities, we strive to accelerate our product release cycles, overcome challenges introduced by platform evolution, continue expanding internationally, and improve both user retention and engagements. To that end, we are working hard to quickly expand our depth, product design, and commercial teams.

In addition to visible work on the new product and functions, we continue to focus on less visible but equally important developments that should result in an improved user experience. For example, we are undertaking initiatives to decrease latency and improve content recommendations. These and other under-the-hood initiatives are usually not front and center when we talk with investors, but are a part of our daily routine and their importance to our continued success cannot be underestimated.

Now, I'm going to turn the call over to Jonathan Reich for a discussion of the quarter and full-year financial results. Jonathan?

Thank you, Tom. My remarks today will focus on our key operational and financial results for the fourth quarter and full FY16, the 3 and 12 months ended July 31, 2016. Unless I state otherwise, comparisons will be to the comparable FY15 periods. 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 remarks, we will open the call and address any questions you may have.

Zedge's total downloads as of July 31 exceeded 216 million, a 36% year-over-year increase and a 7% increase compared to April 30. We estimate that active installs, the number of phones with the Zedge app currently installed, surpassed 92 million. Zedge remains installed on 42% of the phones on to which it was downloaded.

Monthly average users, or MAU, for July 2016 were 31.1 million, a 10% increase from July 2015 and a 1% decline from April 2016. Revenue for the quarter was $2.5 million, a year-over-year increase of 1% and a 5% decline when compared to the third quarter. Full-year revenue increased by close to 23% to $11.1 million from $9.1 million.

As Tom discussed, we anticipate the sequential decrease in MAU to be transient. We started addressing the causes in the summer and MAU has started to recover. The decline in MAU contributed to a 4.7% drop in revenue when compared to the third quarter of FY16.

On iOS, revenue decreased 29% compared to the previous quarter. As you recall, Apple removed our app from the iTunes store in late January because of policy compliance issues. We relaunched the app, albeit with wallpapers only, in late March, leaving Zedgers seeking ringtones for their Apple device without an option.

As Tom mentioned earlier, we expect, subject to Apple's approval, to address this deficiency by rolling out a new ringtone app on iOS during the calendar fourth quarter. The demand for Zedge is robust on iOS, and we hope, with time, to make up the ground that was lost when we could not offer ringtones.

Average revenue per monthly active user, or ARP MAU was $0.0244, a 9% year-over-year decrease and a 7% decrease sequentially, contributing to this setback for both the decline in MAU across iOS, and fewer paid installs from our game channel. We have decided to deprioritize our game channel product development in light of the improvements that Google has made in their store. We recognize that we have limited ability to differentiate ourselves in games discovery, and instead, have decided to reallocate these resources in the higher growth potential initiatives that Tom shared with you.

Direct cost of revenue expressed as a percentage of revenue increased to 15% from 11% in the year-ago quarter and 13% sequentially. Our direct costs are incurred to operate our content distribution platform and include hosting, marketing automation, and content filtering services. The increase is a result of having more users, in addition to some infrastructure upgrades that are needed to help ensure that our business continues to be scalable. For the full year, direct costs were 12% of revenue, unchanged from FY15.

SG&A increased to $2.4 million from $1.4 million in the year-ago quarter and $1.8 million in the prior quarter. The increases reflect the incremental expense of operating a public Company, which we anticipate will total between $750,000 to $900,000 on an annualized basis and an increase in employee compensation, including $123,000 in non-cash compensation related to modification of outstanding stock options. Full-year SG&A was $7.8 million compared to $5.7 million in FY15, primarily reflecting investment in content creation, the costs associated with the preparations for an execution of the spinoff, and increases in compensation expense.

The net loss of $780,000 in fourth quarter included certain non-cash expenses, including a $281,000 write-off of capitalized software and technology development costs, depreciation and amortization expense of $135,000 and the $123,000 expense related to option modifications. The net loss also reflected on an after-tax basis certain expenses unlikely to repeat consistently in future quarters, including the write-off of capitalized development costs and costs incurred to prepare for and execute the spinoff. The quarterly loss includes FX losses of $17,000 compared to gains of $87,000 and $128,000 in the year-ago and sequential quarters.

As we discussed last quarter, most of our employees reside in Norway and are compensated in Norwegian kroner. We typically purchase hedges to mitigate the impact of FX fluctuations. Hedges are marked to market and incorporated in our total FX gains or losses. Full-year net income was just under $1 million compared to $1.6 million in FY15, driven by the year-over-year MAU growth.

Our balance sheet remains strong and liquid. As of July 31, Zedge had cash and cash equivalents totaling just under $6 million; working capital, that is current assets less current liabilities, of $6.1 million; and cash plus receivables of $7.6 million. As we've mentioned in the past, we are fortunate and have a 100% collections rate, and our days sales outstanding is approximately 45. In the first quarter of 2017, Zedge entered into a $2.5 million credit facility on favorable terms with Bridge Bank.

And one final operational note: prior to the quarter close, the US District Court for the Eastern District of Texas dismissed Zedge from the Blue Spike patent litigation that was filed in 2012. The suit pertained to automatic content recognition technologies we obtained through a supplier. We are pleased to have this behind us.

To sum up, during FY16, we continued adding to our engineering product design and data teams in order to grow our product portfolio and meet the needs of our users. Earlier in the year, we encountered some hiccups on both Android and iOS that were impactful this quarter, but the underlying growth narrative remains intact. Looking ahead, we will continue to invest in hiring key personnel with a goal of driving user growth to be followed by revenue expansion, all supported by our strong balance sheet.

That concludes my remarks. Now, Tom and I will be happy to take your questions. Operator, back to you for Q&A. Thank you.

(Operator Instructions)

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