Zedge Inc (ZDGE) 2017 Q1 法說會逐字稿

Good day, everyone, and welcome to Zedge's first-quarter fiscal year 2017 earnings conference call. (Operator Instructions)

In today's presentation, Tom Arnoy, Zedge's cofounder 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-month period ended October 31, 2016.

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 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 can 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. The earnings release has also been filed on Form 8-K with the SEC.

I would now like to turn the conference over to Mr. Arnoy. Please go ahead, sir.

Thank you, operator, and thank you all for joining us today. I am Tom Arnoy, cofounder and CEO of Zedge. Welcome to Zedge's first-quarter of fiscal 2017 earnings conference call recapping the three months ended October 31, 2016. Joining me today is Jonathan Reich, our Chief Financial and Chief Operating Officer.

We are pleased to share the highlights of the quarter. As you know from our previous calls, Zedge is focused on growing our user base, increasing engagement, and ultimately expanding our revenues through that user growth and new methods to monetize our base. We know there is great untapped potential in our platform that we can unlock by investing in these priorities.

After a decline last quarter, we made good progress in Q1, most notably with the uptick in monthly active users, or MAU, and we are seeing improvement -- improving trends in engagements. And I want to quickly note that we are no longer reporting active installs as Google has ceased reporting total device active installs.

For Zedge, MAU is a significant performance indicator, because it speaks to both reach and retention. We are pleased about the recent improvement in MAU and are optimistic that we can build on that success. During the last 30 days of the first quarter MAU grew by 2.6% to 31.6 million when compared to the last 30 days of Q1 of fiscal 2016. We also saw modest growth in MAU compared to Q4 of the prior fiscal year.

MAU resumed growing this past quarter, which is important considering that Q4 2016 was the first quarter in our history which witnessed a decline in MAU. This growth is a direct result of our investments in improving user experience, which should provide a sustained user growth and ultimately translate into revenue expansion.

That said, in Q1 average revenue per monthly active user declined by 10.7%. We are working hard to reverse this downturn by continuing to grow our user base with users that generate greater revenues and unlocking the potential with improved engagement and introducing new monetization layers.

As stated earlier, user growth, engagement, and retention are harbingers of revenue growth. In Q1, we took assertive steps to advance Zedge's reach and revenue potential. To that end, I want to outline three areas of focus that we have adopted: scaling our team, optimizing the user experience, and expanding our product portfolio.

I would like to elaborate on the progress we made in each of these areas. First, the team. We have made significant investments in expanding our team, both in Norway and in the US. In fact, compared to the year-ago quarter our team has grown by eight people. Key hires in Q1 were related directly to driving Zedge's revenue potential, namely hiring in products, engineering, marketing, and commercial partnerships.

Our engineering and development team growth contributed directly to an unprecedented level of updates and new product growth. We also expanded our commercial team by bringing on seasoned professionals focusing on the sports and entertainment verticals. They are already hard at work establishing partnerships with major content providers as Zedge takes action on its stated commitment to open up the home screen to brands that want to engage with their fans and the customers with compelling personalization content.

Second is our focus on optimizing the user experience and improving engagement. Our quarterly results show that our efforts are resonating in these areas as we selectively deploy feature enhancements to accelerate user growth and increase customer engagement. An improved user experience has been especially critical as we approach the holiday periods; not to mention for overall retention.

Examples of feature enhancements made in the first quarter include using AI technology to scale images from low resolution to high resolution, thus making more content available just in time for those turning to Zedge in order to personalize their new high-end phones this holiday season. This effort resulted in a significant increase of wallpapers available to 54% of US users and 40% of global users. For users affected, this has led to 20% more interaction with the content and 4% more in wallpapers being sent.

Through deep learning and enhanced technology we have improved the user experience by ensuring that our content is easy to discover and fun to navigate. This update has unearthed 10% more unique content. We will continue to leverage this powerful functionality to improve content recommendations and search results. We have enabled the possibility to set lock screen wallpapers directly from within the app for more than 40% of our user base, which for this group has increased the number of users setting wallpapers by 6%.

In the coming months we expect to enable this functionality to more and more users. We have significantly reduced the latency for users playing ringtones and notifications to ensure a much more responsive experience. After these improvements, on average our users are listening to 15% more ringtones and notifications than before.

Finally, we remain committed to expanding our product portfolio with a goal of increasing our reach. We have rolled out an unprecedented number of products over the past several months. We most recently launched ringtones for iOS as well as expanded the beta of our new app, Snakk, globally. Even as we expect to continue to optimize these products, we view these launches as a significant accomplishment which will help us in growing our user base.

Beyond this, our data revealed that overall retention has improved with the Android widgets beta. We are also focused on finalizing Set My Ringtone and Calendar 2017, which we believe will have broad appeal and help expand our user base.

In another exciting development, we made steady progress with the introduction of Zedge Stories, both in terms of the core product offering and brand partners. To this end, we started promoting content from MMA's World Series of Fighting, our first foray into sports, and expect to offer embedded merchandising capabilities in Stories in time for the holidays. The content is related to World Series of Fighting's New Year's Eve mega-event at New York's Madison Square Garden to be broadcast live on NBC television network.

We remain committed to growing our user base and designing and deploying products that cement our leadership position in smartphone personalization. We believe that over time this will create a sustainable path to revenue growth.

Now I'm going to turn the call over to Jonathan Reich for a discussion of the quarter's financial results. Thank you.

Thank you, Tom. My comments today will focus on our key operational and financial results for Q1 of fiscal 2017, the three months ended October 31, 2016. 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 December 15.

Following my comments, we will open the call and address any questions you may have. In my remarks, and unless I specify otherwise, comparisons are to the year-ago quarter, namely the first quarter of fiscal year 2016.

Monthly active users, or MAU, climbed to 31.6 million during the last 30 days of the first quarter from 30.8 million in the comparable period one year ago and 31.1 million in the sequential quarter. As Tom mentioned, this growth primarily relates to improving the user experience, increasing engagement, and relaunching the iOS ringtone app.

Revenue in the first quarter was $2.4 million, a decrease of 6.9% compared to the first quarter of fiscal year 2016, while average revenue per monthly active user, or ARPMAU, decreased 10.7% year over year to $0.0233. The year-over-year declines in revenue and ARPMAU reflect the impact of Apple's decision to remove the Zedge app from iTunes in early 2016 and our decision in April 2016 to deemphasize the game channel, which resulted in a decline in game installs. MAU is a leading directional indicator of revenue and we expect that the investments we are making in our offerings will help expand our reach and drive continued growth in MAU.

Taken together with the improvements in user engagement, we believe that these efforts will translate into both expanding revenues and new monetization opportunities that will start to unfold later this year. Direct cost of revenue as a percentage of revenue increased slightly to 15.4% from 15% in Q4 2016 and from 11.5% in Q1 2016 as we experienced higher marketing automation expense related to reaching a larger number of our customers and increases in both hosting and content filtering costs. We will seek to manage these costs and ensure that we have the right partners and infrastructure to support our user growth.

SG&A grew by 4.2%, or $71,000, to $1.8 million compared to the year-ago quarter. The increase primarily reflects growing our headcount to 59 from 51 in the year-ago quarter and the added costs of operating as a public company following our spinoff from IDT in June. The impact of these factors was partially offset in the first quarter by several non-routine items, including a tax credit in Norway and lower bonus payouts.

Looking ahead, we expect that SG&A will continue to increase in 2017 as we further expand the team and increase our investments in new technology and content development. The revenue decline in combination with the increase in SG&A expense, lowered income from operations to $113,000 from $419,000 in the year-ago quarter. Net income per diluted share decreased to $0.02 compared to $0.04 in the first quarter of fiscal 2016, despite a $51,000 foreign exchange gain compared to foreign exchange loss of $54,000 a year earlier.

Turning to our balance sheet, Zedge remains well-capitalized. As of October 31, we recorded $6 million in cash and cash equivalents, compared to $2.4 million a year earlier. Trade Accounts Receivable were $1.9 million and our historical receivables collection rate is 100%. Zedge continues to carry no debt, although we have access to a $2.5 million credit facility with a bridge bank.

To wrap up my remarks, our efforts to improve MAU, expand reach, and improve engagements are starting to pay dividends, as evidenced by the reversal in the direction of MAU from last quarter. We believe that these initiatives will result in expanding revenue in 2017, both organically and through the introduction of new monetization schemes. We will continue to invest judiciously in growth opportunities pursuant to the strategy Tom outlined in his remarks and do so while maintaining a healthy balance sheet with ample liquidity.

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

(Operator Instructions) John Rolfe, Argand Capital.

Just a little help, I guess, with the numbers. Can you give us any sort of guidance with respect to, on either a percentage of revenue basis or on an absolute basis, how we should be thinking about SG&A for the entire year?

And I guess I sort of ask the question in the context of your comment that there were some puts and takes this quarter. I'm just trying to understand what a sort of normalized level for SG&A might be for the year now that you have sort of an ongoing run rate with all the public company expenses.

This is Jonathan and thanks for asking the question. What we have said in the past really is two things. First of all, the cost of being a public company we estimated to be somewhere between $750,000 to $900,000 compared to when we were majority-owned by IDT. The growth in SG&A that we see aside from that really relates to adding more personnel, which as we had mentioned we grew by eight people from a year ago this quarter.

We're not really at the point where we are providing projections, but suffice it to say that if we are at 59 people now, we believe that we will be north of 70 people by the end of the fiscal year, if not more than that. And I should add as well that we have had a pretty consistent policy within the Company that we are not going to just load up the ship with tons and tons of people unless we know that or unless we feel very comfortable that the revenue will be there to ultimately support that investment.

Okay, that's helpful. Thank you. Let me just ask I guess one additional question.

Looking longer term, can you guys talk at all about what you think a target operating model for the business might be? When you look at a business like yours, once you sort of transition through the growth investments, what sort of operating margins do you think should be achievable for a business like yours?

It's also a little bit early for us to answer that question because, as we have described, we have several initiatives in terms of the monetization stack that we need to really scale out in the marketplace. As I think, John, you know that our revenue today is primarily driven by programmatic advertising and the new monetization schemes that we have been working on we believe will sell at a premium to those, but it's still a little bit too early for us to really be able to sort of say, hey, it will be a 20%, 30%, 40%, whatever that number is. So we ask that you indulge with us while we are getting those products out there and assessing what demand will be like and where those products price out.

That being said, I am thinking about the add-ons that we have had on the commercial side focusing on the sports in the entertainment verticals. These are verticals which are investing tons and tons of money in terms of their marketing initiatives. And thinking about the fact that Zedge really can bring ownership of the home screen, whether it be through wallpapers, lock screen wallpapers, widgets, icons, and all of the associated audio to these different verticals, we are very excited about what the opportunity is and look forward to executing on that in the upcoming quarters.

Okay, great. Thanks very much, appreciate it.

Andrew Walker, Rangeley Capital.

Thanks for taking the question. I just wanted to start with -- for the overall revenue declines, obviously [ARPU] was way down and you guys mentioned gains as a driver, but I was wondering if you could drill a little bit further down and break it down. Like how much was games a driver versus I think the other piece has to be either a lot lower prices on advertising or a lot less engagement from users? So can you kind of break those three different pieces down?

Andrew, it's Jonathan; a couple of things. What we had said was really that there were two pieces here: A) not being around in iOS obviously had hurt us and that prevented us from pushing upgrades to the existing customers. So that was basically something that contributed to the downturn. When comparing the two platforms, iOS does monetize at a higher rate, number one.

Number two is the game channel specifically we experienced a downturn there because we have not been investing there. And that was a -- we have not broken out the numbers in the past, but it's fair to assume that that was definitely something that was helping us in terms of lifting the average revenue per monthly active user. We, overall, have seen that on Android that we're holding our own in terms of where that has been pricing out. So these ancillary -- important, but ancillary removals from iOS and from the game channel we think are the overall piece that has hurt us there.

In terms of engagement, Tom, do you want to address that a little bit?

Yes, sure. We have not seen a decline on engagement, on retention in general. There are no clear patterns on decrease there. In fact, our focus on engagement and retention we think over time will have a significant impact on the average revenue per user and we speak more to both factors like session time and frequency of use as to like how many times a user actually uses Zedge in a month, etc.

That has very big impact on the average revenue per user and that is one of our main focus areas right now. It spans everything from focusing on content discovery, like search, recommendations, and UI algorithms; a whole lot of things.

That was super helpful. I guess you've mentioned the iPhone a couple of times and we didn't get to talk about it last quarter, but if we just looked at monthly active users on Android versus iPhone, would it be substantially higher than the 2% that you are reporting right now on the Android? Because I'm guessing iPhone drags it down.

Are you talking about growth on Android versus growth on iOS?

Yes, monthly active users on Android instead of -- like you guys report overall, but if I was looking just at Android, would it be much higher; so iPhone is dragging the overall number down?

I don't have the numbers in front of me, but let me get back to you on that.

Okay, I can follow up with you guys on that. Then just turning to Zedge Stories, I'm just on my iPhone looking at Zedge Stories and the top two right now are Bad Santa and The Washington Wizards. Are you guys getting paid for these or are you still kind of in, I guess, freebie mode?

We are not, as of yet, charging for Stories and let me just sort of share with you what we envision in terms of progression. We need to iterate until we get the product right and we also need to have a couple of successes and wins that we can use to market. But we believe that in calendar year 2017 we will begin to monetize those Stories directly with content owners that are looking to gain access to our customer base.

Perfect. That was super helpful and I will follow up offline with you guys on everything else.

Okay, great. Thanks, Andrew.

(Operator Instructions) Dylan Adelman, Global Platinum Securities.

I have a question about the alignment of management and shareholder interest. Because Zedge is a smaller, fast-growing company that's based around a mobile application, it does seem very much like a start-up company and start-ups usually compensate upper management, and regular employees as well, using options. This is to align those interests of management with shareholders as well as to prevent cash burn.

But looking through the proxy I noticed that both you, Mr. Reich, and Mr. Arnoy, you both received about $990,000 in total compensation and none of that was in stock or in options. This is about 1/7 of the total SG&A of the firm and more than the firm's net income for the year.

So in recognizing that options are really critical for smaller, fastest-growing companies like Zedge, they are critical for aligning that management shareholder interest; can you talk a little bit more about how you think about this compensation structure and choosing to pay a large salary and bonus in cash rather than focusing mostly on options?

First of all, Dylan, I think that there was mention of a new options package being offered to management and the compensation that you are looking at is for the previous year. The ownership of the Company itself, in light of our having grown the Company to the point where it was self-sustaining and would unlock value for shareholders, that it was the right thing to throw some additional cash our way.

But certainly we had -- at the point of the spinout our equity piece had been fully vested and there is an additional equity grant that is part of compensation now. In terms of our cash compensation, we have a bonus on top of -- or the potential for a bonus, I should say, on top of our base compensation. And if we don't meet our numbers in fiscal year 2017, we will not be able to take benefit of that cash bonus accordingly.

Okay. So just one follow-up question on that. Are you looking at shifting your compensation more towards stock or options in the future?

And the reason why I just press on it so much is because, to me, Zedge does seem like a great company, but there's always those concerns with smaller companies if management is not -- really they don't have skin in the game, if I can phrase it that way. And for me that's just one persistent concern that I don't see that same skin in the game that you might hope for in a smaller company. So do you see that compensation shifting at all?

That's really not a question that -- and I don't want to sound that I'm not sensitive to your question, but, ultimately, our compensation is determined by the Board and by the comp committee. And I would venture to say that we both have skin in the game and that our employees overall have skin in the game in terms of overall option grants and hard equity that is owned by that group. So I will be glad to follow up with you, if you'd like, but I don't have that much more to say on this at this point in time.

All right, thank you.

(Operator Instructions) It looks like we have no further questions, so this will conclude our question-and-answer session and today's conference call. Thank you all for attending today's presentation and you may now disconnect your lines.