Zedge Inc (ZDGE) 2020 Q1 法說會逐字稿

Good afternoon, and welcome to Zedge's First Quarter 2020 Earnings Conference Call. (Operator Instructions)

In today's presentation, Elliot Gibber, Zedge's Interim 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 period that ended on October 31, 2019.

Any forward-looking statements made during this conference call, either in 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 to differ materially from those which the company anticipates. These risks and uncertainties include, but are not limited to, specific risks and uncertainties disclosed in the reports that Zedge files periodically with the U.S. Securities and Exchange Commission.

Zedge assumes no obligation either to update any forward-looking statements that they have made or may make or to update the factors that may cause actual results to differ materially from those that they forecast. Please note that Zedge's earnings release is available on the Investor Relations page of the Zedge 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. Elliot Gibber. Sir, the floor is yours.

Thank you, operator, and thank you all for joining us today. I am Elliot Gibber, Interim CEO of Zedge. Welcome to Zedge's First Quarter Fiscal 2020 Earnings Conference Call recapping 3 months ending October 31, 2019. Joining me today is Jonathan Reich, our Chief Financial and Chief Operating Officer, who will provide additional insight into the numbers that we reported earlier this afternoon.

Although I'm early on my new position as Interim CEO, I benefit from the long-term relationship with the company, having served as a Board member from January 2018, until I resigned from that position last month to take on my current role. My history with Zedge has given me the opportunity to learn the business and work closely with the executive management. I'd like to take this opportunity to update you about some of the progress we have made in our goal to become cash flow positive in fiscal 2020, while continuing to invest in new and innovative products that extend our value proposition beyond the mobile phone personalization.

I'll start by focusing on revenue. We continue to experience formidable growth in paid subscriptions. As of the end of November, we had approximately 225,000 paid subscribers starting from base of 0 at the beginning of calendar 2019. This has generated approximately $1 million of gross revenue through November 30, 2019.

The team has initiated a project to unlock more value from users in emerging markets that have contributed in excess of $25,000 in revenue per month with additional improvements expected. We have some additional opportunities with the same goals that we are exploring and expect to start seeing benefits in early calendar 2020.

I think it's important to note that revenue increased on a sequential quarter basis even with the temporary suspension from Google and decline in overall MAUs as well as continued decline in MAUs in developed economies. This points to the progress of unlocking greater value from our customers.

While on the topic of Google suspension, I can't comment about whether it will be made whole. But we want to say that we're in the midst of a process of recouping our losses and mitigating any long-term impact, which are priorities for us.

With respect to cost cutting, we have begun to recognize the benefits associated with the expense reduction initiatives discussed last quarter. Payroll and the discretionary spend has both come down, and our cash burn has declined on both the sequential and year-over-year basis. Loss from the operations was $745,000 for the first quarter. Backing out depreciation and amortization costs and severance has been a loss of $104,000, an improvement that was -- of 3% year-over-year and 79% quarter-over-quarter. At the same time, we continue looking for better and smarter ways to run the business to contribute to our goal of becoming cash flow positive.

I'm excited that we released Shortz for Android users in major English-speaking markets in late November. Shortz is a new app that extends our value proposition into the world of entertainment by offering serialized short-form fiction delivered in a text message format. We are able to develop and deliver this product to the market in approximately 3 months, a remarkable short period of time for such complex undertakings because of the investments we've made in modernizing our infrastructure and publishing platform. I congratulate the team for delivering a great product quickly.

Next up for Shortz is the introduction of iOS versions, which is expected in the coming weeks. Offering Shortz to iPhone users is a great opportunity for Zedge because it is the first time that we will offer a product we expect to be equally viable for both iPhone and Android users. Of course, it goes without saying that we will iterate at improving the experience based on the usage and other data that we will gather and analyze.

As with any new product, we will optimize and perfect the offering incrementally based on what we observe and learn now that the product is live.

We have opted for a freedom subscription model for Shortz. Potential users will be able to sample the first chapter of the story for free. If they like the experience, they'll be given an opportunity to sign up for paid weekly, monthly or annual subscription. As you can tell, I am excited about this potential for Shortz. Don't want to get ahead of myself. Suffice it to say that the team appreciates that any future investment needs to be justified by results and analytics.

I know that many of you have asked about hiring a permanent CEO. Frankly, I've -- this is the beginning of my key responsibility and hope to initiate a search process guided by the Board in early 2020. Before doing so, I need to be empowered with the understanding what Zedge needs for long-term success, which is my current focus. I look forward to keeping you our investors informed of our progress in the upcoming months.

Now I'm going to turn the call over to Jonathan Reich, who will provide an overview of the quarter's financial results. Thank you.

Thank you, Elliot. My remarks today will focus on our key operational and financial results for the first quarter of our fiscal year 2020, the 3 months ended October 31, 2019. 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 next week. Following my comments, we will open the call to any questions you may have.

Monthly active users, or MAU, that is the number of unique users that opened our app during the last 30 days of the quarter, decreased 14.2% to 29.7 million during October 2019 from 34.6 million in the corresponding period a year ago, and by 12.2% on a sequential quarter basis. As you will recall, in late September, Google temporarily removed our app from the Google Play store as a result of buggy code in a standard technology integration with one of our third-party advertising partners. Upon learning about the problem, we promptly mitigated it by removing the problematic code. However, during the 3 day suspension, Google sent a notification to all users that had the problematic version of the app on their phone, recommending that they uninstall it. This accounts for much of the drop of 28.4% and 4.6% in MAU in the well-developed and emerging markets respectively from Q1 of fiscal 2019. On a sequential quarter basis, the declines were 15.1% and 10.7%. We haven't been able to assess what types of users, highly valuable or less valuable, uninstalled the app resulting in the decline in MAU. But as Elliot said, mitigating the damage from the suspension is one of our key focuses.

Total revenue in the first quarter declined 14.6% compared to the year-ago quarter and increased by 4.3% from the previous quarter to $2 million. On a year-over-year basis, revenue was negatively impacted by the shift in MAU from well-developed markets, which command higher advertising rates to emerging markets which do not monetize as well. In addition, nearly half of the year-over-year decline can be attributed to the loss of service revenue from managing ad operations for a third-party mobile app publisher, which terminated on June 1, 2019.

On a sequential quarter basis, we benefited from our renewed focus on improving monetization. To this end, we reconfigured our ad stack, resulting in higher eCPMs, improved monetization in emerging markets and continued in driving paid subscriptions which resulted in 69,000 incremental subscribers, prepaying $341,000 in gross revenue, which has a higher margin when compared to ad-supported revenue.

Zedge Premiums gross transaction volume, or GTV, that is the total sales volume transacting through the platform, was $192,000 in Q1 compared to $41,000 a year ago and $167,000 last quarter. We are likely going to see a short to mid-term decline in GTV and associated Zedge Premium revenue due to the recent redesign of our apps home page, which prioritizes Shortz promotion ahead of Zedge Premium. However, we expect to offset the revenue impact due to an anticipated increase in advertising revenue resulting from more inventory being available on the new home page. Of course, this is separate and distinct from any revenue generated from Shortz. Also, it's important to note that we still intend to invest in and grow Zedge Premium, and we will address this as the year unfolds.

Overall, average revenue per monthly active user generated from our apps, or ARPMAU, remained flat at $0.0210 year-over-year and increased 11.1% sequentially. The improvement is attributable to the actions we have taken to further optimize our ad stack, better monetize users in emerging markets and the contribution from paid subscriptions.

Our direct cost of revenue in Q1 was $329,000 or 16% of revenue, a decline from $350,000, which represented 15% of revenue in the year-ago quarter and from $348,000 or 18% of revenue in the previous sequential quarter. The year-over-year 6.1% decline primarily reflects the savings attributable to our migrating to a cloud-based infrastructure. As the current fiscal year continues to unfold, we expect that direct cost of revenue will continue to decline due to continued changes we are making in our infrastructure.

SG&A in the first quarter was $1.9 million, a 15.8% decrease compared to the year-ago quarter and a 9% decrease compared to the prior sequential quarter. The decrease primarily relates to lower compensation costs, legal expenses and auditing fees, offset by higher marketing costs associated with the 30% we paid to Google for each paid subscriber, severance payments and content acquisition expense associated with Shortz. After backing out onetime expenses for all periods, SG&A would have been $1.87 million, a 19.2% and 11.2% decline when compared to the year-ago quarter and sequential quarter, respectively.

Loss from operations in the first quarter was $745,000 compared to $581,000 in the year-ago period and $939,000 in the previous sequential quarter. Our loss per share increased to $0.08 from $0.07 in the year-ago quarter and decreased from $0.12 last quarter. At October 31, we reported $1.7 million in cash and cash equivalents compared to $3.6 million a year earlier and $1.6 million at July 31. Zedge has no outstanding debt.

We also have access to a revolving credit facility of up to $2.5 million from Western Alliance Bank, if needed.

On December 9, we filed a shelf registration with the Securities and Exchange Commission, enabling us to raise up to $5 million in capital. As we've mentioned in the past, based on market conditions, we want to be in a position to raise a portion of this amount in fiscal year 2020 if we feel there is a good opportunity to accelerate the growth of the business.

I'll close by reiterating that, overall, Q1 was generally a good quarter for us. We began seeing positive results from the fundamental changes we've made in our monetization stack, the continued investment in paid subscriptions, the ongoing cost reduction initiatives and our release of Shortz, which will extend our value beyond the world of mobile phone personalization. We accomplished all of this while committing to doing what we can to become cash flow positive later in the fiscal year.

We will continue to look at ways in which we can resume user growth in well-developed markets with our flagship products and explore new product opportunities that align well with our brand and current user base.

Wishing all a happy and healthy holiday season. Back to you, operator, for Q&A.

(Operator Instructions) And it appears we have no questions at this time. (Operator Instructions)

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time, and have a wonderful holiday.