Zedge Inc (ZDGE) 2020 Q4 法說會逐字稿

Good afternoon, and welcome to Zedge's Fourth Quarter and End of Fiscal Year 2020 Earnings Conference Call. (Operator Instructions)

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 3-month period and close of fiscal year 2020, that ended on July 31, 2020.

Any forward-looking statements made during this conference call in either 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 to either 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 earnings release is available on the Investor Relations page of the Zedge website. The earnings release has also been filed on a Form 8-K with the SEC.

I would now like to turn the conference over to Mr. Jonathan Reich.

Thank you, operator, and thank you all for joining us today. Good afternoon, and welcome to Zedge's Fourth Quarter and Fiscal 2020 Earnings Conference Call. Joining me today, on his first earnings call as our new Chief Financial Officer, is Yi Tsai, who will provide insight into our financial performance. Q4 was another strong quarter for Zedge as we delivered 39% revenue growth year-over-year and positive net income due to our ability to successfully grow our business base by providing compelling content while effectively monetizing our loyal user base. As most of you know, Zedge is one of the leading providers of mobile personalization content, offering consumers a rich array of high-quality wallpapers, video wallpapers, ringtones and notification sounds. Our flagship Zedge app has 450 million organic installs and 32 million monthly active users, or MAU. Our user base today consists primarily of Android users, and approximately 30% of our users are located in well-developed economies. We monetize these users by selling advertising, offering paid subscriptions and through our marketplace, Zedge Premium, where artists can open a virtual store and sell their licensed content to our customers in exchange for Zedge earning a percentage of the sale.

Last year, at this time, our Chairman, Michael Jonas, charged us with identifying opportunities to drive both growth and profitability. He articulated our goals at the time as becoming cash flow positive in the fourth quarter of fiscal 2020, while continuing to invest in long-term growth. I am happy to report that we were cash flow positive in every quarter of the fiscal year. Furthermore, we accomplished this while investing in new growth initiatives, which we expect to bear fruit in the months and years ahead. As a result, we ended the year with a strong liquidity profile, including more than $5 million in cash and cash equivalents.

On the monetization front, fiscal 2020 was a banner year. In January 2019, we launched a subscription option for our flagship Zedge App. During fiscal 2020, we materially expanded our base of paid subscribers, and were successful in surpassing a 40% annual renewal rate. During the fourth quarter, our subscriber base grew sequentially by 26% to 504,000 subscribers. Subscription revenue in the fourth quarter alone exceeded subscription revenue from all of fiscal 2019, demonstrating the progress we continue to make in growing this initiative. As you'll recall, our paid subscriber generates a higher margin for us than an ad-supported user, and the renewal generates even higher margins as the fees we pay to Google drop in year 2.

We also took steps to improve advertising revenues, even in light of a decline in MAU in well-developed economies. We overhauled our ads back by further optimizing our waterfall, increasing what advertisers pay us per 1,000 impressions, known as CPMs, in the industry and also initiated header bidding to increase demand for our inventory. We are working on a plan to customize the ad experience by geography to better monetize across all regions.

Finally, we are continuing to invest in Zedge Premium and expanding its token-based economy. In terms of solidifying our long-term growth opportunities, we took meaningful steps to further diversify our offerings. In December 2019, we began our evolution into the world of mobile entertainment with the beta rollout of Shortz - Chat Stories by Zedge. Shortz provides serialized short-form fiction stories rendered in a text messaging like format along with images. To date, there have been more than 120,000 installs of the Shortz app, mainly from promoting the service through our flagship Zedge personalization app. This growth validates our ability to cross-sell to value of our 30-million-plus loyal customers. While the initial launch results were strong, with solid initial weekly gains in conversion rates, ARPU and churn, COVID-19 temporarily disrupted this progress, but we are currently seeing a recovery in these trends.

Additionally, we are taking the initiative to drive further growth by expanding beyond the current subscription model with an ad-supported offering as well as an A la carte token-based model. Furthermore, we are actively testing different marketing messages, pricing SKUs and free trial periods in order to optimize user segments as they enter the sales funnel. In the coming months, we will continue to iteratively roll out product enhancements for Shortz to improve the experience and introduce an array of additional features, including expanding into new genres, new marketing initiatives and introducing a beta for Shortcastz, mini podcasts, which are stories with voice actors, sound effects and top-notch sound engineering.

Looking to fiscal 2021, we have had a strong start to the year. We have exciting plans and expect to grow revenue by at least 20% for the fiscal year. We are investing to reinvigorate growth in our flagship Zedge app through a comprehensive overhaul of our content management system, merging both user-generated content and premium content together under one centralized back end. This unified platform will open the door for incremental capabilities that we expect to positively impact usage and retention, particularly in well-developed markets, leading to growth in our user base.

Specifically, we expect to introduce a set of social and community features, enabling users to follow their favorite artists, curate the content they like best and more easily share all that across various social platforms.

Next, we are overhauling user accounts and increasing their value by coupling them with additional product features. We are even exploring ways in which we can meet the needs of iPhone users now that Apple has enabled personalized widgets and app icons in iOS 14, which could drive marginal growth in calendar 2021, with the potential to move the needle longer term.

Finally, we will take content recommendations to the next level through personalized feeds that mix relevance user generated content together with premium content, which in turn will also help us in scaling our Zedge Premium offering to artists. Our plan calls for this migration project to be completed before the end of calendar 2020, and we expect to start iterating some of the aforementioned items in early calendar 2021.

Aside from the ongoing investment in both our personalization app and Shortz, we believe that we now have a well-structured product discovery methodology that will help us prioritize our product development efforts. Our goal is to release a new beta product with the potential to become part of the core suite of apps, approximately every 6 to 9 months. We are currently exploring a wide variety of options from content creation to gaming. Our team is analyzing, market sizing, product positioning, technology fit, differentiation, monetization and customer acquisition. Just to mention a few variables. Generally speaking, we want to leverage our existing user base to drive user adoption in well-developed markets.

From a technology standpoint, we have built and validated our platform, and we are positioned to introduce additional new content and new offerings on top of our established platform quickly and cost effectively.

In closing, fiscal 2020 was an outstanding year for Zedge. We have high expectations for fiscal 2021 and believe that our performance and growth prospects are not being valued appropriately by the market.

To address this, we are stepping up our Investor Relations activities and have retained an external firm with expertise in the micro-cap space.

Last but not least, I want to applaud my co-workers for their outstanding performance, especially in light of the challenges associated with the global pandemic and core structural changes in how we operate as a company. Keep up with the good work.

Now I am going to turn the call over to Yi, who will provide details about our financial performance. Thank you and stay safe.

Thank you, Jonathan. I want to start by reminding those on the call that our fiscal year ends July 31. I also want to point out some changes we are making to the metrics we report to investors to improve transparency. We will continue to provide MAU and ARPMAU as well as Growth Transaction Value, or GTV, for Zedge Premium.

Additionally, given the importance of growing our subscription business, we are breaking out our subscription and advertising revenue, while continuing to report quality subscriber number. Please refer to the tables in our earnings release for this additional data.

Monthly Active Users, or MAU, defined as the number of unique users that opened our app during the last 30 days of the period decreased 5.6% to 31.9 million during July 2020 from 33.8 million in July 2019, but was up from the end of Q3 of fiscal 2020 by nearly 11%. The year-over-year decline was mainly driven by erosion of customers in well-developed markets, partially offset by a low single-digit increase in emerging markets. Sequential increases from Q3 to Q4 was driven by a recovery in both emerging and well-developed market.

Total revenue in the fourth quarter increased 39% to $2.7 million compared to the year ago quarter and increased 31% sequentially. The main driver was subscription growth, optimization of our ad waterfall and an increase in advertising rates. Our business has proven to be resilient even as we navigate unprecedented economy and marketing challenges related to COVID-19. This premium Growth Transaction Value, or GTV, that is the total sales volume transacted to our marketplace, 189,000 in Q4, up 13% compared to a year ago quarter and 26% compared to last quarter.

The rebound in this business was encouraging, and we believe that the easing on the impact of pandemic along with some of the upcoming product changes that we have underway will result in continued GTV growth in fiscal 2021.

Pay subscriber also materially increased, exceeding 500,000 at the end of the quarter, a 277% increase year-over-year and 26% on a sequential basis.

As you'll recall, when the freemium users convert into a pay subscriber, we pay a 30% fee to Google, which showed up in our SG&A as marketing expense. However, if a subscriber renew their subscription in year 2, the Google fees dropped to 15%.

Currently, we are seeing annual renewal rate surpassing 40%, which is generally considered with strong performance within the industry. Overall, ARPMAU was nearly $0.3. An increase of 50% year-over-year and 29% sequentially. The year-over-year improvement is primarily attributable to revenue growth in pay subscription and the advertising benefit discussed earlier. As expected, direct cost of revenue continued to decline due to actions we took during the fiscal year, including switching cloud hosting provider and the retirement of old technologies. We believe we have realized most of the cost reduction, which will provide us with a lower sales cost base moving forward.

SG&A in the fourth quarter was $1.7 million, a 20% decrease compared to the year ago quarter and a 9% increase sequentially. The year-over-year decrease primarily related to lower compensation costs and discretionary spend, offset by increase in approval for paid subscription and Shortz content acquisition expense.

Sequentially, our paid subscriber drove higher marketing fee to Google. Income from operations in the fourth quarter was $390,000 compared to a loss of $939,000 in the year ago period and a loss of $127,000 in the prior quarter. We reported net income per diluted share of $0.04 versus a loss of $0.12 in the year ago quarter. We remain in a strong position in terms of liquidity. As of July 31, we had $5.1 million in cash and cash equivalent, a $500,000 sequential increase and a $3.5 million increase compared to a year ago. The increase in cash over the prior quarter was driven primarily by positive operating cash flow, and we announced generating the positive cash flow from operation for 4 consecutive quarters. Zedge has almost no outstanding debt, while maintaining access to a revolving credit facility of up to $2 million, if needed.

Looking to fiscal 2021, we have some exciting new feature and product-specific market, and we look forward to discussing them with you in more detail at the appropriate time.

Finally, a stronger fiscal year. Looking at our business in fiscal 2021, we are targeting top line growth rate in excess of 20%, continuing positive cash flow from operation and profitability on both the quarterly and full year basis. In conclusion, we saw a strong recovery in many parts of our business that have been negatively impacted by COVID-19. And the cost reduction plan we implemented have allowed us to continue to invest in current and future projects while achieving quarterly profitability, consistent positive cash flow. I hope that each of you remain safe, and I look forward to speak with you again on the next call.

(Operator Instructions) And it looks like we've got our first question from Allen Klee with National Securities.

Yes. Just this quarter is a pleasure. You outperformed my numbers on every metric out there and good job. If I just kind of go through the different things, starting with monthly average users and the increase there. Can we drill down into how you think how much of that came from just new Android phone sales increasing? Or to what extent the mix of emerging markets and development or developing or any other reasons why the number did so well?

Allen, it's Jonathan. Thanks so much. Yes, we're very pleased with the quarter ourselves as well. In terms of monthly active users, MAU, as you will see in the press release, there was growth coming out of the emerging markets. We've also seen a very nice uptick in India. As you recall, we had a lawsuit that we were litigating against a entity that had our app as well as many other music apps blocked there. We prevailed, and we are now beginning to see the benefits of having won that case. But overall, tremendous growth in Tier 3 markets this past quarter.

And in terms of Tier 1, yes, quarter-over-quarter, we saw a nice growth as well. One of our primary goals in this fiscal year is to put Tier 1 back on the growth stream, and the way in which we plan on doing that is going to be dependent upon introducing community features, sharing features, social features, amongst other things, and that will begin to hopefully take root in the second half of the fiscal year.

Great. And then you mentioned that you might be able to do more with Apple iOS. I kind of missed why that is that -- could you just go into how that could be an opportunity in your next -- in fiscal 2021?

Sure. So without limiting ourselves to whether it's fiscal year 2021, the big picture is, Apple released iOS 14, their most recent upgrade to the operating system. And unbeknownst to the market at the time, Apple introduced a personalization feature around widgets, where they would allow for customized widgets as well as they began marketing the ability for users to modify their app icons. As it turns out, Zedge has a portfolio of somewhere around 200 different icon styles that we are embedding into the Apple Zedge app or the iOS Zedge app. And we hope that before the end of this calendar year, we will make that a seamless process. If not, in the very beginning of 2021, the calendar year, that will be seamless. And we also hope to begin to offer widgets on the iOS platform as well.

What we've seen in the very early days of the release of iOS 14 is that there are providers out there that are selling their widgets for as much as $2 per piece. We don't know what the long term sustainability of that is, but we sort of view this as a slight crack in the door where Apple is being sensitive to user demand for personalization capabilities, which has been something that has been a very, very different experience across Android where it's seamless versus iOS where it's a very arduous and manual process. But long story short, if users begin to embrace that as a normal part of their iOS Apple experience, we expect that we will benefit from that.

On advertising rates, that recovered very nicely. You mentioned a bunch of reasons, actions you've taken to improve that. How do you think about that going forward? Is it reasonable to think it stays, all else being equal, at the rate it's at now? Or is there any reason why it could change one way or the other?

So certainly, when you take a look at advertising rates on a global basis, independent of Zedge, what we have been reading in the press is that advertising has clearly been negatively impacted by COVID. And clearly, we don't know how that will unfold, depending on how long the pandemic stays in full force, if you will.

Having said that, much of the improvement that we've experienced relates to optimizations that we have made in our platform, and we continue to focus on unearthing additional ways in which we can deliver additional incremental advertising revenue. Some of the things that we're playing with revolve around offering different ad experiences, depending on where one is using the app in the world. And then there is ongoing design work as well as advances in ad tech platforms that we are clearly focused on. And we believe that there is the potential for additional upside there, although still very, very early to give you clarity about that.

That's great. And then with subscriptions. Well, what do you see as the key driver to keep this momentum going that's been going so well?

Sure. So as I indicated in my earlier comments, a lot of the progress that we've made in our subscription-based offering relates to extending the marketing and reaching a broader part of the audience, coupled with optimizations. And what we're beginning to focus on this fiscal year is in building out a value-added set of features that will make subscriptions that much more attractive, and hopefully, drive incremental growth there. There is also a unknown. We begin to record our annual renewal rate for users that signed up in 2018 for their second annual renewal this coming January. As mentioned during the call, the first year renewal rate is somewhere is around 40% or higher. But still too early to predict what will happen with that second annual renewal, but that could add some additional alpha, if you will.

That's great. In terms of your marketplace, last quarter, you basically said that you were going to be shifting marketing dollars to Shortz. So you thought that the marketplace gross transactional value could be declining and it actually grew. So what would you say were the key factors for the outperformance there? And everything you mentioned about how you could grow it is really interesting, I think, of creating more value in this, but I'll just let you expand on that.

Sure. So no question to that. We have been fortunate that the artists that are participating in our marketplace offering are doing a very good job in terms of promoting their works even with our taking inventory that otherwise would have being used from a marketplace and refocusing that inventory on Shortz. So that's a very important factor that these artists are really taking their job seriously and trying to optimize across the platform and doing a good job of it.

In addition to that, the growth that we've seen in monthly active user base and as well as what I will refer more generally to a COVID factor where people are online more regularly, all play a part in this.

For fiscal 2021, as indicated in my comments, we really do have a focus on unlocking greater value for marketplace and making sure that once we complete this back end migration that we can begin to focus on bringing more artists into the platform, offering them a greater opportunity in terms of reaching the customer base and offering the social community features and so on and so forth. So it remains to be seen how that unfolds, but clearly is a high priority for us.

Great. And then with Shortz, I'm not sure if you broke out how much the revenue is, but I know when you first started it, you were kind of learning as you were going, experimenting with a couple of things. How do you feel about kind of where you are? And what do you think are the things that you'll tweak it with that will keep this moving?

Sure. So revenue contribution from Shortz is immaterial. We did not break it out. We have really been focused on building the product. And there have been a whole set of product improvements as well as, I guess, future product enhancements that we are working on. I would say that fiscal year 2021 is really making sure that we accomplish a couple of things in Shortz: First of all, broadening the monetization opportunities. We expect to rollout and ad-supported version as well as a token-based economy that will allow for A la carte purchases in the fiscal year. And ultimately, with the way that we look at this is that it will increase the top of the funnel, drive more users in there, and then we have the opportunity to optimize users based upon how they are consuming the content and so on and so forth.

In addition to that, we expect that in early calendar year 2021 that we will roll out Shortcastz that is short-form podcast of this content.

Podcast market is certainly growing in the U.S. And when it comes to fictional storytelling, we think it's still a very nascent market and one where we can set our stake in the ground that hopefully have a leadership position there. So that's another direction for us. And then as I said earlier, ongoing iterations, which make the product that much more attractive, offering more content genres, we've got a set of initiatives underway based upon focus groups that we've done with customers in terms of delivering to them the things that they feel are missing in the product today. So that will happen on an iterative basis.

Great. Okay. My last question is, so you gave guidance or aspiration that your revenue in fiscal 2021 would grow 20 -- at least 20%. How do -- how should we think about your operating expenses of like SG&A? Is that likely to grow at a similar rate or higher or lower than that?

Yes. I don't think it's pegged to grow as high as that, and there are a couple of unknowns in there. First of all, SG&A, if it grows higher than that, it could very well be because of that being a marketing expense, which means that our subscription business is growing very, very well. So that's what I would call a good point. We do have a set of hires that are on our radar screen. However, we are not just going to bring people on without seeing to it that the ROI that we have planned for is actually being delivered. And all in all, we want to see that we remain profitable. Certainly, in fiscal 2021, barring some incredible growth opportunity where we would say, yes, we're going to take a short-term loss in order to accelerate growth materially.

Okay. That was my last question. I really feel this was kind of that breakout quarter where you've done a lot to try to monetize the large user base you have, and this strikes me as like a really important quarter and that we're seeing the -- hopefully, the beginning of something even better. So congratulations again.

Thank you very much. Yes. Certainly, we're in agreement with you, and our aspirations are to see to it that we can continue the momentum.

(Operator Instructions) And next, we go to Joe Boskovich with Old West Investment.

I had a couple of questions, but there are some good questions asked before me. So most of them were asked. But in regards to Shortz, and as you know, I was very excited about the Shortz launch just because I thought it was the entry into the short-form entertainment, SVOD and AVOD space. In the early days, I noticed that one of the user acquisition strategies was advertising Shortz within the Legacy Zedge app. And I've noticed that -- or at least it seems not to be advertised as heavily as you once did. So I just was kind of wondering about that user acquisition strategy for Shortz going forward.

Sure. So no question of a doubt, promoting Shortz to our existing user base in Zedge wallpapers and ringtones is still a material part of our growth strategy. However, as indicated earlier with COVID, the trajectory of the various KPIs that we've seen was sort of derailed. And as a result, we're trying to be focused on where we're getting the ROI. Until such time that we see that the existing user base is not only installing Shortz, but ultimately, driving revenue contribution and continued usage and so on and so forth. In addition to that, very, very early stage. We have been poking around in looking at inorganic user acquisition channels, what's typically known as CPI, cost per install, acquisition channels and really trying to unlock the channels where, ultimately, we can come to a point that cost per acquisition is attractive enough that we can generate ROI.

And then the final piece of this is looking at what I will call partners where we have a product that is valuable to them for other initiatives that they have. And in a sense, we can co-market a barter inventory, if you will, in order to drive user acquisition.

So that is the general direction in which we're going to head. And each of those is being monitored very, very closely. We have not yet invested any material amount of money in cost per acquisition campaigns. Before we do that, we want to make sure that we have the products where it needs to be, and that we also have what's known as attribution technology in place so that we can really measure every dollar spent, what it is generating to us, across which platform, based upon what actions so that we can then identify the right user groups to go after and drive that growth accordingly.

Okay. Great. And then on -- I noticed you mentioned earlier that you've had 120,000 installs of the Shortz app. That figure you get for the number of subscribers, 504,000, does that subscriber number? Is that just Zedge Premium? Or does that include Zedge Premium plus Shortz?

No, that does not include Shortz.

Okay. So you have that 500,000 plus some part of that 120,000 would be total subscribers for both offerings.

So the 500,000 plus is strictly ad-free Zedge wallpaper and ringtone users.

Okay. Well, great. That's pretty impressive to go from 134 subscribers to 504,000 subscribers in one year. So congrats.

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