Zedge Inc (ZDGE) 2021 Q2 法說會逐字稿

Good afternoon, and welcome to Zedge's Second Quarter 2021 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 months period that ended on January 31, 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 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 the Zedge's 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. Welcome to Zedge's Second Quarter Fiscal Year 2021 Earnings Conference Call. 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.

Q2 was another record quarter for Zedge. We surpassed $5 million in revenue for the first time ever, an increase of more than 100% when compared to the year ago quarter and also reported new highs for operating income, operating margin, net income, EPS, cash flow from operations and EBITDA. Operationally, we completed the long-awaited migration to our new content management system, which is delivering encouraging results earlier than anticipated, and we rolled out at icons on IOS. Taken as a whole, we are well positioned for what we hope to be a strong second half of our fiscal year.

For those of you that are newer to the story, Zedge is a leading app developer focusing on mobile phone personalization and entertainment. Our heritage is rooted in being one of the leading providers of mobile personalization content focused on offering consumers a rich array of high-quality wallpapers, video wallpapers, ring tones and notification sounds. Our flagship app, Zedge Wallpapers and Ring Tones is all about personal identity and acts as a popular hub for self-expression for millions seeking mobile phone personalization, social content and fandom art.

To date, the app has surpassed 482 million organic installs and currently has 35 million monthly active users, or MAU. The app generates revenue from a combination of advertising, paid subscriptions and our Zedge Premium Marketplace, which enables content creators ranging from world-class celebrities to emerging artists to display end market their digital content and sell it to our users.

Moving to our second quarter performance. We continued optimizing our ad inventory, benefiting from both MAU growth and seasonal strength in ad pricing. Active subscriptions also performed well with 102,000 net additions and second year renewal rate of approximately 45%. As you may recall, we earn a higher margin for year 2 renewals as Google's fee drops by 50%. We need to continue to provide the content and user experience to maintain these strong renewal rates, which we expect will fluctuate over time.

Turning to product. We completed the rollout of our new content management system in December. This milestone opened the door for us to start introducing new features and enhancements that we expect will improve engagement and retention, especially in well-developed markets, including overhaul and user accounts, social and community features and search and discovery. These will be tested and rolled out iteratively.

Currently, we are focused on reimagining our user accounts, the foundation needed for many of these initiatives. We expect to complete this redesign in Q3 and shortly thereafter, start introducing community features that will enable users to follow artists and other users, create and share collections, notify users about new followers and new content and even offering an easy-to-remember Zedge handle like Zedge.me/JonathanReich. We are also scoping out product enhancements that can be offered to bolster our paid subscription offering in fiscal 2022.

Our investment in Zedge Premium, our marketplace for artists, continues. We are in the process of identifying and hiring a dedicated product manager to lead this important part of our business. This position's responsibility will be to increase the number of professional artists using Zedge as a distribution platform, growing the average revenue per artist and increasing the use of our marketplace by customers. In the meantime, we are testing new designs that better display relevant premium content to users as well as growing our artist base.

I'm happy to report that the Shortz beta is now available with an ad-supported model, enabling users to consume as much content as they would like simply by watching rewarded ads. Those users speaking an ad-free experience can sign up for a paid subscription. We expect the ad-supported version to increase the customer base at the top of the sales funnel and set the stage for increased subscriptions over time.

In addition, last week, we rolled out Shortcastz, which are high-production-value podcasts of our Shortz stories. We're excited by the possibilities that short-form audio can bring to the product and we'll start by analyzing how our users engage with this content.

On our last call, we discussed the $5 million at-the-market offering, which has now been completed. We expect to initiate a new $10 million program imminently to further fortify our balance sheet in order to provide for maximum flexibility to pursue incremental potential growth opportunities such as acquisitions, for example, to drive incremental growth and unlock shareholder value. We expect to consider potential acquisition targets in, but not limited to mobile gaming, social video and even mindfulness. Our acquisition strategy is to seek out opportunities where we can leverage our large user base, expertise and monetization, outstanding engineering teams and healthy balance sheet. We are early in this process and do not know what will transpire, but suffice it to say that we are being cautious and selects. We also do not plan on discussing specific potential targets or opportunities until there is something to announce publicly.

In closing, we had a record first half and expect to report continued strong year-over-year growth during the second half of the year despite the seasonality in the ad-supported portion of the business. As such, we now believe the top line growth for fiscal 2021 will increase between 75% to 80% when compared to the previous year. In addition, we expect solid growth in EPS and in cash flow from operations.

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 professionals who work at Zedge and who go above and beyond to execute on our vision. Thank you.

Now I'm going to turn the call over to Yi, who will provide details about our financial performance. Thank you.

Thank you, Jonathan. I want to start by reminding those on our call that our fiscal year ends July 31, and that our fiscal Q1 and Q2 tend to be seasonally stronger. While Q3 tend to be the seasonal low, typically, with incremental sequential improvement in Q4. Additionally, we introduced the term active subscription to replace paid subscription as a metric this quarter. Due to the change in calculation used by Google Play that now includes account hole, which is a subscription status that begins when the users form a payment fail. In the 3 days, grace period has ended, we allow payment resolution. The account hold period last for up to 30 days with the aim to reduce cancellation rate.

Moving to the second quarter results, monthly active user, or MAU, defined as a number of unique users that open our app during the last 30 days of the period, increased 3.2% to 35.4 million during January 2021 from 34.3 million in January 2020 and was up 9.3% sequentially. Emerging markets showed strong double-digit growth, while well-developed markets continue to contract. However, at a lower rate than when compared to all 4 quarters in fiscal 2020.

As Jonathan touched on, we are actively taking steps to enhance our offering for users in well-developed markets to spur growth, MAU growth and higher growth rates with less premium.

Total revenue in second quarter increased 101% to $5.3 million compared to the year ago quarter. The main driver were subscription growth optimization of our ad waterfall and an increase in advertising rates relating to year-end budget. This premium growth transaction volume, or GTV, that is the total sales volume transacted through our market was $211,000 in Q2, up 7.1% compared to the year ago quarter. As Jonathan indicated, we want to position that premium as a growth driver in the quarters to come, and the introduction of user's account and traditional future would be key to accelerating growth rates.

Active subscription exhibit 700,000 at the end of the quarter, a 139% increase year-over-year and 17% on a sequential basis. As you'll recall, when the new user purchase a subscription or a premium user convert to a paid subscription, we pay a 30% fee to Google, which shows up in our SG&A as a marketing expense. However, if a subscriber with a monthly or annually, renew their subscription after 12 months, with Google fee drops to 15%. We continue to see annual renewal rates of approximately 45%, which is generally considered to be strong performance within the industry.

Overall, average revenue per monthly user or, ARPMAU, was a worth of $0.049, an increase of 88% year-over-year and 35% sequentially. The year-over-year improvement is primarily attributable to growth in paid subscription, the continued advertising benefits from inventory optimization and adding new distribution partners.

Our operating margin increased to 47% versus 3% last year and 29% in Q1. This reflects higher subscription revenue and strong cost on payment, as SG&A only increased 14% versus last year. Net income and diluted EPS were $2.3 million, and $0.17, respectively, versus $100,000 and $0.01 in the prior year.

Average shares outstanding for the second quarter, 13.4 million on a fully diluted basis. EBITDA was $2.9 million versus $500,000 last year. From a liquidity standpoint, we remain in a strong net cash position with almost no debt. As for January 31, we had $13.6 million in cash and cash equivalent, a $7.4 million sequential increase and an $11.4 million increase compared to a year ago. The increase in cash over Q1 was driven by the combination of positive operating cash flow of $2.3 million and net proceed of $4.8 million from the ATM we completed during the quarter.

Moving to guidance for fiscal 2021. As Jonathan mentioned, we have increased our top line growth expectation to 75% to 80%. Q3, which has historically been our seasonally slowest quarter, is expected to be a relatively favorable comp, due to our business being negatively impacted by COVID-19 last year. Q4 has traditionally been higher than Q3, but keep in mind that our Q4 comp may be slightly tougher due to the growth trajectory that began in Q4 '20.

I hope that each of you remain safe, and I look forward to speaking with you again on the next call. Operator, back to you for Q&A.

(Operator Instructions) Your first question is coming from Allen Klee with Maxim Group.

Congratulations on very strong results. Starting with advertising, your -- the rate that you provided for the quarter of $0.049 is by far the highest you've ever had, and I know it's their seasonality in there. And it's also affected by increase in subscribers. But to what extent are we at like a higher level of advertising monetization in terms of rates based on everything that you've done to make things better?

Allen, it's Jonathan. I'm not sure I understand your question when you say whether we're at a higher rate, one more time?

I'm just trying to understand to what extent you feel the changes you've made have your advertising rates kind of at a higher level?

So the changes that we've made have resulted in generating more revenue per monthly active user. And we are benefiting from changes that we've made, both pre-migration and that is pre-CMS migration that we talked about earlier as well as post-CMS migration. Does that answer your question?

Sure. Could you maybe to follow up on that and for the operator, just want to make sure the call doesn't end after 2 questions? Could you talk about all about what CMS is and what that does for you?

Sure. Our CMS, our content management system, is the part of the platform that manages all of the content that we have in the app. As we've shared with investors, we had a major investment in rebuilding our content management system from the ground up, such that it would house both our user-generated content and our premium content together. And that project was completed in December and opens the door for us to go out and begin rolling out new features and enhancements, such as social features, community features and so on and so forth that we expect will positively impact engagement and retention. Those will be rolled out incrementally after we've completed the overhaul of our whole user account setup, which is underway and which we hope to complete by the end of fiscal year Q3, which is at the end of April. And then those new features will start to roll out. Incrementally, obviously, the better of a job that we do in terms of improving engagement and retention translates into more revenue from our customer base.

Great. And then could you expand a little on what you said about the focus on improving with your well-developed -- in well-developed countries and what you're doing with Apple now and the traction that you're seeing there?

Absolutely. So as we've said, one of our goals is to take our well-developed country user base and put that back on the growth trajectory. And many of the features and enhancements that we are investing in are ones, which we believe will help reverse that trend. Moving to Apple. As you know, with the introduction of iOS 14, Apple opened up the door, a crack, to the whole personalization vertical. And just by way of background, mobile phone personalization is highly available on Android, being that it's been baked into their operating system. And it's very easy to change a wallpaper or a ring tone. With our app, you just preview what it is that you like and you press set and you're done.

That's much more complex in the Apple ecosystem. However, Apple's on-tray, if you will, into the world of personalization is specific to app icons that can now be customized as well as app widgets that can be customized. And we have rolled out app at icons at the end of December on iOS and expect to roll out widgets later this fiscal year.

Those 2 items we believe can help generate incremental revenue from our iOS user base. And just by way of reference, give or take, around 90% of our users today are on Android and around 10% on IOS.

Got it. With short, very encouraging that you have the ad-supported model, can you give us any metrics in terms of what that has done just in terms of amount of usage or any type of metrics?

Well, it's really early, Allen. As I've mentioned, we just rolled out ad supported shorts last week, but from the very, very preliminary data. What we have seen is that there is more engagement and that specifically, day 2 retention has improved. We'd be premature in terms of really getting into mounds and mounds of data. I think that we need to give this some more time before we can report back to shareholders with respect to what the overall impact is, both short and long term.

Okay. And Shortcastz, that sounds pretty exciting. How is that going to be set up in terms of the options of monetizing and the format of it? And what you think the potential is?

Sure. That's a great question. And to be honest with you, we have not made any decisions about how to monetize that as of yet. Our first goal is to understand how users engage with these high-quality mini podcasts, if you will, of the content. And then based upon that, we can use that data to make an informed decision about how we can monetize.

With that being said, there are many different possibilities. There's a possibility for having audio ads in there. There's a possibility for bundling that into subscriptions, making subscriptions more valuable. There's also a possibility with the user base being interested in this in syndicating across third-party platforms, by way of example, Spotify or an Apple podcast or things of that sort.

But really, long story short, still too early to answer the question with great degrees of clarity. We need to see what engagement is like and then proceed from there.

And then I think I know the answer to this, but I just think it would be helpful if you mention this on the call because I think your stock had gotten hit during the quarter when there was some news of Google changing some of their -- what data could be tracked and privacy rules related to that. Could you explain like if that has an impact on you? Or if not, why that is?

Our stock had -- well, I don't know about our stock, our user base had been hit back in late August, 2019, early September 2019 because of some buggy code at a third-party advertiser had in their SDK. That's the software that allows our app to communicate with that advertiser's platform. And we were temporarily banned from the Google Play store until that problem was fixed. Overall, with respect to privacy, we are clearly very sensitive to making sure that we protect our users' privacy. And I should mention as well that unlike many other of apps that will have challenges associated with Apple's decision to remove IDFA, which is the way by which information is collected about users and shared with advertising networks, we really are not going to see a material impact of that because of a small amount of -- relatively small amount of Apple users that we have.

And then just touching on the seasonality. We know that -- I think the next quarter is the seasonally slowest, and you did mention that you will have tough comps in the fourth quarter. But is there a way to think about maybe directionally, the magnitude of the seasonality in the third and fourth quarter?

Yes. If you look back historically, there has been a fall off. And I don't have the numbers in front of me, but anywhere, it's from 10% to 20% seems directionally correct when looking back at previous quarters. I can't tell you whether or not that will continue to be the case this year. But for the purpose of modeling, it's most likely okay to look at that and see how that affects your model.

Yi, do you have anything that you want to add to that?

No. I think you summed up well. I mean when we got hit with COVID, our daily revenue was down to $20,000. We recovered slowly from $20,000 to $30,000 to $40,000 to $50,000 to $60,000. So we, hopefully, we can maintain a $60,000 -- or $50,000 daily revenue level.

Great. And then your monthly active users, which was 35,400, which, was it maybe your...

35,000,400.

Yes, yes. I'm sorry. Sorry about that. So you're hitting kind of a high on that, while I mean the close to a high of what you've ever had, while this isn't the strongest time of the economy we've ever had. So what would you attribute that to?

Sure. So I would say that there are a couple of things. As you know, we have been making improvements in the app. There's also been growth in the emerging markets. One country that screams out in that capacity is India, where we've seen very, very material growth over time. And as you recall, we've had litigation. We were in litigation with an Indian company which we ultimately prevailed with. And as a result of that, our app was suddenly made available throughout the entire country. Prior to that, the plaintiffs in the case had successfully seem to it that the department -- Indian Department of Telecommunications was able to block our app and that block was removed, and we've seen some really, really nice growth in India since then.

And then I would say as well, there has been, as is well aware throughout the entire digital market, an increase in the use of mobile apps because of COVID and stay-at-home orders. Where we have likely suffered to some extent, though, is with respect to with respect to phone sales our new phone sales in retail locations because of the slowdown in retail sales due to COVID. And our hope is that as we begin exiting this COVID tunnel and retail sales begin to resume and get restored that we will be able to benefit from that simply due to the fact that one of the user patterns that is very common when the new -- when the user buys the new phones, they want to personalize it. And as such, they will come to Zedge, download the app and partake of the content.

That's great. My last question, just could you tell me if you happen to know what your share count is kind of as of now?

Yi, correct me if I'm wrong, but I believe it somewhere is around $13.5 million.

That is correct.

(Operator Instructions) We have no further questions from the lines. This concludes our question-and-answer session and conference call. Thank you for attending today's presentation. You may now disconnect.