Zedge : Fiscal Q1 2021 Earnings Call Transcript

• Thank you, operator. And thank you all for joining us 2 today.

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• Good afternoon. Welcome to Zedge's first quarter 5 fiscal year 2021 earnings conference call. I'm Jonathan 6 Reich, CEO of Zedge and with me is our Chief Financial 7 Officer, Yi Tsai, who will provide additional insight into 8 our financial performance.

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1. Q1 was an outstanding quarter for Zedge, as we
2. eclipsed previous highs for revenue, which was up 85%
3. year over year, operating income, operating margin, net
4. income, EPS, cash flow from operations and EBITDA,
5. amongst other metrics. The initiatives we have invested
6. in over the past five quarters are bearing fruit, as
7. demonstrated by the continued progress we made in
8. monetizing our 32 million plus users during the quarter.
9. That said, we believe there is ample opportunity to

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1. continue increasing both revenue and users moving
2. forward.

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1. For those of you that are newer to the story, Zedge
2. is a leading app developer focusing on mobile phone
3. personalization and entertainment. Our heritage is
4. rooted in being one of the leading providers of mobile
5. personalization content, focused on offering consumers a
6. rich array of high-quality wallpapers, video wallpapers,
7. ringtones, and notification sounds. Our flagship app,
8. Zedge Wallpapers and Ringtones, is all about personal
9. identity, and acts as a popular hub for self-expression for
10. millions seeking mobile phone personalization, social
11. content and fandom art. To date, the app has surpassed
12. 465 million organic installs and currently has 32 million
13. monthly active users, of which around 30% are located in
14. well-developedmarkets. The app generates revenue
15. from a combination of advertising, paid subscriptions,

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1. and our Zedge Premium marketplace, which enables
2. content creators, ranging from world class celebrities to
3. emerging artists, to display and market their digital
4. content and sell it to our users.

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1. Moving to our results, we reported record revenue
2. in the first quarter and attribute the growth primarily to
3. higher paid subscriptions and improvements to our ad
4. stack. Paid subscribers, an important growth driver, grew
5. by 214% year over year. Subscriptions are valuable for
6. two reasons. First, they provide us with a recurring
7. revenue stream, which yields some level of predictability
8. in the business, and second, they have a higher margin
9. when compared to ad-supported users. Renewals are
10. even more profitable as the fees we pay Google drop by
11. 50% in year 2.

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1. Ad revenue also experienced robust growth due to
2. several factors, including the improvements we've made
3. in optimizing our inventory; MAU growth and the
4. seasonal improvement in CPMs, which are what
5. advertisers pay us for every 1,000 impressions. Over the
6. next couple of months, we expect to focus on developing
7. regionalized ad experiences, which should yield
8. incremental revenue, as well as expanding the number of
9. demand partners that are able to bid on our inventory on
10. a per impression basis.

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1. Looking to the future, I want to highlight the
2. investments we are making to drive further user growth
3. in fiscal 2021 and beyond. With the recent release of our
4. new content management system, which now houses all
5. content - both user-generated and premium, we can
6. start working on critical enhancements including social
7. and community features, overhauling user accounts,

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1. personalized content feeds, and even improving on
2. personalized widgets and app icons in iOS 14. Taken
3. together, we expect these investments to positively
4. impact user-growth, usage, and retention, particularly in
5. well-developedmarkets. In addition, we expect to
6. enhance our paid subscription offering, which may
7. include unique content or unique value-added features
8. which should make the offering more attractive to a
9. broader set of users.

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1. We believe that Zedge Premium offers great
2. potential beyond the world of mobile personalization
3. content. We're wrapping our heads around how to
4. evolve the platform and make it relevant to a broader
5. swath of users, including fandom communities and stock
6. photo customers. If we execute well, we can become a
7. coveted destination for a broader cross section of

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1. creators that want to monetize their content, even if it
2. isn't directly related to wallpapers and ringtones.

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1. As we look past fiscal 2021, we see optionality in two
2. areas. The first is new product introductions. For
3. example, in fiscal 2020 we entered the entertainment
4. genre with the beta rollout of a new standalone
5. entertainment app, "Shortz by Zedge," - with a "Z" at the
6. end. Shortz is all about serialized short-form fiction.
7. Today, our Shortz app offers a rich catalogue of short
8. stories rendered in a text messaging-like format. We
9. believe user interest in the short-form serialized fiction
10. space remains high, and we will continue to focus on
11. enhancing our Shortz beta by offering both ad-supported
12. and a la carte variants, as well as testing "Shortcastz,"
13. our high quality short-form podcasts of the stories. We
14. envision having clarity about whether Shortz progresses

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1. to a full-blown product offering over the next four or five
2. quarters.

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1. The second relates to penetration of Apple's eco-
2. system. Historically, Apple has shied away from the
3. mobile phone personalization vertical. However, with the
4. introduction of iOS 14, they opened the door for limited
5. customization functionality, specifically with widgets and
6. app icons. We are committed to embedding these into
7. our products over the next several months in order to
8. benefit from the iPhone refresh cycle. Depending on the
9. demand for this content, there is the potential to move
10. the needle longer term, not to mention the potential that
11. Apple evolves its thinking and embraces this vertical in a
12. meaningful way. We want to be in a position to capitalize
13. on that change if it comes about.

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1. In closing, while Q1 was outstanding, we are not
2. resting on our laurels and believe there is great potential
3. for our business going forward. Q2, which we expect to
4. benefit from year-end advertising spend, is already off to
5. a strong start. We are still targeting revenue growth for
6. the full-year to be at least 20%, with profitability and
7. positive cash flow from operations and EBITDA in each
8. quarter.

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1. We could not have achieved these results without
2. the efforts and dedication of our employees. Thank you
3. and keep up the good work. As for our loyal users, please
4. continue to look for product updates in the months to
5. come.

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1. Now, I am going to turn the call over to Yi, who will
2. provide details about our financial performance. Wishing
3. all a happy, healthy, and safe holiday season.

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142Thank you!

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Yi

144 Thank you, Jonathan!

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1. I want to start by reminding those on the call that
2. our fiscal year ends July 31st. I also want to point out
3. some changes we are making to the metrics we report to
4. investors to improve transparency. This quarter, we
5. added EBITDA and Operating Margin to our earnings
6. release tables, including comparisons for historical trends
7. from last year. I also want to remind everyone that our
8. fiscal Q1 and Q2 tend to be seasonally stronger, while Q3
9. tends to be the seasonal low.

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1. Moving to the first quarter results. Monthly active
2. users, or MAU, defined as the number of unique users
3. that opened our app during the last 30 days of the
4. period, increased 9.1% to 32.4 million during October
5. 2020 from 29.7 million in October 2019, and was up

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1. slightly from the end of Q4 of fiscal 2020. Emerging
2. markets showed strong double-digit growth while well-
3. developed markets continued to contract. As Jonathan
4. mentioned, we are actively taking steps to enhance our
5. offerings for users in well-developed markets to spur
6. both MAU growth and higher growth rates for Zedge
7. Premium.

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1. Total revenue in the fourth quarter increased 85% to
2. 3.8 million dollars compared to the year-ago quarter. The
3. main drivers were subscription growth, optimization of
4. our ad waterfall and an increase in advertising rates.

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1. Zedge Premium's Gross Transaction Volume, or GTV
2. - that is the total sales volume transacted through our
3. marketplace - was 208 thousand dollars in Q1, up 8%
4. compared to the year ago quarter and 10% compared to
5. last quarter. As Jonathan indicated, we want to position

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1. Zedge Premium as a growth driver in the quarters to
2. come.

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1. Paid subscribers exceeded 600 thousand at the end
2. of the quarter, a 205% increase year over year and 21%
3. on a sequential basis. As you recall, when a new user
4. purchases a subscription or a freemium user converts
5. into a paid subscriber, we pay a 30% fee to Google -
6. which shows up in our SG&A as a marketing expense.
7. However, if a subscriber - whether monthly or annual -
8. renews their subscription after 12 months, the Google
9. fee drops to 15%. We continued to see annual renewal
10. rates surpassing 40%, which is generally considered to be
11. strong performance within the industry.

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1. Overall, ARPMAU was a record 3.6 cents - an
2. increase of 73% year over year and 28% sequentially. The
3. year-over-yearimprovement is primarily attributable to

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1. revenue growth in paid subscriptions and the advertising
2. benefits discussed earlier.

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1. Our operating margin increased to 29% vs negative
2. 37% last year and positive 14% in Q4. These reflect
3. strong cost containment and higher subscription revenue
4. as SG&A only increased 3% versus last year.

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1. Net income and Diluted EPS were 1 million dollars
2. and 8 cents, respectively, versus a net loss of 800
3. thousand dollars and a loss per share of 8 cents in the
4. prior year.

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1. This quarter, we are introducing EBITDA as a metric
2. that we report. In Q1, EBITDA was 1.4 million dollars, up
3. 1.7 million dollars from last year.

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1. We remain in a strong position in terms of liquidity.
2. As of October 31, we had 6.3 million dollars in cash and
3. cash equivalents, a 1.2 million dollar sequential increase
4. and a 4.6 million dollar increase compared to a year ago.
5. The increase in cash over Q4 was driven primarily by
6. positive operating cash flow, and we have now
7. generated positive cash flow from operations for five
8. consecutive quarters. Zedge has almost no outstanding
9. debt, while maintaining access to a revolving credit
10. facility of up to 2.0 million dollars if needed.

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1. In late November, we filed a shelf-registration to
2. raise up to 20 million dollars. We filed this registration to
3. provide opportunistic financial flexibility should we
4. identify organic or in-organic investment opportunities,
5. or, to further fortify our already strong balance sheet.
6. Along these lines, we put in place an "at the market"
7. offering, also known as an A-T-M offering, to sell up to 5

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1. million dollars in stock directly into the market as
2. conditions warrant.

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1. Finally, as Jonathan said earlier, looking at our
2. business in fiscal 2021, we are targeting top line growth
3. rates in excess of 20%, continued positive cash flow from
4. operations and profitability on both a quarterly and full-
5. year basis.

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1. I hope that each of you remain safe and I look
2. forward to speaking with you again on the next call.

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245Operator back to you for Q&A.

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