Zedge : Fiscal Q4 2021 Earnings Call Transcript

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

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Good afternoon. Welcome to Zedge's fourth quarter and fiscal year-end 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. We will then be happy to take your questions.

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On today's call, I will address the Company's amended 10Q filing for the third quarter ended April 30th, 2021 and briefly review our fiscal 2021 results. I'll then conclude by discussing the next stage in our evolution.

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During our year-end audit we came to the conclusion that we have a material weakness in disclosure controls and procedures related to the reporting of the valuation allowance against deferred tax assets resulting from incorrectly attributing this as a Q4 benefit when it should have been recognized as a Q3 benefit. The change has no impact on our full-year results

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and we are working diligently with our auditors and tax advisor to promptly remediate the weakness and ensure that we do not face similar challenges going forward. Now moving on to our business.

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For those of you that are new to the Zedge story, we own a portfolio of leading digital consumer brands that serve 43 million monthly active users around the globe. Our portfolio consists of Zedge Ringtones and Wallpapers, the leading mobile app used for mobile phone personalization, social content, and fandom art; Zedge Premium, a marketplace for artists, celebrities, and emerging creators to market their digital content to Zedge's users; Emojipedia, the leading source of all

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things emoji; and Shortz, a mobile entertainment app currently in beta, focused on short-form storytelling. We possess deep expertise in monetizing our digital real-estate whether through advertising, subscriptions, or content sales. Our products appeal to a wide range of customer segments globally, and we

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have a strong user base in North America and Europe as well as in emerging markets, and India in particular.

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We finished fiscal 2021, which ended on July 31st, 2021, on a high note, reporting full-year revenue growth of 107%, $8.2 million in net income, over $9 million in EBITDA, and GAAP EPS of $0.59 versus a loss of $0.04 last year. Our business has tremendous operating leverage, which led to a 40% operating margin for the fiscal year, and we generated over $10 million in cash flow from operations. We closed the year with $25 million of cash on our balance sheet and almost no debt. Advertising revenue was the biggest driver of this growth as we continuously optimized our technology to drive higher prices received for every 1,000 advertising impressions, also known as CPMs.

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Subscription revenue and active subscriptions increased 101% and 49%, respectively for the year. Although we experienced a material slowdown in active subscription growth

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during the second half of the year, we have a set of growth initiatives underway that we believe will reverse this trend. On a positive note, even though Zedge isn't a "must-have" app, we nonetheless maintained healthy renewal rates of approximately 45% and 60% for second and third-year renewals, respectively.

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Turning to some key performance indicators for a moment -- monthly active users, or MAU, increased 8% in the fourth quarter, with emerging markets up 16%, driven mainly by demand in India. Developed markets remained a challenge with MAU declining in the low double digits over the year. Despite this, ARPMAU, or average revenue per monthly active user, increased 76% versus last year demonstrating our strength in monetizing users. Developed markets are a key area of focus for us, as they impact both advertising and subscriptions, and I will detail what is being done to deliver growth in these markets shortly.

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As we look to the future, many investors have asked important questions about the size of our opportunity, target growth rates over a sustained period, and what a mature operating model will look like in 3 to 5 years. While we are not yet in a position to provide this information, we ARE expanding our business from a solid foundation of 43 million MAU from which we will continue to extract value. We are looking at ways to further fuel growth in our existing products as well as introduce new products that can yield outsized returns. We will do this in a disciplined fashion by managing our risks while also looking for opportunities that have optionality.

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In fiscal 2021, we made great strides in progressing our product organization, which I believe positions us well for continued success. Over the course of the year, we invested in product management and now have dedicated product managers for our freemium Zedge app, Zedge Premium, our Zedge+ subscription offering, and newer initiatives, including

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Shortz. With leadership in place, we have started shifting to a