Zedge, Inc.

Thank you for your patience, ladies and gentlemen. Please continue to hold the line. Your conference will begin shortly. Again, we appreciate your patience. Please continue to hold the line. Your conference will begin shortly. Thank you. Thank you. Good afternoon. and welcome to ZEDGE's third quarter 2021 earnings conference call. During management's prepared remarks, all participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation by ZEDGE's management, there will be an opportunity to ask questions. To ask a question, please press star, then one on your touchtone phone. To withdraw your question, please press star, then two. In today's presentation, Jonathan Reich, ZEDGE's Chief Executive Officer, and E. Tsai, ZEDGE's Chief Financial Officer, will discuss ZEDGE's financial and operational results for the three-month period that ended on April 30, 2021. Any forward-looking statements made during this conference call, either in the prepared remarks or 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 earnings release is available on the Investor Relations page of the Zedge website. The earnings release has also been filed on a Form 8K 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 third quarter fiscal year 2021 earnings conference call. I'm Jonathan Reich, CEO of Zedge, And with me is our Chief Financial Officer, Yit Tsai, who will provide additional insight into our financial performance. Q3 was an excellent quarter for Zedge. We reported revenue of $5.3 million, our second highest quarter in the history of the company. We also delivered our fourth consecutive quarter of net income, sixth consecutive quarter of positive EBITDA, and seventh consecutive quarter of positive cash flow from operations. We're very proud of these achievements, especially in light of the seasonal nature of our business, with Q3 being historically weak, mostly from a drop in post-year-end holiday ad budgets. 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, ringtones, and notification sounds. Our flagship app, Zedge Wallpapers and Ringtones, is all about personal identity. It acts as a popular hub for self-expression for millions seeking mobile phone personalization, social content, and fandom art. The app is rapidly approaching 500 million organic installs across Android and iOS. an outstanding achievement for any app. 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 and market their digital content and sell it to our users. Zedge's strong third quarter performance is a testament to the ongoing investments we are making in ad operations, paid subscriptions, and Malgrove, the latter of which was up nearly 20% year-over-year. Specific to the last point, we also started seeing a material slowdown in the rate of mail decline in well-developed markets, which dropped by only 1% in Q3. Delving into paid subscriptions, although we benefited from what we consider healthy renewal rates of approximately 45% in year two and approximately 65% in year three, and the year-over-year increase remained strong, we did not match the level of our prior sequential quarterly increases. This was a function of customer churn rate remaining constant on a higher total subscriber number, combined with lower MAU in well-developed countries where our subscription offering tends to have better traction. It is unclear at this time whether the subscription part of our business was actually impacted by seasonality or if it was something else. Either way, we are being proactive in our efforts to reverse this trend, particularly in well-developed markets. Until recently, we had two product managers overseeing our entire product portfolio, Zedge Wallpapers and Ringtones, Zedge Premium, Zedge Plus, and Shorts. We recognized that, to better scale, we needed to invest in expanding our product management team. We waited to pull the trigger on this until early calendar 2021, with the completion of the content management system migration, and now have three dedicated product managers working on our personalization app, one focusing on the premium offering, another focusing on Zedge Plus, our paid subscription offering, and the third focusing on Zedge Premium. In addition, we have a product manager assigned to new initiatives, including shorts. We believe that the additional resources will allow us to scale and execute on the various growth initiatives that we have identified with greater efficiency and ease. Although early, we're starting to see results from these hires, most recently with the completion of the overhaul of user accounts, a prerequisite for social and community features that will be incrementally introduced later this summer. The ability to follow artists and other users, create and share collections, Notify users about new followers and new content and offering an easy-to-remember handle like Zedge.meese forward slash Jonathan Reich are expected to unlock fundamental user growth. Furthermore, we are going to enhance Zedge Plus by bundling in value ads to make it more attractive to a broader cross-section of prospective customers and ultimately drive incremental growth. Finally, The newly hired Zedge Premium Product Manager is working on a set of initiatives to expand our premium creator community, increase average revenue per artist, optimize and localize pricing, make premium content more accessible to consumers, introduce new functionality including NFTs or non-fungible tokens, ensuring that they are easy to use, operationally affordable, environmentally sustainable. and an improvement to our creator publishing platform. Apart from this, we now have the marketing infrastructure in place from attribution to analytics and all the associated connections to start testing paid acquisition growth strategies. This will be an iterative process allowing us to scale based on ROAS or return on ad spend. I would be remiss if I didn't spend some time updating you about Shorts. Earlier this year, we hired a product manager who has been spending the bulk of his time doing foundational work needed to understand the user base, how they interact with the app, what content they like, and how they consume it. Under his watch, we introduced an ad-supported version of short casts, high-value podcasts of the content. We believe that short-form fictional content is optimal for smartphone users and that this space is still in the early stages of maturation. We are also beginning to test various paid user acquisition strategies to complement existing organic channels, introduce new features, and expand our audio catalog. We were even more encouraged that there is a large opportunity here for Zedge in light of Naver's recent acquisition of Wattpad for $600 million and Cacao's acquisition of Radish for $430 million. Last quarter, we introduced disciplined M&A as part of our growth strategy. While we don't have anything to announce at this juncture, we have been active in looking at potential targets. As a reminder, our acquisition strategy is to seek out opportunities where we can leverage our large user base, expertise in monetization, know-how in managing complex platforms, outstanding engineering talent, and a healthy balance sheet. In closing, our first three quarters of the fiscal year have been outstanding, and we expect to report continued strong year-over-year growth in Q4, despite a tougher comp as our business turned the corner in Q4 of fiscal 2020. Based on our strong fiscal year-to-date performance, we are raising our full-year fiscal 2021 expectations for revenue growth of 95% to 100%, while maintaining our track record of strong profitability and cash flow from operations. Before handing the call over to E, I would like 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 and dedicated professionals who work at Zedge and who go above and beyond to execute our vision. Thank you. Now I'm going to turn the call over to E who will provide details about our financial performance. Thank you.

Thank you, Jonathan. I want to start by reminding those on the call that our fiscal year ends July 31st. Additionally, last quarter we introduced the term active subscription to replace paid subscription as a metric. Due to a change in the calculation used by Google Play, they now include accounts hold, which is a subscription status that begins when the users from a payment fail. And the three days grace period has ended with our payment resolution. The account hold period lasts for up to 30 days with the aim to reduce cancellation rate. Moving to the third quarter results. Monthly active user, or MAL, defined as a number of unique users that opened our app during the last 30 days of the period. Increased 20% to 34.5 million during April 2021, from 28.8 million during April 2020. Emerging market MAL expanded by nearly 30%. Total revenue in the third quarter increased 153% from last year to $5.3 million. While our growth was extremely impressive regardless, keep in mind that Q3 of 2020 is when CPMs bottoms up. So this year we saw the benefit of the work we are continually doing to improve our ad operations. Sufficient revenue was up 98% from last year, still demonstrating strong growth despite the slowdown in net additions. It is unclear how much of the slowdown in sequential new sufficient growth was seasonal and how much was related to low amount in oil developed market. But with our recent hires and product initiative we are working, to accelerate growth in fiscal 2022. Zed's premium growth transaction value, or GTV, that is the total sales volume transacted through our marketplace, was $250,000, up 68% compared to the year-ago quarter, and 19% sequentially. As Jonathan indicated, We are investing in growing this offering. Active subscription exceeded $750,000 at the end of the quarter, an 89% increase year-over-year. As you recall, when a new user purchases a subscription or a freeman user converts 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, whether monthly or annual, renews their subscription after 12 months, the Google fee drops to 15%. In Q3, we continue to see annual second renewal rate of approximately 45%. And third-year renewals are coming in at 65%, which is generally considered to be strong performance within the industry. Overall, the average revenue per monthly active user, or RM, was $0.49, an increase of 121% year over year. driven by the combination of better advertising performance and higher pay subscription numbers. Operating margin increase of 38% versus negative 6% last year, reflecting the continued cost control we have implemented while still being able to invest and grow. Net income and diluted earnings per share was $1.9 million and 13 cents respectively, versus a net loss of $300,000 and loss per share of 3 cents in the prior year. Average shares outstanding for the third quarter were about 14.6 million on a fully diluted basis, representing the share with an issue as part of our ATM. combined with option exercises as the stock had increased significantly in value over the past 12 months. EBITDA was $2.3 million versus breakeven last year. From a liquidity standpoint, we remain in a strong net cash position with almost no debt. A near $25 million in cash and cash equivalent a $20 million increase from last year and over $11 million sequentially. The increase in cash over Q2 was driven by a combination of positive operating cash flow of $4 million and net proceeds of $7 million from the $10 million ATM program we initiated this quarter, sales of which occurred at a weighted average price of about $15. Moving to guidance for the full fiscal 2021. As Jonathan mentioned, we have increased our top line growth expectation to 95% to 100%. Q4 has traditionally been stronger than Q3, but also keep in mind that our Q4 calm will be tougher due to the growth trajectory that began in Q4 20. Also note that with some key new hires, we expect our operating expenses run rate to increase slightly in Q4. 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.