Zedge, Inc.

Good afternoon and welcome to ZEDGE's fourth quarter and end of fiscal year 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 2. In today's presentation, Jonathan Reich, ZEDGE's Chief Executive Officer, and Yi Cai, ZEDGE's Chief Financial Officer, will discuss ZEDGE's financial and operational results for the fourth quarter and full fiscal year that ended on July 31, 2021. Any forward-looking statements made during this conference call, either in 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 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 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 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, Yit Tsai, who will provide additional insight into our financial performance. We will then be happy to take your questions. On today's call, I will address the company's amended 10-Q filing for the third quarter ended April 30, 2021, and briefly review our fiscal 2021 results. I'll then conclude by discussing the next stage in our evolution. 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, and we are working diligently with our auditors and tax advisors to promptly remediate the weakness and ensure that we do not face similar challenges going forward. Now, moving on to our business. 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 things emoji. And Shorts, 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 have a strong user base in North America and Europe, as well as in emerging markets and India in particular. We finished fiscal 2021, which ended on July 31, 2021, on a high note, reporting full-year revenue growth of 107%, $8.2 million in net income, and over $9 million in EBITDA, and GAAP EPS of 59 cents versus a loss of 4 cents 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. Subscription revenue and active subscriptions increased 101% and 49% respectively for the year. Although we experienced a material slowdown in active subscription growth 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. 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. 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 three to five 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 monthly active users 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. 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 premium Zedge app, Zedge Premium, our Zedge Plus subscription offering, and newer initiatives, including shorts. With the leadership in place, we have started shifting to a full-stack product team structure to improve efficiency and quality. With the foundation set, I will now talk to our strategic priorities for 2022 and beyond. A top priority is growing our customer base and improving engagement, particularly in well-developed markets. We've already started rolling out personalized recommendations, harnessing the machine learning algorithms that we successfully tested over the summer. Before the end of the calendar year, we plan to introduce social and community features, which we will iterate on over time. Many of these initiatives are coming to fruition due to the foundational work we completed in fiscal 2021, including overhauling our content management system and unifying user accounts, We have also started testing and analyzing paid user acquisition campaigns and will expand this effort as long as it proves to be accretive. Next, we will continue investing in the parts of our business that offer optionality. For Zedge Premium, this means introducing one-of-a-kind and limited edition content in a user and eco-friendly fashion developed through technology innovations. One planned part of this new content offering will include introducing NFTs as a way for our artists and creators to offer protected, unique content. We will also test new content genres and audio implementations in shorts, while expanding the user base with paid user acquisition and simultaneously deepening our understanding of the target demographic. Beyond personalization and short-form entertainment, we are evaluating several potential new product opportunities, but it is too early to provide further details at this time. We are also committed to enhancing our subscription offering by creating value-added bundles like exclusive content and enhanced features, as well as possibly introducing a multi-product subscription offering. Unlocking Emojipedia's value is another priority. We are committed to growing Emojipedia's business beyond desktop and mobile web by opening it up to the world of native mobile apps. Coupled with this is our interest in localizing Emojipedia and supporting other languages beyond English. Our team is also planning on improving monetization by enhancing the ad stack and possibly offering a subscription product. And finally, there's M&A, where we are searching for symbiotic opportunities that can benefit from access to our large user base, our expertise in monetization, our technical know-how, and our skill in managing a complex platform amongst other benefits. Of course, I cannot assure you that any of these will come to fruition, but suffice it to say, we are actively looking, have engaged in some discussions, and have passed on others. In closing, we had an outstanding record year in fiscal 2021, but are not resting on our laurels and are working diligently to drive longer term growth. That said, given it is early in the year and we have some pretty tough comps to beat from fiscal 2021, we are starting the year guiding to top line growth of 25 to 30%. At these levels, we expect continued net income growth, strong operating margins and cash flow, and strong EBITDA growth. Before handing the call over to E, 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 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 Yi, who will provide details about our financial performance.

Yi? Thank you, Jonathan. I want to start by reminding those on the call that our fiscal year ended July 31st. Additionally, the term active subscription is a metric used by Google Play that now includes account hold, which is a subscription status that begins when the users from a payment fail. and the three-day grace period has ended without payment resolution. The canceled period lasts up to 30 days with an aim to encourage renewals and reduce the cancellation rate. Once an account goes past the 30-day grace period, it is no longer an active subscription. Moving to our full-quarter results. Monthly active user, or MAL, defined as the number of unique users that open our app during the last 30 days of the period, increased 8% to 34.4 million during July versus 31.9 million in July 2020. In merchant markets, MAL expanded by 16%. Total revenue in the full quarter increased 93% from last year to $5.2 million. This year, we benefited from our ongoing work to improve our ad operation. Supply chain revenue was up 55% from last year, still demonstrating strong growth despite a slowdown in net addition during the second half of the year. Zed Premium's growth transaction value, or GTD, that is the total sales volume transacted through our marketplace, was about $274,000, up 45% compared to the year-ago quarter and 9% sequentially. As Jonathan indicated, this is a key focus for us going forward as we believe the potential of the marketplace is still substantially untapped. Active subscription was up 49% versus last year. Beginning July 1, 2021, Google updated its policy and reduced fees for the first $1 million of in-app purchases to 15%, which includes subscription and token sales. and it then increased to a 30% fee later after. After 12 months, this fee dropped back down to 15% for annual and monthly subscription. They are renewed. This fee is accounted for as a marketing expense within SG&A. In Q4, we continue to see annual second renewal rate of approximately 45%, and 30-year renewal are coming in at 60%, which is generally considered to be a strong performance within the industry for a non-essential app. The slowdown in net subscription growth in the second half of the year was basically due to the number of new subscriptions added being offset by our churn rate, which has remained a constant percentage, even though we grew to a higher base number of subscriptions. This is a common problem for consumer subscription as the subscriber base gets larger. And as Jonathan mentioned, we are taking steps to return this number to a net positive. Overall, the average revenue per monthly user or amount was $0.05, an increase of 76% year over year. driven by the combination of better advertising performance and higher paid subscription number versus last year. Operating margin increased to 42% versus 14% last year, reflecting the continued revenue growth and strong operating leverage inherent in our business. Net income and diluted EPS were $2.5 million and 17 cents, respectively, versus net income of $500,000 and EPS of 4 cents in the prior year. Average share outstanding for the forecourter was about $15 million on a diluted basis. With an increase representing the share reissued during the year as part of our now-completed ATMs, combined with option exercise. EBITDA was $2.7 million versus $830,000 last year. From a liquidity standpoint, we remain in a strong net cash position with almost no debt, and nearly $25 million in cash and cash equivalent, a $20 million increase from last year, and flat sequentially, despite having put about $4.8 million in cash into escrow for the EvoGP acquisition during Q4. Now, I would like to provide some more color on the guidance Jonathan provided for fiscal 2022. As he said, we are initially providing guidance for revenue growth of 25% to 30% for the year. Due to all of the new initiatives and future releases, seasonality, which usually pick in our second fiscal quarter, may not be typical this year and internally we are monitoring sequential revenue growth each quarter. As we get into the year and have better visibility into the impact of our new initiative, we expect to provide updates as appropriate. Despite the increased level of investment, we currently believe that we should continue to report operating margin of at least 40% for the year. For modeling purpose, we expect to be a taxpayer this year at an expected rate of 21% as we use all of our NIL in fiscal 2021. I would also suggest using 15 to 15.4 million shares for calculating diluted EPS. Given the increases in the logical item, most significantly the tax rate, we expect this to be a drag on our EPS growth in fiscal 2022. However, as Jonathan stated, we anticipate continuing net income growth with strong cash flow and EBITDA growth. For EBITDA, we are targeting a growth rate that is slightly higher than our revenue guidance. Thank you for listening to our four-quarter earning call, and I hope that each of you remain safe. I look forward to speaking with you again on the next call. Operator, back to you for Q&A.