Zedge, Inc.

Good afternoon and welcome to ZEDGE's second fiscal quarter 2022 earnings conference call. During management's prepared remarks, all participants will be in 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 2. 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 second fiscal quarter that ended on January 31, 2022. 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 earnings conference call for the second quarter fiscal year 2022, ended January 31st, 2022. 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. For those of you who are new to the Zedge story or haven't followed us in a while, we own a portfolio of leading digital consumer brands that served 44 million users globally in January of 2022. Our portfolio consists of Zedge ringtones and wallpapers, otherwise referred to as the Zedge app, which is the leading mobile app used for mobile phone personalization, social content, and fandom art. and includes Zedge Premium, a marketplace for artists, celebrities, and emerging creators to market their digital content and NFTs to Zedge's users, Emojipedia, the leading website dedicated to all things emoji, and a set of experimental apps and services that our innovation team are working on, all at various stages of development. It's important to underscore that these are experimental, and may not evolve into full blown commercial offerings. 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 user segments globally. We have a strong customer base in North America, Europe, and emerging markets, particularly India. Importantly, At the current time, we do not have material exposure in Russia or Belarus. Today, Android users account for roughly 96% of the Zedge app's monthly active user base and 91% of its revenue. Our second quarter was another record quarter for revenue, growing 30% over last year. Operating margins remained strong at 45%, Net income came in at $2.3 million, and EBITDA was a record $3.4 million. At quarter end, we held more than $30 million in cash with almost no debt. In addition, we continued optimizing our Zedge Apps advertising stack, driving exceptional CPMs, that is, the price that we received for every 1,000 advertising impressions sold in our app. MAO for our Zedge app increased 3 percent to 36 million, with emerging markets up 7 percent, driven mainly by continued demand in India. However, developed markets remain the challenge, with MAO declining in the low double digits. We are working on enhancing our offerings and services to reverse the trend of declining MAO in this segment specifically, and accelerating growth more generally. including introducing social and community features. Despite the latter, ARP now, or average revenue per monthly active user, increased a healthy 22% versus last year. Subscription revenue and active subscriptions increased 18% and 7%, respectively, versus last year. Before I update you on the strategic priorities I have outlined on our last two earnings calls, I want to take the time to address several important items that I believe are relevant to investors. First, concerning advertising. As many of you know, mobile apps that generate programmatic advertising revenue need technology, otherwise known as ad mediation, to manage the sale of their ad inventory. In late 2021, Twitter sold its ad mediation business, MoPub, to Applovin. Soon after the sale, AppLovin announced that it would deprecate MoPub's platform on March 31st. As such, we started assessing various alternatives, including AppLovin's Max platform, and reallocated resources to commence testing and migration by the end of March. Unfortunately, this needed resource investment temporarily delayed the rollout of some of our social and community features. Despite the challenges, we expect to complete our migration by the cutoff date. Although the migration was a compulsory distraction, it was necessary, and we are doing our best to ensure that the long-term outcome will benefit our customers and our business. Next, I want to talk about our innovation team. This group is tasked with identifying potential new products and is targeting to release up to three proofs of concept per quarter. Even though many of these will not progress to full blown products, we will benefit from the learning associated with them. We have fine tuned this development process over the past few years to the point where we can efficiently and cost effectively introduce new ideas, concepts, and apps without material adverse impact to our bottom line. The idea here is to identify new opportunities that can hopefully scale into a sustainable long-term business. As these unfold, we look forward to sharing more details. The shorts beta was the first foray of the innovation team, and we are currently contemplating the future direction for this project. Over the next couple of weeks, we expect to render a decision about future investment, and we'll update you about our plans next quarter. Even if we decide to reduce investment, I assure you, our efforts were not for naught. We gained meaningful insights into scaling the innovation process, rapid tech development, marketing, and product customer fit, which we will benefit from in the future. Next, I want to address a misconception that some investors are using to justify the decline in our stock price. We have over 540 million cumulative installs, representing 12% growth from the end of last year's second quarter. We also have close to 10 million user ratings in Google Play, with an average rating of 4.6. It appears that, due to the lack of public KPIs, certain investors or followers are attributing our strong revenue growth to oversaturating the app with advertisements at the expense of user experience. We do not believe this argument is justified. We regularly analyze customer experience, their satisfaction and usage, and if the information reveals a fundamental issue, we take corrective measures accordingly. Furthermore, if users prefer an ad-free experience, they have the option of signing up for a very affordable subscription. Although some users leave us one- and two-star ratings, we try our best to optimize the holistic experience as evidenced by the enhancements and features we have released and we will continue to release in the future. This provides a good transition to discussing our key strategic priorities. At the top of the list is growing mail and improving engagement, particularly in well-developed markets. During the fiscal first quarter, we began rolling out social and community features, starting with giving our users the ability to follow artists they find interesting. Now that the ad mediation platform migration is almost behind us, we will introduce more of these features and expect the notification pane to be available in the next several months. This will inform users when new content that aligns with their tastes is uploaded to the platform. In addition to core product development, we are also scaling up paid user acquisition and recently expanded our team to help scale profitably. Next up, we continue to invest in the parts of the business that offer optionality. VegPremium is a big part of this opportunity. We rolled out our potentially disruptive NFTs Made Easy platform in December, and even with limited functionality, have experienced early success. To date, we have sold close to 600 video wallpaper NFTs. Our ease of use approach to NFTs allows non-crypto experts to sell NFTs simply by toggling the publish as an NFT option and allows users to purchase these NFTs by buying Zedge tokens, our existing virtual currency, which are available in the Zedge app through in-app purchases and spending them accordingly. Thus far, we have only opened the platform to select artists and limited the offering to video wallpapers. Soon, we will begin to make the platform available to more artists, diversify the content that can be minted, offer numbered editions, drop dates, auctions, and trading. Stay tuned for further announcements in 2022. While there are no material operational updates about Zedge Plus subscriptions, we remain committed to enhancing this offering and will keep you apprised when there is news to share about their progress. Moving to Emojipedia, we are about to roll out multi-language support. Next up is a site redesign centered around improving functionality and increasing engagement and monetization. Finally, we are looking to the second half of the calendar year to experiment with what a native Emojipedia app experience would be like. And finally, there's M&A, where we remain active in evaluating potential opportunities to broaden our offerings and enhance our portfolio. In closing, we had an outstanding second fiscal quarter of 2022 and believe we are still in the early innings of reaching our growth potential. Given the impending transition to the new ad mediation platform and the temporary delay in releasing social and community features, we have chosen to remain conservative with our guidance by leaving it unchanged at this time. We still expect top line growth of 25 to 30% with continued net income growth, 40% plus operating margins, strong cash flow, and EBITDA growth exceeding revenue growth. Before I wrap up the call, I want to especially call out our team in Lithuania, which has remained focused and productive while offering support and assistance, where possible, to their neighbors in Ukraine who are battling unjustified aggression. In fact, in solidarity, we have changed our logo to the colors of the Ukrainian flag to support the Ukrainian people. While we know this may be controversial to some, we believe it is the right thing to do and we have contingencies in place should the aggressor's ambitions move beyond Ukraine. Before handling the call over to E to go through our financial results, I want to thank our investors for your support. I know the market has not been kind to Zedje's stock over the past several months. Still, our fundamentals growth prospects, and profits remain strong, our valuation is inexpensive, our opportunity is large, and we have built a track record of execution. Yi?

Thank you, Jonathan. I want to remind those on the call that our fiscal year ends July 31st, and our second quarter ended on January 31st. Moving to our second quarter results, MAO defined as the number of unique users that open our ZADS app during the last 30 days of the period. Increased 2.5% to 36.3 million during January versus 35.4 million last January. Immersive market MAO expanded by 7.3%. while well-developed market now contracted by 10.5%. Total revenue in the second quarter increased 30% to $6.9 million from last year. This year, we benefited from our ongoing work to improve our ad operation. In addition, subscription revenue was up 18% from last year. Zed's premium growth transaction volume, or GTD, that is the total sales volume transacted through our marketplace, more than doubled to $434,000. But Jonathan indicated this is a crucial focus for us as we believe the marketplace potential is still substantially untapped. and will benefit significantly from our new NFT platform. Active subscription will top 7% versus last year and will flag sequentially. The slowdown in net subscription growth was basically due to the number of new subscriptions added being offset by our churn rate. which has remained a constant percentage, even as we grew to a higher base number of subscriptions. This is a common problem for consumer subscriptions, as the subscriber base gets larger, and as Jonathan mentioned, we are taking steps to re-accelerate sequential growth in this number. Overall, app miles were 6 cents. An increase of 22% year-over-year, driven by the combination of better advertising performance and higher paid subscription number versus last year. Operating margin decreased to 45% versus 47% last year. While still a very strong number, several items, which when taken as a whole, caused this number to decline. including legal expenses related to the evolving privacy landscape and associated compliance, higher compensation expense due to new hires and stock award, as well as an increase in pay UA. A couple of non-operating items negatively impact net income and EPS in the second quarter. First, as we mentioned on previous call, we are in the transition year for becoming a taxpayer in the U.S. as we use up our U.S. NOL in fiscal 2021, which led to an income tax rate this quarter of 23.4% versus 12.3% last year, which added $392,000 to income tax expense. This tax rate increase restrained our net income growth rate to 2% at $2.3 million. The diluted EPS was down a penny due to the tax increase, combined with an 11.5% increase in share count. When you strip away these non-operating items, EBITDA was a record $3.4 million. versus $2.9 million last year. From a liquidity standpoint, we remain in a strong net cash position with almost no debt and over $30 million in cash and cash equivalent. A $5 million increase for the six-month end of January 31, 2022, and up $2.7 million sequentially. Moving to guidance, despite year-to-date revenue growth of 43%, we remain very conservative, as Jonathan said, due to the impending transition to the Ed Loven Max platform and are therefore not changing our 25% to 30% revenue growth target for the whole year. For operating expenses, We forecasted higher operating expenses mainly due to hiring, pay user acquisition, and other items, and say we expected our operating margin to be at least 40%. We will leave this unchanged as we are at 44% year-to-date. For modeling purposes, we say our expected tax rate would be around 21%, and we are at 22% year-to-date. I also suggested using 15 to 15.4 million shares for calculating diluted EPS, and we are right at 15 million year-to-date. We also said that we expected our net income and EPS growth rate to lag due to this item. Given the increases in the last two items, most significantly the tax rate, we say that we expected a drag on EPS growth in fiscal 2022. Still, we anticipated continued net income growth with robust cash flow and EBITDA growth. For EBITDA, we say we were targeting a growth rate that is slightly higher in our 25% to 30% revenue guidance. And here today, EBITDA growth is 47%, with an EBITDA margin of 49%. Thank you for listening to our second quarter earning call, and I look forward to speaking with you again on the next call. offer them back to you for Q&A.