Zedge, Inc.

Good afternoon, and welcome to ZEDGE's third fiscal quarter 2022 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, press star, then one on your touchtone phone. To withdraw your question, please press one. I will now turn the call over to Brian Siegel. Thank you, Matthew.

In today's presentation, Jonathan Wright, Deputy Chief Executive Officer, and Isai, CEGE's Chief Financial Officer, will discuss CEGE's financial and operational results for the third fiscal quarter ended on April 30th, 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 Dedge files periodically with the U.S. Securities and Exchange Commission. Dedge 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 Zedge earnings release is available on the investor relations page of the Zedge website. The earnings release has also been filed on form 8K with the SEC. I would like to now turn over the conference to Mr. Jonathan Wright.

Jonathan? Thank you, Brian, and thank you all for joining us today. Good afternoon. Welcome to Zedge's earnings conference call for the third quarter of fiscal year 2022, which ended April 30th, 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. Zedge builds marketplaces and games around digital content that people use to express themselves. Our leading products are the Guru Shots photography game and Zedge's premium digital content marketplace, which today offers mobile phone wallpapers, video wallpapers, ringtones, and notification sounds. We also own Emojipedia, a website that is the leading source of information about emojis. In total, our products served over 40 million users during May. Our company is positioned at the intersection of two major growth trends in consumer tech, casual gaming and the creator economy. Today, most smartphone users have become amateur content creators, sharing their photos, illustrations, memes, and videos to express themselves and gain social validation. In addition, They value friendly competition and garner popularity and recognition from their online community. Many of these creators are talented enough to attract a meaningful following and monetize their content. This is what's known as the creator economy, a market that has grown massively over the last five years. We aim to bring creators into our ecosystem to compete with each other while improving their skills and also offer them the opportunity to earn money. Our game provides competitive photo challenges in a peer community, and our marketplace allows this community to share and monetize its content. Our existing base of over 40 million users is an attractive value proposition to talented creators. This synergy between gaming and marketplace unlocks additional engagement and provides an outstanding organic traffic funnel for GuruShots players to also become Zedge premium artists. This has the dual benefit of lowering the spend needed to acquire premium artists while also growing gross transaction value and associated revenue. We announced our acquisition of GuruShots in April. It plays an important role in advancing this vision. The GuruShots team brings significant expertise in gamifying user-generated content and monetizing users by selling game resources through in-app purchases. We expect to apply that gamification expertise across our product portfolio. Similarly, our Zedge Marketplace team is highly experienced in managing massive catalogs of user-generated content and optimizing monetization through a combination of advertising, subscriptions, and a virtual token-based economy. Those of you who regularly join our earnings call will notice that our narrative has evolved and more clearly articulates the strategy we have been pursuing. Now that GuruShots is officially part of Zedge, it makes more sense to explain the opportunity we see in combining games and marketplaces under the same roof than it would have been before we owned a gaming property. Both GruShots and the Zedge Marketplace offer a great promise for incorporating NFTs. Last December, we launched NFTs Made Easy, inviting a select group of Zedge Premium Marketplace creators to start selling their video wallpapers as single-edition NFTs. Thus far, our users have purchased 30% of all NFTs offered in the Marketplace, with prices averaging about $20. This sale rate and average price are substantially higher than other premium marketplace content. I will provide more details about the next evolution of NFPs made easy later in the call. We are also developing new products that fit our interconnected games and marketplaces strategy. These products remain experimental and are not expected to contribute to our revenue in the short term. We possess deep expertise in monetizing our digital real estate, whether through advertising, subscriptions, or content sales. As a result, our products appeal to a wide range of user segments globally. Today, Android users account for roughly 96% of the Zedge app's MAO and 91% of its revenue. Before discussing our evolution and the exciting opportunities we see coming down the pike, I'd like to provide context to our third quarter results. Despite a solid first half of the year, we kept full-year revenue guidance unchanged at 25% to 30% year-over-year growth when we conducted our second quarter earnings call. We chose a conservative approach due to transitory factors that were likely to negatively impact MAO and paying subscribers, resulting in lower revenue growth rates. MAO declines mainly resulted from traditional seasonality in the business, with Q3, which follows the end-of-year holiday season, typically seeing a downturn in MAO, a decline from users who uninstalled the Zedge app after we changed its icon to the colors of the Ukrainian flag, and the forced app upgrade relating to the necessary migration to AppLovin's Max ad mediation platform. As we mentioned last quarter, the latter also resulted in a delay in the release of social and community features, which we believe will help reverse the Mao declines, especially in well-developed markets. by around a quarter. Despite these headwinds, ARPMO increased by 8%, and we generated $5.6 million in cash flow from operations, including AppLovin's one-time $2 million payment, bringing our cash balance at the end of the quarter to $17 million after the $18 million payment to GuruShot's shareholders. We also generated $2.9 million in adjusted EBITDA. On another positive note, the operational transition to AppLovin's Max platform has been smooth, and it is yielding more revenue on a per-user basis compared to MoPub. In addition, Active user levels rebounded from early May lows due to marketing initiatives implemented in advance of the new social and community feature upgrades, which we expect to be available later this month. Over time, we believe these new features will be an important catalyst for growing Mayo in well-developed markets, resulting in higher ad revenue and active subscriber growth. Zedge Premium's gross transaction value, or GTV, continued to increase at an impressive rate with 63% growth. We believe our NFT strategy, mainly providing utility to creators, especially ones that lack a deep knowledge of technology, is critical for building a sustainable business. Fortunately, our business has been insulated from what pundits are deeming the crypto winter. because we offer an affordable, easy, and eco-friendly way for creators to tokenize their content that uses Zedge credits and not cryptocurrency. This month, we will be expanding this functionality by introducing several features, including numbered editions, the ability to add audio to video wallpapers, and expanding into static wallpapers. Keep in mind that the value proposition to our Zedge Premium creator base significantly improves with NFTs. Previously, a creator could make pennies for selling multiple video wallpapers, and now they can make thousands of times that amount with one NFT sale through NFTs Made Easy. To promote these new features, we are forging relationships with artists, that have demonstrated success auctioning their NFTs on other platforms. These artists are excited about the prospect of gaining access to our global user base and offering numbered editions of up to 100 for price points that are more accessible to the masses. We are also in the final stages of unleashing more of Emojipedia's potential. By the end of June, we expect to introduce localized versions of Emojipedia in Spanish, French, German, Italian, and Portuguese, and refresh the user interface with a new design including all monetization elements. This should benefit us in time for World Emoji Day, which is celebrated on July 17th. In summary, we took steps to address some near-term challenges weathered the storm, generated cash, and focused our attention on activities that we expect will return the ZEGF to higher levels of profitable growth. This provides a good transition to discussing the transformational Guru Shots acquisition and our strategic priorities going forward. We closed the Guru Shots acquisition on April 12th, so our results include a partial month of their financials. We see Guru Shots as a transformational asset on its own, but have also identified significant potential synergies that we expect will make one and one equal a lot more than two. My colleagues from Lithuania, Norway, and the U.S. recently returned from an in-depth set of planning sessions with our coworkers at Guru Shots. It was amazing. Guru Shots is a category killer that fuses photography with gaming, enabling amateur photographers, essentially anyone with a smartphone, to compete in a wide variety of contests across iOS, Android, and the web that showcase their photos. The game mechanics include progressively more difficult competitions, with successful players mastering their skills and then continuing to the next level until ultimately earning the coveted Guru title. players can compete individually or join together as a team. The product includes community features, leaderboards, and chat functionality, which create a sense of belonging, inspiration, and competition. While the penetration rates leave a lot of room for growth, we estimate that 30 to 40 million photo enthusiasts regularly use their smartphones to take and publicly share high-quality photos and who would be interested in participating in photo contests every month. Given the early stage of this gaming vertical and the limited investments made to date, the stats are impressive. Guru Shots players have uploaded more than 140 million photos since the game's inception, with more than 1 million new photos currently being added monthly. In addition, their LiveOps team launches more than 300 competitions per month. Users vote on submitted photos, and the ones receiving the most votes secure higher rankings until there's a winner for the competition. Depending on players' engagement, amongst other things, they can secure more voting power, and this yields over 5 billion votes cast monthly. Guru Shots is a free-to-play game that monetizes today strictly by selling in-game resources that increase a photo's exposure. Although only a small fraction of users purchase these resources, GuruShots boasts an ARP mail of approximately $3.50 versus five to six cents for the Zedge app. Furthermore, currently paying players spend over $50 per month, representing an 18% CAGR over the past six years. When looking at Guru Shots on a standalone basis, we have several products and marketing initiatives that we expect to make this year to accelerate growth. Furthermore, we are investing in organic and paid user acquisition strategies to expand the top of the funnel and increase mail. These efforts will include paid user acquisition, app store optimization, also called ASO on iOS and Android, search engine optimization, or SEO, and affiliate and influencer marketing across mobile and the web. As a reminder, we have committed up to $5.3 million for paid user acquisition over the next 12 months, subject to user cohorts generating a minimum return on ad spend, or ROAS. If this spending is effective, it could generate high double-digit revenue growth rates. The product enhancements we are focused on include improving onboarding by segmenting users and drawing them into the gameplay early on. One of the things I learned during my trip was that there is a steep learning curve for new users as successful competitors develop sophisticated game strategies centered around in-game resource utilization. Next, we will release a feature called Battles, which are simple mini competitions that resemble a social game. Battles will introduce new players to the excitement of competing from the get-go. We expect this will result in converting installs into free players, some of whom will ultimately purchase game resources as they become immersed in the experience and get hooked on the game. Finally, we expect to introduce a learn option that users can turn to for photo tips and skills building to improve their photo taking ability. Although we don't have all the details worked out as of yet, we expect this value add will act as a revenue driver and catalyst for user engagement. I would be remiss if I didn't address ScrooShot's R&D team. In a nutshell, they are impressive. Furthermore, Our combined teams have an in-depth plan for migrating to a common cloud platform, which will lower costs and simplify the platform. Let me turn to synergies, which we think can bring significant upside to the company over the next several years. The GuruShots acquisition is expected to accelerate the growth of Zedge Premium's marketplace and NFT offerings. The possibilities here are truly exciting. Think about it. Guru Shots players are a self-selected group of high-quality photographers that crowdsource great content in near real time. Furthermore, these players are either playing for free or paying to play, enabling us to offer them the ability to monetize their handiwork in our creator economy. We believe that the opportunity for GuruShots users to monetize the 1 million plus photos uploaded monthly through our NFTs Made Easy platform is a very attractive value proposition that could materially expand the size and growth rates for this part of the business. GuruShots also brings a deep knowledge of gamification, especially in the world of visual arts. One of our goals is to gamify the ZEGF to improve engagement and retention and thus grow math. Additionally, we have identified several other verticals that we believe are ripe for gamification, but it is too early to provide details. The acquisition of Guru Shots will alter our financial projections given the expected growth investments. we will be making. Despite global economic uncertainty, including the Russian war, inflation, and rising interest rates, we expect fiscal 2022 revenue growth to exceed 30% on a consolidated basis. We also expect to remain profitable and generate positive adjusted EBITDA in the fourth quarter, leading to adjusted EBITDA for the year growing in line with revenue. Beyond fiscal 2022, we are investing in Guru Shots in addition to our existing business. Our goal is to continue to remain profitable and generate positive adjusted EBITDA and cash flow from operations as we drive Guru Shots towards high double-digit revenue growth and positive adjusted EBITDA on a standalone basis over the next 18 to 24 months. To better accelerate growth and control costs, we've decided to redeploy our innovation team to GuruShots for the remainder of the year. This will help accelerate growth while also providing this team with an immersive education in gamification. Once they've acquired this knowledge and gained this experience, they will be tasked with gamifying both the Zedge app and the other verticals that we believe offer untapped opportunities. I think this speaks to our management team's strength and its ability to make responsible decisions that inure to the benefit of the business, both from a growth and cost perspective. It also points to the talented employee base we have cultivated. Before handing the call over to E to go through our financial results, I want to thank our investors for your continued support. As many of you have seen, some of our board members and I made open market purchases of Zedge since the Guru Shots acquisition closed. We did this because we truly believe in Zedge's long-term potential and that the stock price neither reflects this potential nor the current financial results. I also want to thank our employees for their commitment and hard work, especially in light of the Guru Shots acquisition. Finally, I'd like to underscore how highly we think of our colleagues at Guru Shots. We've had a great start to our relationship, and we are excited to work together to increase shareholder value over time.