Zedge, Inc.

Good afternoon and welcome to ZEDGE's earnings conference call for the first fiscal 2023 quarterly results. 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 1 on your touch-tone phone. To withdraw your question, please press star 2. I will now turn the call over to Brian Siegel.

Thank you, Operator. In today's presentation, Jonathan Reich, ZEDGE's Chief Executive Officer, and Isai, ZEDGE's Chief Financial Officer, will discuss EDGE's financial and operational results for its first fiscal quarter 2023, ended on October 31st, 2022. Any forward-looking statements made during this conference call, during 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 in the future to differ materially from those discussed on today's call. These risks and uncertainties include, but are not limited to, specific risks and uncertainties disclosed on the reports that ZEDGE periodically files with the SEC. ZEDGE assumes no obligation to update any forward-looking statements or to update the factors that may cause actual results to differ materially from those that they forecast. Please note that our 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 now like to turn the conference over to Jonathan.

Good afternoon. Thank you, Brian, and thank you all for joining us today. I'm going to start by briefly reviewing our first quarter results, which were generally in line with our expectations, as Q1 has historically been seasonally weaker ahead of the holidays. Q1 revenue increased 15 percent from last year. The most significant driver is attributable to the addition of Guru Shots. However, the combination of global economic uncertainty geopolitical risk, inflation, and rising interest rates resulted in lighter advertising spend when compared to years past. Aside from that, there was also an anomaly in our Q1, as some advertisers tried optimizing their user acquisition campaigns by testing new usage attributes, ultimately resulting in lower ad spend in the Zedge app. The good news is that spending trends improved at the end of the quarter, but were too late to offset the earlier declines. As discussed previously, we are reinvesting our profits into Guru Shots and other new growth initiatives while still aiming to remain profitable and cash flow positive. Specific to Guru Shots, we have been diversifying paid user acquisition by adding new platforms to the mix and optimizing performance across each platform. The expansion to new platforms relates to the challenges associated with Apple making it more difficult for app developers to gain detailed information about their user attributes and harder to track performance for marketing and advertising purposes. On a consolidated basis, we reported operating, gap net, and per share losses in Q1. For those new to Zedge, I'd like to start with a brief discussion of our business and strategy. Zedge sits at the intersection of two major growth trends in consumer tech, casual gaming and the creator economy. To capitalize on this, Zedge is building a strategic flywheel that leverages synergies across our portfolio and engages communities through our content marketplace that provides value across a multitude of online and mobile platforms, including social networks, messaging, and gaming. This approach connects creators with friendly competition, community, and commerce. Our leading products are the Guru Shots photography game and Zedge's digital content marketplace, which today offers mobile phone wallpapers, video wallpapers, ringtones, and notification sounds through a freemium model, subscriptions, and in-app purchases. In total, our products served roughly 40 million users in October. Today, most smartphone users have become amateur content creators, sharing their photos, illustrations, memes, and videos. Technology like DAL-E spurs people's creative needs and now enables consumers to simply type a description of something that they envision and create an excellent image rendition. This bespoke content allows people 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 significant following and monetize their content. This is known as the creator economy, a market that has grown massively over the last five years. Before acquiring Guru Shots, our core offering was the Zedge Marketplace, which served 32 million monthly active users in October 2022. We monetize these customers with advertising, subscriptions, and in-app purchases of Zedge tokens, our virtual currency. Despite being a more mature product, we still see significant opportunities to drive long-term growth and profits. One potential growth opportunity lies in allowing artists to sell their content directly to our 32 million users. To this end, about a year ago, we introduced NFTs Made Easy, which provides non-crypto experts with an easy-to-use, echo-friendly platform to tokenize and sell their art to our customers for Zedge tokens. This enhancement has helped drive Higher Gross Transaction Value, or GTV, while also contributing to higher ARPMAP. Although the industry is grappling with the effects of a crypto winter, we still believe there is a fundamental need for the benefits of limited edition digital goods this technology innovation brings to the table. We will continue to proceed cautiously as to how we execute in this domain. Bottom line, NFT's Made Easy is built for the mainstream and provides provenance which is a win for both creators and consumers. In the coming quarters, we see several opportunities to grow GTV. These include adding new content verticals and expanding NFTs made easy by offering auctions, payments in cryptocurrency, and trading directly within the Zedge app. In addition, and as announced on Monday, we just started realizing one of the synergies we identified when we acquired Guru Shops, mainly the ability for GuruShots players to sell their photographs in the Zedge app. We also believe we can drive now growth in the Zedge app. Marketing is crucial, and I will discuss our plans in more detail in a few minutes. Making it easy to find and create new, relevant content is another way to drive user growth. Earlier this month, we introduced Paint, an AI image generator in the Zedge app. Users can now make exceptionally high-quality images simply by typing descriptive phrases, and the AI algorithm generates art based on those phrases. We believe this feature has significant potential to drive user growth, ARP now, and overall engagement in the Zedge app. We are encouraged by the early interest as over the first weeks following its release, users generated over 150,000 images with paint. Initially, we limited the rollout to a subset of developed countries, but we anticipate opening it up further over time. Our goal is to use paint to both grow our user base and improve engagement. Moving to GuruShots, 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 showcases 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 game includes community features, leaderboards, and chat functionality, which create a sense of belonging, inspiration, and competition. The penetration rates leave much room for growth. As we estimate, 30 to 40 million photo enthusiasts regularly use their smartphone to take and publicly share high-quality photos and who would be interested in participating in photo contests every month. From a product perspective, we have several promising developments that are being scaled up. The first relates to customer onboarding. Over the past several months, we revamped the onboarding process to better convert new players into paying players. As a result, our new onboarding ramp yielded a more than 35% rise in converting installs to first-time paying players in the Android app, which is a key gauge of measuring return on ad spend, or ROAS. Next, we recently introduced Learn, which offers users TikTok-style short-form instructional videos to improve their photographic technique. When surveying ARP users, nearly 70% said they would engage with this content regularly. We are evaluating the different ways we can monetize Learn, including introducing a subscription-based offering. Finally, we're still testing Battles, which offers a quick way for newbies to start competing in simplified photo competitions that are short, limited in size, and built on a coin-based economy. We expect that battles will allow us to convert more users into players early on, increase engagement, advance our game economy, and ultimately drive more revenue. Turning to Emojipedia, we now support 19 different languages. Going forward, we will focus on optimizing the ad stack and expanding the product offerings potentially with a native mobile app version. We are very excited about the changes we've made over the past year and believe they can drive high double-digit, low triple-digit growth rates with very high gross margins in fiscal 2023. Looking across all our properties, we have committed meaningful dollars to marketing, a new focus for our company to drive user and player growth and improve engagement. We are investing in paid user acquisition and customer re-engagement campaigns and building all the infrastructure needed to do this profitably. The additions to our data team are already bearing fruit, not only with respect to marketing, but across the entire organization. Finally, we are down the road in evaluating the viability of new content products in addition to the ones we've discussed today. Paint was an example of this. Stay tuned for more information on this in the coming quarters. Before handing it off to E, I would like to thank our investors, board members, partners, and employees for your continued support. 2022 has been a momentous year with a marked increase in geopolitical, economic, and industry-specific risk. However, it has also opened our business to new and exciting opportunities. We are and will continue doing our best to build long-term, sustainable value and effectively address the challenges that we are facing. I wish each of you a peaceful, healthy, and safe holiday season. Now, I would like to turn the call over to E, who will review our financial results. E?

Thank you, Jonathan. I want to remind those on the call that our Q1 fiscal 2023 ended October 31st. Moving to our first quarter result, now defined as the number of unique users that opened our ZEDS app during the last 30 days of the period. Decreased 7% to 32 million. Now it will develop market was down 16%. and emerging market nearly 4%. Europe, which contributed both metrics, was hit especially hard by the Russian invasion of Ukraine and the energy crisis, which continued to play a significant role in this quarter's mild decline. Total revenue in the first quarter was $6.9 million, a 14.5% increase from last year. The temporary decline in ad buying that Jonathan discussed, combined with low amount, led to a decrease in year-over-year advertising revenue for the first time since Q1 2021. Gaming revenue came in at $1.3 million. Similar to Q4 of fiscal 2022, GuruShot's revenue was negatively impacted by the situation in Europe. Since this business is still in its investment mode, we believe that the new features, marketing, and advertising strategies would ultimately drive solid growth in our gaming revenue. Solution revenue was down 7%. However, we are working on improving the value of the offering in order to return to growth in the quarters to come. Other revenues, which mainly consist of Emojipedia, Zatch Premium, and the amortization of Ed Loven's integration bonus increased by 45%. Zatch Premium's GTV decreased 5% to $310,000. reflecting lower volume and ASPs for NFTs. Again, while we are impacted by the crypto winter, we believe our strategies somewhat insulate us from the broader NFT market challenges, while also providing us with a differentiated offering that we believe will return to growth. Active subscription was down 12% versus last year, as new subscription sales did not offset churn. Despite the decreases in other metrics, app mount was 5.4 cents, an increase of 1% year over year. Operating expenses increased significantly related to both the investment in Guru Shah and a $150,000 decrease in the failed value of contingent consideration related to its acquisition, leading to an operating loss of $201,000. Net loss was $169,000 and reported diluted loss per share was $0.01. Share count was 14.3 million. Adjusted EBITDA was $1 million for Q123 versus $3.3 million in the prior year period. Our adjusted EBITDA margin was 14% in Q123 versus 55% a year ago period. From a liquidity standpoint, we remain in a strong net cash position with over $18 million in cash and cash equivalents. As we mentioned on our last call, we gained access to an 11 million credit line and had to draw down a $2 million term loan, which showed up on our balance sheet this quarter. Moving to our stock repurchase program, Between September 23, 2022, when we started buyback activity, and December 9, 2022, we repurchased 261,000 shares of our Class B common stock. Thank you for listening to our first quarter earning call, and I look forward to speaking with you again on the next call. Operator, back to you for Q&A.

Thank you. We will now begin the question and answer session. To ask a question you may press star then 1 on your touchtone phone. If you are using a speakerphone please pick up your handset before pressing the keys. To withdraw your question please press star 2. At this time we'll pause momentarily to assemble the roster. As a reminder, ladies and gentlemen, if you do have any questions, please press star 1. Thank you. Your first question is coming from Alan Klee. Alan, your line is live.

Yes, good afternoon. First question is on monthly active users. from a sequential basis going forward, what will be the key elements that will cause this to just potentially stabilize and start growing?

Hey, Alan, how are you? Yeah, so there are a couple of initiatives that are contributing to that. First of all, you know, from quarter to quarter on a sequential basis, our monthly active user count was basically flat. There is obviously some variation in terms of, you know, the various geographies, whether it's well developed or emerging market, but in all it was an aggregate. I'm saying it was basically flat. Having said that, several different contributors. One is, as we've talked about for the last couple of quarters, features that will drive users to download and install the app and to re-engage with the app. So most recently we rolled out Paint, which is our AI wallpaper generator. And as you know from following the press, there's been a tremendous amount of pent-up demand for tools like this. uh, my edge, uh, where, uh, we've added social and community features, uh, that, um, contribute to users coming back more regularly, uh, in order to see what either their friends or artists or fans and so on and so forth are adding to the app. Uh, those would be two, uh, examples of features that will drive that. Secondly is, uh, marketing efforts, and that includes paid user acquisition, where we have been scaling up over the course of the last, give or take, six to 12 months. And then that is coupled with re-engagement campaigns, where we market to users that have the Zedge app installed on their phone, to drive them back into the app because of content or features that we have added to the app accordingly.

Okay, excellent. And then on kind of your advertising revenues, you were able to, the statistic for that, I'm forgetting, average revenue per person, for monthly active user, um, that held up year over year. It seemed like despite, um, what you mentioned of some advertisers going away, but, but you feel like that could kind of, uh, I guess come back, um, potentially next quarter to, do you think it would more normalize or, or how do you think about that?

Uh, yeah, so it's, it's, Difficult to provide clarity there. And the complication here is that depending on what one reads in the trade press, there is certainly some downward pressure on advertising budgets and the like. But there are also pockets of growth. More recently, I think I came across an article yesterday saying that mobile advertising spend in calendar year 2023 will decline compared to years past, where CAGR over the course of the last five years or so has been, if I recall correctly, north of 15% a year. But with the economic uncertainty in the overall market, analysts are expecting that that will decline. As you know, we invest a tremendous amount in optimizing our inventory, and we will continue to do that. industry-wide trend will be something that has a material impact on our business. Too early in the fiscal year for me to answer that with clarity.

Yeah, I mean, in my model, I'm assuming that your average monthly advertising revenue per user is going to decline over 10% year over year. So hopefully I factored that in, but we'll see. Nobody knows. So then, so with paint, It sounded like the initial reception of pain has been exceptionally strong. This is a, just so I understand, it's a free product today, but the net benefit to you is more engagement, or how do you think about how that evolves? Sure.

So the product is a free product. insofar as users do not have to make an in-app purchase in order to create AI art. They do need a balance of an in-app currency called a bolt or bolts. And they can acquire those either through rewarded ad experiences or through in-app purchases or through subscribing to this Edge app. So it's not necessary that they make an in-app purchase. But if they don't make an in-app purchase, the only way that they can accumulate more art is through watching rewarded ads and securing the benefits associated with those ads. And we've only rolled this out in tier one or well-developed markets. We're planning on rolling it out in other markets in the not too distant future. And we are viewing this as both a growth driver for new users, as well as a re-engagement tool for existing Zedge customers. with an associated revenue benefit. We're going to have to take a look at the data and how this evolves over time to determine whether we focus more heavily on growth initially or more heavily on revenue and the like. And we've got the infrastructure in place to test analyze results, and then react quickly based upon the various tests that we undertake. And over time, we may prioritize different goals based upon region.

Okay, great. I had a question related to guru shots, generators of photos, shifting them to your marketplace to try to sell them. I think you just announced setting that up. I don't know if it's too early to talk about what's been happening there, but if you have any commentary on that yet, and Maybe a theoretical or philosophical thing, but to what degree do you think that the issue is supply versus the issue of enough people interested in buying things? Is it an issue if you create more supply, there will be more demand, or would you have to create the demand? How do you think about those things?

As you know, we just announced the availability for GuruShot players to market and sell their content in the Zedge app yesterday. So it's obviously, you know, very early and, you know, we will continue to improve upon that process to minimize friction and enable those GuruShot players with an income stream with the least amount of hurdles. Having said that, as with any marketplace, there always needs to be a healthy balance between supply and demand. And we think that the addition of this new content, if you will, is something that will contribute to achieving that overall goal. We also, you know, have said in the previous earnings call that one of the areas that we are very focused on is in building out our data team and its capabilities. And theoretically speaking, that will mean that we will be able to segment users more efficiently than where we are today. and avail the best content to those various user segments in a fashion which really optimizes our marketing and product marketing inventory in order to improve the contribution of Zedge Premium to the overall revenue pie that we have in our business.

That's great. So one of your initiatives this year is to increase your paid marketing spend, a lot of that getting targeted to guru shots. Is it too early or any commentary on what kind of returns you've preliminarily seen from those marketing dollars?

Yeah, it's too early. What I can say is If you rewind the clock to 2020 to 2021, there was a lot less effort needed in order to grow user base. You just would go into platform, define a lookalike audience, and so to speak, begin to scale from there. Of course, I'm simplifying things. When Apple came in and sort of changed the rules of the game in order to limit what data is available, that process has become more complicated and has resulted in, you know, in our case, in our beginning to test a wider array of acquisition platforms and use the benefits of data in order to optimize those user acquisition campaigns. I think it's important to conceptualize that with user acquisition, as one expands into new platforms, it is really, so to speak, a search type of experience. One doesn't know what will optimize best on that platform. One doesn't know if that platform will work out. So inherently, one has to allocate a portion of their budget for that research and development, if you will. And then based upon the data that comes back, one will find certain campaigns, certain creatives, certain approaches in terms of what one is optimizing against. that can scale. And then it's a question of, well, how much can it scale? So that's another piece of this. I will comment as well, there have been some changes that Apple has undertaken in terms of expanding the window of time in which one can collect data. And my suspicion is that Apple has opened up that window slightly. because they had underestimated what the impact would be to the overall market in terms of their very limited, you know, launch or policy with respect to understanding what, you know, is happening from a user acquisition perspective. So we're just hard at work doing our best to unearth The right platforms, the right campaigns, making sure that we've got the right data pipes and good data that we can ultimately use in order to optimize the spend over the, you know, mid to longer term accordingly.

Thank you. So you said your Zedge is testing a wider array of acquisition platforms. Can you just clarify what you mean by acquisition platforms? Does that mean Android versus Apple or do you mean something else? And then how long do you think it would be until you have enough data that you could report back to us on how the marketing plans are doing?

Acquisition platforms would be third-party platforms like Facebook or Instagram or Google or Apple search ads. So these platforms, and those are just some illustrations, but these platforms are selling their inventory to acquirers like Zedge. And we bid on... certain attributes. These platforms have, in many instances, machine learning capabilities in order to unearth and identify the attributes that an advertiser is looking for. And as we get data, we analyze it, and then we try to improve upon that for campaigns that seem to have promise with respect to various KPIs that we consider in making our buying decisions. In terms of, you know, the period of time where we can more properly report back, I would say that, you know, if you roll back in time When we acquired Guru Shots, we said that give or take, we would need around 24 months to bring the business to being, you know, break even. And that is, you know, the process that we're undertaking right now. So incrementally on a quarterly basis, we are becoming more attuned to all of the ingredients that contribute to this return on ad spend. And that is what we're doing on a day in and day out basis. So I think that we're still holding to that 24 month time period in aggregate to get us to profitability with the goal of closing that gap on an incremental basis, quarter by quarter.

Great. My last question for now is if you could comment a little on your prior guidance and how you made a little comment about it in the text, but just how you feel about your ability to continue to grow your revenue and be cash flow positive in fiscal 23 while investing. Just the give and takes, given the first quarter, has anything changed in how you feel about your outlook for the fiscal year?

Yeah, our goal continues to be to meet that threshold of being cash flow positive. And as I've said in quarters past, if we see some incredible growth opportunity, which would require us to have a loss, we would go to the board and explain to them why we think that opportunity is something that we should pursue. But barring that, we really are going to do everything within our power to achieve that goal. And our philosophy generally is, you know, if we're profitable, then we've got runway. And runway is one of the most important assets that one can have in terms of maintaining and scaling the business over the long term.

That's great. Thank you so much, and congrats on your execution.

Thank you, and happy holidays. You too.

Thank you, Alan. Again, if you have any questions, please press star then one. Okay, this concludes our question and answer session and conference call. Thank you for attending today's presentation. You may now disconnect.