Zedge, Inc.

Thank you for holding, ladies and gentlemen. Your conference will begin in two minutes. Please continue to hold. Your conference will begin momentarily. Thank you. © transcript Emily Beynon Good afternoon and welcome to ZEDGE's earnings conference call for the third fiscal 2023 quarterly results. 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 touch tone phone. To withdraw your question, please press star two. I will now turn the call over to Brian Segal.

Thank you, operator. In today's presentation, Jonathan Reich, ZEDRA's Chief Executive Officer at ESI, ZEDRA's Chief Financial Officer, will discuss ZEDRA's financial and operating results that were reported today. 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 in the reports that ZEDGE periodically files with the SEC. that 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 on this website. The earnings release has also been filed on Form 8K with the SEC. I would like to turn the call 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 third quarter results, which were generally in line with our expectations. QT revenue increased 8% from last year. While there were still challenges related to the combination of geopolitical, economic, and industry-specific issues, we saw some early signs of stabilization in advertising, with the year-over-year declines in advertising revenue decreasing to 6% in Q3 from 19% in Q2. The combination of Emojipedia delivering high double-digit growth and the Zedge app's monthly active user base, or MAU, remaining roughly flat on both the sequential and year-over-year basis were the primary drivers behind this performance. The headwinds have taken their greatest toll on Guru Shots. As I discussed last quarter, the mobile gaming industry is still struggling with effectively overcoming Apple's App Transparency Tracking Framework, or ATT, which reduces an advertiser's ability to precisely identify and target prospective customers, resulting in lower ad performance and increased cost. Yet, there is light at the end of the tunnel. as the ecosystem nears the stable adoption of solutions, including Scan 4.0 and the increasing use of AI to improve audience targeting that should result in improved return on ad spend, or ROAS. Let me provide some more granular detail about our major product initiatives. For Zedge, we are iterating with Paint, our generative AI wallpaper maker, to improve take rates and engagement. This includes investments in onboarding, product marketing, and the core product. At the same time, we have revamped Zedge Plus, our subscription offering, by bundling in-app currency that users can paint with, as well as use to purchase other premium content. The subscription overhaul was rolled out in mid-May, and we are currently seeing a 50% increase in free trials on Android. In addition, we also introduced subscriptions on iOS, and the initial demand is exceeding our expectations. If this trend continues, it will add incremental revenue and cash to our financial statements. Over the course of the next several months, we will optimize the pricing and are hopeful that these steps will result in returning to subscriber growth. And finally, we are continuing to scale paid user acquisition for the Zedge app on Android where we have had success in generating ROAS that justifies investment. Turning to GuruShots, over the next couple of weeks, we expect to release the Battles gameplay feature, which brings a hybrid casual gaming experience that enables newbies to start competing in short duration photo competitions that are limited in size. Battles is expected to open the top of the funnel, making the GuruShots game more accessible and relevant to a broader audience who will hopefully become hooked and transform into long-term players. In addition, we are in soft launch with AI Art Master, a new game that harnesses the battles game mechanic and taps into the explosive growth in the AI generative art sector. As with the rest of our portfolio, we will closely monitor KPIs including retention, engagement, session length, and the like, and then iterate to improve performance Our goal is to expand the launch into other markets this summer. Although user acquisition for GuruShots is still challenging, we are expecting improvements as the industry continues adjusting to the post-ATT world. Aside from the improvements and new features we're introducing to make our games more attractive to a broader base of players, we are also keen on benefiting from the advances that the market is making with Scan 4.0 which is Apple's framework to help advertisers measure the effectiveness of their ad campaigns on iOS devices, as well as the increasing use of AI to more effectively target specific audiences. In addition, we are also advancing the economy and testing an advertising layer. Taken all together, we expect that ROAS will return to acceptable levels justifying further UA spend. We also know that heavy hitters like Facebook and Google are hard at work tuning their models to provide publishers with a sustainable solution that delivers profitable UA spend. We are monitoring developments closely, testing, speaking with other publishers, and keeping our ear close to the ground so that we can invest wisely. We also have focused on the AI space, with the introduction of AI ArtMaster because of the potential that organic marketing brings to the table. Recall, the Zedge app has garnered most of its 600 million plus total installs by way of organic channels. Even so, given the change in the market environment and near-term expectations since we acquired GuruShots, we were obligated by accounting standards to take a one-time non-cash write-down of $8.7 million this quarter relating to goodwill, which negatively impacted our operating income. E will address this further in his comments. Turning to Emojipedia, this business is firing on all cylinders, exhibiting an impressive growth of 90% year over year in Q3. The improvements we've made to the user experience, ads back, and multi-language support have been really paying off, and there is more to come. In July, we will celebrate the 10th anniversary of World Emoji Day with a redesign of the website and further upgrades to the offering that we believe will drive continued outperformance for this business. In closing, we saw some encouraging signs in our business in Q3. Even in the face of a difficult environment, our team is passionate about executing effectively, driving innovation, increasing revenue, and reducing costs. despite the numerous obstacles that the tech industry, particularly the mobile app sector, is currently confronting. Throughout the past few quarters, we have successfully bolstered our team with experienced professionals in product development, engineering, data analysis, and management. These individuals are diligently working towards unleashing the full potential of Zedge. With cautious optimism, I believe that these investments will generate significant value for our shareholders, just as we have already begun to accomplish with Emojipedia. I want to thank you, our investors, board members, partners, and employees for your continued support. Now, I would like to turn the call over to Yi, who will review our financial results. Yi?

Thank you, Jonathan. Moving to our third quarter results. Now, defined as the number of unit users that open our Zest app during the last 30 days of the period, decreased 0.3% from a year ago to $32 million. Now, a well-developed market was down 6.7%. An emerging market was up 1.6%, driven by strength in Latin America. Europe, which contributed to both metrics, continued to suffer from the Russian invasion of Ukraine inflation, and the energy crisis. Total revenue in the third quarter was $6.7 million, an 8% increase from last year. Digital goods and services, which encompasses revenue from Guru Shop, came in at $1.1 million. Similar to Q2, GuruShot's revenue was negatively impacted by Apple's ATT framework, macroeconomic issues, and geopolitical situations. Subscription revenue was down 8.6%, driven by a 12% decrease in active subscribers. As Jonathan mentioned, we are now starting to see sign of a rebound with a new subscription offer that we rolled out over the past several weeks. ZSpringman's GTB was flat at $410,000, reflecting incremental revenue generated from pain, which offset modest declines in other content sales. Average revenue per monthly active users or add now, was 5.3 cents, an increase of 1.5% year-over-year. Operating expenses increased primarily due to the inclusion of GuruShop and an increase in paid user acquisition for the Zatch app on Android. Beyond our normal operating expenses, we also took at one time $8.7 million non-cash goodwill impairment charge in Q3 that impacted operating expenses. In accordance with accounting standards, we usually perform our annual goodwill impairment test in Q4. However, in light of the sustained decline in our stock price, We performed an interim impairment test in Q3 and concluded that the carrying value of GuruShots exceeded its fair value, resulting in this one-time charge. Please note, this is an accounting treatment and does not reflect our view on the potential for GuruShots. Net loss, including the $8.7 million one-time charge, was $7.7 million, and reported loss per share was $0.55. Adjusted EBITDA was $1.7 million versus $2.9 million in the prior year period. From a liquidity standpoint, we remain in a strong net cash position with over $18 million in cash and cash equivalents. Moving to our stock re-purchase program, we re-purchased 239,000 Class B shares during the quarter at a very average price of approximately $1.95 per share. In total, as of the end of Q3, we have repurchased 681,000 Clause B shares since inception of the buyback in October 2021. Thank you for listening to our third 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 one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star two at this time. We will pause momentarily to assemble our roster.

Your first question is from Alan Klee with Maxim Group.

Please proceed.

Good afternoon. Congratulations on your discipline to continue to run the business cash flow positive in difficult times. My first question is related to Guru Shots. When you originally bought it, you had discussed some planned increased marketing spend. How do you talk about the amount of marketing spend that you're putting towards it and how you feel those dollars would be, you know, if you're getting or you think you'll get a good return on that and how we should be monitoring battle and learn and also maybe also moving, putting pictures on Zedge Marketplace. Thank you.

Thank you, Alan. Mark Broughton- Marketing spend is a function of return on ad spend so for every dollar that we spend on user acquisition, we have data from historical cohorts. Mark Broughton- That we can compare in terms of the efficiency of that spend and as discussed in my comments with the resettling of the. user acquisition space post ATT, we have seen a decline in performance. Therefore we are being exceptionally careful about waiting for new solutions to come out that will yield better return on ad spend. We are constantly testing. We are constantly investing in our infrastructure to improve the return on ad spend. And in addition to that, as mentioned earlier, we are investing in the product in order to open up new sources of revenue and new customer bases. They can generate that revenue ultimately to yield a better ROI from the product. We believe that as the industry continues to develop and find an effective way to target customers while preserving privacy, according to the guidelines and the rules that Apple has built into its ecosystem, that we will benefit from the advancements and be able to put money to work in terms of identifying those prospective customers and scaling from there accordingly. In terms of battles, As I'd mentioned, we are in the midst of releasing that. It's been in beta. And the goal with Battles is for us to open up more of the top of the funnel to engage users that are newbies that need to understand what Guru Shots is. And the intention is to provide a more contained, less heavily intensive game experience for these users to sample the Guru Shots game. And then as they continue to enjoy battles, we would then begin to bring them into the overall Guru Shots competitive realm, if you will.

Okay, great.

And the process for pictures that people are submitting with Guru Shots into competitions to move some of those pictures into being sold on your marketplace, what's the status of that?

So we've done some initial testing there. There's product work that needs to take place in order to avail that as a seamless, very easy to accomplish business goal, and that is still under development. Separate and apart from that, we've talked about the notion of using some of the GuruShot's expertise in gamification to add gamification elements to the Zedge app, and that is also something we are investing in and I hope that you know fast forward in the next quarter or so some of that will be fully available in the in the Zedge ringtone and wallpaper app okay thank you in terms of

You mentioned that your monthly active users was close to like had held it pretty stable, which in this environment is a positive. What would you attribute that to?

A combination of several factors. First of all, continued focus on seeing to it that our product is enjoyable, offers value, and is easy to use. And in addition to that, we've also been ramping up our user acquisition spend for the ringtone and wallpaper app, specifically focused on Android. And we've seen attractive return on ad spend for that investment. That is one of the movers to the growth that we have experienced, particularly in Latin America. And we will continue to invest in paid user acquisition as long as the ROI is there to justify that investment.

Okay, great. you've been able to hold up your advertising rates despite a market where I imagine most other companies are seeing down numbers. What do you attribute that to?

Our AdOps team has and continues to invest significantly in terms of everything having to do with the optimization of our ad inventory. And on a monthly basis, just to give you a frame of reference, we likely run several hundred different tests where we slice and dice the inventory based upon geography, handset, and various other variables in order to ultimately deliver the best possible CPMs from that ad inventory. And as you know, that's been a never-ending part of our business and one which we continue to excel at.

Great. The new name, new game that you're rolling out, I'm not sure if I got the name, AI Art Master. Could you just tell us a little bit more of, I think it's a soft launch now, but what the plan is there?

Sure. So AI Art Master is really focused around offering a competitive opportunity for users to create AI images and then compete to see who has the best AI image around a particular theme. It could be anything from pets to next-generation automobiles and anything that you can think of. The gameplay is such that we have a small audience competing against each other over a short duration of time. And users will go in and the core game mechanic is that they will begin voting based upon side-by-side views of various images specific to that theme. The user that garners the most votes will get ranking. There's also a metagame associated with that. where the user will be able to open up an art gallery and the intention is to bring visitors into their art gallery. The more visitors that they bring in, the more credits that they receive and rank higher and so on and so forth. From a monetization perspective, we expect that the game will have a combination of both advertising as well as a token-based economy, very much following the trend in mobile gaming, which is this hybrid casual model. And insofar as the soft launch, over the course of the last quarter, we have and will continue to fine-tune, or I should say tune and fine-tune the gameplay, while at the same point in time ensuring that we have no bugs or potential logical errors in the game. And after that, we will begin to take a look at retention graphs, marketing, and seeing to it how do we expand into other markets. We are really working in a very iterative and fast-paced environment, taking our learnings in real time and tuning the game and fine-tuning the game in order see to it that when we do go out to commercial launch, that we have a very, very attractive game mechanic, which will ultimately yield a good retention curve, good engagement statistics, and opportunities to generate revenue.

Great. You're offering a paint where you can do AI wallpaper generation. Any update on that?

Sure. So I think that when you take a look at where we are investing effort, we are very much investing effort company-wide in riding the explosive AI market. And as you had mentioned, we've got paint, which is an AI wallpaper or image generator. We've got the AI art master game. We're also using AI in terms of anything from marketing needs to our tech stack and things of that sort. And we're one of several companies that are publicly traded that offer an opportunity for investors to benefit from the explosive growth that's taking place in this market. Specific to paint, we are doing several things there. First of all, we are continuing to refine the product. We are improving the onboarding funnel to draw more users in. And we are offering users the ability to have a continuum of paint opportunities when they become subscribers. As mentioned earlier, we've invested in our subscription offering and In May, we rolled out a subscription offering that has chock full of value ads in it aside from just what had been our ad-free offering. And one of those is offering paint so that users can paint with large volumes without having to clip the ticket every time they create an image.

Interesting. So following up on that, on subscriptions, you commented – so it was down year over year, but you had very positive comments on what you just said, the May offering of a new offering for Android, and you're also rolling it out for iOS.

Does – how –

Maybe if you could just remind us, what is being added? You just rented paint. Anything else? Or what is added that you think is causing this to improve or whatever is causing it to improve?

Sure. So the core offering is an ad-free experience coupled with the ability for users to paint and larger volumes of opportunities for them to paint without having to pay for each individual image, as well as Zedge tokens that can be used in order to purchase premium content. And that is striking a chord with users when taking a look at the value proposition that that brings to the table. And, uh, on iOS similar, uh, you know, mentality, uh, iOS, uh, has proven to be, uh, or is proving to be very attractive as well in terms of bringing subscribers in. And that is a new line of revenue for us. We had never offered a subscription offering on iOS. I think I'd mentioned that, um, what we've seen is an uptick of 50%, um, of. trial subscriptions on Android and some very, very solid revenue being produced from the iOS offering which we have rolled out for the first time.

That's great. on last quarter's earnings call, you mentioned you were doing, um, you were implementing a two and a half to 3 million cost cutting initiative was, has, has that, or has all the, the whatever that is already been done or, and how much of that was the impact of that reflected in the April results?

Sure. So, um, The annual goal is to get to that two and a half to three million bracket. And we have taken steps forward in order to achieve that. And we're on track, I would say, to meet that goal. And it really addresses or the way in which we are achieving this is really taking a look at all areas of the company. where we are able to either renegotiate rates, where we're able to measure ROI and say, hey, we're not getting the ROI that we needed from this, let's pull back on it, and so on and so forth. And there may be some additional pieces that will not kick in until contract is buyer, but nonetheless, you know, we are, generally tracking to meet those numbers accordingly.

So if I take everything I heard today, from what you know today, would this suggest that maybe the bottom, the business has stabilized at a certain level with some potential of improving if some things go right?

I mean, I mean, listen, I think that last quarter, as I said, last quarter was a much more complicated quarter. Uh, we, we have seen some stabilization. Um, I don't think that the jury is fully out yet in terms of what's happening, uh, at a macroeconomic, uh, slash geopolitical level. And in terms of the industry specific challenges that, uh, you know, we are facing with respect to ATT, um, some of the major players, uh, let's say Facebook is planning on releasing, uh, their solution to this, uh, over the summer. Uh, when that comes out, you can be rest assured that we're going to do everything within our power to benefit from it and, uh, you know, scale on the Guru shot side and on the Zed side of the business, um, We're subject to what's happening on a macroeconomic slash geopolitical level. So depending on what happens with CPMs and user acquisition costs and things of that sort, we hope that we've seen the worst and that times will improve. But at the same point in time, I'm not a market prognosticator. we're really operating and keeping our eye on doing the right things. As you had said in your introductory comments, you know, we had delivered positive cash flow. And that is, to us, something which continues to be a very, very critical part of building and expanding our business.

Great. Thank you so much.

Thank you. Thank you. Again, if you have a question, please press star then 1 on your touch-tone phone. It looks like we have no further questions in queue.

This concludes our question and answer session and conference call. Thank you for attending today's presentation. You may now disconnect.