Zedge, Inc.

Please continue to hold, ladies and gentlemen. Your conference will begin in two minutes. Please continue to hold. Your conference will begin in two minutes. Thank you. Good afternoon and welcome to ZEDGE's earnings conference call for the first fiscal quarter of 2024 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 one on your touchtone phone. To withdraw your question, please press star two. I will now turn the call over to Brian Siegel.

Thank you, operator. In today's presentation, Jonathan Reich, Zedges Chief Executive Officer at ESI, Zedges Chief Financial Officer, will discuss Zedges 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 will start by briefly reviewing our first quarter results, which are primarily encouraging and are a consequence of the investments we made in fiscal year 2023, which we expect will continue driving sustainable, profitable, long-term growth. Q1 revenue increased 3 percent from last year as we continued managing geopolitical, macroeconomic, and industry-specific challenges. Despite these challenges, ad revenue grew following four quarters of decline. The uptick was driven by Zedge Marketplace's improved performance and Emojipedia, which was up 62%. Zedge Plus, our Zedge Marketplace subscription offering, delivered exciting results with revenue up 10% from last year and also showing sequential active subscriber growth for the second quarter in a row quarterly declines. These factors led to record ARC mail and 35% Zedge Premium GTV year-over-year growth. Last quarter, we announced our commitment to building a full-stack marketing team with capabilities spanning user acquisition, branding, creative execution, marketing, analytics, and reporting, competitive research, content marketing, app store and search engine optimization, and re-engagement marketing. Along those lines, we recently hired a seasoned head of user acquisition who is scaling our marketing investments in order to deliver positive return on ad spend growth. I'm now going to provide an update about each of our business units and or products. Paint is now more than a generative AI wallpaper maker and continues to be a primary focus of the Zedge marketplace. Take a look at what we have accomplished since our last call seven weeks ago. First, we have made Paint available globally and are testing different regional business models in order to scale this feature. Next, we launched the beta version of Paint for mobile web, which enables users to create all types of images, not only wallpapers, and seamlessly integrated it with print-on-demand functionality. This feature allows customers to purchase merchandise like T-shirts, pillows, coffee mugs, and more, printed with their art. If this goes well, we believe the Zedge website can fuel incremental growth, especially as we evolve the paint offering. Turning to Zedge Plus, our subscription offering, as you recall, we overhauled the Android offering in late fiscal year 2023, resulting in the second consecutive quarter of sequential revenue growth. Almost in parallel, we introduced Zedge Plus for iOS, which has been an early bright spot in driving subscription growth. Overall, the iOS ecosystem is an untapped opportunity for us and has delivered attractive growth rates over the past two quarters, driven not only by the Zedge Plus subscription offering, but also by better optimization of our ad inventory and growth from Paint. We remain committed to continuing to grow iOS, and generative AI may be key to unlocking this potential. While Emojipedia had another strong quarter, we believe there is more to come with continued product innovation. Our previous investments in the website redesign, localization, and technology upgrades are paying off. In fact, in November, Emojipedia recorded its best revenue month ever. With that success, we are now focused on testing new features such as emoji text translations and mashup emoji designs, as well as introducing new content verticals like emoticons not to mention print-on-demand merchandising, to name a few. Some of these will start rolling out in Q2, while others will become available later in the fiscal year. As mentioned last quarter, Guru Shots is, as had initially been the case with Emojipedia, experiencing a revenue downtrend, with growth taking longer to actualize than originally anticipated at the time of the transaction. Much of this relates to Apple's ATT framework, which has severely limited the information that app marketers can collect to target prospective customers. Although Apple released SCAD Network 4.0 to enable growth with improved attribution tracking capabilities, its impact will be limited until major platforms like Meta successfully embed this into their tech stack. In the meantime, we are taking a two-pronged approach to stabilizing Guru Shots and positioning it for growth. We've focused on product innovation by recently rolling out Battles, a new hybrid casual gameplay feature for users to start competing in fast-paced, short-duration photo competitions that are limited in size. Battles is now available to 5% of GuruShots' global user base. Our product team closely monitors all of the relevant KPIs to tune and refine the experience. and optimize engagement, retention, and in-game economy. We expect to make the feature available to a much larger audience over the next several weeks and believe that Battles will ultimately assist in making the Guru Shots game more accessible and relevant to a broader addressable market. We believe this feature will also avail an advertising-supported monetization strategy. Second, we are expanding our user acquisition efforts to deliver ROAS-positive users. This strategy is an iterative process that benefits from the data overhaul we undertook last year. Beyond the core game, we continue developing AI Art Master, a new hybrid casual game that leverages generative AI in gameplay, where users compete against each other in fun, fast-paced competitions. AI Art Master is currently in soft launch in five countries and can potentially be a fourth core product for us. We are improving the game by analyzing the usage data and targeting a broader rollout over the next several quarters. Taken together, we continue to believe that we have never been in a better position to create sustainable, long-term, profitable growth given the combination of market opportunity, our current product portfolio, and roadmap, our marketing prowess, data capabilities, tech stack, and most importantly, our team. Furthermore, we are not just talking about AI. We have already integrated it throughout our business, including product, technology, and marketing. I wish everyone a happy holiday season, and I would like to turn the call over to E, who will review our financial results. E?

Thank you, Jonathan. Now, for the Zedge marketplace, defined as the number of unique users that opened Zedge app during the last 30 days of the period, decreased 10.7% from a year ago to 28.5 million. Now, in real developed market and in the emerging market, we're down 13.1% and 10% respectively. Total revenue in the first quarter was $7.1 million, up 3% from last year. Digital goods and services, which encompasses revenue from GuruShop, came in at $0.9 million, down 29% from last year. Similar to Q4, Guru Shah's revenue was again negatively impacted by Apple's ATT framework, macroeconomic issues, and the geopolitical situation. Subscription revenue for the quarter was up 10% versus last year. Additionally, this metric was up sequentially for the second straight quarter, as our net active subscriber trend improved. and higher value iOS subscription, and our new value added Zest Plus offering for Android replaced lower cost legacy subscriptions, which only remove ads. Zest Premium and GTV grew 35% from last year to $421,000, reflecting incremental revenue generated from paint. which offset mileage decline in other content sales. Average revenue per monthly active user, or AMO, was 6.3 cents, up 17% year-over-year, reflecting stability in ad pricing and a positive impact of our new iOS and Android subscriptions. Cost of revenue declined by 23% and was 6.9% of revenue. SG&A declined by 5.6% to $5.5 million. GAAP income from operations returned into the black, increasing by $0.5 million to $0.3 million. GAAP net income and EPS for Q1 were near, versus a net loss and loss per share of 0.1 million and one cent last year. This quarter, FX and income tax expense swing negatively impacted GAAP net income by $143,000 and $271,000 respectively versus last year. Adjusted EBITDA was $1.5 million versus $1 million in the prior year. From a liquidity standpoint, we remain in a strong cash position with over $18.7 million in cash and cash equivalent and only $2 million in bank loan at the end of the quarter. Note that on November 15, After the quarter ended, we paid down the $2 million in bank loan and had a remaining cash balance of approximately $16.7 million. Additionally, please note that we reached an agreement with Groucho's prior owners, and we would not make any earner payment related to our purchase of the company. Thank you for listening to our first quarter earning call. And I look forward to speaking with you again on the next call in mid-March. Operator, back to you for Q&A.

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 will pause momentarily to assemble our roster.

The first question comes from Alan Klee with Maxim Group. Please proceed. Alan, can you hear us?

He dropped off the queue. Can you hear me now?

We can hear you, Alan. Thank you.

Hi. I'm sorry about that. Starting off with, so despite monthly active users declining, you've been executing on everything to really, you know, beat my top and bottom line numbers. I wanted to ask a question to start with on monthly active users. That Some of that's macro, some of that's industry. Just on that one point, what would you say is what you're working on doing that could potentially start to stabilize that?

Hi, Alan. It's Jonathan. Thanks so much for the kind words. In terms of MAO and stabilizing and potentially even growing that number, literally everything that we have in our product roadmap is focused on improving that number. And in addition to that, the marketing efforts that we have, both with respect to organic as well as paid marketing initiatives, are focused on improving that number. So everything that we have talked about today as well as our future product growth is tied to improving that monthly active user base. I just want to point that as well, that we're just slightly below 30 million monthly active users. The number is still a very, very significant number. There aren't that many apps that I'm aware of that have, uh, that sort of massive penetration. And, um, we, uh, we are certainly, uh, shooting to resume, resume growth with that number, uh, in the upcoming corners.

Yeah. I would note that some industry research is saying that after, uh, Smartphone sales being down for around two years, it looks like it may start... Sales may start stabilizing and grow next year, which maybe that will help. Just that backdrop also.

Yes.

So... You talk about with guru shots and waiting with Apple's... privacy rules and waiting for the big sites like Facebook to implement what Apple's done. What are you hearing about the timing for that and when that might become effective?

We speak to Facebook regularly.

They, I think as you know, had rolled out a scan for implementation several months ago, and they had to quickly roll that back. There's no question of a doubt that this is a high-priority item for them, but really that question is best geared for the folks over at META. Having said that, we have undertaken several initiatives in order to assist in scaling our paid user acquisition initiatives, including creative and really massively increasing the number of creative themes and design and so on and so forth, as well as taking advantage of a new product that or product feature, I should say, that Facebook had rolled out known as AEM, aggregated event measurement, which is meant to improve performance by aggregating data from both the app or mobile space and the web space. That, we believe, is having a positive impact as well in terms of helping us scale. So those two items together, coupled with some internal work that we are in the process of undertaking in conjunction with our data team that is analyzing funnel events that we believe can be targeted against, are all tools that are being used in order to help us get there. But of course, when SCAD4 does come out, we are chomping at the bit to include that in our marketing stack in order to increase, whether it be first-time depositors, users, and the like.

Thank you.

It sounds like you have good momentum with paint where that's getting rolled out. Talk a little about kind of how you think about how that's going to kind of get the adoption rate for that. Thank you.

Sure. So as mentioned in my earlier comments, We've now made paint available on a global basis. I think a point of differentiation between us and let's say many of the other gen AI apps that are out there is that our offering does not require a user to have to purchase tokens or subscribe to a service, but rather they can essentially paint through watching rewarded videos. And the way that we are approaching this is through several different means in terms of making sure that it is available and visible to our users, making sure that we are optimizing our store listing, but at the same point in time, maintaining our leadership position in terms of ranking with respect to mobile phone personalization, and also using the benefits of marketing automation to convert users from being consumers into actual creators. Separate and apart from all that, I think in last quarter's conference call, I mentioned that we are working on a standalone GenAI app that we hope to release in the first couple of months of 2024 calendar year. And having a standalone, fully dedicated app focused on GenAI is going to allow for us to market in ways that really free us of any focus that we have on personalization, and rather shift that focus all around generative AI. So that is, in a brief nutshell, how we think about this evolving space. And we're excited by where this space can eventually lead to. But at the same point in time, proceeding with a rational and deliberate growth plan so that we are in better control of our destiny.

Excellent.

For AI Art Master, I went to the Google and Apple stores today, and I know they're not yet available in the US, but when you're launching a new game, what's the marketing strategy to try to get it to accelerate and ramp up? How are you thinking about the marketing, how to make that happen? Thanks.

Sure. Uh, so there are many components that go into that. Uh, but let me tell you some of the things that we are currently doing, even though the game is, you know, your point is correct. There's only soft launch is available on only five countries today. Nonetheless, we've been investing in the AI art master website. Uh, and that website has continued to improve its rankings, uh, in, um, terms of search engine optimization. And that will assist in terms of driving organic growth when the game is introduced into more countries and eventually rolled out on a global basis. Separate and apart from that, we have been doing some very, very light paid user acquisition campaigns in the markets in which the game is in soft launch. Certainly, paid user acquisition will be a significant part of that business. And then I think it's really critical to underscore that we will be marketing that game to our user base. So give or take 30 million monthly active users and our users are over indexed for engaging with casual hybrid, casual type of mobile games. So that's an additional plus. And then there is a whole set of initiatives around app store optimization, coming up with the right collaterals in the app store, making sure that we are benefiting from the hypergrowth that Gen AI is currently experiencing. So taken together, That constitutes a good portion of our thoughts with respect to marketing this new title as we continue to progress with the soft launch.

Thank you. Emojipedia has been a home run.

I didn't catch everything you said of some of the new features you're looking to roll out. Could you just go over that again? Thank you.

Sure. So we're looking at, let's call it an emoji translator. You can type in a field of text and you will have that text rendered in a string of emojis. We're looking at adding new content types like emoticons. We are also in the midst of testing a print-on-demand capability where you can design merchandise.

I'm sorry, what was that second one? Emoticons? Yeah, what is that?

Emoticons, E-M-O-T-I-C-O-N-S.

Yeah, could you explain what that is?

It's another form of representation of emojis, if you will. And we think that it's a logical extension of the emoji space. So that is certainly something that we're looking at. But just to give you an example of an emoticon, Prior to emojis, if you wanted to end a email or text message with a smile, you would type in a colon and a closed parentheses. That is an emoticon. So, to answer your question, but, you know, the notion of offering emoticons and then also offering a mashup emoji design where you can actually take two emojis and, you know, Join them together and you have a new visual that is the output associated with that. So those are all areas that we're looking at. And I would add as well that we're also looking into the notion of offering a subscription tier to the Emojipedia service that we would want to test. And if that shows good prospects, then we would further develop that.

That's very helpful. I'll throw in a financial question. I know you're not giving specific guidance, but any commentary on seasonality and maybe any financial metrics that you're kind of prioritizing?

Well, seasonality is, you know, our business is heavily weighted towards advertising revenue and We are, you know, we are in the same boat as any other digital business that is heavily weighted towards advertising space. Obviously our Q2, which extends November, December, January is historically our strongest quarter of the year. And you know, there's no reason to believe that will be different this year. And in terms of, you know, Financial KPIs, we are always looking at, you know, our cash, things like quick ratio, and then, you know, ARPMO as being really important to the theme of being financially solvent and allowing for us to have ample runway to continue to grow the business and seize opportunity as we see that opportunity unfolding.

That's great.

So I'm probably going to say this wrong, but the average revenue per monthly active user, that was up 17%. A lot of things go into that. Subscription definitely helped.

um what what do you see like going forward as the key things you're doing that that can impact what direction that moves in yeah so it's a function of our product and when i start product that involves or that includes not only our ad stack and how we um monetize our ad inventory but also our subscription offering. As you've seen, you know, the growth in the subscription space has sustained for, you know, I guess, two quarters. Subscriptions, the introduction of subscriptions on iOS are really exciting. They are at a higher price point when compared to Android. So that, coupled with the Zedge Premium Marketplace, where we actually go out and allow for artists to sell licensed content and how that is priced and how that is offered to our user base. All of those taken together contribute to influencing that average revenue per monthly active user.

Okay, great. That's it for my questions. Thank you very much. Congratulations on a strong quarter.

Thank you.

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.