Zedge, Inc.

Good morning, everyone. Please remain on the line. Your conference will begin at approximately two minutes after the hour. Please remain on the line. Your conference will begin at approximately two minutes after the hour. Thank you. © transcript Emily Beynon Thank you. Thank you. Good day and welcome to ZEDGE's earning conference call for the second fiscal quarter 2024 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 touchtone phone. To withdraw your question, please press star two. I will now turn the call over to your host, Brian Siegel. The floor is yours.

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. 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 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 morning. Thank you, Brian, and thank you all for joining us today. I will begin by briefly reviewing our second quarter results, demonstrating how our fiscal year 2023 investments have positioned us for sustainable long-term growth. Q2 revenue increased 11% from last year as we continued managing the geopolitical, macroeconomic, and industry-specific challenges spanning the landscape. One of the big stories this past quarter was continued momentum at the Zedge marketplace. Ad revenue was up 18% from last year. Zedge Plus, our marketplace subscription offering, delivered exciting results with revenue increasing 24% from last year with small net subscriber gains sequentially and less than 1% net subscriber loss year over year. And Zedge premium revenue driven by several improvements to content, monetization, and other back and front to end items was up 21%. These factors fueled a 37% increase in the average revenue per monthly active user or ARPMAU, to a record 7.2 cents. And this strength was not just on Android, as iOS revenue for the Zedge marketplace was up an impressive 46% sequentially. I should add that many of these trends are holding up at the halfway point of our fiscal third quarter. At the beginning of this fiscal year, we said building a full-stack marketing team would be our key corporate-wide initiative, similar to what we accomplished with data and analytics in fiscal 2023. We're well on our way here, and our efforts are starting to bear fruit, especially for the Zedge marketplace. Another important story this quarter relates to maturing our product development organization to drive innovation, accelerate product diversification, and consolidate resources to ensure long-term success. To that end, we have assembled an all-star team of seasoned gaming experts who are alumni of the leading mobile gaming publishers and have turned them loose on Guru Shots. Their mandate is to unleash the growth that was core to our investment thesis at the time of the acquisition. This team is already sprinting, having overhauled the product roadmap with four major focus areas. The first is feature development, which hasn't been given the attention it deserves since the acquisition. In the past, successful new features would yield a 10 to 30% jump in revenues with little or no downside when they didn't take hold. The updated product roadmap is full of new features designed to drive revenue and make GuruShots more accessible to an even broader audience. Next, our decision to focus on innovation will allow us to drive user growth by investing our marketing dollars more efficiently. Specifically, we will better couple Guru Shatz's UA spend with feature releases. In January, we introduced Turbo, a feature that expands the gameplay and improves game resource consumption. To date, it has yielded a 15% increase in average daily revenue, giving me confidence that we are on the right track. Additionally, we are about to release another new feature, Flash Challenges, a short-duration photo challenge that limits the number of participants per challenge and provides even more opportunities for users to win. We believe that this dynamic will drive up engagement and make GuruShots more accessible to a broader set of players, both existing and new. In parallel, the team is reinventing the game economy by converting to a coin-based economy supporting multiple currencies and foregoing the existing economy, which we believe is too rigid and limited in terms of the number of ways players can earn and spend in-game resources. This change will open an array of customer value adds. For example, we will be able to reward all players with game currency and manage resource consumption in a fashion that optimizes further coin purchases. Creating a comprehensive and inviting onboarding funnel is also a key focus area for the Guru Shots game. In short, onboarding will enable newbies to immediately experience gameplay in a simplified manner with a limited number of competitors, increasing the chances of winning. The funnel will allow players to progress with more features and increased complexity based on individual performance, enabling skill-based user segmentation, which will be a win for the user base. I want to add that we believe these efforts, taken in concert with one another, will help us deliver growth, which was one of the key theses of the acquisition. Guru Shots is the leading photo competition game, and more than 150 million photos have been used to play the game. Photography continues growing exponentially due to the ubiquity of mobile phones, and with the advent of AI enhancement, high-quality pictures are within everyone's reach. The gameplay is fun, and it touches on the human inner psyche where people like to have fun, compete, and win. With all the opportunities we have in the pipeline, I think we are at a turning point, and I look forward to sharing details as they unfold. Moving to the Zedge marketplace, our success in growing advertising revenue in recent quarters stems from our continuous optimization efforts combined with highly effective paid UA programs driving positive ROAS in 90 days or less. Additionally, over the past two quarters, we began improving our iOS monetization stack by optimizing ads and rolling out Zedge Plus for iOS, which, along with Paint, contributed to strong iOS revenue growth. Overall, the iOS ecosystem remains a largely untapped opportunity for us and we continuously look at ways, most recently AI, to unlock it and capitalize on our brand to drive growth. Emojipedia had another good quarter. Our previous investments in website redesign, localization, and technology upgrades continue to pay off and lay the foundation for the next phase of growth, with new features and content expected to be rolled out in the quarters to come. 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. Now, I would like to turn the call over to E, who will review our financial results. E?

Thank you, Jonathan. As you saw in our earnings release, GAAP required us to take a one-time $11.9 million non-cash write-down of Guru Shah's intangible assets. It's important to underscore that this was a non-cash event dictated by timing, as current performance did not align with the carrying value on our books. As Jonathan indicated, we still believe that, with time, we will unlock growth and achieve the strategic goals that we envision when we acquire Grusia. Additionally, this write-down does not reflect the valuable gamification experience we secured, benefiting the rest of our business. As a result of the strength related to valuation over the past year, we have added non-GAAP net income and non-GAAP diluted EPS as new metrics that we plan to report going forward. The reconciliation for GAAP to non-GAAP is available in our earnings release form this morning. Monthly active users, or MAL, for the ZEDS marketplace decreased 10.7% from a year ago to $28.8 million. MAL in well-developed markets and emerging markets were down 15.6% and 9.2% respectively. Total revenue in the second quarter was $7.8 million, up 11% from last year. Digital goods and services, which encompasses revenue from Guruja, came in at $0.9 million, down 26% from last year. Similar to Q1, Guruja's revenue was again negatively impacted by Apple's ATD framework macroeconomic issues, and the geopolitical situations. Subscription rating for the second quarter was up 24% versus last year. Additionally, this metric was up sequentially for the third straight quarter as our net active subscriber trend improved. and higher-value iOS subscription, and our new value-added ZX Plus offering for Android replaced lower-cost legacy subscription, which only removed ads. ZX Freemium's gross transaction value, or GTV, grew 23% from last year to a record $540,000. reflecting higher price per advertising impression and incremental revenue generated from paint, which offset modest decline in other content sales. Armout was a record 7.2% up 37% year-over-year, reflecting stability in ad pricing and the positive impact of our new iOS and Android subscriptions. Cost of revenue declined by 27% and was 5.9% of revenue. HDNA increased by 11% to 6.5 million. Gap loss from operation, including the impact of the 11.9 million write-off, was 11.9 million versus income from operation of 1.5 million last year. Gap net loss and loss per share for Q2 was $9.2 million and 66 cents versus income and EPS of $1.6 million and 11 cents respectively in the prior year. Non-gap net income and non-gap diluted EPS for the quarter were $0.5 million and 4 cents versus 0.8 million and 6 cents in the prior year, respectively. Adjusted EBITDA was $1.5 million versus $1.4 million in the prior year. From a liquidity standpoint, we remain in a strong cash position with over $18.1 million in cash and cash equivalents. Note that we pay down the $2 million in outstanding bank loans during the quarter. Thank you for listening to our second quarter earning call, and I look forward to speaking with you again on the next call in mid-June. Operator, back to you for Q&A.

Certainly. 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 questions, please press star two. At this time, we will pose momentarily to assemble our roster. Your first question is coming from Alan Klee with the Maxim Group. Please pose your question. Your line is live.

Hi. Congratulations on the strong revenue growth. My first question is, you had record advertising rates. But it's also your seasonally strongest quarter, I think. So can we parse out how to think about maybe to some degree what effect is seasonal versus other stuff?

Hi, Alan. Thanks so much for your comments. And as I mentioned in my earlier presentation, summary of the quarter, we're actually seeing that our halfway through the quarter, numbers are holding up. So that is due to a combination of factors, both feature-wise, ad tech-wise or ad stack-wise, as well as, I guess, you know, some secular features or some secular factors. So it's a little bit hard to sort of parse that out because by contrast, typically our Q3 is our weakest quarter from an ad revenue perspective in light of post season drop off and ad budgets and so on and so forth.

That's great.

Thank you. And then just In terms of the marketplace, I think you said that paint and there's greater functionality on the web and gross transactional value sold was up like 23%. Is there a way to think about what the key drivers are of growth in marketplace and things that you're doing to keep this going?

Sure, just to be more specific, are you talking about Zedge Premium, or are you talking about the overall marketplace, which includes not only licensed content, but also user-generated content?

For both.

Well, when you take a look at Zedge Premium, which is the licensed content area, we continue to iterate tune optimize and as a result you're seeing the improvements there we are also now beginning to think about what can zedge market what can zedge premium look like with the expansion across web and in terms of the overall Zedge app or global Zedge marketplace, it's a function of continually adding and optimizing features that we have, as well as improving the user experience. There's work that can be done on the user experience. One of the areas that we're beginning to look into now relates to onboarding. In the past, we've talked about recommendations and the content that's served up to users. How does that impact the user experience? And then projects around improving engagement and retention. So in totality, each of those contributes to the results that we reported today. And then separate and apart from that, as I've mentioned, The work that we had done last year in terms of overhauling the Zedge Plus subscription on Android and rolling out Zedge Plus subscription on iOS for the first time has also yielded very positive results for us.

Okay.

Does that answer your question?

Yes, thank you.

Just so we understand, Zedge Plus is the Zedge Marketplace subscription. Can you also get another different type of subscription just for being ad-free, or are they the same? And then your paid subscribers were flat sequentially. Do you think that that number can continue to grow sequentially? Thank you.

So Zed Plus is our subscription offering. Our subscription offering has bundled together several value adds. One of those value adds is ad-free, as you described it, but then there are additional value adds in there, whether it be bolts that can be used for creating AI images, as an example. And insofar as potential growth of number of subscribers, our aspiration is clearly to see to it that that subscription number grows over time. And there is ongoing work with respect to how to make that subscription offering, whether it be on Android or on iOS, even more attractive. If I were to provide a metaphor, when you think about Amazon, so Amazon has overnight delivery, but they also offer a wealth of other value ads, whether it be content, whether it be storage and so on and so forth. And as I said, as a metaphor, That is the work that we are heavily invested in, in terms of seeing to it that we can continue to make the subscription offering even more attractive than what exists today. And going back to the overhaul that we had introduced in 2023, that was a improvement in terms of those value ads, making that subscription offering more attractive and ultimately bringing in new subscribers.

Thank you. In terms of Emojipedia, I don't know if you provided any numbers in terms of did it grow over a year or over a year or the results. I'm not sure if you're able to provide revenue. Also, you said there are new actions you'd like to add. You mentioned some things like emoji mashups, emoticons, and I'm probably saying the wrong, K-emojis. Could you just tell me what mashups and K-emojis are? Thanks.

Sure. So these are new content. Just to keep it simple, these are new content forms But by way of example, when today one renders a smiley emoji, they can either have a smiley face, you know, in yellow and so on and so forth, or they can type a colon and a closed parentheses. That is a contrast. So there are the text strings that connote various, messages and that is a potential direction for us to add as a new content vertical within emojipedia and that's one of many in terms of numbers i'm going to hand off to e to answer your question hey alan uh so emojipedia the second quote of code was not as great as we had hoped for

But if you look at the six months, it still grew to 27%. For three months and the January, we only grew about 8%.

Thank you. And then one of the areas that I think you mentioned as a priority is trying to grow monthly active users. It was up slightly sequentially, which is encouraging. Could you maybe just highlight some of the key things you're focused on to get that number just to start growing again?

Sure. So we have a couple of activities that are taking place. We put together what I'll call a task force of rank and file Zedge employees. without management participation that are working on various feature enhancements, new features, and potentially complementary products that would unlock growth. And then separately, we are also looking at ways of reimagining the Zedge app or benefiting from the install base that we have to help fuel additional growth, whether that be through product marketing, incentive plans, influencer type of and referral plans. And then, of course, separate and apart from that, user acquisition investments. And all of those taken together, we, you know, are hoping that we can reverse that trend and see to it that we unlock what we believe to be a promising growth opportunity.

Alan, I would just like to add, sorry, I would just like to add, as we mentioned, even though our active subscribers stayed flat at 648,000, but we are replacing lower value subscription with a higher value from the lifetime subscription as well as IOA subscription. So although the active subscribers remain the same, but our revenue base was much higher.

Thank you, Ian.

Yeah, that's a good point. Thank you. Then on Guru Shots, a couple of questions. My personal experience, and I'm a bad example of not being that savvy in this stuff, but... It's hard to be a newbie. When you first get on, it seems difficult to know how to engage and, you know, and it tells you, you know, you can't engage in a bunch of things until you get to a certain level. So maybe what you're doing to change that and then also... to talk a little about what the turbo feature, what that actually is, and the new feature you're going to add, and then why multiple virtual currencies should help you out. Thanks.

Thank you, Alan, and point very well taken with respect to onboarding. As you had said, a newbie that downloads GuruShots today is immediately immersed in the full game. If they enter into a competition, they can be competing against up to 7,000 other photographers that are in that competition with a dashboard that has a lot of numbers and features to it. So a user has to be exceptionally loyal and very, very insistent on saying they're going to figure this thing out. Overhauling onboarding will allow for us to simplify the gameplay such that we get users into that funnel immediately. which opens up the top of the funnel, hopefully expands the potential player base, and also allows for folks that may think that they are not good photographers making this accessible to them. And then with progression, as users begin to master skills and so on and so forth, they will then gain exposure to additional features that contribute to making the game play more competitive and fun and so on and so forth. In addition to that, the onboarding will have an element to it that makes the game more, or I guess, shorter in duration. So a typical photo challenge today in guru shots can range in duration from one to several days. The notion of going through that onboarding feature will be to decrease that to, you know, it could be 30 minutes, it could be an hour, it could be two hours, and so on and so forth. With respect to changing the economy, the economy today is a rigid economy. There are three game resources that users can benefit from while playing the game. And the way to access those game resources is through a hard in-app purchase event. If you buy resource A, it does not have any relevance to resource B or C. To master the game, you really need to have a portfolio of those three resources, and migrating to a coin-based economy, which has multiple currencies, allows for a lot more flexibility. And it also allows for us to reward every player in the game. Meaning if you are playing the game today and you don't come in first, second, or third place, That means you don't feel that great about yourself, even though you may have come in fourth, which is 6,996 in terms of your ranking. Our ability will be with this new Coinbase economy to see to it that every player, even the player that ranks lowest of those 7,000, will be able to get a reward and ultimately use that reward in one way, shape, form, or another, or use those rewards in order to potentially gain an edge with respect to game resources. As I mentioned during my comments, we've made changes to the product team and the product team is now very, very well resourced with a community of product managers that come out of some of the most well-known global gaming companies that have experience not only in gaming design, user experience, user interface, but also in gaming economies and what can be done in order to optimize those economies, ultimately leading to better revenue generation, as well as contributing to improving user engagement and user retention. In totality, our hope and expectation is that taken together, that will unlock the growth that we believe is inherent in this asset. In terms of the new features, the new features most immediately are around offering what I will call mini game battles for users that are already in the middle of a game, and now beginning to expand that to, just being a standalone, short-term, limited number of competitors type of battle. Again, allowing for this to be a quick win for users to get that dopamine flow and feel like, wow, they're competing in real time without having to wait for an extended period of time in order to ultimately win a battle. And in addition to that, also decreasing the number of people that they're competing against, therefore increasing the chances that they can actually win and gain that accolade accordingly.

Does that answer your question?

Yeah, that was very thorough. Thank you. Just some updates. AI Art Master, can you provide an update on that?

Sure. So AI Art Master remains in soft launch. We made the decision to keep it in soft launch while we are hard at work at unlocking the growth in the core Guru Shots game. And we continue to gather data. Our plan currently is that when we get to GuruShop's trajectory and the direction that we believe will allow for this growth, that we will then refocus efforts and resources on AI Art Master. We just don't want to spread ourselves so thinly that we're not progressing the Guru Shots game. And that as we evolve, it will take time to launch this AI Art Master game as we iterate and so on and so forth. So focusing on getting one thing done really, really well, and then progressing to the next thing, which would be AI Art Master. AI Art Master now is at a point where we are able to monitor the data. That data is going to be exceptionally valuable in terms of helping guide what our future direction is with that game and how it evolves.

Gotcha. Okay, and then I'm guessing a similar answer. On the past call, you talked about potentially launching a hybrid casual game. Is that kind of in the same status?

AI Art Master is in that hybrid casual category. Those are not separate and distinct from one another.

Okay, got it. Thank you. Okay, and then... Question on financials. The jump in SG&A for the quarter, is the way they look at that, to what degree do we think of that as like... kind of that this is a seasonally strong quarter versus some of the other things you've talked about of perhaps paid acquisition or some of the new, well, it's SG, and you've brought on some more people. So I'm trying to get a sense of how much of it is maybe seasonal versus kind of a new run rate for SG&A. Thank you.

Sure. I would actually reframe that a little bit. SG&A includes marketing in it. So there are two components of that number. One is actual money that we have spent on paid user acquisition. And as I've said in the past, in order to scale paid user acquisition, when looking at budgets, there's going to be the steady state of this platform, this particular campaign, works, we continue investing in it, but there is obviously a ceiling there. And then there is what we'll call test budgets, where you try a new platform, you try new creatives and stuff like that. And some of that stuff works, some of that does not. You need both components in order to scale paid user acquisition. But then there is also the fee that we pay to whether it be Apple or Google Google when we bring on a subscriber or when a user makes an in-app purchase. So those two components taken together contributed materially to the increase in SG&A. And the way I sort of look at it is if we're successful in growing our subscriber base, if we're successful in generating more in-app purchases, SG&A goes up. that's actually a good reason for SG&A to go up as opposed to we're not managing our expense for infrastructure properly, you know, by way of contrast. Yi, do you have anything that you want to add to that?

Yeah, I will only add that our FTE remains quite stable and our net compensation expenses are actually in line with last year. So all the increase in XG&A, Jonathan mentioned, was in the marketing spend and also the platform fee. One other downside when we rolled out lifetime subscription was from Google Play's point of view, this is one and done. So they treated it as an in-app purchase. So we paid 30% fee rather than a regular subscription, which is at a 15% fee. So as a result, our platform fee went up by virtue of our rolling out of a lifetime subscription on Android.

Great. Okay. Congrats again. Thank you so much.

Thank you.

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