Zedge, Inc.

Good day and welcome to ZEDGE's earnings conference call for the fourth quarter and end of year fiscal 2025 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 2. I will now turn the call over to Brian Siegel.

Thank you, Operator. During today's call, Jonathan Wright, ZEDGE's Chief Executive Officer, and Isai, ZEDGE's Chief Financial Officer, will discuss ZEDGE's financial and operational results that were reported today. Any forward-looking statements made during this conference call during the prepared marks 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 calls. These risks and uncertainties include, but are not limited to, specific risks and uncertainties disclosed in ZEDGE's periodic SEC filings. 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, and it has also been filed on Form 8K of the SEC. Finally, on this call, we will use non-GAAP measures. Examples include non-GAAP EPS, non-GAAP net income, and adjusted EBITDA. Please see our earnings release for an explanation of our use of these non-GAAP measures. Now I would like to turn the call over to Jonathan.

Thank you, Brian, and good afternoon, everyone. Fiscal 2025... was a year of transition in which we reshaped Zedge to be more efficient, financially disciplined, and positioned it for scalable and sustainable innovation. During the year, we completed a major restructuring aimed at positioning Zedge for sustainable, profitable growth. This included closing operations in Norway and a targeted rightsizing of guru shots. These actions When combined with the completion of the Guru Shat's retention program that was implemented at the time of the acquisition in 2022, are expected to reduce our gross annualized expenses by about $4 million. We also incurred approximately $1.5 million in cash restructuring costs and $1 million in non-cash charges, which E will discuss in more detail shortly. Fortunately, As we enter fiscal year 26, the vast majority of these charges and cash expenditures are behind us, providing greater operating flexibility. This leaner cost base enables us to reinvest selectively in initiatives that offer the highest return potential, focusing on accelerating growth, improving margins, and enhancing free cash flow generation. Operationally, business performance was mixed in Q4. Our Zedge Marketplace, which includes Zedge Premium, subscriptions, and advertising performed well, while Guru Shots appears to be plateauing. Separately, subscription revenue increased 21% year over year, and we ended the year at record levels with nearly 1 million active subscribers, an increase of 47% compared with Q4 of fiscal 24. We also saw continued growth in Zedge Premium's GTV. Fourth quarter, Zedge Marketplace ad revenue grew year over year, but total ad revenue for the company was softer than expected due to a decline at Emojipedia from the competitive impact of AI search. Going into Q1, Google introduced a change to its search engine results page, whereby users can now directly copy and paste emojis from the search page. Although Emojipedia still ranks first or second across search, Google's change is diverting traffic away from the site. We are actively testing strategies to mitigate this outcome and strengthen Emojipedia's performance. We also made advances with Dataseeds.ai, our platform for providing rights-cleared, ethically-sourced datasets for AI training. Since launching earlier this year, Dataseeds has secured contracts from several leading AI customers underscoring the value and credibility of our approach. What makes DataSeeds uniquely positioned for success is our community of skilled photographers and graphic artists. Collectively, this group has produced a large and diverse image library of close to 30 million assets, which can be licensed for AI training. We can also leverage our creator community to generate customized on-demand datasets tailored to specific customer requirements. By launching themed GuruShots competitions aligned with client objectives, we can rapidly produce a critical mass of high-quality, rights-clear data that directly supports each customer's unique AI training needs. In parallel, we have started building the DataSeeds Production Cloud, a managed global production network that mobilizes domain experts including professional photographers, videographers, and graphic artists to deliver highly unique and specific data sets at scale that don't lend themselves to photo competitions. This creates a scalable and differentiated advantage for data seeds in this fast-emerging and explosive market. Turning to capital allocation, we repurchased approximately 640,000 shares in the fourth quarter, and a total of 1.3 million shares for the full year using cash generated from operations. For the fourth quarter, our more aggressive share repurchases along with restructuring and retention-related payouts temporarily reduced our cash position. We ended the year with approximately $19 million in cash and cash equivalents reflecting our decision to strategically deploy capital where we see the greatest long-term value. These actions also underscore our confidence that Zedge's intrinsic value is not fully reflected in its current share price. In fact, following the end of the quarter, we also announced the initiation of our first quarterly dividend of 1.6 cents per share, further reinforcing our confidence in the strength of the company's cash flow generation and balance sheet. The share repurchase and dividend reflect a disciplined, balanced capital allocation strategy focused on returning value to shareholders while preserving the flexibility to invest in high-impact innovation and future growth opportunities. Fiscal 26 is going to be a year where we invest in growth and innovation. Our strategy is centered around five key areas of focus. First, expand and diversify our revenue base. For our core products, we plan to continue to innovate new features and optimize our monetization strategies. Late in fiscal 25, we integrated audio AI capabilities into the paint suite, and we intend to further expand those creative tools in 26. We are also evaluating how best to evolve GuruShots. One of the biggest questions we are working through is do we focus on making the game more engaging or do we more closely couple it with DataSeeds as a massive content acquisition platform or both? It's too early to commit to a specific direction, but it's fair to say that we are monitoring performance and opportunity closely. Second is to accelerate product innovation. Our product innovation team has adopted a model that launches test marketing campaigns to measure interest before writing one line of code and then capitalizes on the benefits that AI, vibe coding, and automations offer to accelerate the development of the new potential winners. SyncAt, our recently introduced app that turns still photos into fun and potentially viral video clips, was the first example of this new strategy. This approach allows us to build smaller, more focused products rapidly, test them against define key performance indicators, and scale those that show promise. We call these early stage launches alphas, and we expect to introduce at least six new alphas in fiscal 26 under this framework. Third, scale tape deck and data seeds.ai. In September, we launched Tape Deck in the U.S. on iOS. Tape Deck is a music platform dedicated to indie artists and designed to allow them to make a living from their music by offering transparency and fairness to them. The tape deck pilot started with approximately 500,000 tracks and allows artists, labels, and distributors to set their own pricing and keep 80% of each sale or stream. In addition, it allows their fans the ability to pay extra or tip their favorite artists directly. Although it's too early to comment about performance, Our goal is to expand to Android, web, and international markets during fiscal 26. Similar to all Zedge products, TapedX expansion will be tied to performance, and we plan to refine its creator tools and explore additional monetization models. For data seeds, our priorities center on expanding the creator ecosystem, expanding the pipeline of qualified enterprise prospects, and converting prospects into customers. Our focus remains on delivering bespoke, rights cleared, and ethically sourced data sets that meet the rigorous standards and evolving needs of the AI industry. Fourth is improving operational efficiency. Fiscal 26 will begin to show the full benefit of our restructuring efforts. We'll continue to reallocate resources to the most attractive opportunities, improve process automation, through the implementation of AI across the company and reinvest savings into projects with measurable returns. And fifth, execute a balanced capital allocation strategy. We will continue returning capital to shareholders through buybacks and dividends while maintaining the flexibility to invest in initiatives that enhance our long-term value. In summary, we enter fiscal 26 with positive momentum. We have three early-stage products, DataSeeds, TapeDeck, and SynCat, that are evolving, and the completed restructuring positions us for improved cash flow and profitability. Combined with our innovation pipeline, these initiatives give us confidence that Fiscal 26 will mark the next stage in Zedge's evolution, one which is focused, creative, and financially disciplined. Now I'll turn the call over to E...

Total revenue for the fourth quarter was $7.5 million, down 1.5% from last year. There were a couple of items to note here. First, Zedge Marketplace revenue was up mid-single digits for the quarter and would have performed even better if it were not for a one-time $144,000 benefit. related to Zedge Premium in the year-ago quarter. Also offsetting growth at Zedge Marketplace was an 11% decline at Emojipedia, consistent with Jonathan's earlier comments, and the expected 39% year-over-year drop at Guru Shots. Although sequentially, the business was down less than $25,000, showing stabilization. Advertising revenue was up slightly for the quarter, as growth in the Zedge marketplace was offset by lower ad revenue at Emojipedia. Zedge Plus subscription revenue increased 21% year over year, and our net active subscriber base grew 47%, reaching nearly 1 million subscribers. We continue to optimize our subscription plans, and are seeing the benefits of those changes. Deferred revenue, which primarily represents subscription-related revenue, reached $5.4 million. up 10% sequentially and 73% year over year. This is an important metric as it reflects future revenue that carries essentially 100% gross margin. Zedge Premium GTV grew 7% from the year-ago quarter, and ARPMAU increased 17%, continuing the shift toward higher-value users and improve monetization efficiency. As noted earlier, Guru Shots, which is reported under digital goods and services revenue, remained a challenge, down 39% year over year. As part of our cost optimization initiatives, we significantly reduced user acquisition spending for Guru Shots while we evaluate the best path forward. These revenue declines were expected, and encouragingly, the year-over-year rate of decline improved by 600 basis points. We expect to begin lapping some of these weaker comparisons in fiscal 2026. Cost of revenue was 6.4%, roughly flat year-over-year in absolute dollars. SG&A increased about 1%. to $6.9 million for the quarter. This reflects higher paid user acquisition where we are achieving strong returns and approximately $400,000 in reinvestment from restructuring saving into consulting, professional services, and product development to support the ramp of DataSeed.ai and TAPEDEC. which partially offset restructuring savings. We also recorded $0.6 million in restructuring charges in connection with the actions announced in late January and early February, compared to no restructuring or asset impairment charges last year. As a result, gap loss from operations was $0.7 million. compared to a loss of $0.1 million last year, primarily due to those restructuring costs and growth investments. Gap net loss and EPS were $0.6 million and negative one cent, compared to break-even results last year. On a non-gap basis, net income was $0.1 million, and EPS was zero cents. compared to $0.3 million and 2 cents last year. Cash flow from operations was $0.7 million and free cash flow was $0.5 million for the quarter. As Jonathan mentioned, cash payments related to the restructuring and retention bonuses tied to our 2022 acquisition of Guru Shots reduced free cash flow by about $600,000 in the quarter and $1.5 million for the year. These payments are now complete and will not impact results in fiscal 2026. Adjusted EBITDA for the quarter was $0.3 million. From a liquidity perspective, We ended the year with $18.6 million in cash and cash equivalents and no debt. The sequential decrease reflects our repurchase of approximately 640,000 shares during the quarter and nearly 1.3 million shares for the year. As of mid-October, about $600,000 remains available under our current buyback authorization. Thank you for listening to our fourth quarter earning call. We look forward to updating you again soon when we report results for the first quarter of fiscal 2026. Operator, please open the line for questions.

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're 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. Your first question for today is from Alan Klee with Maxim Group.

Good morning. If you could touch a little more on tape deck and data seeds AI in terms of the actions you're looking to take going forward and how you might think about what the opportunity is in both of these offerings. Thank you.

Hi, Alan. Thanks for asking the question. So I think that, you know, there are really sort of three buckets here. We've got tape deck, which It's been an initiative that we have built to address a portion of the world of music, mainly indie artists, that are underserved today in terms of revenue generation. As you know, Tim Cork, our SVT of product, comes from that world, and the goal of this product is to provide a transparent platform where fans of indie artists can support their fans and do so in a fashion that allows for these indie artists to make a good living from their artwork. The product has been built with many of the hooks needed in order to facilitate that outcome. And we've launched with 500,000 tracks. The need for additional music is there. And based upon performance and KPIs, we will make a decision in calendar year 2026 as to whether to continue this initiative or to really put it on the back burner. Moving to data seeds, similar notion of really managing the business towards KPIs. Data seeds, as I've described, is a B2B offering, our first B2B offering, which is focused on providing foundational AI companies with data sets that they are in need of in order to meet their development goals. And we are hard at work at taking content that we have access to through GuruShots, content that we can create with collaboration with our creator community, whether that be GuruShop players or Zitch premium artists, or even creating very, very bespoke content with professionals that extend beyond our existing user base. We have signed two contracts in fiscal Q4. One of the partners that we signed and these are well-known global brands and so on and so forth. One of those partners has signed a new contract with us in Q1 with a significantly larger order size. What we're in belief of is that many of these prospects will start off doing something small with us. We will need to prove that we can provide the data that's needed in a fashion which adds value to their development process and the goals that they are trying to achieve. And if we are successful there, some portion of those customers will come back and order more content from us to the tune of larger amounts of money. And then finally, we've got Syncat, which is the first of our new innovation products that are being rolled off the conveyor belt quickly through the increasing of AI and vibe coding and automations and other tool sets. And the goal there, again, is to manage two specific APIs in order to demonstrate that if we meet the KPIs, we can double down. If we are unsuccessful in meeting the KPIs, that we can fail fast and move on to the next MVP, if you will, or product concept. I want to underscore, and this is really important, that before we even write one line of code, part of the process is to run marketing tests in order to determine that the marketing funnel is one which is affordable, and will yield customers that we feel that we can monetize and earn a good return on. If we see that the marketing tests are unsuccessful, there is no justification to move forward and develop that concept that we have. So there's a lot of innovation tied to meeting KPIs, doubling down on the ones that are successful, and continuing with that path. We're doing that with our existing resources, and we're not looking to hire additional heads. One could imagine to do such an initiative, we would need to bring on a lot of new people. That is not what our intention is, and we're doing that across the three tracks, whether it be data seeds, whether it be the innovation track, or whether it be with tape deck. I hope that answers your question.

That was great. Thank you. One of the encouraging things I saw in your results was a sequential improvement in monthly active users, which maybe suggests that there's a possibility of some stability of potential growth eventually. What would you point to of the steps you've been taking to get those results?

So, as he had indicated in his comments, we are being very discerning about our marketing spend. and ensuring that we are focusing on bringing on high-value customers that can generate an attractive ROAS profile, and our spend is linked to what's happening in the market in real time. Specific to the Zedge marketplace, we need to see ROAS return in a very short period of time because Zedge Marketplace is not an app that people will come back to on a daily basis like they would with a social network or communications app or a cue in a game. And therefore, we are able to react quickly and we're able to ratchet our marketing spend based upon what is happening in the market at any particular point in time. We have had our data scientists develop a model that we are using in order to make investment decisions in paid UA. And I think that that lends itself to some of the improvement that you're seeing. Clearly, our product evolution is something that contributes to that as well. And then there are just market dynamics where certain things are going on. Let's just say the holidays. People get new phones. They want to personalize their phone. They will then come to Zedge and download accordingly. So some of those are within our control, and others are seasonal. But the ones that were in our control, we are really being very discerning about how we allocate our paid user acquisition spend in order to yield a good return. And that, I think, is a critical part of answering your question.

That's very helpful. Thank you. So I heard you say that you took some of the restructuring savings and reinvested it back in maybe paid user acquisition spend or some other things. Could you just kind of go into kind of where that was focused and is that something as far as you can tell now that you would continue to prioritize those areas?

Generally speaking, we've had a couple of cash expenditures around marketing. We've talked about the share repurchase and Edith said that we've got around $600,000 less than the share repurchase program, which totals a $5 million share repurchase program underway. And now with the initiation of the dividend, that will also consume some cash. Our goal is to fund all of these with our existing cash flow, not to have to dip into reserves ultimately. And If and when we see a tremendous growth opportunity that is backed up by numbers, we may spend more on marketing in order to seize that opportunity. I mentioned earlier, even with respect to data seeds, there is product that is being developed in order to meet enterprise client needs, but we are aligning that development with signed contracts and revenue in order to align expense and revenue as opposed to taking a perspective of bills and then they will come. Eve, do you have anything that you want to add to that? I'm sorry, Eve? Do you have anything that you want to add to that? We may have lost him. I don't know where he is.

Okay, that's fine. Your comments on Emojipedia, could you just explain again what Google changed and what actions you're taking to try to that and how you're thinking about the timing of how you're hoping that those actions might pick in the results.

Sure. So there are really two different things that are going on with Emojipedia. One is a industry-wide phenomenon relating to the advent of AI search. and that can be chat GPT, perplexity, anthropic, quad, whatever the case may be, whereby a user just goes in and types, let's say, a smiley emoji, and chat GPT will respond by posting a smiley emoji. The user will then copy that emoji and put it into their email or into their text message, whatever the case may be. That is independent of Google. Of course, Gemini provides the same sort of experience. Separately, Google consistent regularly and consistently updates the algorithm and the results for their search engine results page. And what they had rolled out as being brand new, has not ever happened in the past, is at least for a limited number of emojis, if someone were to go in and search smiley emoji, on the search results page, there would be a smiley emoji with a little copy or cut or paste button underneath it. And then immediately following that, you would find the link to Emojipedia. We are still ranked number one or two in terms of overall search results, but the functionality of the search results page now allows for a user to immediately acquire the content that they are looking for. In the case of Emojipedia, Emojipedia is much more than just copy-paste, but clearly we have copy-paste users. And let me explain other users in the world of We have a lot of digital agencies. We have news outlets. We have researchers that need to have detailed information behind each individual emoji that they are using in a digital campaign writing about or the like. And that information is available only in Emojipedia or primarily in Emojipedia. And the copy-paste users are the ones that are, so to speak, being affected because they no longer would go to Mojapedia for a straight copy-paste type of experience. I hope that answers your question.

Yes, thank you. I had a question on deferred revenue, which you highlighted how that's been growing and how that can provide future revenue at close to 100% margin. How do we think about the amount of deferred revenue, the timing of how it gets recognized? Can you hear me, Alan? Yes, yes, hi.

Hi. Sorry about that. Something wrong with my headphone. I talked, but you guys couldn't hear me. Yeah, so the way deferred revenue work is that as we sell the lifetime subscription, we take the cash, but we amortize the revenue over 30 months. So whatever we not recommend as a revenue, we put it under defer. which we will recognize over the next 30 months. So would that mean that we'll just recognize those deferred revenue over time? And as soon as we keep the sasquato pools fading, we would, you know, level up the revenue based on what we sell, not what we recognize. I hope I answered your question now.

Yeah, that's great. So one other question. Your SG&A was roughly flat year over year, but up sequentially. And you highlighted a few things that were spent on it. Is it reasonable to think that this quarter is kind of a decent run rate for what SG&A might be going forward?

This quarter, HCNA, as Jonathan mentioned, the saving from the restructuring was used to pay for the rent by the pay UA and pay for some consulting fee related to new initiatives. So, yeah, going forward, the HCNA will probably, you know, decline a little bit because we're not spending the same amount in pay UA consortium for the new project as we did in Q425. Okay.

Thank you. Those are my questions. Thank you so much and good job.

Thank you.

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