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Edited Transcript of ZDGE.Z earnings conference call or presentation 13-Jun-18 9:00pm GMT

Q3 2018 Zedge Inc Earnings Call

NEW YORK Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Zedge Inc earnings conference call or presentation Wednesday, June 13, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jonathan Reich

Zedge, Inc. - President, CFO & COO

* Tom Arnoy

Zedge, Inc. - Executive Officer

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Presentation

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Operator [1]

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Good afternoon, and welcome to Zedge's Third Quarter Fiscal 2018 Earnings Conference Call. (Operator Instructions) In today's presentation, Tom Arnoy , Zedge's Co-Founder and Chief Executive Officer; and Jonathan Reich, Zedge's Chief Financial Officer and Chief Operating Officer, will discuss Zedge's financial and operational results for the 3-month period ended April 30, 2018.

Any forward-looking statements made during the conference call either in 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 to differ materially from those which the company anticipates. These risks and uncertainties include, but are not limited to, specific risks and uncertainties disclosed in the reports that Zedge files periodically with the U.S. Securities and Exchange Commission.

Zedge assumes no obligation either to update any forward-looking statements that have been made or may make or to update the factors that may cause actual results to differ materially from those that they forecast. Please note that the Zedge earnings release is available on the Investor Relations page of the Zedge website. The earnings release has also been filed on a Form 8-K with the SEC.

I would now like to turn the conference over to Mr. Arnoy.

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Tom Arnoy, Zedge, Inc. - Executive Officer [2]

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Thank you, operator, and thank you all for joining us today. I'm Tom Arnoy, Co-Founder and CEO of Zedge. Welcome to Zedge's Third Quarter of Fiscal 2018 Earnings Conference Call, recapping the 3 months ended April 30, 2018. Joining me today is Jonathan Reich, our Chief Financial and Chief Operating Officer, who will provide additional insight into the numbers that we reported earlier this afternoon.

Q3 was both an eventful and challenging quarter for us. On the upside, we completed the first phase of the global rollout of Zedge Premium, our marketplace for artists, and the initial key performance indicators are encouraging. Zedge Premium continues being a top priority for us. And we believe that with time and investment, it will help drive the company's growth.

Conversely, while we saw a year-over-year growth, we experienced a setback in MAU and revenue when compared to last quarter. Historically, growing our user base in our fiscal Q3 has been challenging due to the postholiday slowdown, and this year was no exception. In addition, global smartphone sales growth has been stagnant, and this also puts downward pressure on our results. On the positive side, on a year-over-year basis, we've witnessed exceptional user growth in emerging markets, where new device sales are still robust.

We continued investing in our back-end infrastructure to improve operations and lower our costs. As part of this, we have implemented a new open-source technology that will enable us to improve content search and discoverability at a faster pace with a lower price point. Finally, we adopted a set of measures to ensure that we are compliant with the European Union's new data protection regulations, General Data Protection Regulation or GDPR, which took effect in late May.

Let me provide more details on some of the key developments. In March, we completed the initial rollout of Zedge Premium, making it available across both Android and iOS globally. As you recall, in the marketplace, Zedgers can acquire premium content by unlocking it through a variety of ways, including watching video apps, purchasing merchandise with cash or paying with virtual coins purchased with money. We are excited by the early results and potential. Even without aggressive promotion or seamlessly integrating Zedge Premium into the core user experience, both participation, that is the number of users that enter Zedge Premium, and conversions, the percentage Zedge Premium visitors that monetize in some fashion, are outpacing our initial projections and continue to rise impressively.

In essence, we hope to make a meaningful difference to artists and act as a powerful distribution channel, helping them build their fan base while also opening up an attractive revenue stream for them. We will continue investing in this service to increase user participation and conversion rates, expanding the community of creators and portfolio of content and adding new monetization options. Ultimately, we aspire to be a key destination that both artists and consumers turn to for personalized content and entertainment globally, extending far beyond smartphone customization.

From the artist's perspective, Zedge Premium is currently by invite only and features about 150 artists, most of whom are only offering wallpapers. The obvious question is, how do we scale the offering, assuming that performance data supports continued investments? Our plan is to: first, offer a robust self-serve platform that makes it easy for artists to upload, display and market their work in Zedge Premium; second, support a host of content verticals ranging from existing verticals like wallpapers, ringtones and notification sounds to new verticals, including stickers, live wallpapers, soundtracks, animated 3D AR objects and even physical goods like tees and phone cases; third, ensure that artists are able to effectively market their content to relevant users while maintaining full control over their creations; fourth, offer a host of monetization tools beyond reward advertising and virtual coin packs; and finally, actively markets to the creative community in order to gain interest and participation.

These steps will position Zedge as more than a smartphone customization app, transforming it into a large-scale entertainments ecosystem that's equally attractive to consumers and content creators alike. Furthermore, these activities will assist in creating a virtuous cycle in which artists encourage their fans to visit Premium, which in turn will result in driving higher MAU, making Premium more attractive to new artists and so on.

Currently, we are beta-testing version 1.0 of our self-serve platform and expect to launch later this summer. Once it's available, we will start marketing to artists in order to expand our catalog and make Zedge Premium relevant to a broader swath of users. Separately, we're expanding the portfolio of unlock mechanisms so that artists can choose how to sell and optimize their earnings. Even with today's lean offering, we already have 1 artist who has surpassed 16,000 unlocks in 1 day, which could translate into an annual run rate of around $10,000. Concurrently, we are focused on adding new content verticals, and we expect to introduce these on a rolling basis during the upcoming months.

Finally, we have started partnering with Hollywood studios and top-tier talent like G-Eazy. Furthermore, we are happy to announce that Nicki Minaj, a multiplatinum artist, is now using Zedge Premium to promote her new music and upcoming world tour.

I'll sum up by saying that we're excited by the potential for Zedge Premium but know that it will take time to build and scale it. We are iterating and getting better with one goal in mind, mainly turning Zedge into a scaled ecosystem, extending way beyond mobile phone customization.

I'd like to update you about our ongoing investment in overhauling our infrastructure and the impact it is having on our business. In order to operate more efficiently, provide better service and rationalize our cost structure, we continue migrating to a cloud-based infrastructure. Over the course of the last several months, we have transitioned away from our internally developed search and content technology to a more efficient and less expensive open-source engine that will help us improve content recommendations and search results. This upgrade will enable us to improve conversion, engagement and frequency of use at a lower price point.

Before handing over to Jonathan, who will discuss the quarter's numbers we reported earlier this afternoon, I'm pleased to announce that we are expecting to open a development center in Lithuania that will help us accelerate the development of our marketplace offering. As you know, we have an outstanding and dedicated staff in Norway. Yet it's proven hard to continue solely developing our products in Trondheim. As such, we want to supplement our efforts in a market that has a rich and diverse developer community, is close in proximity and time zone to Norway and provides great economic value. There are no assurances that we will find the right team, but we are optimistic about our prospects, and we'll keep you posted on our progress.

In summary, Q3 was a mixed quarter for us. The promise of Zedge Premium is exciting. Our ongoing transition to a cloud-based infrastructure supporting a host of services at a lower cost is reassuring, and our compliance with GDPR is critical. Yet we struggle with MAU growth and hope to reverse this by accelerating our investment in Zedge Premium.

Now I'm going to turn the call over to Jonathan Reich for a discussion of the quarter's financial results. Thank you.

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Jonathan Reich, Zedge, Inc. - President, CFO & COO [3]

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Thank you, Tom. My remarks today will focus on our key financial results for the third quarter of our fiscal year 2018. For a comprehensive and detailed discussion of our results as well as operational developments, please read our earnings release issued earlier today and our Form 10-Q, which we expect to file with the SEC by June 14, 2018. Following my comments, we will open the call to any questions you may have. Throughout my remarks, the third quarter refers to February through April 2018.

Monthly active users, or MAU, that is the number of unique users that opened our app during the last 30 days of the quarter, increased 7.9% to 34.2 million during April 2018 from 31.7 million in the corresponding period a year ago and decreased 3.7% from 35.5 million in the sequential quarter. Year-over-year growth in emerging markets was 24.5% offset by a decline of 7.6% in well-developed markets.

On a quarter-over-quarter basis, a combination of seasonality, where fewer users opened the app after the end-of-year holiday season, and flat smartphone sales globally resulted in a decline in well-developed markets of 6.2% and of 1.1% in emerging markets. As Tom discussed, we are working on initiatives targeted to drive MAU growth.

The total revenue in the third quarter increased 0.8% compared to the year ago quarter and decreased 16.2% from the previous quarter to $2.6 million. Revenue was impacted by the decline in MAU in well-developed economies, which command higher advertising rates when compared to those offered in emerging markets. Additionally, seasonality impacted sequential quarterly performance negatively due to lower advertising rates, typical in the first 3 months of the calendar year when advertising rates fall, coupled with negative growth rates in new smartphone sales.

Average revenue per monthly active user generated from our apps, or ARPMAU, declined 10.8% year-over-year and 18.7% quarter-over-quarter to $0.0222. This is the first sequential decline in ARPMAU in the last 7 quarters.

Our direct cost of revenue decreased to $378,000 or 14.8% of revenue, a 6.9% decline from $406,000 or 16.1% of revenue in the year ago quarter and increased from $356,000 or 12% of revenue in the previous quarter. The year-over-year decline reflects the savings attributable to our newly deployed back end and the redesign of our infrastructure, which has allowed us to lower our hosting costs, coupled with the slightly higher revenue base. The sequential quarter increase was a result of timing issues relating to a delay in completing Phase 2 of our infrastructure overhaul. We expect this project to be completed before the end of our fiscal year.

SG&A in the second quarter was $2.2 million, a 2% increase compared to the year ago quarter and a 15.1% decrease compared to the prior quarter. The year-over-year increase primarily relates to the investments we're making in Zedge Premium, where we hired a team of employees in the U.S., a high-priced market. As Tom mentioned, we expect to open a development center in Lithuania, a lower-cost market with experienced engineering talent, which will be used for much of the ongoing Zedge Premium development. On a sequential quarter basis, the decline was a result of both lower net compensation expense as well as our success in better managing discretionary expenses.

Loss from operations in the second quarter was $339,000 compared to $193,000 in the year ago period and accounts for depreciation and amortization of $317,000 and $166,000, respectively. Our loss per share increased to $0.03 from $0.02 in both the year ago quarter and last quarter.

At April 30, we reported $4.3 million in cash and cash equivalents compared to $5.1 million a year earlier and $4.2 million at the end of last quarter. Our working capital, or current assets less current liabilities, was $4.1 million compared to $5.3 million a year ago and $4.4 million at the end of last quarter. Zedge currently has no debt. Depending on the success and adoption of Zedge Premium, other commercial opportunities and/or a need for cash to pursue expansion opportunities, we may seek to raise capital through debt or equity financing.

In closing, Q3 was negatively impacted by a host of factors, including seasonality, the secular deceleration of smartphone sales and a continued shift in our customer composition from well-developed markets to emerging markets. However, to reiterate what Tom said, we are enthusiastic about the prospects for Zedge Premium and the impact that it can have on our user and revenue growth and the overall positioning of Zedge as a leading provider of personalized digital content that extends beyond smartphone customization. We look forward to sharing our progress with you in this regard.

Back to you, operator, for Q&A.

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Operator [4]

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(Operator Instructions) This concludes our conference call. Thank you for attending today's presentation. You may now disconnect.