Q2 2024 Zedge Inc Earnings Call
Participants
Brian Siegel; IR; Zedge, Inc.
Jonathan Reich; CEO, President; Zedge, Inc.
Yi Tsai; Treasurer, CFO; Zedge, Inc.
Allen Klee; Analyst; Maxim Group LLC
Presentation
Operator
Good morning, everyone. Please remain on the line and 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.
Good day, and welcome to Zedge's earnings conference call for the second fiscal quarter 2024 results. During management's prepared remarks, all participants will be in a listen only mode. (Operator Instructions) I will now turn the call over to your host, Brian Siegel, the floor is yours.
Brian Siegel
Thank you, operator. In today's presentation, Jonathan Reich, Zedge's Chief Executive Officer; and Yi Tsai, the Chief Financial Officer, will discuss our 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 Zedge parent periodically files with the SEC 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 this EDGE website. The earnings release has also been filed on Form 8-K with the SEC.
I would like to turn the call over to Jonathan.
Jonathan Reich
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-end front-end items was up 21%. These factors fueled a 37% increase in the average revenue per monthly active user or RPU.
Now to a record $0.072, 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 analytics in fiscal 2023. We're well on our way here, and our efforts are starting to bear fruit especially for the Zevex marketplace.
Another important story this quarter relates to maturing our product development organization to drive innovation to 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 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 teacher 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 guru shots 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 a couple grew chasses UA spend with feature releases. In January, we introduced turbo 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. Traditionally, 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 to make food shops 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 autonomy, 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 ads.
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 on-boarding funnel is also a key focus area for the grooming shops, game insured onboarding will enable newbies to immediately experience gameplay in a simplified manner with a limited number of competitors increasing their 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 through 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 enhancements, high quality pictures are within everyone's reach.
The gameplay is fine and it touches on the human interface. Safety for 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 are driving positive roll offs 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 motor PTO had another good quarter. Our previous investments in website redesign, localization and technology upgrades continued 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.
And now I would like to turn the call over to Yi, who will review our financial results. Yi?
Yi Tsai
Yes. Thank you, Jonathan. As you saw in our earnings release, GAAP requires us to take a one-time $11.9 million non-cash write-down of goodwill charges, intangible asset. It's important to underscore that this was a non-cash event dictated by time as current performance demand line with a carrying value in the loan book. As Jonathan indicated, we still believe that with time, we will unlock growth and achieve the strategic goals that we envisioned when we acquire closure.
Additionally, this write-down does not reflect the valuable gamification experience we secure benefiting the rest of our business as a result of the strain related to variation. 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 from this morning.
Monthly active users on now for the debt marketplace decreased 10.7% from a year ago to $28.8 million. Now in well developed market and emerging market were down 15.6% and 9.2%, respectively. Total revenue in the second quarter was $7.8 million, up 11% from last year due to the goods and services, which encompasses revenue from Korea, came in at $0.9 million, down 26% from last year.
Similar to Q1, GuruShots revenue was again negatively impacted by Apple's ATT framework, macro economic issues and the geopolitical situations. Subscription revenue 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 attrition and our new value add exist Plus offering for Android replace lower cost legacy subscription, which only remove it net premiums.
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 payments, which offset modest decline in other content sales. It was a record [$0.072], up 37% year over year, reflecting stability in our pricing and a positive impact of our new IOS Android.
Subscription cost of revenue declined by 27% and was 5.9% of revenue. SG&A increased by 11% to $6.5 million. GAAP 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. GAAP net loss and loss per share for Q2 was $9.2 million or $0.66 versus income and EPS of $1.6 million and $0.11, respectively in a prior year.
Non-gaap net income and non-GAAP diluted EPS for the quarter were $0.5 million and $0.04 versus $0.8 million and $0.06 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, not every pay down the $2 million in outstanding bank loan during the quarter.
Thank you for listening to our second quarter earnings call. And I look forward to speaking with you again on our next call in mid June. Operator, back to you for Q&A.
Question and Answer Session
Operator
(Operator Instructions) Allen Klee, Maxim Group.
Allen Klee
Congratulations on the strong revenue growth from 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 the other stuff?
Brian Siegel
Hi, Allen. Thanks so much for your comments. And as I mentioned in my earlier summary of the quarter, we're actually seeing that our comm halfway through the quarter numbers are holding up. So that is due to a combination of factors, both speaker wise as tech winds or ad stack was high as well as I guess, some secular features or some such 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 in ad budgets and so on and so forth.
Allen Klee
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 them have growth in marketplace and things that you're doing keep us going?
Brian Siegel
Sure. Just to be more specific, are you talking about Zedge Premium? Are you talking about the overall marketplace, which includes not only licensed content but also user-generated content?
Allen Klee
For both.
Brian Siegel
Well, right. When you take a look at Zedge Premium, which is the licensed content area. We continue to iterate Teun Optimiz. And as a result, you're seeing the improvements there. We are also and now beginning to think about what can that market, what converged premium look like with the expansion across web and in terms of the overall Zedge app are global in that 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 us onboarding. In the past, we've talked about our recommendations on the content that served up to users. How does that impact on the user experience and then projects around improving engagement and retention.
So in our totality, each of those contributes up to the results that we reported today and then separate and apart from that, as I mentioned, the work that we had done last year in terms of overhauling the Zedge plus subscription on Android and rolling out Z plus subscription on IOS for the first time, it has also yielded very positive results for us.
Allen Klee
(multiple speakers) Yes. Thank you, Al. Just so we understand, is it Zedge plus is Zedge marketplace subscription and you also get another different type of subscription just for being ad free for, are they the same and then your paid subscribers were flat sequentially do you think that that number can can continue to grow sequentially? Thank you.
Brian Siegel
So that plus is our subscription offering. Our subscription offering has a bundle together. Several value adds up one of those value adds, is it free as you described it, but then if there are additional value adds in there, whether it be both that can be used for creating a I images ahm as an example. And insofar as a 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 terms of saying to us 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 lot of improvements in terms of those value adds, making that subscription offering more attractive and ultimately bringing in new subscribers.
Yi Tsai
Thank you. In terms of a major TV, I don't know if you've provided any numbers in terms of did it grow over year over year as a result, I'm not sure if you're able to provide revenue also, you said the new actions you'd like to add mentioned some things like emoji mash-ups, emotive times, and I'm probably saying around KO. emojis.
Brian Siegel
Could you just tell me what mash-ups and payer markets are saying, I'm sure these are new content just to keep it simple, these are new content forms. But by way of example, on when today, one renders a smiley emoji and they can either have a smiley face in yellow and so on and so forth or they can type of coal and a closed frenzy.
That is a contrast with the text strings that connote a various messages are, and that is a potential direction for us to add as a new content vertical within a motor PDR. And that's one of many in terms of numbers, I'm going to hand off to you to answer your question, Alan.
Yi Tsai
So he moved to PDR. The second quarter call was not as great as we had hoped for. But if you look at the six months, we still grew that 27%. For three months ended January, we only grew about 8%.
Allen Klee
Thank you. And then one of the areas that I think you mentioned as a priority is on monthly trying to grow monthly active users that was up slightly sequentially, which which is encouraging. Pat, could you maybe just highlight some of the key things you're focused on to get that number to start growing again?
Brian Siegel
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 their complaints with out a management participation that are working on some various feature enhancements, new features and potentially complementary products that would unlock growth.
And then separately, we are also looking at ways of reimagining are they Zedge app or benefiting from the installed base that we have got to help fuel additional growth, whether that be through product marketing, incentive plans, influencer type of job of end referral plans.
And then, of course, separate and apart from that on user acquisition investments and all of those taken together, we we are hoping that we can reverse that trend and see to it that we unlock what we believe to be on a promising growth opportunities on an annual escalator at.
Yi Tsai
So I would just like to, as we mentioned, even though our active subscribers stayed flat at 648,000, but we are replacing low value solution with a higher value from the lifetime subscription as well as suppressing. So although the active subscribers remain the same, but our revenue base, what's much higher?
Brian Siegel
Thank you.
Allen Klee
A yes, that's a good point. Thank you. Then on through Charles City, a couple of questions. My personal experience, and I'm a bad example, not being that savvy in this stuff, but on it's hard to be a newbie to when you first get on, it seems difficult to know how to engage, you know, and it tells you, you know, you can 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 talk a little about what the the turbo feature, what that actually is and the new feature you're going to add and then why multiple virtual currencies some should help you out. Thanks.
Brian Siegel
Thank you, Allen. And a point very well taken with respect to onboarding, as you said, a newbie that downloads good shots today, it is immediately immerse in the full game as they enter into a competition, they can be competing against up to 7,000 other photographers that are in that our 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.
Our overhauling onboarding will allow for us too simplify the game plan such that we get users into that funnel immediately, which opens up the top of the funnel, hopefully expand for plate, 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 again, exposure to additional features.
Our that contribute to making in-play more competitive and fun and so on and so forth. In addition to that, the onboarding will on have an element to it to that makes the game more or I guess, shorter in duration. So a typical photo challenge today, Inder shops 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 or it could be two hours and so on and so forth with respect to our 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 BOC to master the game. You really need to have a portfolio of those three resources and migrating to a coin based on economy, which has multiple currencies allows for a lot more flexibility. And it also allows for us to some reward every player in the game.
Meaning if you are playing a 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 for which is 6,996 in terms of your ranking, our ability will be with this new our Coinbase economy proceeded with the every player, even a player that ranks lowest of those 7,000, we'll 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 experienced not only in a 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 content, 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 the game and then and now beginning to expand that too, and 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 again, that escalated accordingly. Does that answer your question?
Allen Klee
No, that was very thorough. Thank you. From just some updates on AI. heart Master, can you provide an update on that?
Brian Siegel
Sure. So a master remains in soft launch. So 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 crew change its trajectory and the direction and that we believe will allow for this growth that we will then refocus efforts and resources on AIR. master.
We just don't want to spread ourselves so thinly that were not progressing the GURU shouts game and that as we evolve, it will take time to watch this AR master game as we iterate and so on and so forth. So focusing on getting one thing gone really, really well and then progressing to the next thing, which would be a our master or 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.
Allen Klee
Got you. Okay. And then probably I'm guessing a similar answer answer from the past call, you talked about potentially launching hybrid casual game. Is that kind of in the same status or --
Brian Siegel
AI. art Master is in that hybrid casual category those those are not separate and distinct from one another.
Allen Klee
Okay, got it. Thank you on. Okay. And then, um, question on financials. The jump in SG&A for the quarter is the ways I look at that. To what degree do we think of that as like on finance that this is a seasonally strong quarter versus some of the other things you talked about perhaps a good acquisition or some of the new well, it's ISG. and you brought on some more people. So I'm trying to get a sense of how much of it is maybe seasonal versus revenue run rate for SG&A?
Brian Siegel
I would actually reframe that a little bit. SG&A includes marketing. So there are two components of that number one is actual money that we have spent on paid user acquisition, as I've said in the past, in order to scale paid user acquisition, when looking at budgets, there is going to be steady state on 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 for you trying new platform, you're trying new creatives and stuff like that and some of that stuff works. Some of that does not need both components in order to scale pay user acquisition. But then there is also the fee that we pay to, whether it be Apple or 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 minute By way of contrast, EVM, anything that you want to add to that.
Yi Tsai
But yes, I'll only add a pattern of FT. remain quite stable in all net compensation expenses to be in line with last year. So all the increase in exiting a Jonathan mentioned is in the marketing spend and also the pipeline we see one of the downside than we were a lifetime subscription runs from Google Play's point of view, it's just one and done. So they traded at a in their purchase just so we pay a 30% fee rather than a vigorous appreciating, which is at 15% fee. So as a result on our platform fee went up by virtue of our rolling out a lifetime subscription?
Allen Klee
Great. Okay. Congrats again and thank you so much.
Brian Siegel
Thank you.
Operator
This does conclude our question and answer session and the conference call. Thank you for attending today's presentation. You may now disconnect.
