Q4 2023 Zedge Inc Earnings Call
Participants
Brian Siegel; IR; Hayden IR
Jonathan Reich; CEO & President; Zedge, Inc.
Yi Tsai; CFO & Treasurer; Zedge, Inc.
Allen Klee; Analyst; Maxin Group LLC
Presentation
Operator
Good afternoon, and welcome to Zedge's earnings conference call for fiscal fourth quarter and end of year 2023 results. During management's prepared remarks, all participants will be in a listen-only mode. (Operator Instructions) After today's presentation by Zedge's management, there will be an opportunity to ask questions. (Operator Instructions)
I will now turn the call over to Brian Siegel. Sir, you may begin.
Brian Siegel
Thank you, operator.
In today's presentation, Jonathan Reich, Zedge's Chief Executive Officer; and Yi Tsai, Zedge's Chief Financial Officer, will discuss Zedge'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 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 of the Zedge 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 afternoon. Thank you, Brian, and thank you all for joining us today. I will start by briefly reviewing our fourth quarter results, which were generally in line with our expectations. Q4 revenue decreased 10% from last year. While we encountered challenges stemming from the combination of geopolitical, economic, and industry specific issues, we observed ongoing stabilization in advertising with ad revenue remaining flat sequentially even during the traditionally weaker Q4 period.
Furthermore, in Q4 of fiscal year 2022, we had a one-time $4 million accounting benefit skewing year-over-year earnings comparisons. Other positive highlights from the quarter included 7% sequential growth in subscription revenue and our new iOS and overhauled Android offerings contributed to positive momentum.
Additionally, Zedge Premium's gross transaction value, or GTV, was up 14% year over year and down $26,000 sequentially, benefiting from paying users of pAInt, our generative AI wallpaper maker. All of this led to higher gross margin and sequential ARPMAU growth.
Finally, Emojipedia continued to build on its momentum throughout the year with revenue up nearly 70% versus last year. Every year, we pick at least one company-wide area of focus to overhaul. In fiscal year '23, we addressed data and analytics, and I'm happy to report that we achieved our goal of democratizing data.
The improvements we made empower our product, marketing, monetization, finance, and executive teams to access accurate and granular data more quickly and run experiments in concert with one another to more easily and quickly make data-driven decisions. As a part of this overhaul, we expanded our data team, and we are now very well positioned for continued evolution in a world that is ever dependent on data supremacy.
In fiscal 2024, we are committed to building a full-stack marketing team with capabilities spanning user acquisition, branding, creative creation, marketing analytics and reporting, competitive research, content marketing, app store, and search engine optimization, and reengagement marketing. Though we already possess many of these skills, we're now bulking up in the areas we haven't previously invested in.
Furthermore, we are also using AI in our workflow to scale quickly and efficiently. In light of the sea change that has occurred in the mobile app marketing space with Apple's IDFA deprecation and the upcoming rollout of Google's Privacy Sandbox across Android, it has become imperative for app developers like us to excel in many marketing disciplines. We expect to increase our investment in paid user acquisition and enhance our expertise in all areas of the marketing stack to generate attractive return on ad spend or roll-offs efficiently.
From a product perspective, we have multiple initiatives to enhance existing products and further diversify our portfolio. From the Zedge Marketplace, we will focus on expanding pAInt, our generative AI wallpaper maker. Our key priorities include the global rollout of pAInt, which may unleash high-growth opportunities, especially in markets where we are an early entrant. We also plan to offer pAInt on our website, enabling users to create all types of images, not only wallpapers.
I want to underscore that our current iteration of pAInt open new opportunities in the iOS ecosystem where we can compete on equal footing in light of Apple openly welcoming this new technology.
Finally, in the second half of this year, we expect to introduce a standalone Gen AI app that will offer many more capabilities and with time, encompass more than images alone. Beyond iOS and Android, we plan to revamp our website, enabling users to access pAInt to create all types of images, not only wallpapers. We will also test a print-on-demand capability so that users can bring their creations into the real world.
I mentioned Zedge+, our Zedge marketplace subscription offering, earlier. I'm excited because prospective subscribers are responding well to the overhaul evidenced by our subscription revenue going up on a sequential basis. With ongoing investments not only in marketing but also in testing subscription value ads and a variety of pricing SKUs, we hope to return to subscriber growth sooner rather than later.
Turning to GuruShots, not unlike what we initially experienced with Emojipedia, GuruShots is taking more time to scale than we would prefer. Yet, we remain confident in its long-term prospects. Although the gaming sector has faced global and economic challenges, the thorniest issue relates to Apple's App Transparency Tracking framework, which severely limits the information that ad marketers can secure to target prospective customers.
Although Apple released SKAdNetwork 4.0 in order to enable growth with improved attribution tracking capabilities, the impact will be limited until major platforms like Meta are successful in embedding this into their tech stack. In the meantime, we are taking a two-pronged approach to stabilizing GuruShots and positioning it for growth.
First, we focused on product innovation by rolling out Battles, a new hybrid casual gameplay feature for users to start competing in fast paced short duration photo competitions that are limited in size. Battles is important and will help make the GuruShots game more accessible and relevant to a broader audience, hopefully converting users into long-term players. In addition, we are also evolving with a token-based economy, and we'll start introducing advertising supported experiences in early calendar 2024.
Second, we are working closely with both Google and Meta to adapt and expand ROAS-positive paid user acquisition by optimizing against several inputs, including creatives. This will take time and resources as their algorithms optimize for relevant customers.
Suffice it to say, we are monitoring developments closely, testing, speaking with other publishers, and keeping our ear close to the ground to invest wisely. We are building out Emojipedia's fiscal 2023 success with continued innovation and plan to test features like emoji translations and mash ups along with new content verticals like emoticons, print-on-demand merchandising, and hyper-casual emoji games and quizzes.
Beyond our three core product groups, we have soft-launched the AI Art Master in five countries and currently plan to expand globally over the next several months. We believe AI Art Master, a hybrid casual Gen AI game that enables users to create wowing content to compete against other players in fun, fast-paced competitions, has the potential to be a fourth core product for us.
AI Art Master capitalizes on GuruShots' mobile gaming expertise and the hottest tech trend, Gen AI, positioning AI Art Master at the center of the explosive growth that both the Gen AI and gaming sectors are experiencing. Taken together, we 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 products, technology, and marketing. Additionally, we have a relatively untapped opportunity in the mobile gaming sector with GuruShots and AI Art Master that are based on our acquisition of GuruShots in 2022.
Before closing, I want to underscore that Zedge is fortunate to have GuruShots as a member of our family. As you know, GuruShots is headquartered in Tel Aviv and Zedge stands firmly with Israel. We were appalled by Hamas' barbaric behavior and our hearts go out to the victims of Hamas' heinous attack and the victim's families and friends.
I want to thank our employees and remain humbled by your courage and commitment, especially in the face of terrorism, rocket fire, army mobilizations, school closings, and the like.
Now, I would like to turn the call over to Yi, who will review our financial results. Yi?
Yi Tsai
Thank you, Jonathan. Starting with our fourth quarter result, now, for the Zedge marketplace, defined as the number of unique users that opened the Zedge app during the last 30 days of the period. Decreased 3.4% from year ago to $30.9 million. MAU in well-developed markets and emerging market was down 6.8% and 2.4%, respectively.
Europe, which contribute to both metrics, continued to suffer from the Russian invasion of Ukraine and inflation. Total revenue in the fourth quarter was $6.6 million, down 10% from last year. Digital goods and services, which encompasses revenue from GuruShots, came in at $1 million, down 29% from last year.
Similar to Q3, GuruShots revenue was negatively impacted by Apple's ATT framework, macroeconomic issues, and the geopolitical situation. Subscription revenue for the quarter was down 3% versus last year. However, this metric was up sequentially as our active subscriber trend improved and higher-value iOS subscription and our new value-added Zedge+ offering for Android replaced lower costs legacy subscription, which only removed ads.
Zedge Premium GTV grew 14.3% from last year to $384,000, reflecting incremental revenue generated from pAInt, which offset modest decline in other content sales. Average revenue per monthly active user, our ARPMAU, was $0.055, a decrease of 5.5% year over year. Still, this metric was up 4% sequentially, reflecting stability in ad pricing and a positive impact of our new iOS and Android subscription.
After backing out a one-time $4 million accounting benefit in Q4 of last year, operating expenses were flat year-over-year at $5.1 million. GAAP net income for Q4 was $0.2 million and EPS was $0.01. Adjusted EBITDA was $1.6 million versus $2.2 million in the prior year period.
From a liquidity standpoint, we remain in a strong cash position with over $18 million in cash and cash equivalents, and only $2 million in bank loans. We repurchased 72,000 Class B shares during the quarter at a weighted average price of $1.98 per share. In total, we bought back roughly 759,000 of our Class B common stock during fiscal 2023.
Thank you for listening to our fourth quarter earnings call and I look forward to speaking with you again on our next call in mid-December.
Operator, back to you for Q&A.
Question and Answer Session
Operator
Thank you. We will now begin the question-and-answer session. (Operator Instructions) Thank you. Allen Klee, Maxim Group.
Allen Klee
Yeah, hi. Good quarter. Our thoughts are with your own employees at GuruShots. I wanted to start with Apple's privacy rules now and the actions that big sites like Facebook are using. How do you think about how this is going to play out in terms of the potential timing of the effectiveness of the advertising to improve over time?
Jonathan Reich
Hi, Allen. Thank you. Thank you for your thoughts. We appreciate that. In terms of timing, that's, I think, not $64,000 question, but the $64 million question. As far as we're concerned, until platforms like Meta or Facebook have fully implemented a working version of [SCAN-4], it is going to be complicated to scale effective advertising without having any data there to drive better marketing decisions.
I think that you know that Meta had rolled out a version of SCAN almost at around month-and-a-half, two months ago, and then quickly had to reverse that introduction. Seeing between the lines, it was likely not yet ready for prime time. And I can only imagine that this is amongst one of the highest priorities for their business.
Having said that, and as I described during the call, we are using other mechanisms in order to optimize. Whether it be rapidly and materially increasing the number of creatives that we have, using all sorts of different creative styles. So as an example, you can see videos or promotional videos and things of that sort coupled with spending based upon where we are seeing an appropriate return on ad spend.
I can assure you that as soon as Facebook is, or Meta is ready to implement this at scale of it, we will jump on that bandwagon and begin to capitalize on the introduction of SCAN-4. I also -- I think it's important to mention that we have become, what I will call, managed account customers of both Meta and Google. Meaning that there are dedicated account managers with subject matter expertise that are overseeing our accounts working closely with our team in terms of helping us expand the marketing initiatives that we have in a ROI or ROAS-positive fashion.
And I would just underscore, in light of the downsizing that Meta has undertaken this year, I view that as -- due to the fact that we are, qoute-unqoute, have this managed account status, that is indicative of how interested they are in our business and how we can scale with them. I hope that answers your question.
Allen Klee
Yeah. That was great. Thank you. You mentioned a lot of initiatives for fiscal '24, what would say are kind of the top ones that you think would potentially have an impact on '24 and '25's financials?
Jonathan Reich
Sure. So let's take a look at each of the business units. The flagship Zedge ringtones and wallpaper business unit, we are really investing a tremendous amount of effort in terms of improving our subscription offering. And as you know, the financials associated with subscriptions are very attractive, not only is the profit margin attractive but we also receive the cash upfront.
Just the notion of having rolled out an iOS subscription is something which is having a meaningful impact, and I would note that in the US the price point for an iOS subscription is around $20 per customer, that is, the resale value, if you will, compared to Android, which is around $5 for an annual subscription. So very, very significant increase.
But it's more than simply price testing and coming up with the price that resonates with users, it's also the value adds and there's a whole bunch of work being done there in addition to marketing efforts. Then, in respect to the flagship as well, we are continuing to invest in pAInt, which is our Gen AI wallpaper maker. Rolling that out on a global basis.
And we may see some accelerated growth there in markets where we are early. Many of the Gen AI apps today that are in this space use a subscription business model, which doesn't necessarily align well with many of the markets that are outside of United States, Canada, and UK, Australia, as an example. And so when you get into more emerging market community, that is, the notion of subscription is less palatable. So there's a lot of work going on in terms of making this available and continuing to improve the experience. So we may have a -- some early mover advantage, if we're successful there.
And then I'd mentioned that we're also working on a standalone AI app and the notion there is to have an app which is not only wallpaper-driven, but image driven and other potential forms of content that has a much more intuitive user interface and which allows for us to really market the notion of Gen AI as opposed to that being a feature within our app. And then also, this introduction of pAInt to our website, that should be available in the next couple of weeks. So a lot of effort going into that.
Moving to GuruShots, the -- I'd say, two drivers are in the GuruShots game itself, the introduction of Battles and using Battles as a mechanism to improve engagement as well as attract and open up the top of the funnel to bring in customers that would want to get a sense for what our competitions are, but with a much lower, much easier barrier in terms of learning curve. And that is what is happening there with the sort of hybrid casual experience. And we continue to believe that that will unlock growth for us.
And then the brand-new AI Art Master game, which is 100% hybrid casual and taps into the growth of not only Gen AI, but also growth in the gaming space. So looking out over the course of the next two fiscal years, we are really trying to deliver that promise to the marketplace, and apart from the market, I should say, to investors.
And then finally, in Emojipedia, so we've seen some substantial revenue growth year over year and our ability to continue to add functionality, broaden the focus of Emojipedia to new content types, and introduce enhancers, for example, [POD]. We think that that can continue to drive incremental growth to that business unit.
Allen Klee
Thank you. In terms of -- last quarter, you mentioned that you were initiating a $2.5 million to $3 million cost cutting initiative, or that's what the benefit you would get annually, I think? If any of -- has that happened already or any update on that?
Jonathan Reich
So we had announced this -- it was not last quarter. I think it was two to three quarters ago. And yeah, we had acted on that, including a host of different initiatives from SaaS infrastructure to staffing. As you know, we've got employees in different regions of the world, different price points and the like to our marketing investment and so on and so forth.
And we have acted on that and we will continue to -- keep in mind, we want to be in a position where ultimately our cash position continues to grow and that we're not getting too far ahead of ourselves in terms of expanding the initiatives or having SG&A grow at a unsustainable pace.
I just want to underscore, I think it's very important when taking a look at SG&A to remember that within SG&A, we have both our marketing expense as well as the percentage that whether it be Google or Apple keeps when a user spends money on their platform. So SG&A is expected to grow, but that tied to marketing and that growth is something that we can expand or contract based upon ROAS.
The other thing that I think it's important to talk about when considering marketing in our growth plan is the fact that marketing is a much different animal than it was three, four years ago because of all the privacy stuff, whether it be ATT with Apple or soon to be Google's Privacy Sandbox. And that will mean that it will take more time to get recurring results that one can then say with confidence, hey, we can expand or this is not the right thing to optimize yet.
However, as I had also mentioned in my recorded remarks, we have prioritized for the entire company, the notion of really building out this full stack marketing team. And seeing to it that we address not only paid user acquisition expertise, but also things like app store optimization, search engine optimization, branding, product marketing, just to name a couple of those components. So that is what we believe to be critical for the ongoing growing success of our business.
Allen Klee
Thank you. For fiscal '24, I think historically, the first quarter is a seasonally slower quarter. Would you agree that that's most likely? Maybe talk about that, just the seasonality, how that typically plays out in the quarters and, is there anything you wanted to comment on of financial outlook for or goals of -- just any type of financial goals for fiscal '24? Thank you.
Jonathan Reich
Sure. So we've historically not provided projections. I will say that seasonality because we have a very, very large percentage of revenue coming from advertising is tied to ad spend typically in the holiday season.
So our fiscal Q2, which is November, December, January is typically the strongest quarter of the year. And then when you get into calendar, let's say calendar Q2 -- or Q1, I should say, you begin to see a downturn.
So although we're technically a month off, generally speaking, seasonality for ad spend aligns with what happens in a typical ad-driven business and that generally holds up. It's not 100% the case, but that generally is an indication of how our business is impacted.
We are fortunate because we do have other diversification, or we have diversification with the subscriptions in there and so on and so forth. And that subscription revenue, as you know, is amortized over the life of that subscription.
So going back to my earlier comment, our ability to continue to have success with our overhauled subscription offering for Android or the newly introduced iOS subscription offering is something which is really a key part to our ability to diversify revenue and have some insulation there, if you will.
Allen Klee
Thank you. One of the other things you mentioned was as an initiative for fiscal '24 is building out your marketing capabilities. Could you maybe just expand a little more on that on what you meant by that?
Jonathan Reich
Sure. Prior to the acquisition of GuruShots, Zedge's growth was primarily driven by organic installs where you know that we surpassed in aggregate over 600 million installs of our app on a global basis and the acquisition of GuruShots introduced a new facet to marketing, where in the deep mobile gaming space, paid user acquisition is a key growth driver.
And in parallel with that, we had also started to dip our toe in the market with respect to paid user acquisition in our flagship Zedge marketplace. And we have expanded that investment over time with what we believe to be attractive return on ad spend investment, a much different profile between the Zedge marketplace around Zedge App for paid user acquisition versus GuruShots. But in order to be successful in our investment in marketing, we have many different areas that we are refining and we are investing.
And so, as I mentioned earlier, not only building out a stellar user acquisition team that's focused on both paid and organic channels, but touching upon the fiscal 2023 goal of overhauling data and analytics, we need very, very precise reporting so that we can make good advertising decisions or user acquisition decisions, investing in things like app store optimization, search engine optimization, messaging and reengagement marketing, content marketing, and then also taking advantage of various forms of tech that can provide us with some additional information or can help us in terms of content creation and things of that sort, all become critical to this investment that we're making.
So that is I think the next -- one of the areas that when looking back in a year and two years from now, we're going to see just having a much more robust team. We started with one person. We have more than that clearly now and that is a critical part of our ability to grow the company.
Allen Klee
Okay, very good answer. Okay, well, thank you so much. I appreciate it.
Jonathan Reich
Thank you.
Operator
Thank you. This concludes our question-and-answer session and conference call. Thank you for attending today's presentation, and you may now disconnect.
