Q4 2020 Zedge Inc Earnings Call

Thank you operator and thank you all for joining us today. Good afternoon and welcome to his fourth quarter and fiscal 2020 earnings conference call joining me today on his first earnings call as our new Chief Financial Officer is who will provide insight into our financial performance package another strong quarter for Zedge as we delivered 39% Revenue growth year-over-year and positive net income due to our ability to successfully grow our business days wage providing compelling content while effectively monetizing our loyal user base as most of you know, Zedge is one of the leading providers of mobile personalization content offering consumer a rich array of high quality wallpapers video wallpapers ringtones and notification sounds our Flagship Zedge app has four hundred and fifty million organic is dead.

and 32

monthly active users or math

Our user base today consisted primarily of Android users and approximately 30% of our users are located in well developed economies.

Demonetized these users by selling advertising offering paid subscriptions and throughout our Marketplace Zedge premium where artists can open a virtual store and sell their licensed content to our customers in exchange for earning a percentage of the sale last year at this time our chairman Michael Jonas charged us with identifying opportunities to drive both growth and profitability. He articulated our goals at the time as becoming cash flow positive in the fourth quarter of fiscal 2023 while continuing to invest in long-term growth. I'm happy to report that we were cash flow positive in every quarter of the fiscal year furthermore. We accomplished this while investing in blue New Growth initiatives, which we expect to bear fruit in the months and years ahead as a result. We ended the year with a strong liquidity birth.

File including more than five million dollars in cash and cash equivalents on the monetization front fiscal 2020 was a banner year in January 2019. We launched a subscription option for our Flagship Zedge app during fiscal 2020. We materially expanded our base of paid subscribers and we're successful passing a 40% annual renewal rate during the fourth quarter our subscriber base grew sequentially by 26% to 504000 months crisis subscription Revenue in the fourth quarter alone, exceeded subscription revenue from all of fiscal 2019 demonstrating the progress we continue to make and growing this initiative as you recall a paid subscriber generates a higher margin for us than an ad-supported user and a renewal generates even higher margins as Thursday.

He's we pay to Google drop in your two. We also took steps to improve advertising revenues even in light of a decline in mail and well developed economies song called our hats back by further optimizing our waterfall increasing what advertisers pay us per thousand Impressions known as cpm's in the industry and also initiated header bidding to increase demand for our inventory. We are working on a plan to customize the ad experience by geography to better monetize across all regions. Finally Thursday. We are continuing to invest in debt premium and expanding its token-based autonomy in terms of solidifying our long-term growth opportunities. We took meaningful steps to further diversify our offerings in December 2019. We began our Evolution into the world of mobile entertainment with the beta roll out of shorts cat stories by Zedge.

shorts

provide serialized short-form fiction stories rendered in a text messaging like format along with images to date there have been more than 120,000 installs of the sports that mainly from promoting the service through our Flagship Zedge personalization app this growth validates our ability to cross-sell to

view of $30 plus loyal customers while the initial launch results were strong was solid initial weekly gains in conversion rates are poo and turn off COVID-19 temporarily disrupted this progress, but we are currently seeing a recovery in these Trends. Additionally. We are taking the initiative to drive further growth expanding beyond the current subscription model with an ad-supported offering as well as an A La Carte token-based model. Furthermore. We are actively testing different marketing message is pricing excuse and free trial periods. In order to optimize user segments as they enter the sales funnel in the coming months. We will continue to interactively role of product enhancements for shorts to improve the experience and introduce an array of additional features including expanding into new genres new marketing initiatives and introducing a beige.

For shorts casts many podcasts which are stories with voice actors sound effects and top-notch Sound Engineering looking to fiscal 2021 that we have had a strong start to the year. We have exciting plans and expect to grow Revenue by at least 20% for the fiscal year. We are investing to reinvest growth in our Flagship Zedge app through a comprehensive overhaul of our content management system merging both user-generated content and premium content together founder one centralized back end. This unified platform will open the door for incremental capabilities that we expect positively impact usage and retention particularly in well developed markets leading to growth in our user base.

Specifically we expect to introduce a set of Social and Community features enabling users to follow their favorite artists curate the content they like best and more easily share all of that across very nice. Social platforms. Next. We are overhauling user accounts and increasing their value by coupling them with additional product features. We are even exploring ways in which we can meet the needs of iPhone users. Now that Apple has enabled personalized widgets and the app icons in iOS 14, which could drive marginal growth in calendar 2021 with the potential to move the needle longer-term. Finally. We will take content recommendations to the next level through personalized speeds that mix relevance user-generated content back together with premium content which in turn will also help us in scaling our ZIP premium offering to artists our plan calls for this migration project to be completed before birth.

end of calendar

Twenty-twenty and we expect to start iterating some of the after mentioned items in early calendar 20-21 aside from the ongoing investment in both personalization app in shorts. We believe that we now have a well-structured product Discovery methodology that will help us prioritize. Our product development efforts off. Our goal is to release a new beta product with the potential to become part of the core Suite of apps approximately every six to nine months. We are currently exploring a wide variety of options from content creation to gaming

Our team is analyzing Market sizing product positioning technology fit differentiation monetization and customer acquisition just to mention a few variables generally speaking. We want to leverage our existing user base to drive user adoption in well developed markets from a technology standpoint. We have built and validating a platform and we are positioned to introduce additional new content and new offerings on top of our established platform quickly and cost-effectively and closing fiscal 2020 was an outstanding year for Zedge. We have high expectations for fiscal 2021 and believe that our performance and growth prospects are not being valued appropriately by the market to address this we are stepping off our investor relations activities and have retained an external firm with expertise in the micro cap space dead.

Last but not least. I want to applaud my co-workers for their outstanding performance, especially in light of the challenges associated with the global pandemic and course structural changes and how we operate as a company keep up with the good work. Now. I'm going to turn the call over to e who will provide details about our financial performance. Thank you and Stacey.

Thank you, Jonathan. I want to stop by reminding those on a call that our fiscal year end July 31st. I also want to point out some changes. I'm making to the metrics we ought to invest to improve transparency. We will continue to provide now and up now as well as growth transaction van a g TV, but that's premium additionally given the importance of growing our success in business and we have breaking out our situation and advertising Revenue am continuing to report quality subscriber number. Please refer to the tables now running release of this additional data monthly active users off now defined as the number of unique user then open our ad during the last 30 day of the. Decrease 5.6% to 31%

9 million

June July twenty twenty from 33.8 million in July 2019, but was up from the end of Q3 of fiscal wage 2020 by nearly 11% year-over-year decline was mainly driven by erosion of customers in well developed markets month.

Possibly offset by a low single-digit increase in emerging-market sequential increases from Q3 to Q4 with driven by a recovery in both the morning and will develop Market total revenue in the fourth quarter increased 39% to 2.7 million compared to Jersey the year ago quarter and increased 31% sequentially the main driver of the subscription growth optimization of our water flow off in an increase in advertising rates.

All business has proven to be resilient even as we navigate unprecedented department and marketing challenges. We need to call the 19th this payment transaction value or g TV. That is a total sales volume transacted to our Marketplace 189000 YouTube to 10% compared to a year ago quarter and 26% compared to last quarter.

Rebound in this business was encouraged and we believe that the evening of the impact of pandemic along with similar uncommon quality things is that we have underway would result in continue GTV group and physical 2021.

Hey subscriber also materially increase exceeding five hundred thousand at the end of the quarter a 277% increase you over here 26% on a sequential basis.

Assume recall when the Supreme Angels or convert into the pay subscriber you pay a 30% fee to Google which showed up, you know, a marketing expense. However, if a subscriber renewal so freaking in YouTube the Google feed drop to 15%

Tony seen any rate. It's a pattern 40% which is generally considered with strong performance within the industry wage was $0.03 an increase of 50% year-over-year and 29% Sequentially. The year-over-year Improvement is primer. It should be able to revenue growth in Pay subscription in the table Titan benefit discussed earlier.

Active direct cause of Revenue continue to decline due to action with during the fiscal year including switching Cloud hosting provider and the retirement of old Technologies. We believe we have realized most of the pulley cost reduction which would provide us with a lower V Coast bass more info.

STNA in the full quota, which one point seven million a 20% decrease compared to a year ago in a 9% increase sequentially the year-over-year decrease primary ready to lower compensation costs and discretionary spending.

offset by increased include Google 4K subscription in short content acquisition instruments

Sequentially our paid subscriber growth drop marketing fee to Google.

Income from operations in the fourth quarter was $390,000 compared to a loss of $939,000 In the year-ago period in the choice of hundred twenty-seven thousand in the prior Court.

Report a name Comfort diluted share of $0.04 versus a loss of $0.12 in the year-ago quarter.

We remain in a strong position in terms of the credit of July 31st. We have five point 1 million in cash and cash equivalents.

A $500,000 increase and the 3.5 million increase compared to a year ago the increase in cash over the prior quarter what's treatment? I'm married but positive operating cash flow and we have now generated positive cash flow from operation for full consecutive Quarters off.

This has almost no outstanding debt one maintaining access to a revolving credit facility of up to two million if need be looking to filter 2021. We have some exciting new feature in product scheduled to hit the market and we look forward to discussing them with you in more detail, Did they appropriate time? Finally external can say early booking a little business and physical 20-21. We are targeting top-line growth in excess of 20% continuing positive cash flow from operation and profitability on both the quality and full year basis in conclusion a strong recovery in many parts of our business that have been negatively impacted by COVID-19 in the cost reduction plan wage.

Continue to invest in current and future projects while achieving follow the profitability inconsistent positive cash flow.

I hope they keep some you remain safe and I look forward to speaking with you again on the next call Operator back to you for Q&A.

We will now begin our question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing keys to withdraw your question, please press * 1 and will please excuse me will pause while we assemble the roster.

And it looks like we've got our first question from Allen clay with national Securities, please go ahead.

Yes. Hi. Just just this this quote is a pleasure. You you have preferred my numbers on every metric out there and you know good job. If if I just kind of go through the different things starting with monthly average users and the increase there can be rolled down into how you think how much of that came from just new Android phone sales increasing or to what extent off the mix of emerging markets and development or developing or or any other reasons? Why the the number did so well

Hey, it's Jonathan. Thanks so much. Yeah, we're very pleased with the quarter ourselves as well in terms of monthly active users. Now as long as you will see in the press release there was growth coming out of the Emerging Markets. We've also seen a very nice up tick off in India as you recall. We had a lawsuit that we were litigating against a uh-huh entity that had our FX well as many other music apps block their we prevailed and we are now beginning to see the benefits of having one that case but overall, uh, tremendous growth and tear flea markets this past quarter and um in terms of tier-one, yes, quarter-over-quarter. We saw a nice growth as well one of our dead.

Primary goals in this fiscal year is to put tier-one back on the growth tree and the way in which we plan on doing that is going home dependent upon introducing, uh, Community features sharing features social features amongst other things and that will begin to uh, hoping the second half of the fiscal year.

Great, and then you mentioned that you might be able to do more with Apple iOS. I kind of miss why that is that could you just go into how that would be an opportunity in your neck in fiscal 2021?

So without you know without limiting ourselves to whether its fiscal year two thousand and Twenty-One. The big picture is Apple released iOS 14 there most recent wage upgrade the operating system and uh unbeknownst to the market is the time Apple introduced a personalization feature around Las Vegas where they would allow for customized widgets as well as they began marketing, uh, the ability for users to modify their app icons as it turns out Zedge has a portfolio of flow somewhere is around two hundred different icons files that we are embedding in to talk to the Apple Zedge app or the IOS app, and we hope that before the end of this calendar year. We will make that a seamless process dead.

It's not in the very beginning of 2021 calendar year that will be seamless and we also hope to begin to offer Widgets app on the iOS platform as well. What we've seen in the very early days of the release of iOS 14 is that there are providers out there that are selling their widgets, you know for as much as a couple of bucks per piece. We don't know what the long-term sustainability of that is, but we sort of you this as a slight crack in the door where apple is being sensitive to uh, user demand for personalization capabilities, which has been something that has been a very very different experience across Android Wear It seamless vs. IOS dead.

Or it's a very arduous in manual process but long story short if users begin to embrace that as a normal part of their IOS app experience. We we expect that we will benefit from that.

Thank you and advertising rates that recovered very nicely. You mentioned a bunch of reasons actions. You've taken to improve that off. How do you think about that going forward? Is it reasonable to think it stays well else being equal at the rate is that now or is there any reason why it could change one way or the other?

So certainly, you know, when you take a look at advertising rates on a global basis independent of Zedge what we have been reading in the Press is that the advertising is clearly been negatively impacted by kogan and uh clearly, we don't know how that will unfold depending on how long the pandemic stays in in, you know full force. If you up having said that much of the Improvement that we've experienced that relates to optimizations that we have made in our platform and we continue to focus on Thursday.

Saying additional ways in which we can deliver additional incremental advertising Revenue. Um, some of the things that were playing with uh, life revolve around offering different experiences, depending on where one is using the app in the world. Uh, and then uh, there is ongoing design work as well as advances in ad Tech platforms that we are clearly focused on and we believe that there is a potential for additional left side there. Although still very very early to uh, give you clarity about that.

That's great and then with subscriptions.

Well, I what do you see as the key driver to keep this momentum going that that's been going so well sure. So, you know as long as I indicated in my earlier comments.

A lot of the progress that we've made in in our subscription-based offering relates to extending the marketing and reaching a bath water part of the audience coupled with optimizations. Uh, and what we're beginning to focus on this month's fiscal year is in building out a value-added, you know set of features that will make subscriptions that much more attractive and hopefully, uh Drive incremental growth there. There's also a unknown, um, we begin to record our annual renewal rate for users that signed up in 2018 for their second annual renewal this coming January birth.

As you know mentioned during the call, the first year renewal rate is Summers around 40% or higher still too early to predict what will happen with that second annual renewal, but that could you know, add some additional Alpha if you will.

That's great. In terms of your Marketplace last quarter. You basically said that you know, you were going to be shifting marketing dollars too short. So you thought that the market place, you know, gross transactional value could be declining and it actually actually grew so what would you say where the the key factors off the outperformance there and and everything you mentioned about how how you could grow? It is really interesting. I think of creating more value in this app, but I'll just let you expand on my sure. So no question for that. You know, we have been fortunate that the dead artists that are participating in our Marketplace offering are doing a very good job in terms of promoting their works even with our birth.

taking in

Tori otherwise would have uh been used to promote Marketplace and we are focusing that inventory on on shorts. So, you know, that's a very important factor that these artists are really taking, you know, their jobs seriously and trying to optimize across the platform and doing a good job of it off in addition to that, you know the growth that we've seen in monthly active userbase and and as well as what I will refer more generally I you you know, a code fact or where people are online more regularly off play a part in this for fiscal 2021 as indicated in my comments. We really do have a focus on unlocking greater value from Marketplace and uh, making sure that once we complete this back-end migraine.

And that we can begin to focus on bringing more artists into a platform offering them greater opportunity in terms of reaching the customer base and am offering the social Community features and so on and so forth. So remains to see be seen how that unfolds but clearly is a high priority for us.

Great and then with shorts, I'm not sure if you broke out how much the revenue is, but I know when you first started it you were kind of learning as you were going experimenting with a couple of things. How do you feel about kind of where you are? And and and what what you think are the things that you'll tweak it says will you know keep this moving? Sure. So Revenue contribution from shorts is immaterial. We did not break it out. We really been focused on building the product and there has been a whole set of product improvements. Um, as well as wage, I guess future product enhancements that we are working out. I would say the fiscal year 2021 is really making sure that wage.

We accomplished a couple of things in shorts. First of all broadening the monetization opportunities, we expect to rollout and not supported a version as well as a token based economy that will allow for a la carte purchases, um in the fiscal year, uh, and ultimately took the way that we look at this is that it will increase the top of the funnel drive more users in there and then we have the opportunity to optimize users based upon how they are consuming the content and and so on and so forth in addition to that, uh, we expected in early calendar year 2021 that we woke up short casts that is short form podcasts of this content. Um podcast Market is certainly growing in the US and when it comes to fictional stories off,

and we think it's still a very

Basement Market in one where we can set our stake in the ground and hopefully, you know have a leadership position there. So that's another ugly directions for us off. And then just as I said earlier ongoing iterations which uh, make the product that much more attractive offering more content genres. We've got a set of initiatives underway based upon focus groups that we've done with customers in terms of delivering to them, but the things that uh, they feel are missing in the product today so that will happen on a group basis it okay. My last question is so you gave guidance office or aspiration that your Revenue in fiscal 2021 would grow twenty at least 20% off.

How do how should we think about your operating expenses of like sg&a is that likely to grow at a similar rate or higher or lower than that?

Yeah, I don't think it's pegged to grow as high as that and you know, there are a couple of unknowns in their first of all sg&a grows higher than that. It could very well be because of that being a marketing expense which means that our subscription business is growing very very well. Uh, so that's what I would call, you know, a uh, a good point. We do have a set of tires that are on our radar screen. Um, however, we are not just going to bring people on without seeing to it that uh, the ROI that we have planned for is actually, uh, you know, being delivered and all in all we want to see who we remain profitable, you know, certainly a fiscal 2021 barring some incredible growth out.

Opportunity where you know we would say yes, we're going to take a short-term loss in order to you know, Excel it accelerate growth material.

Okay, thank you. That was my last question. I I really feel this was kind of that breakout quarter where you've done a lot to try to monetize a large user base you have and off this strikes me is like like a really important quarter in that. We're we're we're seeing you know, the the, you know, hopefully the beginning of something, you know, even better off, you know, congratulations again, thank you very much. Yeah, certainly we're in agreement with you and you know, our aspirations are to see to it that we can continue the momentum.

Again, if you do have a question, please press * then 1 and next we go to Joe boscovich with old west investment.

Jonathan how are you? Hey, Joe, has everything good and I'm doing well, I had a couple questions but but some good questions asked before long. So most of them were asked but in regards to shorts and as you know, I was very excited about the shorts launch just cuz I thought it was, you know, the entry into a short form entertainment s lot in a flood space in the early days. I noticed that one of the user acquisition strategies was advertising shorts within the Legacy basis Edge app, and I've noticed that or at least it seems not to be advertised as heavily as as as you want this so I just was kind of wondering about that user acquisition strategy for shorts going forward.

No question of a doubt promoting shorts to our existing user base in Zedge wallpapers and ringtones is still am a material part of our growth strategy. However, as indicated earlier with COVID-19

The existing user is is not only installing shorts But ultimately driving Revenue contribution and continued usage and so on and so forth in addition to that, uh, very very early stage. We have been poking around in looking at home in organic user acquisition channels what typically known is, you know, CPR class principal wage acquisition channels and really trying to unlock the channels. We're ultimately we can come to a point that cost per acquisition. In fact is attractive enough that we can generate, you know our lot and then the final piece of this is uh looking dog

What I will call Partners from where we have.

A product that is valuable to them for other initiatives that they have and in a sense. We can Co Market slash a bath inventory if you will in order to drive user acquisition. So that is the general direction, uh in which we're going to head and you know, each of those uh is being monitored very very closely. We have not yet, uh, invested any material amount of money and the cost per acquisition campaigns before we do that. We want to make sure that we have the product where it needs to be and that we also have what's known as attribution, um technology in place so that we can really measure every dollar spend what it is generating to us across which platform based upon what actions so that we

You can then identify.

The right user groups to go after and uh drive that growth accordingly.

Okay, great. And then I I I noticed you mentioned earlier that you've had a hundred and twenty thousand installs of the shorts at that age. You give her the number of subscribers 504000. Does that subscriber number is that just veg premium, or does that include the premium plus shorts?

No, that does not include shorts.

Okay. I see you have that $500,000 plus some part of that $120,000 would be total total subscribers for both offerings. So the month $500,000 plus is strictly ad free Zedge wallpaper and ringtone users. Well great. That's pretty impressive to go from 1:30 for subscribers to five hundred four thousand subscribers someone here. So congrats. Thank you.

That's it for me.

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