Q2 2022 Zedge Inc Earnings Call
Ladies and gentlemen, the conference call will begin in approximately two minutes. Please do not disconnect. Your lines. Once again Besides conference call will begin in approximately two minutes. Thank you for your continued patience.
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Good afternoon, and welcome to the <unk> second fiscal quarter 2022 earnings conference call. During management's prepared remarks, all participants will be in listen only mode.
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In today's presentation, Jonathan Reich, such as Chief Executive Officer, and ESI that just Chief Financial Officer will discuss that just financial and operational results for the second fiscal quarter that ended on January 31st 2022.
Any forward looking statements made during this 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 judge files periodically with the U S Securities and Exchange Commission that you assume no obligation either to update any forward looking statements that they have 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 <unk> earnings release.
It's available on the Investor Relations page of <unk> 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. Jonathan Reich.
Thank you operator, and thank you all for joining us today.
Good afternoon, welcome to <unk> earnings conference call for the second quarter fiscal year 2022 .
At January 31.
2022 .
I am Jonathan Reich, CEO of <unk> and with me is our Chief Financial Officer Heath side, who will provide additional insight into our financial performance. We will then be happy to take your questions.
For those of you who are new to the story or haven't followed us in a while we own a portfolio of leading digital consumer brands that served 44 million users globally in January of 2022 .
Our portfolio consists of dead Ringtones and wallpapers, otherwise referred to as <unk>.
As the leading mobile app used for mobile phone personalization social content abandonment and includes that's premium a marketplace for artists celebrities and emerging creators to market their digital content and if tears too that gives users.
<unk>, the leading website dedicated to all things emoji.
And a set of experimental apps and services that our innovation team are working on.
All at various stages of development it's.
It is important to underscore that these are experimental and may not evolve into full blown commercial offerings, we possess deep expertise in monetizing our digital real estate, whether through advertising subscriptions or content sales our products appeal to a wide range of user segments globally.
We have a strong customer base in North America, Europe , and emerging markets, particularly India.
Accordingly.
At the current time, we do not have material exposure in Russia, or Belarus today, Android users accounts for roughly 96% of these edge apps monthly active user base and 91% of its revenue.
Our second quarter was another record quarter for revenue growing 30% over last year.
Operating margins remained strong at 45% net.
Net income came in at $2 $3 million and EBITDA was a record $3 $4 million.
At quarter end, we held more than $30 million in cash with almost no debt. In addition, we continued optimizing our as edge apps advertising stack driving exceptional CPM that is the price that we received for every 1000 advertising impressions sold in our App.
Now for our that gap increased 3% to $36 million.
With emerging markets up 7% driven mainly by continued demand in India.
However developed markets remains a challenge with mail declining in the low double digits. We are working on enhancing our offerings and services to reverse the trend of declining mall in this segment, specifically and accelerating growth more generally include.
Including introducing social and community features.
Despite the ladder arc <unk> or average revenue per monthly active user increased a healthy 22% versus last year subscription.
<unk> revenue and active subscriptions increased 18% and 7% respectively versus last year.
Before I update you on the strategic priorities I outlined on our last two earnings calls.
I want to take the time to address several important items that I believe are relevant to investors.
First concerning advertising as many of you know mobile apps that generate programmatic advertising revenue need technology, otherwise known as AD mediation to manage the sale of their ad inventory.
In late 2021 Twitter sold its AD mediation business Mo pub to App look.
Soon after the sale of App loving announced that it would deprecate Mo pumps platform on March 31.
As such we started assessing various alternatives, including App Robbins, Max platform and reallocated resources to commence testing and migration by the end of March. Unfortunately, this needed resource investment temporarily delayed the rollout of some of our social and community features.
Despite the challenges we expect to complete our migration by the cutoff date.
Although the migration was a compulsory distraction it was necessary.
And we are doing our best to ensure that the long term outcome will benefit our customers and our business mix.
Next I want to talk about our innovation team. This.
This group is tasked with identifying potential new products and is targeting to release up to three proofs of concept per quarter.
Even though many of these will not progress to full blown products.
We will benefit from the learning associated with them.
We have fine tuned this development process over the past few years to the point, where we can efficiently and cost effectively introduce new ideas concepts and apps without material adverse impact to our bottom line.
Idea here is to identify new opportunities that can hopefully scale into a sustainable long term business as these unfold, we look forward to sharing more details.
The shorts data was the first foray of the innovation team and we are currently contemplating the future direction for this project.
Over the next couple of weeks, we expect to render a decision about future investment and we will update you about our plans next quarter, even if we decide to reduce investment I assure you. Our efforts were not for NOG, we gained meaningful insights into scaling the innovation process rapid test.
Development marketing and product customer fit.
We will benefit from in the future.
Next I want to address a misconception that some investors are using to justify the decline in our stock price we have over 540 million cumulative installs representing 12% growth from the end of last year's second quarter.
We also have close to 10 million user ratings in Google play with an average rating of 4.6. It appears that due to the lack of public kpis certain investors are followers.
Our attributing our strong revenue growth to over saturating the app with advertisements at the expense of user experience. We do not believe this argument is justified we regularly analyze customer experience their satisfaction and usage and if the information reveals a fundamental issue we take.
Corrective measures accordingly.
Furthermore, if users prefer an AD free experience they have the option of signing up for a very affordable subscription.
Although some users leave us one and two star ratings, we try our best to optimize the holistic experience as evidenced by the enhancements and features we have released and we will continue to release it in the future.
This provides a good transition to discussing our key strategic priorities at the top of the list is growing now and improving engagement, particularly in well developed markets. During the fiscal first quarter, we began rolling out social and community features starting with giving.
Our users the ability to follow artists they find interesting.
Now that the AD mediation platform migration is almost behind US we will introduce more of these features and expect the notification pain to be available in the next several months.
This will inform users when new content that aligns with their tastes.
Is uploaded to the platform. In addition to core product development. We are also scaling up paid user acquisition and recently expanded our team to help scale profitably.
Next up we continue to invest in the parts of the business that offer optionality.
This premium is a big part of this opportunity.
We rolled out our potentially disruptive and Ftes meet easy platform in December and even with limited functionality have experienced early success to date, we have sold close to 600 video wallpaper and Ftes.
Our ease of use approach to Nf Ts allows non crypto experts to sell and if Ts simply by toggling be published as an F T option.
And allows users to purchase these entities by buying vegetable gains our existing virtual currency.
Which are available in the Z gap through in App purchases and spending them accordingly.
Thus far we have only opened the platform to select artists and limited the offering to video wallpapers. Soon we will begin to make the platform available to more artists diversify the content that can be minted offer a number of additions drop dates auctions and <unk>.
Stay tuned for further announcements in 2022.
While there are no material operational updates about search plus subscriptions, we remain committed to enhancing this offering and we will keep you apprised when there is news to share about their progress.
Moving to emerge a PDR, we are about to rollout multi language support.
Next up is our site redesign.
Entered around improving functionality and increasing engagement and monetization.
Finally, we are looking to the second half of the calendar year to experiment with what a native of motive PD app experience would be like and finally, there is M&A, where we remain active in evaluating potential opportunities to broaden our offerings and enhance our portfolio.
In closing we had an outstanding second fiscal quarter of 2022 and believe we are still in the early innings of reaching our growth potential.
Given the impending transition to the new AD mediation platform and the temporary delay in releasing social and community features we have chosen to remain conservative with our guidance by leaving it unchanged at this time.
We still expect topline growth of 25% to 30% with continued net income growth.
40%, plus operating margins strong cash flow and EBITDA growth exceeding revenue growth.
Four I wrap up the call I want to especially call out our team in Lithuania, which has remained focused and productive while offering support and assistance where possible to their neighbors in Ukraine, who are battling unjustified aggression in fact and solidarity we have changed our logo to the colors of the.
Cranium flag to support the Ukrainian people.
While we know this may be controversial to some we believe it is the right thing to do and we have contingencies in place should be aggressors ambitions move beyond Ukraine before handling the call over to <unk> to go through our financial results I want to thank our investors for your support.
I know the market has not been kind to <unk> stock over the past several months still our fundamentals growth prospects and profits remain strong our valuation is inexpensive our opportunity is large and we have built a track record of execution.
E.
Thank you Jonathan.
Want to remind loss from I'll call. It our fiscal year ends July 30, <unk> and.
And thus our second quarter.
On January 31.
Moving to our second quarter results now defined as the number of unique users.
Awful lot of that.
Junior lobster debates appeared.
The increase to one 5% to $36 3 million Jane Jenny.
Versus $35 4 million loss Jeremy.
And most of March and now expanded by seven 3%.
While well developed market now.
Track that by 10, 5%.
Total revenue in the second quarter increased 30% to six point.
Model from last year.
This year, we benefited from our ongoing work to implore at operation.
In addition.
Subscription revenue was up 18% from last year.
<unk> Premium's gross transaction volume or GTP.
That is the total sales volume.
Through our marketplace.
More than doubled to $484000.
But as Jonathan indicated mythicize crucial focus for us.
As we believe the marketplace potential is still such things with it.
And we will benefit some lift centrally among new and powerful.
Active such Wilson with hot 7% versus last year.
And were flat sequentially.
The slowdown in net subscription growth was basically due to the number of new subscription avid being offset by our churn rate.
Which has remained a constant percentage.
We grew to a higher base number of subscription.
This is a common problem for consumer subscription upsells.
The subscriber base case long term.
And as far as Don mentioned.
We are taking steps to really solid sequential growth in mis London.
Overall app mile was 6%.
An increase of 22% year over year, driven by the combination of banner advertising for <unk> and.
And higher pay sufficient number versus philosophy.
Operating margin decreased from 45% versus 47% loss rate.
While it's still a very strong number.
Central items, which when taken as a hall pass this number to decline.
Including legal expenses related to the evolving privacy lens.
And associated with compliance.
Higher compensation expense due to new hires and Stockwell wall as well as an increase in pay.
A couple of non op in Ireland negatively impact net income and EPS in the second quarter.
Tourists also we mentioned on previous call. We are in a transition year for becoming a tax payer in the U S.
Sweet news of our U S <unk>.
In fiscal 2021 .
Which led to an income tax rate this quarter 23, 4% versus 12, 3% last year.
Which added 392000 volatile income tax expense.
Mid <unk> tax rate increase.
Frank our net income growth rate to 2% at $2 3 million bonds.
The diluted EPS was down a penny due to the tax increase.
Buying or that 11, 5% increase in share count.
When you strip away this month operating harlem's.
EBITDA was a record $3 4 million involves more says to <expletive> loan Midland Bala lawsuit.
From a liquidity standpoint.
Meg and a strong net cash position with almost no debt.
And I'll look boating and involved with cash and cash equivalents.
A $5 million increase for the six months ended January 31 2022.
And up to $7 million sequentially.
Moving to guidance.
Year to date revenue growth of 43%, we remain very conservative on some of those effects.
Due to the impending transition to the end London Max possible.
And therefore, not changing of 25% to 30% revenue growth target.
Yes.
For operating expenses, we <unk>.
Forecasted higher operating expenses, mainly due to hiring.
User acquisition and auto items, and say, we expected operating margin to be at least 40%.
We will leave this unchanged.
At 44% year to date.
For modeling purposes.
Our expected tax rate will be around 21%.
And we are at 22% year to date.
I also suggested using 15 to 15 4 million shares for calculating diluted EPS.
And we are right at $10 million.
We also said that we expected our net income and EPS growth rate.
To lag due to a new site.
Given the increases in the last two items.
Most significantly the tax rate.
We say that we expect that a drag on EPS growth in fiscal 'twenty to 'twenty two.
Still.
Dissipated continue net income growth with robust cash flow and keep the volume growth.
For EBIT.
We will talk hitting a growth rate that is slightly its volume.
And our 25% to 30% will move items.
And year to date EBITDA growth is 47%.
We'll then EBITDA margin of 49%.
Thank you for listening to our second quarter, earning call and I look forward to speaking with you again on our next call.
Operator back to you for Q&A.
Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone now.
Wish to leave the queue you May press Star Q we.
We do ask that of listening via Speakerphone. Please pick up your handset for optimal sound quality.
Again, if you have any questions or comments. Please press star one on your phone now please hold a moment, while we poll for questions.
And our first question today is coming from Alan Klee Maxim Group. Your line is live you may begin.
Yes, hi.
Thank you guys are being humble given.
Your revenue growth rate, 95% gross margins over 40% operating margin from.
Very impressive numbers.
So.
I wanted to start off with with with the migration to a new ad platform.
How has it gone and is there any indication.
It will have an impact on your CPM or or is it just you're being conservative or what could you tell us about that.
Hi, Alan Thank you for the for the complements and really the thanks goes to the entire team.
And so part of that migration.
We have been evaluating.
A couple of different vendors.
And.
Until we are fully up and operational.
I think it would be prudent to.
What we have.
No.
The answer to conjecture.
Having said that the.
Analysis of potential vendor solutions.
Third around.
Ah.
A couple of different <unk>.
<unk>.
Certainly one of those being.
AD rates, but also.
Scalability.
Ease of use reporting data all of those items.
And.
R R.
Our target if you will consider with that there is not a degradation in so far as.
How we've been monetizing but until we're fully at scale.
We're not going to be able to answer that question with absolute clarity, although again to reiterate.
Goes without saying that the.
With that we are monetizing at par if not better than that in the.
World after.
No.
We have completed this migration.
Okay.
Helpful.
Another bigger picture issue.
Google came out.
Little while ago talking about.
Kind of maybe like a two year transition on.
How they're going to handle privacy.
Hum.
How do you think about that and how that codes. If at all have an impact on you guys.
Great question.
And suffice it to say that.
Google's primary revenue source for our largest revenue sources ad dollars.
Our fundamental belief is that as Google.
Works on their solution that they are going to be mindful of both customer.
<unk> as well as.
Maintaining if not enhancing their revenue stream.
Google has been talking about this migration for a while.
They had a prototype Ava.
Available give or take.
Last summer that they ultimately had scratched.
And.
We will continue to monitor.
How this evolves over time with the fundamental understanding that we are very sensitive to maintaining customer privacy.
And with the understanding that.
We don't believe that Google will want to put itself in a position where it.
Metaphorically bites its nose, despite its space considering.
How sensitive their businesses to advertising revenue.
That makes sense and then one other big picture question.
I've read recently that it's possible that Apple might have some supply constraints related to.
Some of the Lockdowns in China, but I'm not sure. If that also applies to Android phone production have you heard anything that may make us think that.
That new users might get impacted by supply chain issues.
Great question.
In all candor not been following that as closely as I should have and.
We'll follow up after the call.
Okay great.
I'll move to.
Company specific.
And if two sounded like Thats started off well.
<unk>.
Maybe I can just not even get that just just a question of do you have a bunch of opportunities you're working on it.
If you had to say your new opportunities, which one you would have to guess would too.
Two years from now be the biggest contributor.
Would you what would you speculate today.
Sure so lets bifurcate between.
The existing.
Ringtone wallpaper business versus.
The reference that I made to the innovation team the.
The innovation team is really focused on.
New products.
That do not exist in our portfolio today.
And.
As I referenced our goal is give or take to try to get around three proof of concepts out into the market per quarter.
And many of those will.
We will fail quickly.
We will be able to gather information collect data analyze and sort of say hey, this makes sense to take the next gate or what.
Cut it off here.
When taking a look at the flagship App.
As I've indicated in the past.
We believe that.
The.
Convergence of generally speaking of the creator economy on a more global basis.
Evolution of the.
Cocainize the world with <unk> web three and alike.
Coupled with.
Our.
Core value proposition of NFC has made easy.
Opening up the door to a token is world for artists.
That.
Do not have.
Deep crypto experience or technical experience.
The thing that we think.
Bodes well for the edge as a business as we continue to evolve and as you know.
Our premium marketplace today.
When taking a look at the overall revenue mix of the company.
Give or take it's around 5% to 10% of the overall revenue mix, we believe that.
We can see to it that with the proper feature set development.
And marketing that we can.
Grow that.
Piece of the pie over time.
That makes sense and then I don't know if people realize but tell me. If this is right.
Artist sells in NFC.
On average, they're selling that significantly higher price than.
Then just there.
<unk>, which is.
Better for the orders and better for you is that correct.
That is correct. There is also another.
Derivative of that and that is.
Consumer buys that.
And ft, and then at a later point in time chooses to sell it.
There is incremental revenue that the artist will generate and that.
<unk> will generate from that sale.
Got it right.
Very interesting.
Okay.
And then.
First subscription you kind of hinted to some things that that might come that some additional features that could.
Maybe an enhanced set of offerings.
Catch that.
So on the subscription side.
I would.
Qualified by saying that there are two areas that we are focusing on.
One is around marketing.
And then the other is feature set developments.
And that.
Those two play hand in hand, I think that we have been more heavily focused.
For the.
Last couple of months on the marketing piece.
<unk>.
As calendar 2022 continues to unfold.
We will begin to look at future development of value adds if you will that can make the subscription offering.
That may make the subscription offering.
More attractive accordingly.
Thank you how do you think about the potential of a <unk> kind of where it is now and maybe where it could be in two years.
Okay.
We we imagine that there's going to be growth there.
Recall that emergent PDR is today only a web based offering available in English.
And.
We are as I discussed in the process of localizing <unk>, so that there will be a multi language support.
Opening up.
The possibility for incremental growth.
For non English speakers and in parallel we are in the midst of an overall site redesign.
That.
Should provide.
Additional functionality.
Use cases make.
<unk> content more discoverable and available.
And as part of that site redesign as well.
That includes monetization and specifically.
What AD units are placed where and how do we benefit from that.
After we're done completing that.
And sort of in the second half of the calendar year.
Going to be looking at potential ways to take the emergent PDR from the world of web into the.
The world of native mobile App.
And that will presumably be another growth driver for us.
Thank you.
<unk>.
In terms of.
On the last last quarter's call you talked about how you were going to be experimenting with.
Paid acquisition.
They're paying to try to get customers in and see how that would go do you have anything to report back on on learning anything there.
Yes.
Sure. So we have started to scale up paid.
Paid user acquisition were.
Pursuing this.
With a.
Very clear mindset of making sure that.
Everything that we can do to bring on profitable customers is <unk>.
Into accounts.
And that we don't get too far ahead of ourselves in terms of saying well we spend a lot of money and then the more money that you spend presumably your.
Return on AD spend begins to decline because you find less relevant customers and so on and so forth. So this is really really being done with that mindset.
Bringing on <unk>.
Customers that will ultimately generate a return for us.
We've.
We've added to that team.
And.
We've had.
Learnings around.
Without getting into the specifics of the platform certain platforms have proven to be.
Valuable to us.
What would be out of our price range other platforms or other forms of.
Acquiring customers.
Have not always worked out as we would anticipate.
But again.
When making our one starting with a new platform or a new <unk>.
Way of.
Attracting a paid user we start with a very modest budget and then start to scale from there and when we see that we've reached the ceiling then we choose not to overspend.
In order to protect.
Profitability.
Okay. Thank you.
You highlighted that you were spending some money on the.
On the transition to the new Ad platform.
Is it possible to call out kind of how much.
How much of that was maybe if we could think of that as kind of one time.
Yes, I think that that is correct in terms of being a one time item we have.
Not.
Broken that out.
In our earnings release.
And as discussed earlier.
Sort of like one time cost if you will.
And there was a.
Diversion of resources So engineers.
That would otherwise work on fees.
Feature development got pulled off to undertake the analysis testing and so on and so forth.
We expect that.
That process will be pretty much wrapped up.
Next Marc.
Barring any unforeseen surprises.
Okay great.
Anything you want to add on shorts.
So as I said were.
In the process of analyzing where we go with shorts.
Will have greater clarity in the next quarter.
And.
We're looking at.
A whole set of different kpis.
And then coming back and sort of saying well.
Build the business case in terms of how can it scale separate and apart from that.
Sure.
Foundation is one.
Shorts platform. If you will is one which lends itself to potentially other innovative.
Products or proof of concepts and we're considering those as well.
We will be able to get into a lot more detail.
When we announced Q3 and give or take around three months from now.
Great. Okay. My last question is just on.
Your efforts too.
Just start to grow the developed.
User base I know some of that's going to be focused on socialization and personalization or could you maybe just.
Just touch on that one more time, because that seems like that should be pretty important long term.
Absolutely so as I mentioned in our fiscal Q1, we started to rollout.
Early stage.
Social.
Capabilities such as follow me.
Because of the AD mediation migration as I had mentioned a couple of minutes ago.
We had to divert resources for getting in the next stage out but next up in the pipeline is.
The notification panel.
Where users will get notified.
On all sorts of different.
Choices, but the concept the new content that is relevant to the user there'll be a little side on the app or something.
Our messaging to the user, saying, hey come back and visit more.
And we will continue to incrementally add.
Add features that we suspect we'll draw users back in.
To the App.
And help us in terms of reversing.
That.
Tier one.
Monthly active decline monthly active user declined.
Have discussed.
<unk> discussed over the course of the last couple of quarters.
Okay.
That's great. Thanks, Thank you so much.
Thank you.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press star one on your phone at this time.
Our next question today is coming from William von at regions Outlandish Capital. Your line is live you may begin.
Hi, guys.
Graduations on the really good quarter.
My question surrounds capital allocation when you look at the market cap of the company.
The cash balance keeps going up and now you're up to $30 million in cash go back out the cash.
I mean, we're looking at something close to.
Five times EBITDA sort of evaluation closing on that five times cash flow whatever.
I wish a metric you want to use.
So how do you think about allocating that cash in terms of.
Through new investments or possibly doing a buyback what are the thought process on using the $30 billion in cash going forward.
Great question volume so.
Our primary focus and we've talked about.
In the past quarters as well.
How can we continue to grow the company.
And invest that cash whether it be through internal development or M&A.
And the board will continue to evaluate these options over time.
In order to prioritize weather.
We continue down that path or potentially.
Consider using some of that for a buyback.
Hello.
Okay. Thanks, Amit terms of.
User growth we saw.
Saw another quarter of growth in emerging markets.
Sort of flat.
Flat numbers in developed markets.
Yes.
Could you talk a little bit more about the trends in terms of.
What makes the products.
Or the experience so it's attractive for emerging markets, specifically, India and also <unk>.
Process around.
Turning around.
The user trends in developed markets I know you just touched on that a little bit, but any more color would be helpful on that.
Yes, really not much more color in terms of the developed markets, obviously as I.
Set social and community features.
More features in terms of.
Our artist community.
And if he is as you can imagine so artists.
Begin to.
Embraced that offering.
As they want to grow their business, they're going to reach out to their followers.
That translates into bringing users into the edge ecosystem.
As well as.
User acquisition.
Initiatives, whether it would be paid or organic and so far is what makes the product.
Attractive in the emerging markets.
Remember that our App consists of our <unk>.
So.
Premium content.
Premium content.
And in many of these emerging markets.
Disposable income is a fraction of what it would be in.
A well developed market.
So when offering a user at option.
Where they can acquire content.
That is attractive to them without having to pay for it in <unk>.
Hard dollars that becomes.
A very very compelling offering if you will.
Yes makes sense makes sense.
<unk> I know you mentioned that.
It's mainly in English right now, what's the geographic distribution of users for both superior.
Roughly.
It is solely in English right now.
We have not.
Broken out geographic footprint, but.
I think it's fair to say that.
Our footprint in terms of the English speaking.
Markets, including the United States, Canada, Australia, and the U K is.
Over 50%, if I recall correctly, so it's a big number.
Okay. Those are all my questions. Thanks, guys great quarter. Thank you.
Thank you ladies and gentlemen.
This concludes our question and answer session and conference call.
You for attending today's presentation you may now disconnect.