Q3 2022 Zedge Inc Earnings Call

[music].

Good afternoon, and welcome to such as third fiscal quarter of 2022 earnings conference call. During management's prepared remarks, all participants will be in a listen only mode.

Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation by is that just management there'll be an opportunity to ask questions to ask a question Press Star then one on your Touchtone phone to withdraw your question. Please press one.

I will now turn the call over to Brian Segal.

Thank you Matthew and today's presentation, Jonathan Reich.

These executive officer, and <unk>, <unk>, Chief Financial Officer, who will discuss <unk> financial and operational results for the third fiscal quarter ended on April 32022.

Any forward looking statements made 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 <unk> files periodically with the U S Securities and Exchange Commission.

So that assumes 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 is available on the Investor Relations page of <unk> website.

Websites. They are in the earnings release has also been filed on form 8-K with the SEC.

I'd like to now turn over the conference to Mr. Jonathan Reich Tarpon.

Thank you, Brian and thank you all for joining US today. Good afternoon, welcome to <unk> earnings Conference call for the third quarter of fiscal year 2022, which ended April 32022.

Jonathan Reich CEO of <unk> and with me is our Chief Financial Officer, <unk>, Si who will provide additional insight into our financial performance.

We will then be happy to take your questions.

<unk> builds marketplaces and games around digital content that people used to express themselves.

Our leading products are the guru shots photography game and veggies premium digital content marketplace.

Which today offers mobile phone wallpapers video wallpapers, Ringtones and notifications.

We also own emoji PD, a website that as the leading source of information about <unk> in total our products serve over 40 million users during may.

Our company is positioned at the intersection of two major growth trends in consumer Tech casual gaming and the creator economy.

Today, most smartphone users have become amateur content creators sharing their photos illustrations means and videos to express themselves and gain social validation. In addition.

Value friendly competition, and garner popularity and recognition from their online community.

Many of these creators are talented enough to attract a meaningful following and monetize their content.

This is what's known as the creator economy, a market that has grown massively over the last five years.

We aim to bring creators into our ecosystem to compete with each other while improving their skills and also.

For them the opportunity to earn money.

Our game provides competitive photo challenges and a peer community and our marketplace allows this community to share and monetize its content.

Our existing base of over 40 million users is an attractive value proposition to talented creators.

Synergy between gaming and marketplace unlocks additional engagement and provides an outstanding organic traffic funnel for Guru shots players to also becomes edge premium targets.

Has the dual benefit of lowering the spend and needed to acquire premium artists, while also growing gross transaction value and associated revenue.

We announced our acquisition of Bureau shots in April .

It plays an important role in advancing this vision.

Shots team brings significant expertise in gamify and user generated content and monetizing users by selling game resources through in App purchases we.

We expect to apply that gamification expertise across our product portfolio.

Literally our as edge marketplace team is highly experienced in managing massive catalogs with user generated content and optimizing monetization through a combination of advertising subscriptions and a virtual token based economy.

Those of you who regularly joined our earnings call will notice that our narrative has involved and more clearly articulate the strategy we have been pursuing now.

Now that Guru shocked us, especially part as edge. It makes more sense to explain the opportunity we see in combining games and marketplaces under the same routes than it would have been before we owned a gaming property.

Both flu shots and as edge marketplace offer great promise for incorporating <unk> last December we launched the NFL teams made easy inviting a select group of <unk> premium marketplace creators to start selling their video wallpapers as single addition, ftes thus far.

Our users have purchased 30% of ball and FTE is offered in the marketplace with prices averaging about $20.

This sale rate and average price are substantially higher than other premium marketplace content.

We'll provide more details about the next evolution of Nsp's made easy later in the call.

We are also developing new products that are.

Our interconnected games and marketplaces strategy.

These products remain experimental and are not expected to contribute to our revenue in the short term.

We possess deep expertise in monetizing our digital real estate, whether through advertising subscriptions or content sales as a result, our products appeal to a wide range of user segments globally.

Today, Android users accounts for roughly 96% of them.

<unk> apps.

And 91% of its revenue.

Before discussing our evolution and the exciting opportunities, we see coming down the pike I'd like to provide context to our third quarter results.

Despite a solid first half of the year, we kept full year revenue guidance unchanged at 25% to 30% year over year growth.

We conducted our second quarter earnings call.

We chose a conservative approach due to transitory factors that were likely to negatively impact MAU and paying subscribers, resulting in lower revenue growth rates.

Now declines mainly resulted from traditional seasonality in the business with Q3, which follows the end of year holiday season, typically seeing a downturn in math.

Decline from users who uninstalled.

Jack after we changed its icon to the colors of the Ukrainian flag.

And the forest App upgrade relating to the necessary migration to App Lubben Max at mediation platform.

As we mentioned last quarter. The latter also resulted in a delay in the release of social and community features which we believe will help reverse the Mayo declines, especially in well developed markets by around a quarter.

Despite these headwinds our MAU increased by 8% and we generated $5 $6 million in cash flow from operations, including App Logan's, one time $2 million payment, bringing our cash balance at the end of the quarter to $17 million after the 18 million.

Dollar payment to Guru shots shareholders.

We also generated $2.9 million and adjusted EBITDA on another positive note the operational transition to App Logan's Max platform has been smooth.

And it is yielding more revenue on a per user basis compared to mow pub in.

<unk> active user levels rebounded from early may lows due to marketing initiatives implemented in advance of the new social and community feature upgrades, which we expect to be available. Later this month overtime. We believe these new features will be an important catalyst.

Four growing MAU in well developed markets, resulting in higher AD revenue and active subscriber growth.

Z premiums gross transaction value or <unk> TV continued to increase at an impressive rate with 63% growth.

We believe our NSP strategy, mainly providing utility to creators, especially one that lack a deep knowledge of technology is critical for building a sustainable business.

Fortunately our business has been insulated from what pundits are deeming the crypto winter because we offer an affordable easy and eco friendly way, where creators to token is their content that uses zev credits and not crypto currency.

This month, we will be expanding this functionality by introducing several features including number of additions the ability to add audio to video wallpapers and expanding into static wallpapers keep in mind that the value proposition towards edge premium creator base significantly improves with NFC.

Previously a creator could make pennies for selling multiple video wallpapers and now they can make thousands of times that amount with one N F T cell through <unk> made easy.

To promote these new features we are forging relationships with artists that have demonstrated success auctioning their Nf Ts on other platforms.

These artists are excited about the prospect of gaining access to our global user base and offering numbered editions of up to 100 for price points that are more accessible to the masses. We.

We are also in the final stages of unleashing more of emergent <unk> potential by the end of June we expect to introduce localized versions of <unk>, and Spanish French German Italian and Portuguese and refresh the user interface with a new design, including all monetization.

Elements.

In summary, we took steps to address some near term challenges, whether the storm generated cash and focused our attention on activities that we expect will return as edge app to higher levels of profitable growth.

This provides a good transition to discussing the transformational guru shots acquisition and our strategic priorities going forward.

We closed the <unk> acquisition on April 12, So our results include a partial month of their financials.

<unk> is a transformational asset on its own but have also identified significant potential synergies that we expect will make one and one equal a lot more than two.

My colleagues from Lithuania, Norway, and the U S. Recently returned from an in depth set of planning sessions with our coworkers at Guru shocks It was amazing.

<unk> as a category killer that fuses photography with gaming, enabling amateur photographers essentially anyone with a smartphone to compete in a wide variety of contests across iOS, Android and the web that showcase their photos.

The game mechanics include progressively more difficult competitions with successful players mastering their skills and then continuing to the next level until ultimately, earning the coveted Guru title.

Players can compete individually are joined together as a team.

<unk> includes community features leaderboards and chat functionality, which create a sense of belonging inspiration and competition.

While the penetration rates leave a lot of room for growth, we estimate that 30 to 40 million photo enthusiasts regularly use their smartphones to take and publicly share high quality photos, and who would be interested in participating and photo contests every month.

Given the early stage of this gaming vertical and the limited investments made to date the stats are impressive.

Guru shots players have uploaded more than a 140 million photos since the games inception with more than 1 million new photos currently being added monthly. In addition, there are live ops team launches more than 300 competitions per month.

Users vote on submitted photos and the ones receiving the most votes secure higher rankings until there's a winner or the competition, depending on players' engagement amongst other things.

You can secure more voting power.

And this yields over 5 billion votes cast.

Guru shot is a free to play game that monetize as today's strictly by selling in game resources that increase of photos exposure.

Although only a small fraction of users purchased these resources Guru shots boasts an ARP now of approximately $3 50.

Versus.

Five to six for the Z Chap. Furthermore, currently paying players spend over $50 per month, representing.

18% CAGR.

Over the past six years.

When looking at Guru shots on a standalone basis, we have several products and marketing initiatives that we expect to make this year to accelerate growth.

Furthermore, we are investing in organic and paid user acquisition strategies to expand the top of the funnel and increase map. These.

These efforts will include paid user acquisition.

Store optimization also called ASO on iOS and Android.

Search engine optimization or SCO.

And affiliate and Influencer marketing across mobile and web App.

As a reminder, we have committed up to $5 $3 million per paid user acquisition over the next 12 months subject to user cohorts generating a minimum return on ad spend or Rojas.

If this spending is effective it could generate high double digit revenue growth rates.

The product enhancements. We are focused on include improving onboarding by segmenting users and drawing them into the game play early on.

One of the things I learned during my trip was that there was a steep learning curve for new users as successful competitors developed sophisticated game strategies centered around in game resource utilization.

Next we will release a feature called battles, which are simple many competitions that resemble a social game.

Battles will introduce new players to the excitement of competing from the get go.

We expect this will result in converting installs into free players some of whom will ultimately purchase game resources as they become immersed in the experience and get hooked on the game finally.

We expect to introduce a learn option that users can turn to poor photo tips and skills building to improve their photo taking ability.

Although we don't have all the details worked out as of yet we expect this value add will act as a revenue driver and catalyst for user engagement.

I would be remiss, if I didn't address new shots R&D team in a nutshell they are impressive.

Furthermore, our combined teams have an in depth plans for migrating to a common cloud platform, which will lower costs and simplify the platform.

Let me turn to synergies, which we think can bring significant upside to the company.

Over the next several years.

The <unk> acquisition is expected to accelerate the growth of <unk> premiums marketplace and NSP offerings.

The possibilities here are truly exciting think about it guru shots players are a self selected group of high quality photographers that crowdsource, great content in near real time.

Furthermore, these players are either playing for free or paying to play enabling us to offer them the ability to monetize their handiwork.

Our creator economy, we believe that the opportunity for Guru shots users to monetize the 1 million plus photos uploaded monthly.

Through our NFL. He's made easy platform is a very attractive value proposition that could materially expand the size and growth rates for this part of the business.

<unk> also brings a deep knowledge of gamification, especially in the world of visual Arts.

One of our goals is to gamify, the zynga to improve engagement and retention and thus grow map. Additionally, we have identified several other verticals that we believe are right for gamification.

But it is too early to provide detailed the acquisition of Guru shots will alter our financial projections given the expected growth investments, we will be making despite global economic uncertainty, including the Russian War.

<unk> and rising interest rates, we expect fiscal 2022 revenue growth to exceed 30% on a consolidated basis. We also expect to remain profitable and generate positive adjusted EBITDA in the fourth quarter, leading to adjusted EBITDA for the year.

Growing in line with revenue.

Allen's fiscal 2022 we are investing in Guru shops. In addition to our existing business. Our goal is to continue to remain profitable and generated positive adjusted EBITDA and cash flow from operations as we drive guru shots towards high double digit revenue growth and positive.

Adjusted EBITDA on a standalone basis over the next 18 to 24 months.

To better accelerate growth and control costs, we have decided to redeploy our innovation team to guru shots for the remainder of the year.

This will help accelerate growth while also providing this team with an immersive education and gamification.

Once they've acquired this knowledge and gained this experience they will be tasked with gamify booth the judge App.

And the other verticals that we believe offer untapped opportunities I think this speaks to our management team has strength and its ability to make responsible decisions that inure to the benefit of the business both from a growth and cost perspective.

It also points to the talented employee base, we have cultivated.

For handing the call over to <unk> to go through our financial results I want to thank our investors for your continued support as many of you have seen some of our board members and I made open market purchases of <unk> since the Guru shots acquisition closed.

We did this because we truly believe in <unk> long term potential and that the stock price. Neither reflect this potential nor the current financial results I also want to thank our employees for their commitment and hard work, especially in light of the Guru shots acquisition.

Finally, I'd like to underscore how highly we think of our colleagues at Guru shots. We've had a great start to our relationship and we are excited to work together to increase shareholder value overtime.

E <unk>.

Thank you Jonathan.

I want to remind loss on the call that all physical year and July 31 and raws.

Third quarter ended on April 30th.

Please note that this quarter included approximately two weeks of ghoulish are resolved.

Also we switched from reporting EBITDA to adjusted EBITDA This quarter.

In light of La Cruz <unk> transaction related expenses, such as professional services.

And stock based compensation.

A press release supplemental table.

Had screen adjusts that historically to account for this change.

Moving to our third quarter results.

No.

Defined as the number of unique user.

Open on that App.

In the last 30 days of the period.

Decreased 7% to $32 1 million for April 2022.

Versus $34 5 million loss April .

Total revenue in the third quarter was $6 $2 million.

A 19% increase from last year.

At revenue and subscription revenue growth rate.

Strain due to the Lone mountain number.

I wonder revenue.

Includes revenue from our emerging product.

Including <unk> premium.

The military Imperia incongruous shot.

With zero point $8 million.

Grusha added $300000 during the final few weeks of the quarter.

Also note that our auditor determine the $2 million payment from at London on April 1st should be classified as revenue and payments highs monthly over a two year period, which increase out of revenue by less than 100000 known this quarter.

This premium gross transaction value or <unk> TV net.

<unk> is the total sales volume 10 sector to our marketplace.

Inquiries, 63%.

$410000.

Reflecting increased sales and a S P.

The N F P mate EV platform.

Active subscription were down 5% versus last year.

New subscription sale did not offset churn.

Overhaul.

ROE was 5.2 cents.

An increase of 8% year over year.

Driven by the advertising performance.

Slide eight higher subscription revenue versus last year.

This year operating expenses increased by 49%.

Leading to a 32% decrease in income from operation and an operating margin of 21, 5%.

Versus 37, 7% last year.

<unk> was the biggest driver of this decreases as it contributed an operating loss of about $249000 during the quarter.

Quoting $93000 or <unk>.

<unk> of intangible.

And $67000 of retention bonus.

Expense for the partial month of April .

We also had a onetime 744000 dollar expenses.

During the quarter.

Mainly for professional service.

Related to the Gousha acquisition.

Provision for income taxes was $429000 this quarter versus a benefit of 473000 NOLA.

In losses Q3.

The effect of becoming a taxpayer this year with material.

Income tax benefit in Q3 last year had.

It had an impact of increasing diluted earnings per share by three cents.

While being the taxpayer in Q3, this year had an impact of decreasing diluted earning per share by 3%.

Diluted EPS was five cents versus 17 cents last year.

Diluted shoe can was $14 9 million.

Moving to adjusted EBITDA.

As I mentioned earlier.

This was the first quarter that we are reporting this metric.

We provided historical adjusted EBITDA reconciliation table.

In our press release.

But to review.

We are calculating hip on pharma.

Calculating traditionally EBITDA.

One 6 million this quarter.

And $2 3 million in Q3 of last year.

Adding back stock compensation expenses of 0.5 million this quarter.

Versus $98000 last year.

Adding back any one time transaction related expenses.

Which this quarter was 744000 novel of professional services.

Related to expenses tied to the flu shot acquisition.

When we make this adjustment we would get adjusted EBITDA of $2.9 million this year.

Versus $2.4 million last year.

And an adjusted EBITDA margin of 46% this year.

Melissa just under 45% last year.

Oh, so you can see.

Our underlying operating performance was much due to onetime items and other noncash items.

From a liquidity standpoint, we remain in a strong net cash position with almost no debt and.

And all of those $70 million in cash and cash equivalents.

Thank you for listening to her 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 we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

If you're using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press one.

At this time, we will pause momentarily to assemble our roster.

Your first question is coming from Allen Klee from Maxim Group. Your line is live.

Yes, good morning, congratulations on the results.

The first question.

Decline in the number of active users.

You believe was behind that and remind US why you think you can turn that around.

Hi, Alan Thanks, so much for the good wishes.

So as I commented there are a couple of moving pieces here.

Including.

Seasonality.

Q3 corresponds to the period of February March April .

Out of the holiday season, which was our Q2.

November December January and we are accustomed to seeing a decline during that period of time in addition to that as <unk>.

You recall.

We were.

Required to migrate.

Our AD mediation platform because.

Mo pub or previous provider.

Deprecated.

Our platform after Apple oven made their acquisition.

That deprecation occurred at the end of March and that required us to push a forced upgrade of our app to all users globally.

And that usually triggers.

Losing users and then finally.

Our <unk>.

Supporting the Ukrainians.

The Russian war.

Caused us to do two things one was that we had updated the on deck app icon for anyone that had or that has the edge on their phone we change the color of the icon for Omar.

Corporate color purple to the colors of the Ukrainian flag.

Namely Blue and yellow and we also.

And updated.

The collateral material and all of the.

Storefront.

To follow that color static as well.

We estimate that.

The forced upgrade coupled with the efforts around.

Ukraine as well as losing.

Users in Russia, and Belarus accounted for at least a third of the decline.

And the.

Efforts that we have underway in terms of reversing that decline.

Surround our focus on releasing our social and community features.

Which.

If the playbook.

Unfolds as we expect will drive engagement. Unfortunately.

That feature set.

Has to be pushed out a quarter because our developers we're hard at work.

On completing the migration to App love, it and I will close by saying that.

We were.

Paid a $2 million.

And feed by Avalon of and in order to migrate their platform as Ive described that will be amortized over.

We believe the next 24 months or so.

But for that $2 million, coupled with the fact that Apple oven is actually outperforming mope hub.

We are confident that we made the right decision.

Thank you so just to conclude I thought I heard sort of the.

The advertising rate did not decline per.

You know per number of.

Viewers. It was just that you.

You had less plus viewers as more though.

And these other factors is the way to think of that as that.

Correct.

What I would describe it.

Actually we've seen that advertising rates had increased.

On a.

Since we've made that.

Since we've made that.

Change so we're pretty happy with that at least what we saw in this past quarter.

Great and then.

You've made some comments on gershon and I'm not sure I caught everything so if you could maybe go over this again, you said I thought I heard so goober shots closed on April 12.

I think I heard you say that it added 300000 in revenue.

And it had a 240000 dollar loss, maybe if you could tell me what that look does that lost mean net income or adjusted EBITDA. But then you also mentioned that that loss included.

Something related to intangibles and one time bonuses so.

Could you review that again, so I could get a sense of what a more on an ongoing type of loss would be and also when you said there was a 740000 onetime expense I assume that's separate from the goober shots stuff that I just said thank you.

Sure Yes.

Think that the best thing is I'm gonna have E provide you with that.

No detail Ian do you want to take that.

Sure Hi, Alan.

So with $249000 operating loss actually had been then wallets.

In coal 93000 novel amortization of intangible and 67000.

Retention bonus they will expand a partial month of April .

So <unk> two item loan losses.

<unk> thousand also.

And then I apologize I said 93000 amortization of intangibles that will be an ongoing cost.

So if you look down to the future.

On the acquisition.

Our cable <unk> 10 million to intangible and it's being amortized within five years to 12 years, So average per year by $1 9 million.

And then the retention bonus if you'll recall you will be.

Amortize over the next three years, so each EBITDA would be $2 6 million. So in all it would be about $4 5 million pretax.

In terms of noncash I mean.

For all of the amine will be cash.

But most of it will be a noncash item.

And how I'm so sorry.

Once there.

The.

The retention bonus how much was that again.

It was $8 million.

It'd be vested over the next six months.

But how much was it for the for the for the fiscal third quarter.

Fiscal third quarter, its only the 67000 for the cash bonus.

And in the non cash equity comp it was 111000, including me.

Equity come then we'd had it back.

Great. Okay. So thank you so much.

And with respect to the expenses just due to its own these brands in all of our advisory expenses, whereas all of the Ah.

Accounting fees related to the pro forma disclosure preparation.

The AC <unk> Fi.

All of those were.

We would also do due to the constraint of the Finance Department.

And those that just one time and then with popular in Q3.

Yeah. So the quarter had around 740000 of one time expenses.

Correct.

Okay. That's great. Thank you.

So what I heard you guys say about N F. Ts was very impressive in terms of let.

Let me just make sure I.

Did I hear this right.

That users have purchased around 30% of the N F. Ts that are offered and the average price around 20.

How many you you say, 30% of what was offered was how much was offered and.

So I think if we know that then we can get a perspective from how much gurus shots could theoretically at.

I'm, sorry, I don't have that number handy right now, but I will get back to you.

Okay.

But.

I think last quarter.

Let's see if I heard you said something I can't find it in front of me something something like 600 Ftes were sold it was a very small number I think in.

Unless I'm mixing things up so you because you just started so far.

And it is a small number and I also want to point out our NFC offerings today.

Is.

Really very rudimentary remember, it's only one content type and it is one of a kind limited edition not numbered editions.

It doesn't have a lot of feature and functionality that will be forthcoming.

Hi.

I guess somewhere in the next four to eight weeks and we will continue to.

At feature sets.

Through the end of the year.

And right now there's not a secondary market as a true for selling.

Users can ultimately.

Take there and he is an author of them on another platform like open Z, but.

But within our product there is not as of yet.

Secondary market, that's correct within our ecosystem that is correct.

Okay.

Okay. So I mean, I'm just thinking about this or if there's a million potential pictures from Google shots a month. So that's like.

Yes.

3 million.

The 3 million a quarter.

If if you if 5% went over to.

The marketplace and you got $20 for that.

And excluding secondary sales.

That would be like.

That would be.

$3 million of revenue in a quarter.

If I if.

If I can if I do the simple math right.

I mean, I don't know what the what precipitate that seems like this that particular synergy.

It could be very high.

Is that the way to and then secondary sales could be even more but is that the way to think about it or.

Tell me what you think here.

I think that.

The arithmetic is correct, but.

It's going to take time to.

Accelerate and.

Penetration rates they can yield.

A.

A healthy revenue number.

Remember we're early into this and we're.

Sure.

Improving our product we also.

We are going to need to work through the conversion funnel for the group shot artist.

And so on and so forth but.

The medically.

The expectation is that.

That.

Self selected group of high quality photographers.

<unk> will contribute to revenue growth.

Within the overall ecosystem.

And.

When compared to the alternative which would have been.

Having to go out and actively solicit artist so without even knowing that they have high quality and so on and so forth.

We think that.

We grew the shops alternative is.

A much better alternative because we can generate.

Revenue from Laguna shops players.

And then we can offer those players.

Players that are interested in opportunity to make money and generate money for us.

More money for us at the same point in time.

So it gets to be a virtuous cycle, if you will.

Got it and I think I heard you say that you thought that.

Goober shots could get too high double digits.

Revenue.

I.

<unk> revenue growth rate over.

Maybe you could tell me what you said I thought it was over 18 month period, and then get to EBITDA positive.

And then I'm, assuming that that revenue is excluding which we just talked about on N. F. Ts, It's just or does that include that.

So what we said was our goal to be EBITDA positive in give or take around 24 months.

And I think longer term, we believe that jewelry shops on a standalone basis.

Can generate.

Very attractive double digit.

Revenue.

As.

You had a.

Formulated in your question.

EBITDA of anything that you want to add to that.

No I think you summed it up well.

And I don't know, but do you have the number in terms of what we sold.

Yeah I think.

It was worth about 20 dollar we saw about telecom the pieces.

500 pieces got it.

Thank you.

Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press Star then one on your phone at this time, please hold while we poll for questions.

Once again, ladies and gentlemen, if you have any questions or comments. Please press Star then one on your phone at this time.

This concludes our question and answer session and conference call.

You for attending today's presentation you may now disconnect.