Zedge, Inc. (ZDGE) Earnings Call Transcript & Summary

Good day, and welcome to Zedge's Earnings Conference Call for the Third Quarter Fiscal 2025 results. [Operator Instructions]. I will now turn the call over to Brian Siegel.

Thank you, operator. During today's call, Jonathan Reich, Zedge's Chief Executive Officer; and Yi Tsai, Zedge's Chief Financial Officer, will discuss Zedge's financial and operational 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 could 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 Zedge's periodic SEC filings. 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 and has also been filed on Form 8-K with the SEC. Finally, on this call, we will use non-GAAP measures. Examples include non-GAAP EPS, non-GAAP net income and adjusted EBITDA. Please see our earnings release for an explanation of our use of these non-GAAP measures. Now I'd like to turn the call over to Jonathan

Thank you, Brian. Good afternoon, everyone, and thank you for joining us today to discuss Zedge's Third quarter fiscal 2025 results. Q3 marked a return to revenue growth for Zedge, highlighting the resilience of our business despite an ad market that saw some disruption due to TikTok's absence from the U.S. until mid-February, along with tariff-related uncertainty that caused macroeconomic volatility and -- and expected softness at GuruShots, where we scaled back user acquisition to focus on what GuruShots 2.0 will become. The $4 million in annualized gross cost savings from our global restructuring and other cost reduction items also began to materialize during the quarter. The closure of our operations in Norway, the streamlining of the GuruShots team and the associated decrease in discretionary spend, especially in lowering GuruShots' marketing investment helped return us to profitability on a GAAP basis and boosted our profitability on a non-GAAP basis. Furthermore, adjusted EBITDA increased 46% year-over-year, and we generated $0.8 million in free cash flow. Notably, free cash flow includes approximately $1 million for certain payments made during the quarter, primarily severance related to our restructuring and a portion of the final installment of the retention bonus stemming from the 2022 GuruShots' acquisition. In Q4, the benefits to free cash flow should further improve as we anticipate a total of about $600,000 in restructuring-related severance and the final payout of the GuruShots retention pool. We expect to complete restructuring-related cash severance payments in the first half of fiscal year 2026, totaling approximately $200,000. Our balance sheet remains strong. We ended the quarter with $20.4 million in cash and no debt, even after repurchasing 219,000 shares under our previously announced $5 million buyback authorization. Key business highlights for the quarter included: We grew the Zedge+ subscriber base to an all-time high of nearly $900,000, a 37% year-over-year increase. Zedge+ subscription revenue grew 13% year-over-year, while deferred revenue primarily representing future recurring subscription revenue reached $5 million, up 83% year-over-year and 13% sequentially. And Zedge Premium revenue more than doubled, driven by expanding the offering to our web users, increased usage of our pAInt AI image generator and ongoing demand for 3D Parallax Wallpapers. While monthly active users or MAU declined year-over-year, the narrative is more nuanced. For a while now, we have focused on attracting and retaining higher lifetime value or LTV users, which are reported as MAU in well-developed markets in the supplemental tables of our earnings release. The overall MAU decrease was the outcome of a mix shift away from lower LTV users globally to higher LTV users in well-developed markets. These efforts to focus on higher LTV users who are more likely to subscribe make purchases and engage more often and more deeply with our content and features are bearing fruit, and thus, we continue to focus on attracting and retaining this part of our base. Additionally, our focused investment in paid user acquisition plays an important role in this success across both Android and iOS and the positive trends are clearly reflected in our key performance metrics. Average revenue per monthly active user increased by 33% year-over-year, indicating that we're monetizing each user more efficiently. Deferred subscription revenue continued to climb, with lifetime plans capturing a larger part of the overall mix. For lifetime plans, the user prepays the full amount at purchase, requiring us to pay the entire app store fee upfront. This allows us to recognize 100% gross margins on the deferred revenue as it is recognized monthly over the subsequent 30 months. And critically, key user metrics within well-developed economies have started to stabilize, hopefully positioning us for a return to growth in the future and reinforcing that the product and monetization strategies we have implemented resonate where they matter most. MAU stabilization remains a focus, but not at any cost. Our priority is to grow our customer base of high LTV users who engage with our product regularly, and we're confident that our performance marketing efforts and product road map are assisting us in achieving these goals. Looking ahead, innovation across our platform remains key to driving growth. We recently announced the launch of DataSeeds.AI, a B2B content marketplace that focuses on supplying enterprise customers in need of both on-demand and off-the-shelf data sets, initially focused on images, enriched with detailed metadata for AI training. DataSeeds.AI leverages our growing content library of over 30 million rights cleared images, our prolific community of photographers and graphic designers and our existing marketplace infrastructure and know-how. We aim to become the go-to source for pre-training and fine-tuning AI data sets, meeting the needs of foundational model developers for high-quality, authentic and diverse rights cleared content at scale. Last week, we signed our first agreement with a leading global AI technology company, validating both the market opportunity and the value of what we have to offer. This initiative opens up a nascent new revenue source with the potential for not only reoccurring revenue, but also potential recurring revenue streams for us while also providing our creators with more ways to monetize their work. Looking ahead, we are exploring opportunities to expand our offerings beyond images and provide additional mediums, including video and audio as well as other commercially viable data types. We believe that this seminal business expansion supports our conviction that investing in and nurturing our vibrant artist community is a critical differentiator that will enable us to scale up quickly. We are also about to roll out an AI audio generator as part of pAInt, our Gen AI creation suite that allows users to harness the power of AI to generate custom ring tones and notification sounds with simple text prompts. This is a major milestone in our AI road map, positioning us as 1 of the first consumer platforms to enable user-generated audio content at scale. It also solidifies our leadership in mobile personalization. Emojipedia remained stable during the quarter and continues to evolve with the expected release of digital stickers, a new vertical on World Emoji Day which is celebrated in July. We're also inching toward the introduction of a full site redesign to improve user experience and engagement. As discussed last quarter, we are ideating about what GuruShots 2.0 can and will be. Part of the undertaking revolves around the core game, including onboarding, progression, the voting mechanic and reward dynamics. At the same time, we are also thinking about how to better meet the needs that we envision are critical for DataSeeds.AI to scale effectively. As expected, GuruShots' revenue declined year-over-year, primarily due to our decision to materially decrease our paid user acquisition spend. Fortunately, the investments we have made are yielding customers with attractive ROAs profiles, but we want to keep much of our powder dry until we're ready for prime time with GuruShots 2.0. Across the company, we've identified 5 core strategic priorities for the remainder of the calendar year. AI innovation, mainly expanding the rollout of tools like our AI audio generator and embedding AI across all departments in the company, including design, engineering, quality assurance, marketing, monetization and finance, creator community empowerment by strengthening our, creator community with opportunities to make money gain recognition and improve their skill base, user and subscription growth with a particular focus on high-value users, GuruShots 2.0, that is imagining what the next generation of GuruShots can be in order to drive stand-alone growth in concert with meeting the needs of DataSeeds.AI. And finally, expansion, scaling DataSeeds.AI and exploring new enterprise content licensing opportunities. We believe the structural improvements we've made will continue to become evident in Q4 fiscal year '25 and be fully visible as we move into fiscal '26. When combined with continued product innovation and strategic discipline, we are positioned well to deliver sustained growth, higher margins and long-term value creation for shareholders. I would now like to call on Yi to provide insights into our financial performance. Yi?

Thank you, Jonathan. Total revenue returned to growth in the third quarter, up 1.3% to $7.8 million. Revenue growth was restrained due to the partial quarter of TikTok returning to the advertising market and the continued expected declines at GuruShots. Third quarter subscription revenue was up 13.4% from last year. And our net active subscriber growth trend continued to improve, up 37% year-over-year and sequentially for the eighth straight quarter. As Jonathan mentioned, we also saw a shift towards lifetime subscription, which provides recurring revenue source for 2.5 years following sign-up. Our deferred revenue, of which the vast majority is related to our subscription revenue, was $4.9 million. Deferred revenue has grown by 111% over the past 7 quarters and has a 100% gross margin. Zedge Premium's gross transaction value grew 4% versus last year. However, Zedge Premium's net revenue more than doubled this quarter. As Jonathan mentioned, the shift towards higher lifetime value or LTV users is important, as subscriptions and higher Zedge Premium sales combined with our expertise at optimizing cost per impressions led to a record average revenue per monthly active user of $0.10, and -- up 33% from last year. GuruShots, which is reported under digital goods and services revenue, remain a challenge, down 45% from last year. Remember that as part of our cost savings initiatives, we cut user acquisition spending at GuruShots, while GuruShots 2.0 is in the planning stage, so this decline wasn't unexpected. Cost of revenue was 5.8% for the quarter, roughly flat year-over-year on an absolute basis despite the pickup in revenue. SG&A decreased by 6% to $6.3 million during the quarter. This decrease was mainly driven by our restructuring initiatives and lower marketing spend at GuruShots. We had restructuring charges of $0.6 million related to our announced restructuring activities in late January and early February versus nonrestructuring charges or asset impairments in the year ago quarter. GAAP income from operations was $0.2 million for the quarter compared to negative $0.1 million last year. GAAP net income and EPS for the quarter was $0.2 million and $0.01, compared to $0.1 million and $0.01, respectively, last year. Non-GAAP net income and EPS were $0.9 million and $0.06, in -- compared to $0.5 million and $0.03 in the prior year. Cash flow from operations was $0.9 million and free cash flow was $0.8 million for the quarter. As Jonathan mentioned, cash payments related to the restructuring and the retention bonuses tied to our 2022 acquisition of GuruShots negatively impacted free cash flow by about $1 million in aggregate. We expect these payments to materially decline in Q4 to about $600,000 and then be immaterial in FY '26, and -- which is when the full impact of our $4 million in annualized cost reduction initiatives should start to show through. Adjusted EBITDA for the quarter increased 46% to $1.2 million. Note that depreciation and amortization decreased 61% and -- or about $350,000 compared to last year due to the impairment of capitalized software and technology development costs. From a liquidity standpoint, we finished the quarter with $20.4 million in cash and cash equivalents, which was up 2% sequentially and -- despite buying back 219,000 shares for about $530,000. Fiscal year-to-date, we have repurchased nearly 700,000 shares. Thank you for listening to our third quarter earnings call, and I look forward to speaking with you again on our year-end call in October. Operator, back to you for Q&A.

[Operator Instructions]. The first question comes from Allen Klee.

Yes. Good job on this quarter, definitely. So congrats on that. Some questions. When I look at your advertising revenue that did well, and there's different pieces of that. Is there a way to kind of say like if you had to rank the different pieces that go into that or how you would rank the ones that had the biggest impact?

Allen, it's Jonathan. Thanks so much for the congratulations. We pursue advertising as a comprehensive effort on our part. So it's kind of hard to answer that question with precision and a recurring theme that we consistently broadcast is that we've got an outstanding team focused on optimizing CPMs, that is cost per thousand, the metric that is used to value our inventory. .

Okay. And but you said during -- you said that TikTok came back at some point during the quarter. Does it feel -- how much -- how much in the quarter -- because you had your best to advertise your best, I'm going to always say this on ARPMAU you've ever put up, and it was up like 33% year-over-year, but their support of the overall market wasn't there for the whole quarter. Could you give us a sense of how long it was there for? And are you hearing anything about like any -- because we are hearing from some other that advertising might be a little challenged, but just whatever you could tell us would be held -- helpful.

Well, as you recall, there was a ban of TikTok in the U.S. that was not lifted until mid-February. When it was lifted, it took a little bit more time for the numbers to come back for TikTok to get back into the market and so on and so forth. And they are and continue to be in the market, very present. I cannot venture to speak to whatever policy decisions are made at Washington. Having said that, they continue to buy in the market and remain ever present across advertising and marketing and all of the other initiatives that they are involved in.

Okay. But I'm still not understanding why they came back, but they didn't come back for the full quarter, maybe less than half...

Remember, our quarter -- our quarter started February 1, that they were not in the market for the entire quarter because the ban was not lifted until mid-February.

Okay.

So what happen was both Google and Apple were not availing users of or new installs of the TikTok app and TikTok was therefore not investing marketing dollars and trying to get users to download their app. When the government reversed the ban, TikTok began to invest in user acquisition once again.

And that has such a big factor on the market. So what -- is there a...

I can't quantify specifically how much of this is TikTok, but TikTok is obviously one of the leading mobile apps in the market. They spend a lot of money on marketing. And Zedge has time and time again, proven to be a very good user acquisition platform for them. With their reentry into the market being that we monetize a good portion of our revenue through programmatic advertising, which is marketplace, buyers and sellers, supply and demand, then pricing increased. Having said that, I also want to underscore what we had talked about with our focus, particularly from a marketing user acquisition perspective, being on catering to the users in well-developed economies, those well-developed economies carry more weight in terms of the CPMs that they can bring to the table. So that was also a significant piece of the overall improvement. Yi, do you have anything you want to add?

Yes. I mean, when thing that come to mind, Allen, was we added -- in addition to AdLava we added AdMob as our second mediation platform, and we're constantly testing different ad formats to try to get higher CPM for our inventory. I hope that answers your question. I mean in addition to the reason what Jonathan mentioned.

Got it. Okay. That's good color. And in terms of your monthly average -- monthly active users, would -- I mean, should we expect that just to continue to kind of grind down? Or is anything -- what can you do to stabilize that and then grow it?

Great question. So we are working on stabilizing it. And the focus is really on the well-developed markets. We have seen some improvement, I think, May to May, year-over-year. We were flat, and we continue to refine and optimize our user acquisition spend to bring on high-value users in those markets. We love users from all markets, but clearly, we're prioritizing our focus on users that can provide a disproportionate impact to our overall revenue stream from the well-developed markets. And to that end, we have expanded our investment in user acquisition for the Zedge Marketplace over the course of the last quarters with attractive return on ad spend users. And that ultimately drives more revenue for the company, even though we have lost users in well -- less well developed or developing economies, emerging markets and the likes.

Okay. Got it. In terms of -- you had me -- with Emojipedias one of the things was the new feature of Emojipedia sandbox. Could you comment on that -- what you're doing there?

Yes. The Emojipedia has been testing new features such as create your own emoji with AI or some mini emoji games. We are really focused on the upcoming release of digital stickers, which will be an adjacent vertical, and we plan that for World Emoji Day, which takes place in July. It will be our first foray into a brand-new content type, which is not emoji driven. And our hope is that based upon the similarity in terms of use of emojis and stickers that, that will drive additional interest, traffic and engagement to the platform.

Okay. Great. In terms of Zedge Premium, the Marketplace, what -- last quarter, you talked about kind of you rewarded video usage, and you had good conversion rates. And what -- any commentary on kind of the factors affecting the marketplace in GTV this quarter, you're thinking year-over-year?

I'm sorry, it was hard to hear. Can you repeat the question?

Just commenting on your Zedge Premium, how you thought about how it performed and the main things you're working on there related to it.

Zedge Premium continues to be a core part of the overall Marketplace and our thought processes to continue to bring on new artists and provide them with tooling that will enable revenue creation for them. The major thing that has happened over the course of the last couple of months has been that we've also made Zedge Premium content available on web and that opens up a new channel for customers to ultimately purchase that content. So with that in mind, that will continue that is -- that investment in terms of our community will continue to be a piece of this. And then separately, although we have not -- you haven't asked about it, we look at our creator community on a comprehensive basis, both in the Zedge Marketplace and in GuruShots as being a very strategic asset that we can turn to for content on demand needs that come to light because of DataSeeds.AI, the new business-to-business marketplace that we had announced last week, focusing on curating and creating content to meet the needs of foundational AI companies in terms of refining and tuning their respective models accordingly.

Yes, that sounds very powerful. In terms of the -- so for DataSeeds, just -- when do you think -- I mean, you've announced the transaction, but -- how do you think about how this gets rolled out?

So we are actively in the market building relationships with prospective customers. And in addition to that, we have also published a research paper in conjunction with Perle.ai and Émet Research, demonstrating that our data set has advantages for automated recognition system visual recognition systems. And that is a marketing effort, clearly, to get our name out there. We've been very highly ranked on Hugging Face since we published that paper. And with any new B2B product for us, this is really brand new. We're now seeding the market, no pun intended, and building those relationships so that we can meet these bespoke needs. One of the problems that we have come to recognize is that many of these foundational models are not able to source these unique needs that they have with materiality and in a short period of time. And the promise that we bring to the table is being able to fill that need. So clearly, if we just look at images on the GuruShots side of the house, if a model has a specific need of unique content that is not something that they can readily get their hands on, we can reach out, we can launch a competition or even engage with our photo enthusiasts in our community in order to amass volume associated with that particular need. Of course, we can't handle every request that is on the market. But by way of example, we're not providing photographs of internal organs, which are really important for AI models and how diseases are recognized and discovered and so on and so forth. Yet there are many, many use cases. And just to mention 1 that we've come across, there's an entity that's trying to build a model that will render shadows accurately. That's a very complex question -- if you just take us -- by way of example, you're sitting in your office, the curtains are open, you've got overhead lighting, how are shadows render, that's the sort of stuff that we can generate, lots and lots of images in a relatively short period of time in order to help refine that model.

That's very interesting. Okay. In terms of you talked about rolling out an audio -- audio AI, what would that look like? Is that like a ring tone? Or is it -- or how should that -- and when do you think it is that coming out? I think it's somewhat near term?

We're going to be rolling it out on a limited basis first before the end of June and then we will scale and based upon iterative feedback and so on and so forth, it will be a feature within the Zedge Marketplace. And just as with an imagery today, a user will essentially be able to go in and create a ring tone or -- and ring tone doesn't necessarily mean that it's strictly music. It can be a funny sound just by way of example, but a user will prompt and based upon their prompt, they will get the content that they will create the content that they have prompted.

So this would be -- it would be somewhat of a premium price versus? Like...

Yes. The business model is something where I imagine that it will going to be somewhat available in our subscription offering. And for those users that do not subscribe, well, we may put up some sort of a paywall or advertising paywall, that's all being worked on as we speak.

Okay. But this could just help with the momentum you already have with subscriptions?

Yes, that's correct. In addition to that, from a timing perspective, audio is still rather nascent in this type of consumer offering in the Marketplace. And we are hopeful that we can benefit from entering at an early point in time, which could lead to more users coming to us to engage with this new feature. That's what our -- that's what we're hoping for.

Okay. That's great. So just what I heard you say, one of the things you said you think year-over-year improvement in bottom line metrics could become more visible next quarter with what you've done in the cost structure, taking into account traditional seasonality, the next quarter is a little -- is it a little slower because of the summer time? Or -- and could you remind us what you said about the restructuring or the retention costs that you said will happen in fiscal fourth quarter?

Sure. So for the specific numbers, I'm going to have Yi answer your question. In terms of let's call it, seasonality in the business, as I think you know, typically, our Q4 is a little bit later because of the summer, it's the month of May, June July, our fiscal year begins on August 1, at the same point in time, we are still very, very focused on making sure that we're growing the business.

When you say growing the business, are you including the top line? Or...

Yes, that's correct.

Okay. Great. And...

But I'll just -- I'll underscore the obvious as was very clear from both Yi's comments in my comments. Our cash flow has and will continue to be outstanding. The restructuring certainly is helping us. I think that we said that there could be up to another like $4 million of cash flow because of restructuring, the restructuring has unfolded very, very well. The fact that the GuruShots retention bonus is almost completely behind us from a payout perspective, and the fact that we have tailed -- or not tailed, but cut back on user acquisition spend for GuruShots, while we get our arms around what GuruShots 2.0 will ultimately be, all of those are contributing to our improved cash flow. So from a cash flow perspective, I would underscore that we're doing really, really nicely. You may want to get into some of the more specific numbers about the retention bonus and other [indiscernible] Allen is interested in.

Right. So the tail end of the restructuring charges in Q4 would be about $325,000. This is because the accounting standard we can only expand and pay out during the period in the retention period is still with the company. So after July, it will be gone in terms of charges, but some severance payment will be paid through the next 5 months after year-end. And in terms of retention bonus, we have charged everything to the P&L, but the cash payment, the last payment was actually in May with the April payroll, if you will,; which was about $323,000. So Q4 accounting for cash flow will be about $600,000 related to retention bonus and related to restructuring charges. I hope that answer your question.

Yes. Okay. I'm trying to think most of the things I wanted to. I think those are my questions. Well, look, this was a very good quarter. So thank you, and congrats.

Thank you, Allen.

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