Zedge, Inc. ($ZDGE)

Good day, ladies and gentlemen, and welcome to Zedge's earnings conference call for the second fiscal quarter of 2026. [Operator Instructions] I will now turn the call over to Mr. Brian Siegel. Sir, the floor is yours.

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 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, and good afternoon, everyone. Let me start with what stood out to me this quarter. The quality of our monetization continues to improve, and this is leading to record results. We achieved record levels of revenue and average revenue per monthly active user in our seasonally strongest quarter driven by continued advertising optimization, record active subscription numbers and record Zedge Premium GTV. What that tells me is that the investments we have made in optimizing our ad inventory and subscription offerings continue to pay off. Although MAU contraction remains, we are focused on acquiring higher-value users and monetizing our audience more effectively. That makes the core marketplace more resilient and durable. Turning to innovation, starting with Data Seeds. It remains early, and we are excited about this market and its incredible growth potential. The appetite for AI training data is virtually insatiable, and we are productizing offerings, we believe can meet the needs of model builders and doing so intelligently and cost effectively. This is in contrast to the many venture-funded start-ups in this market, many of which are overcapitalized and burning money like there is no tomorrow. Data is the fuel that powers AI models and we do not believe this is a bubble. Our challenge is in making the right bets, continuing to grow our library of relevant content and executing well in a rapidly developing market we're witnessing continued inbound interest and have started building an outbound pipeline. Some of our customers have returned placing new larger orders after proving that we were able to meet their highly discerning needs with high-quality outcomes. Enterprise customers tend to scale relationships over time based on consistent and reliable performance. Our operational focus is on building a high-quality outbound pipeline and on better qualifying inbound requests. Not every opportunity converts and not every deal is feasible, being selective, focusing on those needs that we can meet and executing well on the opportunities we pursue is critical to building long-term credibility in the enterprise market. In addition, we are building an off-the-shelf or OTS catalog to drive down cost and accelerate order delivery. Our production cloud is growing as well with a set of vetted production teams that we can call on to create data sets as needed. Revenue remains lumpy at this stage, but engagement trends are encouraging. Our priority is building the infrastructure, supply depth and operational rigor required to support larger, more consistent opportunities over time without getting too far ahead of ourselves and hurting profitability. Our innovation team is humming. We recently launched 2 more alpha products, bringing us halfway toward our goal of introducing up to 6 this fiscal year. As expected, not every initiative will make the cut, but we learn from each new launch. Syncat, our first release under the product innovation team framework did not deliver the KPIs we were shooting for and we are ceasing development of this product. Our framework is simple, prequalify, develop rapidly, test quickly, measure objectively and invest in the winners. Adopting this operating mentality is challenging and requires great discipline and the ability to avoid getting attached to a product because of personal affinities. Turning to Emojipedia, we continue to face structural headwinds tied to the evolving field of search, and we recorded a noncash impairment this quarter to reflect the likely impact of these changes. The business remains profitable and the cost structure, which had always been efficient is aligned accordingly. GuruShots appears to be stabilizing and is being operated conservatively following last year's restructuring as we evaluate longer-term options. From a capital allocation standpoint, we generated solid free cash flow even after investing in Data Seeds, Tapedeck and other innovation priorities. Cash strengthened to $19.1 million with 0 debt. Our free cash flow yield remains in the double digits, and we are now paying a quarterly dividend while continuing to invest in innovation and repurchasing shares when the market conditions are right. Stepping back, our priorities are straightforward. Strengthen monetization in the marketplace, build Data Seeds deliberately and expand our innovation pipeline in a disciplined way. We believe that balance positions us well for the remainder of fiscal 2026. With that, I'll turn it over to Yi.

Thank you, Jonathan. Total revenue for the second quarter was $8.3 million, up 18.3% from last year. Remember, historically, Q2 is our seasonally strongest quarter due to the holidays. There are a couple of items of note in the quarter's results. First, Zedge Marketplace revenue was up over 21% year-over-year driven by strong advertising CPMs and subscription revenue. Consistent with Jonathan's comments earlier and on our last call, Emojipedia was a significant drag on top line growth, and when combined with year-over-year declines at GuruShots were a material drag on our overall revenue growth rate. That said, GuruShots continues to stabilize on a sequential basis. Advertising revenue was up 18.3% for the quarter as strong growth in the Zedge Marketplace was offset by lower ad revenue at Emojipedia. Zedge+ subscription revenue increased 33% year-over-year, and our net active subscriber base grew 49%, reaching nearly 1.2 million subscribers. We continue to optimize our subscription plans and are seeing the benefits of those changes. Deferred revenue, which primarily represents subscription-related revenue reached $6 million, up 5% sequentially and 39% year-over-year. This is an important metric as it reflects future revenue that essentially carries a 100% gross margin. Zedge Premium GTV was up 15.7% from the year ago quarter and ARPMAU increased 47.6%, continuing to shift towards higher value users and improve monetization efficiency. This quarter, note that our digital goods and services revenue includes contribution from both GuruShots and Data Seeds, with the vast majority being generated by GuruShots at this stage as we recognized minimal Data Seeds revenue in the quarter. We expect to see Data Seeds increase its contribution in the second half of fiscal 2026. Cost of revenue was 6.8% of revenue, which was up from 6.4% last year due to the reduction in partner discounts from Google Cloud Services as well as the introduction of Tapedeck licensing fees and Data Seeds production costs. SG&A decreased about 6% to $6.7 million for the quarter. This reflects the net savings from our restructuring, partially offset by investment in ramping Data Seeds and Tapedeck. GAAP loss from operations was $2.9 million compared to a loss of $2.2 million last year. This quarter, we took a $3.7 million asset impairment charge related to Emojipedia. While last year, we had $1.3 million in restructuring charges. GAAP net loss and loss per share were $2.3 million and $0.18 compared to a loss of $1.7 million and a loss per share of $0.12 last year. On a non-GAAP basis, net income was $0.8 million and EPS was $0.06 compared to a loss of $0.2 million and a loss per share of $0.01 last year. Cash flow from operations was $0.9 million and free cash flow was $0.8 million for the quarter. Adjusted EBITDA for the quarter was $1.1 million, versus negative $0.1 million last year. From a liquidity perspective, we ended the quarter with $19.1 million in cash and cash equivalents and no debt. In addition to our dividend payouts, we still have about $500,000 available under our current buyback authorization. I want to point out 1 item as we look to our Q3. Last year, we had a onetime benefit to revenue of $450,000 related to an integration bonus from an ad partner that will not repeat this year. Thank you for listening to our second quarter earnings call. We look forward to updating you again soon when we report results for the third quarter of fiscal 2026. Operator, please open the line for questions.

[Operator Instructions] Thank you. First Question is coming from Allen Klee with Maxim Group.

Yes. Nice quarter. For Data Seeds, could you kind of walk us through, how you think about -- I know you're building a pipeline, but as you get these -- how long do you think it takes to be able to deliver on a when and how -- is this considered -- how you think about it from a margin perspective potentially when it scales? And anything else related to the pipeline and the size of orders that might be in the pipeline?

Allen, thank you. A couple of different observations about Data Seeds. As we've said in the past, Data Seeds is a B2B offering. And from what we've seen the progression of a deal depends on how well the proof-of-concept goes. If we deliver well according to SPAC in time frames that we are given, the customer has interest in coming back to us. The growth of those deals is very much dependent on what the customer needs, whether it's a custom-made deal, whether it's an off-the-shelf deal, and we are still in the midst of refining that process to make sure that we are investing our resources in the right area with the right data, with the right prospects and so on and so forth. In terms of margins, thus far, the margins have been attractive. We do have target margins, but margins are also dependent on what type of deal it is, off-the-shelf will command a lower margin than custom made by and large, and depending on whether or not there is a middle man, meaning a marketplace that's evolved, that also impacts margin. So these are all variables that are being considered by us as we further invest in expanding this business.

Okay. And last quarter, I think you mentioned -- so this makes perfect sense with you guys on photos with which you have in GuruShots . And you also, I think, mentioned you're looking at other type of data? And how are you thinking about that now?

Yes. We are focusing on multimodal data that can be images, audio and/or video. So we are focused on each of those verticals in terms of actual data. The typical entry point is based upon our reputation and business in the image space, but we've already completed 1 proof of concept on the video side, and we're speaking to several prospects about some audio work.

That's great. On your alpha product launches. You mentioned you launched 2 more to get to 4 out of 6. Is there anything you can comment on the 2 new ones?

The 2 new ones literally are fresh out of the starting gate. What I can comment on, thematically is we are -- these are being built on a foundation that continues to evolve such that we can build things at a much more modular fashion, allowing us to accelerate and get stuff out the door sooner rather than later. We also are expanding and monetizing not only through subscription, which was Syncat related but also through advertising. And the refinement that we have in terms of even selecting what to produce next is continuing to improve. We've run fake door tests against the cohort of different ideas that we have research using various industry tools measuring where is the traction in the market, market sizing and then taking a look at things like conversion rates, cost for acquisition amongst other KPIs. And after we've analyzed that data across a cohort of different ideas, we will select 2 winners and then we start the development process. The goal is ultimately to have a foundation, which allows for very fast turnaround so that we can build in a modular fashion as opposed to having to start from scratch every time we go out with a new app.

Right. And you're still seeing good momentum on subscription revenues, is anything different in what's driving that or the kind of the same trends?

Yes. What's driving it is really our ongoing investment in optimizing our subscription offering and trying to find those pockets of prospective subscribers that will be attracted to what we had to offer.

Okay. In terms of Zedge Marketplace, that's also doing very well. How -- talk a little bit about kind of what's been driving that?

Well, it goes without saying our fiscal Q2 overlaps with year-end advertising spend and furthermore, we've been doing a lot of work on the data science side in order to better segment users and optimize their performance from a monetization perspective.

Okay. And in terms of like your active users, how -- how are you thinking -- what's your strategy there on trying to increase that?

Sure. So we've got 3 tracks under way. Number one, is marketing, find new marketing mechanisms that we've not used in the past, let's just say, influencer market. Number two, is we're testing new product features and capabilities that will draw back users on a daily basis. Just by way of example, we're going to be testing the notion of offering alarms such that you can wake up in the morning to an alarm and a user would need to interact with the app in order to turn the alarm off, so product features. And then the third is that we've got data science projects that we've initiated to help us better isolate prospective new users that we can bring into the app based upon the wonders of data science.

Okay. That's great. I'm sorry I forget, your -- the marketplace where you're offering independent music makers to -- where they can get the royalties, could you talk a bit about how that's progressing?

Sure. First of all, as an aside, there was a really fantastic article that came out in Billboard Magazine, over the course of the last couple of days, featuring Tapedeck and really counting the value that Tapedeck brings to the world of indie music. In terms of the actual product itself, the KPIs are trending in the right direction. We are slowing down in terms of ongoing product development and focusing our efforts more closely on expanding our music catalog. The need to find and build a music catalog that will be attractive to users that is material in size, provides variety, and exposes users to that are hyper fans to their perspective indie musicians is table stakes for the success of that business. And that is where we're shifting our focus to because most of the product needs are completed at least for the stage of the rollout.

To what extent is discovery important for the success of this as maybe people don't know the particular artists that -- and if they can find him or her might get excited and do it, how do you engage that? Or how do you think about that?

Discovery is obviously important and if 1 opens up the Tapedeck gap, they can search for their artists who will come back. If the artist isn't there, they will recommend alternative artists, genres and so on and so forth that align to that style. But what we've also started to do is to work directly with artists that are within Tapedeck in terms of promoting the app to their fan base.

[Operator Instructions] Thank you. As we have no further questions, this will conclude our question-and-answer session and our conference call. We thank you for attending today's presentation, and you may now disconnect.