Zedge, Inc. ($ZDGE)

Good day, and welcome to Zedge's Earnings Conference Call for the Third Fiscal Quarter of 2026. [Operator Instructions] Also note that Zedge will be presenting at the Planet MicroCap Conference next Wednesday at 2:30 p.m. Eastern Time. I will now turn the call over to Brian Segal.

Thank you, operator. During today's call, Jonathan Wright, Zedge's Chief Executive Officer; and Eisai, 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 to 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 Zee'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. We continue to demonstrate that the core Zedge marketplace business is resilient. This was a GAAP profitable quarter, which I think is worth noting. And the underlying monetization trends remain strong. Subscription revenue grew 32% year-over-year as active subscriptions reached nearly $1.3 million, up 41%, marking 9 consecutive quarters of year-over-year growth, while Zedge Premium GTV increased 17%. This contributed to our record quarterly average revenue per monthly active user of nearly $0.12. What those numbers collectively tell me is that our ongoing investment in acquiring and retaining higher value users continues to pay off. Even though overall monthly active users declined the quality of engagement and the revenue we generate per user improved. Additionally, while advertising revenue declined slightly, the drop was entirely attributable to emojipedia, which is being managed for profitability and cash generation in light of the structural changes Google made to its search results page. Within the Zedge marketplace itself, advertising revenue was essentially flat year-over-year and I would characterize that as a resilient result, particularly given that the prior year benefited from a onetime integration bonus from an ad platform partner. Within the Zedge marketplace, I want to highlight one data point that I think reinforces our message about monetization quality. iOS revenue grew 35% year-over-year and now represents 6.5% on of total Zedge Marketplace revenue, up from 5.1% a year ago. iOS users are among our highest value users and that trend is moving in the right direction. Turning to data seeds. This was a meaningful quarter for the business. We fulfilled our first 6-figure order stemming from an existing customer, a leading technology company, successfully delivering a project of this size on spec within tight time frames is a meaningful milestone, validating our ability to secure larger, more complex orders, especially from existing customers. At the same time, our prospect pipeline is also growing. We are generating interest from leads interested in ethically sourced images, video and audio data sets. Our ability to tap into our deep experience in creating and operating consumer mobile apps and repurposing this knowledge for managed crowd-sourced content creation that complies with regulatory frameworks is unique. We have said consistently that revenue will remain lumpy as we mature our offering, but each successful delivery strengthens our credibility in the enterprise market. and that is what builds towards larger and more consistent deal flow over time. Turning to tape deck, our marketplace for independent music where artists earn royalties directly from their fans. We have been focusing on expanding the music catalog, and I am excited to share that we recently signed Sync Music, Tough Gong distribution and the BWL entertainment catalog. Sync roster includes artists like Jason Deul and TI. Tough Gong was originally established by Bob and Rita Marley as a home for their own music and fellow independent artists. And VWL manages the estate of Betty Wright, a sole pioneer and the first woman to have a gold LP on an independent label. These are exactly the types of artists tape deck was designed to serve and this progress increases our confidence in the direction of the catalog. Next, our product innovation team released an additional 2 alpha products this quarter. We now have 4 live and remain on track to achieve our goal of 6 alpha launches this fiscal year. That will be 0 to 6 in less than 12 months. What I want to emphasize about our framework is that it is designed to be highly efficient at scaling winners and killing losers. We prevalidate before writing code, build fast, measure against clear KPIs invest in the winners and cut the losers. Each new launch compounds from prior releases by utilizing some of the development work, which shortens our time with every iteration. We are attached to the framework not to any single product. That discipline is what allows us to take multiple shots on goal without putting meaningful pressure on the balance sheet. From a financial standpoint, free cash flow increased 55% year-over-year to $1.2 million and is up 10% year-to-date. Cash and cash equivalents strengthened to $19.7 million and we continue to carry no debt. During the quarter, we increased our quarterly dividend by 25% to $0.02 per share, reflecting our confidence in the business and our ongoing free cash flow generation. We also opportunistically repurchased shares when market conditions warranted and continued to invest in data seeds and our innovation pipeline. All capital allocation priorities are being pursued concurrently, and none of them is coming at the expense of the others or of the balance sheet. Stepping back, our priorities for the remainder of fiscal 2026 are straightforward. Continue strengthening monetization in the Zedge marketplace, build data seeds deliberately and execute well on the opportunities we elect to pursue and advance our innovation pipeline in a disciplined way. With that, I will turn it over to Yi.

Thank you, Jonathan. Total revenue for the third quarter was $8.0 million, up 3.0% from last year. Remember, historically, Q3 is our seasonally weakest quarter. There are a couple of items of note in the quarter. Consistent with Jonathan's comments, in multi pedia was a drag on overall top line growth rate. That said, Zedge Marketplace revenue continued to perform well. Given last year, our advertising revenue benefited from a onetime $450,000 bonus from an ad partner. As a result of these 2 items, advertising revenue was down 4.0% for the quarter. Zedge Plus subscription revenue increased 31.9% year-over-year, and our net active subscriber base grew 40.6% reaching nearly 1.3 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 $6.2 million, up 26% 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 16.6% from the year ago quarter and up now increased 21.2% to $0.119, and continuing to shift towards higher value users and improve monetization efficiency regarding digital goods and services revenue. This line includes contribution from both Guru shots and data sets, with the majority still being generated by Gurushat at this stage, although this quarter, data seeds benefited from the fulfillment of the 6-figure order Jonathan mentioned. SG&A was $6.2 million for the quarter, down 1.7% from last year. GAAP operating income was $1.1 million compared to $0.2 million last year. GAAP net income and diluted EPS were $0.9 million and $0.07 compared to $0.2 million and $0.01, respectively. On a non-GAAP basis, net income was $1.0 million and EPS was $0.07 compared to $0.9 million and $0.06, respectively. Free cash flow was $1.2 million for the quarter. up 55% from last year. Adjusted EBITDA was $1.3 million, up 1% from last year. From a liquidity perspective, we ended the quarter with $19.7 million in cash and cash equivalents and no debt. After quarter's end, our Board added $2 million to our existing $5 million share repurchase authorization, which now has a total available capacity of approximately $2.2 million. To date, we've repurchased about 1.5 million shares for roughly $4.8 million on the existing authorization. Thank you for listening to our third quarter earnings call. We look forward to updating you again when we report results for the fourth quarter of fiscal 2026. Operator, please open the line for questions.

[Operator Instructions] First question comes from Derek Greenberg with Maxim Group.

My first is just on data feeds and wanted to revisit something you called out as a priority, which was to build that part of the business deliberately. I was wondering if maybe you could just expand upon this and talk about what that looks like as well as maybe an update on some of the initiatives from the last call, such as building out the inbound and outbound as well as an off-the-shelf catalog?

Derek, thanks for the question. So as you know, data sets is a B2B offering that provides multimodal that is audio video and image data sets to frontier model developers. And we have several things going on with data sets. In terms of pipeline, we have been developing our thesis around what is known as managed crowd content creation, where we are able to turn to our creator community, which is available through both the Edge marketplace as well as the Bucha players and have them create content based upon there that we received from prospective customers. With respect to the pipeline itself, we have been focused more heavily on working with aggregators as opposed to working through marketplaces. We find that the aggregators seem to have higher quality leads and developing those relationships in a fashion where the aggregators understand our offering, how we differentiate our ability to scale production according to plan and so on and so forth has been a major focus of ours. In terms of differentiating between inbound and outbound we have been focusing more heavily on outbound, which is not only electronic outbound, but participating in conferences. By way of example, there is a very well established computer vision conference that had taken place in Denver, CVPR last week, I attended the conference and met with multiple prospects and ecosystem partners in order to further existing relationships as well as develop new relationships. And that has resulted in are becoming more visible to prospects that are interested in multimodal data sets. And finally, there is another piece of this not related to sales per se, but related to the product, which is all of the technology layered around everything having to do with ensuring that the quality of the content that we are providing has been vetted through technology, so the acceptance rates are high, ensuring that the metadata associated with the content complies with the customers' specifications, naming conventions and a whole set of other requirements that allow for the data to be accepted with a high acceptance rate. I hope that answers your question.

Yes, that's super helpful. And then I was wondering, obviously, you had mentioned the deals a lumpy, not a ton of visibility right now. But I was wondering if we could perhaps get a little bit more color in terms of the pipeline, the magnitude of the pipeline? Or just in terms of how to think about the frequency of potential deals as we go forward, maybe like annually or quarterly or how you think about that?

Yes. Let me say, obviously, I think we are not at the point where we can project revenue with certainty. Having said that, we have seen more prospects in the pipeline, spanning all modalities. And the unique value proposition that we bring to the table is the fact that we are able to provide a managed cloud solution. The ability for us to benefit from our experience in the mobile app space, which spans everything from onboarding to ensuring that the content that is being created applies with a brief ensuring that there is regulatory compliance and that means everything from privacy to ensuring that if there are humans in a particular brief that there's model release biometric information that there is compliance with laws around biometrics and so on and so forth, that being just organically built into the product, coupled with a reward mechanism and the payment mechanism is something which really stands out and is capturing the attention of prospective customers. So that has been a major focus of ours over the course of the last quarter, and we have had success in fulfilling both proof of concepts as well as orders with the maturation of our offering. So if you were to rewind 2, 3 quarters ago, the precision by which we described how we were acquiring data has come a long way. And going back to what you had said earlier about asking about off-the-shelf and growing our catalog, we have focused less on off-the-shelf content because what we are seeing in the marketplace is that models need pre and post training based upon new data that doesn't exist. and our ability to go out and create those data sets at scale with compliance, ensuring that -- they are ethically sourced and that they can be delivered at scale is the direction that we are focusing on in terms of building out this portion of the business.

Good. That makes a lot of sense. I want to turn to tape deck, and it sounds like you've made a lot of good progress there with all the deals you've announced. So I was wondering -- maybe if you could just talk a little bit about how those suites like agreements with the distributors, how those are structured and work as well as just a general update, I guess, on where your priorities lie now? If it's continuing to build out the catalog or if you're thinking about maybe user acquisition or just your thoughts there?

Sure. So most of the effort has been around building out catalog as well as focusing on potential technology enhancements that will make Tape Tec more attractive to inthartists because of the ability to not only earn money but also ease the burden that an indie artist has in terms of launching their music and gaining a broader following -- in terms of the deals, these deals are deals where the -- generally speaking, we're working with in the labels, if you will, that are very, very much in support of the vision that we have, where you can have in the artists get paid. -- for every listen that any piece of that they have in their catalog results in as opposed to platforms like Spotify, where many artists do not -- or artists don't get paid -- start getting paid until after there have been, let's say, 1,000 or more listens. And then how they are paid is not necessarily transparent and the rate at which they are paid is also not as transparent as it needs to be. Our minimum is saying, "Hey, there's a floor of a $0.01 prelicen. But the notion of Patek is really reaching out to, let's call it, above-average fans or hyper fans. -- that really want to support their particular artists, their particular genres and Omoserv as a patron to those artists so that they can thrive and continue to make living with their art form.

That's really interesting. I want to turn now to the AI innovation that the Alpha apps you've been launching you have 4 live now. I was wondering if you have seen any traction or results from earlier launches? Or just any color you can provide in terms of the potential for these margins?

Sure. So let me structurally talk about the harness. We're spinning up new products before we actually launch a product, we've done marketability testing to understand what the demand would be for the product, what the conversion rate would be how much we feel it would cost to acquire a user. And going into that process, we have a set of ideas. We do some test marketing and many of the ideas never make it past the test marketing phase for the ones that do make it past the test marketing phase, what we have been doing is we have been building this harness which centralizes many attributes and functions associated with every new app that we roll out. And that will translate into an accelerated time frame for us to release new apps. In terms of specifics, -- we had announced Sync. Sica was launched. It did not ultimately past the threshold that we had set in terms of revenue KPIs, engagement KPIs and so on and so forth. And with respect to the other reps that are out there. There's 1 which is -- they're all early stage, of course. There's 1 which is trending in the right direction. The other 2 are early in the pipeline to apo as to whether or not they're going to make it. And our expectation going into this is since the KPIs of if the app is crossing the threshold, then continue to evolve those KPIs and through that gating process, we're able to separate the wheat from the chaff, if you will. And the craft is something that we will get rid of very quickly, whereas we will continue to invest in the wheat in order to see to it that we can make this a sizable portion of our business. I just say consistently Rovio's Angry Birds Angry Bird game did not become successful until Rovio had failed at 50 earlier pads. So by and large, most of these are not going to make it to let's call it, mainstream scalable. Our responsibility and our focus is to see that we are managing this in a fashion where for investing our resources responsibly. And then when we identify an opportunity that is delivering the performance that will ensure that it can scale to double down and continue to invest and iterate and develop so that we can have a brand-new revenue stream in our business.

Got it. That's helpful. My last question is just on MAUs. I know on the last call, you kind of called out 3 separate buckets of initiatives that you were trying to implement to try and stabilize and improve MAU between marketing and new product features and data science. I was wondering maybe if you could just talk about how those efforts are going?

Sure. So we continue to invest in all 3 of those. And if I were to describe our monthly active user base -- generally speaking, the quality of our user base is better than it was a year ago. and we are still iterating to not only see to it that the quality is there, but also to see to it that there is a growth opportunity in that domain and specifically focusing on the well-developed markets where CPMs and disposable income are more accessible. And I would conclude by saying growth and the initiatives that we have to unlock that growth is not a static onetime event. It is dynamic. There's not a day that goes by where the team is not exploring new opportunities to unlock growth opportunities for our user base.

[Operator Instructions] We have no questions in the queue. This concludes our question-and-answer session and conference call. Thank you for attending today's presentation. You may now disconnect.