Zedge, Inc. — Q2 Fiscal 2022 Form 10-Q
Reporting period: Three and six months ended January 31, 2022. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
Zedge operates a digital content platform and reports as one operating segment. Its portfolio includes the Zedge personalization app, Shortz and, since August 1, 2021, Emojipedia. The Zedge app had 36.3 million monthly active users (MAU) at quarter-end; Emojipedia reported approximately 8.6 million monthly active users in January.
Key financial metrics
| Metric | Three months ended Jan. 31, 2022 | Six months ended Jan. 31, 2022 | Prior comparable period |
|---|---|---|---|
| Revenue | $6.915 million | $12.943 million | $5.314 million; $9.076 million |
| Operating income | $3.107 million | $5.695 million | $2.518 million; $3.611 million |
| Net income | $2.325 million | $4.380 million | $2.278 million; $3.323 million |
| Diluted EPS | $0.16 | $0.29 | $0.17; $0.26 |
| Operating margin | 44.9% | 44.0% | 47.4%; 39.8% |
| Net margin | 33.6% | 33.8% | 42.9%; 36.6% |
| Operating cash flow | Not presented quarterly | $5.679 million | $3.761 million |
| Cash and cash equivalents | $30.016 million at Jan. 31 | $24.908 million at July 31, 2021 |
Six-month investing cash outflow was $0.323 million and financing cash outflow was $0.225 million. Working capital was approximately $26.9 million, per management. No borrowings were outstanding under the $2.0 million revolving facility; the company reported covenant compliance. Total liabilities were $6.943 million, including $1.879 million due to the Emojipedia seller. The filing does not report conventional funded debt outstanding.
Revenue mix and material changes
- Quarterly revenue rose 30.1% year over year; six-month revenue increased 42.6%. Advertising revenue grew 24% and 35%, respectively, attributed mainly to improved ad optimization and higher advertising rates.
- Paid subscription revenue increased 18% for the quarter and 31% for six months. The quarter had no net subscriber additions, versus 102,000 in the prior-year quarter; ending subscribers were up 7% to 762,000. Gross prepaid subscription sales declined 6% for the quarter.
- Other revenue rose to $0.525 million for the quarter and $1.024 million for six months, including Zedge Premium and Emojipedia-related revenue. Premium gross transaction value was $0.434 million for the quarter, up from $0.211 million.
- Quarterly SG&A increased 43.9% to $3.106 million, primarily from increased headcount, stock-based compensation and professional fees. Depreciation and amortization increased, partly reflecting Emojipedia-related amortization. Income tax expense also rose, and quarterly net income increased only 2.1% despite revenue growth.
- MAU grew 2.5% year over year to 36.3 million, while average revenue per MAU increased 22.2% to $0.0601. Emerging markets represented 77% of Zedge app MAU, up from 73%; emerging-market users grew while developed-market users declined year over year.
Liquidity, acquisition and outlook
Cash increased $5.108 million during the six months, supported by operating cash generation. Management expects cash on hand and operating cash flow to cover anticipated requirements for the twelve months ending March 16, 2023. The company acquired substantially all Emojipedia assets for a final purchase price of $6.7 million, allocated to intangible assets amortized over 15 years; $1.9 million remained payable in two installments. No impairment charge was recorded.
No revenue or earnings guidance is provided. Management expects a fiscal 2022 effective tax rate of approximately 22.8%. It described paid user acquisition and product improvements as growth initiatives, while noting that returns on acquisition spending are monitored.
Risks, contingencies and unusual items
- Advertising remains the principal revenue source, and three customers represented 60% of six-month revenue. Two customers accounted for 68% of receivables at January 31, 2022.
- The increasing share of users in emerging markets weighs on monetization because advertising rates and subscription sales are lower there. Zedge also cited ongoing developed-market user declines and uncertainty around user growth.
- The company uses foreign-exchange forwards to hedge NOK and EUR exposure; reported foreign-exchange results were a loss of $0.085 million for the quarter and $0.095 million for six months. Forward contracts had a $0.067 million liability at quarter-end.
- Management cited potential operational disruption from the Russia-Ukraine conflict, including the proximity of its Lithuania development center to Belarus, and said it was contingency planning. COVID-19 and broader economic uncertainty may also affect business and advertiser demand.
- The company reported ordinary-course legal proceedings that it did not expect to have a material adverse effect. A previously reported material weakness in tax-related controls was stated to be remediated; management concluded disclosure controls and internal control over financial reporting were effective at January 31, 2022.
Important facts for investors to verify
- Whether advertising growth, subscription monetization and MAU trends persist, particularly in developed markets.
- Whether increased paid user acquisition produces an acceptable return and how the user mix affects revenue per user.
- Integration and performance of Emojipedia, including its contribution to revenue and the remaining seller payments.
- Customer and advertising-platform concentration, foreign-exchange exposure, and the potential operational effects of geopolitical developments.
- Execution of the tax-control remediation and the assumptions underlying management’s expected tax rate and liquidity assessment.