Zedge, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended January 31, 2020. Dollar amounts below are in millions unless stated otherwise. The filing is unaudited.
Business context
Zedge operates a digital publishing platform, primarily through its mobile personalization app. Advertising generated about 85% of quarterly revenue; other revenue came from subscriptions and Zedge Premium. The company also beta-launched Shortz, a serialized short-form fiction app, in December 2019.
Financial performance
| Metric | Quarter ended Jan. 31, 2020 | Prior-year quarter | Six months ended Jan. 31, 2020 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $2.644 | $2.573 | $4.677 | $4.954 |
| Operating income (loss) | $0.079 | ($0.245) | ($0.666) | ($0.826) |
| Net income (loss) | $0.100 | ($0.240) | ($0.701) | ($0.946) |
| Basic and diluted EPS | $0.01 | ($0.02) | ($0.07) | ($0.09) |
| Cash from operations | Not separately provided for the quarter | $0.925 | $0.536 |
- Quarterly operating margin was approximately 3.0%, compared with about negative 9.5% a year earlier; six-month operating margin was about negative 14.2%, versus negative 16.7%. These are calculated from reported revenue and operating results.
- Quarterly revenue increased 2.8%; six-month revenue declined 5.6%. Direct costs were 11.6% of quarterly revenue and 13.6% for the six-month period, compared with 12.7% and 13.7%, respectively, in the prior comparable periods.
- SG&A declined 12.4% for the quarter and 14.1% for six months. Depreciation and amortization rose 10.7% and 37.6%, respectively, as completed software projects began amortizing.
- At January 31, cash was $2.252, current assets were $3.525, current liabilities were $2.323, and working capital was approximately $1.2. Total assets were $9.160 and stockholders’ equity was $6.654.
- Six-month investing cash outflow was $0.417, primarily for capitalized software and technology development; financing provided $0.172. Cash increased $0.643 from July 31, 2019.
- No borrowings were outstanding on the $2.5 million revolving credit facility at January 31; the company reported compliance with its covenants. The facility matures September 26, 2020. Current insurance-premium loan payable was $0.063. Operating lease liabilities totaled $0.397.
Material changes and operating trends
- Quarterly advertising revenue was $2.260, down from $2.374; subscriptions and Zedge Premium revenue rose to $0.384 from $0.021. The prior-year quarter included $0.178 of service revenue; that third-party service contract ended May 31, 2019.
- For the six months, advertising revenue fell to $3.927 from $4.572, partly offset by subscription and Zedge Premium revenue of $0.750 versus $0.033. No service revenue was reported in the current period.
- Monthly active users were 34.3 million, down 6.5% from 36.7 million a year earlier. Users in emerging markets increased 2.6%, while users in developed markets declined 20.9%. ARPMAU increased 21% to $0.0262 from $0.0217.
- Management attributed the user decline in part to Google Play’s temporary suspension of the app in late September 2019 after buggy code in a third-party advertising integration; the app was subsequently reinstated. Management said the suspension affected revenue during the quarter ended October 31, 2019.
- Headcount fell to 39 from 63, following a May 2019 workforce reduction and subsequent attrition. The company reported 423.9 million cumulative installs, compared with 367.9 million a year earlier.
Outlook, risks and unusual items
- Management expects cash on hand and operating cash flow to cover anticipated cash requirements for the 12 months ending January 31, 2021. It gave no specific revenue or earnings guidance.
- Management expects near- to medium-term pressure on Zedge Premium gross transaction value and related revenue as it promotes Shortz, and expects better advertising-inventory optimization to help offset the impact. It continues to pursue subscription growth, advertising monetization and user-growth initiatives.
- On February 5, 2020, after quarter-end, Zedge closed a registered direct offering of 1,734,459 Class B shares for net proceeds of $2.16 million. $0.275 million had been received by January 31 and recorded as additional paid-in capital; the shares were issued at closing.
- The company’s advertising revenue and receivables are concentrated: two customers represented 33.0% and 29.7% of six-month revenue, and 33.9% and 33.6% of receivables at January 31. It also faces currency exposure to the Norwegian krone; forward contracts are not designated for hedge accounting and fair-value changes affect earnings.
- The Saregama copyright case, which sought approximately $1.6 million in damages, was dismissed after the injunction was lifted and the plaintiff consented. The company reported no other material changes to previously disclosed risk factors.
- Adoption of lease accounting standard Topic 842 in fiscal 2020 materially affected the balance sheet, adding operating-lease right-of-use assets and liabilities, but did not affect the reported income statement or cash flows.
Key facts for investors to verify
- Whether MAU stabilizes or recovers, particularly in higher-ad-rate developed markets, following Google Play reinstatement.
- Whether subscription growth and improved ARPMAU can offset weaker advertising revenue and the ended service contract.
- Progress and monetization of Shortz, alongside any resulting impact on Zedge Premium.
- Cash generation, covenant compliance, and the refinancing or renewal of the revolving facility before its September 2020 maturity.
- The dilution and use of proceeds associated with the February 2020 share offering, and continued customer and foreign-exchange concentration.