Zedge, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended January 31, 2018; fiscal year ends July 31. Financial amounts below are in thousands of dollars unless stated otherwise. Results are unaudited.
Business context
Zedge operates a global mobile-personalization content platform, with most content free to users. More than 90% of revenue comes from advertising. The company reported 35.5 million monthly active users (MAU) at January 31, 2018, up 6% year over year, and 306.2 million app installations, up from 246.3 million.
Financial performance
| Metric | Three months ended Jan. 31, 2018 | Three months ended Jan. 31, 2017 | Six months ended Jan. 31, 2018 | Six months ended Jan. 31, 2017 |
|---|---|---|---|---|
| Revenue | $3,045 | $2,572 | $5,704 | $4,955 |
| Operating loss | $(122) | $(338) | $(964) | $(226) |
| Net loss | $(173) | $(326) | $(993) | $(164) |
| Basic and diluted loss per share | $(0.02) | $(0.03) | $(0.10) | $(0.02) |
| Operating cash flow | Not presented separately | Not presented separately | $253 | $205 |
- Quarterly revenue grew 18.4%; six-month revenue grew 15.1%. Management attributed growth to higher average revenue per MAU (ARPMAU) and improved ad monetization. ARPMAU was $0.0273 in the quarter versus $0.0237, and $0.0265 for six months versus $0.0236.
- Direct costs were 11.7% of quarterly revenue and 12.8% for six months, compared with 16.0% and 15.7%, respectively, a year earlier. Revenue less direct costs was approximately 88.3% and 87.2% of revenue for the respective 2018 periods; this is not a reported gross-margin measure.
- Quarterly operating loss narrowed year over year, but the six-month operating loss widened. Six-month SG&A rose 36.6% to $5,558, primarily reflecting Freeform-related costs, Zedge Premium development, severance, and foreign-exchange effects on compensation.
- Six-month foreign-exchange transaction losses were $45, versus a $33 gain in the prior-year period. Quarterly foreign-exchange losses were $43, versus $17.
Cash, liquidity and debt
- At January 31, 2018, cash and cash equivalents were $4,160, down from $4,580 at July 31, 2017. Working capital was approximately $4,353; current assets were $6,583 and current liabilities $2,230.
- For the six months, operating cash flow was $253, investing cash outflow was $798 (mainly capitalized software development and equipment), and financing cash inflow was $91. Cash decreased by $420.
- Total liabilities were $2,230; the filing reports no amounts drawn on the $2.5 million revolving credit facility. The facility is secured by substantially all assets, matures September 27, 2018, and had covenant compliance at quarter-end. The company also had no outstanding foreign-exchange contracts.
- Management said cash on hand and expected operating cash flow should cover anticipated requirements for the next 12 months.
Developments, outlook and risks
- Zedge Premium beta launched on iOS in December 2017; management expected Android rollout in March 2018. Beta revenue was immaterial in the quarter. Management said engagement and ARPMAU trends had improved and planned to build user adoption, expand the artist community, and test monetization approaches. No formal financial guidance was provided.
- Management reported an 11% year-over-year decline in quarterly advertising eCPMs, attributing it to prioritizing ad impressions per user and a growing share of users in lower-rate emerging markets.
- The September 2017 Freeform acquihire and related arrangements involved $223 in cash and 319,632 Class B shares with reported fair value of $611; $465 of Freeform liabilities was expensed in SG&A. Restricted shares issued to former Freeform employees are subject to continued employment and vest over four years.
- On February 7, 2018, the company disclosed that it dismissed BDO USA and appointed Mayer Hoffman McCann as auditor for the remainder of fiscal 2018, following a competitive process. The filing does not state a reason for the change.
- A copyright lawsuit filed by Saregama India seeks approximately $1.6 million and an injunction. Zedge considers material liability remote. A Norwegian tax audit covering 2012–2016 was ongoing; no significant issues had been identified, but assessments could exceed accrued amounts.
- Revenue and receivables are concentrated among a small number of advertising-exchange customers. For the six months, three customers accounted for 37%, 19%, and 12% of revenue; at January 31, three customers represented 53%, 11%, and 10% of receivables. The company also cited foreign-exchange exposure and ongoing reliance on advertising monetization.
- Disclosure controls were assessed as effective at January 31, 2018. The filing reported no material changes to internal control over financial reporting during the quarter and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the planned Android Premium rollout occurred and whether adoption and monetization became material.
- Whether revenue growth and ARPMAU gains continued, particularly given lower eCPMs and user growth concentrated in emerging markets.
- Progress in reducing SG&A and the effects of Freeform-related costs, severance, and equity compensation.
- Cash use, capitalized development spending, and the revolving facility’s status and maturity in September 2018.
- Developments in the Saregama litigation and Norwegian tax audit, plus any explanation or subsequent implications of the auditor change.