Zedge, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended July 31, 2017. This is an annual report; it does not provide standalone fourth-quarter financial results. Dollar amounts below are U.S. dollars.
Business context
Zedge operates a mobile content platform, principally through its app for smartphone personalization, including wallpapers, ringtones and icons. It reported one business segment. More than 90% of revenue came from advertising; other revenue primarily came from managing advertising for a third-party app publisher. At year-end, the app had 273.7 million cumulative installs and 31.7 million monthly active users (MAUs).
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $10.031 million | $11.113 million |
| Direct cost of revenue | $1.567 million | $1.299 million |
| Operating income (loss) | $(0.683) million | $1.173 million |
| Net income (loss) | $(0.611) million | $0.983 million |
| Operating cash flow | $(0.097) million | $1.842 million |
| Investing cash flow | $(1.506) million | $(1.006) million |
| Cash at year-end | $4.580 million | $5.978 million |
- Revenue fell 9.7%. Operating margin was approximately -6.8% versus 10.6% in FY2016; net margin was approximately -6.1% versus 8.8%.
- Direct costs rose 20.6%, while selling, general and administrative expense rose 9.2% to $8.468 million. Depreciation and amortization was $0.643 million; software project write-offs were $0.036 million.
- Year-end total assets were $12.531 million, total liabilities $1.909 million, stockholders’ equity $10.622 million and working capital $5.1 million. No borrowings were outstanding on the $2.5 million revolving credit facility; the company reported covenant compliance. The facility is secured by substantially all assets and matures in September 2018.
- Management said cash on hand and expected operating cash flow should meet anticipated FY2018 cash requirements. No dividend was anticipated until sustainable profitability and minimum cash reserves are achieved.
Changes and operating trends
- Revenue decline was attributed primarily to a 9.3% fall in app average revenue per MAU, to $0.0244 from $0.0269. Management cited weaker monetization in developed markets, reduced game-install activity, lower-than-expected advertising rates during the holiday quarter, and incomplete recovery after iTunes removed the Zedge app in early 2016.
- Year-end MAUs increased 1.9% to 31.7 million, but the mix shifted: emerging-market MAUs rose 17.3%, while developed-market MAUs declined 9.9%. Management noted the shift could make the audience less attractive to some advertisers. Cumulative installs rose to 273.7 million from 216.4 million.
- Three advertising customers accounted for 70% of FY2017 revenue: MoPub 43%, Google 17% and Facebook 10%. The corresponding shares in FY2016 were 45%, 20% and 13%.
- Cash declined by $1.398 million, as operating cash flow turned negative and investment in software, technology and equipment totaled $1.506 million. Public-company costs also weighed on expenses; management estimated these costs had increased annual costs by about $0.9 million.
Outlook, risks and unusual items
- Management planned continued product, technology and marketing investment, new monetization methods, and a marketplace intended to let artists earn revenue from their content. It targeted annual cost reductions of $1.5–$2.0 million, excluding marketplace investment, through workforce, infrastructure and discretionary-spending measures. These are plans, not formal financial guidance.
- In September 2017, after year-end, Zedge agreed to the Freeform Development acquihire. Aggregate consideration was $833,000: $223,000 cash and 319,632 Class B shares valued at $611,000. Former employees received 192,953 of the shares, subject to four-year vesting; the filing said accounting for the transaction was still under review.
- Key risks include dependence on mobile advertising and third-party ad platforms, customer concentration and generally cancellable advertising arrangements, Android exposure (about 92% of MAUs), app-store policies, privacy and data regulation, competition, foreign-exchange exposure, and the company’s recent losses and negative operating cash flow.
- A Norwegian tax audit covering Zedge Europe returns for 2012–2016 was ongoing; no significant issues had been identified, but additional assessments could affect results and cash flows. A 2014 copyright lawsuit by Saregama India sought approximately $1.6 million and an injunction; Zedge said material liability was remote and reported no material developments.
- Management reported effective disclosure controls and effective internal control over financial reporting as of July 31, 2017. The independent auditor gave an unqualified opinion on the financial statements; it did not attest to internal controls.
Investor verification priorities
- Track whether revenue, MAUs and monetization per user recover, particularly in developed markets, and assess the effect of the changing geographic mix.
- Monitor advertising customer concentration, platform dependence and changes in advertising rates or formats.
- Test whether planned cost savings and the artist marketplace can improve profitability and operating cash flow without undermining product growth.
- Review the final accounting and dilution impact of the Freeform transaction, plus the Norwegian tax audit and Saregama litigation developments.
- Assess available liquidity against ongoing investment needs, the secured credit facility’s covenants and maturity, and Zedge’s concentrated voting control.