Zedge, Inc. — Q1 Fiscal 2021 Form 10-Q
Reporting period: Three months ended October 31, 2020; comparisons are with the three months ended October 31, 2019 unless otherwise noted. Dollar amounts are in millions except per-share data and operating metrics. Zedge operates mobile personalization and entertainment apps, including Zedge Wallpapers and Ringtones, Zedge Premium and Shortz.
Financial and operating performance
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Revenue | $3.762 | $2.033 |
| Operating income (loss) | $1.093 | $(0.745) |
| Net income (loss) | $1.045 | $(0.801) |
| Diluted earnings (loss) per share | $0.08 | $(0.08) |
| Cash from operating activities | $1.487 | $0.352 |
- Revenue rose 85.0%. Advertising revenue increased 79.1% to $2.986 million and paid subscription revenue increased 214% to $0.650 million; other revenue fell 20.8% to $0.126 million.
- Direct costs were $0.304 million, or 8.1% of revenue, versus $0.328 million, or 16.1%. The resulting gross margin was approximately 91.9%, compared with 83.9%. Operating margin was approximately 29.1%, versus negative 36.6%; net margin was approximately 27.8%, versus negative 39.4%.
- SG&A increased 3.1% to $2.006 million, but declined to 53.3% of revenue from 95.7%. Depreciation and amortization decreased 28.9% to $0.359 million.
- At October 31, cash and cash equivalents were $6.252 million, working capital was approximately $5.286 million, and total assets were $13.467 million. Current liabilities were $3.264 million and total liabilities were $3.485 million. The balance sheet included $0.218 million of loans payable and a $0.142 million insurance premium loan payable.
- Investing cash outflow was $0.215 million, primarily for capitalized software, technology development and equipment. Financing cash outflow was $0.066 million; cash increased $1.141 million to $6.252 million.
- MAU was 32.4 million, up 9.1% year over year. ARPMAU was $0.0364, up 73.3%. Paid subscribers reached approximately 609,000, versus 200,000 a year earlier; average monthly revenue per paid subscriber declined 7% to $0.39.
Changes, outlook and risks
- Management attributed stronger advertising revenue to improved ad optimization and higher advertising rates, and lower direct costs partly to migrating backend infrastructure to cloud providers. Subscription growth and monetization improvements contributed to the results.
- Emerging markets accounted for 72% of MAU, up from 66% a year earlier. Emerging-market MAU grew 17.8%, while developed-market MAU declined 8.0%; management noted that lower advertising rates in emerging markets can weigh on revenue.
- COVID-19 had disrupted advertising spend and smartphone sales, although daily advertising revenue had recovered strongly since July 2020. Management said the pandemic’s full future effects remain uncertain. It expected cash on hand and operating cash flow to cover anticipated requirements for the 12 months ending October 31, 2021; no formal revenue or earnings guidance was provided.
- The company had no borrowings under its revolving credit facility at quarter-end and was in covenant compliance. The facility’s borrowing limit had been reduced to the lesser of $2.0 million or 80% of eligible receivables; it was secured by substantially all assets. Outstanding foreign-exchange contracts totaled $1.5 million and reduced available borrowing by $0.150 million.
- The company expected all or most of its $0.218 million Paycheck Protection Program loan to be forgiven and submitted a forgiveness application on November 25, 2020; forgiveness was not reported as completed. After quarter-end, Zedge arranged an at-the-market offering of Class B shares for up to $5 million; issuance was at the company’s discretion and not assured.
- Unusual compensation expense included $0.078 million from extending an executive’s fully vested options, alongside increased stock-based compensation overall. The company reported no material changes to previously disclosed risk factors. A previously disclosed copyright lawsuit was dismissed after the injunction was lifted and the plaintiff consented.
Key facts for investors to verify
- Whether advertising growth, subscription additions and ARPMAU gains persist, particularly given the changing geographic mix of users.
- The status and outcome of PPP loan forgiveness, and whether the company sells shares under the up-to-$5-million ATM program.
- Exposure to major advertising customers and exchanges: three customers represented 57% of quarterly revenue and 73% of receivables at October 31.
- Cash generation, credit-facility availability and foreign-exchange exposure, including the effect of contracts on borrowing capacity.
- Management’s assessment of COVID-19 effects on ad budgets, smartphone sales, user growth and future estimates.