Zedge, Inc. — FY2022 Form 10-K Summary
Reporting period: Fiscal year ended July 31, 2022. Although the request identifies 2022 Q4, this is an annual filing; the supplied text does not provide a clear standalone fourth-quarter income statement or cash-flow statement. All amounts below are U.S. dollars unless stated otherwise.
Business context and reporting period
Zedge operates a mobile personalization marketplace (Zedge), emoji-information websites (Emojipedia), and the GuruShots skill-based photography game. The company reports one operating segment. FY2022 includes Emojipedia following its August 2021 acquisition and GuruShots only from its April 12, 2022 acquisition date.
- Zedge App had 32.0 million monthly active users (MAU) at July 31, 2022, down 7.0% year over year; the app had nearly 569 million lifetime installs.
- Across the portfolio, the company reported approximately 40 million MAU. It had 692,000 active Zedge subscribers at year-end.
Financial and operating performance
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | $26.545 million | $19.569 million | +35.6% |
| Income from operations | $11.838 million | $7.803 million | +51.7% |
| Net income | $9.714 million | $8.248 million | +17.8% |
| Operating cash flow | $11.492 million | $10.130 million | +$1.362 million |
| Cash and cash equivalents at year-end | $17.085 million | $24.908 million | -$7.823 million |
- Revenue mix: Advertising was $18.883 million (+20%) and 71.1% of revenue; subscriptions were $3.741 million (+13%); GuruShots virtual goods contributed $1.673 million after acquisition; and other revenue was $2.248 million. Zedge Premium net revenue was $827,000, up 62%.
- Margins and costs: Direct costs were 6.2% of revenue, versus 6.1% a year earlier. SG&A rose 61.8% to $15.061 million and increased to 56.7% of revenue from 47.6%; depreciation and amortization rose 55.9% to $1.966 million. Reported operating margin was approximately 44.6%, including a material contingent-consideration remeasurement benefit described below.
- Liquidity: Working capital was $11.2 million at July 31, 2022. Management expected cash on hand and operating cash flow to cover anticipated needs for the 12 months following the report’s issuance.
- Debt: No balance was outstanding on the existing revolving facility at July 31, 2022. After year-end, a new bank agreement provided a $7 million term-loan facility and a $4 million revolving facility; $2 million was advanced at closing on October 28, 2022, with up to $5 million of additional term borrowing available subject to the agreement. Interest is Prime plus 0.5%, subject to a 4% floor, and the agreement includes financial and restrictive covenants.
Material changes and unusual items
- GuruShots was acquired for approximately $18 million in cash at closing, with earnout consideration of up to $16.8 million. It contributed approximately $1.7 million in revenue and an estimated $1.7 million net loss from acquisition through year-end. The company’s unaudited pro forma FY2022 revenue and net income, assuming the acquisition occurred August 1, 2021, were $31.506 million and $7.111 million, respectively; these are not reported actual results.
- A $3.961 million reduction in the estimated fair value of GuruShots contingent consideration was recorded as a benefit in operating results, reflecting a lower likelihood of certain earnout milestones. This materially increased reported operating income.
- AppLovin paid a one-time $2 million integration bonus for the advertising-platform migration. The company recognized $333,000 in FY2022 and deferred $1.7 million for recognition over an estimated 24-month service period. The migration delayed other product work; management said most delayed features had been rolled out by September 30, 2022.
- Cash used in investing activities was $18.950 million, primarily reflecting acquisitions. Advertising revenue increased, but dependence on advertising remained substantial. In-app purchases and subscriptions declined 3.7% in aggregate, and active subscribers at year-end fell 8% from 752,000 to 692,000, despite higher average subscribers during the year.
- Revenue concentration remained significant: two customers accounted for 28% and 15% of FY2022 revenue. The filing also says four advertising demand partners generated 83% of revenue; three partners, mainly Google, Facebook and AppLovin, represented 63%.
Outlook, commentary, and risks
The filing gives no quantified revenue or earnings guidance. Management’s stated priorities include growing users profitably, improving monetization and subscriptions, developing Zedge Premium and NFTs, increasing Zedge marketing, adding advertising to GuruShots, and pursuing cross-product opportunities. These plans are subject to execution and market risks.
- Advertising exposure, reliance on a small number of demand partners and geographies, and the shift of Zedge users toward lower-ad-rate emerging markets could pressure revenue and profitability. Emerging markets represented 77% of Zedge App MAU, compared with 75% a year earlier; India represented approximately 28%.
- Apple privacy changes and other platform-policy, data privacy, and measurement changes may reduce ad targeting and effectiveness or increase user-acquisition costs. The business also depends on Google Play and Apple’s App Store for distribution and payments.
- Management identified risks from user attrition, competition, acquisition integration and synergies, economic and advertising-market conditions, NFT volatility, foreign-exchange exposure, cybersecurity, and geopolitical instability affecting operations in Israel, Lithuania, and Norway. The company disabled its products in Russia and Belarus following the invasion of Ukraine.
- GuruShots commitments include a $4 million cash retention pool over three years and minimum user-acquisition investment obligations tied to earnout conditions and return on ad spend.
- The company reported that its previously identified material weakness in tax-related controls was remediated and that disclosure controls and internal control over financial reporting were effective as of July 31, 2022. The financial-statement audit opinion was unqualified; the auditor did not express an opinion on internal-control effectiveness.
Key facts for investors to verify
- How much of FY2022 operating income and net income is attributable to the $3.961 million contingent-consideration benefit and the AppLovin integration bonus, and what are comparable underlying earnings?
- Whether Zedge can stabilize MAU and subscriber counts, improve the geographic mix of users, and sustain advertising rates and demand-partner relationships.
- GuruShots’ post-acquisition performance, earnout likelihood, required user-acquisition spending, retention costs, and progress toward expected synergies.
- Cash, borrowings, covenant headroom, and repayment terms under the October 2022 bank agreement, including the impact of any additional draws.
- Customer and advertising-partner concentration, as well as the status and financial effect of the disclosed privacy, platform, foreign-exchange, and geopolitical risks.