Zedge, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended January 31, 2023. Unless otherwise noted, financial amounts below are in U.S. dollars; statements present amounts in thousands. The filing was signed March 17, 2023.
Business context and reporting period
Zedge operates the Zedge digital-content marketplace, the GuruShots competitive photography game, and Emojipedia. This is the first fiscal year in which the company reports Zedge App and GuruShots as separate segments; GuruShots was acquired in April 2022. Zedge reported 32.2 million Zedge App monthly active users in the quarter, down 11.3% year over year, and approximately 654,000 active paid subscribers at quarter-end.
Financial performance
| Metric | Three months ended Jan. 31, 2023 | Year-over-year change | Six months ended Jan. 31, 2023 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $6.983 million | +1.0% | $13.883 million | +7.3% |
| Operating income | $1.458 million | −53.1% | $1.257 million | −77.9% |
| Net income | $1.606 million | −30.9% | $1.437 million | −67.2% |
| Basic/diluted EPS | $0.11 / $0.11 | Prior year: $0.16 / $0.16 | $0.10 / $0.10 | Prior year: $0.31 / $0.29 |
Quarterly reported operating margin was approximately 20.9%, compared with 44.9% a year earlier. Results included a $1.793 million quarterly gain from a reduction in the fair value of GuruShots contingent consideration; the corresponding six-month gain was $1.943 million. The gain reflects a lower likelihood of achieving certain acquisition milestones, rather than revenue from operations.
Quarterly Zedge App revenue fell 17.1% to $5.735 million, while GuruShots contributed $1.248 million. Zedge App advertising revenue declined 19% in the quarter and 14% for the six-month period, which management attributed to lower active users in developed markets and weaker advertising rates. Paid subscription revenue fell 8% in both comparisons. Quarterly Zedge Premium net revenue was down 5%.
Direct costs were $632,000 in the quarter, or 9.1% of revenue, versus 4.9% a year earlier. SG&A rose 89% to $5.871 million, and depreciation and amortization rose 126% to $815,000. Management attributed much of the expense increases to GuruShots, including its infrastructure, staffing, user acquisition, stock compensation, and acquired intangible amortization. Segment results show Zedge App operating income of $1.563 million for the quarter and GuruShots operating loss of $105,000; for six months, the reported segment table shows Zedge App operating income of $2.935 million and GuruShots operating loss of $1.678 million.
Cash flow, balance sheet, debt, and liquidity
For the six months, operating cash flow was $1.121 million, down from $5.679 million a year earlier. Investing cash outflow was $1.683 million, including $962,000 of final Emojipedia acquisition payments and $668,000 of capitalized software and development costs. Financing cash inflow was $993,000, including a $2 million term-loan advance and $989,000 of treasury-stock purchases. Cash increased by $374,000 to $17.459 million.
At January 31, 2023, working capital was $14.221 million (current assets of $21.581 million less current liabilities of $7.360 million), compared with $11.235 million at July 31, 2022. Total liabilities were $9.343 million and stockholders’ equity was $45.907 million. The balance sheet carried a $1.983 million term loan, net of financing costs; the company had borrowed $2 million principal under its new facility. The October 2022 agreement provides for a term loan facility of up to $7 million and a $4 million revolving facility, subject to terms and covenants. Management said cash on hand and operating cash flow should cover anticipated needs through the twelve months ending March 17, 2024.
Changes, outlook, risks, and unusual items
- Revenue growth reflects GuruShots’ contribution, offset by contraction in the established Zedge App business. Zedge App ARPMAU declined 13.0% to $0.0523; emerging markets remained 77% of MAU, which management says monetize less effectively.
- GuruShots quarterly monthly active payers were 7,943 and ARPMAP was $52.40, down 14.9% and 15.2%, respectively, from the filing’s pro forma prior-year comparison. Management cited macroeconomic conditions and lower payer activity and monetization.
- Because of gaming-market conditions and user-acquisition results, the company said it was not on track to meet the minimum investment for the first GuruShots earnout period and did not believe additional investment would maintain the required return on ad spend. Contingent consideration was reduced to zero at January 31, 2023.
- The company outlined product initiatives for GuruShots, including onboarding and game-economy changes, and potential cross-promotion with Zedge. These are plans, not quantified financial guidance; the filing gives no specific revenue or earnings forecast.
- Subsequent to quarter-end, Zedge discontinued its Shortz app on March 8, 2023 and expected to write off approximately $124,000 of remaining capitalized development costs in the following quarter. It also disclosed a potential indirect risk from the March 2023 Silicon Valley Bank collapse through customers’ ability to pay or vendors’ ability to perform; Zedge said it had no deposits at SVB or Signature Bank.
- Management identified macroeconomic and geopolitical uncertainty, acquisition integration and synergy execution, and advertising and user monetization trends as risks. The filing says ordinary-course legal proceedings are not expected to have a material adverse effect. Management reported disclosure controls were effective as of January 31, 2023.
Most important facts for investors to verify
- Whether Zedge App MAU, advertising rates, subscriptions, and ARPMAU stabilize, and whether GuruShots payer activity and monetization improve.
- How much of reported operating income and net income depends on the non-cash contingent-consideration remeasurement gain, and how ongoing GuruShots expenses compare with revenue.
- Cash conversion, working-capital movements, buybacks, and planned software investment relative to management’s liquidity outlook.
- Compliance with the new loan agreement’s debt-service and leverage covenants, remaining borrowing availability, interest costs, and repayment requirements. The filing text does not clearly state compliance with the new facility’s covenants as of January 31, 2023.
- The earnout and retention obligations, including the cash and stock retention pool, and the effect of acquisition performance on future costs and dilution.
- The filing’s MD&A narrative describes GuruShots operating losses of $1.9 million for the quarter and $3.5 million for six months, whereas its segment table reports losses of $105,000 and $1.678 million, respectively. Verify the differing presentations and their underlying basis.