Zedge, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended January 31, 2019. Fiscal year ends July 31. Amounts below are in U.S. dollars; financial statement figures are in thousands unless noted.
Business context
Zedge operates a global mobile content platform, principally monetized through advertising. It reported more than 36 million monthly active users (MAU) and 367.9 million cumulative app installs at January 31, 2019. Advertising generated about 90% of revenue. Zedge Premium, its creator marketplace, remained at an early stage and generated insignificant revenue in the quarter.
Financial results and liquidity
| Metric | Three months ended Jan. 31, 2019 | Three months ended Jan. 31, 2018 | Six months ended Jan. 31, 2019 | Six months ended Jan. 31, 2018 |
|---|---|---|---|---|
| Revenue | $2,573 | $3,045 | $4,954 | $5,704 |
| Operating loss | $(245) | $(122) | $(826) | $(964) |
| Net loss | $(240) | $(173) | $(946) | $(993) |
| Loss per share, basic and diluted | $(0.02) | $(0.02) | $(0.09) | $(0.10) |
| Operating cash flow | Not separately provided | Not separately provided | $536 | $253 |
- Direct costs were 12.7% of quarterly revenue versus 11.7% a year earlier; for the six-month periods, 13.7% versus 12.8%. Corresponding revenue less direct-cost margins were 87.3% and 86.3%, respectively, compared with 88.3% and 87.2%.
- Cash and cash equivalents were $2.704 million at January 31, down from $3.408 million at July 31, 2018. Working capital was $2.867 million. Six-month investing cash outflow was $1.166 million, including $916,000 of capitalized software, technology development and equipment spending and a $250,000 TreSensa investment.
- Total liabilities were $1.606 million; no borrowings were outstanding under the $2.5 million revolving credit facility. The facility matures September 26, 2020; the company reported covenant compliance. Foreign-exchange contracts reduced available borrowing by $362,500.
- Total assets were $10.839 million and stockholders’ equity was $9.233 million at January 31, 2019.
Changes versus prior comparable periods
- Revenue declined 15.5% in the quarter and 13.1% for the six months. Advertising revenue fell to $2.374 million from $2.785 million in the quarter and to $4.572 million from $5.218 million for the six months.
- Management attributed the revenue decline mainly to user mix shifting toward emerging markets with lower advertising rates, fewer users in developed markets, and discontinuation of certain monetization mechanisms. Overall MAU rose 3.4% year over year, while developed-market MAU fell about 11.8%; emerging-market users grew 16.3%.
- Quarterly average revenue per MAU declined 21.2% to $0.0215 from $0.0273. SG&A fell 16.4% in the quarter and 19.6% for the six months, reflecting lower compensation and prior-year severance and Freeform-related costs. Depreciation and amortization increased as completed software projects began amortizing.
- Despite lower revenue, the six-month net loss improved to $946,000 from $993,000. Quarterly net loss widened to $240,000 from $173,000, and operating loss widened to $245,000 from $122,000.
Outlook, commentary, and risks
- Management said cash on hand and expected operating cash flow should meet anticipated cash requirements for the 12 months ending January 31, 2020. No specific revenue or earnings guidance was provided.
- Zedge expanded Premium to all Android users in January 2019 and is pursuing new content and monetization initiatives. It began testing a paid option to remove unsolicited ads; early take rates were described as encouraging, but no results or revenue target were quantified.
- Management is continuing backend infrastructure redesign, which it expects to produce further cost savings, and is investing in user growth, content recommendations, gamification, and Premium. It noted that developed markets have higher advertising rates than emerging markets.
- Customer concentration is significant: four customers accounted for 76% of six-month revenue; four accounted for 84% of receivables at January 31. The filing identifies the customers as leading advertising exchanges, but does not provide their names in the concentration disclosure.
- Foreign exchange remains a notable exposure: six-month foreign-exchange transaction losses were $164,000, including hedging effects, compared with $45,000 a year earlier. Forward contracts had an $86,000 liability at January 31.
- The company disclosed a Saregama copyright lawsuit seeking approximately $1.6 million and an injunction; management considers material liability remote, with no material update reported. Tellagemini’s patent complaint was voluntarily dismissed without prejudice in November 2018.
- Norwegian tax authorities completed an audit of 2012–2016 returns with no changes, but recommended replacing the company’s cost-plus transfer-pricing method with a profit-split method; Zedge was evaluating the recommendation.
- The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. It reported no other material changes to the risk factors in its prior Form 10-K.
Important facts for investors to verify
- Whether MAU growth can recover in higher-rate developed markets and arrest declining revenue per user.
- Progress, user adoption, and monetization of Zedge Premium and the paid ad-removal test; Premium revenue was still insignificant.
- Cash consumption and software-development spending, given the $704,000 six-month cash decline and management’s 12-month liquidity assessment.
- Exposure to concentrated advertising customers and the effect of foreign-exchange movements and forward contracts.
- Potential consequences of the Norwegian transfer-pricing recommendation and developments in the Saregama litigation.