Zedge, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended July 31, 2023. Although the request labels this “2023 Q4,” the filing is an annual report; selected operating indicators are also reported for the three months ended July 31, 2023. Fiscal 2022 comparisons are affected by GuruShots being consolidated only from April 13, 2022.
Business context
Zedge operates a freemium mobile personalization marketplace, the GuruShots photo-competition game, and Emojipedia. Revenue comes mainly from advertising, subscriptions, marketplace sales, and GuruShots virtual goods. The company reported two segments: Zedge Marketplace and GuruShots.
Financial and operating results
| Metric | FY2023 | FY2022 | Change / context |
|---|---|---|---|
| Revenue | $27.2 million | $26.5 million | Up 2.6%; acquisition contribution from GuruShots offset decline in Zedge Marketplace revenue |
| Operating income (loss) | $(6.9) million | $11.8 million | Operating margin approximately (25.4%) |
| Net income (loss) | $(6.1) million | $9.7 million | Net margin approximately (22.4%); diluted loss per share $(0.43) |
| Operating cash flow | $3.2 million | $11.5 million | Down $8.3 million |
| Cash and cash equivalents | $18.1 million | $17.1 million | At July 31, 2023 |
| Working capital | $16.0 million | Not stated here | At July 31, 2023 |
| Term loan | $2.0 million | None | Outstanding at July 31, 2023; $4.0 million revolving facility was also established |
Direct costs were $2.2 million, or 8.2% of revenue, compared with $1.6 million, or 6.2%, in FY2022. Selling, general and administrative expense increased 45% to $21.9 million; depreciation and amortization rose 66% to $3.3 million. The company recorded an $8.7 million non-cash GuruShots goodwill impairment. A $1.9 million reduction in contingent consideration was recorded as a benefit, leaving no contingent consideration liability at year-end.
- Revenue mix: Zedge Marketplace revenue declined 9.2% to $22.6 million. Advertising revenue fell 10.0% to $18.3 million; subscription revenue fell 6.8% to $3.5 million; other revenue was $0.8 million. GuruShots revenue was $4.6 million, versus $1.7 million for the partial FY2022 consolidation period.
- Segment operating results: Zedge Marketplace operating income declined 34% to $6.3 million. GuruShots reported a $13.2 million operating loss, including the $8.7 million impairment and $1.9 million contingent-consideration benefit; excluding those items, its loss was approximately $6.4 million.
- Cash flows: Investing activities used $2.4 million, mainly for software development and asset-acquisition payments; financing activities provided $0.4 million, including the $2.0 million term-loan advance, partly offset by share repurchases.
- Key indicators: Zedge App MAU was 30.9 million, down 3.4% year over year; ARPMAU for the quarter was $0.0552, down 5.5%. GuruShots monthly active payers were 6,444 for the quarter, down 21.5%, and ARPMAP was $50.30, down 10.3%.
Material changes and management outlook
Management attributed lower Zedge advertising and subscription revenue to weaker macroeconomic advertising demand, lower user activity in developed markets, and subscription churn. GuruShots’ payer and monetization declines were attributed primarily to Apple’s App Tracking Transparency framework limiting profitable paid user acquisition, along with macroeconomic and geopolitical pressures. The company says GuruShots has not achieved its expected growth trajectory or synergies.
Management expects cash on hand and operating cash flow to be sufficient for anticipated requirements for the twelve months following the report’s issuance. It plans to increase paid user acquisition in FY2024 if returns remain attractive, continue subscription and advertising initiatives, and pursue cross-promotion and marketplace integration. AI Art Master was in soft launch, with commercial launch targeted for late 2023 or early 2024; this is an expectation, not a commitment. No numerical revenue or earnings guidance is provided.
Risks, contingencies, and unusual items
- Advertising dependence and concentration remain significant: two customers represented 42% of FY2023 revenue, and three advertising demand partners accounted for 51% of total revenue. The filing also gives different estimates of advertising’s share of Zedge revenue in separate passages; investors should verify the stated denominator and percentage.
- Most Zedge App users are on Android, and 78% were in emerging markets at year-end, where advertising rates are lower. Changes to app-store policies, privacy restrictions, advertising demand, or user acquisition economics could pressure results.
- Following the October 7, 2023 Hamas attack and subsequent Israel-Hamas war, employees were mobilized and operations could be disrupted. Management could not estimate the conflict’s duration or full business impact; the company said it generally lacks commercial insurance for losses related to security events in the region.
- A prior GuruShots owner disputed the company’s determination that first-year earnout conditions were unmet; Zedge says it believes the claim is without merit. Separately, on September 26, 2023, Zedge noticed an indemnification claim concerning alleged inaccuracies in acquisition representations and warranties; the outcome was unknown.
- The GuruShots acquisition includes a $4 million cash retention pool payable over three years subject to continued employment. The earnout was reduced to zero and no first-year earnout payment was made or accrued.
- Management reported effective disclosure controls and effective internal control over financial reporting as of July 31, 2023. The independent auditor gave an unqualified opinion on the financial statements but was not engaged to audit internal controls.
Important facts for investors to verify
- Reconcile the filing’s inconsistent subscriber figures: 638,000 total active subscribers in the overview (including 11,000 on iOS) versus 627,000 Android subscribers in the detailed table.
- Assess whether GuruShots’ declining payers and ARPMAP, and its impairment, indicate further execution or valuation risk; review the assumptions used in the intangible-asset impairment assessment.
- Track advertising concentration, regional user mix, MAU, ARPMAU, subscription churn, and the profitability of paid user acquisition.
- Review debt covenant compliance, amortization requirements, restrictions under the Western Alliance Bank loan, and the effect of the Israel conflict on staff and operations.
- Monitor the GuruShots earnout dispute and indemnification claim, as well as delivery of management’s planned product launches and cross-selling initiatives.