Zedge, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2022, the three months ended October 31, 2021. Comparisons are with the three months ended October 31, 2020, unless otherwise noted. Financial statement amounts are in U.S. dollars.
Business context
Zedge operates a digital content platform that includes the Zedge app, Shortz and, beginning August 1, 2021, Emojipedia. Its Zedge app monetizes users primarily through advertising, paid subscriptions and Zedge Premium. The company reported approximately 34.2 million Zedge app monthly active users (MAU) at quarter-end; this figure excludes Emojipedia.
Financial performance and liquidity
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $6.028 million | $3.762 million | +60.2% |
| Operating income | $2.588 million | $1.093 million | +136.8% |
| Net income | $2.055 million | $1.045 million | +96.7% |
| Diluted EPS | $0.14 | $0.08 | Up |
| Cash from operating activities | $2.694 million | $1.487 million | Up $1.207 million |
Operating margin was approximately 42.9%, versus 29.1% a year earlier; net margin was approximately 34.1%, versus 27.8%. Revenue comprised advertising of $4.569 million (+53.0%), paid subscriptions of $0.960 million (+47.7%), and other revenue of $0.499 million (+296.0%). Advertising remained the largest source, at 75.8% of revenue.
Cash and cash equivalents were $27.249 million at October 31, 2021, compared with $24.908 million at July 31, 2021. Working capital was $23.7 million. Management expected cash on hand and operating cash flow to cover anticipated cash requirements for the 12 months ending October 31, 2022. There were no borrowings under the revolving credit facility; it provided for up to $2.0 million of advances, subject to borrowing conditions. Total liabilities were $6.931 million.
Investing activities used $0.188 million and financing activities used $0.232 million. The financing outflow primarily reflected shares repurchased to satisfy employee tax withholding. The company reported no material off-balance-sheet arrangements.
Material changes and operating trends
- Revenue growth was supported by higher advertising rates and improved ad optimization, as well as growth in subscriptions and other revenue. Direct costs increased only 2.0%; as a share of revenue, they declined to 5.1% from 8.1%.
- SG&A rose 36.2% to $2.732 million, mainly due to higher compensation and bonuses, stock-based compensation, professional fees and software-as-a-service expenses. SG&A fell to 45.3% of revenue from 53.3%.
- Zedge app MAU increased 5.6% year over year to 34.2 million, but declined 0.6% sequentially. Emerging-market MAU grew 11.2% year over year, while developed-market MAU declined 8.5%; emerging markets represented 75% of app MAU, up from 72%.
- Average revenue per Zedge app MAU rose 46.4% year over year to $0.0533 and 6.4% sequentially. Active paid subscriptions reached approximately 763,000, up 25% year over year, although quarterly net additions fell to 11,000 from 105,000.
- On August 1, 2021, Zedge acquired substantially all assets of Emojipedia for estimated consideration of $6.9 million. The purchase price was allocated to intangible assets, with a 15-year estimated useful life; $2.094 million remained payable at quarter-end. The final purchase price determination was pending and was not expected to differ materially. The company said the acquisition did not materially affect consolidated operating results.
Outlook, risks and unusual items
- Zedge expected to launch subscriptions on iOS in fiscal 2022 and increase paid user-acquisition spending while monitoring returns. No numerical revenue or earnings guidance was provided.
- Management identified the growing proportion of users in emerging markets as a monetization headwind because advertising rates and subscription pricing are lower there. The filing also discusses uncertainty over the continuing effects of COVID-19 on user growth, advertising demand and operations.
- Advertising revenue and receivables were concentrated: three customers accounted for 25%, 21% and 12% of quarterly revenue, and three customers represented 31%, 29% and 10% of receivables at quarter-end. The customers were advertising exchanges operated by leading companies.
- The income-tax provision was $0.536 million, versus $0.008 million a year earlier. Management estimated a 23.1% effective tax rate for fiscal 2022; a discrete restricted-stock tax item contributed to a 20.7% effective rate for the quarter.
- Disclosure controls and procedures were reported as ineffective at October 31, 2021 because of a previously identified material weakness concerning controls over evaluation of the valuation allowance on deferred tax assets. Management described an additional review step by an outside accounting firm and said it would continue monitoring remediation.
- The company reported no material change to previously disclosed risk factors. It stated that ordinary-course legal proceedings were not expected to materially adversely affect results, cash flows or financial condition.
Most important facts for investors to verify
- Whether the strong revenue and margin growth persists, particularly given the shift in user mix toward lower-monetizing emerging markets and the decline in developed-market MAU.
- Whether subscription net additions recover, and whether paid user acquisition and the planned iOS subscription launch generate returns sufficient to support growth.
- Emojipedia’s contribution to revenue and cash generation, the final acquisition consideration, and the value and useful life of acquired intangible assets.
- Advertising-customer concentration and collection exposure, alongside the disclosed reliance on advertising for most revenue.
- Progress in remediating the material weakness in internal controls over income-tax accounting and whether disclosure controls become effective.
- Cash-flow performance and liquidity, including payment of the remaining Emojipedia consideration and availability of the revolving facility, which matures September 26, 2022.