Zedge, Inc. — Form 10-Q summary
Reporting period: Fiscal third quarter and nine months ended April 30, 2020. The filing was signed June 12, 2020. Amounts are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.
Business context
Zedge operates a digital publishing platform centered on its mobile personalization app, with advertising, subscriptions and Zedge Premium marketplace revenue. It reported approximately 28.8 million monthly active users (MAU) and 436.3 million cumulative installs at quarter-end. Its newer Shortz fiction app was in beta and generated immaterial revenue.
Financial performance
| Metric | Three months ended Apr. 30, 2020 | Three months ended Apr. 30, 2019 | Nine months ended Apr. 30, 2020 | Nine months ended Apr. 30, 2019 |
|---|---|---|---|---|
| Revenue | $2.079 million | $1.912 million | $6.756 million | $6.866 million |
| Operating loss | $127,000 | $1.121 million | $793,000 | $1.948 million |
| Net loss | $325,000 | $1.195 million | $1.026 million | $2.142 million |
| Loss per share, basic and diluted | $0.03 | $0.12 | $0.10 | $0.21 |
| Operating cash flow | Not separately stated | Not separately stated | $1.583 million | $471,000 |
Quarterly direct costs were 13.9% of revenue, compared with 18.5% a year earlier; nine-month direct costs were 13.7%, versus 15.0%. SG&A fell 31.5% for the quarter and 20.0% for the nine months. The filing does not report a single gross-margin line; these direct-cost ratios exclude capitalized software and technology amortization.
Quarterly revenue rose 8.7% year over year, while nine-month revenue declined 1.6%. Advertising revenue was $1.501 million for the quarter and $5.428 million for the nine months, down from $1.670 million and $6.243 million, respectively. Subscription and Zedge Premium revenue together were $578,000 for the quarter and $1.328 million for the nine months. Prior-year service revenue was $179,000 for the quarter and $528,000 for the nine months; that third-party service contract ended May 31, 2019.
Cash and cash equivalents were $4.630 million at April 30, compared with $1.609 million at July 31, 2019. Working capital was approximately $3.1 million; current assets were $5.790 million and current liabilities $2.668 million. Total liabilities were $3.031 million. The company had $218,000 outstanding under a Paycheck Protection Program (PPP) loan and no borrowings under its $2.5 million revolving credit facility. Nine-month investing cash use was $613,000 and financing cash provided was $2.177 million.
Material changes and drivers
- Active paid subscribers reached approximately 394,000, up from approximately 129,000 at July 31, 2019. Subscription revenue recognized was $455,000 for the quarter and $984,000 for the nine months; the company reported gross subscription revenue of $684,000 and $1.5 million, respectively.
- MAU fell 15.4% year over year to 28.8 million. Emerging markets accounted for 69% of MAU, versus 63% a year earlier, a mix shift that weighs on advertising rates. ARPMAU increased 32.8% year over year to $0.0220, but fell 16.2% sequentially.
- Management attributed the improved operating and net losses mainly to lower SG&A and direct costs. Headcount declined to 39 from 61 a year earlier, following a prior workforce reduction and subsequent attrition.
- The company raised $2.25 million gross, or approximately $2.1 million net, through a February registered direct offering of 1,734,459 Class B shares. Class B shares outstanding were 11.675 million at quarter-end, up from 9.854 million at July 31, 2019.
Outlook, risks and unusual items
- Management said cash on hand and expected operating cash flows should cover working-capital and capital needs for the foreseeable future, and anticipated sufficient liquidity for the 12 months ending April 30, 2021. It also described contingency plans but said it did not then expect to need them. No formal revenue or earnings guidance was provided.
- COVID-19 reduced global advertising spend and new-phone sales, affecting ad revenue, app installs and user growth. Management reported stabilizing daily advertising revenue and improving subscription sales in May 2020, but said it could not reasonably estimate the pandemic’s future impact. It shifted resources toward near-term revenue, froze hiring temporarily and reduced discretionary spending.
- Management expected short- to medium-term pressure on Zedge Premium activity as it prioritized Shortz and redesigned the app homepage. It cited potential further risks from weaker advertiser demand, collection delays, remote-work disruption, product delays and renewed pandemic impacts.
- Foreign-exchange losses were $200,000 for the quarter and $239,000 for the nine months. The quarter included a $148,000 unrealized loss on currency contracts at April 30; the derivative liability was $145,000. The company had $1.4 million of outstanding forward contracts.
- The $218,000 PPP loan bears 1% interest and is potentially forgivable subject to program requirements. The company expected most of it to be forgiven; any unforgiven balance was due five years after inception. The revolving credit facility matured September 26, 2020 and was secured by substantially all company assets; there were no revolver borrowings at quarter-end.
- The Saregama India copyright case was dismissed after the injunction was lifted and the plaintiff consented. Management said it did not expect other ordinary-course legal proceedings to materially affect results, cash flows or financial condition.
Key facts for investors to verify
- Whether May’s subscription and advertising trends persisted, and how COVID-19 affected subsequent revenue, cash generation and MAU.
- Subscriber retention, subscription gross-versus-recognized revenue, and the effect of platform fees and deferred revenue.
- Advertising customer concentration: two customers generated 59% of nine-month revenue; three accounted for 80% of quarter-end receivables.
- PPP loan forgiveness status and the revolving credit facility’s maturity, renewal or replacement.
- Execution and timing of the Shortz strategy and app redesign, including the expected impact on Premium revenue.