Zedge, Inc. — Q1 Fiscal 2023 Form 10-Q
Reporting period: Three months ended October 31, 2022; filed December 15, 2022. Amounts below are in U.S. dollars. The quarter is not necessarily indicative of full-year results.
Business context
Zedge operates the Zedge digital personalization marketplace and, following its April 2022 acquisition, the GuruShots competitive photography game. Emojipedia, acquired in 2021, is also part of the business. Beginning this quarter, Zedge reports two segments: Zedge App and GuruShots App.
Financial results and liquidity
| Metric | Q1 FY2023 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $6.90 million | $6.03 million | +14.5% |
| Operating income (loss) | ($0.20 million) | $2.59 million | Down $2.79 million |
| Net income (loss) | ($0.17 million) | $2.06 million | Down $2.22 million |
| Diluted loss/earnings per share | ($0.01) | $0.14 | |
| Cash from operating activities | $1.08 million | $2.69 million | Down $1.61 million |
| Cash and cash equivalents at period end | $18.42 million | $27.25 million |
Operating margin was approximately -2.9%, compared with 42.9% in the prior-year quarter. Direct costs were 9.2% of revenue, versus 5.1%. Selling, general and administrative expense rose 113% to $5.83 million (84.4% of revenue), and depreciation and amortization rose 99% to $0.79 million.
At October 31, 2022, current assets were $21.50 million and current liabilities were $7.78 million. The balance sheet therefore implies working capital of about $13.72 million; MD&A reports $13.4 million. The company reported a $2.0 million term-loan balance, $44.04 million in stockholders’ equity, and no outstanding revolving-credit borrowings. Cash exceeded reported term debt by about $16.4 million.
Material changes and segment performance
- Revenue growth primarily reflects $1.33 million from GuruShots, included in the quarter after its acquisition. Zedge App revenue fell 7.6% to $5.57 million.
- Zedge App operating income declined 47% to $1.37 million, attributed to lower revenue and higher expenses. GuruShots reported a $1.57 million operating loss, with increased paid user-acquisition spending and lower monthly active payers and revenue per payer cited as factors.
- Zedge advertising revenue declined 13%, which management attributed to lower activity in developed markets and lower advertising rates. Zedge App monthly active users fell 6.7% year over year to 31.9 million; average revenue per monthly active user increased 0.8% year over year but declined 8.0% sequentially, which the company attributed to seasonality.
- GuruShots monthly active payers were down 14.1% year over year to 8,690, and average revenue per payer declined 15% to $51. These comparisons are presented as pro forma because Zedge acquired GuruShots after the prior-year quarter.
- Stock-based compensation increased to $0.59 million from $0.32 million. The company repurchased 123,595 shares for approximately $0.29 million under its buyback program during the quarter.
Cash flow, debt and outlook
Investing activities used $1.31 million, including the $0.96 million final payment for the Emojipedia asset acquisition and $0.35 million in capitalized software, technology development and equipment spending. Financing activities provided $1.67 million, including the $2.0 million term-loan advance, partly offset by financing costs and share repurchases.
On October 28, 2022, Zedge amended its Western Alliance Bank agreement to establish a $7 million term-loan facility and a $4 million revolving facility. The term loan has a four-year term; the revolver has a two-year term. Interest is at prime plus 0.5%, subject to a 4% prime-rate floor. The company drew $2 million, with a further $5 million available for drawdown during the following 24 months, subject to agreement terms. The facilities are secured by substantially all company and subsidiary assets and include financial and other covenants, including a minimum 1.25:1 debt-service coverage ratio.
Management said cash on hand and operating cash flow should be sufficient for anticipated cash needs through December 15, 2023. The filing gives no specific revenue or earnings guidance. GuruShots earnout payments may total up to $16.8 million, subject to performance milestones; their fair value was $1.79 million at quarter-end. The company also has a cash retention commitment of up to $4 million over three years, subject to continued employment, as well as equity-based retention awards.
Management commentary, risks and contingencies
Management described plans to improve GuruShots onboarding, test subscription features, develop the game economy and potentially add advertising. It also expects to explore cross-promotion and other product synergies between GuruShots and Zedge. These are initiatives, not quantified financial forecasts.
- Management cited inflation, rising interest rates, reduced consumer confidence, geopolitical conditions and the continuing war in Ukraine as sources of uncertainty. It terminated or suspended certain Russia- and Belarus-related client and vendor relationships subject to sanctions and said the associated revenue was not material.
- The company faces integration and execution risks related to acquisitions, including realizing GuruShots synergies and meeting performance targets. Advertising demand, user engagement, regional monetization differences and foreign-exchange movements are also relevant risks.
- Foreign-exchange hedges generated a $0.12 million loss in the quarter; the reported net foreign-exchange loss was $0.08 million. The company had $3.2 million of outstanding foreign-exchange contracts at October 31.
- Management said it did not expect ordinary-course legal proceedings to have a material adverse effect. No material subsequent events were reported, and no material changes to previously disclosed risk factors were identified.
Important facts for investors to verify
- Reconcile the subscription-revenue figures: Note 2 lists $391,000 for the quarter, while MD&A lists $891,000. The $891,000 figure reconciles with the disclosed Zedge App revenue total; the filing text does not explain the conflicting Note 2 value.
- Reconcile working capital: MD&A reports $13.4 million, while the balance-sheet current-asset and current-liability figures imply approximately $13.72 million.
- Monitor Zedge user activity and monetization, especially the decline in developed-market users and the shift toward emerging markets, which management says monetize less effectively.
- Track GuruShots payer growth, revenue per payer, user-acquisition spending and return on ad spend, alongside the acquisition earnout and retention obligations.
- Review compliance with loan covenants and the terms and availability of undrawn facilities; the filing reports $2.0 million drawn against a $7.0 million term-loan commitment and a separate $4.0 million revolving facility.