Zedge, Inc. — Q2 FY2017 Form 10-Q
Reporting period: Quarter and six months ended January 31, 2017. Financial amounts below are in U.S. dollars; income statement and cash flow amounts are in millions unless stated otherwise.
Business context
Zedge operates a mobile personalization and content platform, monetized primarily through advertising. The company reported 33.4 million monthly active users at quarter-end and 246.3 million cumulative app installs. It became an independent public company after its June 2016 spin-off from IDT Corporation.
Financial performance and liquidity
- Q2 revenue: $2.572 million, down 27.1% from $3.530 million. Six-month revenue was $4.955 million, down 18.6% from $6.089 million.
- Profitability: Q2 operating loss was $338,000 versus operating income of $1.283 million; net loss was $326,000 versus net income of $1.111 million. For six months, operating loss was $226,000 versus income of $1.701 million; net loss was $164,000 versus income of $1.436 million.
- Margins: Approximate gross margin, calculated as revenue less direct cost of revenue, was 84.0% in Q2 versus 91.2% a year earlier; for six months it was 84.3% versus 90.1%. Operating margin was approximately (13.1)% in Q2 versus 36.3%; for six months, (4.6)% versus 27.9%.
- Cash flow: Six-month operating cash flow was $205,000, compared with $1.428 million. Investing used $757,000, primarily for software development and equipment, versus $344,000. Financing provided $166,000 from stock-option exercises. Cash decreased $374,000 to $5.604 million.
- Balance sheet and debt: Cash was $5.604 million and working capital was $5.8 million at January 31, 2017. Total assets were $12.675 million and current liabilities were $1.932 million. No borrowings were outstanding on the $2.5 million revolving credit facility; the company reported covenant compliance.
Changes versus prior year and management commentary
- Revenue per monthly active user declined 26.6% in Q2 to $0.0237 and 19.2% for the six-month period to $0.0236. Management cited lower monetization, faster user growth in lower-ad-rate emerging markets, reduced investment in its Game Channel, and weaker-than-expected advertising eCPMs.
- Q2 MAUs were down 0.6% year over year, while cumulative installs rose from 189.1 million to 246.3 million. The company said it was working on content discovery, app features, marketing, and higher-value ad formats intended to support growth and monetization.
- Q2 SG&A rose 29.9% to $2.314 million; six-month SG&A rose 17.4% to $4.070 million, mainly due to payroll and benefits and accounting, tax, and legal costs. Direct costs also increased, reflecting hosting, content serving, and marketing automation services.
- Management expected cash on hand and operating cash flow to cover anticipated requirements for the 12 months ending January 31, 2018. It estimated public-company costs would add $750,000–$900,000 annually; some estimates remained preliminary.
Risks, contingencies, and unusual items
- A Norwegian tax audit covering Zedge Europe AS returns for 2012–2016 was ongoing; no significant issues had been identified, but later assessments could adversely affect results, cash flow, or financial condition.
- A copyright-infringement suit filed by Saregama India seeks approximately $1.596 million in damages and an injunction. The company believes material liability is remote.
- Three customers generated 49%, 18%, and 11% of six-month revenue. Two customers accounted for 60% and 11% of accounts receivable at January 31, 2017.
- The company uses NOK forward contracts to manage foreign exchange exposure. Q2 foreign-exchange transactions recorded a net loss of $17,000; six-month results recorded a net gain of $33,000. Derivatives are not hedge-accounted.
- The company wrote off $9,000 of capitalized software costs in the six-month period after deciding not to launch a project. It reported no material change to previously disclosed risk factors and stated disclosure controls were effective.
Important facts for investors to verify
- Whether revenue per user, advertising eCPMs, user engagement, and MAUs improve following the company’s product and ad-format initiatives.
- Whether operating cash flow can recover as revenue declines and spending on product development and public-company infrastructure continues.
- The outcome of the Norwegian tax audit and the Saregama litigation, including any resulting assessments or liabilities.
- Customer concentration, the terms and remaining availability of the secured credit facility, and potential share dilution from stock options.