Zedge, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended April 30, 2017. Amounts below are in thousands of dollars, except per-share and user metrics.
Business context
Zedge operates a mobile-personalization content platform offering ringtones, wallpapers, icons and sounds. The company reported 31.7 million monthly active users at quarter-end and 260.4 million cumulative app installs. More than 90% of revenue comes from advertising. Zedge became an independent public company after its June 2016 spin-off from IDT Corporation.
Financial performance and liquidity
| Metric | Three months ended April 30, 2017 | Three months ended April 30, 2016 | Nine months ended April 30, 2017 | Nine months ended April 30, 2016 |
|---|---|---|---|---|
| Revenue | $2,530 | $2,573 | $7,485 | $8,661 |
| Operating income (loss) | $(193) | $243 | $(419) | $1,943 |
| Net income (loss) | $(239) | $326 | $(403) | $1,762 |
| Basic and diluted EPS | $(0.02) | $0.04 | $(0.04) | $0.22 basic; $0.20 diluted |
- Revenue fell 1.7% for the quarter and 13.6% for the nine-month period. Gross margin, calculated as revenue less direct cost of revenue, was approximately 84.0% for the quarter and 84.2% year to date, versus 87.3% and 89.2%, respectively, in the prior-year periods.
- Quarterly SG&A rose 16.3% to $2,151; nine-month SG&A rose 17.0% to $6,222. Nine-month operating results included a $9 write-off of abandoned software development costs.
- Operating cash flow was $187 for the nine months, versus $2,470 in the prior-year period. Investing activities used $1,240, principally for capitalized software development and equipment; financing provided $167. Cash declined $896 to $5,082.
- At April 30, cash was $5,082, working capital was $5,298, and total assets were $12,487. Total liabilities were $2,018; the company had no borrowings under its revolving credit facility. Stockholders’ equity was $10,469.
- The revolving facility provides up to $2.5 million, subject to borrowing-base limits, is secured by substantially all assets and matures September 27, 2018. Zedge reported covenant compliance. Outstanding FX contracts reduced availability by $100.
Changes, outlook and risks
- Management attributed revenue pressure to the app’s removal from the iTunes Store in February 2016, lower activity in developed markets, reduced investment in the Game Channel, weaker web advertising and lower third-party publisher revenue. It said the company had not fully recovered from the iTunes removal.
- Quarterly app revenue per monthly active user increased 0.8% to $0.0249; for the nine-month period it declined 13.4% to $0.0240. Management cited a new Android ad unit and new advertising relationships as quarterly positives, while lower eCPMs and developed-market user declines remained concerns. Overall MAU increased 0.3% year over year, as emerging-market growth offset declines in developed markets.
- Management expects cash on hand and operating cash flow to meet anticipated cash needs for the 12 months ending April 30, 2018. It also estimated incremental annual public-company costs of $750–$900, subject to finalization. No earnings or revenue guidance was provided.
- Foreign-exchange results were volatile: the quarter included a $52 net FX loss, including $92 of losses from hedging activities. The company does not apply hedge accounting. Norway tax authorities were auditing Zedge Europe’s 2012–2016 returns; no significant issues had been identified, but additional assessments could affect results and cash flows.
- Three customers represented 45%, 17% and 11% of nine-month revenue. Two customers accounted for 45% and 10% of receivables at quarter-end. A copyright lawsuit seeking approximately $1.6 million was disclosed; the company considered material liability remote. Management reported effective disclosure controls and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether revenue, monetization and user trends improve following the iTunes relaunches and new advertising formats.
- Whether operating cash flow recovers given the year-to-date decline and planned investment in product and technology.
- The extent of customer concentration and any changes in major advertising relationships or receivable exposure.
- Results of the Norwegian tax audit and any developments in the Saregama litigation.
- Availability and covenant terms of the revolving facility, including its borrowing-base limits and FX reserves.