Zedge, Inc. — Form 10-Q Summary
Business context and period: Fiscal 2019 first quarter, the three months ended October 31, 2018, compared with the three months ended October 31, 2017. Zedge operates a mobile content platform; advertising generated about 90% of revenue. The filing reports more than 34 million monthly active users (MAU) and 351.3 million cumulative app installs.
Financial results and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $2.381 million | $2.659 million |
| Gross profit / margin | $2.031 million / 85.3% | $2.287 million / 86.0% |
| Operating loss / margin | $581,000 / (24.4%) | $842,000 / (31.7%) |
| Net loss | $706,000 | $820,000 |
| Basic and diluted loss per share | $0.07 | $0.08 |
| Cash from operations | $921,000 | $106,000 |
| Capitalized development costs and equipment | $445,000 | $488,000 |
Cash and cash equivalents were $3.561 million at October 31, 2018, up from $3.408 million at July 31, 2018. Working capital was $3.0 million. Current assets were $5.178 million and current liabilities $2.133 million. No borrowings were outstanding under the $2.5 million revolving facility; the company reported covenant compliance. Outstanding foreign-exchange contracts totaled $5.0 million and reduced available borrowing by $550,000. The filing states the company expected cash on hand and operating cash flow to cover anticipated cash requirements for the following 12 months.
Changes versus prior-year quarter
- Revenue fell 10.5%, primarily as user mix shifted toward emerging markets with lower advertising rates. MAU rose 3.6% year over year, but average revenue per MAU declined 17.9%, to $0.0210 from $0.0256.
- Advertising revenue declined to $2.198 million from $2.433 million; service revenue increased to $171,000 from $149,000. Zedge Premium revenue remained insignificant.
- Advertising eCPMs decreased 12.6% year over year. Management cited lower rates in emerging markets and a strategy prioritizing viewed ad impressions per user.
- SG&A decreased 22.3%, mainly because the prior-year quarter included Freeform transaction and workforce-reduction costs. Excluding those items, SG&A was flat year over year. Depreciation and amortization rose 93.0%, primarily as completed software projects entered amortization.
- Operating loss narrowed to $581,000 from $842,000, while net loss improved to $706,000 from $820,000. Foreign-exchange losses increased substantially, to $129,000 in the income statement from $1,000; the derivative note reports a $150,000 loss on forward contracts.
Outlook, commentary, and risks
- Management planned to develop Zedge Premium, broaden content and artist participation, test monetization formats, and pursue user-growth initiatives. It expected additional hiring, particularly in Lithuania. No quantitative revenue or earnings guidance was provided.
- Management attributed sequential revenue and MAU declines partly to seasonality and limited growth in new smartphone sales. Sequential MAU fell 0.5%, from 34.8 million to 34.6 million; well-developed-market users declined while emerging-market users increased.
- In August 2018, Zedge invested $250,000 for less than 1% of TreSensa and entered a playable-ad distribution agreement. The maximum stated loss on the investment was $250,000; no impairment was recorded.
- Revenue and receivables were concentrated among a small number of advertising customers: four customers represented 79% of quarterly revenue, and three represented 76% of receivables at quarter-end. A shift toward lower-rate markets and advertising-price declines remain business risks.
- Foreign-exchange exposure, particularly to the Norwegian krone, affected results despite forward contracts. The company recorded a $133,000 fair-value liability for forward contracts at quarter-end.
- A Norwegian tax audit covering 2012–2016 was ongoing; no significant issues had been identified, but assessments could exceed accrued amounts. Saregama’s copyright lawsuit seeks approximately $1.6 million; management considered material liability remote. A patent complaint filed in October 2018 was voluntarily dismissed without prejudice in November.
- The company adopted the new revenue-recognition standard on August 1, 2018; the reported adoption impact was not material. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether user growth and monetization in emerging markets can offset declining users and higher advertising rates in developed markets.
- Whether Zedge Premium and playable ads generate meaningful revenue relative to their development and staffing costs.
- Customer and receivables concentration, advertising eCPM trends, and the company’s ability to sustain operating cash generation.
- Foreign-exchange losses, forward-contract exposure, and the effect of reserves on borrowing availability.
- Updates on the Norwegian tax audit and the Saregama litigation, including any changes to estimated exposure.