Zedge, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended April 30, 2023; fiscal year ends July 31. Financial statements are unaudited. Unless noted otherwise, amounts below are U.S. dollars.
Business context and reporting period
Zedge operates the Zedge App digital content marketplace, the GuruShots photography game, and Emojipedia. The company reports two segments: Zedge App and GuruShots. GuruShots was acquired in April 2022, so reported comparisons with 2022 are not fully comparable because it was consolidated only from April 13, 2022.
Key financial results
| Metric | Three months ended Apr. 30, 2023 | Nine months ended Apr. 30, 2023 |
|---|---|---|
| Revenue | $6.73 million, up 8.0% | $20.61 million, up 7.5% |
| Operating income (loss) | $(8.41) million | $(7.16) million |
| Net income (loss) | $(7.69) million | $(6.26) million |
| Diluted loss per share | $(0.55) | $(0.44) |
| Operating cash flow | Not presented for the quarter | $2.74 million, versus $11.31 million in 2022 |
Quarterly revenue growth included GuruShots revenue of $1.09 million, while Zedge App revenue declined 5.1% to $5.64 million. The nine-month revenue comparison is also affected by GuruShots’ partial-period inclusion in 2022.
- Zedge App: Quarterly advertising revenue fell 5.6% to $4.57 million; subscription revenue fell 8.6% to $0.83 million. Monthly active users were 32.0 million, down 0.3%, and average revenue per monthly active user was $0.0531, up 1.5%.
- GuruShots: Quarterly revenue was $1.09 million. Monthly active payers fell 21.3% to 6,817 and average revenue per monthly active payer fell 10.7% to $53.20, on the company’s pro forma comparison.
- Margins and expenses: Direct costs were 7.4% of quarterly revenue versus 6.4% a year earlier. Selling, general and administrative expense was 74.6% of quarterly revenue versus 65.2%; depreciation and amortization was 13.3% versus 6.8%. Higher costs largely reflect GuruShots, acquisition-related amortization and increased compensation, marketing and user-acquisition spending.
- Unusual items: A non-cash $8.73 million goodwill impairment charge was recorded for GuruShots after an interim impairment test. Nine-month results also include a $1.94 million gain from a reduction in the fair value of contingent acquisition consideration.
Liquidity, debt and cash flow
At April 30, 2023, cash and cash equivalents were $18.07 million, current assets were $22.02 million, and current liabilities were $7.26 million, for working capital of approximately $14.76 million. Total liabilities were $9.46 million. The term loan had $2.0 million principal outstanding, reported net of financing costs at $1.98 million. Management said cash on hand and operating cash flow were expected to meet anticipated cash requirements for the 12 months ending June 14, 2024.
Nine-month operating cash flow decreased by $8.57 million year over year, primarily reflecting the net loss and changes in assets and liabilities. Investing cash outflow was $2.13 million, including $1.11 million of capitalized software and technology development costs. Financing cash flow was positive $0.53 million, including a $2.0 million loan advance and $1.45 million used for treasury-stock purchases.
After quarter-end, on May 11, 2023, Zedge amended its bank agreement, reducing the maximum term-loan availability from $7 million to $2 million and agreeing to maintain a bank cash deposit of at least 1.05 times indebtedness to the bank. The filing states the amendment reduced aggregate term-loan and revolving-credit capacity from $11 million to $6 million. The loan is secured by substantially all company and subsidiary assets and carries financial covenants.
Outlook, commentary and risks
- Management expects a fiscal 2023 effective tax rate of approximately 24% before discrete items; discrete third-quarter items resulted in an approximately 10% net effective tax rate for the quarter.
- Management described initiatives for GuruShots involving gameplay, onboarding, game-economy improvements and advertising tests. It also plans to pursue cross-promotion between GuruShots and the Zedge marketplace. These are plans, not quantified financial guidance.
- GuruShots continued to underperform, with lower revenue from existing users and fewer new users. Management said industry, macroeconomic and geopolitical challenges negatively affected return on advertising spend; the company did not make the minimum user-acquisition investment for the first earnout year.
- The company cited weaker advertising economics, lower monetization in emerging markets, foreign-exchange exposure, macroeconomic and geopolitical uncertainty, and acquisition integration and performance risks. Three customers represented 52% of nine-month revenue. Management reported no material change to previously disclosed risk factors.
- Zedge discontinued its Shortz app in March 2023 and wrote off approximately $124,000 of remaining capitalized development costs. It repurchased 680,594 shares for approximately $1.4 million during the nine-month period. Management does not anticipate dividends until sustainable profitability and minimum cash reserves are achieved.
- The company reported that disclosure controls were effective as of April 30, 2023 and that there were no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether GuruShots user, payer and revenue trends improve, and whether Zedge’s planned product and cross-promotion initiatives produce measurable results.
- The assumptions underlying the $8.73 million GuruShots goodwill impairment and the remaining carrying value of goodwill and acquired intangible assets.
- Cash generation relative to operating losses, capitalized development spending, share repurchases and the amended bank-deposit requirement.
- Compliance with loan covenants, remaining credit availability and the effect of the post-quarter loan modification.
- Revenue concentration, advertising-market exposure and the comparability limitations arising from GuruShots’ acquisition date.