Zedge, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended April 30, 2019. Financial statements are unaudited; amounts below are in U.S. dollars. The company operates a mobile content platform, principally monetized through advertising, with newer subscription and Zedge Premium offerings.
Financial performance
| Metric | Three months ended Apr. 30, 2019 | Prior-year quarter | Nine months ended Apr. 30, 2019 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $1.912 million | $2.551 million | $6.866 million | $8.255 million |
| Operating loss | $1.121 million | $0.339 million | $1.948 million | $1.303 million |
| Net loss | $1.195 million | $0.309 million | $2.142 million | $1.302 million |
| Loss per share, basic and diluted | $0.12 | $0.03 | $0.21 | $0.13 |
- Quarterly revenue fell 25.0%; nine-month revenue fell 16.8%. Advertising revenue was $1.670 million for the quarter and $6.243 million for the nine months, compared with $2.279 million and $7.496 million, respectively, in the prior-year periods.
- Direct costs were 18.5% of quarterly revenue versus 14.8% a year earlier, and 15.0% of nine-month revenue versus 13.4%. Lower revenue against relatively fixed costs drove the increase in these ratios.
- Quarterly SG&A increased 4.3% to $2.289 million; nine-month SG&A declined 12.8% to $6.761 million. Depreciation and amortization rose 23% for the quarter and 46.2% for the nine months, partly reflecting completed software projects.
- Foreign-exchange transactions generated losses of $72,000 for the quarter and $236,000 for the nine months, versus a $26,000 gain and a $19,000 loss in the comparable prior-year periods.
- For the nine months, operating cash flow was $471,000, down from $784,000. Investing used $1.527 million, including $1.277 million for software, technology development and equipment and a $250,000 TreSensa investment. Cash declined $1.160 million to $2.248 million.
- At April 30, cash was $2.248 million, working capital was $1.798 million, total assets were $10.158 million and stockholders’ equity was $8.064 million. The company had no borrowings under its revolving credit facility; it reported covenant compliance. No other funded debt balance is reported in the filing.
Changes and operating developments
- Management attributed the revenue decline to user mix shifting toward emerging markets, which have lower advertising rates, and the discontinuation of certain monetization mechanisms. Quarterly average revenue per monthly active user fell 25.3% to $0.0166 from $0.0222.
- Overall monthly active users were down 0.5% year over year. Users in well-developed markets declined 16.6%, while users in emerging markets grew 12.1%. The app had more than 34 million monthly active users and 382.3 million cumulative installs at April 30, 2019.
- Zedge Premium generated quarterly gross transaction value of $159,000 and net revenue of $36,000; nine-month amounts were $317,000 and $69,000. Management said sequential GTV growth had slowed.
- Ad-free subscriptions, launched in January 2019 and expanded across the Android user base in the quarter, generated $187,000 in gross subscription sales and $26,000 in recognized revenue during the quarter. The company reported nearly 60,000 active accounts, about 14,000 monthly and 46,000 yearly, and $164,000 of subscription deferred revenue. Total balance-sheet deferred revenue was $284,000.
- The third-party publisher service agreement, representing about 9% of revenue, was scheduled to terminate effective May 31, 2019.
Outlook, risks and contingencies
- Management expected cash on hand and operating cash flow to cover anticipated cash requirements for the 12 months ending April 30, 2020. No revenue or earnings guidance was provided.
- A restructuring announced May 15 was expected to reduce headcount by approximately 12 employees, or 20%, by August 31, 2019. Management estimated annualized savings of $0.8 million to $1.0 million before additional resources and did not expect material one-time costs.
- Management identified user growth in well-developed economies as a central risk: those users generate higher revenue and profit, and prior user-experience efforts had not proven successful. It cautioned that further initiatives might not restore revenue to sustainable levels.
- The $2.5 million revolving facility is secured by substantially all assets and matures September 26, 2020. Foreign-exchange contracts totaled $2.0 million at quarter-end and reduced available borrowing by $200,000; the related derivative liability was $96,000.
- A 2014 Saregama copyright lawsuit seeks approximately $1.6 million and an injunction; the company considered the likelihood of material liability remote. Tellagemini’s patent complaint was voluntarily dismissed without prejudice in November 2018.
- Norwegian tax authorities concluded an audit with no changes but recommended a profit-split transfer-pricing method instead of the company’s cost-plus method; the company was evaluating the recommendation.
- The company invested $250,000 in privately held TreSensa, with a maximum stated loss equal to the investment; no impairment or upward adjustment was recorded. Management reported effective disclosure controls at April 30, 2019.
Key facts for investors to verify
- Whether user acquisition and engagement efforts can reverse declines in higher-monetizing markets and improve revenue per user.
- How the May 31, 2019 termination of the publisher services contract affects revenue and cash flow.
- Whether subscriptions and Zedge Premium grow sufficiently to offset advertising weakness; compare gross subscription sales with recognized revenue and deferred revenue.
- Actual timing, costs and realized savings from the announced workforce reduction, including any investment in additional resources.
- Cash burn, working-capital needs and borrowing availability under the asset-secured revolving facility, including the effect of foreign-exchange reserves.
- Developments in the Saregama matter and the Norwegian transfer-pricing recommendation.