Zedge, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended July 31, 2018. This 10-K reports full-year results; the filing text does not provide a clear standalone fiscal fourth-quarter financial summary.
Business context
Zedge operates a mobile content discovery and creation platform, principally through its Zedge app. The app had 34.1 million average monthly active users in FY2018 and more than 336 million cumulative installs at year-end. Zedge Premium, a marketplace for professional creators and brands, completed its rollout in March 2018.
Financial and operating performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $10.833 million | $10.031 million |
| Direct cost of revenue | $1.518 million | $1.567 million |
| Operating loss | $1.299 million | $0.683 million |
| Net loss | $1.563 million | $0.611 million |
| Operating cash flow | $0.332 million | $(0.097) million |
| Investing cash flow | $(1.702) million | $(1.506) million |
| Cash and cash equivalents at year-end | $3.408 million | $4.580 million |
- Revenue grew 8.0%. Direct costs were 14.0% of revenue, down from 15.6%; the resulting gross margin was approximately 86.0% versus 84.4%.
- Operating margin was approximately -12.0% (FY2017: -6.8%); net margin was approximately -14.4% (FY2017: -6.1%). Loss per share was $0.16 versus $0.06.
- Average MAU increased 6.3% to 34.1 million. ARPMAU edged up to $0.0246 from $0.0244, while advertising eCPM declined 13.4%.
- Users in emerging markets grew 22.5%, while users in developed markets declined 8.3%. Management said the mix shift weighed on monetization because developed markets have higher advertising rates.
- SG&A rose 13.1% to $9.581 million, and depreciation and amortization rose 60.7% to $1.033 million. Management attributed higher expenses to Freeform-related costs, Premium development, severance, SaaS and stock compensation, among other items.
- Working capital was $4.1 million. No borrowings were outstanding under the revolving credit facility at July 31, 2018; total liabilities were $1.709 million. The $2.5 million credit facility was extended in September 2018 through September 2020, with its minimum interest rate increased to 5.0%.
- Cash declined by $1.172 million during the year, primarily reflecting investing outflows. The company said cash on hand and expected operating cash flow should cover anticipated needs for the 12 months ending July 31, 2019.
Material changes, outlook and risks
- Premium revenue was insignificant in FY2018, though management described early participation and conversion indicators as encouraging. Management expects continued investment and said losses may continue until Premium scales and becomes profitable; no quantified revenue or earnings guidance was provided.
- Advertising remained the dominant revenue source, representing over 90% of revenue. MoPub contributed 35%, Google 22%, and Ogury 14% in FY2018; the filing also identifies Facebook at 7%. Dependence on advertising platforms and customer concentration are material risks.
- Cash provided by operations improved from a use of $0.097 million to a source of $0.332 million, while net loss widened. Management attributed the improved operating cash flow partly to revenue growth and noncash expenses.
- The company recorded a $0.230 million income tax provision despite a pretax loss, including effects related to tax reform and deferred-tax valuation allowances. It placed a full valuation allowance on U.S. and foreign deferred tax assets.
- Disclosure controls and internal control over financial reporting were deemed ineffective at July 31, 2018 due to a material weakness involving accruals at the Norwegian subsidiary. Management stated the weakness had since been remediated and performed additional closing procedures; the financial statements received an unqualified audit opinion.
- Legal matters include a 2014 Saregama copyright case seeking approximately $1.6 million; the complaint was returned for filing in the proper jurisdiction, and management considered material liability remote. A patent complaint by Tellagemini Communication LLC was filed in October 2018; the company said it intended to defend the claim.
- Other key risks include reliance on Android and app-store distribution, privacy and data-protection compliance, content and intellectual-property claims, foreign-exchange exposure, and the ability to grow users and monetize Premium. The company reported no dividends anticipated until it achieves sustainable profitability and retains minimum cash reserves.
- After year-end, Zedge invested $250,000 for less than 1% of TreSensa and entered a playable-ad distribution agreement. This is a subsequent event, not an FY2018 operating result.
Important facts for investors to verify
- Whether Premium is gaining users, creators and meaningful revenue, and what ongoing investment or losses it requires.
- Whether user growth can recover in higher-monetizing developed markets and offset declining eCPMs and the emerging-market mix shift.
- Current cash burn, available borrowing capacity under the receivables-based credit line, and compliance with its covenants.
- Progress and effectiveness of remediation of the Norwegian accrual control weakness, including any subsequent control disclosures.
- Developments in the Saregama and Tellagemini proceedings, Norwegian tax audit, and privacy or copyright regulatory requirements.
- The financial impact and terms of the TreSensa investment and playable-ad agreement.