Zedge, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended April 30, 2022. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Comparisons are with the periods ended April 30, 2021, or July 31, 2021, as applicable.
Business context
Zedge operates a digital content platform, including its personalization app, Emojipedia and, from April 12, 2022, GuruShots, a competitive photography game. Zedge reported 41 million monthly active users across its portfolio at quarter-end; its Zedge App had 32.1 million MAU. The company has one operating segment.
Financial performance
| Metric | Three months ended Apr. 30, 2022 | Year-over-year change | Nine months ended Apr. 30, 2022 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $6.230 | +18.6% | $19.173 | +33.8% |
| Operating income | $1.342 | −32.2% | $7.037 | +25.9% |
| Net income | $0.803 | −67.2% | $5.183 | −10.2% |
| Diluted EPS | $0.05 | vs. $0.17 | $0.35 | vs. $0.43 |
| Operating margin | 21.5% | vs. 37.7% | 36.7% | vs. 39.0% |
| Net margin | 12.9% | vs. 46.6% | 27.0% | vs. 40.3% |
Quarter revenue growth reflected higher advertising revenue, acquisitions and other revenue. Advertising revenue rose 7% to $4.526 million; paid subscription revenue was $0.910 million, up 1%; other revenue was $0.794 million, versus $0.126 million. Quarter results included $0.232 million from Emojipedia and $0.294 million from GuruShots. The company also received a $2 million AppLovin integration bonus, which is deferred and recognized over an estimated 24-month service period.
Quarter operating income and net income declined despite revenue growth. SG&A increased 50.9% to $4.064 million, including $0.860 million of GuruShots acquisition costs, higher headcount and stock compensation. Depreciation and amortization increased 46.4% to $0.423 million, partly due to acquired intangibles. Foreign-exchange transactions produced a $0.125 million loss, and income tax expense was $0.429 million, compared with a $0.473 million tax benefit a year earlier. For the nine months, SG&A rose 44.4% to $9.902 million.
For the nine months, operating cash flow was $11.314 million, versus $7.737 million. Investing cash flow was negative $18.807 million, primarily reflecting the GuruShots acquisition and asset acquisitions; financing cash flow was negative $0.225 million. Cash declined $7.813 million from July 31, 2021, to $17.095 million.
Financial position and liquidity
- At April 30, 2022, cash was $17.095 million, working capital was approximately $6.4 million, total assets were $55.667 million and total liabilities were $16.538 million. Working capital was $23.4 million at July 31, 2021.
- The company had no balance drawn on its revolving credit facility at April 30, 2022. The facility provides up to $2 million, is secured by substantially all assets and was scheduled to mature September 26, 2022. Zedge reported compliance with its covenants.
- There was no funded revolver debt, but acquisition-related contingent consideration and deferred payments were recorded as liabilities. Total stockholders’ equity was $39.129 million.
- Management said cash on hand and operating cash flow should meet anticipated cash needs for the 12 months ending June 14, 2023. The company does not anticipate paying dividends until it achieves sustainable profitability and retains minimum cash reserves.
Material changes and outlook
- GuruShots acquisition: Completed April 12, 2022. Preliminary total consideration was $23.904 million, including $5.904 million fair value for contingent consideration; the maximum earnout is $16.8 million over two years and may be paid in cash, stock or both. Zedge also committed to $4 million of cash retention awards and issued $4 million of restricted stock, subject to continued employment over three years. GuruShots contributed $0.294 million revenue and a $0.2 million net loss from acquisition through quarter-end. Purchase accounting remains preliminary.
- Emojipedia: Acquired August 1, 2021, for a final purchase price of $6.7 million. The company reported $0.962 million remaining due on the 12-month anniversary of closing.
- User and monetization trends: Zedge App MAU was down 7.0% year over year. Users in emerging markets accounted for 77% of MAU, where monetization is lower; developed-market MAU fell 15.7%. ARPMAU rose 7.8% year over year to $0.0523, but declined 13.0% sequentially, which management attributed to seasonality.
- Management attributed some user losses to a forced app upgrade for the AppLovin ad-mediation migration, branding changes related to the Ukraine war and the decision to disable the Zedge App and GuruShots in Russia and Belarus. It reported minimal disruption to GuruShots development from contractors affected by the conflict and said it was contingency-planning for possible disruption near its Lithuania development center.
- Management is increasing paid user-acquisition efforts and plans to cross-market to Zedge users, develop organic growth initiatives for GuruShots and potentially migrate GuruShots technology to Zedge’s cloud platform. Shortz development was deprioritized. The filing provides no specific revenue or earnings guidance; it estimates a fiscal 2022 effective tax rate of approximately 25.7%.
Risks, contingencies and unusual items
- Key risks include integration and synergy execution for GuruShots, user-acquisition economics, retaining and monetizing paying players, managing the game economy, potential earnout-related dilution, and meeting agreed user-acquisition spending commitments.
- Russia’s invasion of Ukraine, sanctions and possible regional disruption could affect users, revenue and operations. The company reported disabling its apps in Russia and Belarus and described adverse effects from app/store branding changes.
- Advertising customer concentration remains significant: three customers represented 29%, 19% and 13% of nine-month revenue. Two customers represented 40% and 19% of accounts receivable at April 30, 2022.
- Acquisition valuations, including $21.602 million of net intangible assets and $11.031 million of goodwill at quarter-end, are subject to estimation and potential measurement-period adjustments. No impairment charges were recorded for the nine-month period.
- The filing says ordinary-course legal proceedings are not expected to have a material adverse effect. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Reconcile reported MAU trends: the narrative says third-quarter MAU “increased 11.6%” sequentially, while the table shows a decline from 36.3 million to 32.1 million, or 11.6%.
- Track whether the GuruShots and Emojipedia acquisitions deliver growth, integration benefits and returns sufficient to justify acquisition costs, amortization and earnout obligations.
- Monitor Zedge App user growth, emerging-market mix, advertising rates, subscription additions and renewals, and paid user-acquisition returns.
- Assess liquidity after acquisition spending, upcoming Emojipedia payment obligations, GuruShots retention awards and earnout payments; also verify the status of the revolving facility after its stated September 2022 maturity.
- Evaluate whether the $2 million AppLovin integration bonus and other acquisition-related or one-time items materially affect comparisons of recurring revenue and profitability.