Zedge, Inc. — Q3 FY2021 Form 10-Q
Reporting period: Fiscal quarter and nine months ended April 30, 2021; comparative periods ended April 30, 2020. Financial statement amounts are in U.S. dollars, generally in thousands unless noted.
Business context
Zedge develops mobile personalization and entertainment apps. Its flagship Zedge app monetizes primarily through advertising and paid subscriptions, with Zedge Premium and Shortz also contributing. The company reported approximately 34.5 million monthly active users (MAU), 497 million cumulative app installs, and 753,000 active subscribers at quarter-end.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $5.252 million | $2.079 million | $14.328 million | $6.756 million |
| Operating income (loss) | $1.979 million | $(0.127) million | $5.590 million | $(0.793) million |
| Net income (loss) | $1.932 million | $(0.325) million | $5.255 million | $(1.026) million |
| Diluted EPS | $0.13 | $(0.03) | $0.39 | $(0.10) |
- Quarterly revenue rose 153%; advertising revenue increased 182% to $4.227 million and subscription revenue rose 98% to $899,000. For the nine-month period, revenue increased 112%, with advertising up 114% and subscriptions up 139%.
- Direct costs were $290,000 in the quarter, or 5.5% of revenue, versus 13.9% a year earlier. Operating margin was approximately 37.7% versus a loss margin of approximately 6.1%; net margin was approximately 36.8% versus approximately negative 15.6%.
- SG&A rose 72% to $2.694 million in the quarter, reflecting higher compensation, bonuses, payroll taxes tied to option exercises, professional fees, and subscription marketing costs. SG&A nevertheless fell to 51.3% of revenue from 75.5%.
- Quarterly ARPMAU increased 120.5% year over year to $0.0485, while MAU increased 19.8% to 34.5 million. Sequentially, MAU fell 2.6% and ARPMAU fell 1.4%.
- Nine-month operating cash flow was $7.737 million, versus $1.583 million. Investing used $593,000; financing provided $12.518 million. Cash increased $19.804 million to $24.915 million.
Balance sheet and liquidity
At April 30, 2021, cash and cash equivalents were $24.915 million, current assets $27.905 million, current liabilities $5.005 million, and working capital approximately $22.9 million. Total liabilities were $5.402 million and stockholders’ equity was $27.642 million. Loans payable were $218,000; the $2.0 million revolving credit facility had no borrowings outstanding. Zedge reported compliance with the facility’s covenants.
Financing cash flow included proceeds from Class B share sales. The two ATM offerings generated approximately $12.4 million gross proceeds through April 30, 2021, with $469,000 of issuance costs reflected in cash flows. Class B shares outstanding increased from 11.749 million at July 31, 2020 to 13.683 million at April 30, 2021.
Changes, outlook, and risks
- Revenue and profitability rebounded substantially from the pandemic-affected prior-year period. Management attributed advertising growth to improved ad optimization and higher advertising rates.
- Users in emerging markets represented 74% of MAU, up from 69% a year earlier. Management noted that these markets generally monetize less effectively; emerging-market MAU grew 29.3% year over year while developed-market MAU declined 1.2%.
- Management said cash on hand and expected operating cash flow should meet anticipated cash needs for the 12 months ending April 30, 2022. It gave no specific revenue or earnings guidance, but expected headcount to grow 15%–20% in calendar 2021, primarily in engineering, product, and design.
- COVID-19 remains a source of uncertainty. Advertising revenue had recovered from its sharp decline in spring 2020, but management said future impacts depend on economic conditions and smartphone demand. The filing notes that accounting estimates may be affected by the pandemic.
- Customer concentration is significant: three customers represented 31%, 22%, and 12% of nine-month revenue; two customers represented 44% and 25% of receivables at quarter-end. Currency movements also affect results; the company uses foreign-exchange forwards but does not apply hedge accounting.
- The Saregama copyright case was dismissed after the injunction was lifted and the plaintiff consented. The company reported no other material change to previously disclosed risk factors.
- After quarter-end, on May 21, 2021, the company was notified that its $218,000 PPP loan, including accrued interest, had been forgiven; it expected to record the debt-forgiveness gain in fiscal Q4.
Important facts for investors to verify
- Whether advertising growth, ARPMAU gains, and subscriber additions persist, particularly as sequential MAU and ARPMAU declined.
- The impact on monetization of the growing emerging-market share of users and the continued decline in developed-market users.
- Customer and receivables concentration, and exposure to advertising-market and foreign-exchange movements.
- The dilutive effect of ATM issuance, option exercises, and equity compensation on future per-share results.
- The timing and accounting for PPP loan forgiveness, and whether cash generation supports the stated 12-month liquidity outlook.