Zedge, Inc. — Q3 FY2018 Form 10-Q
Reporting period: Fiscal quarter and nine months ended April 30, 2018. Unaudited consolidated results; amounts below are in U.S. dollars unless noted.
Business context
Zedge operates a mobile personalization content platform, including wallpapers, ringtones and related content. Its app had 34.2 million monthly active users (MAU) at quarter-end and had been installed 321.5 million times. More than 85% of revenue came from advertising. Zedge Premium was rolled out to all users in March 2018; its Q3 revenue was immaterial.
Financial performance and liquidity
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $2.551 million | $2.530 million | $8.255 million | $7.485 million |
| Operating loss | $339,000 | $193,000 | $1.303 million | $419,000 |
| Net loss | $309,000 | $239,000 | $1.302 million | $403,000 |
| Loss per share, basic and diluted | $0.03 | $0.02 | $0.13 | $0.04 |
| Direct costs as % of revenue | 14.8% | 16.0% | 13.4% | 15.8% |
Gross margin, calculated as revenue less direct costs, was approximately 85.2% in Q3 and 86.6% for the nine-month period, versus 84.0% and 84.2% in the respective prior-year periods. The widening losses reflected higher SG&A and depreciation and amortization; Q3 depreciation and amortization rose 91% year over year, primarily as completed software projects began amortizing.
For the nine months, operating cash flow was $784,000, investing cash outflow was $1.295 million, and financing cash inflow was $216,000. Cash declined $308,000 to $4.272 million. Cash flow from operations less investing outflows was negative $511,000. At April 30, cash was $4.272 million, working capital was $4.1 million, and current assets and current liabilities were $6.502 million and $2.401 million, respectively. No amounts were drawn on the $2.5 million revolving facility; the company reported covenant compliance and no outstanding debt under it.
Material changes and management commentary
- Revenue grew 0.8% year over year in Q3, but declined 16.2% sequentially from Q2. For the nine months, revenue increased 10.3%, which management attributed to product improvements and new Android ad units.
- Overall MAU increased 7.9% year over year to 34.2 million, but MAU in well-developed markets fell 7.9% to 15.1 million. Management said growth was concentrated in lower-ad-rate emerging markets. Q3 average revenue per MAU fell 10.8% to $0.0222; Q3 advertising eCPMs declined 18.3% year over year.
- SG&A rose 24.6% for the nine months, partly due to Freeform acquihire costs, Premium development, $372,000 in severance and higher stock-based compensation. These increases were partly offset by workforce reductions and discontinuation of some services previously provided by IDT. Headcount was 57, compared with 64 a year earlier.
- Management said cash on hand and expected operating cash flow should fund anticipated requirements for the 12 months ending April 30, 2019. It expected to hire additional staff for Zedge Premium and continue expanding its artist community, content categories and monetization tests. The filing provides no quantified revenue or earnings guidance.
Risks, contingencies and unusual items
- The revolving credit facility matures September 27, 2018, is secured by substantially all company assets and restricts dividends. No amount was outstanding at quarter-end.
- On May 2, 2018, after quarter-end, Zedge entered into foreign-exchange forward contracts totaling $3.0 million against NOK, with settlements from June through November 2018. The filing identifies currency movements as a risk.
- A Norwegian tax audit covering 2012–2016 was ongoing; no significant issues had been identified. Potential assessments could exceed accrued amounts. The company also disclosed a $212,000 receivable under Norway’s SkatteFUNN research-credit program and said it had not worked on related projects since January 2018.
- Saregama India had sought approximately $1.6 million in a copyright lawsuit. The complaint was ordered returned for filing in the proper jurisdiction; Zedge said it had received no notice of a new suit and considered material liability remote.
- The company identified GDPR and other privacy, data-protection and security requirements as risks that could lead to reduced demand, higher costs, fines or penalties.
- The U.S. tax-law change was expected to reduce deferred tax assets by approximately $425,000, offset by valuation-allowance changes; the accounting was described as provisional. The company also recorded a $25,000 receivable and reduced Freeform acquihire costs from $465,000 to $440,000.
Important facts for investors to verify
- Whether Premium monetization can offset lower advertising rates, declining developed-market MAU and the sequential revenue decline.
- Progress in controlling SG&A and converting revenue growth into operating profitability and positive cash generation.
- The status and terms of the credit facility at its September 2018 maturity, and cash needs after the reported 12-month liquidity outlook.
- Developments in the Norwegian tax audit, the Saregama matter and the company’s GDPR and data-security compliance.
- Subsequent results for MAU, ARPMAU, eCPMs and customer concentration, given that three customers accounted for 69% of nine-month revenue.