Zedge, Inc. — Fiscal 2024 Second-Quarter 10-Q
Reporting period: Three and six months ended January 31, 2024. Financial amounts below are in millions of dollars unless otherwise noted. Zedge operates the Zedge Marketplace, GuruShots, and Emojipedia businesses; statements are unaudited.
Financial performance
| Metric | Three months ended Jan. 31, 2024 | Year-over-year change | Six months ended Jan. 31, 2024 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $7.77 | +11.3% | $14.85 | +7.0% |
| Operating income (loss) | $(11.93) | Prior-year income $1.46 | $(11.61) | Prior-year income $1.26 |
| Net income (loss) | $(9.23) | Prior-year income $1.61 | $(9.25) | Prior-year income $1.44 |
| Operating cash flow | $2.81 for the six-month period | Prior-year $1.12 |
The reported operating and net losses principally reflect an $11.96 million impairment charge against GuruShots-related intangible assets. The quarter included an income tax benefit of $2.46 million, primarily associated with deferred tax assets arising from the impairment.
Revenue mix: Zedge Marketplace revenue was $6.85 million in the quarter, up 19.5%; advertising rose 18.4% and subscriptions rose 24.3%. GuruShots revenue was $0.92 million, down 26.4%. For the first half, Marketplace revenue increased 14.9% to $12.99 million, while GuruShots revenue fell 27.7% to $1.86 million.
Direct costs were 5.9% of quarterly revenue versus 9.1% a year earlier, reflecting backend cost reductions. SG&A was 83.9% of revenue versus 84.1%; it rose 11.1% in dollars, primarily due to higher paid user acquisition spending. Zedge Marketplace operating income improved to $1.68 million for the quarter, while GuruShots reported a $13.61 million operating loss, including the impairment. Excluding the impairment and prior-year contingent-consideration gain, management reported GuruShots operating losses of $1.6 million for the quarter and $3.0 million for the first half.
Cash, liquidity and debt
- Cash and cash equivalents were $18.06 million at January 31, 2024, nearly unchanged from $18.13 million at July 31, 2023. Working capital was $16.3 million, up from $15.8 million.
- Six-month operating cash flow was $2.81 million; investing cash use was $0.80 million, including $0.78 million of capitalized software and technology costs. Financing cash use was $2.01 million, including repayment of the $2.0 million term loan.
- The term loan was fully prepaid in November 2023. No term-loan balance remained at quarter-end. A $4 million revolving credit facility remained in place, expiring October 2024; foreign-exchange contracts reduce its available borrowing capacity. The filing reports $1.8 million of FX contracts outstanding at January 31.
- Management stated that cash on hand and operating cash flow should cover anticipated requirements for the twelve months ending March 15, 2025. No dividends are anticipated until sustainable profitability and minimum cash reserves are achieved.
Material changes and business indicators
- Management’s strategic review lowered GuruShots revenue and operating-result forecasts and led to the conclusion that its long-lived asset group was not recoverable. The company valued that asset group at approximately zero and impaired $11.96 million of developed technology, customer relationships and trade names. Net intangible assets declined from $18.71 million at July 31, 2023 to $5.59 million at January 31, 2024.
- Zedge App monthly active users were 28.8 million, down 10.6% year over year; average revenue per monthly active user rose 36.7% to $0.0715. Management attributed the MAU decline partly to lackluster growth in global phone purchases and said users in emerging markets represented 78.1% of MAU.
- GuruShots monthly active payers were reported at 6,009, down 24.3%; average revenue per payer declined 3.8% to $50.4. Management cited Apple’s App Tracking Transparency framework as limiting profitable paid acquisition and said it had scaled back GuruShots acquisition spending.
- Active Zedge subscriptions were approximately 648,000 at period-end, compared with 654,000 a year earlier. Quarterly subscription revenue increased as average monthly revenue per active subscription rose to $0.56 from $0.44. Subscription billings, a non-GAAP measure, increased 78.0% to $1.48 million.
Outlook, risks and unusual items
- Management expects to continue Zedge App paid user acquisition investment in the second half of fiscal 2024 if return on ad spend remains compelling. GuruShots initiatives include gameplay and onboarding changes, development of its in-game economy, and preliminary web advertising tests, with mobile advertising tests expected in summer 2024. AI Art Master remained in soft launch in the Philippines, Poland and India; further investment depends on user testing and performance.
- Management highlighted uncertainty from macroeconomic and geopolitical conditions, including the Israel-Hamas war, which affects employees and operations in Israel. It said the financial impact could not reasonably be estimated. Russia and Belarus users were not material to consolidated results.
- The company and former GuruShots owners settled purchase-agreement claims, including disputes concerning user-acquisition spending, earnout rights and indemnification. The company said ordinary-course legal matters were not expected to materially affect results, cash flows or financial condition.
- Two customers accounted for 29% and 11% of first-half revenue; two customers accounted for 35% and 15% of accounts receivable at January 31, 2024. These were advertising exchanges operated by large companies.
- Management reported effective disclosure controls at January 31, 2024 and no material changes in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether GuruShots’ revised commercial plan can stabilize revenue and operating losses after the full impairment of its long-lived intangible assets.
- Whether Zedge App user declines continue, and whether improved ARPMAU and advertising pricing can sustain Marketplace growth.
- Performance and return on spend for Zedge and GuruShots user-acquisition programs, plus the results of GuruShots product and advertising tests.
- Cash generation, revolving-credit availability and compliance with the facility’s financial covenants as the facility approaches its October 2024 expiry.
- Customer concentration, foreign-exchange exposure, and the operational and financial effects of geopolitical conditions in Israel.