Zedge, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Three and six months ended January 31, 2021; fiscal year ends July 31. Dollar amounts below are in millions unless noted.
Business context
Zedge develops mobile personalization and entertainment apps, led by Zedge Wallpapers and Ringtones. Monetization includes advertising, paid subscriptions, and Zedge Premium content sales. The company reported approximately 35.4 million monthly active users (MAU) and 711,000 active subscribers at January 31, 2021.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Revenue | $5.314 | $2.644 | $9.076 | $4.677 |
| Operating income (loss) | $2.518 | $0.079 | $3.611 | $(0.666) |
| Net income (loss) | $2.278 | $0.100 | $3.323 | $(0.701) |
| Diluted EPS | $0.17 | $0.01 | $0.26 | $(0.07) |
| Operating margin | 47.4% | 3.0% | 39.8% | (14.2%) |
Quarterly revenue rose 101% year over year; six-month revenue rose 94%. Advertising revenue increased 95% for the quarter and 88% for six months, while subscription revenue increased 150% and 175%, respectively. Advertising represented about 83% of Q2 revenue, versus 85% a year earlier. Management attributed advertising growth primarily to improved ad optimization and higher rates. Direct costs were 5.9% of quarterly revenue, compared with 11.6% a year earlier; SG&A was 40.6% of revenue, down from 71.6%.
Q2 MAU increased 3.2% year over year to 35.4 million, while average revenue per MAU rose 87.8% to $0.0492. The subscriber count increased 139% year over year to 711,000, though average monthly revenue per active subscription decreased 7% to $0.40. Zedge Premium generated $0.103 million of Q2 net revenue on $0.211 million of gross transaction value.
Cash flow, liquidity and debt
For the six months, operating cash flow was $3.761 million, investing cash outflow was $0.401 million, and financing cash inflow was $5.055 million. Cash increased $8.497 million to $13.608 million. Operating cash flow improved from $0.925 million in the prior-year period, primarily reflecting higher revenue.
At January 31, 2021, working capital was $13.2 million, compared with $3.9 million at July 31, 2020. Current assets were $16.777 million and current liabilities $3.609 million. Total liabilities were $3.827 million; this included $0.218 million of PPP borrowing and an $0.081 million current insurance-premium loan balance. No amounts were drawn on the $2.0 million revolving credit facility. Management said cash on hand and operating cash flow should cover anticipated needs for the 12 months ending January 31, 2022.
Financing included a $5.0 million gross at-the-market stock offering, completed by January 28, with $0.215 million of issuance costs, and $0.396 million of proceeds from option exercises. The ATM offering issued 761,906 Class B shares.
Material changes, outlook and risks
- Revenue and profitability rebounded substantially from the pandemic-affected prior-year period. Management said advertising revenue had recovered strongly since July 2020.
- Management expects to increase headcount by 15%–20% in calendar 2021, mainly in engineering, product and design. The filing provides no specific revenue or earnings guidance.
- COVID-19 effects remain uncertain. Management cited dependence on economic conditions, advertising budgets, and new smartphone sales; the pandemic-related decline in smartphone sales adversely affected new-user growth.
- Users in emerging markets made up 73% of MAU, up from 67% a year earlier. These users grew 12.6% year over year, while developed-market users declined 15.9%; lower advertising rates in emerging markets may pressure monetization.
- Advertising and receivables are concentrated: three customers represented 31%, 22% and 12% of six-month revenue; two customers represented 47% and 22% of receivables at period end. The filing identifies these as advertising exchanges.
- Approximately 711,000 subscribers included users under a Google Play account hold following failed payments. The filing does not quantify the related potential effect on subscriber retention or revenue.
- The company expects all or most of its $0.218 million PPP loan to be forgiven; it submitted a forgiveness application in November 2020. No forgiveness outcome is reported in this filing.
- The Saregama copyright case was dismissed after the injunction was lifted. Management said it did not expect other ordinary-course legal proceedings to materially affect results or financial condition.
Important facts for investors to verify
- Whether advertising-rate and optimization gains, and the sharp year-over-year revenue growth, are sustainable.
- Trends in developed-market MAU, emerging-market mix, and revenue per user as smartphone sales and advertising conditions evolve.
- Subscriber quality and retention, including the outcome and revenue impact of Google Play account holds.
- Customer concentration and collection timing, given the significant shares of revenue and receivables tied to a small number of advertising exchanges.
- PPP loan forgiveness status, and the dilutive impact of equity issuance and outstanding stock awards.