Zedge, Inc. — Form 10-Q Summary
Period: First quarter of fiscal 2020, the three months ended October 31, 2019. Financial statements are unaudited; amounts below are in U.S. dollars unless noted.
Business context
Zedge operates a digital publishing platform centered on its mobile personalization app, with advertising as its primary revenue source and newer subscription and Zedge Premium offerings. The app had 409 million cumulative installs and 29.7 million monthly active users (MAU) at quarter-end.
Financial performance and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $2.033 million | $2.381 million |
| Operating loss | $745,000 | $581,000 |
| Net loss | $801,000 | $706,000 |
| Loss per share, basic and diluted | $0.08 | $0.07 |
| Operating cash flow | $352,000 | $921,000 |
| Capitalized software, technology development and equipment cash spend | $213,000 | $445,000 |
- Gross margin, calculated as revenue less direct cost of revenue, was approximately 83.9%, versus 85.3% a year earlier. Operating loss margin was approximately 36.6%, versus 24.4%.
- Cash and cash equivalents were $1.659 million at October 31, 2019, up from $1.609 million at July 31. Working capital was approximately $484,000, down from $1.178 million.
- No borrowings were outstanding under the $2.5 million revolving credit facility; the company reported compliance with its covenants. It had $110,000 outstanding on an insurance premium loan and $449,000 in operating lease liabilities.
- Cash increased by $50,000 during the quarter. Operating cash flow declined from the prior-year quarter, while investing cash use fell to $213,000 from $695,000.
Changes versus prior year
- Revenue fell 14.6%. Advertising revenue declined to $1.667 million from $2.198 million; prior-year service revenue of $171,000 ended after the publisher contract was terminated in May 2019. Other revenue rose to $366,000 from $12,000, reflecting growth in subscriptions and Zedge Premium.
- MAU fell 14.2% year over year to 29.7 million. Management attributed the decline partly to Google Play temporarily suspending the app in late September after detecting buggy code in a third-party advertising integration and recommending users uninstall it. Users declined more sharply in developed markets, which generally have higher advertising rates.
- SG&A decreased 15.8% to $1.945 million, partly from lower compensation and professional costs. Depreciation and amortization increased 66.7% to $505,000, primarily as seven completed software projects began amortizing. The larger amortization expense and lower revenue contributed to a wider operating loss.
Outlook, risks and unusual items
- Management said cash on hand and expected operating cash flow should cover anticipated requirements for the 12 months ending October 31, 2020. No specific earnings or revenue guidance was provided.
- Management expected near- to medium-term declines in Zedge Premium transaction volume and revenue following an app homepage redesign that promoted Shortz; it anticipated that additional advertising inventory on the redesigned homepage could offset the effect.
- Shortz, a serialized short-form fiction app, launched in late November 2019 for Android users in the U.S., U.K. and Canada; an iOS launch was expected in the following weeks. The company also filed a Form S-3 on December 9, 2019, registering up to $5 million of Class B shares and/or warrants.
- Foreign-exchange losses were $56,000, compared with $129,000 in the prior-year quarter. Outstanding forward contracts totaled $1.6 million and had a $60,000 fair-value liability.
- The company recognized $80,000 of revenue from expired Zedge Credits. In Q1, subscription sales were $341,000 gross and $207,000 recognized as revenue; approximately 198,000 active subscriptions were reported at quarter-end.
- The Saregama copyright lawsuit was dismissed after the court lifted the injunction and the plaintiff consented to dismissal. Management reported no other material changes to previously disclosed risk factors. Customer concentration remains notable: three customers represented 68% of quarterly revenue.
- Adoption of the new lease accounting standard added right-of-use assets and lease liabilities to the balance sheet; management said it did not affect the statements of loss or cash flows.
Important facts for investors to verify
- Whether the Google Play suspension’s effects on app distribution, MAU and advertising revenue have fully reversed.
- Whether subscriptions and Zedge Premium can offset the decline in advertising and discontinued service revenue, including the impact of the homepage redesign.
- Whether operating cash flow and working capital remain adequate relative to expected spending and lease obligations.
- The status and potential dilution from the Form S-3 registration and the proposed increase in shares available under the incentive plan.
- Customer concentration, advertising-market exposure and foreign-exchange exposure, including the company’s forward contracts.