Zedge, Inc. — Form 10-Q Summary
Business context and reporting period
Reports fiscal 2017’s first quarter, the three months ended October 31, 2016, compared with the three months ended October 31, 2015. Zedge operates a mobile content platform offering ringtones, wallpapers, icons and notification sounds. More than 90% of revenue comes from advertising. The company became an independent public company in June 2016 following its spin-off from IDT Corporation.
Financial performance and liquidity
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Revenue | $2.383 million | $2.559 million | Down 6.9% |
| Income from operations | $113,000 | $419,000 | Down 73.0% |
| Net income | $163,000 | $325,000 | Down 49.8% |
| Diluted earnings per share | $0.02 | $0.04 | — |
| Operating cash flow | $215,000 | $473,000 | Down $258,000 |
| Investing cash flow | $(349,000) | $(183,000) | — |
- Operating margin was approximately 4.7%, versus 16.4% a year earlier. Direct cost of revenue increased 24.4% to $367,000; selling, general and administrative expense rose 4.2% to $1.756 million.
- Foreign-exchange transactions produced a $50,000 gain, compared with a $55,000 loss in the prior-year quarter. The company reported $67,000 of gains from hedging activity in the current quarter, versus $102,000 of losses in the prior-year quarter.
- At October 31, cash and cash equivalents were $5.983 million, working capital was approximately $6.1 million, total assets were $12.917 million and stockholders’ equity was $10.927 million. Cash was nearly unchanged from July 31 ($5.978 million).
- There was no borrowing outstanding under the $2.5 million revolving credit facility. Availability is limited to the lesser of $2.5 million or 80% of eligible receivables, subject to concentration limits. The facility is secured by substantially all company assets and includes financial covenants and a dividend prohibition; Zedge reported compliance at quarter-end.
Material changes and management commentary
- Revenue per monthly active user declined 10.7%, to $0.0233 from $0.0261. Management attributed the decline mainly to the temporary removal of the app from the iTunes Store in January 2016 and reduced investment in its Game Channel. Monthly active users increased 2.6% to 31.6 million; app installs reached 230.5 million, up from 173.8 million.
- Zedge reintroduced its ringtone offering in the U.S. and Canada iTunes Store in November 2016, with global release planned for December 2016. These events occurred after the reporting period.
- Management cited higher hosting, content-filtering and marketing-automation costs, and higher accounting, tax and legal fees. A $200,000 receivable from Norway’s SkatteFUNN research-credit program related to prior periods. A development project was abandoned, resulting in a $9,000 write-off.
- The company expects cash on hand and operating cash flow to cover anticipated cash needs for the 12 months ending October 31, 2017. It estimated incremental annual public-company costs of $750,000–$900,000; the estimate was preliminary and subject to negotiation.
- Management identified ongoing investment in product and technology, user growth, engagement, retention and monetization as important to its growth plan. The filing provides no formal revenue or earnings guidance.
Risks, contingencies and other notable items
- Revenue and receivables are concentrated: three customers generated 52%, 15% and 13% of quarterly revenue; one customer represented 63% of receivables at October 31. The filing describes these customers as advertising exchanges and says receivables reflect amounts due from many advertisers.
- A copyright infringement lawsuit filed by Saregama India seeks approximately $1.596 million in damages and an injunction. Zedge believes material liability is remote.
- Norwegian tax authorities began audits of Zedge Europe AS’s 2013 and 2014 returns. No significant issues had been identified at the time of filing, but the company cautioned that assessments could exceed accrued amounts and adversely affect results, cash flow or financial condition.
- Foreign-exchange exposure includes NOK/U.S. dollar forward contracts. The company did not apply hedge accounting, so fair-value changes were recorded in earnings. It also entered a foreign-exchange agreement with its bank after quarter-end.
- Zedge reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its prior Form 10-K.
Most important facts for investors to verify
- Whether the reintroduced iOS ringtone app improved user retention, monetization and revenue per monthly active user.
- Whether advertising-customer concentration and the 63% receivables exposure to one customer changed after quarter-end.
- How public-company costs, employee-related expenses and ongoing product investment affect margins and cash generation.
- Developments in the Saregama litigation and Norwegian tax audits, including any change in the company’s assessment or recorded provisions.
- Revolving-facility availability, covenant compliance and the effect of foreign-exchange hedging on earnings and borrowing capacity.