Zedge, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the fiscal third quarter and nine months ended April 30, 2016; fiscal year ends July 31. Zedge operates a mobile content platform offering ringtones, wallpapers, icons and notification sounds. It reported over 200 million app installs and 31.6 million monthly active users (MAUs) at quarter-end. More than 90% of revenue came from advertising. IDT spun off Zedge on June 1, 2016, after the reporting date.
Financial results
Amounts below are in thousands of dollars, except per-share data. Margins are approximate calculations from reported figures.
| Metric | Quarter ended Apr. 30, 2016 | Quarter ended Apr. 30, 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $2,573 | $2,199 | $8,661 | $6,624 |
| Operating income | $243 | $404 | $1,943 | $1,002 |
| Net income | $326 | $211 | $1,762 | $859 |
| Diluted EPS | $0.04 | $0.02 | $0.20 | $0.10 |
| Operating margin | 9.4% | 18.4% | 22.4% | 15.1% |
| Net margin | 12.7% | 9.6% | 20.3% | 13.0% |
- Revenue grew 17.0% for the quarter and 30.8% for the nine months. Operating income fell 39.9% in the quarter but rose 93.9% year to date. Net income increased 54.5% and 105.1%, respectively.
- Direct cost of revenue was $327 for the quarter and $932 for nine months; approximate gross margins were 87.3% and 89.2%, compared with 86.9% and 87.6% in the prior-year periods.
- Quarterly SG&A rose 35.9% to $1,850; nine-month SG&A rose 23.7% to $5,316. Higher staffing, recruitment, facilities, content costs and Spin-Off preparation contributed.
- Foreign-exchange gains were $130 in the quarter versus a loss of $44 a year earlier; nine-month results included a loss of $31 versus a gain of $84. The company reported hedging gains of $0.2 million for the quarter and hedging losses of $0.1 million year to date.
- At April 30, cash was $3,976; working capital was $3.9 million; total assets were $10,570 and current liabilities were $2,138. The filing reports no borrowings; $458 was due to IDT at quarter-end and approximately $0.6 million was repaid May 31.
- Nine-month operating cash flow was $2,470, investing cash flow was $(680), and financing cash flow was $9. Cash increased by $1,806 from July 31, 2015. Investing outlays primarily funded capitalized software and technology development.
Drivers, outlook and material matters
- Management attributed growth to user expansion, push notifications, localization, and opening iOS advertising inventory to additional buyers. MAUs rose 18% year over year to 31.6 million; active installs exceeded 90 million versus 70 million a year earlier.
- Quarterly average revenue per MAU declined 1.6% to $0.0247, primarily due to a temporary removal from the iTunes Store and fewer cost-per-install game downloads. The app relaunched in late March with wallpapers only. Nine-month average revenue per MAU remained $0.0277.
- Management expected cash on hand and operating cash flows to cover anticipated requirements for the 12 months ending April 30, 2017. It estimated an additional $750,000–$900,000 in annual costs from operating as a public company; estimates were preliminary. No specific earnings or revenue guidance was provided.
- Three advertising-exchange customers accounted for 45%, 20% and 12% of nine-month revenue; one customer represented 57% of receivables at April 30. This creates significant customer and collection concentration.
- Following the Spin-Off, certain equity holders purchased approximately 10% of the company’s capital stock for $3 million. The company said it did not anticipate paying dividends until it achieved sustainable profitability and retained minimum cash reserves.
- Disclosure controls were deemed ineffective as of April 30 due to three unremediated material weaknesses: financial reporting expertise, timely account reconciliations, and segregation of duties. Management had begun remediation with IDT personnel and expected control improvements to require time and resources.
- Legal matters included a patent case brought by Blue Spike, in which the court entered summary judgment of non-infringement for the supplier’s technology on May 31, 2016; supplier counterclaims remained pending. A separate Indian copyright suit sought approximately $1.6 million and an injunction; management considered possible liability remote.
- Foreign-exchange exposure to the Norwegian krone is managed with forward contracts; outstanding contracts at April 30 had a total U.S. dollar notional amount of $2.5 million. The company also remained subject to transition, tax allocation and indemnification agreements with IDT.
Important facts for investors to verify
- Whether user growth and advertising demand continue, and whether quarterly monetization recovers after the iTunes disruption.
- Customer concentration, particularly the three exchanges responsible for 77% of nine-month revenue and the customer holding 57% of receivables.
- Actual post-Spin-Off operating costs versus the estimated annual $750,000–$900,000 increase, and the resources needed to remediate internal-control weaknesses.
- Progress and outcomes in the Blue Spike and Saregama litigation, and the company’s obligations under its IDT separation and tax agreements.
- Cash and working-capital position after the Spin-Off, IDT repayment and $3 million equity purchase. The filing’s detailed balance sheet is dated April 30, 2016, before these subsequent events.