Zedge, Inc. Price & Performance (ZDGE)

Examples include non GAAP EPS, non GAAP net income and adjusted EBITDA. Please see our earnings release for an explanation of our use of these non GAAP measures. Now I would like to turn the call over to Jonathan. Thank you, Brian. Good afternoon, everyone, and thank you joining us today to discuss Zedge's second quarter fiscal twenty twenty five results. This quarter presented a challenging macro environment. Negatively impacting ad revenue. For the most part, the unclear regulatory status of a TikTok ban resulted in TikTok pulling back on user acquisition spend which had a ripple effect across the industry on companies where ad spend is an important revenue driver. Both Apple and Google remove TikTok from their storefronts for close to a month. With less demand from a high bidder, CPMs fell across the industry although our optimization efforts did enable our overall CPMs to rise versus last year helping offset the lower demand and lower MAU sets. While total revenue declined 10% year over year to $7,000,000 TikToks returned to the Apple and Google App Stores in fiscal Q3 is yielding encouraging results even while we await a final outcome about TikTok's future in The U. S. The other key event during the quarter was our announced restructuring in order to improve operational efficiency profitability and free cash flow.

Overall, between our restructuring and other items, we expect to reduce our annualized expense run rate by approximately $4,000,000 primarily related to a 22% reduction in our global workforce, driven by cuts to the Gurushatz team and the closure of our Norway office. Taken together, this will yield annualized cost savings of approximately $3,000,000 in compensation related and other expenses and $1,200,000 in savings resulting of the retention bonus payments owed to Guru Shots employees under the terms of the April 2022 acquisition. Our financials will start reflecting these savings in Q3 and culminate in Q4. The impetus in undertaking the restructuring was to improve efficiency, enhance our ability to invest in growth opportunities and positions Zedge for sustainable profitability. In addition, we expect that this will help us in generating free cash flow. I also want to underscore that we acted decisively to mitigate the impact of TikTok's mandated withdrawal from the market by focusing efforts on areas under our control such as further optimizing our ad inventory. For example, this quarter we added new demand partners and a new ad unit. With these continual optimizations, we are enhancing engagement driven monetization strategies and strengthening our subscription and premium offerings.

Our quarterly subscription revenue growth remained strong, increasing 13% year over year reflecting our success in effectively monetizing our user base. We continue to reap the benefits of our revamped subscription offering and upselling legacy subscribers to higher value plans which helped drive a 22% increase in active subscribers. This quarter, we not only experienced an uptick in but also from emerging markets, which points to our ability to iterate until achieving success. Zedge Premium continued to see strong momentum with GTV growing 27% year over year. Our relentless efforts to optimize monetization continues to pay off. For example, the work we've done with rewarded video has made this category a powerful monetization channel for increasing Zedge Premium's GTV. Rewarded video usage grew nearly 40% with very impressive low double digit conversion rates, effectively activating a new segment of purchasers of smaller volumes of Zedge credits and expanding the overall ecosystem. The launch of Paint two point zero on iOS in September and Android in October was also significant to our Gen AI strategy, introducing powerful new creation capabilities, including image to image and real time photo editing. Paint has gained significant traction over the past year with increasing engagement metrics from a low single digit percentage of Zedge Marketplaces daily users to a low double digit percentage more recently.

Engagement metrics specific to Paint surged more than 100% year over year in February, further underscoring its growing popularity. Let's not forget that Gen AI is still early in consumer market adoption. And we offer a great product for an attractive price. In the coming quarters, we are going to further expand the Zedge marketplaces Gen AI capabilities by offering an AI audio creator. This expansion represents a significant opportunity to further engage with users in an emerging and growing vertical. With the goal of converting our consumers into creators by empowering them with an easy way to make awesome ringtones sound effects and personalized audio clips By diversifying our AI driven offerings, we aim to tap into the growing demand for customizable audio content. While opening new monetization opportunities. While Gura Shot faced continued challenges in Q2, our late January restructuring plan will help lower costs as we revamp the unit for growth. Fortunately, there was only a slight sequential revenue decline when compared to Q1. Looking beyond the cost structure improvements we made, we are early in the process for reimagining Guru Shots two point zero and looking at everything from gameplay to content generation to monetization and more to unlock value from this asset.

Once the strategy and roadmap are solidified over the next few quarters, we will begin to allocate investment based on key milestones to enhance engagement and long term revenue potential. Emojipedia's results were roughly flat compared to last year. On a positive note, the introduction of Emojipedia's first AI feature an AI emoji generator monetized with rewarded videos has been encouraging. Users can now design their own custom emojis allowing them to easily make their creative dreams a reality. This is in keeping with our goal of turning consumers into creators. Additionally, we plan to continue to expand the Emoji Sandbox over time with new content and features.

And finally, we are in the process of redesigning the Emojipedia .org website to a more modern user friendly experience. Which we believe will drive further engagement. Looking ahead, we are cautiously optimistic of the ad revenue decline is behind us. And while TikTok is back in the market at this time, like the rest of the industry, we will continue to monitor the situation and adjust if the situation is resolved in an adverse manner. That said, we are excited by the potential of the roadmap for all of our products. We continue to believe our stock is significantly undervalued based on multiple valuation metrics.

And we expect to continue actively buying back shares under our existing $5,000,000 authorization. With that, I'll now turn the call over to E to discuss our financials in more detail. Ee?

Thank you, Jonathan. Total revenue in the second quarter was $7,000,000 down 10% from last year. Mainly due to the advertising headwind [indiscernible] that Jonathan mentioned. And the continued challenges at Gurusha. Second quarter subscription revenue was up 13% from last year. And our net active subscriber growth rate [indiscernible] to improve. And was up 22% year over year and sequentially for the seventh straight quarter. Our higher value iOS subscription and value added Zedge Plus offering for Android, are not only seeing organic growth, but they also continue to outpace churn. Which is many replacing lower cost legacy subscription. Which only remove ads. Zedge Premium's GTV achieved roughly $700,000 up 27% versus last year as the combination of our feature and content offering and monetization expertise continue to drive attractive growth. Despite the pressure on advertising, AppMall still grew 9% year over year to $7.8 Curishat, which is reported under Digital Good and Services revenue, remain a challenge. Down 33% from last year but only 4% sequentially. We expect the year over year comp to start to improve in our full quarter and into 2026. Cost of revenue was 6.4% for the quarter roughly flat year over year on an absolute basis.

SG and A increased by 9% to $7,100,000 during the quarter. This increase was mainly driven by marketing expenses related to higher pay user acquisition at the Zedge marketplace. And our subscription model has higher near term expenses as the timing of revenue and cost don't align. This is especially the case for a lifetime subscription. Which also carry a higher platform fee than an annual subscription. For example, for lifetime subscription, platform fees are expensed immediately while revenue is recognized over two point five years. Leaving us with a 100% operating margin after the initial purchase. And helping improve operating margin leverage as we scale. We had restructuring charges of $500,000 and non cash asset impairment charges of $800,000 during the quarter related to our announced restructuring activity in late January and early February.

Last year, we had asset in payment charges of $12,000,000 related to writing down the Gurusha acquisition. Which has now been fully written down. We currently expect to take a total of approximately $1,100,000 in additional restructuring, and non cash asset impairment charges during our third and fourth fiscal quarter. GAAP loss from operations was $2,200,000 the quarter. Compared to $12,000,000 last year. GAAP net loss and loss per share for the quarter were $1,700,000 and $0.12 compared to $9,200,000 and $0.66 respectively last year. Non GAAP net loss and loss per share were $200,000 compared to non GAAP net income and EPS of $500,000 and $0.04 in the prior year. Cash flow from operations was $700,000 and free cash flow was $600,000 for the quarter. While both were down from last year, we believe this will start to improve in the third and fourth quarters. As our restructuring savings start to impact the bottom line.

But Adjusted EBITDA for the quarter was negative $100,000 versus positive $1,500,000 in the prior year. Non GAAP G and A decreased 58% or over $400,000 compared to last year. Due to the impairment of intangible. From a liquidity standpoint, we finished the quarter with over $20,000,000 in cash and cash equivalents. June quarter, we bought back 245,000 shares under our 5,000,000 share repurchase program that was announced in Q1. Thank you for listening to our second and I look forward to speaking with you again on our third quarter call in mid June. Operator, back to you for Q and A. Thank you. We will now begin the question and answer session.

And the first question today is coming from Alan Klee from Maxim Group. [indiscernible] Alan, your line is live.

Yes. Hi. Good afternoon.

Could you I missed when you said what you expected the restructuring charges to be in your third and fourth fiscal quarters. Could Could you repeat that please?

Hi, Alan. Because of the accounting rule, we can't really accrue certain severance and termination benefit until it's been communicated to the impacted employee. So that occurred in February, which fall in Q3. Additionally, we are looking to certain impairment related to our office space in China. Those costs were be recorded either Q3 or Q4 as we look for sub tenor and how we negotiate with [indiscernible] I hope that answers your question.

Yes.

On the so you're targeting around $3.94100000.0 dollars annualized cost savings That's compared to the prior 12 what does that compare to of the base? And then second, when do you have a sense of how much of that shows up in of that's annualized, but how much of the amount you might see in fiscal third quarter and how much in fiscal fourth quarter? I mean, the cost savings is annualized. So approximately about $1,000,000 per quarter.

But would it be fully at that run rate for the third quarter or will it be at that run rate in the fourth quarter or sometime next year? When will it do you think it will be at that 1,000,000 savings Yes.

From third quarter, we should start seeing that $1,000,000 run rate per quarter in in savings. Before you factor in additional restructuring charges, So when you see the full $1,000,000 do you think in the third quarter or do you think you won't quite be there yet in the third quarter?

We will see that for $1,000,000 in the third quarter because current impact in employee, they're still on the payroll, but they will be offset against the restructuring charges.

Which is not part of the normalized SG and A expenses, if you will.

Okay.

Thank you. And then just in terms of the the business, Just when you were talking about TikTok, how you said you have some sense that [indiscernible] [indiscernible] that it's starting to improve. Maybe I wanted to ask your your average revenue per don't even know if I'm going to say it right, per monthly active user. That metric looked like it held up for the quarter.

But is that because of things like subscriptions and marketplace spending getting blended into it? Or why I'm talking about sequentially, but [indiscernible] what's the rash why is that? Yes.

So So we had decline in advertising revenue, but it was partially offset by the growth in subscription revenue. And also from Zedge premium. But remember, the average revenue for monthly user, it will be lower base because we have a lower amount.

So sequentially, our ARML is still higher compared to last year or sequentially?

Okay. For GroussHT, help me understand again, right now you've I guess allocated a good amount of the cost cutting related to it How do you think of are you still trying to do some initiatives to increase the the top of the funnel and engage and usage of new users or or what's the status with that?

Yes, Alan, it's Jonathan.

So in Groucho's we have the existing [indiscernible] we know it today. And the focus is on optimizing revenue performance and with reduced ad spend bringing in new users with a very attractive ROAS profile. Separate and apart from that, we are now in ideation planning stage for what Guru Shops two point zero will be. And how we will be able to improve the game materially built on modern infrastructure in order to realize and recognize the value that we believe that the game carries with it.

We are not as of yet doing any development work on Gurush Chats two point zero When I say development work, I mean coding and stuff like that. We're now in ideation phase. Game design phase, and thinking about where we can bring the game such that we can ultimately make a presentation to the Board and have a recommendation as to what should come next in terms of that part of the business.

Okay. [indiscernible] In the past, you've the last quarter you mentioned Wishcrap and AI Art Master were in beta. Is there any change in that or what's happening there?

Those are still in beta. And obviously, with the restructuring there's not a tremendous amount of effort being invested in those. I believe that sometime between now and the end of Q3, we will make a decision as to what we're going to move forward with, what we or what we might just say like, hey, no sense in moving forward on this one and But we're not there yet.

Okay. And similarly with AI audio, I think I heard you say something like looking to launch that maybe in the next couple of quarters. Any thoughts? AI audio is we are expecting to add an AI audio feature to [indiscernible] in the PaintSuite in the next couple of months. And I hope that that will actually be in Q3, if not, in Q3, it will be the beginning of Q4. But that will not be a separate app, that will just be part of our AI suite of solutions.

Adding a new vista, which is outside of the realm of visual in entering us into the realm of audio.

Okay, got it. If I step back and I think about your company, I I think you get very high marks over time with what you've done on monetizing advertising. And the challenges have come from Guru Shots and monthly average users So it sounds like I mean, tell me if I'm wrong, but [indiscernible] downsizing and then addressing Monthly active users, how do you think about just in general [indiscernible] I don't know what it is. How do you think about getting that to start to grow?

Yes. So I think that there are a couple of pieces in motion there. One is continued product innovation.

And resilience in terms of how we invest in the product and how we get users to engage with new features and the like.

And then another feature of this relates to subscriptions. Whereby we monetize better with subscriptions and subscribers There's a funnel there in terms of what happens second year, third year and some lifetime. And as you as you know, we've discussed about the growth that we've had with lifetime subscriptions and so on and so forth. So holistically, our perspective is try to continue to build with new features and monetize those features well. Optimize the segment of prospective subscribers and try to get lifetime subscribers And for those users that don't subscribe, optimize our ad inventory to generate the greatest ROI.

And that's in the Zedge marketplace. In terms of [indiscernible] certainly mention investment in paid user acquisition to complement the strong organic growth that we have for this Zedge marketplace. And we've been doing that successfully.

When it comes to Guru Shops, part of the reason that we have undertaken the restructuring relates to the notion of giving us runway in order to redesign and then come out with something that we think will strike the cord and spark the growth that we believe is achievable. And that will also be a function of not only product but also investment in [indiscernible] And as I indicated earlier, we've scaled back considerably in terms of our marketing spend for Gutter Shops yielding a much more attractive ROAS profile.

And then we're keeping fire powder in the kegs such that when Guru shops two point zero comes to fruition, that we have the money to invest and to grow that user profile and that user base, profitably. Yes. Thank you. You mentioned lifetime subscriptions and pushing to grow them. Does there at some point become an issue if you just do lifetime subscription that you you start to lose like subscriptions revenue because everyone's signed up for the lifetime or how do you think I mean you get the benefit in the short term, but how do you think about that? That's a great question.

Remember, we have a very, very large set of users that are coming into Zedge. On a regular basis. New users that is, and the way that we think about it is really segmenting based upon where we see the best possible outcome for any particular user. So I think with the robust organic growth coupled with the paid user acquisition that we invest in, we have room to maneuver there. It's not binary. It's not like we only have lifetime subscription and if you don't sign up for it, you can't use the app. Remember, we've got multiple tiers.

We've got subscriptions, within subscriptions we've got annual subscription, monthly subscription. [indiscernible] So then we have the free tier and then we have features that are available by a user interacting with a rewarded video. So there's a pretty wide range of [indiscernible] that we can steer users down in order to yield the best possible outcome per segment, if you will.

Okay. Thank you. I wanted I'm not sure if I heard what you guys said right. When you you made some commentary that you expected improvement in advertising from what you've seen so far in the next quarter? But I don't know if you went this far.

Let me ask The quarter you just reported, I think, is your seasonally strong quarter. So the next quarter I believe is normally seasonally not as strong. Did you make a comment that you think [indiscernible] fiscal 3Q revenue would be above fiscal 2Q or am I extrapolated in something you didn't say?

No, you are extrapolating. What we've said is we think that the challenge imposed with the in availability of TikTok for basically around a month is behind us. TikTok being back in the market has the impact of increasing CPMs and that is what we are experiencing.

And coupled with that, TikTok being back in the market also helps us on the paid user acquisition side because there are more platforms, so supply demand dynamics kick in and are benefiting us. Seasonally, you are correct, our fiscal Q2 quarter is the strongest quarter. And although it's With some optimizations we've done with our ad inventory that [indiscernible] from what we can see the pressure that the downside pressure that existed when TikTok wasn't around is in the rearview mirror. And then from a I guess, political perspective, my understanding is that the seventy five day window has been extended. Which I guess could point to the outcome that President Trump is trying to achieve and that is finding an appropriate buyer to keep TikTok alive and well. In The U. S. Okay.

Thank you.

Sure.

Okay. Those are my questions.

Thanks.

Thank you so much.

Thank you. You may disconnect your lines at this time.

You for your participation.