Good afternoon, and welcome to Zedge's Second Quarter 2021 Earnings Conference Call. [Operator Instructions] In today's presentation, Jonathan Reich, Zedge's Chief Executive Officer and Yi Tsai, Zedge's Chief Financial Officer, will discuss Zedge's financial and operational results for the three months period that ended on January 31, 2021.

Any forward-looking statements made during this conference call either in prepared remarks or in the question-and-answer session, whether general or specific in nature, are subject to risks and uncertainties that may cause actual results to differ materially from those, which the company anticipates. These risks and uncertainties include, but are not limited to, specific risks and uncertainties disclosed in the reports that Zedge files periodically with the U.S. Securities and Exchange Commission. Zedge assumes no obligation either to update any forward-looking statements that they have made or may make or to update the factors that may cause actual results to differ materially from those that they forecast. Please note that the Zedge earnings release is available on the Investor Relations page of the Zedge website. The earnings release has also been filed on a Form 8-K with the SEC.

I would now like to turn the conference over to Mr. Jonathan Reich.

Jonathan Reich - Chief Executive Officer

Thank you, operator and thank you all for joining us today. Good afternoon. Welcome to Zedge's Second Quarter Fiscal Year 2021 Earnings Conference Call. I'm Jonathan Reich, CEO of Zedge and with me is our Chief Financial Officer, Yi Tsai, who will provide additional insight into our financial performance. Q2 was another record quarter for Zedge. We surpassed $5 million in revenue for the first time ever, an increase of more than 100% when compared to the year ago quarter and also reported new highs for operating income, operating margin, net income, EPS, cash flow from operations and EBITDA. Operationally, we completed the long-awaited migration to our new content management system, which is delivering encouraging results earlier than anticipated. And we rolled out app icons on iOS. Taken as a whole, we are well positioned for what we hope to be a strong second half of our fiscal year.

For those of you that are newer to the story, Zedge is a leading app developer focusing on mobile phone personalization and entertainment. Our heritage is rooted in being one of the leading providers of mobile personalization content focused on offering consumers a rich array of high-quality wallpapers, video wallpapers, ringtones and notification sounds. Our flagship app, Zedge Wallpapers and Ringtones, is all about personal identity and acts as a popular hub for self-expression for millions seeking mobile phone personalization, social content, and fandom art. To date, the app has surpassed 482 million organic installs and currently has 35 million monthly active users or MAU. The app generates revenue from a combination of advertising, paid subscriptions, and our Zedge Premium Marketplace, which enables content creators ranging from world-class celebrities to emerging artists to display and market their digital content and sell it to our users.

Moving to our second quarter performance, we continue to optimizing our ad inventory, benefiting from both MAU growth and seasonal strength in ad pricing. Active subscriptions also performed well with 102,000 net additions and second-year renewal rate of approximately 45%. As you may recall, we earned a higher margin for year two renewals as Google's fee drops by 50%. We need to continue to provide the content and user experience to maintain these strong renewal rates, which we expect will fluctuate over time.

Turning to product. We completed the roll-out of our new content management system in December. This milestone opens the door for us to start introducing new features and enhancements that we expect will improve engagement and retention, especially in well-developed markets, including overall user accounts, social and community features, and search and discovery. These will be tested and rolled out iteratively. Currently, we are focused on reimagining our user accounts, foundation needed for many of these initiatives. We expect to complete this redesign in Q3 and shortly thereafter start introducing community features that will enable users to follow artists and other users, create and share collections, notify users about new followers and new content and even offering an easy-to-remember Zedge handle like Zedge.me/JonathanReich. We are also scoping our product enhancements that can be offered to bolster our paid subscription offering in fiscal 2022.

Our investments in Zedge Premium, our marketplace for artists, continues. We are in the process of identifying and hiring a dedicated product manager to lead this important part of our business. This positions responsibility will be to increase the number of professional artists using Zedge as a distribution platform, growing the average revenue per artists and increasing the use of our marketplace by customers. In the meantime, we are testing new designs that better display relevant premium content to users as well as growing our artist base. I'm happy to report that the Shortz beta is now available with an ad supported model, enabling users to consume as much content as they would like simply by watching rewarded ads. Those users seeking an ad free experience can sign up for paid subscription. We expect the ad supported version to increase the customer base at the top of the sales funnel and set the stage for increased subscriptions over time.

In addition, last week, we rolled out Shortcastz, which are high production value podcasts of our Shortz stories. We're excited by the possibilities that short-form audio can bring to the product and we'll start by analyzing how our users engaged with this content. On our last call, we discussed the $5 million at-the-market offering, which has now been completed. We expect to initiate a new $10 million program imminently to further fortify our balance sheet in order to provide for maximum flexibility to pursue incremental potential growth opportunities such as acquisitions, for example, to drive incremental growth and unlock shareholder value. We expect to consider potential acquisition targets in, but not limited to, mobile gaming, social video and even mindfulness. Our acquisition strategy is to seek out opportunities where we can leverage our large user base, expertise and monetization, outstanding engineering teams and healthy balance sheet. We are early in this process and do not know what will transpire, but suffice it to say that we are being cautious and selective. We also do not plan on discussing specific potential targets or opportunities until there is something to announce publicly.

In closing, we had a record first half and expect to report continued strong year-over-year growth during the second half of the year despite the seasonality in the ad supported portion of the business. As such, we now believe the top line growth for fiscal 2021 will increase between 75% to 80% when compared to the previous year. In addition, we expect solid growth in EPS and in cash flow from operations.

Before handing the call over to Yi, I want to thank you, our investors for your support. I also want to remind everyone that our success is a direct outcome of the outstanding team of talented professionals who work at Zedge and who go above and beyond to execute on our vision. Thank you. Now, I am going to turn the call over to Yi who will provide details about our financial performance. Thank you.

Yi Tsai - Chief Financial Officer and Treasurer

Thank you, Jonathan. I want to start by reminding those on our call that our fiscal year ends July 31 and that our fiscal Q1 and Q2 tend to be seasonally stronger, while Q3 tend to be the seasonal low. Typically, with incremental sequential improvement in Q4, additionally, we introduced the term active subscription to replace paid subscription as a metric this quarter. Due to a change in calculation used by Google Play that now includes account hold, which is a subscription status that begins when the users former payment fail. When the three days grace period has ended, we will allow payment resolution. The account hold period lasts for up to 30 days with the aim to reduce cancellation rate.

Moving to the second quarter results. Monthly active user or MAU defined as a number of unique users that open our app during the last 30 days of the period increased 3.2% to 35.4 million during January 2021 from 34.3 million in January 2020 and was up 9.3% sequentially. Emerging markets showed strong double-digit growth, while well-developed markets continued to contract, however, in the lower rates than when compared to all four quarters in fiscal 2020. As Jonathan touched on, we are actively taking steps to enhance our offering for users in well-developed markets to spur both MAU growth and higher growth rates for Zedge Premium.

Total revenue in second quarter increased 101% to $5.3 million compared to the year ago quarter. The main drivers were subscription growth, optimization of ad waterfall and an increase in advertising rates relating to year-end ad budget. Zedge Premium gross transaction value or GTV that is a total sales volume transacted through our market was $211,000 in Q2, up 7.1% compared to a year ago quarter. As Jonathan indicated, we want to position Zedge Premium as a growth driver in the quarters to come. And the introduction of users account and additional feature will be key to accelerating growth rates. Active subscriptions exceeded [Phonetic] 700,000 at the end of the quarter, 139% increase year-over-year and 17% on a sequential basis. As you'd recall, when a new user purchase a subscription or premium user convert to a paid subscription will pay 30% fee to Google, which shows up in our SG&A as a marketing expense. However, if a subscriber with a monthly or annual renew their subscription up to 12 months, the Google fee drops to 15%. We continue to see annual renewal rates approximately 45%, which is generally considered as the strong performance within the industry.

Overall, average revenue per monthly user or ARPMAU was a record $0.049, an increase of 88% year-over-year and 35% sequentially. The year-over-year improvement is primarily attributable to growth in paid subscription, the continuing advertising benefits from inventory optimization and adding new distribution partners.

Our operating margin increased to 47% versus 3% last year and 29% in Q1. This reflects higher subscription revenue and strong cost containment as SG&A only increased 14% versus last year. Net income and diluted EPS were $2.3 million and $0.17 respectively versus $100,000 and $0.01 in the prior year. Average shares outstanding for the second quarter, 13.4 million on a fully diluted basis. EBITDA was $2.9 million versus $500,000 last year.

From a liquidity standpoint, we remain in a strong net cash position and almost no debt. As of January 31, we had $13.6 million in cash and cash equivalents, a $7.4 million sequential increase and a $11.4 million increase compared to a year ago. The increase in cash over Q1 was driven by a combination of positive operating cash flow of $2.3 million and net proceeds of $4.8 million [Phonetic] from the ATM we've completed during the quarter.

Moving to guidance for fiscal 2021. As Jonathan mentioned, we have increased our top line growth expectation to 75% to 80%. Q3, which has historically been our seasonally slowest quarter, is expected to be a relative variable comp due to our business being negatively impacted by COVID-19 last year. Q4 has traditionally been higher than Q3, but keep in mind that our Q4 comp may be slightly tougher due to the growth trajectory that began in Q4 '20. I hope that each of you remain safe. And I look forward to speaking with you again on the next call. Operator, back to you for Q&A.

Question & Answers

Questions and Answers:

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Operator

We will now begin the question-and-answer session. [Operator Instructions] Your first question is coming from Allen Klee with Maxim Group. Your line is live.

Allen Klee - Maxim Group - Analyst

Good afternoon, and congratulations on very strong results. Starting with the advertising, your - the rate that you provided for the quarter of [Indecipherable] is by far the highest you've ever had. And I know it's - there are seasonality in there. And it's also affected by increase in subscribers, but to what extent, are we at like a higher level of advertising monetization in terms of rates based on everything that you've done to make things better. Thank you.

Jonathan Reich - Chief Executive Officer

Hi, Allen. It's Jonathan. I'm not sure I understand your question when you say it, are we at a higher rate, one more time?

Allen Klee - Maxim Group - Analyst

I'm just trying to understand to what extent, you feel the changes you've made, have your advertising rates kind of at a higher level?

Jonathan Reich - Chief Executive Officer

So the changes that we've made have resulted in generating more revenue per monthly active user and we are benefiting from changes that we've made, both pre-migration and that is pre-the CMS migration that we talked about earlier, as well as post CMS migration. Does that answer your question?

Allen Klee - Maxim Group - Analyst

Sure. Could you - maybe to follow up on that and for the operator, I just want to make sure the call doesn't end after two questions. Could you talk a little about what CMS is and what that does for you?

Jonathan Reich - Chief Executive Officer

Sure. Our CMS, our content management system, is the part of the platform that manages all of the content that we have in the app. As we've shared with investors, we had a major investment in rebuilding our content management system from the ground-up such that it would house both our user generated content and our premium content together, and that project was completed in December and opens the door for us to go out and begin rolling out new features and enhancements such as social features, community features and so on and so forth that we expect will positively impact engagement and retention. Those will be rolled out incrementally after we've completed the overhaul of our whole user account setup, which is underway and which we hope to complete by the end of fiscal year Q3, which is at the end of April. And then, those new features will start to roll out incrementally. Obviously, the better of a job that we do in terms of improving engagement and retention translates into more revenue from our customer base.

Allen Klee - Maxim Group - Analyst

Great. And then, could you expand a little on what you said about the focus on improving with your well-developed countries and what you're doing with Apple now and the traction that you're seeing there?

Jonathan Reich - Chief Executive Officer

Absolutely. So as we've said, one of our goals is to take our well-developed country user base and put that back on the growth trajectory and many of the features and enhancements that we are investing in are ones, which we believe will help reverse that trend. Moving to Apple, as you know, with the introduction of iOS 14, Apple opens up the door a crack to the whole personalization vertical. And just by way of background, mobile phone personalization is highly available on Android being baked into their operating system. And it's very easy to change your wallpaper or ring tone. With our app, you guys preview what it is that you like and you're press set and you're done. That's much more complex in the Apple ecosystem. However Apple's entree, if you will, into the world of personalization is specific to app icons that can now be customized as well as app widgets that can be customized. And we have rolled out app icons at the end of December on iOS and expect to roll out widgets later this fiscal year. Those two items, we believe, can help generate incremental revenue from our iOS user base. And just by way of reference, give or take, around 90% of our users today are on Android and around 10% on iOS.

Allen Klee - Maxim Group - Analyst

Got it. Thank you. With Shortz, very encouraging that you're - you have the ad supported model, can you give us any metrics in terms of what that has done just in terms of amount of usage or any type of metrics?

Jonathan Reich - Chief Executive Officer

Well, it's really early, Allen. As I mentioned, we just rolled out ad supported Shortz last week, but from the very, very preliminary data, what we have seen is that there is more engagement and that specifically, day two retention has improved. We would be premature in terms of really getting into amounts and amounts of data. I think that we need to give us some more time before we can report back to shareholders with respect to what the overall impact is both short and long term.

Allen Klee - Maxim Group - Analyst

Okay. And Shortcastz, sorry, that sounds pretty exciting. How was that going to be set up in terms of the options of monetizing and the format of it and what you think the potential is?

Jonathan Reich - Chief Executive Officer

Sure. That's a great question. And to be honest with you, we have not made any decisions about how to monetize that as of yet. Our first goal is to understand how users engage with these high-quality many podcasts, if you will, of the content. And then, based upon that, we can use that data to make an informed decision about how we can monetize. With that being said, there are many different possibilities. There is a possibility for having audio ads in there. There is a possibility for bundling that into subscriptions making subscriptions more valuable. There is also a possibility with the user base being interested in this and is syndicating across third-party platforms by way of example, Spotify - as Spotify or an Apple podcast or things of that sort. But really long story short, still too early to answer the question with great degree of clarity. We need to see what engagement is like and then proceed from there.

Allen Klee - Maxim Group - Analyst

Thanks. And then, I think I know the answer to this, but I just think it would be helpful if you mentioned this on the call because I think your stock has gotten hit during the quarter when there was some news of Google changing some of their what data could be tracked and privacy rules related to that. Could you explain like if that has an impact on you or if not, why that is?

Jonathan Reich - Chief Executive Officer

Our stock had - I don't know better stock. Our user base had been hit back in late August 2019, early September 2019 because of some buggy code at a third-party advertiser had in their SDK that's the software that allows our apps to communicate with that advertisers' platform. And we were temporarily banned from the Google Play Store until that problem was fixed. Overall, with respect to privacy, we are clearly very sensitive to making sure that we protect our users' privacy and I should mention as well that unlike many other apps that we'll have challenges associated with Apple's decision to remove IDFA, which is the way by which information is collected about users and shared with advertising networks. We really are not going to see a material impact of that because of the small amount of - relatively small amount of Apple users that we have.

Allen Klee - Maxim Group - Analyst

Thank you. And then, just touching on the seasonality, we know that I think the next quarter is the seasonally slowest, then you did mention that the - you will have tough comps in the fourth quarter, but is there a way to think about maybe directionally the magnitude of the seasonality in the third and fourth quarter?

Jonathan Reich - Chief Executive Officer

If you look back historically, there has been a falloff and I don't have the numbers in front of me, but anywhere from 10% to 20% seems directionally correct when looking back at previous quarters. I can't tell you whether or not that will continue to be the case this year. But for the purposes of modeling, it's most likely okay to look at that and see how that affects your model. Yi, do you have anything that you want to add to that?

Yi Tsai - Chief Financial Officer and Treasurer

No. I think you sum it up well. I mean one, but when we got hit with COVID, daily revenue was down to $20,000. And we recovered slowly from $20,000 to $30,000 to $40,000 to $50,000 to $60,000. So we - hopefully, we can maintain $60,000 or $50,000 of daily revenue level.

Allen Klee - Maxim Group - Analyst

Great. And then, your monthly active users, which was 35,400, which…

Jonathan Reich - Chief Executive Officer

35.4 million. [Phonetic]

Allen Klee - Maxim Group - Analyst

Yeah, yeah. I'm sorry about that. So you're hitting kind of a high on that, while I mean close to a high of what you've ever had, while this isn't the strongest time of the economy we've ever had. So what would you attribute that to?

Jonathan Reich - Chief Executive Officer

Sure. So I would say that there are a couple of things. As you know, we have been making improvements in the app. There has also been growth in the emerging markets. One country that screams out in that capacity is India where we've seen very, very material growth over time. And as you recall, we had litigation. We were in litigation with an Indian company, which we ultimately prevailed with and as a result of that, our app was suddenly made available throughout the entire country. Prior to that, the plaintiffs in the case had successfully seen to it that the Department - Indian Department of Telecommunications was able to block our app and that block was removed. And we've seen some really, really nice growth in India since then.

And then, I would say as well, there has been, as is a way - as is well aware throughout the entire digital market an increase in the use of mobile apps because of COVID and stay-at-home orders where we have likely suffered to some extent though is with respect to phone sales - our new phone sales in retail locations, because of the slowdown in retail sales due to COVID. and our hope is that as we begin exiting this COVID tunnel and retail sales begin to resume and get restored that we will be able to benefit from that simply due to the fact that one of the user patterns that is very common when a user buys the new phone is they want to personalize it and as such, they will come to Zedge, download the app and partake of the content.

Allen Klee - Maxim Group - Analyst

That's great. My last question, just could you tell me if you happen to know what your share count is kind of as of now?

Jonathan Reich - Chief Executive Officer

Yi, correct me if I'm wrong, but I believe it's somewhat around 13.5 million.

Yi Tsai - Chief Financial Officer and Treasurer

That is correct.

Allen Klee - Maxim Group - Analyst

Fantastic. Well, congratulations on excellent execution. Thank you so much.

Jonathan Reich - Chief Executive Officer

Thank you.

Operator

[Operator Instructions] We have no further questions from the lines.

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ZEDGE INC

Q2 2021

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