Zedge: The Worst May Be Over But Headwinds Remain (NYSE:ZDGE)

Zedge, Inc.’s (NYSE:ZDGE) business involves building digital marketplaces and competitive games around content created by regular people, and in some cases, influencers.

Tech and gaming stocks like Zedge can quickly take away with one hand what it gave with another, and that’s the case with the stock as it experienced a rapid growth trajectory starting in October 2020, soaring from about $1.35 per share to almost $20.00 per share in June 2021, and after about three weeks started a prolonged descent that ended up with a 52-week low of $1.86 in the latter part of October 2022.

Much of the price movement came from the gaming sector in particular starting to fall out of favor after optimism took a hit on growing concerns and impact over the war between Russia and Ukraine, inflation, the Federal Reserve’s probable response to it, and signs everything is not well with the economy.

Add to that the hype associated with NFTs, which Zedge was introducing during this time period, and the loss of interest in the aftermath, which resulted in lower-than-expected impact on the top and bottom lines of ZDGE. although part of that was mitigated by its focus on low-cost NFTs and making it easy to sell to potential customers.

Since then, the company has been focusing on building for the long term, further developing and promoting its freemium digital content marketplace and its recently acquired GuruShots photography game, which represent the two major products the company offers.

In this article we’ll look at the recent numbers from its earnings report, and where the company stands in its attempt to build a profitable company over the long term.

Some of the numbers

Revenue in the fourth fiscal quarter was $7.4 million, up 41 percent from the $5.2 million in revenue generated year-over-year, with full-year revenue reaching $26.5 million, up 35.6 percent from 2021’s $19.6 million in full-year revenue.

Breaking it down the revenue sources, advertising revenue was $4.4 million, up 5.4 percent from advertising revenue of $4.1 million in the fourth fiscal quarter of 2021. Advertising revenue for full-year 2022 was $18.9 million, an increase of $3 million over full-year revenue of $15.9 million in 2021.

Gaming revenue accounted for $1.4 million in sales in the fourth fiscal quarter, with no gaming sales recorded in the fourth quarter of 2021. Total gaming revenue in 2022 was $1.7 million.

Subscription revenue was $0.9 million, down 3.7 percent from the $1.0 million in revenue produced in the same reporting period of 2021.

Other revenue was $0.7 million, up $500,000 year-over-year, with full-year Other revenue coming in at $2.2 million, an increase of $1.7 million from last year’s fourth fiscal quarter.

Earnings in the fourth fiscal quarter were $4.5 million, an increase of $2 million from the same quarter in the prior year, or 83 percent. Full-year earnings were $9.7 million, or $0.65 per share.

Adjusted EBITDA in the quarter was $2.2 million, down $500,000 from the $2.9 million in adjusted EBITDA from last year in the same quarter. Full-year adjusted EBITDA was $12.4 million, an increase over the $9.9 million in adjusted EBITDA for full-year 2021.

Adjusted EBITDA margin was 30 percent for the year against 55 percent for full-year 2021.

Cash flow from operations fell to $0.2 million in the quarter, down $2.2 million from the fiscal fourth quarter of 2021. Full-year cash flow from operations was $11.5 million, an increase of $1.4 million year-over-year.

With the acquisition of GuruShots, the company added the new line item of Gaming to its report, adding $1.4 million in revenue in the quarter, as mentioned above. In-app purchases are what drives that revenue.

Other revenue, which is primarily driven by Zedge Premium and Emojipedia, increased from the acquisition of Emojipedia earlier in the year.

At the end of the quarter ZDGE had cash and cash equivalents of over $17 million.

The company also had an $11 million loan facility put in place, of which it drew $2 million at closing. Included in the facility was a term loan and a revolving line of credit.

Management stated it will help strengthen its balance sheet while providing the company more flexibility to invest in growth at the right times.

It also repurchased 160,000 in shares in the quarter, which I believe wasn’t a prudent move at this stage of the company’s growth. I understand why the company did it, but in light of current economic conditions, it would have been better to keep in available for usage.

APP metrics

APP metrics are a concern for Zedge, as monthly active users (MAU) dropped to 32 million in the fourth fiscal quarter, down 7 percent. In developed markets MAU dropped by 14 percent, while emerging market MAU was down almost 5 percent.

Management cited the conflict between Russia and Ukraine, along with energy issues and its impact on the pocketbooks of people as the key reason for the decline. For the same reasons, the company noted that revenue from GuruShots and subscription revenue underperformed expectations. Active subscriptions fell from 752,000 last year in the same reporting period, to 692,000 in the fourth fiscal quarter of 2022, as new subscribers couldn’t make up for the churn.

GuruShots

With the acquisition of GuruShots Ltd in April 2022, ZDGE provided a look into where it wants to take the company in the future. GuruShots is a company that combines gameplay with photography which empowers amateur photographers to compete in a variety of contests using their photos while engaging in a social media feature that includes recognition of their work via awards and badges, as well as providing the option to vote.

The company said it estimates the overall market in the vertical at this time to be in from 30 million to 40 million people a month, and considers it to be in the early stages of growth.

On a monthly basis, the company has over 300 competitions which attracts over 1 million photos being uploaded to the platform, resulting in over 4.5 billion in “perceived votes.”

GuruShots has introduced a variety of elements to the mix in order to increase engagement from users and make it stickier, which in turn should increase revenue from the segment. The business model of GuruShots is to attract users by offering a ‘Free-to-Play’ experience, while monetizing users by providing resources that can be acquired to give payers using them and edge.

The monthly average for players that pay is over $55 per player, and it’s been growing over 14 percent annually. If Zedge can increase usage and stickiness at GuruShots, it could become the top-performing unit at the company.

Management said it doesn’t expect GuruShots to be profitable for anywhere from 18 to 24 months. The company is allocating resources in order to scale GuruShots.

Zedge Premium

The Zedge App was the core product offered by ZDGE until it acquired GuruShots, but remains popular, having served approximately 32 million MAU in July 2022, according to management.

Using a freemium digital content marketplace model, the company monetizes users with advertising, subscriptions, in-app purchases and Zedge tokens, a virtual currency of the company.

What Zedge Premium does is empower creatives to sell their work directly to customers. Part of that included ‘NFTs Made Easy’, which provided artists with an easy-to-use platform to sell their creations to its large customer base.

Zedge Premium has been partially insulated from the negative effects of the crypto winter, primarily because it focused on NFT affordability and making it easy to acquire NFTs on its platform.

While MAUs are down, the number of installs were up 11 percent in 2022 against where they stood at the end of 2021. That translated into average revenue per monthly active user (ARPMAU) jumping by 17 percent, and gross transaction value (GTV) climbing by 23 percent in the fourth fiscal quarter, and 60 percent full year.

But as mentioned above, MAU for the Zedge App dropped overall in the markets it serves.

While Zedge Premium should continue to contribute significantly to the company’s performance in the near term, further out I expect GuruShots to become a larger percentage of overall revenue and earnings.

Conclusion

There’s a lot of potential in the business model of ZDGE, which combines gaming and photography in a way that has attracted a lot of users. I has been under some pressure from the effects of geopolitics and a weakening economy, but it is definitely, in my opinion, competing in a market that has significant, long-term growth potential.

Even so, it’s going to take some time for ZDGE to work its way through the headwinds it now faces, and with some of the initiatives it’s taking to attract and retain more users, it’ll be a while before investors will know how successful they’ll be.

For those reasons, I consider ZDGE as a speculative play that presents a possibly asymmetric play over the long term which investors would probably consider taking only a small position in the company.

If some of the steps it’s taking start to take hold, at that time it would be worth revisiting that strategy. But for now, and under current market conditions, at best, only taking a small position at close to the current entry point would make sense, for investors interested in this particular market sector.

The worst may be over for the company, but there are still a lot of headwinds remaining that will cause a lot of volatility and swings in its share price.