Zedge, Inc. (ZDGE) Earnings Call Transcript

Good day, and welcome to Zedge's earnings conference call for the fourth quarter and end of fiscal year 2026. [Operator Instructions] I will now turn the call over to Brian Siegel.

Thank you, operator. During today's call, Morris Berger, that is newly appointed CEO, Jonathan Reich, CEG's President and Chief Operating Officer; and Yi Tsai, Zedge's Chief Financial Officer, will discuss Zedge's financial and operational results that we reported today. Any forward-looking statements made during this conference call during their 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 in the future to differ materially from those discussed on today's call. These risks and uncertainties include, but are not limited to, specific risks and uncertainties disclosed in Zedge's periodic SEC filings. Zedge assumes no obligation to update any forward-looking statements or to update the factors that may cause actual results to differ materially from those that they forecast. Please note that our earnings release is available on the Investor Relations page of the Zedge website and has also been filed on Form 8-K with the SEC. Finally, on this call, we will use non-GAAP measures. Examples include non-GAAP EPS, non-GAAP net income free cash flow and adjusted EBITDA. Please see our earnings release for an explanation of our use of these non-GAAP measures. Now I'd like to turn the call over to Morris.

Thank you, Brian, and good afternoon, everyone. I am happy to be back at Zedge. For those who may not know my background, I was involved with Zedge very early in its history. In fact, I was the person who found the company in Norway when it only had 2 employees, and I served as CEO for over 4 years. I've spent much of my career building and operating businesses across media and technology, including IDT Entertainment and Zeno Media. When Howard approached me about returning, what caught my attention was the opportunity for Zedge as a whole and specifically what Jonathan and the team had identified and begun developing with DataSeeds.AI. Zedge has an established business that generate cash, a strong balance sheet and a collection of assets and capabilities that can be applied to various growing markets. Through DataSeeds, we have already demonstrated an ability to turn some of those capabilities into a commercial offering, securing repeat business and expanding into new services. What I find particularly compelling is that we are building on a foundation that already exists within Zedge, we're not starting from scratch. We have established creator communities, experience developing and operating digital platforms and an infrastructure that can support specialized data production. Of course, DataSeeds is still early in its development, and there's considerable work ahead. My initial focus has been on getting to know the team and the business understanding our customers and identifying where additional investment can have the greatest impact. Howard's increased involvement and the recent capital investment give us additional resources to pursue the opportunity. I've worked with Howard before with much success and I'm looking forward to working closely with him, Mishi, Jonathan and the rest of the multinational team. I believe we have an opportunity to build DataSeeds into a substantial business over time with high enterprise value, and I am looking forward to helping make that happen again. With that, I'll turn it over to Jonathan.

Thank you, Morris. It's great to be working together again, and good afternoon, everyone. I'll begin with a DataSeeds update, then review our fiscal 2026 performance and then more about the opportunities we see across the company and our priorities for fiscal 2027. DataSeeds is our primary growth initiative and the area where we see the largest opportunity to create additional value for Zedge stockholders over time. AI developers increasingly need specialized purpose-built data tailored to particular models, applications and edge cases. Much of that data cannot be scraped from the Internet or acquired from an existing library, we must be produced subject to a detailed technical brief. Zedge entered this market with meaningful advantages, including creator communities, content libraries and extensive experience building technology that can attract, engage and mobilize contributors. During fiscal 2026, we combined these assets with new production capabilities and enterprise workflows, enabling us to deliver data sets to leading technology companies. That foundation produced meaningful commercial traction, including repeat orders from existing customers, our first 6-figure engagement and an expansion into model evaluation. Revenue will likely remain uneven in fiscal 2027 because assignments vary in size and timing, and we are still in the early stages of this endeavor, but the early progress reinforces our conviction in the opportunity. Our ability to invest in DataSeeds is supported by the performance and cash generation of our established businesses. So let me turn to our fiscal 2026 results. Fiscal 2026 was a year of meaningful financial improvement following last year's restructuring activities. Consolidated revenue increased approximately 8%, subscription revenue grew nearly 30%, and we delivered substantial gains in profitability and free cash flow. Yi will provide a more detailed review of our financial results shortly. The Zedge Marketplace remains our principal source of profitability and cash flow. It also contributes a scaled creator community and by nature of operating that business, we have developed expertise in user acquisition, creator onboarding, engagement, consent management and payments that are critical for DataSeeds growth. In the fourth quarter, marketplace average revenue per monthly active user increased year-over-year by more than 30% to $0.121 and active subscriptions increased 35% and to approximately 1.3 million. Those gains more than offset the revenue impact of a 17% decline in monthly active users. Reversing the MAU downward trend remains a priority while improving monetization across the audience we retained. Zedge Marketplace on iOS continues to perform well supported by strong product acceptance, effective marketing and subscription growth. Looking ahead, we expect to more tightly calibrate paid user acquisition spend with return on advertising spend or ROAS. This may result in a more measured rate of marketplace growth while maintaining our disciplined approach to investment and user growth. We continue to believe in the Zedge marketplace and are investing in product development. Over the past year, we introduced features designed to improve retention and engagement, including alarms and task-driven reward activities and introduced new content verticals, including watch faces, dynamic wallpapers and battery charge screens. Marketplace is a valuable asset both on a stand-alone basis and as a driver for DataSeeds and maintaining its profitability and cash generation remains paramount. At Emojipedia revenue continued to decline and weighed on our consolidated growth rate, the business nevertheless continues to generate very high margins because it has minimal fixed and variable operating costs. We will continue to manage Emojipedia for cash generation while evaluating opportunities to slow the decline without significant investment. GuruShots and DataSeeds are now being managed as 1 business. GuruShots contributes an established photography community, an extensive image catalog and experienced visual contributors who can support DataSeeds collection, annotation and evaluation work. We are also designing new consumer products with technology that can connect to DataSeeds, and we have redirected an innovation team to DataSeeds initiatives. These efforts create reusable technology and capabilities for the enterprise business. I will close by returning to DataSeeds and explaining how we plan to build on the foundation established during fiscal 2026. Depending on a customer's needs, we can use existing content, mobilize contributors through our communities, develop mission-specific data collection applications or deploy professional resources through our DataSeeds production cloud. We manage rights, consent, metadata, compliance and quality assurance throughout the workflow. Combining these sourcing and production methods gives us flexibility to meet highly specific customer requirements without building every capability from scratch. The opportunity now extends beyond training data. DataSeeds began with rights cleared image data sets and has expanded into multimodal data, including audio and video. We are also building services across annotation, enrichment and model evaluation. Our first commercial model evaluation engagement with Bria demonstrates that expansion. Bria needed to assess subtle quality differences in AI-generated images that automated systems could not evaluate reliably through GuruShots we mobilized experienced photographers who routinely evaluate and vote on images. Multiple evaluators independently reviewed the content using a process designed around Bria's requirements, demonstrating how expert human judgment can complement automated evaluation methods. Our model evaluation offering combines an established community of visual evaluators with the workflow and quality controls required to produce consistent, usable enterprise results. On a demo for another client, we tested our evaluation capabilities on a customer's AI-generated images and found that our solution was able to provide value-added insights regarding the image quality of their model, particularly when judging for nuanced variables like dim lighting conditions. That result illustrates how DataSeeds can expand existing customer relationships and the synergies between GuruShots and DataSeeds. Physical AI and robotics are another promising area. These applications require specialized video data sets that capture how people interact with physical environments. That can include egocentric video recorded from a participant's perspective, exocentric video recorded from external viewpoints and the associated synchronized sensor data. Much of this content must be collected specifically for the task being modeled. Our experience developing mobile applications and managing distributed contributors gives us a strong foundation. We are developing collection capabilities now, although this business remains early. In fiscal 2027, our priorities are to expand our technical and production capabilities, deepened customer relationships, broaden and grow the pipeline and add the people and processes needed to manage larger more complex engagements, all while remaining disciplined as we invest. Individual projects can vary considerably in size, scope and timing, and our objective is to turn the early traction into a larger more diversified and more consistent business. The investment Morris referenced gives us the flexibility to move faster and not miss out due to resource scarcity. Our focus now is to deploy those resources with discipline and align customer technical and organizational priorities that can build a durable business and deliver outsized value. Our established businesses provide the cash flow, communities, content and operating expertise behind this strategy. DataSeeds converts those advantages into an enterprise growth platform that we believe can become a meaningful growth driver for Zedge. We entered fiscal 2027 with commercial validation, expanding capabilities and additional resources. We now need to execute deliver for customers, convert the pipeline and build the organization required to scale. With that, I'll turn the call over to Yi for a detailed review of our financial results. Yi?

Thank you, Jonathan, and good afternoon, everyone. I'll begin with our fourth quarter results, followed by our full year performance and our balance sheet. Total revenue for the fourth quarter was $7.8 million, an increase of 4% from the prior year. Advertising revenue declined 1.9% to $5.1 million primarily reflecting the continued decline at Emojipedia. Subscription revenue increased 25.6% to $1.8 million, continuing the strong growth we've seen throughout fiscal 2026. Active subscriptions increased 35.3% year-over-year to approximately 1.3 million, while average revenue per monthly active user increased 30.5% to $0.121. Digital goods and services revenue, which combines DataSeeds and GuruShots, was down approximately 2% to $0.4 million compared to approximately $0.5 million in the prior year quarter, as the decline in traditional GuruShots gaming revenue was mostly offset by DataSeeds revenue. Other revenue increased 11.6% to $0.5 million. Turning to profitability. GAAP operating income was $0.3 million compared to an operating loss of $0.7 million in the fourth quarter of fiscal 2025. GAAP net income was $0.4 million or $0.03 per diluted share compared to a net loss of $0.6 million or a loss of $0.04 per share in the prior year quarter. Non-GAAP net income was $0.5 million or $0.04 per diluted share compared to $0.1 million or approximately breakeven per share last year. Adjusted EBITDA increased 75.6% to $0.5 million compared to $0.3 million in the prior year quarter. Turning to our full year results. Total revenue increased 7.6% to $31.6 million. Subscription revenue increased 29.5% to $6.6 million while advertising revenue grew [ 41% ] to $21.2 million despite the declines at Emojipedia. Digital goods and services revenue was $2.0 million compared to $2.2 million in fiscal 2025, and other revenue increased 6.5% to $1.9 million. For the full year, our GAAP operating loss narrowed to $0.6 million from $3.2 million in fiscal 2025. Our GAAP net loss narrowed to $0.1 million compared to a net loss of $2.4 million last year. On a per share basis, the loss was $0.02 compared to $0.17 in fiscal 2025. Non-GAAP net income increased to $3.1 million or $0.24 per diluted share compared to $0.7 million or $0.05 per diluted share in fiscal 2025. Adjusted EBITDA increased 134.2% to $4.1 million compared to $1.8 million last year. Turning to cash flow and liquidity. We Fourth quarter cash flow from operations increased to $1.7 million from $0.7 million in the prior year period. Free cash flow increased to $1.6 million from $0.5 million. For the full year, cash flow from operations increased to $4.6 million from $3.4 million while free cash flow increased 46.6% to $4.2 million from $2.9 million. We ended fiscal 2026 with $20.3 million in cash and cash equivalents and no debt. During fiscal 2026, we repurchased approximately 686,000 shares and returned an aggregate of approximately $2.7 million to stockholders through share repurchases and dividends. Subsequent to fiscal year-end, we completed the approximately $7.7 million insider-led financing discussed earlier in the call. That capital is not reflected in our July 31 cash balance, which, on a pro forma basis, stands at around $28 million. As previously disclosed, we suspended share repurchases in connection with the financing and expect to continue our quarterly dividend. That concludes my financial review. Operator, please open the line for questions.

[Operator Instructions] Our first question is coming from Allen Klee from Maxim Group.

I was going to kind of let Derek ask some questions on DataSeeds, and I was going to ask some other questions. But even though I know tests your focus. So I'll try to be more brief. In terms of I'm sorry, just share with me 1 second. just in general, for monthly active users, what are you actually trying to do now to stabilize it?

Allen, it's Jonathan. So we have 2 parallel tracks that we're pursuing. One is around product. Allen, it's Jonathan. So we have 2 parallel tracks that we're pursuing. One is around produ features, enhancements, development and so on and so forth. And then the other is around expanding paid user acquisition channels, focusing on channels that are going to deliver positive ROAS, monthly active users. And there have been some changes in our marketing team that we believe will translate into stabilizing the monthly active user base. And on the product enhancements and feature development side, that is a core part of what we do on a day in and day out basis in terms of trying to unlock new growth opportunities accordingly.

Okay. your SG&A jumped up this quarter. Is that kind of -- what was behind that? And is that kind of a good run rate going forward?

Yi, do you want to take that?

Yes. Sorry, I was on mute. The SG&A went up primarily because the net compensation when you may not have a U.S. dollar depreciate gain is really sharp quite a bit with how of the common expenses in GuruShots and some of our employees and -- does that answer your question?

Okay. And where -- can you tell me where the share count is today or your expected to come out of?

Yes. [indiscernible] Wednesday night. We have about 15 million indiscernible] and 0.5 million in cost.

Okay. And when you talked about for the equity raise you're looking to put that towards DataSeeds. Is there anything more detailed about what you're going to be doing to grow that? I mean to build it out?

I'm sorry, Alan, repeat the question. I didn't hear.

You have more money to invest in DataSeeds. So like what is the priorities of how you're going to use that money?