Zedge: Making The Right Moves
Summary
- Zedge has been losing MAUs as consumer preferences change.
- Increasing percentage of MAUs are from emerging markets, lowering ad revenue.
- The company has responded by rolling out subscription and marketplace products.
- The early signs are that those appear to be a success but the stock has run substantially on the good news.
Introduction
Zedge (NYSE:ZDGE) started out as a mobile app where the user could download a variety of customizations for their phone, including ringtones, wallpapers, and sounds. The company has over 450 million downloads and 32 million monthly active users ("MAUs").
Historically the company has monetized their app by selling ad space to advertisers and ad networks. More recently, the company has undertaken a number of new initiatives to move away from this model. The three chief new initiatives are a new app that utilizes their platform, a marketplace within the Zedge app, and a premium subscriber service.
Driving these initiatives is the fact that due to saturation, changing consumer behavior, and slowing phone sales, the company has been losing users in developed markets but gaining them in emerging markets. The problem with this shift is that advertising rates are much lower in emerging markets.
Source: Q1 2021 Release
Subscription Service Growth
The subscriber service removes the ads within the Zedge app and offers other perks, such as rewards, that the company is still fully fleshing out. This type of business model is not new, and plenty of companies from Spotify to Hulu rely on some form of this free-mium business model.
The paid subscription service got off to a slow start but recently it has accelerated drastically.
Subscription revenue is on track to hit $2.8 million this year after doing $1.6 million last year. At that level, it will be about half the company's advertising revenue, so it may still take a few years for subscription revenue to be the main driver for the company.
Overall revenue increased 85% in FQ1 2021.
Looking at full year fiscal 2020 results, which end July 31, 2020, the company did feel the pandemic's impact. Revenue growth was only 35%. Subscriber growth was staggering, although only 40% of subscribers renewed their subscription. That is a very low number, so look for Zedge to work on that going forward.
The company did hit its goal of becoming cash flow positive and almost broke even on net income. In Q1 2021, Zedge managed to do one better and positive net income of $1 million.
Source: Q1 2021 Release
They achieved this by keeping their costs essentially flat year over year but finally seeing revenue growth from their new products. This is the beginning of an inflection and scale point for Zedge, where the initial effort to get these products off the ground is complete and the existing costs can be channeled into continuing to grow them.
Marketplace and New App Growth
Shortz, Zedge's new app, and its marketplace appear to be struggling more than the subscription service. They do not offer a lot of detail, which in itself speaks volumes, but if we assume they are part of the other revenue segment, then FY 2020 revenue was down $2 million and 2021 revenue is on track to be down again.
Source: Q1 2021 Release
I think these endeavors are part of the longer-term plan for Zedge, with the new app being a complete gamble as to what will work while the marketplace appears to be a better idea that fits nicely into the existing Zedge app.
In the short term, results from Zedge will be driven by subscription growth, renewal rates, and how effective they are at monetizing their emerging market users via advertising.
Financials Continued
Now that Zedge is cash flow positive and beginning to post a profit on a GAAP basis, let's look at the rest of the financials.
The balance sheet is top notch, with the company having very little in liabilities total, and a current ratio close to 2. The equity section shows that the company has been accruing an accumulated deficit from years of consistent losses, but as mentioned, that is beginning to turn.
It is clear that the company has grown itself with almost all equity, which gives them strong financial flexibility. They should have no issue injecting as much cash as they need to support these initiatives that will drive Zedge forward or pivoting if they don't work.
Source: Q1 2021 Release
Valuation & Conclusion
The only bad thing I can find regarding Zedge is the valuation is rich. Looking at the 1-year chart, the stock has run some 534%.
Data by YCharts
The company now trades at a market cap of $137 million or 15 times revenue. Sure, revenue did grow 85% in the latest quarter and they are turning the corner on profitability, but that is a steep price to pay.
The stock was in the doldrums for years before November 2020 when it started to take off like a rocket. I guess this was likely due to the positive results the company posted for their FQ4 2020, even as they paled in comparison to Q1 2021's results.
Data by YCharts
At this price, I think there is a lot more risk in the stock that I am not comfortable with. Despite their current fast growth, as they begin to lap the rollout of their new products, they will see this growth decline substantially.
The direction of the core, advertising related app will remain a headwind for many years until the other product's revenue can carry the company. I will watchlist Zedge for now and would be more interested around $2-$3 a share.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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