Zedge, Inc. (NYSE:ZDGE) Zedge Announces Acquisition of GuruShots April 13, 2022 11:00 AM ET
Brian Siegel - Hayden IR
Jonathan Reich - President, CEO
Conference Call Participants
Allen Klee - Maxim Group
Howard Rosencrans - Value Advisory
Good morning, and welcome to the Zedge Investor Conference Call and Webcast. [Operator Instructions].
I will now turn it over to Brian Siegel, Senior Managing Director at Hayden IR.
Thank you, and good morning, everyone. With me on today’s call is Jonathan Reich, Zedge’s Chief Executive Officer, who will discuss today’s exciting news, the transformational acquisition of GuruShots, the world’s greatest photography game.
There’s also a slide show available with the webcast, which will be posted after the call on the IR portion of Zedge’s website at https://investor.zedge.net. There, you can also find the press release for today’s announcement, which was filed on Form 8-K with the SEC as well.
Any forward-looking statements made during this conference call, either in the prepared remarks or in the question-and-answer session, whether general or specific in nature, are subject to risks and uncertainties that may cause the 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 they have made or may make or update the fact that may cause the actual results to differ materially from those they forecast.
I would now like to turn the conference over to Jonathan.
Thank you, Brian, and thank you all for joining us today. Good morning. I’m Jonathan Reich, CEO of Zedge. Welcome to our call, highlighting today’s announced acquisition of GuruShots, the world’s greatest photography game. In short, this is a transformational deal for Zedge. We believe that prior to this transaction that we were undervalued, and we see even greater potential to create truly meaningful incremental shareholder value with the addition of GuruShots.
The promise for the combined company aligns with major strategic themes that we believe will accelerate revenue growth over the next few years, notably, embracing the creator economy and NFTs, adding new content verticals, establishing category leadership and providing attractive user engagement. Importantly, GuruShots adds another elements that we are incredibly excited about, mainly gamification.
For those of you who are new to the Zedge story, or who haven’t followed us in a while, we own a portfolio of leading digital consumer brands that served 44 million users globally in January of 2022. Our portfolio consists of Zedge ring toes and wallpapers, otherwise referred to as the Zedge App, the leading mobile app for mobile phone personalization, social content and Pandamart.
The Zedge App also includes the Zedge Premium, our marketplace for artists, celebrities and emerging creators to market their digital content, including NFTs to Zedge’s users. The portfolio also includes Emojipedia, the leading website dedicated to all things emoji as well as an extensive pipeline of apps and services that our innovation team is working on, all in various stages of development. It’s important to underscore that these are experimental and may not evolve into full-blown commercial offerings.
Let me now turn to today’s exciting news, mainly our acquisition of GuruShots, a category killer that fuses photography with mobile gaming. GuruShots, based in Israel, offers a platform spanning iOS, Android and the web that gamifies photography by providing a fun educational and structured way for amateur photographers essentially anyone with a mobile phone to compete in a wide variety of contests, showcasing their photos.
The game mechanics include competitions that become progressively more difficult with successful players mastering their skills and then continuing to the next level until ultimately achieving the coveted title of Guru. Players can compete individually or together with the team. Product features include community features, leaderboards and chat functionality, which create a sense of belonging, inspiration and competition.
On a monthly basis, GuruShots’ live ops team creates more than 300 unique photo competitions, to which competitors submit more than 1 million high-quality user-generated photos. The tightly knit GuruShots’ community of players cast their votes totaling around 5 billion per month to rank the images in real time, ultimately determining the winners of each competition. So think about the this measure of engagement, 5 billion of votes monthly. That is outstanding.
Aside from these impressive monthly numbers, GuruShots has amassed more Than 140 million high-quality photos. GuruShots is a freemium game that monetizes through in-app purchases of expabilities that increase a photo’s exposure, helping players progress through the competitions. This model has led to an average revenue per monthly active user, or ARPMAU, of approximately $3.50 compared to the $0.06 Zedge reported in our Q2 Additionally, the average paying player spends well over $50 per month on the game, an amount that has grown at an 18% CAGR over the past 6 years.
These are all impressive metrics and compare favorably to the Zedge App. On its own, this acquisition has several strategic benefits. It makes us relevant to a new and sizable audience. It diversifies our portfolio with a mobile game category killer. It adds gamification expertise to our knowledge base and drives revenue expansion with the existing in-app purchases.
Now let me delve into some of these benefits in more detail. GuruShots materially expands our TAM. We estimate that every month, there are 30 million to 40 million photo enthusiasts who regularly use their smartphones to take and publicly share high-quality photos, who would be interested in participating in photo contests.
Given the combination of a large TAM, together with low penetration rates, we see an opportunity to significantly increase the participation of this audience. To win this market, we will focus on marketing strategies, including paid and organic user acquisition, search engine optimization, app store optimization and user conversion and retention. Zedge already boasts expertise in these areas and brings an impressive team that will assist the GuruShots in deepening its market prowess. GuruShots will also diversify Zedge’s portfolio by entering the world of mobile gaming and squarely giving us a leadership position in the evolving world of peer-based photo competitions.
Furthermore, it brings several core areas of competency that we lack mainly gamification and live ops that we believe can be powerful drivers in growing Zedge’s monthly active users, particularly in well-developed economies. Today, GuruShots is only available in English and solely generates revenue from in-app purchases. In the medium term, we expect to capitalize on our deep understanding of both ad-supported monetization and paid subscriptions to diversify further and expand GuruShots’ revenue base. In addition, we expect to localize the app by adding multi-language support, which can both drive user growth and globalize the customer base.
Of course, I would be remiss if I didn’t discuss how access to GuruShots’ user base can materially advance our progress with Zedge Premium as a part of the burgeoning creator economy. To scale Zedge Premium and NFTs Made Easy, we need to rapidly expand our community of talented artists and creators. As with any marketplace, one needs a healthy balance of buyers and sellers. Today, we have around 36 million potential buyers from across the world using our Zedge app, yet our community of premium artists is only approaching 2,000.
Considering the GuruShots’ emesis over 1 million high-quality photo submissions monthly speaks worlds to the potential these artists can bring to Zedge Premium and NFTs Made Easy. Let’s put it like this. Today, many of these photographers are paying GuruShots to compete. With Zedge Premium being a part of the picture, they can now start earning money. That’s a win-win and 1 whose potential is particularly exciting.
I hope that by now you can begin to appreciate the potential value this asset brings to Zedge. Over the mid- to long term, there are additional opportunities that we are going to consider, including gamifying the Zedge app and potentially launching new gamified verticals. As such, -- we have decided to reallocate resources that were previously focused on shorts to help us accelerate some of the GuruShots’ priorities. Shortz has been a valuable learning experience for us. And we now have a vetted team that can hit the ground running, focusing on making GuruShots’ new initiatives, a reality.
Finally, to the deal terms, we paid $18 million to existing GuruShots investors at closing. In addition, the deal includes an aggressive performance-driven earnout of up to $16.8 million payable in cash and/or stock at Zedge’s discretion to these investors over the next 2 years. The qualification thresholds are revenue based. In connection with these thresholds, we have agreed to invest in paid user acquisition of up to $5 million over the next 12 months and up to $8.5 million in the second year, contingent on GuruShots surpassing specific return on ad spend, or ROAS targets.
We did our best to ensure this steel incentivizes growth tied to performance. If GuruShots meets or exceeds these milestones, it’s a win for us because of both, the extremely attractive revenue growth it brings with it and the commensurate EBITDA contribution. In addition, with scale, we believe their business model has potential for material operating leverage. In the event the GuruShots falls short of meeting these milestones, Zedge is protected from being required to fund the entire user acquisition budget and may only have to pay out a ratable portion of the earnout. At the same time, we would still benefit from the diversification of our portfolio with a mobile gaming asset that brings significant optionality.
We like assets that provide a wealth of possibilities, both on a stand-alone and synergistic basis. Although not a part of the purchase price, we established a retention bonus pool of $8 million for employees to incentivize their performance. The pool is payable over 3 years, half in cash and half in stock, and is tied to continued employment with Zedge.
Before opening the floor to questions, I’d like to comment on the financial discipline we imposed while making this acquisition. The market for mobile gaming remains a hot one, driving premium valuations with a forecasted TAM of $272 billion by 2030, implying a CAGR of 11%. There has, and continues to be a significant investment in this sector, with M&A unfolding at a frenetic pace.
For example, in August of 2021, Playtika, a leading mobile gaming company, acquired Reworks, maker of the hit Design Entertainment app Redecor, for a trailing 12-month revenue multiple of 13.3% at closing, and a multiple of 20x revenue when accounting for all future earnouts. Additionally, when we analyze the top 15 mobile game deals of 2021, 11 of which had multiples publicly available, we paid the second lowest upfront multiple. This is especially impressive because GuruShots attracted strong interest from several significantly larger and better capitalized companies. We believe that GuruShots chose Zedge because of the shared vision that we crafted together and the strong working relationship we developed during the due diligence process.
We are thrilled to welcome them to the family. In calendar 2021, GuruShots generated approximately $8 million in revenue and had a loss of approximately $1 million. Please note that these numbers are as of yet unaudited. We believe that with the right support from our team, GuruShots will be on track to contributing positive EBITDA in around 2 years’ time.
I want to provide one other update before completing my prepared remarks. As I mentioned during our last earnings call, we were compelled to migrate away from MoPub’s ad mediation platform following their acquisition by AppLovin because MoPub’s platform was being deprecated at the end of March. After stress testing various alternatives, we opted to migrate to AppLovin MAX platform. AppLovin, in recognition of our business in valuable customer base, paid us a onetime integration fee of $2 million earlier this month. With the migration behind us, our team resumed the development of social and community features for the Zedge app, which we hope to start rolling out over the summer, if not sooner.
In summary, we believe the acquisition of GuruShots will be a game changer for Zedge and, even before accounting for potential synergistic upside, has the potential to accelerate our growth meaningfully. When thinking about the wealth of synergistic opportunities available between our combined businesses, including Zedge Premium, NFTs Made Easy, gamification, localization, live ops and operational efficiencies, our excitement is palpable.
We are also excited by GuruShots being an Israeli company, as this gives us a presence in a leading global market for mobile, gaming and tech, which we view as a benefit. We look forward to sharing our progress in the upcoming quarters and expect to file consolidated pro forma financial statements with the SEC when required. In addition, we are looking forward to presenting at the Sidoti Investors Conference on May 11 and 12, 2022.
Before handing back to the operator for Q&A, I want to take this opportunity to formally welcome GuruShots to the Zedge family as well as thank the Zedge team for the incredible work that they have done especially during the due diligence process. We look forward to growing together as one team. As the Hebrew saying goes, [Foreign Language], which means a warm welcome.
Operator, back to you for Q&A.
[Operator Instructions] Our first question is coming from Allen Klee from Maxim Group.
Jonathan, congratulations. Just to make sure I caught a couple of things. I thought I heard you say, and maybe I missed it that the GuruShots is currently only available in England and the revenue is coming from -- did I hear advertising? Could -- is that true? Or could you explain that and thinking about it seems like that could get significantly expanded?
Alan, and the congratulations really goes to both the GuruShots and Zedge teams for doing such a fabulous job together. What I said was that Guru shot is only available in the English language today.
And one of the things which Zedge has a lot of experience with, considering our global footprint, and the fact that our app is -- has been localized in around 15 different languages is multi-language support. And GuruShots’ business model today is made up of in-app purchases where users buy extra abilities in order to get more visibility of their content so that users will cast votes in favor of their content in those specific competitions. And we envision that, over time, we will introduce advertising as well as subscriptions as being part of the monetization scheme so that there will be a portfolio of different revenue drivers that can contribute to the ongoing growth of this business.
Got it. Thank you so much for clarifying that. And then in terms of -- so how should we think about kind of the integration, and how -- what’s your plan is of the time to get this all together?
It’s a good question. And some of those
details are being worked on as we speak. GuruShots is, prior to the acquisition, a stand-alone company based in Israel and recognizes its revenue in Israel. We are working with both the tax counsel as well as with our various operational units in order to decide what the best go-forward plan is in so far as integration and take advantage of assets that both GuruShots has and that we have with respect to yielding the best possible outcome for GuruShots shots on a stand-alone basis, Zedge on a stand-alone basis and then the integrated businesses when taken in totality. I’ll just close by saying that I think that for the mean time, we will have GuruShots operate independently. And then as we begin to undertake the synergistic opportunities, there will be more opportunity for convergence. But that is, at first blush, clearly, as we’re working on the integration planning, we will be able to better define and answer that question.
Got it. Something else I wanted a clarification on. You said that for paid acquisition, you would pay -- you would dedicate $5-ish million this year and $8.5 million the next year. That’s -- just so I understand it, that’s in addition to the earn-out?
That is in addition to the earnout, but let me provide a little bit more color. We have an obligation of up to $5 million in paid user acquisition in year 1 and up to $8.5 million in year 2, tied to GuruShots’ meeting certain return on ad spend threshold that will be monitored on a regular and consistent basis. And in the event that GuruShots fall short of those thresholds, then we can pull back on the ad spend in order to ensure that we are able to yield that set of returns. The earnout is contingent, or I should say, the earnout is earned on a ratable basis based upon meeting certain revenue thresholds. And if those revenue thresholds are not met, then the earn-out, or I should say, the entire earnout or possibly none of the earnout will be recognized.
Clearly, the linkage between return on ad spend and revenue are highly correlated. So in the event that GuruShots does not meet those minimum thresholds on return on ad spend, it is highly likely that they will not meet the revenue thresholds needed in order to qualify for 100% of the earnout.
Interesting. Are you able to provide or maybe you have, there’s a lot of stuff we’re looking at, but the number of monthly active users that they have?
We haven’t shared that as of yet. And we will give that consideration over time. I also want to point out that there are really 2 metrics in that set of key performance indicators. There are monthly active users. And then there are monthly active paying users. So as indicated in my comments, on average, a monthly active paying user is generating north of $50 per month. Considering that this is a freemium game, most of the users are just engaging with the game for free. And then as is common in the freemium gaming business model, only a very small percentage, relatively speaking, of those users convert into paying customers.
What we have generally seen is that the number or the percentage of users that convert into paying customers, when compared to benchmarks, we’re tracking ahead of the benchmark. And from a revenue perspective, 1 of the things that we are going to test over time is introducing advertising to the majority of users that are playing GuruShots today, but not generating revenue for us. So there is an ad layer in there that we want to begin to test in order to see whether or not we can generate incremental revenue on top of the users that are making in-app purchases without cannibalizing that revenue stream.
Got it. And then so the users -- so the people who are in GuruShots that are putting their photos in, if they were to join Zedge Premium, they could try to sell their photos as an online image, but also, I guess, they could also do it as an NFT. How do you think about kind of making that happen?
The answer to your question is absolutely. One of the synergistic justifications for this deal and 1 of the opportunities that is very exciting to us is the ability for GuruShots to materially help us grow Zedge Premium generally, and more specifically, scale NFTs Made Easy. Today, the GuruShots players are paying money in order to win competitions, and so far as the converted paying users.
And then the general public that is just using GuruShots, or competing in GuruShots for free, well, we’re giving both of those audiences and opportunity to generate revenue, or I should say, we will give those audiences the opportunity to generate revenue by having them market their photos in Zedge Premium and potentially [indiscernible] as NFTs. And that is going to be -- that exercise will be 1 which will require a lot of marketing prowess and so on and so forth.
But considering the GuruShots today is seeing upwards of $1 million photo submissions on a monthly basis and has this user base which is engaged and casting votes to the tune of 5 billion votes on a monthly basis, we believe that there’s a really, really outstanding opportunity to help us in scaling Zedge Premium, NFTs Made Easy and the like.
I mean it seems clearly just like the winners of the contest, if you highlight them as potential NFT drops or things like that, that would be at a premium, maybe could be a potential thing.
Yes, I agree with that, but I want to point something out. In order to compete in GuruShots by definition, users need to have high-quality photos. And the 1 thing that I can tell you in my experience in Zedge over the course of the last 10 years has been, there are so many different tastes that people have, and it doesn’t have to be limited to the winners of those competitions. In order to compete effectively, the photo has to be of a high-quality nature. And as such, my belief is that it’s not only the folks that will win those 300-some-odd competitions on a monthly basis that will have the ability for selling their goods, but it’s actually an overwhelming majority of the players that potentially will have the ability to join Zedge Premium and generate revenue in the marketplace and mint NFPs and so on and so forth.
Recall that we’ve got an audience of, give or take, 35 million monthly active users. With that sort of broad, deep audience, there are so many different tastes. And as such, we believe many opportunities for this creative GuruShots community to participate, not leaving it strictly to the winners alone of those competitions.
That’s great. My last question relates to what you said on MoPub and AppLovin. Why were you paid a $2 million integration fee? And -- and then your -- just a comment of if it went smoothly and you said resources back to developing social and community features expected roll out of summer ‘22. If you could just kind of go into kind of how you feel about on this platform? Or just in general, what do you think about that?
Sure. So as I had mentioned earlier, we stress tested different platforms. We had conversations with an even larger portfolio of potential ad mediation platforms. And some of those prospective suitors we’re prepared to pay us an integration fee that is material because of the fact that our user base is coveted. And we have built up a reputation in the overall ad tech space and mobile ad tech space of really bringing high-value customers from an ad monetization perspective to the table. And AppLovin recognized that. While stress testing their platform, we came to a comfort level that they would be able to meet the needs that we have, not only today, but also on an ongoing basis with some spectacular dedication, the ability to move quickly, great engineering and so on and so forth, not to mention that the return that we were recognizing was on its own merit worthwhile from a selection of which mediation platform to go with.
So in totality, when we had completed our stress testing and AppLovin was generating incremental revenue for us, that, coupled with the integration fee, really made a lot of sense to us. I want to underscore though that the mentality that we had taken and adopted going into this process was, let us really select the right platform independent of any potential integration fee. We’re in this business for the long term. We want to make sure that we can continue to scale. And in the event that we find that platform, and it is performing as we would like it to, not only from a monetization perspective, but also from and operational perspective, and it meets the other requirements that we had, then we would consider the integration fee as an additional incentive.
Yes, it’s very impressive. I mean you --
Does that answer your question?
Yes, you’re getting a new system and they’re paying you for it because of the value that you’re bringing them. That’s pretty amazing. Okay. That’s it for my question. So it seems like a great strategic fit of the acquisition.
[Operator Instructions] Your next question is coming from Howard Rosencrans from Value Advisory.
Thank you. You mentioned that you were targeting positive EBITDA from the acquisition I guess, on a stand-alone basis in 2 years. Could you tell us what sort of revenue level you’ll need to achieve to produce that?
Howard, thanks so much for the question. Yes, at this point, we’re in the middle of a deep analysis that will allow for us to answer that question with greater precision. Recall, as I said earlier, that there’s a sort of multivariable equation here. It’s not simply a question of revenue. It’s a question of how much are you spending on ad spend, and what’s the return on ad spend accordingly. But as we work through that process, we’ll be able to provide a more precise answer. Suffice it to say that what we are targeting for right now is, and give or take or out 2 years from now, we expect that this asset will be EBITDA positive? Or I should say, yes, it will be EBITDA positive.
I know you’re conservative --
You spend $1 today on user acquisition. That is a hard marketing expense. That is not amortized over time. You begin earning money from that, and that is, hopefully, an annuity that unfolds over the long term.
I understand that --
I didn’t -- I thought you had finished our thought. I apologize.
No, no, that’s okay. What did you say?
I recognize there are very -- there are a lot of variables and certainly, an upfront spend is not -- it takes time to fully monetize or to move towards maturation. And I certainly understand that there are plenty of variables in the context of the return on the ad spend, but I -- but as you did go there and suggest that it would be EBITDA positive, could you provide us some general range as to what the revenue level is that would take you to EBITDA positive? I mean, obviously, your spending along the way will vary, and we get that. But you did throw it out there. So if you could just add a little color as to some sort of various range that you think would get there?
And just so I understand, you’re saying that this is on -- if I’m understanding correctly, is it a function of the business on a stand-alone basis? Or is it a function of getting your 44 million users to really start monetizing GuruShots?
No. The stand-alone basis analysis is what I was describing. And as we continue to refine that model, we’ll be happy to provide more details with you and the rest of our investors accordingly.
When do you envision having your I guess -- I mean, you’ve given us the -- I mean, we could probably do back of the envelope and come pretty darn close based on what you’re -- where you -- I don’t have your balance sheet in front of me as to where you exited last quarter, but -- or maybe you could just quickly remind me where did you exit last quarter in terms of in terms of…
We exited last quarter with around $37 million of cash on our balance sheet. And as I’ve mentioned, in this quarter, AppLovin paid us the $2 million onetime integration fees. So give or take, you’re talking around $35 million of cash on the balance sheet with a business that -- with a legacy business or our flagship business that has been throwing off cash on a regular basis. And we will, as I said, share more information about what this looks like on the operational level, but you got to give us a little bit more time.
Essentially, you spent all your cash. I mean that’s -- but without coming to the ins and outs, you spent all your cash, which is great because --
I don’t agree with that. I do not agree with that. We did not spend all of our cash. Let me remind you that this is a deal which is highly leveraged towards an earnout, and that our obligation and so far is user acquisition spend is tied to GuruShots’ generating a return on ad spend, a minimum return on ad spend. So there is protection. We actually look at it as being a positive insofar as GuruShots being able to meet those numbers and not only achieve, but potentially beat those thresholds because that will have a flywheel effect towards revenue generation and profitability over the mid- to long term.
And I know that you are -- I know that you’re going to try to ask me in multiple different ways to answer the question today, but I think that we should move on to the next question.
I wasn’t going to ask you multiple. I just wanted to finish the thought. I was -- the rest of the thought was, I think it’s fantastic that you spent some money. We weren’t getting paid for the cash anyway. And I think it’s -- and I know it’s going to be a huge high-class problem if we have to do the payouts. So you only got half of the thought there. So that was -- I look forward --
But seriously, we will -- we’re working on providing the sort of -- we would like to provide you with more detail. I’m just not prepared to do it today. And --
Yes. We really believe that this, on a stand-alone basis, has great value associated with it. But when we begin to think about the synergistic opportunities, that is something that can really generate some outstanding opportunity in terms of our positioning in the market with respect to revenue generation, profitability and then optionality insofar as gamification as I think you know the overwhelming majority of app revenue today is coming from the gaming space. And gamification, overall, has taken a tremendous, tremendous step forward in terms of unlocking value. I talked about the Playtika Reworks acquisition. But for those of you that are familiar with the space, there is a company by the name of Duolingo, which focuses on teaching foreign languages. And the way that they have built their business, which is a market cap, multibillion-dollar business today, has been by gamifying the language learning space or vertical, if you will.
So when thinking about that, whether it be able to respect to the existing Zedge flagship app or potentially new verticals, it really opens up one’s mind to where this can go. And then finally, as discussed earlier, where the creator autonomy and NFTs can go with having an almost infinite source of high-quality content that we can crowdsource based upon any number of different social trends that are happening in almost real time.
Our goal is to continue to grow this asset and -- on a consolidated basis without the need to go out and raise additional capital. That is what we are targeting.
[Operator Instructions] Thank you. This concludes our question-and-answer session and conference call. Thank you for attending today's presentation. You may now disconnect.