Good afternoon, and welcome to Zedge's Earnings Conference Call for the First Fiscal 2023 Quarterly Results. During management's prepared remarks, all participants will be in a listen-only mode. [Operator Instructions] After today's presentation by Zedge's management, there will be an opportunity to ask questions. [Operator Instructions] I will now turn the call over to Brian Siegel.

Thank you, operator. 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 its first fiscal quarter 2023 ended October 31, 2022. Any forward-looking statements made during this conference call during 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 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 the reports that Zedge periodically files with the SEC. 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. The earnings release has also been filed on Form 8-K with the SEC. I would now like to turn the conference over to Jonathan.

Good afternoon. Thank you, Brian. And thank you all for joining us today. I’m going to start by briefly reviewing our first quarter results, which were generally in line with our expectations, as Q1 has historically been seasonally weaker ahead of the holidays. Q1 revenue increased 15% from last year. The most significant driver is attributable to the addition of GuruShots. However, the combination of global economic uncertainty, geo-political risk, inflation and rising interest rates resulted in lighter advertising spend when compared to years past. Aside from that, there was also an anomaly in our Q1, as some advertisers tried optimizing their user acquisition campaigns by testing new usage attributes, ultimately resulting in lower ad spend in the Zedge App. The good news is that spending trends improved at the end of the quarter but were too late to offset the earlier declines. As discussed previously, we are reinvesting our profits into GuruShots and other new growth initiatives while still aiming to remain profitable and cash flow positive. Specific to GuruShots, we have been diversifying paid user acquisition by adding new platforms to the mix and optimizing performance across each platform. The expansion to new platforms relates to the challenges associated with Apple making it more difficult for app developers to gain detailed information about their user attributes and harder to track performance for marketing and advertising purposes. On a consolidated basis we reported operating, GAAP net, and per share losses in Q1. For those new to Zedge, I’d like to start with a brief discussion of our business and strategy. Zedge sits at the intersection of two major growth trends in consumer tech, casual gaming and the creator economy. To capitalize on this, Zedge is building a strategic flywheel that leverages synergies across our portfolio; and engages communities through…

Thank you, Jonathan. I want to remind those on the call that our Q1 fiscal 2023 ended October 31. Moving to our first quarter results. MAU, defined as the number of unique users that opened our Zedge app during the last 30 days of the period, decreased 7% to 32 million. MAU in well-developed markets was down 16% and emerging markets nearly 4%. Europe, which contributes to both metrics, was hit especially hard by the Russian invasion of Ukraine and the energy crisis, which continued to play a significant role in this quarter’s MAU decline. Total revenue in the first quarter was $6.9 million, a 14.5% increase from last year. The temporary decline in ad buying that Jonathan discussed, combined with lower MAU led to a decrease in year-over-year advertising revenue for the first time since Q1 2021. Gaming revenue came in at $1.3 million. Similar to Q4 of fiscal 2022, GuruShots’ revenue was negatively impacted by the situation in Europe. Since this business is still in its investment mode, we believe that the new features, marketing and advertising strategies will ultimately drive solid growth in our gaming revenue. Subscription revenue was down 7%; however we are working on improving the value of the offering in order to return to growth in the quarters to come. Other revenue, which mainly consists of Emojipedia, Zedge Premium and the amortization of AppLovin’s integration bonus, increased by 45%. Zedge Premium's GTV decreased 5% to $310,000, reflecting lower volume and ASPs for NFTs. Again, while we are impacted by the crypto winter, we believe our strategy somewhat insulates us from the broader NFT market challenges, while also providing us with a differentiated offering that we believe will return to growth. Active subscriptions were down 12% versus last year, as new subscription sales did not…

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

Yes. Good afternoon. First question is on monthly active users. From a sequential basis going forward, what will be the key elements that will cause this to just potentially stabilize and start growing?

Hey, Allen. How are you? Yes. So there are a couple of initiatives that are contributing to that. First of all, from quarter-to-quarter on a sequential basis, our monthly active user count was basically flat. There is obviously some variation in terms of the various geographies, whether it's well developed or emerging market. But in all, it was in aggregate, I'm saying it was basically flat. Having said that, several different contributors. One is, as we've talked about for the last couple of quarters, features that will drive users to download and install the app and to reengage with the app. So most recently, we rolled out pAInt, which is our AI wallpaper generator. And as you know from following the press, there's been a tremendous amount of pent-up demand for tools like this. My Zedge, where we've added social and community features that contribute to users coming back more regularly in order to see what either their friends or artists or fans and so on and so forth are adding to the app. Those would be two examples of features that will drive that. Secondly is marketing efforts, and that includes paid user acquisition, where we have been scaling up over the course of the last, give or take six to 12 months. And then that is coupled with reengagement campaigns, where we market to users that have the Zedge app installed on their phone to drive them back into the app because of content or features that we have added to the app accordingly.

Okay. Excellent. And then on, Jon, the kind of your advertising revenues, you were able to – the statistic for that of the – I'm forgetting average revenue per monthly active user. That held up year-over-year it seemed like despite what you mentioned of some advertisers going away, but you feel like that could kind of I guess, come back potentially next quarter? Do you think it would more normalize? Or how do you think about that?

Yes. So it's difficult to provide clarity there. And the complication here is that depending on what one reads in the trade press. There is certainly some downward pressure on advertising budgets and the like, but there are also pockets of growth. More recently, I think I came across an article yesterday saying that mobile advertising spend in calendar year 2023 will decline compared to years past, where CAGR over the course of the last five years or so has been, if I recall correctly, north of 15% a year. But with the economic uncertainty in the overall market, analysts are expecting that, that will decline. As you know, we invest a tremendous amount in optimizing our inventory, and we will continue to do that. But I can't say with certainty whether or not that industry-wide trend will be something that has a material impact on our business. Too early in the fiscal year for me to answer that with clarity.

Yes. I mean, in my model, I'm assuming that your average monthly advertising revenue per user is going to decline over 10% year-over-year. So hopefully, I factor that in, but we'll see. Nobody knows. So then – so with pAInt, it sounded like the initial reception of pAInt has been exceptionally strong. This is a – just so I understand, it's a free product today, but the net benefit to you is more engagement? Or how do you think about how that evolves?

Sure. So the product is a free product insofar as users do not have to make an in-app purchase in order to create AI art. They do need a balance of an in-app currency called a Bolt or Bolts and they can acquire those either through rewarded ad experiences or through in-app purchases or through subscribing to the Zedge app. So it's not necessary that they make an in-app purchase. But if they don't make an in-app purchase, the only way that they can accumulate more art is through watching rewarded ads and securing the benefits associated with those ads. And we've only rolled this out in Tier-1 or well-developed markets. We're planning on rolling it out in other markets in the not-too-distant future. And we are viewing this as both a growth driver for new users as well as a re-engagement tool for existing Zedge customers with an associated revenue benefit. We're going to have to take a look at the data and how this evolves over time to determine whether we focus more heavily on growth initially or more heavily on revenue and the like. And we've got the infrastructure in place to test, analyze results and then react quickly based upon the various tests that we undertake. And over time, we may prioritize different goals based upon region.

Okay. Great. I had a question related to GuruShots generators of photos shifting them to your marketplace to try to sell them. I think you just announced setting that up. I don't know if it's too early to talk about what's been happening there. But if you have any commentary on that yet? And maybe a theoretical or philosophical thing, but to what degree do you think that the issue is supply versus the issue of enough people interested in buying things? Like is it an issue if you create more supply, there will be more demand? Or would you have to create the demand? Or how do you think about those things?

As you know, we just announced the availability for GuruShots players to market and sell their content in the Zedge app yesterday. So it's obviously very early. And we will continue to improve upon that process to minimize friction and enable those GuruShots players with an income stream with the least amount of hurdles. Having said that, as with any marketplace, there always needs to be a healthy balance between supply and demand. And we think that the addition of this new content, if you will, is something that will contribute to achieving that overall goal. We also have said in the previous earnings call that one of the areas that we are very focused on is in building out our data team and its capabilities. And theoretically speaking, that will mean that we will be able to segment users more efficiently than where we are today and avail the best content to those various user segments in a fashion which really optimizes our marketing and product marketing inventory in order to improve the contribution of Zedge Premium to the overall revenue pie that we have in our business.

That's great. So one of your initiatives this year is to increase your paid marketing spend, a lot of that getting targeted to GuruShots. Is it too early or any commentary on what kind of returns you've preliminarily seen from those marketing dollars?

Yes, it's too early. What I can say is if you rewind the clock to 2020 to 2021, there was a lot less effort needed in order to grow user base. You just would go into platform, defined a lookalike audience and so to speak, begin to scale from there. Of course, I'm simplifying things. When Apple came in and sort of changed the rules of the game in order to limit what data is available, that process has become more complicated and has resulted in our case, in our beginning to test a wider array of acquisition platforms and use the benefits of data in order to optimize those user acquisition campaigns. I think it's important to conceptualize that with user acquisition as one expands into new platforms, it is really so to speak, a search type of experience. One doesn't know what will optimize best on that platform. One doesn't know if that platform will work out. So inherently, one has to allocate a portion of their budget for that research and development, if you will. And then based upon the data that comes back, one will find certain campaigns, certain creatives, certain approaches in terms of what one is optimizing against that can scale. And then it's a question of, well, by how much can it scale? So that's another piece of this. I will comment as well. There have been some changes that Apple has undertaken in terms of expanding the window of time in which one can collect data. And my suspicion is that Apple has opened up that window slightly because they had underestimated what the impact would be to the overall market in terms of their very limited launch or policy with respect to understanding what is happening from a user acquisition perspective. So we're just hard at work. We’re doing our best to unearth the right platforms, the right campaigns, making sure that we've got the right data pipes and good data that we can ultimately use in order to optimize the spend over the mid to longer-term accordingly.

Thank you. So you said your Zedge is testing a wider array of acquisition platforms. Can you just clarify what you mean by acquisition platforms? Does that mean Android versus Apple? Or do you mean something else? And then how long do you think it would be until you have enough data that you could report back to us on how the marketing plans are doing?

Acquisition platforms would be third-party platforms like Facebook or Instagram or Google or Apple search ads. So these platforms – and those are just some illustrations, but these platforms are selling their inventory to acquirers like Zedge, and we bid on certain attributes. These platforms have, in many instances, machine learning capabilities in order to unearth and identify the attributes that an advertiser is looking for. And as we get data, we analyze it, and then we try to improve upon that for campaigns that seem to have promise with respect to various KPIs that we consider in making our buying decisions. In terms of the period of time where we can more properly report back. I would say that if you roll back in time, when we acquired GuruShots, we said that, give or take, we would need around 24 months to bring the business to being breakeven. And that is the process that we're undertaking right now. So incrementally, on a quarterly basis, we are becoming more attuned to all of the ingredients that contribute to this return on ad spend. And that is what we're doing on a day-in and day-out basis. So I think that we're still holding to that 24-month time period in aggregate to get us to profitability with the goal of closing that gap on an incremental basis quarter-by-quarter.

Great. My last question, for now, is if you could comment a little on your prior guidance and how you made a little comment about it in the text, but just how you feel about your ability to continue to grow your revenue and have profitable cash flow positive in fiscal 2023, while investing given just the give and takes, given the first quarter, how you feel about? Has anything changed and how you feel about your outlook for the year fiscal year?

Yes. Our goal continues to be to meet that threshold of being cash flow positive. And as I've said in quarters past, that we see some incredible growth opportunity, which would require us to have a loss, we would go to the Board and explain to them why we think that opportunity is something that we should pursue. But barring that, we really are going to do everything within our power to achieve that goal. And our philosophy generally is if we're profitable, then we've got runway. And runway is one of the most important assets that one can have in terms of maintaining and scaling the business over the long-term.

That's great. Thank you so much, and congrats on your execution.

Thank you, and happy holidays.

You too.

Thank you, Allen. [Operator Instructions] Okay. This concludes our question-and-answer session and conference call. Thank you for attending today's presentation. You may now disconnect.