Good afternoon and welcome to Zedge's Earnings Conference Call for the Second 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 second quarter 2023 ended on January 31st, 2023. 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 second quarter results, which were generally in line with our expectations. Q2 revenue increased 1% from last year. The combination of geopolitical, economic, and industry-specific challenges resulted in lighter advertising spend compared to past years and lower discretionary spend by consumers. Additionally, GuruShots like most iOS apps, whose growth depends on paid user acquisition has suffered because of Apple's App Transparency Tracking Framework or ATT for short, making paid iOS user acquisition less efficient and more expensive. While Apple's release of its SCAD Network 4.0 in late 2022 is meant to alleviate some of this turmoil, it is taking time for various ecosystem providers to integrate this successfully into their tech stacks. Adding to the turbulent market is the decline in mobile phone sales in 2022 to the lowest levels in nearly a decade. Mobile phone sales are a growth factor for the Zedge marketplace. Nevertheless, I am encouraged that the holiday season, which encompassed the first two months of the quarter was better than we expected heading into the quarter and MAU actually increased sequentially for the first quarter to over $32 million. Given this overall backdrop, we are focusing on the areas that are within our control, and have taken or are taking steps to ensure we don't lose money over the near-term, while positioning the company for sustainable and profitable growth when the environment improves. To accomplish this, we have implemented a cost reduction plan and are totaling annualized savings of more than $2.5 million. Additionally, we have narrowed our product focus as follows; for the Zedge marketplace, our top priorities are iterating with pAInt, our generative AI wallpaper maker to improve take rates and engagement;…

Thank you, Jonathan. Moving to our second quarter results, now, defined as the number of unique users that opened our Zedge app during the last 30 day of the period, decreased 11% from a year ago to 32 million. Now, in well-developed market was down 13% and the emerging markets were down nearly 11%. Europe, which contributed to both metrics continued to suffer from the Russian invasion of Ukraine, inflation, and the energy crisis, which continue to play a significant role in this quarter's MAU decline. Total revenue in the second quarter was $7 million, a 1% increase from last year. Digital goods and services revenue came in at $1.2 million. Similar to Q1, GuruShots' revenue was negatively impacted by condition in Europe and app was limitation on user data. Subscription revenue was down 8%, driven by a 14% decrease in active subscriber. Zedge Premium GTV increased 1% to $440,000, reflecting revenue from AI pAInt, which offset decline in NFP sales. Again, while we are impacted by the [Indiscernible] winter, we believe our strategy provide us with a differentiated offering that will result in more significant growth over time. ARPMAU was 0.052, a decrease of 13% year-over-year. Operating expenses increased significantly related to both the investment in GuruShots, higher investment in paid user acquisition, on Android for the Zedge Marketplace and higher D&A from acquisition, but were partially offset by a $1.8 million contract expense related to a reduction in the fair value of contingent consideration related to GuruShots acquisition. Net income was $1.6 million and reported diluted earnings per share was $0.11. Diluted share count was 14.3 million. Adjusted EBITDA was $1.4 million versus $3.9 million in the prior year period. From a liquidity standpoint, we remain in a strong net cash position with over $17 billion in cash and cash equivalents. Note that we don't have any direct exposure to SVB, Republic National, or Signature Bank. Moving to our stock repurchase program, we repurchased 318,000 Class B share during the second quarter at an average price of approximately $2.14 per share. We have repurchased 442,000 Class B shares since inception of the buyback in September 2022. Thank you for listening to our second quarter earnings call. And I look forward to speaking with you again on the next call. Operator, back to you for Q&A.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Thank you. First question comes from Allen Klee with Maxim Group. Please go ahead.

Yes, good afternoon. You talked about GuruShots. When you originally did the acquisition, you had some potential commitments of how much you were going to spend on user acquisition spend, I think $5.3 million in year one, subject to getting good returns on that. Are you changing the plan of how much you'll be spending?

So Allen, this is Jonathan. We have until the end of March to spend $5 million, although we are not spending that amount of money. And we have found that when trying to ramp up user acquisition spend, the return on ad spend has declined. As I mentioned during my comments in large part, that is due to a combination of the App Transparency Tracking System, a framework that Apple had released and is causing major, major issues throughout the industry. As well as the macroeconomic and geopolitical risks that we are all experiencing on a global basis.

Okay. That makes sense. Could you -- I may have missed it. Did you disclose how much GuruShots contributed during the quarter? And I also heard you say that you thought that Apple was going to be rolling out something else in the future, which might help in terms of your ability to market. Could you review what that is? Thank you.

Sure. I'll address the second question first and for the numbers, I'll hand over to Yi. Apple has -- I think it was in November 2022, started to roll out their SCAD 4.0 ad network, if you will, and essentially prior to that rollout, the window in which advertiser was able to collect information about a user that has downloaded and installed their app was limited to one day time. And SCAD 4.0 opens up that window to three and potentially seven days with a little bit less accuracy. Although Apple had released SCAD 4.0 back in November, there's a lot of work that the entire ecosystem needs to undertake in order to comply with and integrate into that technology stack. And that is slowly, but surely unfolding in the industry, although it is not complete. Our hope and expectation is that with access to more information over a slightly wider period of time that advertising efficiency will kick-in allowing for publishers to better acquire customers that align with the particulars of what they're optimizing against. Yi, do you want to handle the financial breakout between GuruShots and other revenue sources?

Yes, sure. Hi, Allen. So, GuruShots contributed $1.25 million on the topline. On the income loss from operation, it shows that they have been $5,000 loss from operation, mainly because we had about $1.8 million contract expenses that helped reduce the loss from operations.

Does that answer your question Allen?

Yes. Thank you. I heard you guys mentioned that you developed a casual game that you're doing a soft launch on for that's a generative AI art, could you just expand on that a little bit?

Sure. The notion around this is to have competitions around creating generative AI art. And if you will -- if you were to take GuruShots, specifically the addition of GuruShots, Battles and as opposed to focusing on amateur photographers, which is a more limited audience, but open up that funnel to really anyone that can prompt, anyone that can type a character string in around a particular competition. That is what we envision. There will be set of in-game resources that is more -- those game -- we will have more in-game resources and we imagine that from monetization perspective that this will open the door for monetization through a combination of advertising as well as in-app purchases of particular game resources. Obviously, very, very early, as you've mentioned, this is in soft launch. We are doing a lot of iteration. And in the world of gaming, it's not atypical that you can have a game in soft launch for, easily a year. So, we're gathering information, we're fine-tuning, hand-tuning overall gameplay and doing this on a regular and consistent basis. However, we believe that this is very much in keeping with a theme that we had made at the point of time when we acquired GuruShots, which essentially was our ability to gamify other verticals that are focused around visual arts, if you will. So, we're looking forward to seeing how it unfolds. Clearly, there's been a tremendous amount of interest in AI generative art and we think that we have gameplay here that could be really attractive to folks that are avid players of casual games, if you will.

Got it. Thank you. And then--

I'm sorry I should mention one other thing, I think this is critical. We've done all of this with our existing employee base. We've been very, very clever around the code base and being able to take advantage of a lot of the tech stack that we have and expanding into this without having to increase the size of our employee base. So, that will likely continue to be the case. Of course, as the game evolves, assuming that the game begins to see great success, we may need to bring on some additional staff to scale with the game, but we don't see that as being an imminent short-term need.

That's very helpful. And then I heard you talk about -- you were impacted by the sales of smartphones, but that started to pick up. So does that imply -- I know, you're not guiding on this, but just that MAUs might sequentially have at least have a bottom and might pick up a little. And then on the rates that you get, is it reasonable to think that the level of this quarter is kind of a rated -- as good as you can tell, it will be at or that are the reasons that you might see pressure downwards or upwards? Thank you.

Okay. So generally speaking and per your comments, this is not guidance, but generally speaking, there is a strong correlation between handset sales and Zedge, Ringtone & Wallpaper monthly active user base. And intuitively, it makes a lot of sense. As a new Android user buys an Android phone or as someone buys a new Android phone and as you know, we're highly weighted towards Android users, one of the early things that, that user wants to do is they want to personalize their phone. So, it's obvious that they would download the Zedge app and accomplish that goal. And when there's been a contraction in new phone -- new handset sales, typically, that has resulted in a contraction in monthly active users. So, moving on to your second question in terms of, let's call it, CPMs and what we're seeing in the industry overall, the pressures are really quite hard for us to account for. Obviously, if the economic situation declines, because of the war continuing in the Ukraine or the Russians potentially blockading the Black Sea, so the grain shipments can't take place and so on and so forth, we think that will, generally speaking, have spillover effect to the economy. And as food prices or energy prices, or just general cost of living increases, many people have to make that decision, are they going to buy their next loaf of bread? Or are they going to engage with a mobile app where either they may need to buy something or an advertisers, they are advertising something which there's not demand for? So I don't pretend to be prognosticator and sort of say, hey, we've hit the bottom, we haven't hit the bottom. What I can tell you is that, we continue to invest resources in really optimizing the ad inventory that we have to squeeze out the most value from that. And in so far as being almost halfway through Q3, we have seen some improvement in CPMs. But between now and the end of the quarter, as we all know, the world can change dramatically, just rewind a week ago and Silicon Valley Bank was not on people's minds. And nonetheless, that bank has been taken over by the FDIC.

Got it. Okay. And then you talked about a cost-cutting initiative of $2.5 million to $3 million. Is that something that -- how do you think about the time that it takes to implement that?

Sure. So I think that we started to undertake this initiative towards the tail end of Q2. And I think that for Q3, that will be more apparent in the financials. And we're really moving quickly in order to see to it that potential is met sooner rather than later. It's not that, this is back loaded, but rather this is something where boom, there are areas that we have cut back on cost, we've become more efficient and so on and so forth and that immediately benefits the entire business.

Got it. And just to clarify one more big-picture question, and I'd like to get into your groups, but when you say you're not expecting a return to growth in the near-term, do I understand that, that would mean that likely for your next fiscal quarter, your revenue growth will be down year-over-year?

Yes, I really prefer not to share projections at this point. I think that it's fair to say that we are doing everything within our power to see to it that we do not have a continued downturn in the business and we're doing whatever we can in order to preserve our cash and doing our best to try to operate the company at very minimum without losing money on an aggregated basis, on a comprehensive basis, that is.

Okay. In terms of your Premium Marketplace, what are your top priorities for the next quarter or two?

Yes. Top priorities are, we continue to evolve in the marketplace and offer content that our users or prospective purchasers would be interested in purchasing that continues to be the case. We have been very clear from the outset, especially during the hype of what had happened with NFTs, that our view of NFTs has been around a technology benefit for creators and purchasers, namely Providence and the ability to ensure that you've bought that one or that one of a set of that digital, that particular digital item, we did not play the speculative game in terms of being the next people and we believed then, and I think it's been proven since then, that we have been in the right in terms of taking that perspective. So we continue to operate within that regard, offering, whether it be NFTs through our NFTs Made Easy product, or non-NFT, non-tokenized content and availing that to our users at various points in their journey for a price.

Okay. Great. Well, I mean, you guys have been very disciplined and quite good performance in a tough market. So I admire, what you guys are doing. Thank you so much for answering my questions.

Thank you.

This concludes our question-and-answer session and conference call. Thank you for attending today's presentation. You may now disconnect.