Good day and welcome to Zedge’s Earnings Conference Call for the Second Quarter Fiscal 2025 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. During today's call Jonathan Reich, Zedge's Chief Executive Officer; and Yi Tsai, Zedge's Chief Financial Officer will discuss Zedge's financial and operational results that were reported today. 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 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 it 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, and adjusted EBITDA. Please see our earnings release for an explanation of our use of these non-GAAP measures. Now, I would like to turn the call over to Jonathan.

Thank you, Brian. Good afternoon, everyone, and thank you for joining us today to discuss Zedge's second quarter fiscal 2025 results. This quarter presented a challenging macro environment, negatively impacting ad revenue. For the most part, the unclear regulatory status of a TikTok ban resulted in TikTok pulling back on user acquisition spend, which had a ripple effect across the industry on companies where ad spend is an important revenue driver. Both Apple and Google removed TikTok from their storefronts for close to a month. With less demand from a high bidder, CPMs fell across the industry, although our optimization efforts did enable our overall CPMs to rise versus last year, helping offset the lower demand and lower MAU sets. While total revenue declined 10% year-over-year to $7 million, TikTok’s return to the Apple and Google app stores in fiscal Q3 is yielding encouraging results even while we await a final outcome about TikTok’s future in the US. The other key event during the quarter, was our announced restructuring in order to improve operational efficiency, profitability and free cash flow. Overall, between our restructuring and other items, we expect to reduce our annualized expense run rate by approximately $4 million, primarily related to a 22% reduction in our global workforce, driven by cuts to the GuruShots team and the closure of our Norway office. Taken together this will yield annualized cost savings of approximately $3 million in compensation-related and other expenses; and $1.2 million in savings resulting from the expiration of the retention bonus payments owed to GuruShots employees under the terms of the April 2022 acquisition. Our financials will start reflecting these savings in Q3 and culminate in Q4. The impetus in undertaking the restructuring was to improve efficiency, enhance our ability to invest in growth opportunities, and position…

Thank you, Jonathan. Total revenue in the second quarter was $7 million, down 10% from last year, mainly due to the advertising headwinds the industry faced in the quarter that Jonathan mentioned, and the continued challenges at GuruShots. Second quarter subscription revenue was up 13% from last year and our net active subscriber growth trend continued to improve and was up 22% year over year, and sequentially for the seventh straight quarter. Our higher value iOS subscriptions and value-added Zedge+ offering for Android are not only seeing organic growth, but they also continue to outpace churn, which is mainly replacing lower-cost legacy subscriptions, which only removed ads. Zedge Premium's GTV achieved roughly $700000, up 27% versus last year as the combination of our feature and content offering, and monetization expertise continued to drive attractive growth. Despite the pressure on advertising, ARPMAU still grew 9% year over year to $0.078. GuruShots, which is reported under digital goods and services revenue, remained a challenge, down 33% from last year, but only 4% sequentially. We expect the year-over-year comps to start to improve in our fourth quarter and into 2026. Cost of revenue was 6.4% for the quarter, roughly flat year-over-year on an absolute basis. SG&A increased by 9% to $7.1 million during the quarter. This increase was mainly driven by marketing expenses related to higher paid user acquisition at the Zedge Marketplace and our subscription model has higher near term expenses, as the timing of revenue and costs don’t align. This is especially the case for a lifetime subscription, which also carries a higher platform fee than an annual subscription. For example, for a lifetime subscription, platform fees are expensed immediately, while revenue is recognized over 2.5 years, leaving us with a 100% operating margin after the initial purchase and helping improve…

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

Yes. Hi. Good afternoon. Could you -- I missed when you said, what you expected the restructuring charges to be in your third and fourth fiscal quarters. Could you repeat that, please?

Hi Allen, because of the accounting rule, we can't really accrue certain severance and termination benefit, until it's been communicated to the impacted employee. So that occurred in February, which falls in Q3. Additionally, we are looking to certain impairment related to our office space, in Shanghai. Those costs will be recorded in either Q3 or Q4, as we look for sub-tenant and how we negotiate with our current landlord. I hope that answers your question. Allen.

Yeah. So you're targeting around $3.9 million to $4.1 million, annualized cost savings. That's compared to the prior 12 -- what does that compare to of the base? And then second, when -- do you have a sense of how much of that shows up in -- that's annualized, but how much of the amount you might see in fiscal third quarter and how much in fiscal fourth quarter?

I mean, the cost savings annualized, so approximately about $1 million per quarter Allen.

But will it be fully at that run rate for the third quarter? Or will it be at that run rate in the fourth quarter or sometime next year? When will it -- do you think it will be at that $1 million savings?

Yeah. From third quarter, we should start seeing that $1 million run rate per quarter in savings, before you factor in additional restructuring charges.

So will you see the full $1 million, do you think in the third quarter? Or do you think you won't quite be there yet in the third quarter?

We will see that full $1 million in the third quarter, because current impacted employee, they're still on the payroll, but they will be offset against the restructuring charges, which is not part of the normalized SG&A expense, if you will.

Okay. Thank you. And then just in terms of the business, just when you were talking about TikTok, how -- you said you have some sense that it's starting to improve. How -- maybe I wanted to ask your average revenue per -- I don't even know if I'm going to say it right, for monthly active user, that metric looked like it held up for the quarter. But is that because of things like subscriptions and marketplace spending getting blended into it? Or why -- I'm talking about sequentially, but or what's the -- why is that?

Yes. So we have decline in advertising revenue, but it was partially offset by the growth in subscription revenue and also from Zedge Premium. But remember, the average revenue per monthly user, it will be a lower base because we have a lower MAU. So sequentially, our ARPMAU is still higher compared to last year or sequentially.

Okay. For GuruShots, what -- help me understand again, right now, you've, I guess, allocated a good amount of the cost cutting related to it. How do you think -- are you still trying to do some initiatives to increase the top of the funnel and the engagement and usage of new usage users? Or what's the status with that?

Yes, Allen, it's Jonathan. So in GuruShots, we have the existing GuruShots game as we know it today. And the focus is on optimizing revenue performance and with reduced ad spend bringing in new users with a very attractive ROAS profile. Separate and apart from that, we are now in ideation/planning stage for what GuruShots 2.0 will be and how we will be able to improve the game materially, built on modern infrastructure in order to realize and recognize the value that we believe that the game carries with it. We are not as of yet doing any development work on GuruShots 2.0. When I say development work, I mean coding and stuff like that. We're now in ideation phase, game design phase and thinking about where we can bring the game such that we can ultimately make a presentation to the Board and have a recommendation as to what should come next in terms of that part of the business. Q – Allen Klee: Okay. For in the past, the last quarter, you mentioned WishCraft and AI Art Master were in beta. Is there any change in that or what's happening there?

Those are still in beta. And obviously, with the restructuring, there's not a tremendous amount of effort being invested in those. I believe that sometime between now and the end of Q3, we will make a decision as to what we're going to move forward with what we -- or what we might just say like, hey, no sense in moving forward on this one and move on to some other project. But we're not there yet. Q – Allen Klee: Okay. And similarly with AI audio, I think I heard you say something like looking to launch that maybe in the next couple of quarters. So any thoughts?

AI audio is -- we are expecting to add an AI audio feature to the Zedge marketplace in the paint suite in the next couple of months. And I hope that, that will actually be in Q3, if not in Q3, it will be the beginning of Q4. But that will not be a separate app. That will just be part of our AI suite of solutions, adding a new Vista, which is outside of the realm of visual in entering us into the realm of audio. Q – Allen Klee: Okay. Got it. If I step back and I think about your company, I think you get very high marks over time with what you've done on monetizing, advertising. And the challenges have come from GuruShots and monthly average users. So it sounds like -- I mean, tell me if I'm wrong, but GuruShots, you're downsizing and then addressing. Monthly active users, how do you think about just in general, that -- and some of it is macro, some of it, I don't know what it is. Just how do you think about getting that to start to grow?

Yes. So I think that there are a couple of pieces in motion there. One is continued product innovation and resilience in terms of how we invest in the product and how we get users to engage with new features and the like. And then another feature of this relates to subscriptions, whereby we monetize better with subscriptions and subscribers, there is a funnel there in terms of what happens second year, third year and lifetime. And as you know, we've discussed about the growth that we've had with Lifetime subscriptions and so on and so forth. So holistically, our perspective is try to continue to build with new features and monetize those features well, optimize the segment of prospective subscribers and try to get lifetime subscribers and for those users that don't subscribe, optimize our ad inventory to generate the greatest ROI. And that's in the Zedge marketplace. In terms of -- and I should certainly mention investment in paid user acquisition to complement the strong organic growth that we have for the Zedge marketplace. And we've been doing that successfully. When it comes to GuruShots, part of the reason that we have undertaken the restructuring relates to the notion of giving us runway in order to redesign and then come out with something that we think will strike the cord and spark the growth that we believe is achievable. And that will also be a function of not only product, but also investment in marketing. And as I indicated earlier, we've scaled back considerably in terms of our marketing spend for GuruShots, yielding a much more attractive ROAS profile. And then we're keeping fire powder in the keg such that when GuruShot 2.0 comes to fruition that we have the money to invest and to grow that user profile and that user base profitably. I hope that answers your question. Q – Allen Klee: Yes. Thank you. You mentioned Lifetime subscriptions and pushing to grow them. Does there at some point become an issue if you just do lifetime subscriptions that you start to lose like subscription revenue because everyone signed up for the lifetime -- or how do you think -- I mean, you get the benefit in the short term, but how do you think about that?

That's a great question. Remember, we have a very, very large set of users that are coming into Zedge on a regular basis, new users, that is. And the way that we think about it is really segmenting based upon where we see the best possible outcome for any particular user. So I think with the robust organic growth coupled with the paid user acquisition that we invest in, we have room to maneuver there. It's not binary. It's not like we only have lifetime subscription. And if you don't sign up for it, you can't use the app. Remember, we've got multiple tiers. We've got subscriptions. Within subscriptions, we've got annual subscription, monthly subscription, lifetime subscription. So then we have the free tier and then we have features that are available by a user interacting with a rewarded video. So there's a pretty wide range of paths that we can steer users down in order to yield the best possible outcome per segment, if you will. Q – Allen Klee: Okay. Thank you. I want to -- I'm not sure if I heard what you guys said right. When you made some commentary that you expected improvement in advertising from what you've seen so far in the next quarter. But I don't know if you went this far. Let me ask the quarter you just reported, I think, is your seasonally strong quarter. So the next quarter, I believe, is normally seasonally not as strong. Did you make a comment that you think your fiscal 3Q revenue would be above fiscal 2Q? Or am I extrapolating something you didn't say?

No, you are extrapolating. What we've said is we think that the challenge imposed with the inavailability of TikTok for basically around a month is behind us. TikTok being back in the market has the impact of increasing CPMs, and that is what we are experiencing. And coupled with that, TikTok being back in the market also helps us on the paid user acquisition side, because there are more platforms, so supply-demand dynamics kick in and are benefiting us. Seasonally, you are correct, our fiscal Q2 quarter is the strongest quarter. And although, it's -- with some optimizations we've done with our ad inventory that from what we can see, the pressure that -- the downside pressure that existed when TikTok wasn't around is in the rearview mirror. And then from a, I guess, political perspective, my understanding is that the 75-day window has been extended, which I guess, could point to the outcome that President Trump is trying to achieve, and that is finding an appropriate buyer to keep TikTok alive and well in the U.S. Q – Allen Klee: Okay. Thank you.

Sure. Q – Allen Klee: I'm trying to -- okay. Those were my questions. Thank you so much.

Thank you. [Operator Instructions] There were no other questions at this time. That concludes our question-and-answer session and conference call. You may disconnect your lines at this time. Thank you for your participation.