ZDGE - AMEX

Good afternoon, and welcome to

Thank you, operator. In today's presentation, Jonathan Reich,

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

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

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

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

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

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

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

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.