ZDGE - AMEX

Good day and welcome to

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

Good morning. Thank you, Brian and thank you all for joining us today. I will begin by briefly reviewing our second quarter results, demonstrating how our fiscal year 2023 investments have positioned us for sustainable long-term growth. Q2 revenue increased 11% from last year as we continue managing the geopolitical macroeconomic and industry-specific challenges spanning the landscape. One of the big stories this past quarter was continued momentum at the

Thank you, Jonathan. As you saw in our earnings release, GAAP requires us to take a one-time $11.9 million noncash write-down of GuruShots intangible assets. It's important to underscore that this was a noncash event dictated by timing, as current performance did not align with the carrying value on our books. As Jonathan indicated, we still believe that with time, we will unlock growth and achieve the strategic goals that we invested when we acquired GuruShots. Additionally, this write-down does not reflect the valuable gamification experience with secure, benefiting the rest of our business. As a result of the strength related to valuation over the past year, we have added non-GAAP net income and non-GAAP diluted EPS as new metrics that we plan to report going forward. The reconciliation for GAAP to non-GAAP is available in our earnings release from this morning. Monthly active user or underscore that this was a noncash event dictated by timing as current performance did not align with the carrying value on our books. As Jonathan indicated, we still believe that with time, we will unlock growth and achieve the strategic goals that we invested when we acquired GuruShots. Additionally, this write-down does not reflect the valuable gamification experience with secure, benefiting the rest of our business. As a result of the strength related to valuation over the past year, we have added non-GAAP net income and non-GAAP diluted EPS as new metrics that we plan to report going forward. The reconciliation for GAAP to non-GAAP is available in our earnings release from this morning. Monthly active user or underscore that this was a noncash event dictated by timing as current performance did not align with the carrying value on our books. As Jonathan indicated, we still believe that with time, we will unlock growth and achieve the strategic goals that we invested when we acquired GuruShots. Additionally, this write-down does not reflect the valuable gamification experience with secure, benefiting the rest of our business. As a result of the strength related to valuation over the past year, we have added non-GAAP net income and non-GAAP diluted EPS as new metrics that we plan to report going forward. The reconciliation for GAAP to non-GAAP is available in our earnings release from this morning. Monthly active user or MAU, for the

[Operator Instructions] Your first question is coming from Allen Klee with the Maxim Group.

Congratulations on the strong revenue growth. My first question is you had record advertising rates. It's -- but it's also your seasonally strongest quarter, I think. So when we parse out how to think about maybe to some degree, what effect is seasonal versus other stuff?

Allen, thanks so much for your comments. And as I mentioned in my earlier summary of the quarter, we're actually seeing that our halfway through the quarter, numbers are holding up. So that is due to a combination of factors, both feature-wise, ad tech-wise or ad stack-wise as well as, I guess, some secular features or some secular factors. So it's a little bit hard to sort of parse that out because by contrast, typically, our Q3 is our weakest quarter from an ad revenue perspective in light of post-season drop-off and ad budgets and so on and so forth.

That's great. And then just in terms of the marketplace, I think you said that pAInt and there's greater functionality on the web and gross transactional value sold was up like 23%. Is there a way to think about what the key drivers are of growth in marketplace and things that you're doing to keep this going?

Sure. Just to be more specific, are you talking about

For both.

Well, when you take a look at

Just so we understand it, there's

So

In terms of Emojipedia, I don't know if you provided any numbers in terms of did it grow over year-over-year or the results -- I'm not sure if you're able to provide revenue? Also, you said there are new actions you'd like to add. You mentioned some things like Emoji mashups and emoticons and -- I'm probably saying around kaomojis. Could you just tell me what mashups and kaomojis are?

Sure. So these are new content, just to keep it simple. These are new content forms. But by way of example, when today one renders a smiley emoji, they can either have a smiley face in yellow and so on and so forth or they can type a colon and a close parenthesis. That is a contract. So there are the text strings that connote various messages and that is a potential direction for us to add as a new content vertical within Emojipedia and that's one of many. In terms of numbers, I'm going to hand off to Yi to answer your question.

Allen, so in Emojipedia, the second quarter growth was not as great as we had hopeful but if you look at the 6 months, we still grew that 27%. For 3 months ended January, we only grew about 8%.

And then one of the areas that I think you mentioned as a priority is monthly [indiscernible] monthly active users. It was up slightly sequentially which is encouraging. Could you maybe just highlight some of the key things you're focused on to get that number to start growing again?

Sure. So we have a couple of activities that are taking place. We put together what I'll call a task force of rank-and-file

Allen, I would just like to add. Sorry, I would just like to -- as we mentioned, even though our active subscribers stayed flat at 648,000 but we are replacing lower value subscription with a higher value from the lifetime subscription as well as annual subscription. So although the active subscribers remained the same but our revenue base was much higher.

Yes, that's a good point. Then on GuruShots, a couple of questions. My personal experience and I'm a bad example, not being that savvy in this stuff. But it's hard to be a newbie. So when you first get on, it seems difficult to know-how to engage and it tells you, you can't engage in a bunch of things until you get to a certain level. So maybe what you're doing to change that? And then also could you talk a little about what the Turbo feature, what that actually is and the new feature you're going to add? And then why multiple virtual currencies should help you out?

Thank you, Allen and point very well taken with respect to onboarding. As you had said, a newbie that downloads GuruShots today is immediately immersed in the full game, they enter into a competition, they can be competing against up to 7,000 other photographers that are in that competition with a dashboard that has a lot of numbers and features to it. So a user has to be exceptionally loyal and very, very insistent on saying, they're going to figure this thing out. Overall, onboarding will allow for us to simplify the gameplay, such that we get users into that funnel immediately which opens up the top of the funnel, hopefully expands the potential player base and also allows for folks that may think that they are not good photographers making this accessible to them. And then with progression as users begin to master skills and so on and so forth, they will then gain exposure to additional features that contribute to making the game play more competitive and fun and so on and so forth. In addition to that, the onboarding will have an element to it that makes the game more or, I guess, shorter in duration. So a typical photo challenge today in GuruShots can range in duration from 1 to several days. The notion of going through that onboarding feature will be to decrease that to -- it could be 30 minutes, it could be an hour, it could be 2 hours and so on and so forth. With respect to changing the economy. The economy today is a rigid economy. There are 3 game resources that users can benefit from while playing the game. And the way to access those game resources is through a hard in-app purchase event. If you buy resource A, it does not have any relevance to resource B or C. To master the game, you really need to have a portfolio of those 3 resources and migrating to a coin-based economy which has multiple currencies, allows for a lot more flexibility and it also allows for us to reward every player in the game. Meaning if you are playing the game today and you don't come in first, second or third place, that means you don't feel that great about yourself. Even though you may have come in fourth which is 6,996 in terms of your ranking, our ability will be with this new coin-based economy to see to it that with every player, even the player that ranks the lowest of those 7,000, will be able to get a reward and ultimately use that reward in one way, shape, form or another or use those rewards in order to potentially gain an edge with respect to game resources. As I mentioned during my comments, we've made changes to the product team. And the product team is now very, very well resourced with a community of product managers that come out of some of the most well-known global gaming companies that have experience not only in gaming, design, user experience, user interface but also in gaming economies. And what can be done in order to optimize those economies ultimately leading to better revenue generation as well as contributing to improving user engagement and user retention. In totality, our hope and expectation is that taken together, that will unlock the growth that we believe is inherent in this asset. In terms of the new features, the new features most immediately are around offering what I will call mini game battles for users that are already in the middle of the game and then -- and now beginning to expand that to just being a stand-alone short-term limited number of competitors' type of battle, again, allowing for this to be a quick win for users to get that dopamine flow and feel like, well, they're competing in real time without having to wait for an extended period of time in order to ultimately win a battle. And in addition to that, also decreasing the number of people that they're competing against, therefore, increasing the chances that they can actually win and gain that accolade accordingly. Does that answer your question?

Yes, that was very thorough. Just some updates on AI Art Master? Can you provide an update on that?

Sure. So AI Art Master remains in soft launch. We made the decision to keep it in soft launch, while we are hard at work at unlocking the growth in the core GuruShots game and we continue to gather data. Our plan currently is that when we get to GuruShots' trajectory in the direction that we believe will allow for this growth, that we will then refocus efforts and resources on AI Art Master. We just don't want to spread ourselves so thinly that we're not progressing the GuruShots game and that as we evolve, it will take time to launch this AI Art Master game as we iterate and so on and so forth. So focusing on getting one thing done really, really well and then progressing to the next thing which would be AI Art Master. AI Art Master now is at a point where we are able to monitor the data. That data is going to be exceptionally valuable in terms of helping guide what our future direction is with that game and how it evolves.

And then I'm guessing a similar answer answered on the past call, you talked about potentially launching a hybrid casual game. Is that kind of in the same status or...

AI Art Master is in that hybrid casual category. Those are not separate and distinct from one another.

Okay, got it. Okay. And then a question on financials. The jump in SG&A for the quarter, is the way to look at that -- to what degree do we think of that as like kind of that this is a seasonally strong quarter versus some of the other things you've talked about of perhaps paid acquisition or some of the new -- well -- and you brought on some more people. So I'm trying to get a sense of how much of it is maybe seasonal versus kind of a new run rate for SG&A?

Sure. I would actually reframe that a little bit. SG&A includes marketing in it. So there are 2 components of that number. One is actual money that we have spent on paid user acquisition. And as I said in the past, in order to scale paid user acquisition, when looking at budgets, there's going to be the steady state of this platform. This particular campaign works, we continue investing in it but there is obviously a ceiling there. And then, there is what we'll call test budgets where you try a new platform, you try new creators and stuff like that. And some of that stuff works, some of that does not. You need both components in order to scale paid user acquisition. But then there is also the fee that we pay to whether it be Apple or Google when we bring on a subscriber or when a user makes an in-app purchase. So those 2 components taken together contributed materially to the increase in SG&A. And the way I sort of look at it is, if we're successful in growing our subscriber base, If we're successful in generating more in-app purchases, SG&A goes up, that's actually a good reason for SG&A to go up as opposed to we're not managing our expense for infrastructure properly by way of contrast. Yi, do you have anything that you want to add to that?

Yes. I will only add, Allen, our SG&A remains quite stable and our net compensation expansion is actually in line with last year. So the order increase in SG&A, Jonathan mentioned, is in the marketing spend and also the platform we see. One of the downside when you rolled out lifetime subscriptions from Google Play's point of view, this is one is done. So they treat as an in-app purchase. So we pay a 30% fee rather than a regular subscription which is at a 15% fee. So as a result, our platform fees went up by virtue of our rolling out lifetime subscription on [indiscernible].