Zedge Hyper-Growth Accelerates To New Highs
Zedge (NYSEAMERICAN: ZDGE) caught our attention last quarter when it reported earnings. The company operates a mobile app that allows users to customize their smartphones including ringtones, wallpaper, icons, and many other features. The company has been around for quite a few years, but recently entered a new phase of growth. The combination of internal efforts and pandemic-inspired demand drove revenue growth to triple digits and it is still accelerating. Add to that the company’s inclusion in the Russell Microcap Index and another increase to guidance and we think this stock will see triple-digit gains before the end of the year.
Zedge Blows Past The Consensus And Raises Guidance
The core of Zedge’s hyper-growth story centers around its premium products. Many of Zedge offerings are free, the app itself is free, but within that are many up Sells. The upsells are good both for the company and for the platform users specifically artists and creators who use it as a tool to reach their Market. The company's net revenue topped $5.25 million for the quarter which is up 152% from last year and beat the consensus by 3800 basis points. The growth is notable not only for its size but also for its acceleration, the company's year-over-year growth was just over 100% in the previous quarter which is seasonally the strongest quarter.
Looking at the internal metrics, the company's revenue gains are at the very least sticky if not on track for further acceleration. The company reports monthly active users rose by 20% year-over-year and drove an even higher conversion rate to subscriptions and premium services. Zedge premium gross transactions rose 68% while active subscriptions rose 88.7% and subscription revenue rose 97.6%. Ad revenue, another important facet of Zedge business model, rose 188.3 % despite seasonally expected weakness in ad spending.
Moving down the report, the company was able to leverage the revenue gains to great effect. The operating margin came in at 37.7% vs (-6.1%) in the previous year, EBITDA rose to $2.3 million versus a loss in the prior year, and cash flow from operations surged more than 500%. On the bottom line, the company's GAAP EPS of $0.13 beat by a dime.
Turning to the guidance, the guidance is very good. The company’s strength led it to raise forward guidance for the third time this year and to a range above the previously stated. Execs are now expecting revenue growth in the range of 95% to 100% versus the 75% to 80% guided at the end of the last quarter. Based on what we're seeing, we will not be surprised to see this company raise its guidance again at the end of the next quarter. Zedge’s 34.5 million monthly active users is a drop in the bucket of the addressable market and this company is making moves to capture a greater market share.
"To continue our strong growth into the future, we recently made strategic product management hires to focus on driving user engagement, particularly in well-developed markets, across Zedge Premium, paid subscriptions, our freemium phone personalization product, and Shortz. To that end, we expect to iteratively roll out social and community features, Zedge Premium value-ads, and other upgrades that will help us continue to grow our core business while scaling newer initiatives."
The Technical Outlook: Zedge Surges To New High
Shares of Zedge spent some time in consolidation over the past few months but began moving higher 2 or 3 weeks ago. That move was accelerated by news the company would be included in the Russell Microcap Index and accelerated again by the Q3 results. Shares of the stock are up about 10% in pre-market trading following the report and breaking out to a new all-time high. Based on the results, the outlook, and strength in the indicators we think this rally has only just begun. Even at these new highs, the stock is only trading at 33 times this year's earnings expectation and offers quite a value for a hyper-growth stock of this quality.
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