Tom Arnoy, co-founder and CEO of Zedge, said, “Since our inception, we have been focused on developing an exceptional service that enables Zedgers to express their identity, feelings, tastes and interests on their mobile phones with outstanding personalization content including wallpapers, ringtones, app icons and notification sounds. As a result of this focus, we have developed a huge following. We have tremendous opportunities for continued growth before us, and we will continue to execute on our growth strategy delighting customers and attracting new users.”
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Jonathan Reich, CFO and COO of Zedge, said “We are grateful to IDT for its support during the past years enabling us to get to this point, and are excited by the prospect of continuing to grow as an independent company in order to unlock value for our shareholders.”
Zedge stock, which had performed well in when issued trading, held up for much of the day, but between 3:33PM and the close, fell from $6.40 to $4.70. Much of the stock’s trading volume came during this time period and just before it, including some larger blocks. It may well be that a large holder of IDT wanted out of a stock that did not meet his objectives. Of course it may be related to company performance as well.
It just so happens that after the bell yesterday, IDT reported earnings for the quarter ending April 30. Included in that release were Zedge’s numbers for the quarter.
Zedge’s revenue in 3Q16 was $2.6 million, an increase from $2.2 million (+17.0%) in 3Q15 and a decrease from $3.5 million (-27.1%) in 2Q16. The year over year increase was driven by continued user growth and increased customer engagement. The sequential decrease conformed to expectation and reflected seasonal factors that increased revenue in the second quarter. Zedge generated income from operations of $239 thousand in 3Q16 compared $123 thousand in the year ago quarter, and $1.7 million in 2Q16.
The sequential decrease may have “conformed to expectation”, but I don’t think most investors understood or expected the extreme seasonality of the business. Factoring in the costs of being public, Zedge would have lost money in this quarter. These numbers came out after the bell and could not have been the direct cause of the drop, but, we guess the market is efficient. Or, it may just be a coincidence. Spinoffs often experience first day drops as holders shed the new company and this may be nothing more than that.
In any case, at yesterday’s close of $4.70, the market cap is under $44 million, which, even factoring in the reported quarter, seems to us to be an attractive valuation for a unique asset. The valuation may, indeed, get even better this morning as investors absorb the report and make their own decision. In many ways, this reminds us of Nuvectra(NVTR), which recently plunged after its spinoff to below its cash position, only to quickly rebound.
Disclosure: The author owns shares of Zedge