Revenue

9 Months Ended

Apr. 30, 2019

Revenue from Contract with Customer [Abstract]

Revenue

Note 2—Revenue

Adoption of Topic 606, "Revenue from Contracts with Customers"

On August 1, 2018, the Company adopted Topic 606, applying the modified retrospective method to those contracts not yet substantially completed as of August 1, 2018. Results for reporting periods beginning after August 1, 2018 are presented under the new revenue standard, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historical accounting practices under Topic 605. The impact of adopting the new revenue standard was not material to our consolidated financial statements and there was no adjustment to beginning retained earnings on August 1, 2018.

Pursuant to Topic 606, revenue is recognized in an amount that reflects the consideration to which the entity expects to be entitled in exchange for promised goods or services. An entity applies the following five steps to achieve the core principle of Topic 606:

1. Identify the contract with a customer

2. Identify the performance obligations in the contract

3. Determine the transaction price

4. Allocate the transaction price to the performance obligations in the contract

5. Recognize revenue when (or as) the entity satisfies a performance obligation

Revenue Recognition

The Company generates revenue from three sources: (1) Advertising; (2) Service; and (3) Other. Approximately 90% of the Company’s revenue is generated from selling its advertising inventory (“Advertising Revenue”) to advertising networks, advertising exchanges, and direct arrangements with advertisers. Approximately 9% of the Company’s revenue relates to our managing and optimizing the advertising inventory of a third-party mobile application publisher, as well as overseeing the billing, collections and reporting related to advertising for this publisher (“Service Revenue”). The contract with this publisher is being terminated effective May 31, 2019. The remaining revenue is a combination of subscriptions and Zedge Premium (“Other Revenue”) which were introduced in January 2019 and March 2018 respectively. Currently subscription revenue allows users to pay a monthly or annual fee to remove unsolicited advertisements from the Zedge app although the Company is working on adding additional capabilities to subscriptions including offering subscriptions to iOS customers. The Company retains 30% as fee when users purchase licensed content using Zedge Credits or unlock licensed content by watching a video or taking a survey on Zedge Premium.

The following table summarizes revenue by type of service for the periods presented:

	Three Months Ended				Nine Months Ended
	April 30,				April 30,
	2019		2018		2019		2018
	(in thousands)				(in thousands)
Advertising revenue	$	1,670	$	2,279	$	6,243	$	7,496
Service revenue		179		213		528		556
Other revenue		63		59		95		203
Total Revenue	$	1,912	$	2,551	$	6,866	$	8,255

Advertising Revenue: The Company generates the bulk of its revenue from selling its Zedge app’s advertising inventory to advertising networks and advertising exchanges and direct sales to advertisers. The Company also generates revenue from app publishers that pay the Company for installations of their app.

● Advertising Networks. An advertising network is a third party relationship where buyers of advertising inventory go to purchase either specific targeted inventory or a large scale of inventory at a set price. Advertising Networks serve as an indirect source of advertising fill to a variety of branded ad campaigns and performance-based ad campaigns.

● Advertising Exchanges. An advertising exchange is similar to an advertising network, except that the exchange typically bids in real-time for inventory. Advertisers may utilize an exchange when looking for scale or specific audiences, and accept that the price will vary based on when and how much volume of inventory they wish to buy.

● Direct Sales to Advertisers. The Company sells advertising directly to advertisers through a contractual relationship. These relationships typically offer higher than average pricing than realized from sales via advertising networks or advertising exchanges.

● App Installs. The Company earns revenue when a Zedge user installs an app offered by a publisher in the Game Channel that pays the Company a pre-negotiated fee for the installation (referred to as Cost Per Install or CPI). In October 2018, the Company replaced the Game Channel with a game wall which offers Zedge users with a mix of interactive playable ads which, if installed by the user, generate revenue for Zedge.

The Company recognizes advertising revenue as advertisements are delivered to users through impressions, ad views or app installs (depending on the terms agreed upon with the advertiser). For in-app display ads, in-app offers, engagement advertisements and other advertisements, the Company’s performance obligation is satisfied over the life of the relevant contract (i.e., over time), with revenue being recognized as advertising units are delivered. The advertiser may compensate the Company on a cost-per-impression, cost-per-click, cost-per-action or cost-per-install basis.

Service Revenue: The Company manages and optimizes the advertising inventory of a third-party mobile application publisher, as well as overseeing the billing, collections and reporting related to advertising for this publisher. In exchange for these management and optimization services, Zedge shares a portion the advertising revenues from this publisher whose revenue is also derived from sales of advertising. The contract with this publisher is being terminated effective May 31, 2019.

Other Revenues:

Zedge Premium: Zedge Premium is the Company’s marketplace where artists and brands can market, distribute and sell their digital content to Zedge’s users. The content owner sets the price and the end user can purchase the content by paying for it with Zedge Credits, the Company’s closed virtual currency. A user can earn Zedge Credits when taking specific actions such as watching rewarded videos or completing electronic surveys. Alternatively, users can buy Zedge Credits with an in-app purchase. If a user purchases Zedge Credits (ranging from 500 credits for $0.99 to 14,000 credits for $19.99), Google Play or iTunes retains 30% of the purchase price as its fee. When a user purchases Zedge Premium content, the artist or brand receives 70% of the actual value of the Zedge Credits used to buy the content item (“Royalty Payment”) and the Company receives the remaining 30%, which is recognized as Other Revenue. Some of the Zedge Premium content is available for print on demand merchandise, including phone cases and tee shirts fulfilled through third party vendors. When a user purchases a print-on-demand item the artist or brand is paid 70% of the net profit, after accounting for cost-of-goods sold, shipping and handling, credit card processing, and other direct expenses, and the Company recognizes Other Revenue in the amount of the remaining 30%. In the three months ended April 30, 2019, gross transaction revenue (the total sales volume transacting through the platform, or “GTV”) and net revenue generated from Zedge Premium were $159,000 and $36,000, respectively. For the nine months ended April 30, 2019, GTV and net revenue generated from Zedge Premium were $317,000 and $69,000, respectively. Although GTV growth slowed on a sequential quarter basis, we are developing ways to target user segments with content that is relevant to them based on their personal preferences as well as improving artists’ tools in order to meet the needs of the creative community. We believe that both of these efforts will enhance conversion rates and generate greater revenue from Zedge Premium.

Subscription Revenue: Beginning in January 2019, the Company has generated revenue for monthly and yearly subscription services through subscriptions sold through Google Play. When a customer subscribes, they execute a clickthrough agreement with Zedge outlining the terms and conditions between Zedge and the subscriber. Google Play processes subscription payments on Zedge’s behalf, and retains up to 30% as its fee. Subscription revenue is a series type performance obligation and is recognized net of sales tax amounts collected from subscribers. Both monthly and yearly subscriptions are nonrefundable after a period of 7 days. Subscriptions are automatically renewed at expiration unless cancelled by subscribers. The enforceable rights in monthly and yearly subscription contracts are the service period. Because of the cancellation clauses for these subscriptions, the duration of these contracts is daily, and revenue for these contracts is recognized on a daily ratable basis. To date cancellation rates have been immaterial. The payment terms for subscriptions is 30 days after month-end. The Company sold $187,000 in gross subscription in the three months ended April 30, 2019 and recognized $26,000 in revenue in the same period. The Company had close to 60,000 active subscription accounts as of April 30, 2019, including approximately 14,000 monthly subscription accounts and 46,000 yearly subscription accounts with an aggregate $164,000 in deferred revenue.

In the three and nine months ended April 30, 2019, Other Revenue represented revenues derived solely from Zedge Premium and subscription. In prior year periods, Other Revenue represented revenue from assorted monetization trials that the Company tested.

Gross Versus Net Revenue Recognition

The Company reports revenue on a gross or net basis based on management’s assessment of whether the Company acts as a principal or agent in the transaction. To the extent the Company acts as the principal, revenue is reported on a gross basis unless the Company is unable to determine the amount on a gross basis, in which case the Company reports revenue on a net basis. The determination of whether the Company acts as a principal or an agent in a transaction is based on an evaluation of whether the Company controls the good or service prior to transfer to the customer.

The Company generally reports its advertising revenue net of amounts due to agencies and brokers because the Company is not the primary obligor in the relevant arrangements, it does not finalize the pricing, and it does not establish or maintain a direct relationship with the advertiser. Certain advertising arrangements that are directly between the Company and advertisers are recognized on a gross basis equal to the price paid to the Company by the customer since the Company is the primary obligor and the Company determines the price. Any third-party costs related to such direct relationships are recognized as direct cost of revenues.

The Company reports subscription revenue gross of the fee retained by Google Play, as the subscriber is Zedge’s customer in the contract and Zedge controls the service prior to the transfer to the subscriber.

Payment terms

The majority of Zedge’s Advertising Revenue is derived from large credit-worthy entities, including Twitter, Google, Facebook, Apple and Amazon or affiliates of those entities. The Company invoices its customers monthly. Payment terms are stipulated as a specific number of days subsequent to the end of the month, generally ranging from 30 to 60 days. The Company endeavors to terminate relationships with smaller advertisers promptly if balances become past due. Since these smaller advertisers rely on the Company to derive their own revenue, they generally pay their outstanding balances on a timely basis. Historically, write-offs of revenue have been de minimis. Accordingly, the Company does not maintain a bad debt allowance.

The Company makes Royalty Payments to the artists and brands within sixty (60) days after the end of each calendar quarter. If the quarterly royalty amount is less than two hundred dollars ($200), the Company may defer payment to a later period in which the artist or brand surpasses the $200 threshold. The artist or brand forfeits any accrued royalty amounts below the $200 threshold upon expiration or termination of the artist’s license agreement with the Company. This provision will become effective on the first anniversary for all existing license agreements and for all new license agreements entered into on or after November 1, 2018. Additionally, the Company has established a minimum threshold of twenty-five dollars ($25) in accrued Royalty Payments in order for an artist or brand to maintain its license agreement. Accordingly, if an artist hasn’t generated a minimum of $25 in accrued Royalty Payments amount in a year, the Company may deduct up to $25 from the artist’s accrued Royalty Payment account. As of April 30, 2019, the aggregate amount owed by the Company to artists was approximately $38,000.

Deferred Revenues and Unsatisfied Performance Obligations

The Company records deferred revenues when users purchase or earn Zedge Credits. Unused Zedge Credits represent the value of the Company's unsatisfied performance obligation to its users. Revenue is recognized when Zedge App users use Zedge Credits to acquire Zedge Premium content. As of April 30, 2019, the Company’s deferred revenue balance related to Zedge Premium was approximately $120,000.

The Company also records deferred revenues related to the unsatisfied performance obligations with respect to the subscription revenue.

Practical Expedients

The Company generally expenses the fees retained by Google Play related to the subscriptions revenue when incurred because the duration of the contracts for which the Company pay commissions are less than one year. These costs are included in the selling, general and administrative expenses of the Consolidated Statements of Comprehensive Loss.

Significant Judgments

The advertising networks and advertising exchanges track and report the impressions and installs to Zedge and Zedge recognizes revenues based on these reports. The networks and exchanges base their payments off of those reports and Zedge independently compares the data to each of the client sites to validate the imported data and identify any differences. The number of impressions and installs delivered by the advertising networks and advertising exchanges is determined at the end of each month, which resolves any uncertainty in the transaction price during the reporting period.