Q3 2021 Digital Turbine Inc Earnings Call

Good day and welcome to the digital turbine reports fiscal 'twenty 'twenty, one third quarter results conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero. After today's presentation, there will be and opportunity to ask questions to ask a question you May Press Star then.

One on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would like now to turn the conference over to Brian Bartholomew VP of capital markets. Please go ahead.

Thanks, Matt.

Good afternoon, welcome to the digital turbine and fiscal 2021 third quarter earnings Conference call. Joining me on today's call to discuss our results are CEO, Bill stone and CFO Barrett garrison.

And we get started I would like to take this opportunity to remind you that our remarks. Today will include forward looking statements. These forward looking statements are based on our current assumptions expectations and beliefs, including projected operating metrics future.

And your products and services anticipated market demand and other forward looking topics.

Although we believe that our assumptions are reasonable they are not guarantees of future performance and some will inevitably prove to be incorrect.

Except as required by law, we undertake no obligation to update any forward looking statements.

For a discussion of the risk factors that could cause our actual results to differ materially from those contemplated by our forward looking statements. Please refer to the documents we filed with the Securities and Exchange Commission.

Also during this call we will discuss certain non-GAAP measures of our performance non-GAAP measures are not substitutes for GAAP measures. Please refer to today's press release for important information about the limitations of using non-GAAP measures as well as reconciliations of these non-GAAP financial results for the most comparable GAAP measures.

Now I'd like to turn the call over to our CEO, Mr. Bill Stone.

Thanks, Brian and thank you all for joining our call Tonight.

Before getting into my prepared remarks on our business results and commentary I want to give a shout out to our global digital turbine team, who are also all shareholders and while investors may only hear from Barrett, Brian and myself I want all of you to know that these quarter after quarter positive results don't just magically happen.

People and make them happen and the team generating these results. It's the best team I've been around and my nearly 30 year career.

Working virtually and a pandemic for almost a year now is a challenge for all of US and our team continues to hustle and crush it while maintaining amazing focus on our customers partners and driving positive business outcomes.

I could not be more proud of them and you should be too and thanks D T team.

And you can break out on my prepared remarks, and the three areas.

First I'll summarize our quarterly results.

Second I'll provide some real time operational updates on many of the exciting new partnerships and initiatives underway.

And finally, I'll end with some commentary about the strategic value and the platform and where we're going into the future.

To close out our fiscal 'twenty, one third quarter, we continue to build out on our breakout momentum from the first half of the fiscal year with record results across the board.

We had $88 $6 million and revenue, which represented nearly 150% annual growth on an as reported basis and over 70% on a pro forma basis.

Higher gross margins and accelerating operating leverage enabled us to turn this strong revenue growth and to morph into more than four times, the EBITDA compared to the EBIT generated a year ago.

278% growth and non-GAAP earnings per share.

And more than three extra free cash flow from a year ago as we continue to benefit from network effects of our platform and economies of scale.

Per it'll provide more details on the numbers, but operationally I was pleased with the improving global reach of our platform.

And as a reminder, revenue per device or are PD is a core operational health metric of our business and in the U S. Strong media demand resulted in 25% gross of RP DS and we saw and nearly 70% growth and international Rpt's.

Combined with the strong device growth our international supply revenues increased by nearly 200% year over year.

And for the first time, we also had more international demand revenues and our App media business come from outside the United States.

More specifically on devices for application media business. We also added approximately 65 million devices and the quarter, which represents over 50% growth year over year.

This growth was achieved despite an overall decrease for Android devices and the macro global market.

And in other words, we're still a penetration story against the larger opportunity.

And our content business revenues and the December quarter pro forma increased by over 100% year over year.

This result was driven by our new content platform being fully deployed and our legacy platform being sunset and improved advertising rates, all driving better operating results.

And this $31 $7 million and contract revenues was achieved against over 10 million daily active users or Dallas.

It includes just over 100000, Dallas coming from revenue synergies on our existing addressable market distribution footprint, which is many hundreds of millions of devices with our current software.

That's the opportunity for growth is enormous.

And in particular I'm pleased to announce that we anticipate multiple tier one partners to launch some of our content products later, this year, which should materially improve our DAU accounts and drive revenue synergies from our mobile posse acquisition last year.

As you've heard me say on prior calls diversification is a major strategic priority for the company.

Diversification of partners business models products geographies and advertisers.

We continue to have success with our U S based carrier partners with whom we grew revenues healthy double digits year over year.

Despite flat number total devices activated.

However, our revenues with partners outside of this group increased by over 100% year over year.

Now turning to the forward outlook I want to provide some commentary on how we are positioned for continued growth across each of our growth levers, including devices media and new products.

Yeah.

First on devices as I mentioned earlier, we set a quarterly record with more than 65 million new devices launched with our software.

Given the flattish U S device trends at the moment the overwhelming majority of growth and devices is occurring internationally as we are ramping our international partners.

The international revenue growth from these partners is expanding nicely with almost 200% growth annually and international partner revenues.

Which was more than a third of our App media revenues and the quarter compared to less than 20% a year ago.

Just as a small anecdote to highlight our progress we did more revenue from our international partners. This past Christmas Eve Christmas day, and the day after Christmas and then the entire digital turbine company generated on those same three days and 2018.

Our pipeline remains robust and we're excited about many opportunities in front of us to further increase our device footprint.

And as you've heard me mentioned on prior calls.

Spanning devices beyond smartphones is an exciting opportunity for us and a natural extension of our offerings.

We continue to make progress on our TV offerings as we discussed on our last earnings calls and look forward to those launches occurring later this year.

On the product front, our revenues from dynamic installs grew by 40% year over year.

But now represents less than 50% of our total revenues compared to over 80% last year.

Revenues derived from non dynamic install products grew nearly 50% sequentially and over 500 per cent year over year as our content products single tap and other products are showing solid growth.

Well as a strong gross exciting I believe it'll even better as we drive more revenue synergies on our content products. We continue to capture the recent momentum and our single tap business and other emerging products such as notifications ramp even faster.

Our recurring revenues are now nearly 50% compared to just over 10% a year ago.

I also want to specifically call out our progress on single tap.

Not including our social media integration with our large carrier partner a.

A few quarters ago, we talked about single tap being on a seven figure run rate.

Last quarter, we talked about it being on a seven figure quarterly business for us and today I'm happy to say, it's now a seven figure monthly business. The growth is becoming more material and we expect single tap to be a growth driver for the business in 'twenty and 'twenty, one and beyond.

Specifically, we're seeing nice growth from our demand side platform or DSP efforts and we'll look to continue to scale our AD Tech stack here, both on the U S and internationally.

The bigger tick bigger picture takeaway for investors is that we have growth occurring on multiple product fronts and will continue to make this diversification a major focus area of the business.

And we'll continue to proactively make investments in these areas.

On the media front. We are currently very focused on scaling our international demand to meet a significantly greater supply of international devices, while continuing to see international application developers want to be on U S devices.

Last year and the December quarter, 32% of our application media revenues were from international applications, such as things like tick tock or candy crush and for the first time on our history and this past December quarter.

We saw more media spending and our application media business from companies that are not based on the United States.

And this was despite more than 30% year over year growth from our U S Media partners.

Our international media demand increased by approximately 190% from a year ago.

Achieving this global scale from a broader set of a demand partners is a direct reason why we saw rpt's grow more than 25% and the U S and nearly 70% outside the U S.

We continue to see the benefits of global scale, where we see partners spending on more geographies and more devices outside of their home geography, whether that is Chinese companies like Alibaba, and Tencent and bite, Dan spending and Latin America, and Europe, and U S and European companies, such as Pinterest snap Uber Mcdonalds and King all spending with us.

Side of their respective home geographies.

In terms of the mix of verticals the percentage of revenues coming from gaming and non gaming remains fairly consistent each quarter for our media business as both areas grow at similar rates as the overall business.

In particular, we've seen very strong growth and streaming video news sports and social networking and entertainment with the only category showing any material decline from last year as travel.

And finally before I turn it over to Barrett I want to highlight my enthusiasm not just for these quarterly results and the team but for how we're strategically positioned for the long term given the scale of our on device distribution footprint.

This is unique and the industry and our moat, our ability to drive additional vertical integration against that footprint through extending both our AD Tech stack and are on content is a strategic focus area for us.

And we look forward to updating you on our progress and want you all to have that context, and our strategies as you see future activities from us.

With that this concludes my prepared remarks, and I'll turn it over to Barrett take you through the numbers.

Thanks, Bill and good afternoon, everyone. We're very pleased with our Q3 financial performance and execution delivering another record quarter for digital turbine.

Before I cover the performance and the period as a reminder, our content business includes primarily results from our acquisition and mobile posse earlier and the year I will occasionally referenced results on a pro forma basis were appropriate to provide additional insight into the underlying trends when comparing current performance against prior periods.

Turning to the quarter revenue was $88 6 million and the quarter was up 146% as reported and 73% on on a pro forma basis, adjusted EBITDA increased to $22 5 million growing 303% year over year.

We continue to experience accelerating growth across both our application media business and our content business. Our obligation media business delivered revenue of $56 9 million, representing 58% growth and the quarter. We saw continued strength and advertiser demand and product expansion, leading to U S. R. P D growth.

Over 25% and and more than 65% on international Rpgs.

Our content business generated $31 7 million, which was up 108% year over year as we experienced improved performance on a fully deployed content platform combined with increasing advertising demand and yields.

Gross profit our key financial performance metric grew a 166% to 38 4 million and in the quarter, which was up 69% on on a pro forma basis.

Gross margin on the platform was 43% and the quarter up from 46, 40% and the prior year. Our continued margin expansion is largely driven by the acceleration of our high margin content media business and continued margin improvements on our apps business for momentum and new partner and new product revenue.

While gross.

Margin rates can fluctuate from quarter to quarter, we anticipate further margin expansion as we continue to execute on our product and partner diversification strategy.

We experienced continued impressive expense scale on the platform as cash expenses were $15 9 million and in the quarter or 18% of revenue down.

Down from 25% of revenues and the prior year and increased only 20% year on year on a pro forma basis, while revenues were up 73 per cent and the period.

Total operating expenses were $17 2 million down slightly sequentially and compared to total operating expenses of $9 9 million and the prior year.

I will note that our operating leverage is being achieved ease and even as we make a number of focused investments. These investments within our primarily within our international sales force and technology teams to support new partners and products to drive future incremental revenues on the platform.

I continue to be very pleased with the profitability and free cash flow delivered by our business and the quarter. We achieved adjusted net income of $20 million.

Or 21 cents per share during the quarter as compared to a $5 million or five cents per share and the third quarter of last year.

Adjusted EBITDA of $22 5 million and the quarter was up 303% over prior year and margins continue to expand to 25, 5% this quarter from 15, 5% and the prior year quarter.

Our free cash flow totaled 22 million and impressive increase of $15 million as compared to the prior year quarter, enabling us to exit Q3, with a strong balance of $4 7 million and cash.

Our GAAP net income was $14 5 million or <unk> 15 per share based on 97 million diluted shares outstanding compared to a third quarter of 2020 net income of $3 3 million or four cents per share include.

Included in our GAAP net income for the quarter is a recorded adjustment of $4 7 million from the impact of the change and the earn out liability tied to accelerated performance versus our original expectations of our mobile posse acquisition and as a reminder, our final quarterly earn out payment related to this acquisition will be closed out and the.

March quarter.

Lastly, we executed a new credit facility led by Bank of America, which provides for a revolving line of credit of $100 million with an accordion feature enabling upsizing to $200 million.

With favorable terms and lower interest rates than our prior facility given the current attractive debt markets.

While we have a strong balance sheet and generate a significant level of free cash flow from our core operations. We want to ensure the company had greater flexibility and liquidity to take advantage of potential opportunities to further accelerate our growth plans.

Now, let me turn to our outlook.

We currently expect full year fiscal 'twenty and 'twenty, one revenue to grow to between $298 million and 300 million and expect adjusted EBITDA to grow to between 71 million and $72 million and adjusted net income per diluted share of <unk> 67 cents.

I'll highlight that this implied growth and the midpoint of our guidance has our fiscal 'twenty and 'twenty, one revenues growing over 115% year over year and EBITDA growing over 260%.

With that let me hand, it back to the operator to open the call for questions operator.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.

And anytime you question and that's been addressed and you would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Yeah.

Our first question comes from Darren <unk> with Roth Capital Partners. Please go ahead.

Hey, guys. Thanks for taking my question on pure well, a very nice quarter.

A few if I may on the device side.

Looks like you guys are the top 60 million devices for two quarters in a row can you just kind of share what's.

And what's driving that significantly higher.

Level of relative penetration is at Samsung and and just in terms of is that kind of a new consistent run rate and any reason that number would dip back down.

And question you talked about new carriers later, and I guess calendar 'twenty one for content. This year just gone.

How do we think about scale and then second one.

Any insight into.

And to kind of cross pollination of the media business to other domestic carriers that don't currently have it on their platform and then last one last two quarters you guys have talked about international I think you said, 200% growth this year.

I'm curious, what's the relative mix of foreign brands, reaching U S.

<unk> versus U S brands wanted to reach foreign customers. Thanks.

Yeah, Hey, Thanks, Aaron and Dan I appreciate it so.

And so you take took on to take your questions and order yeah as far as devices go.

Yes, the vast majority of the growth was it was internationally I'd refer to kind of U S. As its flattish.

We're seeing a little bit of bump.

<unk> is getting going and the U S, but I'd say the predominant and the vast majority of that growth is coming from our international partners. Obviously Samsung is at the top of the list, but I'll highlight our other partners as.

As well that are continuing to perform well like a like American mobile and <unk>.

And me and some of our other partners in addition to Samsung.

As far as your second question on the comments around the content business.

And our new tier one partners, yes, we expect those to launch later this year I'm going to be a little bit hesitant about not making any forward looking statements on their behalf.

But our expectation is that this should materially.

Influence, our DAU counts and a positive way.

This is something we've been working on for a while and now we've got some commitments to get going with some of our tier one partner. So we're really excited about that.

Your third question was around you know kind of cross pollination with our products and yes, we continue to make progress there and nothing specific to report today, just would just characterize it could you have strong and and deep relationships with our partners and you and your last question was really around international demand and the U S and yes, yes, what we.

And right now, we're just ramping and we're getting to a point, where we're probably seeing 30% 40% of our App media revenues are coming from international partners that wanted to be here and you know and.

And then just a classic case of scale begets scale.

And as we continue to show Rois for our demand partners, they spend more and more with US and then we get more and more partners on the platform.

And that we're such a miniscule part of the broader mobile AD spend from a from a global ecosystem perspective. So I think we've got a lot of room to run there and then.

The key is just continuing to add really good quality supply around the world, which we're focused on but I think that international demand is something that's here to stay.

Great. Thank you.

Our next question comes from Tim Horan with Oppenheimer. Please go ahead.

Thanks, a lot guys and great quarter.

Active daily users can you give us a sense of where you think that could be three four years from now I know you don't want to talk specifically to your customers or some order of magnitude of what you're talking about here with daily active users are we talking about them.

Doubling or tripling or you know being a penfolds and IMAX you know three four years and I know, it's a little tough to call and then secondly on where do you think the RPG pricing and you can kind of go at this point I mean, it sounds like it was up 25% and United States and but I think you had pre booked a lot of this pricing six months ago maybe.

Maybe you can talk about what the pricing was like and are in the quarter versus what youre seeing on the on the new spot markets or in any kind of indication what do you think that could trend over time. Thank you.

Thanks, Tim Yeah on the on the DAU growth when we think about it today the lion's share of our DAU growth as with T mobile.

And not 100%, but the lion's share of it and so if we think about other tier one partners here in the United States and we think of our tier one partners around the around the world and extrapolating those numbers out something that at least.

We think of in terms of the opportunity set and the short term and the longer term, yes, I remember we're on many many hundreds of millions of devices today and as we talked about today, and we're adding 60 plus million a quarter right now so as we think about it looking out into beyond 2021, and in 'twenty and 'twenty, two and 2023 and it's something we're quite excited and bullish.

About in terms of how we can grow that number and given the recurring nature of those revenues, it's not necessarily only tied to new device sales as well. So that's something that we're excited about is a big focus area for the business.

On your second question around RPT pricing.

Yes. It continues to be strong and I don't think that that's 100% just due to holidays or our seasonality.

And that's something that we've seen for prior quarters before the holidays and given the uniqueness of our platform and I think just the macro trend of advertisers are spending dollars right now have to see on ROI of what their spend is and given every dollar they spend on our platform, we can provide and ROI back to those partners.

And that makes our platform more sticky and they can clearly see that that return on their on their investment that they're getting from US and then as we get more demand partners and its working for the existing partners Theres kind of and economics 101 that happens here right is your supply of inventories fixed you're bringing now more demand onto the platform. So it allows you to rise right.

<unk> raised prices and so from our perspective.

We continue to expect to see our PD grow through this increased media demand, but we also expect it to see it grow as these new products that I referenced such as single tap and notification and so on.

<unk> continue to gain traction and the marketplace. So we're pretty excited and pretty bullish on the opportunity to grow RPT.

And then just a clarification on the new customers are they needed tapes and type of size and the two month T. Mobile would be are you, adding like one quite possibly like a T mobile and you're adding a couple or you can call.

And I was referring to yes without without without getting too many hot water on forward looking statements on we just say tier one partners.

Thank you.

Yeah.

Our next question comes from Austin <unk> with Canaccord. Please go ahead.

Hi, Thanks for taking my questions first one is on single tap.

What does the product look like now compared to the.

Historical social media integration and how does the price and work on on these newer.

Single tap relationships.

Yeah, Hey, Austin as far as a single tap goes in terms of you know as you're well aware we have two ways that we look at revenue on single tap one as you referenced is with our social media partner on this.

Our prepay them and if you will on new device sale. So those revenues will fluctuate with device sales and it's been relatively consistent over time, but what's really ramping and what we're really excited about is a single tab for everybody else and.

And what we're seeing right now is the ability through leveraging our demand side platform to be able to go out and arbitrage in the marketplace and what I mean by that is we're aware of devices that have single tap capability. The rest of the market is not and given the improved conversion rates that allows us to buy advertising.

And at very competitive and better pricing given we know we're going to get better conversion and if somebody tries to use the regular Google play flow. So that's something that has really just been a ramp and scale game for us and we're going to continue to invest materially there and as I referenced in my remarks, we're seeing really nice positive growth there, but our aspirations are.

Not just for seven figure months are our aspirations to continue put zeros on those trends.

Great. Thank you and my last question is on the content segment in terms of products and what drove that.

Pronounced content and media revenue growth.

Yes, so there's really three drivers of the growth one is la.

Last year, there was a legacy based platform that was in place and we about and the summertime.

Did a lift and replace and put a new platform in place and so a lot of the operational benefits of just kind of standard blocking and tackling of better view at a better view ability.

More retention and stickiness with customers better.

Just kind of overall performance helped drive results secondly, we introduced some new things within chrome.

Well to be deliver richer better AD experiences that we get higher rates for and and the third reason was just the broader macro secular tailwind you saw on maybe some of that from Google yesterday, I am sure Youll see it from other players out there.

The broader AD market has really started to rebound from the pandemic. So I think those three factors are really the key drivers of how we got to a 100% pro forma growth.

Alright, Thank you very much.

Our next question comes from Allen Klee with Maxim Group. Please go ahead.

Uh huh.

Good afternoon.

If you can add a new tier one carrier to the media content inside.

Is the Tam that you're going after.

New new devices, where can you also somehow get someone who already has a smartphone from one of the tier one carriers to also add your service and and become a customer.

Yeah, Hey on it yet.

Absolutely we can do that that's a decision that the mobile operator, and the OEM will make us if they want to push the software out to their base through a maintenance release, they can absolutely do that and it would allow the opportunity for a more content products to hit the entire base or if they were just wanted to do it for new devices that come on to the network. They can do that as well so that will be their decision.

And they make from our perspective.

It's just a technical implementation issue for us, but its absolutely something we can do.

Great and then on your content application internationally could you maybe just give us a generic example to understand that.

If you have a new new.

New customer internationally.

And kind of what happens when you first get them kind of how many apps maybe.

People, who are bidding for and and what that could look like and a year or two where the amount of devices.

They put it on and how do you how do we see the path of how this grows or potentially gross.

Yes, so there's really three drivers of the growth Alan one will just be continuing to put the software on more and more devices and that's the equivalent of just building more stores right and then the second part of the same store sales or how do you get more on every device that they are launching and so on the on the second part we do that through two ways. One is we continue to add products.

Onto the partners and with so for example, with Samsung and Brazil, We started out with our out of the box Wizard when you select the apps that you want.

As part of the setup process and then we added dynamic installs to that and then we've recently added single tap to that and so as we add more products that obviously increases more RP D. And then the final driver is just media demand that I referenced in my remarks, where we continue to see now our international media partners wanted to be and geography.

And outside their home geography, and then spending more money, which therefore increases the bid rates to get onto the device. So the combination of more devices plus more products plus more media partners. As you know really how we see ourselves ramping our international business and we're doing all three right now.

Okay. Thank you.

As a reminder, if you have a question. Please press Star then one our next question comes from Jon Hickman with Ladenburg. Please go ahead.

He built on.

Nice quarter.

Anyway.

Could you.

And I'll elaborate a little bit on the international growth is there any geography, where that.

Accelerating its new different.

Anything like that.

Yes, I think we're re and we didn't really pleased with our growth and Latin America, and we think we're just scratching the surface there.

And just with our Samsung relationship, but American mobile and others are showing really nice positive gross so I'd really highlight Latin America is one second I'd highlight as Europe, we've really as a result of our Samsung relationship and and you know as we've got go on with some of the other operators and Oems there.

Thats ramp nicely for us.

As well I'd say the biggest opportunity for us and where we're focused is in Asia Pacific on.

Got to improve there.

And obviously a lot of people a lot of devices, there and I'd really look forward to us rounding out our international performance by improving and the APAC region.

So just one more follow up.

So are you getting like.

Are you still have going to chase these carriers or are they calling you.

Yeah, well internationally as you know, it's a little bit different because here in the United States that the carriers have more control over the device and so the relationship with and mobile operators more important than it is with the OEM outside the United States the relationships with the Oems are more important because in many markets, especially in Asia Pacific that the carriers just selling Sim card.

The OEM actually is deciding how the device is configured and and what types of applications and content. They want on the device. So our relationships with the Oems matter more outside the United States and they do inside the United States.

So are they calling you or are you chasing them.

We're always call and people and we got people, calling us so it's a two way street.

For me.

This concludes our question and answer session I would like to turn the conference back over to Bill Stone Chief Executive Officer for any closing remarks.

Yeah, Thanks, everyone for joining the call today, and we'll look forward to reporting on our progress against all the points that we made on today's call and we'll talk to you again on our fiscal fourth quarter call and a few months, thanks and have a great night.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.