Q1 2024 Digital Turbine Inc Earnings Call

Good day and welcome to the digital turbine fiscal 2024 first quarter earnings Conference call.

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I would now like to turn the conference over to Brian Bartholomew Senior Vice President of capital markets. Please go ahead Sir.

Thanks, Chris.

Good afternoon, welcome to the digital turbine fiscal year 2024 first quarter earnings conference call.

Joining me on the call today to discuss our results are CEO , Bill stone and CFO Barrett garrison.

Before we get started I'd 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 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 exchange 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 to the most comparable GAAP measures.

Now I will turn the call over to our CEO , Mr. Bill Stone.

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

For the June quarter, I was pleased that we beat the top end of our guidance range, both on the top and bottom lines, but we still have a lot of work to do to reach both our internal expectations and the potential of our broader total addressable market or Tam.

I was pleased that we had a very clean quarter as operationally, we sequentially improved our business performance across key financial metrics.

Our strategy is not simply to harvest our profitable products for short term financial performance, but rather use our profitability to make capital investments against the future with new technology platform and new AD Tech capabilities are hub alternative app distribution and single tap.

We believe these investments will prove to be well served against our future growth.

I'll provide updates on those future growth drivers after providing some operational updates and commentary on the current business.

For the June quarter, we had $146 $4 million of revenue $27 million of EBITDA and.

And <unk> 18 of non-GAAP earnings per share and gross profit margins were 47, 1%.

All of these financial metrics represented sequential improvements from our March quarterly results.

From a segment perspective. Despite continued soft device sales are on device business or Ods also grew sequentially to $98 $3 million.

Operationally I was pleased with our improvement of revenue per device or our PD in the U S, which continues to grow and set an all time high in the June quarter.

Over the past five years, our Rpt's have accreted from just over $2 in fiscal year 2020 to $3 in fiscal 2021 to $4 in fiscal 2022 to $5 in fiscal 'twenty three and today is now over $6.

We continue to see strong demand from our platform both from advertisers and new products contributing more revenue to each device.

Expanding global demand to our U S device supply has also been a big driver of those improved revenue per device results as two years ago U S demand was approximately 50% of our U S supply and today it is less than 25%.

In particular, we have seen some positive movement on the willingness of our U S supply partners to soften their positions on some popular Chinese applications, which increases the overall demand for our platform.

While we expect the current quarter to experience continued softness in the U S devices, we expect a strong global pipeline of expanding telcos and OEM relationships to help offset any macro weakness and device sales in the future.

We also made progress on our single tap enablement.

As a reminder, we are five ways, we monetize single tap.

The first is direct demand via our demand side platform, where we leverage our own AI and machine learning to target advertising to single tap enabled devices.

The second is enabling other third party demand partners from companies, who can buy advertising on our single tap enabled supply.

The third is licensing mobile web traffic from brands, such as epic games Fortnite title, which then uses single tap to convert its web visitors into native fortnight users.

Fourth is distributing alternative versions of applications, whether that's our own D. T hub version and Amazon version and so on for direct distribution to device.

And the fifth is enabling large distributors of application installs such as large social media players to leverage the conversion rate benefits of single tap across their entire network.

And given there's so many use cases of how we utilize single tap going forward, we're going to focus on talking about single tap in the aggregate versus confusing investors with each individual use case, which may be seen as overwhelming with various operational metrics.

However, given the investor focus on this product and interest in social media players in particular I did want to provide some operational updates on our progress.

It's early days, but we've now generated our first revenues with Tic Toc, who is running single tap campaigns for their advertisers wanted to use their own version of an application to their users.

We are also launching this quarter with Linkedin, whose converting their mobile web users to native App users.

Finally, we expect to begin a revenue generating pilot with another large social media company across our entire user base here in the U S. Later this calendar year.

Later in my remarks, I want to connect these operational updates to where we see single tap fitting in with the alternative app distribution markets of the future.

Our app growth platform segment, our <unk> business I was pleased to see our business show sequential growth in the June quarter, which was up nearly 10% from the March quarter.

We are seeing sequential improved E. C. P M rates on both our brand demand and DSP from advertisers and in particular it was encouraging to see our brand business showed double digit sequential growth as we expand our relationships with large advertisers such as Starbucks and Chase bank.

The macro market has stabilized and our execution is improving.

In addition, our exchange business had solid double digit sequential growth in the quarter and the exchange business continues to be well diversified globally with approximately 40% of our publishers in North and South America, 35% in Europe , Middle East Africa, and 25% and Asia Pacific.

We've made numerous enhancements to our AD tech capabilities, such as improved AI and machine learning optimizations AD rendering new AD formats, and new bedding methodologies.

We spent the last year integrating the companies and are now finally building upon the integration with new products and services.

The combination of the new demand solutions and the expansion of supply types are allowing us to focus on controlling what we can control to drive improved performance.

Combined with a more stable macro environment for AD spend we expect these new AD tech capabilities to be a growth driver for our business as we enter the second half of this fiscal year.

Turning to the future I want to spend a few moments highlighting our longer term growth drivers.

I mentioned single tap earlier in my remarks, as a strategic growth opportunity, but as we've mentioned on prior calls we are building alternative app distribution for App publishers.

We believe we're uniquely positioned with our on device technology or expansion of publisher relationships and our operator and OEM relationships.

We've launched our first alternative app distribution products, which we brand as D T hub, which for operators here in the United States, leveraging our apt toyed investment and are generating revenue today.

The carrier feedback has been impressive and supportive and it's very early days and not yet material to our overall results, but we are seeing incremental higher rps from devices engaging with our hub product, which is a combination of incremental in app purchase revenues and incremental cost per install revenues from helping publishers.

<unk> acquire more users.

So the focus for us is driving more devices more engagement and more downloads.

We have not started leveraging our in app advertising assets into this alternative app distribution, but we do expect to add that as an additional revenue stream to this opportunity and then all three of these monetization capabilities being drivers of RPT accretion into the future.

Yeah.

We also believe the global regulatory environment will provide additional thrust to this vision.

Many of you may have seen articles in the press talking about a concept of direct distribution of applications involving Mega cap Tech players.

This is highly strategic and I want to spend a few moments describing it.

Direct distribution is where any app publisher, such as Spotify, Netflix or epic games can run advertising for a user to install its application.

But rather than take the user to the Apple or Google store after clicking on the advertisement it would direct download the application to the device with its own unique version of an application outside of the traditional app stores.

And to achieve this there are some market pain points that need to be solved such is it making it easy for the App publishers to port their out to a new version.

Managing the payments and advertising inside the application installing the apps without friction is there may not be a store involved at all and managing the curation of the applications and these are all things that digital turbine is uniquely positioned to deliver on whether directly via our own hub product or indirectly through white labeling our capabilities to large players wanting to leverage.

They're large audiences.

And to accomplish all of these new growth areas allocating resources will be key.

In addition to paying down our debt we are allocating capital to these new investments with a new dedicated team focused on unlucky unlocking this future growth opportunity.

Despite these investments our cash operating expenses are flat from the June quarter last year as we are focused on running lean and efficient with our legacy products, while simultaneously investing in new platforms and products for future growth and scale.

<unk> will provide additional details in his remarks.

And before I turn it over to Barrett I want investors to take away from our quarter. Yeah, We had a very clean quarter and operationally, we sequentially improved our business performance across key financial metrics, and we're making progress against our longer term vision, but still have much work to do.

Our strategy is to use that profitability to make investments against the future with new technology platforms, New AD tech capabilities are hub and alternative app distribution and single tap.

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

Thanks, Bill and good afternoon, everyone. Overall, we were pleased to see results in the quarter ahead of our expectations for both topline and profitability measures revenue of $146 $4 million in the quarter was up 4% sequentially and down 22% year on year with revenues improving sequentially across.

Both segments of our business on device solutions, or Ods, and our app growth platform or a G. P from the March quarter.

Within Ods revenues were slightly up sequentially from the March quarter, and down 17% to the prior year.

However, as bill referenced while we saw softer device volumes in Q1. This impact was offset by improved U S revenue per device, which exceeded $6 per device and increase both sequentially and year on year.

As we've discussed in the past, while our content business has stabilized in the quarter. Our <unk> segment continues to experience headwinds from our prepaid content media business from a year over year comparison, and we expect this grow over comp to run off by Q3 within the December quarter.

On our AGP business Q1 revenues increased 9% sequentially and declined 32% over prior year.

While we're encouraged by the improvement in the core business. The overall decline in a G. P year on year continues to be driven largely by the short term impact of the consolidation and the exiting of certain legacy AD colony business lines that we have discussed previously and we would expect these comps to fully run off by the back half of this fiscal year.

I reiterate bill's earlier comment that despite the near term headwinds we are encouraged by the integration benefits, we're seeing from the investments, we're making to bring these businesses together and expect these moves to have a positive return on our future growth.

Our consolidated gross margin was 47% in Q1, which increased from Q4 sequentially. It was down from 50% in Q1 from the prior year improvements.

Improvements in margins sequentially were largely driven by the combination of quarterly quarterly.

Quarterly product mix shifts, where we experienced an increase in the mix of certain higher margin products are those where revenues are recognized on a net basis.

As a reminder, while gross margin rates can fluctuate from quarter to quarter. We generally anticipate long term margin expansion as we continue to execute on growth opportunities.

We remain disciplined with expenses and cash operating expenses were $42 million in the quarter, increasing 1% from prior year and represented 29% of revenues in the quarter.

Highlight while our expenses have remained relatively constant we are making important investments that bill referenced to ensure we capitalize on the full potential of our growth strategy. These internal initiatives are focused on integrating the technology platforms.

And financial and back office systems across our assets also developing new AD tech capabilities.

And strategic growth initiatives, Bill discussed, namely within D T hub.

Alternative app distribution and single tap.

While the current and near term periods will incur increased costs due to the completion of these integrations and new growth initiatives, we expect both the efficiencies and the growth to begin to be reflected in our results as we move into calendar year 2024.

During this investment phase, we will continue to remain highly focused on operating efficiency.

Turning to our profitability, our adjusted EBITDA of $27 million in the quarter increased $3 $8 million sequentially and was down from $52 million in the prior year, our EBITDA margin of 18% grew sequentially from 16% in the March quarter.

And given the inherent operating leverage in our business model. We expect the active focus on expense measures and integration efforts. We are taking will strengthen the platform as we returned to growth and enable a greater portion of those dollars to fall to the bottom line.

In the quarter, we achieved non-GAAP adjusted net income of $18 $2 million or <unk> 18 per share as compared to $38 7 million or <unk> 38 per share in the first quarter of last year.

As compared to prior year, we incurred greater interest expense driven by the rising rate environment on our outstanding debt.

Our GAAP net loss was $8 4 million or eight cents per share based on $103 5 million diluted shares outstanding and compared to a prior year net income of $15 million or 15 cents per share on $102 7 million diluted shares outstanding.

Our cash balance at the end of the quarter was $58 6 million after paying down an additional $5 million of debt using cash flows from operation to further deleverage our debt position cash flow and working capital were negatively impacted by the timing of revenues, which were weighted towards the end of the quarter.

And we expect to return to generating positive free cash flow in Q3.

Our debt balance ended the quarter at $408 million drawn on our revolving credit facility and as our business continues to strengthen we would expect to continue to pay down our revolver and larger quarterly increments.

We continue to be confident in our balance sheet and our capital position given our profit model cash flow generation and access to low cost credit facility.

Now, let me turn to our outlook.

We currently expect revenue for fiscal Q2 to be between $141 million and $149 million and adjusted EBITDA to be between $25 million and 27 million and non-GAAP adjusted net income per diluted share to be between 13% and 15 cents based on approximately.

<unk> 4 million diluted shares outstanding and an effective tax rate of 25%.

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

Thank you well now begin the question and answer session as a reminder.

Question, just a question you May press.

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If at any time. Your question has been addressed and you would like to withdraw it with you.

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

Today's first question comes from Omar <unk> with Bank of America. Please proceed.

Hey, guys. This is Arthur on for Omar Thanks for taking my question.

So my question is on Google's header bidding into fair bet I understand this skewing testing.

But I was wondering if you guys could talk a little bit about you know some early signals, we're seeing from the niche initial integrations.

And you know what's the learnings are you taking away from our initial testing.

And probably just on the same note like if we should be expecting any sort of revenue contribution impact for the carnal next fiscal year. Thank you.

Yeah sure I'll take that one.

The short answer is yes, we're seeing positive impacts there and the strategy here is obviously to increase our share of voice and demand into the mediation platform, which then benefits publishers and so.

Having the ability to bring.

Google's, obviously vast demand as it is a positive for us are still very early days I wouldn't characterize it as moving the needle we're still and we're still kind of optimizing what we're doing around that but that is absolutely something that we think as we go into next year are bringing more demand, bringing the credibility of Google to our publishers. It's something we think will be a benefit for us.

Understood. Thank you.

Today's next question comes from it.

Darren.

Right.

Popcorn excuse me todays next question comes from Dan Day with B Riley Securities. Please proceed proceed.

Yeah morning, guys can you hear me there was a little choppy.

I think thats the operator's line.

Okay.

Great. So thanks for taking the questions.

Fill in the in the past when you talked about single tap on these calls.

Been pretty cautious around kind of the path to material revenue generation, you've been pretty clear.

We're developing it investors should be patient I didn't hear you say that this time.

Can we take that as a sign that you guys maybe have any more visibility than you have in past quarters, Intuit, becoming a material revenue contributor.

Or am I, just reading too much into that.

Yes, we continue to be excited about singles happening there. There's no question about that it's not it was not material to our results in the June quarter, but theres a lot of catalysts that we're seeing into the future.

Right now and so we're starting to see some excitement around the catalysts and the opportunity for scale to really improve on that.

We'll say it will it's going to take time, but the encouraging signs are starting to really show for us with the product and the thing that I really want to remind investors about is we have this embedded base of many many hundreds of millions of devices and that's extremely difficult for for anyone to replicate and so having that high amount of devices already out in the market.

Our scale and our focus to continue to grow that you know something I think that our advertisers.

Advertisers publishers demand side platforms and all the people are going to integrate and this new App World is something I think theyre going to take advantage of I think important point I want to also make on this is the integration with the alternative app stores are theirs.

Gonna be this increasing our our view is it Jamie is increasing pressure on the duopoly of App stores today and the ability to have a publisher get lower rates to pay is going to watch them, they're going to want to acquire new users and single tap is absolutely an enabler to help make that happen to distribute.

On Google or non Apple builds out to customers. So that's going to be something that we're excited about and leveraging our existing capabilities to go do.

Okay.

Great. Thanks, and then just for the.

Fiscal second quarter revenue outlook at the midpoint.

It was right around where fiscal first quarter revenue came in just any material difference between the old device versus the app growth platform segments.

As far as the outlook goes or do you think pretty flat.

For both quarter over quarter.

Yeah.

Dan I think we think about.

Q1, we've seen we talked we touched on the improvements we're seeing in AGP business near 10% sequential improvement.

We think theres a lot of there's a lot of opportunity there we don't give guidance by segment, but we're seeing we're seeing nice trends there we touched on some of the device softness.

It's sometimes hard to predict.

We might see that for the near term, that's that's kind of embedded in our guidance.

But.

I think I think the the AGP business is.

Growing is growing nicely on a sequential basis, and I think that might be.

Continued true trend, we would expect to see.

Perfect. Thank you guys. Appreciate you taking the questions.

Thank you.

Next question. Please next question.

Ross. Please proceed proceed.

Okay. This is dylan on for Darren Thanks for taking my questions.

I wanted to sort of talk about.

Sort of R. R. P D in the U S.

And it's an all time high at $6.

You sort of say, 25% coal supply. So I guess I mean, what are sort of your strategies in going after growing at our P. D on the international side.

Both with sort of higher monetization.

On the existing devices that sort of just capturing more devices in the different markets with some of the partnership.

Mentioned in the past.

Yeah sure.

What we're seeing right now and it was encouraging is the diversification of our demand on our U S supply and I wanted to highlight that out, particularly because you know we're to a point where.

Well north of 50% of the demand coming in to use supply from places outside the United States and a lot of international advertisers, whether they're from Europe for APAC Wanna be on those devices and so being able to bring those onto devices and then we can do strategic demand deals, whether it's carving out things like.

Whether a particular game type or social media or whatever happens to be allows that international competition as well to come in and so that allows us to achieve higher rates. So that's something that has been really encouraging for US now the key is for us how do we expand that to other markets, whether that's in Europe or.

Latin America or what have you. So a major a major focus area for us to replicate that success that we're seeing in the U S. Outside that's on the Advertiser side and then the other part would be on the product side. So you know historically as you're well aware, we started with dynamic installs as a primary product, but you know as we've added so many other products to our portfolio the product growth is.

Also enhancing RPT. So the combination of this more demand on the platform combined with the more products on the platform is really helping drive those accretion and results.

Great. Thank you.

And sort of as a follow up with with some of the investments you mentioned with AD Tech.

And.

With other app stores like.

How should we think about the timeline of that trade off of the incremental investment dollars and aren't really bringing in revenue.

In terms of like the Opex sort of when do you start to see those contribute.

Yeah, Let me, let me start on the revenue side and I'll turn it over to Barrett on the Opex side.

Now in terms of how we're thinking about it in terms of the back end of this year you know Barrett mentioned his remarks on AGP showing nice sequential growth in our view right now is in the short term as you look at future quarters and in the near term.

And these enhancements and things I mentioned in my prepared remarks will be drivers and as we get into next year, I think you're going to see more things like with the hub and single tap and some of these other things ramping it's how we think about it from a revenue slash business protective and I'll turn over to Barry to talk about the Opex and the investment side.

Yeah, John I think.

For for your model, if we touched on it in my remarks.

We're incurring those expenses some of those excess cost for.

A lot of the back the back office systems that we're integrating and bringing the companies together and those are our financial systems. Those are things like our HR systems as well as the investments in the teams that bill touched on those investments are in place today I think we're going to carry those expenses.

Kind of similar levels.

Out through the end of the calendar year, and then we'll start to see those cost are those investments drop off and you'll start to see efficiencies in both our cost structure as well as the.

The incremental growth in revenues.

Begin to pick up as well.

Great. Thank you.

Thanks, Phil.

Okay.

As a reminder, if you do have a question. Please press Star then one.

The next question comes from Anthony Stoss with Craig Hallum. Please proceed.

Hey, Bill.

I wanted to ask about this verge article where they were interviewing met an employee and they are discussing with certainly sounded like single tap functionality, if not digital turbine who else could it be.

Yes, it's hard for me Tony to comment on like things that came from somebody on future speculation, so I'm going to kind of stay away from that but what I will say is.

Is that Youre seeing Mega cap tech players not just meta but others now.

Now talking about alternative App distribution and Youre seeing specifically in Europe now that the digital markets Act is coming into reality and you're seeing for example, sideload and applications on things like <unk> 17.

Really opening up a lot of interest from Mega cap players.

And I'd I'd highlight Amazon I'd I'd highlight with the Microsoft Activision Blizzard deal getting done as an example meta was in the article you're referencing so theres a lot of interest you are starting to see right now, but I think the key is it. Okay. It's one thing to have the interest and have the one wanted to be able to do this the question then becomes how and so when you think about how the apps actually get ported from.

Different versions, how you manage the internal plumbing of the apps, how you make it a friction free experience if it's not a store its been and in fact direct distributor down to you. How do you curate that on the device with your telco and OEM partners. Those are all things that we've got unique advantages to go to.

And so when I mentioned in my comments doing it directly through D T hub or doing it white labeling with other large players I think we're in a pretty unique spot here to really capture on this this wave of alternative app distribution and so it's something from our perspective, I think about CTV, a few years ago and how CTV is today I must say, but I'll turn it.

Apt distributions kind of it is early innings today and something you know as the regulations and somebody's either large players and you'll just customers and publishers really wanting alternative choice I think it's gonna be some some really nice opportunities that we're really uniquely positioned to just given the embedded base of devices with our technology already on them.

Okay, and then a couple of follow ups.

In past quarters, you've talked about I think it was in your prepared remarks quite often international carrier launches.

Literally the on device segments week in the U S.

Not a shock to anybody is there anything or new carriers that you're planning on launching that will help offset that I mean, I think in the past you used to highlight the percent of the international markets covered and then you guys haven't really done that lately I'm, just if you could update us that'd be helpful.

Yes, absolutely I did make a comment in the prepared remarks around a strong global pipeline of expanding our telcos and OEM relationships and so I'd kind of dry it tried it out we're not going to name names here on the call for obvious reasons, but we think we have a lot of a lot of optimism right now in terms of the ability to continue to expand our addressable market here.

Got it and then if I can slide in one for Barrett normally your seasonally the December quarter is up pretty strongly seasonally any thoughts on if you expect it to be more muted again this year like it was last year.

And Andrea.

December yes.

Yes.

Tony.

Yes. So December was an odd quarter last year I would kind of.

Market's changed quite quickly.

I think.

As we're seeing things now I would I would like to expect that we see closer to a more.

A more normalized seasonal trend.

I don't not sure we're back to.

Not sure about that.

21 levels, but yes, we would expect to see some seasonal uplift for the holiday quarter.

Got it and one last quickie for Bill Love to hear more on <unk>. You think it is I'm, just curious kind of where you're at with <unk>.

Yeah, we continue our App toyed technology partnership has been great. There tech integrated into our hub product today, they've been great to work with you and we're looking forward to expanding with them and looking forward to expanding with others I know, there's a lot of players out there in the space. After it's been fantastic I think we're we want to think about it.

Even broader than that we think there is an enormous opportunity you heard the word investment a lot and Barrett in my prepared remarks. So we really want to think about how we can get after this space and really have some first mover advantages.

Thanks, guys I appreciate it.

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