Q2 2024 Digital Turbine Inc Earnings Call

Good afternoon, and broken to the digital turbine reports fiscal 'twenty 'twenty four second quarter results conference call.

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Now I'd like to turn the Congress over to Brian Bartholomew Senior Vice President of capital markets. Please go ahead.

Thank you good afternoon, and welcome to the digital turbine fiscal year 2024 second quarter earnings Conference call.

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

Before 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 products and services anticipated market demand and other forward looking topics.

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

Sept 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.

These non-GAAP financial results to the most comparable GAAP measures.

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

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

For the September quarter, we finished in line with our guidance range.

I was pleased with the cash flow generation in the quarter were sequentially higher EBITDA and free cash flow.

And we still have much work to do to reach both our internal expectations and the potential of our broader total addressable market or Tam.

I continue to be encouraged with our effort and execution on controllable and believe it will pay dividends into the future as we worked through some of the uncontrollable with soft U S device sales and also being able to extend the reach of popular Chinese applications on our U S supply.

I was also pleased with the tangible progress on a variety of capital investments against the future with new technology platform in.

New AD tech capabilities.

Our hub initiative.

Alternative app distribution and single tap.

We believe these investments will prove to be well served against our future growth and also have the added benefit of being able to reallocate many of those resources against shorter term revenue initiatives over the next few quarters to drive growth.

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

For the September quarter, we had $143 million of revenue $28 million of EBITDA.

13th sense of non-GAAP earnings per share and our gross profit margins were 47%.

Our EBITDA improved sequentially driven by reduced controllable costs.

Third I'll talk about the details in his remarks, but it was positive to also see us reduce our debt in the quarter by $22 million driven by improved sequential free cash flow.

From a segment perspective, despite continued soft device sales here in the United States are on device business grew revenue sequentially to just over $99 million.

Operationally I was pleased with our improvement our revenue per device or are P. D. In the U S, which continues to be over $6 for all of our partners and for two of our U S. Postpaid carriers, we almost hit $10 for the first time.

Over the past five years, our RPT is that accretive from just over $2 in fiscal year 'twenty to $3 in fiscal year 'twenty, one to $4 in fiscal year 'twenty two to $5 in fiscal 'twenty three and today is over $6.

We continue to see strong demand for 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 our P. D results as U S demand is less than 20% of revenues on our U S supply. Despite some continued headwinds and be able to run all the Chinese media dollars that we have budgets for them.

While we expect the current quarter to experience continued device softness here in the U S going into 'twenty 'twenty four will it be expanding our global telco and OEM relationships to help offset weakness in device sales from our existing partners.

As an example to this point many of you have seen her announcement with Xiaomi that is focused on growing in Europe, Middle East Africa, and Asia Pacific and we're also adding new operator partners in Latin America in this current quarter and our global pipeline remains robust.

Regarding our content media business as we've discussed on prior calls we expected it to trough in the June quarter and that is what happened as we showed sequential growth quarter over quarter in September.

And our outgrowth platform segment or <unk> business, we finished with $46 million in revenues we're.

We're seeing sequential improvements in E. C. P M rates on both our brand demand N D. S. P from advertisers and in particular, it was encouraging to see our brand business continue to grow nearly 10% sequentially.

As we saw E C. P M improved by nearly 25% in the quarter.

The macro market has stabilized.

And our execution is improving but there's still some uncertainty baked into our outlook given some of the global macro and geopolitical issues others have mentioned in your commentary.

Our exchange and offer wall business was roughly flat in the quarter and the exchange business continues to be well diversified globally with approximately 37% of our publishers in North and South America, 51% in Europe, Middle East Africa, and 12% in Asia Pacific.

We have nearly completed our consolidation of multiple exchanges into a single D T exchange.

The main benefit of this consolidation is the efficiencies and new products such as SDK bidding that we'll have with it will help us capture more AD dollars from company such as the trade desk, Google and Amazon into the future.

And as part of that migration, which will be complete in the current quarter. We've also chosen not to migrate some of the many thousands of long tail publishers on the legacy exchanges over to the GT exchange, which will create headwinds on past comps, even as we grow our D T exchange into the future.

Yeah.

We've also beta launched our evolution of our demand side platform or DSP that we brand as DT direct.

This allows us to have more intelligent buying and selling of AD dollars across the D. T network, which means better margins and better return on AD spend for our customers as we can better leverage single tap our first party data data science machine learning and AI at better scale and performance than our legacy D. S. P.

These enhancements mean that D T direct will be a growth driver for us in 2024.

In addition to leveraging single tap on the D. S. P. We continue to utilize it in many other ways across our device solutions as an enabling technology.

The first is direct I'm Andrea to D. S P, where we leverage our own AI and machine learning to target advertising to single tap devices.

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

The third is licensing mobile web traffic from brands, such as epic games, Fortnite title, which sent US a single track to convert its web visitors to native applications.

The fourth is distributing alternative versions of the applications such as what we do with our hub and Amazon version and so on for direct distribution of the device and finally as enabling large distributors of applications.

Such as large social media players to leverage the conversion rate benefits of single tap or across your network.

We continue to make progress on all fronts, including with multiple social media companies.

In particular I'm encouraged by the number of publishers wanted you use single tap to distribute alternative builds other applications, which fits nicely with our strategy of alternative App distribution hub that will talk later in my remarks.

And as the market expands with alternative builds single tap will be a primary differentiator from others for distributing those new versions of applications.

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

We believe we're uniquely positioned with our on device technology, including our first party data or AI machine learning tools single tap, our extensive publisher relation and operator and OEM relationships.

We've launched our first alternative app distribution products, which we brand as D. T hub with five operators here in the U S. Leveraging our App toyed investment that are generating revenue today.

We have increased our equity investment in <unk> to almost 20%.

The carrier feedback has been encouraging and we expect to be across many tens of millions of devices by the end of this calendar year.

It's still early days and still not yet material to our overall results, but we are seeing incremental and higher revenue per device from devices engaging with our <unk> product, which is a combination of in app purchase revenues and incremental cost per install or CPI revenues, helping publishers acquire new users.

So the focus for us is driving more devices.

More engagement and more downloads.

We've not start we've not yet started leveraging our in app advertising assets into this alternative that distribution, but do you expect that to add an additional revenue stream for this opportunity.

And all three of these monetization capabilities being drivers of incremental or P. D into the future.

Monetizing by via cost per install and our in App advertising are all very natural extensions of our existing business models.

We also believe the global regulatory environment will provide additional thrust to this vision, especially in the U S. The digital markets Act becomes effective next March.

Many of you have seen articles in the press talking about a concept of direct distribution of applications that involve 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 epic games, and so on is running advertising for user to install its application, but rather than take the user to the apple or Google store after clicking on the AD. It would direct download the application to the device with its own unique V.

<unk> of an application outside of the traditional app stores.

And to achieve this there's some market pain points that need to be solved such as making it easy for app publisher support their apps to a new version.

Managing the payments and advertising inside the application installing the apps without friction as there may not be a store involved and also managing the creation of the applications.

And these are all things 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 their large audiences.

And to that end in addition to apt wide, we're expanding our partnership with flexion Who's a market leader in porting applications into alternative version select Shine works, not just with us, but with all the other major alternative App store, such as the Samsung Galaxy store, Amazon Appstore, Xiaomi get apps, while Waze App Gallery, App toyed one store.

In Korea, and many others.

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

To recap, we have an enormous addressable market large customers that want our solutions and operating leverage with our business models.

Our focus is bringing these elements together with all the initiatives underway mentioned earlier in my remarks from alternative App stores AD Tech enhancements platform Modernizations strategic media relationships and leveraging our global device footprint. This is our formula for future growth and scale.

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 results in the quarter went in line with our expectations for topline and profitability delivering sequential improvements in EBITDA and cash flow measures.

Revenue of $143 3 million in the quarter was lower by 2% sequentially and down 18% year on year.

Within Ods revenues were slightly up sequentially from the June quarter, and down 9% to the prior year September quarter.

And as Bill referenced while we saw softer device volumes in Q2. This impact was offset by improved U S revenue per device, which exceeded $6 per device and increased materially year on year, our content business delivered sequential growth in the quarter and while this part of our business has experienced headwinds from prepaid content media.

From a year on year comparison, we expect this grow over comp to run off within the December quarter.

On our a G. P business Q2 revenues declined 32% over prior year, while were inquiry 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 exiting certain legacy business lines that we have discussed previously.

And we would expect these revenue lines will be fully consolidated by the end of the fiscal 2024.

I'd reiterate bill's earlier comments so despite the near term headwinds we're encouraged by the platform consolidations, we're making to bring the businesses together and expect these actions to have a positive return on our future growth.

Our consolidated gross margin was 47% in Q2.

Which was constant sequentially and was down from 52% in Q2 from the prior year driven largely by product mix shift year on year, where we experienced an increase in the mix of certain lower margin products.

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 strategy.

We remain disciplined with expenses and cash operating expenses were $39 4 million in Q2, a reduction of 7% from prior year and represented 27% of revenues in the quarter.

I highlight that we incurred lower than normal performance compensation expenses in the quarter, which we would not anticipate recurring in the second half of the fiscal year.

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.

Internal initiatives are focused on integrating the technology platforms and back office systems across our assets developing new AD tech capabilities and also on strategic growth initiatives Bill discussed, namely D. T hub alternative app distribution and single tap.

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

And as I've discussed previously during this investment phase we will continue to remain highly focused on operating efficiency.

Turning to profitability.

Our adjusted EBITDA of $27.7 million in the quarter increased <unk> 7 million sequentially. It was down from $48 2 million in the prior year.

Our EBITDA margin of 19% grew sequentially from 18% in the June 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 $13 9 million or 13 cents per share as compared to a 35 million or 34 cents per share in the second quarter of last year.

As compared to prior year, we recorded a $2 million noncash.

FX loss in the quarter and also in core incurred greater interest expense driven by rising rates on our outstanding debt.

Our GAAP net loss of $1 61 per share in the second quarter reflects a noncash goodwill impairment charge of $1 46 per share or $147 2 million and our E. G P business unit.

This charge was driven by the recent market based factors such as the sustained decline in our market cap and increases in interest rates as well as updates to our forecasted a G. P cash flows consistent with our guidance disclosed today.

There was no change to the goodwill for the Ods reporting unit and we remain excited about the G. P segment, given the AD Tech enhancements, we've made and that are underway to enable future growth.

$23 9 million in free cash flows generated for the quarter enabled us to exit Q2 with $58 1 million in cash after paying down an additional $22 million in debt using free cash flows from operations to further deleverage our debt position.

Our debt balance ended the quarter at $386 million drawn on our revolving credit facility and our business as our business continues to strengthen we would expect to continue to pay down our revolver.

We continue to be confident in our balance sheet and 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 Q3 to be between $144 million and 150 $50 million and.

And adjusted EBITDA to be between $27 million, and 31 million and non-GAAP adjusted net income.

Per diluted share to be between 16 cents of 19 cents based on approximately 104 million diluted shares outstanding.

And an effective tax rate of 20, 25%.

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 can I ask a question you May Press Star then one on your telephone keypad.

We are using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

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

Our first question comes from Darren that's fine.

Okay.

Please go ahead.

Oh, Hey, guys. Good afternoon. Thanks for taking my questions just a few if I may.

If my memory serves me correct last December quarter.

You guys guided I think so many channel partners you.

You know, maybe you had some handset expectations that kind of fell off a cliff.

Half of the quarter I'm, just wondering if there's any conservatism baked into the December quarter or similar to that.

Second question Bill the comments you made about some of the legacy long tail.

Publishers on the D. T change not migrating it is there a way you can kind of quantify maybe how big and how long that impact may take and then maybe one for Barrett your free cash flow was pretty nice in the quarter. Congrats on that I look back on the last quarter and theirs.

Kind of some variability.

Sequentially and I'm, just trying to understand what maybe is the steady state free cash flow generation Z EBITDA pass through thanks.

Yeah, Hey, Thanks, Darren I'll take the device sales in the D. T exchange I know you said bear can take the free cash flow one yeah, I think on the device sales.

The things we saw here in the U S. There's a lot of carriers are back during Covid had moved from a two to three year leases on the devices you know both across Android and iOS.

Burnt off next year, and so I think that'll be a good thing in terms of changing some of the trajectory around U S device demand, but in terms of the focus on the holidays. You know right now we want to make sure that you know we're pretty conservative in what we're expecting you know on devices and yeah. Just in the September quarter, you know we saw.

You know amongst our large carrier partners, you know down millions of devices between the large carriers from September quarter last year September quarter. This year. So I don't know if we.

I would expect anything to dramatically change in the current quarter are around that and you can do the math multiplying it by you know north of six box in terms of what that that impact is to us. So that's something we look forward to getting back on track with that with the operators. You know next year and then on the on the exchange side, Yeah, where we're consolidating and really focus on.

Where the puck is going versus where it's been so I mentioned a lot of things in my remarks around new features on the exchange like SDK bidding and what we see from large brands that are you buying advertising through the trade desk or Google's D. D 360, <unk> Amazon whatever they.

They want to buy through our SDK bidding so getting our exchange going to where things are going in the future to capture those dollars is going to be really key and critical so that's where we're focused but it's part of that yeah. There's probably many thousands of long tail publishers are from the legacy companies that are doing very small dollars, where it's just not.

Worth the effort to migrate them over but in aggregate, we still have to comp over those and you know that's you know millions of dollars of revenue a quarter its not tens of millions and it's something that will burn off and our expectation is we'll go through to where the growth is going with a lot of these brands and larger Omnichannel D. S piece and then I'll.

I'll turn over to Barrett on the cash flow.

Yeah, Darrin I think your question on the cash flow was kind of timing seasonality and kind of flow through so we had a little over 27 million in cash from operations in this quarter as we touched on last quarter, you're right. We mentioned some timing elements on working capital that would push into this quarter, which we saw.

Al.

I think you know.

But on a quarterly basis.

Over the year, we'd expect the flow through of EBITDA to you know, our our cash from operations to be around 50%.

And you know the give or take a quarter or so are those will those there are some timing elements, especially when we see rises in revenue.

But otherwise we'd see about a 50% of our EBITDA turn it into a free cash for us.

Great. Thank you I'll pass it on thanks.

Sure.

Our next question comes from Omar <unk> with Bank of America. Please go ahead.

On for Omar. Thanks, So much for your question for taking my question. So.

So I know you guys are you know we're working on working with some of the supply partners that you have to feel demand from some of the Chinese E. Commerce players like email like you guys had a touch on that.

A bit in the prepared remarks I'm just wondering if there has been any progress there and you know just in terms of timeline like when should we expect a sort of the hurdles to clear out.

Yeah. So you know our expectation is that.

We're going to see some positive progress in the current quarter, we did not bake that into our outlook AR just because it's not here yet if it happens then that's great, but our expectation is rescue a little positive movement in the current quarter, but I think as we go into next year, we're gonna see some improvements there I mean, we continue.

See you know a lot of popular Chinese apps and want to run on U S supply and you know given you know some of the historical geopolitical things we've seen throughout the balance of this year. That's really limited. The dollars you know that we've been able to run on that it does vary by partner So partner ex U has a you know me.

A little more conservative view than partner why on on these things and then we even within the apps themselves.

So yeah, there's really two impacts there one is the actual dollars from the the Chinese the popular Chinese applications, but the other thing is the rising tide lifts all boats, meaning that the rates that others don't have to pay when there's higher rates coming in from them. So it was kind of a double whammy. There. So we're obviously working hard on to Derisk that with our operator partners.

You know our expectation is that something that could be a material driver for us on our ots business.

Great. Thank you very much.

Our next question comes from Anthony Stoss with Craig Hallum. Please go ahead.

Hey, guys.

Bill over the last couple of quarters, you've talked about a large social media company expected to go live with single trapped by the end of this year can you update us where they stand and then I have a couple of follow ups.

Yeah sure Tony Yeah. Unfortunately, a large social media company doesn't want me, making any statements on their behalf. So unfortunately I can't make any statements here today around that I'd like to so I'm kind of say you know states you know stay.

Stay tuned nothing's changed from our prior comments or remarks, you know we continue to have good relationships there, but unfortunately, nothing nothing I can say specifically on the topic today.

Got it and then just I'm going to pick one of your your see what type of customers Amazon I think they've been life or maybe just short of a year talk to us about what the experience has been do you expect them to renew or would you expect pricing because it seems like you know you're not generating a lot of revenue yet from single tap.

More or less giving it away or attractive prices to get them hooked I'd love to hear kind of the experience of your customers have been using it for say a year or less.

Yeah sure. So you know with Amazon specifically, you know today, what we do with Amazon is a we have a licensing deal with Amazon, where they pay us a fixed fees you know, let's call. It low seven figures a year and revenue to distribute the alternative versions of the Amazon apps you know so and then the store itself so think about it.

You know things like crime and audible and so on.

And you know that relationship has been going great with Amazon. Our next step with them is to expand it to third party applications. So you know I think you know candy crush Uber Starbucks that kind of thing.

That would be kind of a next leg of the relationship there that would have a different monetization with them and so we're working through some of those integration details you know right now.

You know I'd characterize our relationship isn't it and in a good spot I think we're all wanting to see things move faster than what we're seeing right now but in terms of delivering the conversion rate benefits that they expect we're absolutely seeing that in the marketplace.

Got it and then just wanted to try to get a little bit more info on the Latin American carrier that you talked about that you expect to go live with your RP DS can be really attractive for for carriers, where do you stand with kind of interest levels from other international carriers.

Yeah. So the pipeline is really robust and you don't expect to have some some good things to talk about here over the upcoming I over the upcoming future.

<unk> is in really good shape right now we're in the process of launching with this quarter with the some new Latin American operators, which is encouraging to continue to expand our presence.

Down there and then you I touched on Xiaomi as well in my comments and you know really the point here is rather than just being only relying upon a few operators here in the U S. Oh, we Gotta go ahead and cast a wider net and get a wider footprint. So we're not relying upon just upgrade cycles here in the U S and that's exactly what we're doing.

Thanks, Bill I appreciate it thanks Tony.

Yeah.

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

Hi, guys. Thanks, the last few years I think your fiscal fourth quarter revenues have been down 10% or so in an EBITA little bit any reason that should be different this year.

Yeah, I don't I don't know that it would be much of a different a seasonal factor.

You know Tim one one thing we're considering as you know last December quarter. It was quite unique.

It didn't have quite the holiday seasonal lift that.

Many expected in the AD markets.

So you know we've taken what we think is a pretty prudent approach to how we're thinking about our December quarter.

But I don't I don't think.

Outside of outside of historical trends are.

A seasonal decline of normal seasonal decline I wouldn't wouldn't be odd for a for Q4 this year.

Got it and can you give us a sense of the profitability of the two main lines of business you know what.

At this point and maybe.

You know maybe relative to on the growth rates for 25.

Yeah.

Tim was your question around quickly.

Can you give us a sense of is there much difference in profitability for the two different business units.

I know you don't want an EBITDA basis, and then how about growth into 2025, maybe in total of the two units yeah.

Yeah. So let me start with the first one on on kind of profitability I'd say there is a difference on profitability, especially when you think about the margin.

And we have some details in the in the Q that you'll be able to review, which breaks out the profitability.

It doesn't have all the expenses bird, but does give you a sense of that but as a reminder, you know.

Much of our exchange business on our on our E. G P business.

As reported on a on a net basis, so you'll see the margins are slightly higher.

But on an absolute dollar basis, there they're similar profitability.

Of course, there are different products within each of those business units that have different.

Economic and profitability profiles, but.

Typically I'd I'd say there are similar on an absolute dollar basis, but on a margin basis or a R. A G. P business would be it would be a would be higher.

And then secondly, given the growth profile. We're not you know we don't we're not guiding to next year.

But you would hear optimism around many of the things the investments we put in place as well as.

Some of the comps that we're growing over that would enable and allow us to grow next year.

Thank you.

Thanks, Tim.

This concludes our question and answer session.

Like to turn the conference back over to Bill stone for any closing remarks.

Thank you everyone for joining the call Tonight, we look forward to reporting on our progress against all the points made on today's call. We will talk to you again on our fiscal 'twenty four third quarter call in a few months, thanks and have a great night.

The conference has now concluded thank you for attending.

Hey, Chen you may now disconnect.