Digital Turbine, Inc.

Good day and welcome to the Digital Turbine Fiscal 2019 Third Quarter Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Brian Bartholomew, Senior Vice President of Capital Market and Strategy. Please go ahead.

Thank you, Nicole. Good afternoon and welcome to the Digital Turbine third quarter fiscal 2019 earnings conference call. Joining me on the call today to discuss our results are Bill Stone, CEO, and Barrett Garrison, our CFO. 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. 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 to the most comparable GAAP measures. Now we will turn the call over to Mr. Bill Stone.

Thanks, Brian, and thank you all for joining our call today. Our stated goal has been to build and sustain a profitable growth business. We had a very strong December quarter as the company set all-time records in revenue, gross profit, EBITDA, non-GAAP net income, device installs, and revenue per device, or RPD, on a continued operations basis. And as pleased as I am with the business continuing to set these record milestones, I'm more excited about the opportunities for growth we're seeing in the strategic value of the platform and how we've positioned ourselves for the future. I'm going to break out my prepared remarks into three areas. First, I'll provide some commentary to close out the December quarter. Second, I'll provide some real-time operational updates. And finally, I'll end with some commentary about the strategic value of the platform and how we were positioned for 2019 and beyond. We finished the December quarter with $30.4 million in revenue, which represents 34% growth compared to the December quarter last year. Our non-GAAP gross margin, which has been an area of focus for us, improved to 37% in the quarter, which was an improvement of more than 240 basis points year over year. The resultant 43% growth in gross profit, along with disciplined cost management, enabled us to generate a record $3.8 million in adjusted EBITDA and approximately $2 million in free cash flow for the quarter, showcasing the strong operating leverage of our business. Barrett will provide more specifics on financials. But from an operational perspective, I was very pleased with our revenue per device performance, or RPD, which was driven by strong advertiser demand, increased slot configurations with some partners, and incremental contribution from newer products. And as many of you have heard me say countless times, RPD is a fundamental health metric of our business. And in the December quarter, our collective revenue with our three largest North American partners grew by 22% compared to the same period last year, despite their total related device unit sales being 14% lower. And this was all due to a 42% lift in RPD as our global media team did a fantastic job executing in the December quarter. I'm also pleased with our growing revenue and gross margin diversification, which was aided in the quarter by stepped up international growth as well as the launch of a new partner here in the United States. In particular, it is worth noting that our international revenues were up approximately 100% year over year, including a tripling of revenues with our largest Latin American partner compared to the December quarter last year. These results all showcase the improving diversification of our partner base as our percentage of gross profits coming from places other than our three largest US partners grew from 20% a year ago to 32% in the December quarter. And now turning to the forward outlook, I want to provide some commentary on how we are positioned for growth across each of our three growth levers, devices, media demand, and new products. First on devices, I know there's been a lot of negative press surrounding slowing smartphone replacement rates here in the US and other mature smartphone markets driven by disappointing recent results from some high profile smartphone manufacturers. And while our business model is certainly sensitive to the overall smartphone market, we are not at all fully dependent on it at the current time. For one thing, we're still largely a penetration story, and that even with an annualized install rate of greater than 100 million devices, we are still on fewer than 10% of the Android smartphones sold globally today. We are, however, continuing to add key strategic partners to the platform to meaningfully grow this penetration figure in future quarters, particularly on the international front. For example, we're now live and generating revenue with many new partners such as TracFone, Panasonic, Carbon, Intex, and others that were not active partners last year. Obviously, our recently announced partnership with Samsung is another extremely promising opportunity for us to significantly expand our global footprint, and I'll address our Samsung partnership in further detail here shortly. Before I leave the discussion on devices, I want to note a few possible positive catalysts for devices in 2019, the most significant of which is the imminent arrival of 5G here in the United States. As we've witnessed with previous network upgrades, we anticipate some incremental demand as smartphone users look to take advantage of the benefits of 5G. and it's been publicly reported, it is anticipated that 5G for 2019 will be exclusively on Android with no Apple 5G devices expected in the next 12 plus months. I also want to repeat again that we continue to assess opportunities to extend our platform onto new device types beyond smartphones, such as televisions, which would also foster incremental growth. And now a shift to the other key drivers of our business. The main factor that enabled us to more than offset weaker underlying smartphone demand in 2018 is a higher advertising yield per device, which leads to a discussion of media demand and new products. And as I mentioned earlier, we are generating substantially higher RPD that has enabled us to grow with our key partners even when device units are down. This explosive RPD growth reflects increased demand for same store slots from advertisers as well as incremental contributions from newer products such as single tap and smart folders and is a testament to the value add that we are providing to our advertising clients as well as to our operator and OEM partners. And on the media side, we continue to grow RPD as we expand our media relationships. Digital Turbine is the number three distributor of Android applications in the United States, trailing only Facebook and Google. And I've been pleased with the increasing diversification of the types of applications we're delivering. And while we're seeing growth in aggregate gaming revenues, as a percentage of total revenues, we are seeing much faster revenue growth from brands and other non-gaming applications, such as LinkedIn, Starbucks, eBay, Yelp, and many others. Brand revenues now comprise more than 50% of our overall advertiser demand. I also want to call out here that we are starting to see noticeable results from our revenue share arrangements with select advertising partners, including Netflix, Yahoo!, Amazon, The Weather Channel, and others, who are anxious to utilize our platform to scale not only their US user bases, but are increasingly looking to our international footprint as an effective means to grow their international users. These revenue share arrangements and some of our other lifecycle products now constitute approximately 5% of our total revenue and yield a stream of revenue over the entire life of the device and as such are insensitive to the varying length of smartphone replacement cycles. On the new product front, While our Singletap revenues outside of our social media partner and large U.S. operator integration are not yet material, I am pleased that we are now live with Singletap on more than 130 million devices worldwide, including 50 million here in the United States. It's taken us a lot longer time to get to that scale than we anticipated, but now that we're here, it has made signing up demand partners far easier. onboarding new demand partners such as Twitter, the Weather Channel, Yelp, and others is the top priority of the Singletap team. And although the conversion rates continue to perform well with improvements anywhere from 30% to 200% higher compared to non-Singletap or a traditional flow through the Google Play Store, the partners needed to see those device volumes to justify the investment of resources on their side. That's now happening. and is largely an operational and distribution demand exercise from this point forward to scale. We also continue to launch more products across more partners, including our wizard out of the box experience, post install notifications and smart folders, just to name a few. We're also pleased with the growth tied to our open market and recycled device initiatives that mitigates some of the negative impact of declining new device sales with some operators. 2019 will be about continuing to scale these new products while also launching our bring your own device or BYOD product to the market. Currently, operators don't have a good solution to deliver their branded experiences to their customers when a device is not directly sold by them. In most of the world, this is how devices are distributed, so it's a pain point for them. And as we grow our device base into the hundreds of millions, being able to deliver a customized out-of-the-box experience for operator subscribers is a tremendous market opportunity. Another attractive opportunity for us will be leveraging our distribution footprint and expanded product set to help our products distribute and promote their considerable in-house media content. And we look forward to sharing more with our investors on this front on future calls. I now want to spend a few minutes on Samsung. As you recall, we signed a multi-year agreement with Samsung, the world's largest smartphone OEM, back in November to meaningfully expand our geographic reach and to better exploit the open market and global mobile operator opportunity worldwide. I've been extremely pleased with the first few months of our partnership as we are working hand in hand with Samsung to carefully formulate specific go-to-market global strategies spanning across multiple continents. Samsung is already a highly valued and supportive partner of ours and one of the key lessons I've learned in this business is that internal partner sponsorship or platform offerings is a key driver of success and our internal sponsorship at Samsung has been great. Our Samsung relationship is also helping us in a number of international operator accounts where we've historically been blocked and now going forward Our technical integration with Samsung knocks down a key hurdle we've been facing historically with those international operators. We expect that our partnership with Samsung will begin to generate incremental revenue for Digital Turbine over the next few months and very much look forward to updating you on our steady progress going forward. And finally, before I turn it over to Barrett, I will conclude my comments that the past December quarter set many all-time firsts for us. and our future growth levers of devices, media and new products are all coming together to drive continued profitable growth into 2019. And with that, this concludes my prepared remarks and I'll turn it over to Barrett to take you through the numbers.