Digital Turbine, Inc.

Good afternoon and welcome to the Digital Turbine third quarter fiscal 2020 earnings 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 telephone keypad. 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 Markets and Strategy. Please go ahead.

Thanks, Gary. Good afternoon and welcome to the Digital Turbine Fiscal 2020 Third 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 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'll turn the call over to Mr. Bill Stone.

Thanks, Brian, and thank you all for joining our call tonight. I'm going to break out my prepared remarks into three areas. First, we'll close out the December quarter. Secondly, we'll provide some operational real-time color on our current growth drivers. And then finally, I want to spend some time discussing why I'm so excited about the acquisition of Mobile Posse. Closing out the December quarter, we finished with $36 million in revenue and $5.6 million in EBITDA. And while the top line revenue number fell short of our expectations, largely due to soft device sales with our core U.S. operators in the month of November, we nonetheless managed to exceed expectations for EBITDA as a result of great operational execution in the quarter. I really want to give a shout out to our entire Digital Turbine team. The team's focus and hustle, along with our internal command over key business drivers, really set a positive tone. And from time to time, we'll experience certain uncontrollable near-term factors, such as weaker Android smartphone sales in a particular quarter, but I couldn't be happier with our execution on all aspects of the business within our control. This execution was particularly evident in the December quarter, with a record high blended revenue per device, or RPD, North of $3 with our core U.S. operators, which is an increase from just under $2.50 versus prior year, and also meaningful quarter-over-quarter and year-over-year growth with our international partners. Our revenue per device performance continues to be driven by strong demand among advertisers across numerous categories, including brands, games, and mobile-first applications such as Pandora, Disney+, Apple Music, Snap, Amazon, and others. Barrett will take you through the financials in a few minutes. But for now, I do want to quickly highlight our efficient operating leverage and record cash flows generated during the quarter. This is one of the primary reasons that I get so excited about the inherent potential of our business model. Now that we operate as a cloud-based mobile software company at true scale, we are really starting to harvest the fruits of real operating leverage as our profitability expands at a far faster clip than our revenues. This was evident in the December quarter, a quarter which we managed to grow our EBITDA at a 47% annual rate and generate an all-time record of more than $7 million of free cash flow, even despite headwinds impacting our top-line growth. In addition to our operational prominence of the quarter, I also want to highlight our markedly improved diversification. As you've heard me say many times, we're extremely focused on diversifying our business, diversifying it by partner, by geography, and by product. In terms of partner diversification, our total revenue with our initial U.S. partners, Verizon, AT&T, Cricket, and U.S. Cellular, increased year over year despite a decline in the total combined devices sold. and represented just over 70% of our total revenues in the December quarter, which compares to approximately 85% in the year-ago December quarter and over 90% in the December quarter two years ago. Helping us in this diversification are our rollouts with newer-based U.S. partners such as Tracfone and international partners such as Samsung and American Mobile. And specifically, with respect to Samsung, and given the importance of this partnership, I want to provide an update on our progress. To date, our software has been installed on more than 7 million unlocked Samsung devices across more than 75 countries. In particular, I want to call out Brazil as a highly strategic market for both us and Samsung. Samsung has the majority OEM market share in Brazil, and we are focused on growing our business not only with Samsung in Brazil but also Telefonica, American Mobile and others. We currently believe that we have line of sight to having our software on the vast majority of devices in the Brazilian market by the end of this calendar year. And with this expectation in mind, we continue to invest on the ground resources in Latin America to best ensure that we optimally capitalize on our wealth of opportunities in the Brazil and the surrounding areas. I'd also like to announce today that we have a partnership with AT&T in Mexico that we expect to launch this summer. For context, AT&T Mexico has approximately 20 million subscribers. And we expect this partner diversification trend to continue going forward as Samsung and other new partner rollouts such as Telefonica continue to progress, and as we add additional partners such as LG to the platform. We're very excited to formally announce our global partnership with LG today. We've already begun working on integration and go-to-market plans with LG and expect this partnership to begin contributing revenues this summer. Similar to our announced partnership with Samsung, we will be focused initially on LG's open market devices across multiple geographies. In the big picture, our LG partnership is another validation of the value that our solutions can provide Tier 1 OEMs. And on a related note, I also want to continue to reiterate that we have productive, ongoing discussions with many other OEMs, including several of the leading Chinese ones, that we hope will lead to additional formal global partnerships for us in future quarters. In short, we see a tremendous amount of opportunities to grow our global device count, which, as all of you know, is one of our three key growth drivers for our business. Product diversification is another primary growth driver for the business. And in terms of product diversification for the December quarter, our newer products, beyond dynamic installs, nearly doubled year over year and reached an all-time high of 20% of our total revenues during the quarter, as compared to 13% in the year-ago December quarter and 2% in the December quarter two years ago. We saw encouraging performance metrics and heightened demand for many of our newer products during the quarter. Our Notification and Wizard products were the largest aggregate contributors of revenue growth, but other products, such as MediaHub and Singletap, continue to show promise. And in particular, our Media products were the call out here. The recurring revenue nature of that business and our early positive returns were a catalyst for our pursuit of Mobile Posse, which I'll discuss later in my remarks. We are now live with our initial single tap with our first mobile measurement partner branch, and although it's taken us longer than expected to integrate with them, we still believe this integration is a catalyst for growth going forward. We continue to work with many other high-profile partners on Singletap, including names such as Pinterest, Twitter, Epic Games, which owns the Fortnite franchise, to name a few. And lastly, I want to mention that we are continuing to make meaningful progress in discussions with select strategic partners regarding expansion into televisions and expect this new product and device category to be a growth driver for our overall business in the future. I want to now turn to our Mobile Posse acquisition. First, I want to call out and recognize founder and CEO John Jackson and the Mobile Posse team. John and I have talked a number of times over the years, and we have been admiring their progress. They've done an amazing job building their business from scratch. Six years ago, this was a business doing less than $10 million in revenue. Today, it's doing over $55 million annually. with all of the revenues of a recurring nature, and as such, less sensitive to fluctuations in new smartphone sales from quarter to quarter. John's brought a great entrepreneurial spirit to his team in building their business. We believe we can now leverage their success and take it to a true global level with our scale, relationships, and operating expertise. Culturally, the Moxie of the Mobile Posse team is something we really like well and resonate with. They not only understand the mobile ecosystem and share our vision of connecting the dots between mobile operators and OEMs to customers and advertisers that want to be on the home screen, but they do it with amazing hustle, professionalism, and a real attention to the details. Mobile Posse has many different mobile products that are complementary to our app install products. They have a minus one screen that you swipe left off the home screen for content, a product that powers the mobile operator's content portals, a home screen product, and also a product similar to our Media Hub product that curates news, weather, sports, and other content through an application and or a widget on the home screen. They monetize these products by way of programmatic advertising and their platform works with the largest advertisers such as highly recognizable names like Google, the Trade Desk and Rubicon to name a few. That is their demand and their source of revenues. And similar to us, they then pay their supply partners via revenue share such as T-Mobile, Metro PCS, Boost, AT&T, Blue and Cricket. We're excited about this transaction for many reasons. First, It is immediately accretive and being fully funded with our existing cash and debt resources. There is no dilution to Digital Turbine shareholders. Secondly, 100% of Mobile Posse's revenue are recurring and therefore will dramatically increase the overall percentage of our combined revenues that we derive from more predictably recurring revenue sources. Third, we're excited about the revenue synergies. Specifically, we believe our ability to cross-market their differentiated products to our vast set of distribution partners and, conversely, cross-sell our DT products to their unique distribution partners, along with the opportunity to establish the combined entity as more of an advertising powerhouse with more products and more partners can improve the revenue per device on Mobile Posse's existing business. This acquisition fits hand in glove with our core diversification strategy. Post-close, we expect the combined entity to generate more than one-third of total revenue from recurrent sources and expect no single mobile operator or OEM distribution partner should be responsible for more than one-third of our total company revenues. At close, CEO John Jackson will join our team as general manager of the mobile policy business to ensure we don't miss a beat on execution. And together we'll work to facilitate a smooth integration process while working to unlock revenue and cost synergies wherever possible. The bottom line is this will be a transformative acquisition for Digital Turbine and will significantly move the needle for a top line and bottom line growth trajectory. And with that, let me turn it over to Barrett to take you through the numbers.