Digital Turbine, Inc.

After today's presentation, there will be an 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, and welcome to the Digital Turbine 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. 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 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 make them happen, and the team generating these results, it's the best team I've been around in my nearly 30-year career. Working virtually in 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. Thanks, DT team. I'm going to break out my prepared remarks into three areas. First, I'll summarize our quarter 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 of the platform and where we're going into the future. To close out our fiscal 21 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 in 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 the strong revenue growth into more than four times the EBITDA compared to the EBITDA generated a year ago, 278% growth in non-GAAP earnings per share, and more than 3x the free cash flow from a year ago, as we continue to benefit from network effects of our platform and economies of scale. Barrett will 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 RPD, is a core operational health metric of our business, and in the U.S., strong media demand resulted in 25% growth of RPDs, and we saw nearly 70% growth in international RPDs. 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 in our app media business come from outside the United States. More specifically on devices for our application media business, we also added approximately 65 million devices in the quarter, which represents over 50% growth year over year. This growth was achieved despite an overall decrease for Android devices in the macro global market. In other words, we're still a penetration story against the larger opportunity. In our content business, revenues in 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 in content revenues is achieved against over 10 million daily active users, or DAOs. It includes just over 100,000 DAOs coming from revenue synergies on our existing addressable market distribution footprint, which is many hundreds of millions of devices with our current software. Thus, the opportunity for growth is enormous. In particular, I'm pleased to announce that we anticipate multiple Tier 1 partners to launch some of our content products later this year, which should materially improve our DAO counts 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 of 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. 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 flattest U.S. device trends at the moment, the overwhelming majority of growth in 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 in international partner revenues, which was more than a third of our app media revenues in 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 than the entire digital turbine company generated on those same three days in 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 mention on prior calls, expanding 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% year-over-year as our content products, single tap, and other products are showing solid growth. While the strong growth is exciting, I believe it will be even better as we drive more revenue synergies on our content products. We continue to capture the recent momentum in 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 Singletap, not including our social media integration with our large carrier partner. A few quarters ago, we talked about Singletap 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 Singletap to be a growth driver for the business in 2021 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 in the US and internationally. The 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 will 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, in the December quarter, 32% of our application media revenues were from international applications such as things like TikTok or Candy Crush. And for the first time in our history in this past December quarter, we saw more media spending in our application media business from companies that are not based in 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 demand partners is a direct reason why we saw RPDs grow more than 25% in the US and nearly 70% outside the US. 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, Tencent, and ByteDance spending in Latin America and Europe, and U.S. and European companies such as Pinterest, Uber, McDonald's, and King all spending with us outside 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 app media business as both areas grow at similar rates as the overall business. In particular, we've seen very strong growth in streaming video, news, sports, social networking, and entertainment, with the only category showing any material decline from last year is travel. And finally, before I turn it over to Barrett, I want to highlight my enthusiasm, not just for these quarterly results in 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 in the industry and our moat. Our ability to drive additional vertical integration against that footprint through extending both our ad tech stack and our own content is a strategic focus area for us. We look forward to updating you on our progress and want you all to have that context on our strategies as you see future activities from us. 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. We are 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 of Mobile Posse earlier in the year. I will occasionally reference results on a pro forma basis, where appropriate, to provide additional insight into the underlying trends when comparing current performance against prior periods. Turning to the quarter, revenue of $88.6 million in the quarter was up 146% as reported and 73% 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 application media business delivered a revenue of $56.9 million, representing 58% growth in the quarter. We saw continued strength in advertiser demand and product expansion, leading to U.S. RPD growth of over 25% and more than 65% on international RPDs. Our content business generated $31.7 million, which was up 108% year over year. as we experienced improved performance on our fully deployed content platform, combined with increasing advertising demand and yields. Gross profit, a key financial performance metric, grew 166% to $38.4 million in the quarter, which was up 69% on a pro forma basis. Gross margin on the platform was 43% in the quarter, up from 40% in 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 mix. 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 in the quarter, or 18% of revenue, down from 25% of revenues in the prior year, and increased only 20% year on year on a pro forma basis, while revenues were up 73% in the period. Total operating expenses were $17.2 million, down slightly sequentially and compared to total operating expenses of $9.9 million in the prior year. I will note that our operating leverage is being achieved even as we make a number of focused investments. These investments are 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. In the quarter, we achieved adjusted net income of $20 million, or $0.21 per share during the quarter, as compared to a $5 million, or $0.05 per share in the third quarter of last year. Adjusted EBITDA of $22.5 million in the quarter was up 303% over prior year, and margins continue to expand to 25.5% this quarter from 15.5% in the prior year quarter. Our free cash flow totaled $22 million, an 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 in cash. Our GAAP net income was $14.5 million, or $0.15 per share, based on 97 million diluted shares outstanding, compared to a third quarter of 2020 net income of $3.3 million, or $0.04 per share. Included in our GAAP net income for the quarter is a recorded adjustment of $4.7 million from the impact of the change in 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 in 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 2021 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 67 cents. I'll highlight that this implied growth in the midpoint of our guidance has our fiscal 2021 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 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Darren Aftai with Roth Capital Partners. Please go ahead.

Hey, guys. Thanks for taking my question. I hope you're well. Very nice quarter. A few, if I may. On the device side, looks like you guys have top 60 million devices for two quarters in a row. Can you just kind of share what's driving that significantly higher? level of relative penetration that Samsung, and then just in terms of, is that kind of a new consistent run, right? Any, any reason that number would dip back down? Um, second question, you talked about new carriers later in, uh, I guess, calendar 21, uh, for content this year, just kind of, how do we think about scale? And then second one, um, any insight, um, into 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. consumers versus U.S. brands wanting to reach foreign customers? Thanks.

Yeah. Hey, thanks, Darren. Appreciate it. So, to kind of take your questions in order, yeah, as far as devices go, yeah, the vast majority of the growth was internationally. I'd refer to kind of U.S. as flattish. You know, we're seeing a little bit of bump, you know, as 5G is getting going in the U.S., but I'd say the predominant and the vast majority of the growth is coming from Our international partners, obviously Samsung's at the top of the list, but I highlight our other partners as well that continue to perform well, like American Mobile and Xiaomi 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, yeah, we expect those to launch later this year. I want to be a little bit hesitant about not making any forward-looking statements on their behalf. But, you know, our expectation is that, you know, this should materially influence our Dow counts in a positive way. You know, this is something we've been working on for a while, and, you know, now we've got some commitments to get going with some of our Tier 1 partners. So we're really excited about that. And I think your third question was around, you know, kind of cross-pollination with our products. And, yeah, we continue to make progress there. Nothing specific to report today. I just would just characterize that, you know, because you have strong and deep relationships with our partners. And, you know, your last question was really around international demand in the U.S. And, yeah, what we're seeing right now is it's ramping. And, you know, we're getting to a point where we're probably seeing 30%, 40% of our app media revenues are coming from international partners that want to be here. And it is 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, given that we're such a minuscule part of the broader mobile ad spend from a global ecosystem perspective. So I think we've got a lot of room to run there. And the key is just continue to add really good quality supply around the world, which we're focused on. 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. You're active daily users. Can you give us a sense of where you think that could be in 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 up tenfold in the next, you know, three, four years. I know it's a little tough to call. And then secondly, where do you think the RPD pricing can kind of go, you know, at this point? I mean, it sounds like it was up 25% in the United States, but I think you had pre-booked a lot of this pricing six months ago. You know, maybe you can talk about what the pricing was like in the quarter versus what you're seeing on the new spot markets or any kind of indication where you think that can trend over time. Thank you.

Yeah, thanks, Tim. Yeah, on the Dow growth, you know, when we think about it today, you know, the lion's share of our Dow growth is with T-Mobile, you know, not 100%, but the lion's share of it. So if we think about, you know, other Tier 1 partners here in the United States and we think about our Tier 1 partners around the world, you know, I think extrapolating those numbers out, you know, is something that, you know, at least we think of in terms of the opportunity set in the short term. In the longer term, remember, we're on many, many hundreds of millions of devices today. And as we talked about today, we're adding 60-plus million a quarter right now. So as we think about it, looking out into beyond 2021 into 2022 and 2023, 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. It's a big focus area for the business. On your second question around RPD pricing, yeah, it continues to be strong. And I don't think that that's 100% just due to holidays or seasonality. 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 who are spending dollars right now have to see an ROI of what their spend is. And given every dollar that's spent on our platform, we can provide an ROI back to those partners. you know, that makes our platform more sticky. And they can clearly see that return on their investment that they're getting from us. And then as we get more demand partners and it's working for the existing partners, you know, there's kind of an economics 101 that happens here, right? As your supply of inventory is fixed, you're bringing now more demand onto the platform, so it allows you to raise prices. And so from our perspective, You know, we continue to expect to see RPD grow through this increased media demand, but we also expected to see it grow as these new products that I referenced, such as single tap and notifications and so on, continue to gain traction in the marketplace. So, you know, we're pretty excited and pretty bullish on, you know, the opportunity to continue to grow RPD.

And just a clarification on the new customers, are they going to take the same type of size as a T-Mobile would be? Are you adding, like, one type customer like a T-Mobile, or are you adding a couple, or

Yeah, without getting too many hot water on forward-looking statements, let me just say tier one partners.

Thank you. Our next question comes from Austin Moldo with Canaccord. Please go ahead.

Hi, thanks for taking my questions. First one's on single tap. What does the product look like now compared to the historical social media integration, and how does the pricing work on these newer single tap relationships?

Yeah. Hey, Austin. As far as single tap goes, 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. It's basically a prepayment, if you will, on new device sales. 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 single tap for everybody else. 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 at very competitive and better pricing, given we know we're going to get better conversion than if somebody tries to use the regular Google Play flow. So that's something that has really just been a rampant 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. Our aspirations are to continue to put zeros on those trends.

Great, thank you. And my last question is on the content segment. In terms of products, what drove that really pronounced content media revenue growth?

Yeah, so there's really three drivers of the growth. You know, one is, you know, last year there was a legacy-based platform that was in place, and we about in the summertime did a lift and replace and put a new platform in place. And so a lot of the operational benefits of just, you know, kind of standard blocking and tackling of, you know, better viewability, you know, more retention and stickiness with customers, you know, better just kind of overall performance, you know, to help drive results. Secondly, we introduced some new things within Chrome that were able to deliver richer, better ad experiences that we get higher rates for. And then the third reason was just the broader macro secular tailwinds. You saw maybe some of that from Google yesterday. I'm sure you'll see it from other players out there where 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 100% pro forma growth.

All right, thank you very much.

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

Good afternoon. If you add a new Tier 1 carrier to the media content side, is the TAM that you're going after new devices, or can you also somehow get someone who already has a smartphone from one of the Tier 1 carriers to also add your service and become a customer?

Yeah, absolutely we can do that. That's a decision that the mobile operator or the OEM will make is, 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 our content products to hit the entire base. Or if they just want to do it for new devices that come onto the network, they can do that as well. So that will be their decision they make from our perspective. It's just a technical implementation issue for us, but it's 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 customer internationally, kind of what happens when you first get them, kind of how many apps maybe people are bidding for and what that could look like in a year or two, or the amount of devices that they put it on? How do we see the path of how this grows or potentially grows?

Yeah, 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 is same-store sales, or how do you get more on every device that you're launching? And so on the second part, we do that through two ways. One is we continue to add products onto the partners we're with. So, for example, with Samsung in Brazil, we started out with our out-of-the-box wizard where you select the apps that you want. as part of the setup process. Then we added dynamic installs to that, and then we've recently added single tap to that. As we add more products, that obviously increases more RPD. Then the final driver is just media demand that I referenced in my remarks, where we continue to see now our international media partners wanting to be in geographies outside their home geography, and then spending more money, which therefore increases the bid rates to get onto the device. The combination of more devices plus more products plus more media partners is 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 1. Our next question comes from John Hickman with Lattenburg. Please go ahead.

Hey, Bill, nice quarter. Anyway, could you elaborate a little bit on the international growth? Is there any geography where that's accelerating, that's new, different, anything like that?

Yeah, I think we've been really pleased with our growth in Latin America, and we think we're just scratching the surface there, not just with our Samsung relationship, but American Mobile and others showing really nice positive growth. So I'd really highlight Latin America as one. Second, I'd highlight is Europe. You know, we've really, you know, as a result of, you know, our Samsung relationship and then, you know, as we've gotten going with some of the other operators and OEMs there, that's ramped nicely for us as well. I'd say the biggest opportunity for us and where we're focused is in Asia Pacific. You know, we've got to improve there. You know, there's obviously a lot of people, a lot of devices there, and, you know, I'd really look forward to us, you know, rounding out our international performance by improving in the APAC region.

So just one more follow-up. So are you still having 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, the carriers have more control over the device. And so the relationship with the mobile operator is more important than it is with the OEM. Outside the United States, the relationship with the OEMs are more important because in many markets, especially in Asia Pacific, the carriers just sell on SIM cards. OEM actually is deciding how the device is configured and what types of applications and content they want on the device. So our relationships with the OEMs matter more outside the United States than they do inside the United States.

So are they calling you, or are you chasing them?

We're always calling people, and we've 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. 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 in a few months. Thanks and have a great night.

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