Digital Turbine, Inc.

Good day and welcome to the Digital Turbine Reports Fiscal 2023 Third Quarter Results Conference Call. All participants will be in a 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 touch-tone phone. And 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 Mr. Brian Bersolomew, Senior Vice President of Capital Markets. Please go ahead, sir.

Thanks, Chuck. Good afternoon. Welcome to the Digital Turbine Fiscal Year 2023 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 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. Stepped 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 file 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'll turn the call over to our CEO, Mr. Bill Stone.

Thanks, Brian, and thank you all for joining our call tonight. I'm going to talk about both the macroeconomic landscape and our micro-operational details in my remarks. But before getting into those specifics, I want to summarize our view on the business and begin with the most important takeaway for investors to have versus getting lost in any one specific detail later in the remarks. Our conviction on our strategy and our long-term financial and operational view on the business has not changed. We're also not satisfied with our near-term results. We have work to do to improve those results against our near-term expectations. There are many things for us to do, but one of the things investors do not need to worry about is ensuring we have laser focus on the controllables and accountability for their improvement. As a CEO, I own that. But I also want investors to know that we view the macro situation as temporary, and it will change positively in the near future, and the micro situation issues we're dealing with are largely comprised of extraneous, non-strategic things that are not critical to our long-term success, but are nevertheless headwinds when comparing year-over-year results against the past pro forma results of some of our prior acquisitions. The foundation of the DT investment thesis has not changed. The core building blocks of the mode around our on-device platform, the strategic interest advertisers have for monetization on the platform, the ability to leverage the macro secular trends in digital advertising, and having a highly scalable and profitable operating leverage for our business are all in place. That's the underlying investment thesis for Digital Turbine that we believe will power long-term results. Successful businesses are built on years of success, not built on any one quarter of results. And we have some short-term macro and micro dynamics to overcome, But our history has dealt with much more challenging times than this, and like those prior times demonstrated, our resilience has made us a stronger company as we successfully manage through short-term headwinds. We hope investors see our ability to overcome those prior obstacles as a predictor for our future success. It's part of our DNA. Turning to the macro environment, the past three years have been the most dynamic I've seen in my 30-year career. It's required companies to operate lean while being nimble, flexible, and open to change. I'm going to focus my commentary on today's macro operating environment and what we're seeing regarding digital ad spending, devices, and operator and OEM focus areas. First on digital ad spending. At the headline level, and as many others have already reported, pricing has slowed anywhere from 10% to 30% compared to a year ago, depending upon the company vertical, survey company being quoted, or digital ad type. However, we believe this is both temporary and much more nuanced in the details, as many are painting all digital ad spending dynamics with the same brush. We believe this trend is temporary and will rebound for a very simple reason. Since the beginning of the first ad dollar spend hundreds of years ago, continuing to today, and ultimately tomorrow, ad dollars have always followed where our eyeballs are and today our eyeballs are on our digital devices, and we don't see that changing. In fact, we see that growing. So like in this past holiday season, where we experienced deceleration in the short term, as advertisers figure out how to best optimize their spends in an inflationary and slowing macroeconomic environment, the dollars are and will absolutely be there over the mid and long term. Also, we see a lot of nuance in ad dollar spend. For example, platforms that have been heavily reliant upon ad tech tactics like view through attribution have been disproportionately negative impacted. Also, platforms that have a difficult time working with advertisers on the return on ad spend or ROAS metrics are also having a difficult time. And while we saw year-over-year growth in global devices to nearly 75 million in the December quarter, we are seeing macro slowdown of device growth as consumers pause on upgrades. For example, 2022 saw global device smartphone shipments decline by 12% to 1.2 billion units, which was the lowest level since 2013. And in the US, we saw the lowest level of shipments for our DT carrier partners since 2019. And while our revenue shift has moved to revenues over the life of the device versus just at activation, it is a headwind, albeit a temporary one, as we don't see consumers for going upgrades to new devices for a sustained period of time. And finally, it's been well documented in the commentary from many global operators and OEMs and how they're trying to grow revenues in these types of macro environments. This is a tailwind for our business as they look for new revenue streams from companies like Digital Turbine. And I'll provide some specific examples of our success later in my remarks. The takeaway for investors is that we view the present macroeconomic situation as challenging, but also temporary. The macro conditions are more difficult compared to prior years, but not insurmountable and not falling off a cliff. Unlike the macro situation that is currently more supply versus demand driven, the situation in our industry is more demand versus supply driven in the short term. OEMs, operators, and app publishers are looking for companies like Digital Turbine that can provide them more dollars while demand sources are being more cautious and deliberate in their spends. The dollars and opportunities are still there, albeit more work and effort is required to capture them compared to prior years. And in here in the US, I'm pleased to report that we have now extended our contracts with both AT&T and Verizon for three and four years respectively. Now turning to our second quarter results, we had $162.3 million of revenue $40 million of EBITDA, and 29 cents of non-GAAP earnings per share. In addition, we reported gross margins of 50% and EBITDA margins of 25%. Non-GAAP gross profit margins were 50% compared to a reported margin of 46% in the third quarter of last year. Many companies struggle to increase margins in this current inflationary environment, and the ability for us to continue to show year-over-year margin improvement is something we're proud of. Given the macroeconomic situation, focus and optimization is key. To that end, we've reoriented our capital allocation towards future versus legacy projects. Specifically, we are focused on growing things like our brand business and improving performance on leveraging single tap on our DSP and de-emphasizing portions of our legacy performance and reseller ad tech businesses. We've also prioritized resourcing our alternative app store or hub business versus things like our prepaid content media business, which is less than 10% of our revenues and underperforming versus our expectations. Both of these dynamics are having a short-term headwind on pro forma overall top-line performance, but the changes should continue to help both our margin profile and sharpen our focus by doing fewer things better. For our on-device business, while our overall devices were up 10% year over year, the sale of new devices in the United States was the lowest we have seen in any one quarter since fiscal 2019, despite it being the holiday season. We had expected device sales to be flattish based upon input from our U.S. partners. The disappointing holiday device sales were a primary driver of our quarterly results being behind our expectations. As mentioned earlier, we do expect this to be a temporary issue. In the U.S., our revenue per device, or RPD of over $5, was up year over year. We have RPD work to do internationally as we did not see that same year over year growth as the mix of devices was indexed higher in developing versus developed markets where RPDs tend to skew a bit lower. We also made progress on our single tap licensing product. We continue to add partners including being live with high profile customers like Amazon, and Epic, the creator of the Fortnite franchise, utilizing single tap licensing, and we're also gaining momentum with Google as a distribution partner for us. While single tap licensing is not yet material in our overall results, the ramp is occurring and the progress is noticeable. We are now on a run rate of many millions of single tap licensing installs per month, and have already done more single tap licensing installs so far in 2023 than we did in all of 2022. Bigger picture for single tap licensing, the product market fit is strong, and while we are excited about its prospects, I want to remind investors it will take time to get to material revenue generation. Similar to the early days of our dynamic install business where we launched on one mobile operator with only a slot or two and then ramped and then added another and so on, It layered on nice sequential growth as we expanded the depth and breadth of carriers and OEMs. I expect a similar trend to emerge with our single tap licensing business. On our app growth platform, or AGP business, our business was roughly flat with the prior quarter, but down 24% year over year. The primary driver of the year over year comparisons are macro declines in ad rates and the consolidation of certain ad colony business lines. As mentioned earlier, winding down our Scandinavian reseller business is not strategic. We've also started consolidating the ad colony exchange business into our digital turbine exchange, which means that some of our long-tail publisher and partner revenues are transitioning. This is absolutely the right strategic decision for our customers and partners to deal with one versus multiple companies. but it's creating revenue headwinds and year-over-year comparison issues in the short term. But it will be tailwinds for us next year. And as a reminder, this primary strategic rationale for our ad colony acquisition was for the brand business. I was pleased to see sequential growth in our managed brand and private brand marketplace business in the third quarter as we have rebuilt the team, acquired one of our channel partners in Europe, and sharpened the focus. It's early days, but we are now seeing our approach bear fruit in a very challenging macro environment for brand dollars. We're seeing strong growth from brands such as Starbucks, Chick-fil-A, and Procter & Gamble, just to name a few that are spending more dollars with Digital Turbine. From a regional perspective, we continue to maintain a diversified global footprint. In the current quarter, we saw impressions relatively flat year-over-year in EMEA and APAC and modestly down here in the United States. Looking at ad placement types, we've maintained a balanced portfolio weighted between banner, interstitial, and video. And across all ad formats and geographies, eCPMs declined between 10% to 20% year-over-year, which is roughly in line with industry trends. And as mentioned earlier, we've made a number of enhancements in the current quarter to our ad tech capabilities, such as ad rendering, new ad formats, new bidding methodologies, and so on. We spent the last year integrating the companies and are now finally building upon the integrations with new products and services. Early results are encouraging, so the combination of the new demand and the expansion of supply types are allowing us to focus on controlling what we can to drive improved performance. Turning to the future, I want to spend a few moments highlighting our growth drivers. I mentioned both single tap licensing earlier in my remarks as a strategic growth opportunity, but also as we've mentioned on prior calls, we want to build a Shopify for app stores on device. We believe we're uniquely positioned with our on device technology, our publisher relationships, and our operator and OEM relationships. We have launched our first alternatives app store with U.S. Cellular here in the United States, leveraging our Aptoide investment, and it is generating revenue today. We anticipate launching with an additional tier one U.S. partner in the current quarter. The carrier feedback has been impressive and supportive. We also believe the global regulatory environment will provide additional thrust to our vision. And to achieve this vision, there are some market pain points we're solving, including making it easier for app publishers to port their apps to a new platform, managing payments, installing the apps, and managing the curation of the microstores. And making it easier to port the apps and manage payments, we took that first step in accelerating our efforts in this area by taking an equity position in an alternative app store called Aptoid, which has approximately 250 million users 10 billion downloads, and over a million applications. Combining these capabilities with things like single tap will make installs easier for consumers. And we can further leverage our on-device position with Ignite to drive AI and machine learning to focus on the right apps to feature on the device versus the customer being overwhelmed by being dumped into a big app store with many millions of apps to choose from. The alternative app stores will also help us further leverage our ad tech assets with applications supported by in-app advertising revenue, but the app stores will also help us with our first foray into the in-app purchasing market, which is a $100 billion global addressable market today. You'll see us refer to this business as our hub business and variants on the hub, whether it be things like Games Hub, App Hub, and so on. And to tie all of this past, present, and future together, Because of the exclusivity and uniqueness of our position with our on-device and publishers, we're able to create deeper and more strategic relationships with our partners. To that end, we have secured many tens of millions of dollars of revenue bookings for next fiscal year across various verticals such as social media, weather, gaming, and so on. We will provide the publishers with an alternative route to market, leveraging our on-device and single tap footprint whether that is through our new app hub, our dynamic installs, our DSP, and so on. This has not just strategic benefit and validation of the DT platform benefit, but also financial benefit and de-risks our future revenues.