Digital Turbine, Inc.

supports fiscal 2024 second 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 telephone keypad. To withdraw your question, please press star, then two. Please note that this event is being recorded. I would now like to turn the conference 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. 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 to the most comparable GAAP measures. Now we'll turn the call over to our CEO, Mr. Hillstone.

Thanks, Brian, and thank you all for joining our call tonight. For the September quarter, we finished in line with our guidance range, And I was pleased with the cash flow generation in the quarter with 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 controllables and believe they'll pay dividends into the future as we work through some of the uncontrollables with soft U.S. device sales and also being able to expand 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 platforming, new ad tech capabilities, our hub initiative, alternative app distribution, and single tab. 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, 13 cents of non-GAAP earnings per share, and our gross profit margins were 47%. Our EBITDA approved sequentially, driven by reduced controllable costs. Barrett will 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, our on-device business grew revenues sequentially to just over $99 million. Operationally, I was pleased with our improvement of revenue per device, or RPD in the U.S., which continues to be over $6 for all of our partners, and for two of our U.S. post-pay carriers, we almost hit $10 for the first time. Over the past five years, our RPDs have accreted from just over $2 in fiscal year 20 to $3 in fiscal year 21 to $4 in fiscal year 22 to $5 in fiscal 23, 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 RPD results, as U.S. demand is less than 20% of revenues on our U.S. supply, despite some continued headwinds on being able to run all the Chinese media dollars that we have budgets for. While we expect the current quarter to experience continued device softness here in the U.S., going into 2024, we will 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 our 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. And 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. On our app growth platform segment, or AGP business, we finished with $46 million in revenues. We're seeing sequential improvements in eCPM rates on both our brand demand and DSP from advertisers, And in particular, it was encouraging to see our brand business continue to grow nearly 10% sequentially, as we saw ECPMs improve 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 their 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 DT exchange. The main benefit of this consolidation is the efficiencies and new products such as SDK bidding that will help us capture more ad dollars from companies 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 DT Exchange, which will create headwinds on past comps, even as we grow our DT Exchange into the future. 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 DT 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 DSP. These enhancements mean that DT Direct will be a growth driver for us in 2024. In addition to leveraging single tap on the DSP, we continue to utilize it in many other ways across our device solutions as an enablement technology. The first is direct demand via the DSP, 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 our single-tap enabled supply. The third is licensing mobile web traffic from brands such as Epic Games' Fortnite title, which then uses Singletrap 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, an Amazon version, and so on, for direct distribution of the device. And finally, is enabling large distributors of applications, such as large social media players, to leverage the conversion rate benefits of Singletap 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 wanting to use Singletap to distribute alternative builds of their applications, which fits nicely with our strategy of alternative app distribution and hub that I'll talk later in my remarks. And as the market expands with alternative builds, Singletap 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, our AI, machine learning tools, Singletap, and our extensive publisher relation and operator and OEM relationships. We have launched our first alternative app distribution products, which we brand as DTHub, with five operators here in the US, leveraging our Aptoide investment that are generating revenue today. We have increased our equity investment in Aptoide 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 hub 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 yet started leveraging our in-app advertising assets into this alternative app distribution, but do expect that to add an additional revenue stream to this opportunity, and all three of these monetization capabilities being drivers of incremental RPD into the future. Monetizing via cost per install 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 EU, as 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 a 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 version 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 publishers to port 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 curation of the applications. And these are all things that 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 Aptoide, we're expanding our partnership with Flexion, who is the market leader importing applications into alternative version. Flexion works not just with us, but with all the other major alternative app stores, such as the Samsung Galaxy Store, Amazon App Store, Xiaomi Git Apps, Huawei's App Gallery, Aptoide, 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 top line 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 AGP business, Q2 revenues declined 32% over prior year. While we're encouraged by the improvement in the core business, the overall decline in AGP year-on-year continues to be driven largely by the short-term impact of the consolidation and exiting of certain legacy business lines that we have discussed previously, and we would expect these revenue lines to be fully consolidated by the end of the fiscal 2024. I'd reiterate Bill's earlier comments that 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 shifts 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 strategies. 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'd 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. These 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 DTHUB, alternative app distribution, and Singletap. While the current and near-term periods will incur increased transformation costs due to the completion of these platform consolidations and 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 $0.7 million sequentially and 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 that Active focus on expense measures and integration efforts we are taking will strengthen the platform as we return to growth and enable a greater portion of those dollars to follow 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 non-cash FX loss in the quarter, and also incur greater interest expense driven by rising rates on our outstanding debt. Our gap net loss of $1.61 per share in the second quarter reflects a non-cash goodwill impairment charge of $1.46 per share, or $147.2 million in our AGP business unit. This charge was driven by the recent market-based factors, such as sustained decline in our market cap and increases in interest rates, as well as updates to our forecasted AGP cash flows consistent with our guidance disclosed today. There was no change to the goodwill for the ODS reporting unit, and we remained excited about the AGP 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 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 million, 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 and 19 cents based on approximately 104 million diluted shares outstanding and an effective tax rate of 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. To ask a question, you may press star then one on your telephone keypad. If you were 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, a spy with

Ross MKM, please go ahead.

Hey, guys. Good afternoon. Thanks for taking my questions. Just to see if I may, if my memory serves me correct, last December quarter, you guys guided, and I think some of your channel partners, you know, maybe had some handset expectations that kind of fell off a cliff, second half of the quarter. I'm just wondering if there's any conservatism baked into this December quarter similar to that. Second question, Bill, the comments you made about some of the legacy long tail publishers on the DT Exchange not migrating. 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 there's kind of some variability there. sequentially, and I'm just trying to understand what maybe is a steady state of free cash flow generation vis-a-vis EBITDA. Thanks.

Yeah, hey, thanks, Darren. I'll take the device sales and the DT exchange, and as you said, Barrett can take the free cash flow one. Yeah, I think on the device sales, you know, one of the things we saw here in the U.S. is a lot of carriers back during COVID had moved from two- to three-year leases on the devices, you know, both across Android and I.O.S., That's going to burn 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 right now, we want to make sure that we're pretty conservative in what we're expecting on devices. And just in the September quarter, we saw amongst our large carrier partners down millions of devices between the large carriers from September quarter last year, September quarter this year. So I don't know if we would expect anything to dramatically change in the current quarter around that. And you can do the math, multiplying it by north of $6 in terms of what that impact is to us. So that's something we look forward to getting back on track with the operators next year. And then on the DT exchange side, yeah, we're consolidating and really focused 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 buying advertising through the trade desk or Google's DV360 or Amazon, whatever. they want to buy through 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 as part of that, there's probably many thousands of long tail publishers 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 that's you know, millions of dollars of revenue a quarter. It's 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 DSPs. And I'll turn over to Barrett on the cash flow.

Yeah, Darren, I think your question on the cash flow was kind of timing, seasonality, and kind of the 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. I think, you know, that on a quarterly basis over the year, we'd expect the flow through of EBITDA to, you know, our cash flow operations to be around 50%. And, you know, the give or take a quarter or so. There are some timing elements, especially when we see rises in revenue. But otherwise, we'd see about 50% of our EBITDA turning into free cash for us.

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

Thanks, Darren.

Our next question comes from Omar Asouki with Bank of America. Please go ahead.

Thanks so much for taking the question. So I know you guys are working with some of the supply partners in the U.S. to fill demand from some of the Chinese e-commerce players like Timu. I'd like you guys to touch on that a little bit in the prepared remarks. I'm just wondering if there has been any progress there, and just in terms of timeline, like when should we expect sort of the hurdles to clear out? Thanks.

Yeah. So our expectation is that we're going to see some positive progress in the current quarter. We did not bake that into our outlook just because it's not here yet. If it happens, then that's great. But our expectation is we're going to see a little positive movement in the current quarter. But I think as we go into next year, we're going to see some improvements there. We continue to see a lot of popular Chinese apps that want to run on U.S. supply and Given some of the historical geopolitical things we've seen throughout the balance of this year, that's really limited the dollars that we've been able to run on that. It does vary by partner. So partner X has maybe a little more conservative view than partner Y on these things and even within the apps themselves. So there's really two impacts there. One is the actual dollars from the popular Chinese applications. But the other thing is the rising tide lifts all boats, meaning that the rates that others now have to pay when there's higher rates coming in from them. So there's kind of a double whammy there. So we're obviously working hard to de-risk that with our operator partners because our expectation is that's something that could be a material driver for us on our ODS business.

Great.

Thank you very much.

Our next question comes from Anthony Stoss with Greg Hallam. 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 Singletap 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. 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, you know, kind of say, you know, stay tuned. Nothing's changed from our prior comments or remarks. You know, we continue to have good relationships, you know, there. But, unfortunately, nothing I can say specifically on the topic today.

Got it. And then just I'm going to pick one of your single-type customers, Amazon. I think they've been live for maybe just short of a year. Okay. Talk to us about what the experience has been. Do you expect them to renew? What do you expect pricing? Because it seems like you're not generating a lot of revenue yet from single tap, more or less giving it away or attractor prices to get them hooked. I'd love to hear kind of the experience of your customers that have been using it for, say, a year or less.

Yeah, sure. So, you know, in Amazon specifically, you know, today what we do with Amazon is we have a licensing deal with Amazon where they pay us a fixed fee. You know, let's call it, you know, low seven figures a year, you know, in revenue to distribute the alternative versions of the Amazon apps, you know, so and then the store itself. So think about, you know, things like, you know, Prime, you know, and Audible and so on. And that relationship's been going great. With Amazon, our next step with them is to expand it to third-party applications. So think Candy Crush, Uber, Starbucks, that kind of thing. And that would be kind of the next leg of the relationship there. They would have a different monetization with them. And so we're working through some of those integration details right now. But I characterize the relationship as 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 RPDs, I mean, really attractive for carriers. Where do you stand with kind of interest levels from other international carriers?

Yeah, so the pipeline is really robust, and I expect to have some good things to talk about here over the upcoming future because the pipeline is in really good shape right now. We're in the process of launching with this quarter with some new Latin American operators, which is encouraging to continue to expand our presence down there. And then I touched on Xiaomi as well in my comments. And really the point here is rather than just being only reliant upon a few operators here in the U.S., you know, we've got to go ahead and, you know, cast a wider net and get a wider footprint so we're not relying upon just, you know, upgrade cycles here in the U.S., and that's exactly what we're doing. Got it. Thanks, Bill. Appreciate it. Thanks, Tony.

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, you know, 10% or so and even a little bit. Any reason that should be different, you know, this year?

I don't know that it'd be much of a different seasonal factor. You know, Tim, one thing we're considering is, you know, last December quarter was quite unique. and didn't have quite the holiday seasonal lift that, you know, 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 think, you know, outside of historical trends, a seasonal decline, a normal seasonal decline wouldn't be odd for Q4 this year.

Got it. Can you give us a sense of the profitability of the two main lines of business, you know, at this point? It may be, you know, maybe relative kind of growth rates for 25. Yeah. Tim, was your question around... Can you give us a sense of, is there much difference in profitability for the two different business units? on an EBITDA basis. And then how about growth into 2025, maybe in total for the two units?

Yeah. So let me start with the first one 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 queue that you'll be able to review, which breaks out the profitability. It doesn't have all the expenses, Bert, but it does give you a sense of that. But As a reminder, much of our exchange business on our AGP business is reported on a net basis, so you'll see the margins are slightly higher. But on an absolute dollar basis, they're similar profitability. Of course, there are different products within each of those business units that have different economic and profitability profiles. Typically, I'd say they're similar on an absolute dollar basis, but on a margin basis, our AGP business would be higher. And then secondly, given the growth profile, 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. I would like to turn the conference back over to Bill Stone for any closing remarks.

Thanks, everyone, for joining the call tonight. We'll look forward to reporting on our progress against all the points made on tonight's call. We'll talk to you again on our fiscal 24 third 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 disconnect.