Digital Turbine, Inc.

Good day, and welcome to the Digital Turbine Report's fiscal 2025 second quarter earnings 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 a touch-tone phone. 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, Head of Investor Relations. Please go ahead.

Thanks, Nick. Good afternoon, and welcome to the Digital Turbine Fiscal 2025 Second 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. 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 statement, 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 our CEO, Bill Stone.

Thanks, Brian, and thank you all for joining our call tonight. Before breaking down our specific quarterly results, I want to start the call with a summary of where we're at in our business. Our results for the September quarter were marginally better than our June quarter, and our results for the June quarter were better than the March quarter. Our outlook for the remainder of the fiscal year assumes December will be better than September, and we will perform better in this upcoming March than we did last March. However, while these results are showing positive progress, that progress is below our expectations and thus has been baked into our go-forward forecast. We've been able to grow the strategic areas of our business that we discussed on prior calls and will discuss later in my remarks. But that new growth has not been strong enough to offset the declines in both our exited businesses and legacy businesses, including device sales with our U.S. partners, our Sunset products, and our legacy performance bidding strategies into the DSPs on our exchange. Given this new operating environment, we need to make these businesses more efficient and right-size their costs and support structures to reflect their current profitability contributions. We've begun a transformation project, including some third-party consultation, to take out more than $25 million of annual costs in our business to become leaner, improve cash flow, and enable us to invest in these growth areas. That future is bright is evidenced by a multi-year agreement we've just signed with a new Tier 1 operator here in the U.S. for a variety of services and a relationship with one store that will be a catalyst for us to grow additional device supply here in the U.S., the EU, and Latin America. In addition, our brand strategy on our AGP part of our business is now showing solid year-over-year and sequential growth, and we believe we are building a nice moat around our strategy. I'll provide more details in my remarks on these items, but the bottom line is we need to execute better, faster, and more efficiently in the present as a company so we can attack the enormous market opportunity in front of us in the future. That's our number one priority. To move to our second quarter results, We achieved $119 million of revenue and just over $15 million of EBITDA. In addition to the numbers, and as we've discussed on prior calls, we continue to invest in the future with notable progress on numerous investment activities that set us up for the future, including our progress on our new version of Ignite. Our new hosting platform has moved from migration phase to optimization phase. Our launch of improved bidding capabilities is showing positive growth with brands, and many new back-end corporate systems consolidated and launched, which are simplifying and automating our work. For the quarter, we had a variety of encouraging activities that are showing improvement and a variety of activities that need improvement. First on the ODS segment, on the positive side, as we've discussed on prior calls, the importance of increasing our revenue for device or RPD outside the United States to offset the device declines inside the United States. As places here, international ODS revenues improved nearly 25% year-over-year, driven by better RPDs and new supply offsetting legacy U.S. supply. We also saw both sequential and year-over-year growth in our content media business, We still need to add more supply to our content media business, but I was pleased to see the team doing a great job optimizing the supply we do have to drive growth. We also saw our single tap licensing product continue to grow as we expanded relationships with many partners. The biggest headwind call-outs are device sales and reduced software updates over the life of those reduced device volumes. In the U.S., operators have now publicly reported another quarter of post-pay upgrade rates that were approximately 3% of the base for the September quarter, or a run rate of approximately 12% per year. That would imply more than an eight-year upgrade cycle, which I think all of us would recognize as unsustainable for the long term, but this is a reality in the present. We do expect this trend to reverse in 2025 as we see the anniversary and migration from two to three releases in the U.S. market, as well as likely upgrades driven by new AI features on OEM hardware. For an IGP business, the bright spots continue to be our investment in brands that want to leverage our first-party data to reach their existing and potential customers over our global network. That is now bearing fruit. We achieved double-digit sequential growth, and our year-over-year growth was up over 25%. As we've discussed on prior calls, this is a strategic objective for us and something we have invested in to differentiate us from other players. We're now in a great position to continue to grow, and we will continue to invest here as we believe we are building a moat given the high barriers to entry and work required to earn the trust of brands like P&G, Coke, Disney, Starbucks, and so on. However, this new growth has been offset by declining legacy performance advertising on our exchange. Improving our own performance advertising, leveraging our own first-party data, is our most important execution improvement area for our HEP business. We have simply not made the progress here that we need. The legacy fiber and ad colony exchange businesses were focused on waterfall bidding with third-party performance DSPs, primarily buying gaming advertising inside gaming applications. As expected, these DSPs have been executing their own supply path optimization strategies to vertically integrate the demand connected to their own supply. And for those companies, without a strong mediation footprint, it has become a largely commoditized ad tech gaming space for both iOS and Android. We saw this risk years ago, and that's why we invest in our own brand and SDK bidding activities to mitigate that risk, increase our own first-party activities over our own network, and continue to invest in mediation. We've also been able to expand our AGP supply from being largely dependent upon game publishers to much more diversified over non-gaming. To illustrate this point, our DTX revenues on non-gaming applications have nearly doubled over the past year. In summary, our investment and focus areas are showing growth. We just need them to grow faster to offset the impacts of U.S. device sales with our legacy supply partners and also outrun our legacy performance DSP declines on our exchange as we just transition to more brand, more AI machine learning in our data science, increase our non-gaming applications, and improve our share of voice or first-party performance demand over our network. Those are our AGP priorities. Turning to the future, our focus is on growth and efficiency. The keys to driving growth are more devices, improved performance from legacy and new products, and a wider and deeper net of media and brand relationships. The key to efficiency is automation, aligning operating costs to gross profit, and realigning our people, process, and systems for maximum benefit. Barrett will provide more details on our transformation activities in his remarks. To drive faster growth, the first driver is expanding our device footprint. Despite those soft device sales in the U.S., we have been expanding our global device relationships through partners like Motorola, Nokia, One Store, Xiaomi, and Telecom Italia Brazil. Today, I'm pleased to announce that a tier one U.S. operator has recently selected us for a variety of services leveraging our Ignite platform such as Singletap in a multi-year deal that should prove to be a nice 2025 growth catalyst for us. This win is a nice proof point and validation of the product market fit for our solutions. Our second growth driver is expanding our product portfolio for both our ODS and AGP businesses. Scaling new ad tech and on-device capabilities are critical to our return to growth. On our AGP business, as mentioned earlier, our SDK bidding capabilities have been a nice product enhancement to unlock brand spends on our exchange. While we still have plenty of work to do to transform our migration to this method of bidding with such enhancements of improved AI machine learning, integration, and more first-party data and so on, SDK bidding is already showing strong growth. It's now approximately 70% of the total impressions on our exchange compared to only 5% a year ago. We're diversifying away from waterfall bidding as it's less than 40% to our traffic compared to 90% a few years ago. Our investments in first-party data, DTX, and other features are a major enabler to drive more brand revenues through our network. Our other AGP product growth driver will be increasing our share of voice for leveraging our first-party data and our Ignite capabilities via our own demand-side platform, or DSP. We do this today through our Appreciate acquisition, which is showing renewed growth, and we're beginning to partner with third-party DSPs that can help grow our share of voice. This will all translate not to just top-line revenue growth with more demand dollars, but it's also key in driving the flywheel effects of improving revenues for other products like Single Tap, the DT Exchange, and Fairbid, our mediation product. On the ODS side of our business, our primary growth drivers are Single Tap, alternative apps, and better leveraging our first-party data for our existing ODS products. Single-cap continues to add more devices, more advertisers, and better execution. It's early days for alternative app distribution approach, but as many saw with our recent PR announcement with OneStore, our strategy is starting to come together. We believe one of the keys to unlocking more device supply will be the ability to offer alternative app distribution to publishers, OEMs, mobile carriers, and mega-cap tech players. Many of you have read about all of the regulatory activity around the globe in the EU, Japan, Korea, India, and here in the U.S. There's building momentum to increase options for consumers and publishers on how they distribute and get applications to market. And all of our hard work over the past decade has positioned us perfectly to leverage these opportunities. I encourage investors to pay close attention to these developments in the space as they'll likely open up growth opportunities for companies like Digital Turbine. And beyond this fiscal year, our goal is not just to return to growth, but to accelerate it. And the key driver here will be the expansion of our alternative app strategy. We've launched our first alternative app distribution products, which we brand as DTHub, with five operators here in the United States. With our OS, our one-store announcement last week, we will be leveraging the platform across our operator relationships, not just in the United States, but also in the European Union and Latin America. Be on the lookout for operator and OEM progress here, as this will be a major driver of accelerating our device supply and thus revenues. We're excited about our one-store relationship for many reasons, but one is that it is not capital intensive, as we can leverage the great work the one-store team has done in Korea with alternative apps and their local work with Korean operators. We expect to begin increased focus in the EU with the Digital Markets Act, or DMA, now in effect. And as a reminder for investors, the DMA launched in March of this year in the EU, and we would encourage investors to pay close attention to the details around this, such as how the regulators manage Apple compliance and the corresponding opportunities it presents to us. I'd also encourage investors to pay close attention to all the developments here in the United States, such as the recent decisions on Google's loss and the DOJ antitrust suit and a variety of other legal and regulatory manners that should be tailwinds for companies like ours. I also want to emphasize that the alternative app strategy is not just about new in-app payment revenues, but perhaps more importantly, to be the catalyst to accelerate our existing lines of business beyond this fiscal year. Today, approximately 50% of our business is driven by user acquisition, and 50% is driven by in-app advertising. Our app providers want to find innovative ways to acquire more users at lower costs And also, we believe that this will open up new app providers to leverage our ad tech stack as part of the strategy, thereby driving more AGP revenue growth. We're live today running both alternative app user acquisition campaigns and in-app advertising leveraging our technology. In other words, improving our present revenues and cash flow are closely linked to this future strategy. In conclusion, improving our execution remains the top priority of the company. We're confident we have the right strategy, partners, market opportunity, commercial model, and products to have a very bright future as we're in the right space at the right time, which is critical for any tech company. With that, I'll turn it over to Barrett to take you through the numbers.

Thanks, Bill, and good evening. As we review our performance in this quarter, it's clear we've made progress, though not at the pace we had anticipated. Revenue of $119 million in the quarter was up modestly sequentially, and EBITDA of $15.3 million also improved quarter over quarter. In our ODS segment, revenues reached $82.4 million, a 2% increase from the June quarter, but down 17% compared to the same period last year. While we are encouraged by the positive revenue growth from our international ODS efforts, driven by our focus initiative to expand RPDs outside the U.S., we are facing significant headwinds. Softer U.S. device volumes have impacted our performance, with Q2 device volumes experiencing the largest year-on-year percentage decline in the past four quarters. And we have integrated these disappointing trends into our revised forecast for FY25. Alternative app distribution remains a critical growth initiative within ODS. While our efforts to accelerate this strategy are still in early stages, we are energized by the recent advancements with our one-store partnership requiring minimal capital outlay, and we believe this will help us gain further momentum in the market. Turning to our AGP business, T2 revenues came in at $37.3 million, which was a modest sequential decline. As Bill mentioned, revenues from brand spending continues to shine, with brand revenues up 26% year-over-year and 13% sequentially. However, these positive trends are tempered by our exchange business, which underperformed expectations in Q2. Despite our initiatives to enhance our bidding capabilities and attract improved ESP spending on our platform, we have not yet achieved the anticipated progress. Our consolidated Q2 growth margin was 45%, down from 46% in Q1 and 47% in Q2 of the prior year. This sequential decline in margins was primarily influenced by modest product mix changes in AGP, where our higher margin exchange business has not kept pace with the growth in our brand revenues. We remain committed to pursuing expense efficiencies to maximize the profitability of our growth strategy. We are disciplined in our cost controls, which I will discuss further in relation to our important transformation program as Bill highlighted. Our cash operating expenses were $38.7 million in Q2, down 3% sequentially and 2% year-on-year, representing 33% of our revenues for the quarter. It's important to note that the actions from our recently announced transformation program did not yet impact Q2 results. In the quarter, we achieved non-GAAP adjusted net income of $5 million, or $0.05 per share, as compared to a $13.9 million, or $0.13 per share, in the second quarter of fiscal 2024. Our GAAP loss was $25 million, or $0.24 per share, based on 103 million basic shares outstanding, compared to a prior year net loss of $1.61 per share. Moving to the balance sheet and cash flow, our cash balance at the end of the quarter stood at $32 million, a decrease of $3 million from the June quarter. Cash flow from operations was negative $8.7 million, primarily driven from an improvement in working capital as we reduced payable balances in the quarter. Our net working capital increased $8 million in the quarter to $20.3 million. With steady growth in sequential EBITDA and recent cost reduction actions, we maintain ample liquidity to execute on our growth plans. We increase the amount drawn on our revolver by $15 million in the quarter, bringing our debt balance at the end of the quarter to $411 million. As our business continues to strengthen, we would expect to pay down our revolver in quarterly increments. Reducing our debt and lowering leverage remain top financial priorities to strengthen our balance sheet, objectives that are crucial for our shareholders. Our recently launched transformation program is a significant step towards achieving this goal. Now let me address the transformation program that Bill mentioned. Despite green shoots of improved performance in the first half of the year, we recognize there's more work to do. We are not making sufficient progress on our growth initiatives to offset the headwinds in our legacy business lines. In response, we have enacted a program aimed at achieving more than $25 million in cost reductions across the business. We will drive these efficiencies by streamlining our processes and leveraging the system integrations and platform migrations we have recently completed. Our goal is to create a faster and leaner organization. Additionally, we will cut costs in non-strategic areas and ensure our overall cost structure is aligned with our greatest growth opportunities. Importantly, we plan to reinvest a portion of our savings into strategic growth areas, such as our alternative app business, to fuel growth while we improve profitability. We are taking aggressive action to optimize our cost structure. In the current quarter, we have already reduced annualized cost savings by $15 million, primarily through a reduction in our workforce focused on non-revenue generating areas, combined with other non-personnel expenses. While these changes involve difficult decision, they are necessary to optimize our company and strengthen our balance sheet and invest in the future. We expect to achieve the majority of our $25 million target on a full run rate basis by the first quarter of fiscal 2026. We will provide more specifics on our plans and the timing in our coming quarters. Now let me turn to our outlook. Reflecting the current operating environment and recent trends, we anticipate revenue in the range of $475 million to $485 million in the fiscal year 2025, with projected non-gap adjusted EBITDA of between $65 million and $70 million. As we look ahead to the second half of the year, we expect continued sequential revenue growth in Q3. we also lap the residual impact of the exited legacy businesses in Q4, which positions us to return to growth year-on-year top line in the March quarter. In closing, despite these challenging circumstances, we are energized and optimistic about the future. We are committed to executing our plans that capitalize on the emerging opportunities, strengthen our financial position, drive top line and free cash flow growth, and position DT to achieve its full potential. With that, let me hand it back to the operator to open the call for questions. Operator?

I believe we can open the call for questions now.

Are you ready for the next question? The next question comes from Neil Nyberg, private investor. Neil, please go ahead with your question. Nope, Mr. Nyberg is disconnected. If you'd like to ask a question, please press star then one. The next question comes from Anthony Scott from Cricalla.

Thank you, Operator. Bill, I'm curious if you could lay out, you talked about the phone activation side of the business. I think that's been bouncing along the bottom according to most of our covered companies within the handset space. So I'm struggling to see why that's getting worse. And maybe just comment on that, but also do you think you're losing – a substantial share on the performance advertising side. Just more detail would be helpful, and I have a couple of follow-ups. Thanks.

Yeah, hey, Tony. Yeah, so we're seeing some new partners we brought on that I referenced in my remarks that are actually growing our device supply, which is encouraging. A few of those names have shown nice growth, but just not enough to outrun some of the legacy supply issues here in the United States. And one nuance here is we also, because of the declining supply base in the United States, what we've been able to work with our partners on is, is working on services that would offer applications after they do software updates. And that part of the business, because of the reduced volume, is also now starting to have reduced software updates over the life. And so those two drivers are really what we're seeing. We saw the major U.S. operators report their upgrade rates in the quarter that were down year over year. I don't have that broken out by iOS or Android, but in aggregate they are. We'll continue to still see that show up in our volumes that we see, but we're seeing some encouraging things internationally. On the performance DSP side, this is the biggest area we've got to improve on our AGP business. Specifically, we've done a nice job on brands and bringing brands into our network, and we think that's unique and differentiated from other players. But taking our first-party data that we have on things like Ignite, bringing that into our performance business, whether we do that through our build, which is appreciated in DT Direct, or we do that through leasing it, those AI machine learning capabilities from other third parties, we've got to improve here. This is our single biggest area for improvement on the AGP side of the business is we see some of our legacy performance DSPs doing their own supply path optimization strategies. So there's a major focus area, but there's some other bright spots in the AGP business, but that's the one we've got to focus on.

Once again, to ask a question, you may press star then one. We have another question from Anthony Scott from St. Gallen.

Somehow I got cut off. Bill, could you list or tell us what the RPD was? Was it up, down, flat in the quarter? And then also, just so I don't get cut off from the operator again, At what point does the board start to explore strategic alternatives?

Yeah, so, Tony, as far as RPDs go, you know, we had nice improvement in our RPDs outside the United States. So it was encouraging to see some accretion and growth there. That's always been a focus area is to bring more revenue outside the U.S. In the U.S., we saw RPDs decline a little bit, but that was primarily driven by that software issue I mentioned earlier in my remarks. And then as far as strategic options go for the company, our focus right now is we've got to go execute in the business. We think we've got some right assets. We've just got to improve our present to get to the bright future for what we're doing.

Thank you.

At this time, we show no further questions, so I'd like to turn the conference back over to Bill Stone for closing remarks.

Thanks, everyone, for joining the call tonight. We'll talk to you again in our fiscal 25 third quarter call in a few months. Thanks, and have a great night.

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