Digital Turbine Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 8 speakers on the call.

Operator

Please note that today's 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, sir.

Speaker 1

Thanks, Chris. Good afternoon, and welcome to the Digital Turbine fiscal year 2024 Q1 earnings conference call. Joining me on the call today to discuss our results are CEO, Bill Stone and CFO, Barrett Garrison. Before we get started, I'd like to take this opportunity to remind you 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.

Speaker 1

Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. Except as required by law, we undertake no obligation to update any forward looking statements. For a discussion of the risk factors that could cause our actual results To differ materially from those contemplated by our forward looking statements, please refer to the documents we 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.

Speaker 1

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 Now I'll turn the call over to our CEO, Mr. Bill Stone.

Speaker 2

Thanks, Brian, and thank you all for joining our call tonight. For the June quarter, I was pleased that we beat the top end of our guidance range both on the top and bottom lines, but we still have a lot of work to do to reach both expectations and the potential of our broader total addressable market or TAM. I was pleased that we had a very clean quarter As operationally, we sequentially improved our business performance across key financial metrics. Our strategy is not With new technology platforming, new ad tech capabilities, our hub, alternative app distribution and Single Tap. We believe these investments will prove to be well served against our future growth.

Speaker 2

I'll provide updates on those future growth drivers after providing some operational updates and commentary on the current business. For the June quarter, we had $146,400,000 of revenue, dollars 27,000,000 of EBITDA $0.18 of non GAAP earnings per share and gross profit margins were 47.1%. All of these financial metrics represented sequential improvements from our March quarterly results. From a segment perspective, despite continued soft device sales, our on device business or ODS also grew sequentially to $98,300,000 Operationally, I was pleased with our improvement of revenue per device or RPD in the U. S.

Speaker 2

Which continues to grow and set an all time high in the June quarter. Over the past 5 years, our RPDs have accreted from just over $2 in fiscal year 2020 to $3 in fiscal 2021 to $4 in fiscal 2022 to $5 in fiscal 2023 and today is now over $6 We continue to see strong demand from 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 revenue per device results as 2 years ago U.

Speaker 2

S. Demand was approximately 50% of our U. S. Supply and today it is less than 25%. In particular, we've seen some positive movement on the willingness of our U.

Speaker 2

S. Supply partners to soften their positions on some popular Chinese applications, which increases the overall demand for our platform. While we expect the current quarter to experience continued softness in the U. S. Devices, We expect a strong global pipeline of expanding telcos and OEM relationships to help offset any macro weakness in device sales in the future.

Speaker 2

We also made progress on our Single Tap enablement. As a reminder, we have 5 ways we monetize Single Tap. The first is direct demand via our demand side platform where we leverage our own AI and machine learning to target advertising to Single Tap enabled 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 Single Tap to convert its web visitors into native Fortnite users.

Speaker 2

The 4th is distributing alternative versions of applications, whether that's our own DT Hub version and Amazon version and so on for direct distribution to device. And the 5th is enabling large distributors of application installs such as large social media players to leverage the conversion rate benefits of Single Tap Across their entire network. And given there are so many use cases of how we utilize Single Tap going forward, we're going to focus on talking about Single Tap in the aggregate versus Confusing investors with each individual use case, which may be seen as overwhelming with various operational metrics. However, given the investor focus on this product and interest in social media players in particular, I did want to provide some operational updates on our progress. It's early days, but we have now generated our first revenues with TikTok, who is running Single Tap campaigns for their advertisers wanting to use their own version of an And finally, we expect to begin a revenue generating pilot with another large social media company across their entire user base here in the U.

Speaker 2

S. Later this calendar year. Later in my remarks, I want to connect these operational updates to where we see Single Tap fitting in with the alternative app distribution markets of the future. Our app growth platform segment or HEP business, I was pleased to see our business show sequential growth in the June quarter, which was up nearly 10% from the March quarter. We are seeing sequential improved ECPM rates on both our brand demand and DSP from advertisers.

Speaker 2

And in particular, it was encouraging to see our brand business show double digit sequential growth as we expand our relationships with large advertisers such as Starbucks and Chase Bing. The macro market has stabilized and our execution is improving. In addition, our Exchange business had solid double digit sequential growth in the quarter and the Exchange business continues to be well diversified globally with approximately 40% of our publishers in North and South America, 35% in Europe, Middle East, Africa and 25% in Asia Pacific. We've made numerous enhancements to our ad tech capabilities such as improved AI and machine learning optimizations, ad rendering, new ad formats and new bidding methodologies. We spent the last year integrating the companies and are now finally building upon the integration with new products and services.

Speaker 2

The combination of the new demand solutions and the expansion of supply types are allowing us to focus on controlling what we can control to drive improved performance. Combined with a more stable macro environment for ad spend, we expect these new ad tech capabilities to be a growth driver for our business as we enter the second half Turning to the future, I want to spend a few moments highlighting our longer term growth drivers. I mentioned Single Tap earlier in my remarks as a strategic growth opportunity. But as we mentioned on prior calls, we are building alternative app distribution for app publishers. We We believe we're uniquely positioned with our on device technology, our expansion of publisher relationships and our operator and OEM relationships.

Speaker 2

We've launched our first alternative app distribution products, which we brand as DT Hub with 4 operators here in the United States, Leveraging our Aptoide investment and are generating revenue today. The carrier feedback has been impressive and supportive And it's very early days and not yet material to our overall results, but we are seeing incremental higher RPDs from devices engaging with our hub product, which is a combination of incremental in app purchase revenues and incremental cost per install revenues from helping publishers acquire more users. So the focus for us is driving more devices, more engagement and more downloads. We have not started leveraging our in app advertising assets into this alternative app distribution, but we do expect to add that as an additional revenue stream to this opportunity. And then all three of these monetization capabilities being drivers of RPD accretion into the future.

Speaker 2

We also believe the global regulatory environment will provide additional thrust to this vision. Many of you may have seen articles in the press talking about a concept of direct distribution of applications involving 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 a Spotify, Netflix or Epic Games can run advertising for a user to install its application. But rather than take the user to the Apple or Google Store after clicking on the advertisement, It would direct download the application to the device with its own unique version of an application outside of the traditional app stores.

Speaker 2

And to achieve this, there are some market pain points that need to be solved, such as making it easy for the app publishers to port their app 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 at all and 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 accomplish all of these new growth areas, allocating resources will be key. In addition to paying down our debt, we are allocating to these new investments with a new dedicated team focused on unlocking this future growth opportunity. And despite these investments, our cash operating expenses are flat from the June quarter last year as we were focused on running lean and efficient with our legacy products While simultaneously investing in new platforms and products for future growth and scale.

Speaker 2

And Barrett will provide additional details in his remarks. And before I turn it over to Barrett, I want investors to take away from our quarter that we had a very clean quarter and operationally we improved our business performance across key financial metrics and we're making progress against our longer term vision, but still have much work to do. Our strategy is to use that profitability to make investments against the future with new technology platforms, new ad tech capabilities, our hub and alternative app distribution and Single Tap. And with that, this concludes my prepared remarks and I'll turn it over to Barrett to take you through the numbers.

Speaker 3

Thanks Bill and good afternoon everyone. Overall, we were pleased to see results in the quarter ahead of our expectations for both top line and profitability measures. Revenue of $146,400,000 in the quarter was up 4% sequentially and down 22% year on year. With revenues improving sequentially across both segments of our business, on device solutions or ODS and our app growth platform or AGP from the March quarter. Within ODS, revenues were slightly up sequentially from the March quarter and down 17% to the prior year.

Speaker 3

However, as Bill referenced, while we saw softer device volumes in Q1, this impact was offset by improved U. S. Revenue per device, which exceeded $6 per device and increased both sequentially and year on year. As we've discussed in the past, while our content business has stabilized in Our ODS segment continues to experience headwinds from our prepaid content media business from a year over year comparison And we expect this grow over comp to run off by Q3 within the December quarter. On our AGP business, Q1 revenues increased 9% and declined 32% over prior year.

Speaker 3

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 AdColony business lines That we have discussed previously and we would expect these comps to fully run off by the back half of this fiscal year. I reiterate Bill's earlier comment that despite the near term headwinds, we're encouraged by the integration benefits we are seeing From the investments we're making to bring these businesses together and expect these moves to have a positive return on our future growth. Our consolidated gross margin was 47% in Q1, which increased from Q4 sequentially and was down from 50% in Q1 from the prior year. Improvements in margin sequentially were largely driven by the combination of quarterly product mix shifts Where we experienced an increase in the mix of certain higher margin products or those where revenues are recognized on a net basis. 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 opportunities.

Speaker 3

We remain disciplined with expenses and cash operating expenses were 42,000,000 Increasing 1% from prior year and represented 29% of revenues in the quarter. I'd highlight, 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 financial and back office systems across our assets, also developing new ad tech capabilities and strategic growth initiatives Bill discussed, namely within DT Hub, alternative app distribution and Single Tap. While the current and near term periods will incur increased costs due to the completion of these integrations and new growth initiatives, We expect both the efficiencies and the growth to begin to be reflected in our results as we move into calendar year 2024. During this investment phase, we will continue to remain highly focused on operating efficiency.

Speaker 3

Turning to our profitability, our adjusted EBITDA of $27,000,000 in the quarter increased $3,800,000 sequentially It was down from $52,000,000 in the prior year. Our EBITDA margin of 18% grew sequentially from 16% in the March quarter. And given the inherent operating leverage in our business model, we expect the active focus on expense measures and integration 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 $18,200,000 or $0.18 per share as compared to $38,700,000 or $0.38 per share in the Q1 of last year. As compared to prior year, we incurred greater interest expense driven by the rising rate environment on our outstanding debt.

Speaker 3

Our GAAP net loss was $8,400,000 or 0.08 dollars per share based on $103,500,000 diluted shares outstanding and compared to a prior year net income $15,000,000 or $0.15 per share on 102,700,000 diluted shares outstanding. Our cash balance at the end of the quarter was $58,600,000 after paying down an additional $5,000,000 in debt using cash flows from operation To further deleverage our debt position, cash flow and working capital were negatively impacted by the timing of revenues, which were weighted towards the end of the quarter and we expect to return to generating positive free cash flow in Q3. Our debt balance ended the quarter at 408,000,000 revolver in larger quarterly increments. We continue to be confident in our balance sheet and our capital position given our profit model, cash flow generation and access to low cost credit facility. Now let me turn to our outlook.

Speaker 3

We currently expect revenue for fiscal Q2 to be between $141,000,000 $149,000,000 And adjusted EBITDA to be between $25,000,000 $27,000,000 and non GAAP adjusted net income per diluted share to be between $0.13 $0.15 based on approximately 104,000,000 diluted shares outstanding and an effective tax rate With that, let me hand it back to the operator to open the call for questions. Operator?

Operator

Thank you. Thank you. We'll now begin the question and answer session. As a reminder, Today's first question comes from Omar Basokhi with Bank of America. Please proceed.

Speaker 3

Hey, guys. This is Arthur on for Omar.

Speaker 4

Thanks for taking the question. So my question is on Google's header bidding in I understand this is still in testing. But I was wondering if you guys could talk a little bit about some of the early signals we're seeing from the Initial integrations and what sort of learnings are you taking away from the initial testing? And probably just on the same note, like if we should be expecting any sort of revenue contribution impact for the car in the next fiscal year? Thank you.

Speaker 2

Yes, sure. I'll take that one. The short answer is yes. We're seeing positive impacts there and the strategy here is obviously to increase our share of voice And demand into the mediation platform, which then benefits publishers. And so having the ability to bring Google's obviously vast demand is a positive for us.

Speaker 2

Still very early days. I wouldn't characterize it as moving the needle. We're still kind of optimizing what we're doing around that, but it's absolutely something as we think as we go into next year, bringing more demand, bringing the credibility of Google Our publishers is something we think will be a benefit for us.

Speaker 3

Understood. Thank you.

Operator

Today's next question comes from Darren Today's next question comes from Dan Day with B. Riley Securities. Please proceed.

Speaker 5

Yes, good morning guys. Can you hear me? There was a little choppy in there.

Speaker 2

Yes, I think it's the operator's line.

Speaker 3

Okay,

Speaker 5

Great. So thanks for taking the questions. Bill, in the past, when you talked about Single Tap on these calls, You've been pretty cautious around kind of the path to material revenue generation. You've been pretty clear. You're developing it.

Speaker 5

Investors should be patient. I didn't hear you say that this time. Can we take that as a sign that you guys maybe have any more visibility than you have in past quarters Intuit becoming a material revenue contributor, or am I just reading too much into that?

Speaker 2

Yes, we continue to be excited about single tapping. There's no about that. It's not it was not material to our results in the June quarter, but there's a lot of catalysts that we're seeing into the future right now. And so, we're starting to see some excitement on the catalyst and the opportunity for scale to really improve on that. I will say it's take time, but the encouraging signs are starting to really show for us with the product.

Speaker 2

And the thing that I really want to remind investors about We have this embedded base of many, many hundreds of millions of devices and that's extremely difficult for anyone to replicate. And so having that high Amount of devices already out in the market at global scale and our focus to continue to grow that, something I think that advertisers, publishers, demand side platforms and all the people are going to integrate in this new app world is something I think they're going to want to take advantage of. I think important point I want to also make on this is the integration with the alternative app stores. There's going to be this increasing our view is there's going to be this increasing pressure On the duopoly of app stores today and that the ability to have a publisher get lower rates to pay They're going to want to acquire new users and Single Tap is absolutely an enabler to help make that happen to distribute non Google or non Apple builds out to customers. So that's going to be something that we're excited about and leveraging our existing hub capabilities to go do.

Speaker 5

Great. Thanks. And then just for the fiscal second quarter revenue outlook, the midpoint Is right around where fiscal Q1 revenue came in. Just any material difference between the on device versus the App growth platform segments, as far as the outlook goes or do you think pretty flat for both quarter over quarter?

Speaker 3

Yes. Dan, I think we think about in the Q1, we've seen we touched on the improvements we're seeing AGP business near 10% sequential improvement. We think there's a lot of opportunity there. We don't give guidance by segment, but we're seeing nice trends there. We touched on some of the device softness that It's sometimes hard to predict.

Speaker 3

I think we might see that for the near term. That's kind of embedded in our guidance. But I think the AGP business is growing nicely on a sequential basis. And I think that might be a continued trend we basis and I think that might be a continued trend we'd expect to see.

Speaker 5

Perfect. Thank you guys. Appreciate taking the questions.

Speaker 2

Thank you.

Speaker 6

Hey, this is Dylan on for Darren. Thanks for taking my questions. I wanted to sort of talk about Sort of RPD, in the U. S, you mentioned it's an all time high at $6 I think You sort of said 25% total supply. So I guess, I mean, what are sort of your strategies In going after growing that RPD on the international side, both with sort of higher monetization on the existing devices and sort of just capturing more devices in the different markets with some of the partners you've mentioned in the past.

Speaker 2

Yes, sure. What we're seeing right now is it was encouraging, is the diversification of our demand on our U. S. Supply. And I wanted I like that out particularly because now we're to a point where we're well north of 50% of The demand coming in to U.

Speaker 2

S. Supply from places outside the United States and a lot of international advertisers from Europe or APAC want to be on those devices. And so being able to bring those onto devices and then we can do strategic demand deals Whether that's carving out things like, weather, particular game type or social media or whatever happens to be, allows that international competition as well to come in. And so that allows us to achieve higher rates. So that's something that has been really encouraging for us.

Speaker 2

Now the key is for us how do we expand that other markets, whether that's in Europe or Latin America or what have you. So major focus area for us To replicate that success that we're seeing in the U. S. Outside, that's on the advertiser side. And then the other part would be on the product So historically, as you're well aware, we started with dynamic installs as a primary product.

Speaker 2

But as we've added so many other products to our portfolio, The product growth is also enhancing RPD. So the combination of this more demand on the platform combined with the more products on the platform is really helping drive those accretion and results.

Speaker 6

Great. Thank you. And sort of as a follow-up, with some of the investments you mentioned with Ad Tech And with other app stores, like how should we think about the timeline of that trade off of the incremental investment dollars that aren't really bringing in revenue, in terms of like the OpEx, sort of when do you start to see those contribute?

Speaker 2

Let me start on the revenue side and I will turn it over to Barrett on the OpEx side. Right now in terms of how we're thinking about it, in terms of the back end of Sure. Barrett mentioned in his remarks on AGP showing nice sequential growth. And our view right now is in the short term as we look at future quarters In the near term, AGP and these enhancements and things I mentioned in my prepared remarks will be drivers. And as we get into next year, I think you're going to see more things like with the hub and Single Tap and some of these other things ramping.

Speaker 2

It's how we think about it from a revenuebusiness And I'll turn it over to Barrett to talk about the OpEx and the investment side.

Speaker 3

Yes. Dylan, I think for your model, we touched on it in my remarks. We have we're incurring those expenses, some of those excess costs for a lot of The back office systems that we're integrating, bringing the companies together, those are our financial systems, those are things like our HR systems, As well as the investments in the teams that Bill touched on, those investments are in place today. I think we're going to carry those Expenses at kind of similar levels out through the end of the calendar year. And then We'll start to see those costs, those investments drop off and you'll start to see efficiencies in both our cost structure as well as The incremental growth in revenues begin to pick up as well.

Operator

The next question comes from Anthony Stoss with Craig Hallum. Please proceed.

Speaker 7

Hey, Bill. I wanted to ask about this Verge article where they were interviewing a Meta employee and they were discussing Would certainly sound like single tap functionality. If not Digital Turbine, who else could it be?

Speaker 2

Yes. It's hard for me, Tony, to comment on like things that came from somebody on future speculation. So I'm going to kind of stay away from that. But what I will say is that you're seeing mega cap tech players, Not just Meta, but others, now talking about alternative app distribution. And you're seeing in specifically in Europe now that the Digital Markets Act is coming into reality and you're seeing, for example, side loading applications on things like iOS 17, it was really opening up a lot of interest from mega cap players, and I'd highlight Amazon, I'd highlight, with the Microsoft Activision Blizzard deal getting done as an example, Meta was in article you're referencing.

Speaker 2

So there's a lot of interest you're starting to see right now. But I think the key is that, okay, it's one thing to have the interest and have the want be able to do this, the question then becomes how. And so when you think about how the apps actually get ported from different versions, How you manage the internal kind of plumbing of the apps, how you make it a friction free experience if it's not a store, it's being in effect direct distributed down to you, how do you curate that on the device with your telco and OEM partners. Those are all things that we've got unique advantages to go to. And so when I mentioned in my comments doing it directly through Hub or doing a white labeling with other large players.

Speaker 2

I think we're in a pretty unique spot here to really capture on This wave of alternative app distribution. And so it's something from our perspective. I think about CTV a few years ago and how CTV is today. I'm going to say about alternative app distribution is kind of in its early innings today and something as the regulations and some of these other large

Speaker 7

International carrier launches, Literally, the on device segment is weak in the U. S, not a shock to anybody. Is there anything or new carriers that you're planning on launching that will help I mean, I think in the past you used to highlight the percent of the international markets covered and then you guys haven't really done that lately. I'm just if you could update us that would be helpful.

Speaker 2

Yes, absolutely. I did make a comment in the prepared remarks around your strong global pipeline of expanding our telcos and OEM relationships. And so I kind of draw it out. We're not going to name names here on the call for obvious reasons, but we think we have a lot of optimism right now in terms of The ability to continue to expand our addressable market here.

Speaker 5

Got it. And if

Speaker 7

I can slide in one for Barrett. Normally your December quarter is up pretty Any thoughts on if you expect it to be more muted again this year like it was last?

Speaker 3

Andrew, that's December? Yes. Tony. Yes, so December was an odd quarter last year, right? We kind of markets changed quite quickly.

Speaker 3

I think as we're seeing things now, I would like to expect that we see closer to a More normalized seasonal trend. I don't not sure we're back to 'twenty one levels, but yes, we would Expect to see some seasonal uplift for the holiday quarter. With Aptoide?

Speaker 2

Yes. We continue our technology partnership has been great. Their techs integrated into our hub product today and think about how we can get after the space And really have some first mover advantages. Thanks guys. Appreciate it.

Speaker 2

Thank you, Tony.

Operator

At this time, we are showing questioners in the queue and this does conclude our question and answer session and answer session. I I would now like to turn the conference back over to Stone for any closing remarks.

Speaker 2

Yes. Yash, thanks for everyone joining the call today. We'll look forward to reporting on our progress against all the points that we made on the call. And we'll talk to you again on our fiscal 2024 Q2 call in a few months. Thanks and have a great night.

Operator

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

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