Digital Turbine, Inc.
Q3 2021 Earnings Call Transcript

Published: 3 Feb 2021

[Operator:]

Good day and welcome to the Digital Turbine Reports Fiscal 2021 Third Quarter Results Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would like now to turn the conference over to Brian Bartholomew, VP of Capital Markets. Please go ahead.

[Brian Bartholomew:]

Thanks Matt. Good afternoon and welcome to the Digital Turbine fiscal 2021 third quarter earnings conference call. Joining me on today's call to discuss our results are CEO, Bill Stone; and CFO, Barrett Garrison. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. These forward-looking statements are based on our current assumptions, expectations, and beliefs including projected operating metrics, future products and services, anticipated market demand, and other forward-looking topics.

[Bill Stone:]

Thanks Brian and thank you all for joining our call tonight. Before getting into my prepared remarks on our business results and commentary, I want to give a shout out to our global Digital Turbine team who are also our shareholders. And while investors may only hear from Barrett, Brian, and myself, I want all of you to know that these quarter-after-quarter positive results don't just magically happen. People make them happen and the team generating these results it's the best team I've been around in my nearly 30-year career. Working virtually in a pandemic for almost a year now is a challenge for all of us and our team continues to hustle and crush it while maintaining amazing focus on our customers, partners, and driving positive business outcomes. I could not be more proud of them and you should be too. Thanks DT team. I'm going to break out my prepared remarks into three areas. First, I'll summarize our quarterly results. Second, I'll provide some real-time operational updates on many of the exciting new partnerships and initiatives underway. And finally, I'll end with some commentary about the strategic value of the platform and where we're going into the future. To close out our fiscal 2021 third quarter, we continue to build out on our breakout momentum from the first half of the fiscal year with record results across the board. We had $88.6 million in revenue which represented nearly 150% annual growth on an as-reported basis and over 70% on a pro forma basis. Higher gross margins and accelerating operating leverage enabled us to turn the strong revenue growth into more than four times the EBITDA compared to the EBITDA generated a year ago 278% growth in non-GAAP earnings per share and more than 3x the free cash flow from a year ago as we continue to benefit from network effects of our platform and economies of scale.

[Barrett Garrison:]

Thanks Bill and good afternoon everyone. We are very pleased with our Q3 financial performance and execution, delivering another record quarter for Digital Turbine. Before I cover the performance in the period as a reminder, our content business includes primarily results from our acquisition of Mobile Posse earlier in the year. I will occasionally reference results on a pro forma basis where appropriate to provide additional insight into the underlying trends when comparing current performance against prior periods.

[Operator:]

We will now begin the question-and-answer session. Our first question comes from Darren Aftahi with ROTH Capital Partners. Please go ahead.

[Darren Aftahi:]

Hey, guys. Thanks for taking my question. Hope you are well. Very nice quarter. A few if I may. On the device side looks like you guys have topped 60 million devices for two quarters in a row. Can you just kind of share what's driving that significantly higher level of relative penetration? Is that Samsung? And then just in terms of -- is that kind of a new consistent run rate? And any reason that number would dip back down? Second question. You talked about new carriers later in, I guess calendar 2021, for content this year. Just kind of how do we think about scale? And then second one, any insight into kind of cross-pollination of the media business to other domestic carriers that don't currently have it on their platform? And then last one last two quarters you guys have talked about international. I think you said 200% growth this year. I'm curious what's the relative mix of foreign brands reaching US consumers versus US brands wanting to reach foreign customers? Thanks.

[Bill Stone:]

Yes. Hey, thanks, Darren. I appreciate it. So to, kind of, take your questions in order. Yes, as far as devices go, the vast majority of the growth was internationally. I'd refer to U.S. as flattish. We're seeing a little bit of bump as 5G is getting going in the U.S. but I'd say the predominant and the vast majority of the growth is coming from our international partners. Obviously Samsung is at the top of the list, but I highlight our other partners as well that are continuing to perform well like América Móvil and Xiaomi and some of our other partners in addition to Samsung. As far as your second question on the comments around the content business and our new Tier 1 partners. Yes, we expect those to launch later this year. I want to be a little bit hesitant about not making any forward-looking statements on their behalf. But our expectation is that this should materially influence our DAU counts in a positive way. This is something we've been working on for a while and now we've got some commitments to get going with some of our Tier 1 partners. So we're really excited about that. And I think your third question was around cross-pollination with our products. And, yes, we continue to make progress there, nothing specific to report today. I just would just characterize that could you have strong and deep relationships with our partners. And your last question was really around international demand in the U.S. And, yes, what we're seeing right now is just ramping. And in your point we're probably seeing 30%, 40% of our App Media revenues are coming from international partners that want to be here. And it's just a classic case of scale begets scale. And as we continue to show ROIs for our demand partners they spend more and more with us. And then we get more and more partners on the platform given that we're such a miniscule part of the broader mobile ad spend from a global ecosystem perspective. So I think we've got a lot of room to run there. And the key is just continue to add really good quality supply around the world, which we're focused on. But I think that international demand is something that's here to stay.

[Darren Aftahi:]

Great. Thank you.

[Operator:]

Our next question comes from Tim Horan with Oppenheimer. Please go ahead.

[Tim Horan:]

Hi, guys, a great quarter. Your active daily users, can you give us a sense of where you think that could be three, four years from now? I know you don't want to talk specifically to your customers or some order and magnitude of what you're talking about here with daily active users. Are we talking about them doubling or tripling or being up tenfold in the next three, four years? I know it's a little tough to call. And then secondly, where do you think the RPD pricing can go at this point? I mean, it sounds like it was up 25% in the United States. And -- but I think you had pre-booked a lot of this pricing six months ago. Maybe you can talk about what the pricing was like in the quarter versus what you're seeing on the new spot markets, or any kind of indication where you think that can trend over time? Thank you.

[Bill Stone:]

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

[Tim Horan:]

And then just a clarification on the new customers are they the same type -- the same type of size as a T-Mobile would be? Are you adding like one type customer like a T-Mobile? Or are you adding a couple or just anything of color?

[Bill Stone:]

Yes, I will just refer you -- yes, without getting into any hot water on forward-looking statements let me just say Tier 1 partners.

[Tim Horan:]

Thank you.

[Bill Stone:]

Sure.

[Operator:]

Our next question comes from Austin Moldow with Canaccord. Please go ahead.

[Austin Moldow:]

Hi. Thanks for taking my questions. First one is on SingleTap. What does the product look like now compared to the historical social media integration? And how does the pricing work on these newer SingleTap relationships?

[Bill Stone:]

Yes. Hey, Austin, as far as SingleTap goes in terms -- as you're well aware we have two ways that we look at revenue on SingleTap. One, as you referenced is with our social media partner. It's basically a prepayment if you will on new device sales. So those revenues will fluctuate with device sales. And it's been relatively consistent over time. But what's really ramping and what we're really excited about is a SingleTap for everybody else. And what we're seeing right now is the ability through leveraging our demand side platform to be able to go out and arbitrage in the marketplace. And what I mean by that is we're aware of devices that have SingleTap capability. The rest of the market is not. And given the improved conversion rates that allows us to buy advertising at very competitive and better pricing given we know we're going to get better conversion than if somebody tries to use the regular Google Play flow. So that's something that has really just been a ramp and scale game for us and we're going to continue to invest materially there. And as I referenced in my remarks, we're seeing really nice positive growth there but our aspirations are not just for seven-figure months. Our aspirations are to continue to put zeros on those trends.

[Austin Moldow:]

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

[Bill Stone:]

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

[Austin Moldow:]

All right. Thank you very much.

[Operator:]

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

[Allen Klee:]

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

[Bill Stone:]

Yes. Allen, absolutely we can do that. That's a decision that the mobile operator or the OEM will make is if they want to push the software out to their base through a maintenance release they can absolutely do that and it would allow the opportunity for more content products to hit the entire base or if they just want to do it for new devices that come on to the network they can do that as well. So that will be their decision they make. From our perspective, it's just a technical implementation issue for us but it's absolutely something we can do.

[Allen Klee:]

Great. And then on your content application internationally, could you maybe just give us a generic example to understand that, if you have a new customer internationally kind of what happens? When you first get them kind of how many apps maybe people are bidding for? And what that could look like in a year or two or the amount of devices that they put it on? How do you -- how do we see the path of how this grows or potentially grows?

[Bill Stone:]

Yes. So there's really three drivers of the growth Allen. One will just be continuing to put the software on more and more devices. That's the equivalent of just building more stores right? And then the second part is same-store sales or how do you get more on every device that you're launching. And so, on the second part we do that through two ways. One is we continue to add products onto the partners we're with. So for example Samsung in Brazil we started out with our out-of-the-box Wizard where you select the apps that you want, as part of the setup process. Then we added dynamic installs to that. And then we've recently added SingleTap to that. And so as we add more products that obviously increases more RPD. And then the final driver is just media demand that I referenced in my remarks where we continue to see now our international media partners wanting to be in geographies outside their home geography, and then spending more money which therefore increases the bid rates to get on to the device. So the combination of more devices plus more products, plus more media partners is really how we see ourselves ramping our international business and we're doing all three right now.

[Allen Klee:]

Okay. Thank you.

[Operator:]

Our next question comes from Jon Hickman with Ladenburg. Please go ahead.

[Jon Hickman:]

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

[Bill Stone:]

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

[Jon Hickman:]

So just one more follow-up. So are you getting like -- are you still having to chase these carriers? Or are they calling you?

[Bill Stone:]

Yes. Well internationally as you know it's a little bit different because here in the United States the carriers have more control over the device. And so the relationship with the mobile operator is more important than it is with the OEM. Outside the United States the relationship with the OEMs are more important because in many markets especially in Asia/Pacific the carrier's just selling SIM cards. The OEM actually is deciding how the device is configured and what types of applications and content they want on the device. So our relationships with the OEMs matter more outside the United States than they do inside the United States.

[Jon Hickman:]

So are they calling you? Or are you chasing them?

[Bill Stone:]

We're always calling people and we got people calling us. So it's a 2-way street.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Bill Stone Chief Executive Officer for any closing remarks.

[Bill Stone:]

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

[Operator:]

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