Digital Turbine, Inc.
Q3 2019 Earnings Call Transcript

Published: 5 Nov 2019

[Operator:]

Good day, and welcome to the Digital Turbine's Second Quarter Fiscal 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.I would now like to turn the call over to Brian Bartholomew. Please go ahead.

[Brian Bartholomew:]

Thank you, sir. Good afternoon and welcome to the Digital Turbine fiscal 2020 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 a discussion of the Risk Factors that could cause our actual results to differ materially from these 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, I will turn the call over to Mr. Bill Stone.

[William Stone:]

Thanks, Brian. And thank you all for joining our call today. Our stated goal has been to build in scale a profitable growth business. With this objective in mind, we continued our strong start to fiscal 2020 with our second quarter results setting all time quarterly records for revenue, gross profit, EBITDA and device installs.I’m going to break out my prepared remarks into three areas. First, I will summarize our quarterly results. Secondly, I will provide some real time operational updates on many of the exciting new partnership and initiatives underway and finally, I will end up with some commentary about the strategic value of the platform and where were going into the future.To close out the September quarter, we finish with $32.8 million in revenue, which represented 37% annual growth. I was even more pleased with our 57% growth in non-GAAP gross profit. This record gross profit combined with continued effective operating expense management enabled the Company to achieve $4.5 million in EBITDA, $5.7 million in free cash flow and non-GAAP earnings per share of $0.05 during the quarter.Barrett will provide some more specifics on the financials, but from an operational perspective, I was really pleased with our Revenue Per Device performance or RPD driven by strong underlying advertising demand and incremental contribution from our newer platform products. Revenue per device is a core health metrics of our business and our RPD with our four longest tenured U.S. based partners once again increased more than 30% year-over-year.As you have heard me say on prior calls diversification is a major strategic priority for our Company. Diversification of partners, business models, products, geographies and advertisers. We continue to have success with those for tenured U.S. based are partners with whom we grew revenue healthy double-digits year-over-year despite a modest decline in a total number of devices activated.However, revenues with other partners outside of this group more than tripled year-over-year and represented approximately 24% of our total revenues in the quarter, compared to less than 8% in the prior year.Also our revenue from new products outside of the dynamic installs grew 32% sequentially and represented 18% of total revenues during this quarter. Although this marks solid improvement, not satisfied with the results as the opportunity for these products are enormous and the market reception has been tremendous.Now turning to the forward outlook, I want to provide some commentary on how we are positioned for continued growth across each of our growth levers. Devices, new products and media. First on devices, we set a quarterly record with more than 36 million new devices on-boarded for platform globally.In the U.S. we continue to see a flattening out of the broader smart phone market during the September quarter, total devices activated with our largest four partners were basically flat sequentially. We expect this trend to continue over the next several quarters as elongated upgrade cycles are likely offset by new flagship device launches along with expanded 5G availability, promotion and adoption.Given the flattish U.S. trends at the moment, the overwhelming majority of our growth in devices occurred internationally as we ramp new partners such as Samsung. Our partnership with Samsung is now moving into the next phase as we continue to install our software onto more devices, and more markets, and more products.We began with two devices across 12 countries in the March quarter, have expanded the footprint to more than 50 countries today and expect to be in more than 20 different Samsung device models across more than 70 countries over the next few months. And we also have reached an agreement with Samsung to launch single tap which we anticipate beginning in 2020.We also anticipate launching with Telefonica this fiscal year, which is a direct result of our Samsung partnership. For those U.S. investors not familiar with Telefonica they have more mobile subscribers than AT&T and Verizon and focused primarily in Europe and Latin America.And as you have heard me mentioned on prior calls expanding devices beyond smart phones is an exciting opportunity for us and natural extension of our offerings. We have made some material progress on our TV offerings as we see the secular tailwinds of Android TV and other over-the-top screening offerings gain in popularity.We expect to begin to see revenue from our TV efforts in 2020 with a variety of Tier 1 partners. All-in-all, the prospects for us to continue to expand the reach of our platform and grow our business with additional device types like television look very promising.On the new product front our revenues derive from non-dynamic install products grew 32% sequentially with new products such as single tap, wizard, notifications and our media news hub product all showing healthy sequential growth. In the June quarter they were collectively 15% of revenue and for this past quarter they were 18% of our total revenue.And while the strong growth is positive, I’m not satisfied with those results as our internal expectations are higher. We need to improve our ability to scale these products as the opportunity continues to be massive, we have great product market fit in solid commercial models to not just drive incremental revenue growth, but also expand overall profit margins for the business.This is a major focus area for us and we have made some organizational tweaks to better refine our focus and improve our execution as delivering results against our core dynamic install business has cannibalized the management focus away from scaling new products. I'm happy to report that these changes are already yielding improved new product in international performance just over the past 30 days.And on the media front we are currently very focused on scaling our international demand to meet a significantly greater supply of international devices while continuing to see international application developers that want to be on U.S. devices.Our international media demand grew 58% from last year and now accounts for 32% of revenues across our U.S. and international operator and OEM partners. We are continuing to work hard and where necessary strategic resources to improve our international revenue per device and ensure that we scale the partnerships in infrastructure effectively to capitalize on enormous opportunity in front of us.Here in the United States many of you saw the Disney Plus and Verizon news and I’m pleased to announce that we will be a partner delivering that application to android devices for the upcoming holiday season and beyond. We are proud that Verizon trust us to handle distribution and management of the very high profile applications such as Facebook, Netflix, Apple music and now Disney.In addition, to Verizon were just beginning to work directly with Disney on distribution of our applications to other partners around the globe. We continue to work with well-known U.S. brands such as Twitter, Snap, Uber, Netflix and so on that are focused on expanding their international presence and emerging international brands such as Alibaba, Tick-Tock and Tencent as the look to expand their presence here in the United States.And finally before I turn over to Barrett, I want to highlight now that we are operating at scale. It has opened up even more material opportunities for our business with many of the largest players in the TNT space.Our business is growing both the top and bottom lines at a nice 30 plus percent rate, but our number one opportunity and challenge is to grow it not with just these positive comps against prior quarters or prior years, but grow it against a massive addressable market opportunity set. That is where we are focused.And with that, this concludes my prepared remarks and I will turn it over to Barrett to take you through the numbers.

[Barrett Garrison:]

Thanks Bill and good afternoon everyone. We are pleased with our results delivered in the second quarter, 37% top-line growth along with expanding profit margins enabled us to generate adjusted EBITDA of $4.5 million and free cash flow of 5.7 million during the quarter.As a reminder, my comments will refer to comparisons on a year-over-year basis and resulting for continued operation unless other note. Revenue of 32.8% million in the quarter was up 37% versus the prior year and benefited from the stream across all three of our focus platform growth drivers device logins, product expansion and media demand.While we are excited about the continued top-line growth in our business, I want to make sure to highlight our expanding profit margin. Non-GAAP gross margins increased nearly 500 basis points year-over-year to 39% in the quarter, enabling us to generate $12.6 in gross profit, representing a growth to 57% year-over-year.Our gross margin expansion is largely driven by the successful diversification of partners and products on the platform. Overall, we are pleased with the overall experience in gross margins in the business over the last several periods. We want to remind investors that our gross margin rate can be sensitive from quarter-to-quarter based on changes and partner mix and revenue type.We are also continuing to make significant progress expanding our operating margins, as we scale the platform. Total operating expenses were 9.2 billion during the second quarter as compared to 7.2 million in the prior year.Cash operating expenses totaled 8.1 million represent an increase of 27% year-over-year considerably below our revenue and gross profit growth rates of 37% and 57% respectively over the same period. It is important to note that this operating leverage is being achieved even as we make a number of focused investments to support new partners and products to drive future incremental revenues on the platform.Now turning to net income and cash flow. We achieved non-GAAP net income of 4.1 million or $0.05 per share during the quarter. Adjusted EBITDA was $4.5 million in the quarter and EBITDA margin is roughly doubled to 14% from 7% in prior year quarter. Free cash flow totaled 5.7 million as compared with 1.6 million in a year ago period.Turning to our GAAP net income as a reminder, included in our GAAP results, we see the impact of changes in the fair value of liabilities resulting from our recently retired convertible notes that is highly sensitive in Company’s stock price which increased significantly in the quarter.For this reason, among others, we offered the previous mentioned supplemental non-GAAP adjusted net income measure, which we believe is more indicative of the recurring core business operating results. Our GAAP net loss from continuing operations for Q2 was 1.3 billion or $0.02 loss per share based on 83.9 million weighted shares outstanding.Compared to a second quarter of 2019 net income of 2.1 million or $0.02 per share. Included in our GAAP net income for the quarter is a recorded loss of 4.5 million from the impact of the change in fair value of derivative - is connected to the outstanding warrants issued related to our previously retired convertible notes.We expect these remaining 1.1 million warrants outstanding to be retired soon as the expiration window is now less than year out. With respect to the balance sheet, the positive cash flow trend that I noted earlier contributed to a much stronger balance sheet at quarter end.We finished the quarter with more than 25 million in cash and zero debt on the balance sheet and we continue to feel very comfortable with our balance sheet and access to capital at this time. Now let me turn to our outlook. We currently expect revenue for Q3 to grow between 37 million and 38.2 million and expect adjusted EBITDA to grow to between five million and 5.5 million.With that, let me hand it back to the operator to open the call for questions. Operator.

[Operator:]

[Operator Instructions] Our first question comes from Mike Malouf with Craig Hallum. Please go ahead.

[Michael Malouf:]

Great and thanks for taking my questions. Well done this quarter guys. I’m wondering if you could just dig into the Samsung opportunity, it seems like you are having a lot of success driving that one. You talked about 20 devices over 70 countries here pretty soon. Can you give us a sense as you look into calendar 2020, how many devices that you think that you are actually be on and can you give us a sense of what kind of products you expect to eventually have on all these front?

[William Stone:]

Yes, sure, thanks Mike. As we think about the Samsung partnership, we are excited for many reasons. The first reason is you referenced is more products, more devices, more markets. The second reason we are excited is the opportunity it opens up for other operator relationships supports globally, we talked Telefonica briefly and then third one is how it really helps us with the international media demand having Samsung is an anchor tenants to provide inventory to. So those are the high level, the three reasons we are excited about Samsung.As it relates to the specific comments made in my prepared remarks, we continue to expect a steady drumbeat of positive momentum the September quarter was better than the June quarter better than March quarter and we expect the December quarter and future quarters to continue to build on that momentum as we add more devices in more markets.People know publicly Samsung moves a couple hundred million plus devices, our goal is to eventually get on to all those at some point in time, we don’t have a target on that in terms of this quarter in 2020. But we are making nice steady progress in working with Samsung as we plan out the acceleration of our efforts globally with them.And so our expectation is it will be not just in more markets, but also more devices in existing markets. As I referenced single tap is a product extensions from our core offerings with Samsung, we would expect to continue that additional products with them as well and we are talking with them.So that is how we kind of think about the opportunity and it is similar as we saw with Verizon in the past, AT&T in the past, [Cricket] (Ph) with cellular and so on, now with track phone. We would expect Samsung to follow those kind of similar trajectories with a nice study drumbeat quarter-over-quarter.

[Michael Malouf:]

Okay, great and then just a follow-up question with regard to Disney, it sounds pretty good opportunity here for you is this going to go just on new installs for new phones as you provision the phone or Verizon provisions the phone or are you going to be installing this on basically existing phones you are going to take ignite and then star Disney Plus on a phone that is already been provisioned.

[William Stone:]

Yes. Unfortunately I can't comment on the plans or forward-looking statements that Verizon may or may not do that is probably not my place. I will say technically we can do it, it is not a technical issue or turbine issues, it is the decision how Verizon intends to go to market with the product and service and I don’t think asking publicly and talk about that.

[Michael Malouf:]

Okay, great. Thanks for the help guys.

[Operator:]

Our next comes from Darren Aftahi with Roth Capital. Please go ahead.

[Darren Aftahi:]

Hey, guys. Thanks for taking my questions and nice quarter. Can we circle back your measurement partners I think in particular last quarter you said you guys have been making traction which branch - I’m just kind of curious if we could get an update on that.

[William Stone:]

Yes, sure. Yes so right now we are in the process of implementing, we have made affix with our software and branches software to be able to enable deep linking capabilities onto consumer devices. So in other words I check ESPN sports core I can directly link to the app to get that. So we have now worked to branch variety a software issues to put that on a marketplace, now it is just matter of us deploying it across our partners here in the United States and we are in slate of doing that, expect that to happen over the next few months.

[Darren Aftahi:]

Great. And then your comments on TV, can you just walk us through a little bit go to market strategy there and is this something that potentially could work on things outside the Android eco system.

[William Stone:]

Yes. As we think about our Company and our products. I know historically we have taken a very smart phone centric view of the world, because that is where the volumes are now we are increasingly seeing the set-top box been increase replacing over the top offerings where that is an android or other operating systems that may exist around the world.Our platform is architected to be able to support those in addition to android, there is nothing magical about android. We see android is a natural given we are already on that and there is a lot of momentum behind that and while there is a lot of momentum around this broader space.And just over the top offerings in general a lot of apps recommendations and management and media management and other kind of operational things have to go with the television, very similar it is just another screen to smart phones. So it is a natural extension for us. And so were excited about a number of opportunities that we got, have made some pretty major progress over the past couple of quarters as we look into 2020, this is a nice natural adjacency for us to start to get into.

[Darren Aftahi:]

Great. And then last one if I may. Form a couple I wouldn’t call competitors, but just peers in the space maybe there has been some weakness in advertising demand, I’m just curious that if you are seeing any of that either domestically or abroad.

[William Stone:]

Absolutely not, from what we are doing, we have got tremendously media demand out there, we saw some of those similar headlines from companies that are doing different things than what we are doing, so I can speak to those companies or their offering, I can just speak to our media demand as we look into the holiday quarter we are very excited about it here in the U.S. and internationally.Our platform is really are operating at scale right now. I think the question for us is going to what is going to happen to device volumes and so that is the one for us that we are more focused on. But the immediate demand has been really strong especially on high end devices.

[Darren Aftahi:]

Great. Thanks Bill.

[Operator:]

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

[Austin Moldow:]

Hi, thanks for taking my questions. My first one is on Q4 revenue guidance. Your range suggests kind of a somewhat meaningful slow down sequentially, just wondering if you can elaborate on what is being incorporated into your projections?

[William Stone:]

Let me do this Aus and let me take kind of macro headwinds and tailwinds that we are seeing and I will let Barrett comment a little bit more on the specifics here. As we look at the December quarter, right now most everyone is well aware, there is six fewer days of the holiday season of this year compared to last year that Black Friday is almost a week later on. So we all what kind of impact that is going to have, it is just properly conservative around that if there is six fewer days than last year on that.And second one I will touch on the device forecast is well in terms of what is going to happen in these markets, so we want to make sure that we are pretty conservative on that. On the tailwind side we have got a lot of exciting new partnerships and comps that we didn’t have before.I already touched on the media demand. So I think at macro level there is ins and outs on it, but it is important for us to be prudent on some of things that are somewhat on controllers that we don’t know. But with that I will turn it over to Barrett for any other color.

[Barrett Garrison:]

Yes Aus and I think the only thing I would add there is a clarifier point on launches that we had last year that we are lapping and Bill and I we think it has been prudent the plan out and guided out on things that are known. And so many while we have many partners that are launching or have launched that are growing very rapidly. We focused on the known items such as Bill mentioned obviously a lot of growth, we also have line of site to device volumes near-term, but we want to understand all of these season plays out and so all of those things combined has kind of compiled our guidance for Q3 rather fiscal year.

[Austin Moldow:]

Got it and I know you talked about your four major U.S. carriers sort of flattening out that device growth, those device should kind of flatten out over the next couple of quarters. Can you maybe comment on what kind of RPD you are seeing from them, is there still room there to expand RPD to continue to the top-line growth for those customers?

[William Stone:]

Yes. So Austin that RPD that the help metric and as mentioned in my prepared remarks, we saw nice improvement on revenue per device 30% year-over-year with those guys. Despite flattish device volumes and so as we get the new product scales and strong media demand, you know it is something we expect to continue to see improved performance there. So in 5G and higher end devices in the sense things will also be tailwinds against that.

[Austin Moldow:]

Okay. And my last question is on investing in the product, so in the quarter there was nice expense leverage, but just wondering if you can talk through kind of what you are philosophy is in terms of you know realizing some expense leverage and you know whether you think you are investing adequately or where you might invest more for further invitation and sort of extending the runway for growth.

[Barrett Garrison:]

Yes Austin, I will start and let bill add in color. I would start with the fact that we are taking kind of a measured approach to it, as we got a number of growth initiatives on the horizon and we are focused primarily building supporting those products and those product launches and so if you think about where we centered our resources really the incremental resources they are around our salesforce and sales support teams and then our technology teams.So in order to launch driver demand expanded partners as well as new products that we are either launching or bringing to market in the near future those are the things we have been focused on. When I mentioned measured approach, we have seen a lot of growth, we very excepted about the inherent operating leverage in the business and we missed our investment, the teams would be able to drive some efficiencies that can somewhat offset or amass the increased investments we are making for future growth.

[Austin Moldow:]

Got it. Okay, thanks very much for taking the questions.

[Brian Bartholomew:]

Thanks Austin.

[Operator:]

Our next question comes from Lee Krowl with B. Riley FBR. Please go ahead.

[Lee Krowl:]

Great. Thanks for taking my questions guys. First one you guys kind of alluded to some changes either strategically or headcount wise as it relates to scaling the new products, curious if you guys could provide a little bit more detail on what changes you guys made and kind of what that translates to you guys in terms of either execution or revenue growth?

[William Stone:]

Yes, sure. So we have made a few strategic investments and really just matching a lot of these broader strategies we are doing around diversification. So specifically we made some pretty material investment in our international sales force and our international channel partnerships, we are working with different advertising and media agencies in many overseas markets specifically in Europe and Latin America to really help increase our focus a lot of device growth is coming from those areas.And those really partner don’t want to just be in those areas, they also want to be in the U.S. as I referenced in my comments. So we are making some material investments there. Also in our technology we continue to invest in our technology pretty nice clip to help go against opportunity, but with discipline as Barry just mentioned in his prior remarks. But specifically we continue to invest in our technology stack and ramping these new products, so actually those are the two primary focus areas for us.

[Lee Krowl:]

Got it and then specifically on these, did it contribute to revenue in the quarter and then I guess kind of tailing it back to findings with single tab, is there kind of chicken and the egg problems associated with the news product or is there a way to scale revenue in that business where you don’t have to go out and push so aggressively to drive kind of the monetization element of it?

[William Stone:]

Yes so, the new subs did contribute revenue in the quarter. I wouldn't consider it material revenues, but it contributed revenue, it is ramping and it is going up into the right direction, which we like. One thing I’m really been excited about the news hub product is we preloaded other news product to other partners as we have done this throughout the years and our news product is materially better retention rates, than what we have seen from other products that have been loaded on.So in other words on APPS at our news product week did in August looking at the results here in November and the percentage of people that are still engaging with the products is off to a good start that is a big drivers, we think about this longer term as a recurring revenue story for the business. So we are off to a good start, we are heading the right direction, but you know not yet anything material to get too excited about.

[Lee Krowl:]

Got it and then can you just remind us, as you have these new products kind of come online, maybe just talk to the revenue or excuse me the margin profile of these products relative to the install product?

[William Stone:]

Yes, Barrett do you want to take that one?

[Barrett Garrison:]

Yes. Sure, so I think we have said this before what we liked about new products is in each individual case they contribute at or above aggregate gross margin that we are experiencing today. So those can - overtime. And I’m talking about fewer gross profit, if we think about operating margin we are investing important dollars for those - to get those programs launched, but from a gross profit standpoint they create to the aggregate margins that we see today.

[Lee Krowl:]

Got it. Thank you for taking my questions.

[Operator:]

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

[Jon Hickman:]

Hey Bill, thanks for taking my questions, nice quarter. So could you talk a little bit more about the Telefonica, when should we expect that to launch?

[William Stone:]

Yes. So we expect that to be in the fiscal year for us, we are working through a variety of kind of just coordination efforts between Telefonica, Samsung and ourselves. And so it is in the I would call the go-to-market process, right now, so I would expect to see that show up this fiscal year.

[Jon Hickman:]

Okay and then with - I couldn’t write as fast you were talking. You said that you were about to launch single tab with somebody new or across Verizon.

[William Stone:]

Yes. So in our master Samsung agreement, we signed an addendum to add single tab to the portfolio of products with them, so we are working through them right now on what does that look like from a go to market perspective.

[Jon Hickman:]

So that also you think will occur this fiscal year, we will get that.

[William Stone:]

I think in our prepared remarks, I said expected in 2020, I don’t want to put a specific timeline on it, but we have reached agreement on what it looks.

[Jon Hickman:]

Okay and then with the Disney thing and the Samsung thing and the new products, as you go into the March quarter. I know the March quarter is always kind of the weaker quarter from the advertising standpoint, but you can kind of growth through that normal downturn or how much of a fall off, can you give us any opinion there?

[William Stone:]

Yes. We are not providing any guidance specifically on the March quarter, in terms of media demand there is defiantly nothing in the media demand or landscape right now that has us concerned. We are seeing tremendous demand for our part products and we just to go out and get it and we talked about the resources and scaling to make that happen.

[Jon Hickman:]

Okay. And then one more question. In your prepared remarks did you tell us what the revenue per device was for the four carriers in the U.S.?

[William Stone:]

I don't believe we broke out a specific number other than in the prepared remarks, it was up 30% year-over-year.

[Jon Hickman:]

Yes, okay. thanks, really nice quarter.

[William Stone:]

Thanks Jon.

[Operator:]

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

[William Stone:]

Great, thanks everyone for joining our call today. We look forward to reporting our progress against all the points we made on today's call and we will talk to you again on our fiscal 2020 third 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.