Bill Stone - Chief Executive Officer Barrett Garrison - Chief Financial Officer Brian Bartholomew - Senior Vice President of Capital Markets.

Good day everyone and welcome to the Digital Turbine, First Quarter Fiscal 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please also note, today’s event is being recorded. And at this time I would like to turn the conference call over to Mr.

Brian Bartholomew, Senior Vice President of Capital Markets. Please go ahead..

Thanks Jamie. Good afternoon and welcome to the Digital Turbine, fiscal 2020 first 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 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. 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..

Thanks Brian and thank you all for joining our call tonight. Our stated goal has been to build and sustain a profitable growth business.

With this objective in mind, we had a very strong start to our fiscal 2020 with our first quarter results, continuing to set all time quarterly records in our continued operational revenue, gross profit, adjusted EBITDA, non-GAAP net income, earnings per share, device installs and U.S. revenue per device.

I'm going to break out my prepared remarks into three areas.

First, I’ll summaries our quarterly results; secondly, we’ll provide some real time operational update on many of the exciting new partnerships and initiatives underway, and finally, we’ll end with some commentary about the strategic value of the platform and where we are going into the future.

To close out the June quarter, we finished with $30.6 million in revenue, which was a 38% annual growth rate. I was even more pleased with our 78% annual growth in non-GAAP gross profit on the strength of 40% gross margins in the quarter.

Record gross profit combined with continued affected operating expense management enabled the company to achieve over $4 million in non-GAAP net income, EBITDA and free cash flow during the quarter. We also reached a new high for quarterly non-GAAP EPS at $0.05 per share.

Barrett will provide more specifics on the financials, but from an operational perspective I was very pleased with our revenue per device performance or RPD, driven by strong advertiser demand and incremental contributions from new products. Our RPD with our four largest U.S.

based partners increased 38% year-over-year and currently exceeds $2.75 per device. As you've heard me say on prior calls, diversification is a major strategic priority for the company; diversification of partners, business models, products, geographies and advertisers. Regarding our partners, we continue to have success with our top four U.S.

based carrier partners, with whom we grew revenues 18% year-over-year. However, our revenues with other partners outside of this group grew nearly 4x year-over-year and represented approximately 21% of total revenue in the June quarter, up from less than 8% in the prior year.

Our revenue from new products outside of dynamic installs grew from 13% total revenues in the March quarter to 15% in the June quarter. Although growing, I'm not satisfied with this result as we still have more work to do.

We expect this figure to continue to grow as products such as our Wizard, Notifications, Single-Tap and Folders become a greater part of the story.

I'll provide more information later in my remarks, but overall I'm excited about the opportunity with all the new products and the validation we are getting in the market place from our partners and customers and have been pleased with our execution so far with Wizard and Media Hub who want to see faster operational progress against our BYOD, Single-tap, Notifications and Folders.

Now turning to the forward outlook, I want to provide some commentary on how we are positioned for continued growth across each of our key growth levers; devices, media and new products as we now enter the new fiscal year. First on devices, we set a quarterly record of over $30 million new devices onboard to our platform.

For context, Apple just reported global iPhone shipments estimated at just over $33 million for the June quarter, so we are now operating at real global scale. In the U.S. we saw flattening out of the broadening smartphone market during the June quarter.

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. We're also seeing nice growth internationally as we ramp new partner such as Samsung.

Our partnership with Samsung is now moving into the next phase, as we install our software in more devices in more markets. We expect our Samsung partnership to grow to approximately 50 countries in the September quarter compared to 12 in the June quarter.

We also anticipate launching our first devices with Telefonica this fiscal year that is also a direct result of our existing integration work with Samsung. We have numerous other operator and OEM partners, very deep in the pipeline and contract process and expect more to have to communicate soon.

All-in-all, the prospects for us continue to grow our top-line with additional devices and partners looks very promising. On the new product front, while our single-tap revenue is outside of our social media partner and large U.S.

operator integration are not yet material and I'd like to see faster progress, we do continue to make positive steady progress as we work to integrate more partners. Conversion rates continue to perform well with improvements anywhere from 30% to 200% versus non Single-tap or the traditional flow via the apps store.

Partners who are waiting enough device scale to justify the investment of resources on their side are now starting to take progressive action. It's now an operational and distribution demand exercise moving forward.

Our recent press announcement on leveraging the infrastructure and relationship of our mobile measurement partners, including Branch, Kochava, AppsFlyer and Singular, is a focus area for the business to scale Single-Tap as this represents 85% of the top applications in the global app install market.

We are working most actively with Branch to integrate their Deep Linking capabilities into Single-Tap.

So for example, you could be researching a restaurant on a Yelp mobile web page and with Single-Tap it’s taken to the richer Yelp application experience, directly to the restaurant you're researching versus having to start at the home page of the application.

You can imagine this deep-linking capability for many other types of applications like news, weather, social media, sports, airlines and so on. And finally I do you want to call out our new sub-product that will go into beta release with multiple partners this quarter.

We are excited about the potential of this non-app installed product which is a natural extension of our product portfolio, that leverages both the secular tailwind of customers consuming, information and entertainment content directly on their device versus traditional outlets like magazines, televisions and newspapers, and also leverages our strong distribution footprint of operator and OEM partners.

Assuming successful beta testing, we anticipate more broadly launching this product throughout the remainder of the fiscal year and will report out on our progress on future calls. Now on the Media front, we continue to show a nice diversification of applications as no single application is more than 10% of our revenues.

We are currently very focused on scaling our international demand to meet a significantly greater supply of international devices.

We are continuing to work hard and where necessary add strategic resources to improve our international revenue per device and ensure that we scale our partnerships and infrastructure, effectively to capitalize on the enormous opportunity in front of us.

Specifically, I can report incremental increases in spending by some high profile multinational advertising clients such as Pinterest, Twitter and Uber. And finally before I turn it over to Barrett, I want to take a personal moment and thank many of you that have been patient and stuck with us.

I know it hasn't always been the smoothest of paths towards the development and adoption of our platform, but we're now beginning to really bear fruit from the original vision. I'm more excited than ever about our future and believe we're just getting started.

And with that, this concludes my prepared remarks and I'll turn it over to Barrett to take you through the numbers. .

Thanks, Bill, and good afternoon, everyone. We are pleased with the results delivered in the quarter and off to a great start to our fiscal year. As a reminder, my comments will refer to comparisons on a year-over-year basis and results for continuing operations, unless otherwise noted.

Revenue of $30.6 million in the quarter was up 38% experiencing strengthening momentum as the quarter progressed. This accelerating rate of growth was driven by a positive momentum from all three major growth drivers across our business, media demand, product expansion and device volumes on the platform.

While we are excited about the top line growth in our business, I'm particularly pleased with our expanding margins which drove 78% increase in non-GAAP gross profit dollars over the prior year to $12.3 million. Non-GAAP margin was 40% in Q1, expanding from 31% in the prior year.

Our continued margin expansion is largely driven by the successful diversification of our partners and products. We also experienced continued positive margin benefit in the quarter from a recent carrier contract renewal which is not expected to continue beyond Q1.

Overall, we are pleased with the expanding margin levels in the business over the last several periods and as a reminder, our gross margin rates can be sensitive to future changes and partner mix and revenue type and these fluctuations may vary from quarter-to-quarter. We experienced continued impressive expense scale on the platform.

Total operating expenses were $9 million compared to $7.6 million in the prior year and our cash expenses in the quarter were $8.1 million. That $8.1 million represented 26% of revenues compared to 30% in the prior year during a period of revenue and gross profit growth of 38% and 78% respectively.

I will highlight that these results are achieved while we continue to make focused investments to support the new partners and new products launched on the platform. Adjusted EBITDA was $4.2 million, up from $200,000 in Q1 of last year and represented an EBITDA margin of 14%.

This resulted in a marginal EBITDA conversion rate of almost 50% on incremental revenues year-over-year, and further emphasizes the embedded operating leverage in our business. Non-GAAP adjusted net income in the quarter was $4.2 million or $0.05 per share as compared to a net loss of $0.6 million a $0.01 loss per share in the first quarter of 2019.

Turning to our GAAP net income, as a reminder, including our GAAP results we see the impact of changes in the fair value and liabilities resulting from a recently retired convertible note that is highly sensitive to the company stock price which increased significantly in the last quarter.

For this reason among others, we offer the previous mentioned supplemental non-GAAP adjusted net income measure, which we believe is more indicative of the recurring core business operating results.

Out GAAP net loss from continuing operations for Q1 was $1.7 million or a $0.02 loss per share based on $81.8 million weighted shares outstanding, compared to our first quarter of 2019 net income of $1.5 million or $0.02 per share.

Included in our GAAP-net income for the quarter is recorded loss of $5.2 million from the impact of the change in fair value of derivative liabilities, resulting from our recently retired convertible note, which is highly sensitive to the company's stock price that I referenced earlier.

Moving on to the balance sheet, we generated $4.3 million in positive free cash flow, finishing the quarter was $16.2 million in cash and exited the period with zero debt.

This represents an improvement in our net cash position of approximately $15 million year-over-year and during this time we also improve our networking capital position in the quarter, exiting with a positive $5.5 million balance, which is a $13.8 million improvement over prior year. Now, let me turn to our outlook.

We currently expect revenues for Q2 to grow to between $31 million and $32 million and expect adjusted EBITDA to grow to between $3.2 million and $3.7 million. With that, let me hand it back to the operator to open the call for questions.

Operator?.

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

Thanks for taking my questions and let me offer my congratulations to a very impressive quarter from you guys. .

Thanks Mike. .

First off, I'd like to just kind of explore a little bit on the new products side, you know going from 13% in March to 15% in June, certainly a nice improvement. But I would like to get a little bit more color on the Single Tap side.

Is it more of a chicken and egg thing with regards to ramping that? Basically the advertisers didn't want to put, as you said put the resources into it and tell you we’re at scale and then of course trying to get the scale with no advertisers at the top.

Can you just talk us through that process and where we are currently with that?.

Yeah, sure Mike. So first let me just talk about new products and aggregates. You know as I mentioned in my remarks, we did grow those sequentially, you know low seven figures in revenue quarter-over-quarter. So you know we were pleased with that, but by far from satisfied.

You know we expect that to continue to go up into the right as you know a lot of products, you know such as our Wizard, Notifications and others continue to scale and also I’m excited about the potential that the media hub product has, we're seeing a lot of demand out there for that.

Regarding Single-Tap specifically, yeah we had a chicken or egg problem in regards to first getting the devices launched with our partners; you know we’ve now accomplish that, and then as a matter of working through, you know scaling our demand partners, and by demand partners we are talking about you know companies like your Twitter, Pinterest and so on, and now we are in place where we are doing that, and it's largely an operational scaling game.

So we've been going, what I’ll call brick by brick to do that, you know seeing nice progress and most importantly we're seeing the conversion rate lift versus the traditional flow that you get through the Google Play Store, be anywhere from 30% to 200% better.

So as long as those metrics continue to show the products work and as advertisement, we’re excited, but we’ve got to scale it. I touched in my remarks around how we're doing that with these mobile measurement partners and most notably one call Branch out in the West Coast that we are excited to work with as a partner.

We see a tremendous amount opportunity for these mobile measurement partners to accelerate our efforts and we look forward to continue to report on that in our subsequent quarters. .

Okay, that's great. And then just a follow-up on Samsung, you said you're going from 12 countries to 50 countries by September.

Can you talk a little bit about what's the most important part of that Samsung arrangement? Is it countries or is it actual devices and maybe you can give us sort of an update on which devices that you’re on or many devices you are on, just gives us a sense of where that’s scaling, that relative to the number of devices that Samsung sell. .

Sure, yes so when I think about the Samsung relationship, I think of four key benefits that it brings us.

Number one, is what we talked about, just the expansion of devices in countries with Samsung open market devices and you know we talked about how we're expanding into many more countries and primarily in Europe and Latin America with them from the prior quarter to the current quarter, you know expect that to continue to grow, so that’s important.

But you know the other benefit is I referenced Telefonica in my remarks and the second benefit of the Samsung relationship is our integration with them, is really opening up a lot of opportunity with other international operators.

So you know we think Telefonica is the tip of the iceberg here and so we're quite excited about that and that integration with Samsung is key, not just to get on the Samsung devices, but other OEMs as well because those operators want one stop shot; they don't want to go to multiple providers, so that’s good for us.

The third benefit with the Samsung relationship you know is how that helps us with our media partners. So you know having the credibility now of having an anchor tenant like Samsung, just like internationally its important so we have anchor tenants here in the United States with Verizon and AT&T to help pull through other U.S.

demand, same thing with having Samsung internationally with advertisers. So we think that bodes well for our broader international revenue per device efforts to help us really scale the international business. And in the final benefit is just our pipeline with that with other OEMs.

Obviously have an operator is great, but you know having Samsung as an OEM brings us additional credibility; there is other global OEM partners.

So you know in aggregate that makes us really excited about the Samsung relationship, but taking a very near term operational focus, yeah it's really about more devices, more market and just continue to execute well and a nice slow steady drumbeat of ramp, you know as we've seen with other partners over the years. .

Okay, got it. Thanks a lot for the help. I appreciate it. .

Our next question comes from Darren Aftahi from ROTH Capital. Please go ahead with you question..

Good afternoon, thanks for taking my questions and let me offer my congratulations as well. Just a couple, I want to follow-up on Mike’s question on Samsung.

Bill maybe it’s too early, but when you launched new devices I'm kind of curious how fast kind of a launch are you actually seeing kind of real revenue you know when you call out 12 the 50 countries.

What kind of lag can we expect in terms of when this you know starts to move the needle on the top line?.

Yeah, so as I think about the Samsung relationship, one exit we’ve got in our business is as we go back and we look at time and we look to when we started with Version, and we look to when we started AT&T and we look when we started Cricket and we go down the line and most recently Tracfone.

You know what we see as a pretty stable steady drumbeat of ramping.

You know those things as they go quarter-over-quarter you know we see nice top line growth and you know we’d expect Samsung to mimic those prior data points that we've gotten and we are starting out of the gates to see that as we go from one figure to two to three to four to five and so one of daily revenue with these guys.

We’d expect to see that trend continue and you now it is really ramp and scale game, we’d expected to see that start showing up in more material ways each quarter going forward. .

Great, and then on your Single-Tap, so when you talk about demand partners, I know you got kind of the third party ecosystem with analytics and attribution partners.

I guess two questions there; what is causing you know a branch to maybe scale faster than some of those other partners and then the second question is, where do you expect to see more kind of demand from that product, because it’s going to be from the third party partners or is that going to be from your demand partners. .

Yeah, so I think regarding Branch specifically, I think they've got some unique technology that I know they are excited about and the investors are excited about, but so are we. It’s really this deep linking capabilities.

You know most of us go to mobile web pages you know today and we check a sports score, an airline flight or what have you and the ability to deep link right into that and get the app and the richer experience, I think it’s something that’s natural for all of us as consumers.

So integrating Single-Tap into that capability is a natural, and so I think you know the ability to really do two things, one is that technical integration, but then also leverage the business development footprint of their existing partners and our existing partners is another natural.

So it’s not something that's going to you know necessarily show-up and baked into our guidance here for the September quarter, but I think as we you know think about subsequent quarters, you know this is a key piece of the ramp and scale part of the Single-Tap story.

So we are excited about our Branch partnership and I look forward to give you guys’ updates on future calls. .

And then maybe one for Barrett. I guess I'm looking at the right things, so last two quarters your marginal dollar of EBITDA on the revenue ramp year-over-year has been 50% roughly.

How do we think about that marginal operating leverage longer term? I mean can you sustain at that level or what’s kind of the right way to think about?.

Yeah, we’ve been pleased with the progress and that trajectory. I wouldn't say that you know we count on that same level you know on going, but I think you know it is proof that you know there’s strong operating leverage in the business model.

You know we would think that would hover about probably between 30% and 50% over time and you know it also Darren as you know can change with – if we were to structure any kind of do different pricing models with the arrangements, but on the business as it is, I think we'll see it weighing a little bit, but it will still be strong. .

Great, thank you. .

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

Hi, thanks for taking my questions, and congrats on the quarter. The device installation growth accelerated pretty nicely.

So wondering if we could just dig into that a little bit and maybe you can talk about, if possible what kind of contribution you saw from carriers versus OEMs in the quarter and maybe if there is anything that was particularly successful in the quarter. .

Yeah, sure Austin. Yeah, we saw a nice growth internationally with devices, so that’s something that really contributes towards your know strong device growth in terms of getting into the all-time record quarter. We also saw you know a real stabilization of our big four partners.

As you and others are aware, you know those have been in decline for while, so now we're starting to see that flattening through a combination of flagship devices you know beginning to 5G being offset by some as these elongated upgrade cycles. So that’s encouraging and a trend we expect to continue. And then we got to accomplish some new partner.

So you know people like Samsung and Tracfone and Sam song and Telefonica and so on are also helping to contribute to the incremental device growth and we’d expect to see that continue. .

Great, and on the international side, I know you mentioned Telefonica, but wondering if you could maybe talk about what you are seeing, a progress that you're seeing with other large international operators like maybe America Movil or something like that. .

Yeah, so as it relates to kind of pipeline, nothing too specific or record out on the call today than to say we are encouraged, and very excited to see about the future. In terms of the existing partners, American Movil is someone that we expect to see benefit from the Samsung relationship and you know it's really just a shopping mall concept.

You know you bring out more anchor tenants into a shopping mall everyone benefits in terms of more traffic into it.

You know same concept here where you're now on demand partners or advertising partners want us to want to work with us in Latin America as we expand our Samsung relationship and the quality of the Samsung brand will allow us in my opinion to help cope here American Moviel demand as well in that, as we just increase our footprint and our scale in those markets.

So you know that’s something that we are encouraged and excited about. .

Got it, and last one from me is on the additional resources going into improving your international RPD rates.

Can you talk about specifically what kind of resources you're referring to?.

Yes, so really three different types of resources. You know incremental demand is really the number one priority. So that’s a combination of direct sales folks as well as ones who can help us on account management and partnerships with other advertising agencies would be bucket one.

Bucket two would be on the supply side as we now launch these new operator and OEM partners ensuring that we've got account management to really develop strong relationships in market with you know these operator and OEM partners in terms of getting our software on the device.

And the third is really something that the technical and the operational side as we onboard more devices and more partners. In aggregate, we don't give it as a material number in the state of our overall headcount, but you know definitely we are make investments across those three areas. .

Great. Thanks very much for taking my questions..

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

Yes, thanks for taking my questions and congrats on a solid quarter and outlook. Just wanted to jump into the North American RPD. Obviously you guys signaled for flattening device growth in the U.S.

I don't think anyone surprised by that, but could you maybe talk about some of the growth drivers underlying the RPD growth and kind of what gives you the confidence that you can continue to grow RPD as a solid rate throughout the year. .

Yes, so I’ll start with that and Barrett, if he wants to add any color, jump in. I think as we think of RPD growth, we think of it really across three levers.

The first one is just media partners that are seeing results in ROI and the platform and therefore you know we are able to continue to charge higher rates, because they are going to need a higher ROI for their customers.

So that’s more of incremental listings for Pandora or more incremental riders for Uber and more rewards members for Starbucks or whatever. As long as those folks continue to see an ROI on the platform, you know that allows us to continue to garner higher rates, so that will be number one.

Number two as we continue to you know expand a number of applications on the device for some of our partners, which obviously got more real-estate, which allows us to get a high revenue per device and in the final one, which we talked about a little bit in Mike's first question, you know is the ability to continue to add new products to the story as we grow from 13% of revenues to 50% of revenues and we expect that to continue to grow.

You know that will continue to drive accretive RPD for us. So I think those three factors are exciting. You know that one that kind of plays a sub-goal around that would be recurring revenues as we get more of that. But you know in aggregate, you know those are all helping to drive a positive RPD performance..

Got it, and then you know maybe it’s a no commenter or maybe no impact, but just kind of your thoughts on the recent consolidation in the U.S.

carrier space and the impact that potentially has of your business?.

Yes, so you know we see a few benefits of that as we think about our business. We recently you know established a partnership with a company called iMovie who’s handling a lot of the advertising distribution for Sprint. We’ve actually just launched with them on new devices, you know with Sprint and are seeing revenue on that.

You would expect to continue to grow that partnership; you know that would be a specific one opportunity. You know we continue to have you know I think positive relationships and dialogue with T-Mobile.

Obviously they are focused you know more on the getting the merger closed out right now, but I think you know long term that has a potential opportunity for us. And the final one is we'll see what happens with Boost and Dish.

You know we’ve good relationships there, so to the extent that becomes a fourth operator in the market, that could be something that’s encouraging and we can leverage our strong prepaid presence right now that we’ve got with folks like Cricket and TrackOne for example ad continue to leverage that into those markets as well. .

Got it. Thank you for taking my questions. .

Our next question comes from Ilya Grozovsky from National Securities. Please go ahead with your questions. .

Thanks. Just wanted to talk about the gross margins a little bit. Barrett I think you had said that the gross margin trend, the results were from a contract renewal, but if I heard you correctly that that trend was not going to continue.

Can you just kind of elaborate on what's going on with that contract that it wouldn't continue?.

Yeah, we’ve got a – we had a renewal at the end of last year, one of our major partners and as part of that renewal we had a higher amount, a percentage of revenue that we retained at a certain volume and then we just recently crossed the volume to where it resets back to where the legacy rates were, back to prior year.

So that’s what I was referencing in that comment. .

And is that reset on an annual basis or on a fiscal basis or on a fiscal basis.

How does that work?.

No, it’s a one-time on a contract basis. So it's where we renewed that contract, it was a multiyear contract, so we got a benefit at the beginning of the contract period. .

Got it.

And so if we think about gross margins going forward for the next, for the fiscal year, kind of where do you see them heading and kind of what’s the ceiling for them?.

Yes, so without that benefit, you know we would have - that benefit was worth one to two points of gross margin in the quarter.

And you know keeping the product mix the same, I would assume you know the margins are in the high 30s on a normalized basis and then you know as Bill talked about, the traction, the grow we are seeing in some of the higher margin products, you know they may or may not move the needle in the next quarter or two, but our expectation is our margin profile will be at or above 40% on an ongoing basis.

But over the next few quarters we are probably in the high 30s. .

Great, and then just on the new product, given your high level of comfort and confidence in the September quarter guidance, what percentage of revenues do you think new products will be in September?.

Well, I think there will be you know above where we are, you know whether it's a point or three points, I’m not certain yet, we are still early in the quarter, but you know the bright spot here is we continue to move this portion of our revenues towards our new product mix. .

So it will be up sequentially right, so you thought..

Yeah, we would expect it to continue and move up. .

Great, okay thanks guys. .

[Operator Instructions]. Ladies and gentlemen, at this time ensuring no additional questions, I would like to turn the conference call back over to Bill Stone for any closing remarks. .

Thanks everyone for joining the call tonight. We look forward to reporting against our progress on all the points made on today's call, and we'll talk to you again on our fiscal 2020 second quarter call in a couple months. Thanks and have a great night. .

Ladies and gentlemen, that will conclude today's conference call. We do thank you for attending. You may now disconnect your lines..