Good day, and welcome to the Digital Turbine Second Quarter Fiscal 2020 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brian Bartholomew. Please, go ahead. .

Thank you, Sarah. 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 those 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. .

Thanks, Brian, and thank you all for joining our call tonight. Our stated goal has been to build and scale a profitable growth business. With this objective in mind, we continued our strong start to fiscal 2020 with our second quarter results setting the all-time quarterly records for revenue, gross profit, EBITDA and device installs.

I'm going to break out my prepared remarks into 3 areas. First, I'll summarize our quarterly results. Secondly, I'll provide some real-time operational updates on many of the exciting new partnerships and initiatives underway. And finally, I'll end up with some commentary about the strategic value of the platform, and where we're going into the future.

To close out the September quarter, we finished with $32.8 million in revenue, which represented a 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 advertiser demand and incremental contribution from our newer platform products..

Revenue per device is a core health metric of our business and our RPD with our 4 longest tenured U.S.-based partners, once again increased more than 30% year-over-year. As you've 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 4 tenured U.S.-based carrier partners, with whom we grew revenues healthy double-digits, year-over-year, despite a modest decline in the 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 our Dynamic Installs grew 32%, sequentially, and represented 18% of total revenues during the quarter. All this -- although this marks solid improvement, I'm not satisfied with the results, as the opportunities for each 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're 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 onto our platform globally. In the U.S., we continue to see a flattening out of the broader smartphone market during the September quarter, total devices activated with our largest 4 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 adoptions. .

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 2 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 are focused primarily in Europe and Latin America. And as you've heard me mention on prior calls, expanding devices beyond smartphones is an exciting opportunity for us and a natural extension of our offerings.

We've made some material progress on our TV offerings as we see the secular tailwinds of Android TV and other over-the-top streaming 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 the -- grow our business with a division of device types, like television, looks very promising.

On the new product front, our revenues derived from non-dynamic installed products grew 32%, sequentially, with newer 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 this 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 and 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've made some organizational tweaks to better refine our focus and improve our execution as delivering results against our core dynamic install business has cannibalized some management focus away from scaling the new products. .

I'm happy to report that these changes are already yielding improved new products 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 a 32% of our revenues across our U.S. and international operator and OEM partners.

We'll continue to work hard and where necessary, add strategic resources to improve our international revenue per device and ensure that we scale the partnerships and infrastructure effectively to capitalize on the 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 the partner delivering that application to android devices for the upcoming holiday season and beyond.

We're proud that Verizon trusts us to handle distribution and management of their very high profile applications such as Facebook, Netflix, Apple Music and now Disney. In addition to Verizon, we're just beginning to work directly with Disney on distribution of their 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, TikTok and Tencent as they look to expand their presence here in the United States. .

And finally, before I turn it over to Barrett, I want to highlight now that we're operating at scale, it's opened up even more material opportunities for our business with many of the largest players in the TMT space.

Our business is growing both the top and bottom lines at a nice 30-plus-percent rate but our #1 opportunity and challenge is to grow it, not with just these positive comps against prior quarters or prior years, grow -- but grow it against the massive addressable market opportunities set. That's where we are focused.

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're 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 results for continuing operations unless otherwise noted. Revenue of $32.8 million in the quarter was up 37% versus the prior year and benefited from the stream across all 3 of our focused platform growth drivers, device volumes, product expansion and media demand.

While we're excited about the continuing 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 million in gross profit, representing a growth of 57% year-on-year..

Our gross margin expansion is largely driven by the successful diversification of partners and products on the platform.

Overall, while we're pleased with the overall expansion of gross margins in the business over the last several periods, we want to remind investors that our gross margin rates can be sensitive for quarter-to-quarter based on changes in 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 million during the second quarter as compared to $7.2 million in the prior year.

Cash operating expenses totaled $8.1 million, representing an increase of 27% year-on-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 margins roughly doubled to 14% from 7% in the prior year quarter. Free cash flow totaled $5.7 million as compared to $1.6 million in the 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 in liabilities resulting from our recently retired convertible notes, that is highly sensitive in the company stock price, which increased significantly in the quarter.

For this reason among others, we offered a previously 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 million or $0.02 loss per share, based on 83.9 million weighted shares outstanding. Compared to the second quarter of 2019, net income of $2.1 million or $0.02 per share.

Included in our GAAP net income for the quarter it is a recorded loss of $4.5 million from the impact of the change in fair value of derivative liabilities connected to the outstanding warrants issued related to our previously retired convertible notes.

We really expect these remaining 1.1 million warrants outstanding to be retired soon as the expiration window is now less than a year out. With respect to the balance sheet, the positive cash flow trends, 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 $0 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 up to between $37 million and $38.2 million and expect adjusted EBITDA to grow to between $5 million and $5.5 million. With that, let me hand it back to the operator to open the call for questions.

Operator?.

[Operator Instructions] Our first question comes from Michael Malouf with Craig-Hallum. .

Well done this quarter guys. I'm wondering, if we could just dig into the Samsung opportunity. It seems like you're 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're going to actually be on? And can you give us a sense of what kind of products you expect to eventually have on all these phones?.

Yes. Sure, thanks, Mike. As we think about the Samsung partnership, we're excited for many reasons. The first reason is -- you referenced is more products, more devices, more markets. The second reason we're excited is the opportunity it opens for other operator relationships for us globally. We talked about Telefonica briefly.

And then the third one is, how it really helps us with international media demand, having Samsung in it as an anchored tenant to provide inventory to. So those were the high level, the 3 reasons we're excited about Samsung.

As it relates to the specific comments I made in my prepared remarks, we continue to expect a nice steady drumbeat of positive momentum of the -- the September quarter was better than the June quarter was better than the 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.

As people know, publicly, Samsung moves couple hundred million-plus devices, and our goal is to eventually get on all of those at some point in time. And we don't have a target on that in terms of this quarter in 2020, but we're 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 that we'll be, not just in more markets and -- but also more devices in the existing markets. And as I referenced Single-Tap is a product extension from our core offerings with Samsung, we'd expect to continue to add additional products with them as well, and we're talking with them.

So that's how we, kind of, think about the opportunity and as similar as we saw with the Verizon in the past, AT&T in the past, Cricket in the past, U.S. Cellular and so on. Now with Tracfone, we'd expect Samsung to follow those, kind of, similar trajectories with a nice steady drumbeat quarter-over-quarter. .

Okay, great. And then just a follow-up question with regards 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 phones? Or as Verizon provisions the phone? Or are you going to be installing this on basically existing phones? You are going to take Ignite and then install Disney Plus on a phone that has already been provisioned?.

Yes, unfortunately, I can't comment on the -- kind of, plans or forward-looking statements that Verizon may or may not do. So that's probably not my place. I will say technically, we can do it, it's not a technical issue or a Digital Turbine issue. It's just a decision, how Verizon intends to go-to-market with the product and service.

And I don't think I've seen anywhere publicly them talk about that. .

Our next question comes from Darren Aftahi with Roth Capital. .

Nice quarter.

Can we circle back to 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 can get an update on that?.

Yes, sure. So right now, we're in the process of implementing. We've made a fix with our software and Branch's software to be able to enable deep linking capabilities onto consumer devices. So in other words, you want to check the ESPN sports score, and I can directly link into the app to get that.

So we've now worked through Branch and a variety of software issues to put that out in the marketplace. Now it's just a matter of us deploying it across our partners here in the United States, and we're in-flight of doing that. Expect that to happen over the next few months. .

Great. And then your comments on TV.

Can you just walk us through a little bit go-to-market strategy there? Is this something that potentially could work on things outside the android ecosystem?.

Yes.

So as we think about our company and our products, I know historically we've taken a very smartphone-centric view of the world because that's where the volumes are, and now we are increasingly seeing the set-top box being increasingly replaced with these over-the-top offerings, whether it's an android or other operating systems that may exist around the world.

Our platform's architected to be able to support those, in addition to android, there's nothing magical about android. We see android is a natural given.

We're already on that and there is a lot of momentum behind that and while there's a lot of momentum around this broader space and just over-the-top offerings, in general, a lot of the app recommendations and management and media management and other, kind of, operational things have to go with the television and very similar, it's just another screen to a smartphone.

So it's a natural extension for us, and so we're excited about a number of opportunities that we've got that have made some pretty major progress over the past couple quarters. So as we look into 2020, this is a nice natural adjacency for us to start to get into. .

Great. And then just last one if I may. We've heard from a couple, I wouldn't call them competitors, but just peers in this space, that maybe there's been some weakness in advertising demand.

I'm just curious, if you're seeing any of that either domestically or abroad?.

Absolutely not. For what we're doing and we've got tremendous media demand out there. We saw some of those similar headlines from companies that are doing different things than what we're doing.

So I can't speak to those companies or their offerings, I can just speak to our media demand as we look into a holiday quarter, we are very excited about it here in the U.S. and internationally. Our platform's really operating at scale right now.

I think the question for us is going to be what's going to happen to device volumes? And so that's the one for us that we're more focused on. But the media demand has been really strong especially on high-end devices. .

Our next question comes from Austin Moldow with Canaccord. .

My first one is on Q4 revenue guidance. Your number -- your range suggests, kind of, somewhat meaningful slowdown, sequentially.

Just wondering, if you can elaborate on what's being incorporated into your projections?.

Yes, let me do this, Austin. Let me take, kind of, the macro headwinds and tailwinds that we're seeing. And I'll let Barrett comment a little bit more on the specifics here. As we look at the December quarter, right now, as I think mostly everyone's well aware there's 6 fewer days of the holiday season of this year compared to the last year.

Black Friday is almost a week later. So we don't know what kind of impact that's going to have or not. So I think it's just proper to be conservative around that if there's 6 fewer days than last year on that. And then secondly, I touched on the device forecast. It is well in terms of what's going to happen here in these markets.

So we want to make sure that we're pretty conservative on that. On the tailwind side, we've 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's ins and outs on it, but I think, it's important for us to be prudent on some of the things that are somewhat uncontrolled or we don't know. But with that I'll turn it over to Barrett for any other color. .

Yes. Austin, I think the only other thing I'd add there is put a finer point on launches that we had last year that were lapping. And Bill and I, we think it's been prudent to plan out and guide out on things that are known.

And so while we have many partners that are launching or have launched and are growing very rapidly, we focused on the known items, and as Bill mentioned, while we’ve seen a lot of growth, we also have line of sight to device volumes in the near-term but we want to understand how the holiday season plays out.

And so those things -- all those things combined, kind of -- what kind of compiled our guidance for Q4 or Q3 rather, for our fiscal period. .

Got it. And I know you talked about your 4 major U.S. carriers, sort of, flattening out that device growth. Those devices should, kind of, flatten out over the next couple of quarters.

Can you, maybe, comment on what kind of RPD you're seeing from them? Is there still room there to expand RPD to continue at the top-line growth for those customers?.

Yes. So Austin, we expect that RPD -- that's a health metric, and as I mentioned in my prepared remarks, we saw a nice improvement on revenue per device, I think it was 30% year-over-year with those guys despite flattish device volumes.

And so, as we get these new products scale and the strong media demand, I mean, that's something we expect to continue to see, improved performance there. So in 5G and higher-end devices and those kind of things will also be tailwinds against that. .

Okay. And my last question is on -- in ingesting in the product.

So the -- in the quarter, there was nice expense leverage but just wondering if you can talk through, kind of, what your philosophy is in terms of realizing some of that expense leverage and whether you think you're investing adequately or where you might invest more for further innovation in, sort of, extending the runway for growth?.

Yes, Austin, I'll start and then let Bill add in color. I'll start with the fact that we're taking a, kind of, a measured approach to it as we've got a number of growth initiatives on the horizon, and we're focused primarily in building and supporting those products and those partnered launches.

And so if you think about where we've centered our resources, at least our incremental resources, they are around our sales force and sales support teams and then our technology teams.

So in order to launch -- drive the demand needed for these expanded partners as well as new products that we're either launching or bringing into market in the near future. Those are the things we've been focused on. I mean, when I mentioned measured approach, we've seen a lot of growth.

We're very excited about the inherent operating leverage in the business, and we -- amidst our investments, the teams have been able to drive some efficiencies that can somewhat offset our math, the increased investments we're making for future growth. .

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

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 can, maybe, 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?.

Yes, sure. So we've made a few strategic investments and really, just matching a lot of those broader strategies we're doing around diversification. So, yes, specifically, we've made some pretty material investments in our international sales force, and our international channel partnerships.

We're working with different advertising and media agencies in many overseas markets, specifically in Europe and Latin America to really help increase our focus. There is a lot of device growth that's coming from those areas. And those media partners don't want just to be in those areas, they also want to be in U.S., as I referenced in my comments.

So we're making some material investments there.

And also on our technology -- we continue to invest on technology pretty nice clip to help go against the opportunity but with discipline, as Barrett just mentioned in his prior remarks, but specifically, we continue to invest in our technology stack and ramping these new products, such are -- those are the 2 primary focus areas for us. .

Got it. And then specifically on news. Did it contribute to revenue in the quarter? And then I guess, kind of, peeling it back to findings with Single-Tap.

Is there, kind of, a chicken-and-the-egg problem 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?.

Yes. So the news updates contributed revenue in the quarter. I wouldn't consider it material on revenues but it's -- it contributed revenues, it's ramping and it's going up into the right -- in the right direction, which we like.

One thing I'm really been excited about the news hub product is we've preloaded other news products to other partners as we've done this throughout the years, and our news product is showing materially better retention rates than what we've seen from other products that have been loaded on.

So in other words, apps that are news products we did in August, looking at the results here in November and the percentage of people that are still engaging with the product. .

It was off to a good start and that's a big driver as we think about this longer term as a recurring revenue story for the business. So we're off to a good start, we're heading in the right direction but yes, not yet anything material to get too excited about. .

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 installed product?.

Yes.

Barrett, you want to take that one?.

Yes, sure. So I think, we've said this before. What we like about the new products is in each individual case they contribute at/or above the aggregate gross margin that we're experiencing today. So -- and those can escalate over time. But I'm talking about the pure gross profit.

If we think about operating margins, we're investing important dollars towards those -- to get those programs launched. But from a gross profit standpoint, they agreed to the aggregate margins that we see today. .

Our next question comes from Jon Hickman with Ladenburg. .

Nice quarter.

So could you talk a little bit more about the Telefonica? When do you expect that to launch?.

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

Okay. And then with -- I didn't -- I couldn't write fast -- as fast as you were talking.

You said that you were about to launch Single-Tap with somebody new or on the horizon?.

Yes. So -- we -- so in our master Samsung agreement, we signed an addendum to add Single-Tap onto the portfolio of products with them. So we're working through them right now and what does that look like from a go-to-market perspective. .

So that also you think will occur this fiscal year? We'll get that... .

Yes. As I think in our prepared remarks I said, expected in 2020. I don't want to put a specific timeline on it but we've reached agreement on what it looks like. .

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, a weaker quarter from advertising standpoint.

But do you think you can, kind of, grow through that normal downturn or how much of a fall off? Could you give us any opinion there?.

Yes. We are not providing any guidance specifically on the March quarter. In terms of media demand, there's definitely nothing in the media demand or landscape right now, there is -- that has us concerned. We're seeing tremendous demand for our products and there's -- we just got to go out and get it.

And we talked about the resources and scaling to make that happen. .

Okay. And then one more question.

In your prepared remarks, did you tell us what the revenue per device was for the 4 carriers in the U.S.?.

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

Really nice quarter. .

Thanks. .

Thanks, Jon. .

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

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'll talk to you again on our fiscal 2020 third quarter call in a few months. Thanks, and have a great night. .

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