Good day, and welcome to the Digital Turbine Fiscal First Quarter 2023 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Brian Bartholomew, Senior Vice President, Capital Markets and Strategy. Please go ahead, sir..

Thanks, Roco. Good afternoon. Welcome to the Digital Turbine Fiscal Year 2023 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'd 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 statement.

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 our Chief Executive Officer, Mr. Bill Stone..

first, focusing on the fundamentals of our business and executing on the $300 billion total addressable market; secondly, integrating our companies into one; and third, making the right strategic moves so the company is, as Wayne Gretzky famously said, skating where the puck is going, not where it's been.

On the first priority of fundamentals, we're going to grow our business by continuing to add devices, add additional products and expand our media relationships. We expect to expand both our device and product offerings. I mentioned SingleTap licensing earlier in my remarks, but also I want to highlight our other growth drivers.

We've begun pivoting our Content Media business to focus increasingly on postpaid subscribers versus predominantly prepaid subscribers today.

And while that's negatively impacting our short-term content media results, we have increased traction with Verizon and AT&T on postpaid with a bigger addressable market that should serve as a nice growth catalyst into the future. We're also making solid progress on our mediation solutions, adding many additional app publishers in the quarter.

And finally, I mentioned additional supply traction on devices earlier in my remarks now that the operator and OEM partners are looking for additional revenue streams more than ever in a recessionary environment, and we're seeing increased traction with many global operators and OEMs. And finally, we want to expand our media relationships.

I'm excited about is our expansion into verticals beyond gaming, even while we grow our gaming relationships with leading providers such as Tripledot.

Our social media vertical, led by companies such as TikTok and Pinterest, our utility verticals such as Weather and our financial verticals with customers such as Square and PayPal, all grew more than 50% year-over-year.

The only real material vertical showing decline were the crypto and news verticals, which are low single-digit percentage of our revenues. Also, we're working to realign our channel strategy and our brand business. AdColony's legacy brand business had been operating with a direct sales force in some countries and channel partners in others.

We want to realign this approach and take a more direct approach in larger brand-spending countries and work with channel partners in smaller markets. Specifically, we are going to bring our channel partners in-house in the U.K. and look to scale up our efforts in Europe.

This should have the benefit of adding both margin and revenues to our brand business. Our second priority is to continue to integrate our company into one. We've made material progress on internally facing things like our systems, tools, processes and organizational design.

And with these net elements now in place, it provides us increased ability to deliver as 1 company versus 4, and we're now turning our focus externally to deliver to our customers and partners. Specifically, we're now putting increased focus on building a DT brand in the marketplace. We rebranded the company last month with a new look and feel.

But more importantly, we've unified the legacy DT, Mobile Posse, Appreciate, AdColony and Fyber teams under a common umbrella, leveraging their unique assets now as one.

We are working surgically to ensure our partners, customers and other stakeholders see the benefits of OneDT in the marketplace, leveraging our On-Device position, our independence, our direct demand and our differentiation solutions such as SingleTap across the entire enterprise. Early feedback from customers has been very encouraging.

Our final priority is making the right strategic moves for the future, which includes making investments in our ad tech scalability and our App Store strategies. While we see both of these more as a driver beyond 2022, we're already seeing traction today.

And as a reminder, we're expecting numerous pieces of bipartisan legislation in the EU and the U.S. to become law over the next year that will disrupt how applications and digital advertising work. We view these regulations as a tailwind for our business.

As a parallel in the e-commerce world, we're all used to having companies like Amazon sell nearly everything and then more segment-specific stores that white-label e-commerce capabilities from companies like Shopify to sell their goods and services.

Due to the dominance of Apple and Google bundling the operating system in store and smartphones, this white label capability has been difficult to execute in the app distribution world. Today, we offer up things like Games folder that could be from a single company like Zynga or for a specific type of game catalog.

But the idea of a carrier store, Disney store, streaming video store and so on are not widely utilized today due to the bundling of the operating system with the App Store. We see DT as being in a unique position to potentially power these type of offerings, agnostic of platform, and our early conversations have been encouraging.

And to make a specific example of this point, we're entering into strategic partnerships with leading app distribution platforms, which we see as a precursor to our ability to deliver on a more democratized app ecosystem over the next few years.

And as we've mentioned on prior calls, we believe the regulatory framework is favorable to build the Shopify for app stores, and a key element of that is our ability to port apps from a publisher into various app stores. We're looking to accelerate our efforts in this area, and these arrangements should help accomplish the objective.

We look forward to updating investors on our progress in this area.

In conclusion, while we are seeing some short-term headwinds that are impacting our near-term results, we believe the combination of our company-specific growth catalysts and investments and rebounding secular tailwinds for the digital ad spend will generate strong profitable growth for us into the future.

And on a personal note, one of the requirements about being a public company's CEO is the ability to focus simultaneously on both the short and the long term. That goes with the territory of the job. Today, investor focus on the short term is the greatest I've seen in my time at DT.

I definitely understand why it is, but would encourage investors that are able to take an outlook beyond a particular quarter are more likely to be rewarded over the long term.

And by looking at our past performance of being able to work in difficult times, that's definitely true for apps investors that have been with us for many years versus just a few quarters. With that, it concludes my prepared remarks, and I'll turn it over to Barrett to take you through the numbers..

Thanks, Bill, and good afternoon, everyone. Before I cover our financial results, I'll start by echoing Bill's sentiment around the challenging macro climate and the headwinds observed in Q1.

And despite the current macro conditions, we continue to be excited about the expansive opportunity ahead of Digital Turbine, especially as we execute on this transformational phase of the company. Now turning to the results in the quarter. Our Q1 results reflect our focus to deliver sustainable profitability.

And as Bill mentioned earlier, we have made conscious efforts to expand our gross margin and EBITDA margins even during these dynamic times. Revenue of $188.6 million in the quarter was up 19% as reported and 5% on a pro forma basis.

While revenue growth decelerated from the fourth quarter linked to the macro challenges discussed, our On-Device business also experienced anticipated headwinds largely from 2 other areas. First, as Bill mentioned earlier, our content products have been impacted as we evolve the products and ramp users with new partners.

Secondly, a focused effort on expanding margins in certain areas resulted in an expected top line deceleration while driving growth in absolute gross profit dollars. As we've integrated our businesses over the last 12 months, we have made an update to our segment reporting to align with how we operate and manage the business.

While our On-Device Solutions business remains the same, beginning in this June quarter, we aggregate the legacy Fyber and AdColony ad tech businesses with a single app growth platform segment. And before I leave revenue, I'll note that in this environment, global companies are facing headwinds driven by the trending strength in the U.S. dollar.

Fortunately, foreign exchange rates have had only a modest impact on revenues despite the macro climate. This is due primarily to our current business model, where we only have modest FX exposure given the majority of our revenues are nominated in U.S. dollars.

Our top line growth enabled gross profit to increase 33% as reported and 7% on a pro forma basis to $93.6 million in the quarter. Gross margin on the platform was 50% in Q1, up from 45% as reported in the prior year and up sequentially from 49% in Q4.

While focus on margins enabled expansion across our business line, our On-Device business was an important driver in the sequential increase. In addition to our core business expansion, we also experienced a onetime benefit in the quarter from a partner agreement extension that improved margins in the quarter.

While this business -- while this benefit should not be expected to recur, we believe it's a testament to the company's value delivered to our partners. As a reminder, while gross margin rates can fluctuate from quarter-to-quarter, we anticipate further margin expansion as we continue to execute on our growth and synergy strategies.

We continue to deliver healthy expense scale in the platform as cash expenses were $41.6 million in the quarter, up 2% over prior year on a pro forma basis, while revenues were up over 5% in the period.

Total operating expenses were $67.9 million, including $16.1 million in amortization of intangibles and $1.3 million in transaction-related costs, and compared to total as-reported operating expenses of $50.7 million in the prior year.

While we've experienced lower-than-expected operating expenses, partly driven by the virtual work environment, we continue making investments in our teams, infrastructure and our recently announced unified brand relaunch.

We have been experiencing increases in return-to-work expenses that were much less during the pandemic period, including events, travel and other operational costs. The integration of our acquisitions continues to be a focus, and we expect to make continued investments to migrate certain systems to a unified platform.

These near-term investments are anticipated to drive continued cost benefits to be realized over the coming quarters as integration efforts are successfully implemented to further improve our efficiency and operating leverage.

Our adjusted EBITDA of $51.9 million in the quarter increased 30% over prior year, and our EBITDA margin expanded to 28%, up approximately 300 basis points over the prior year. And we're pleased to deliver in Q1 our fifth consecutive quarter of sequential EBITDA margin expansion.

I'm proud that our operating leverage and consistent EBITDA growth is being achieved even as we continue to make a number of focused near-term investments, primarily within our sales force and technology teams to support new partners and products to drive future incremental revenues on the platform.

In this context, we would expect our EBITDA margins to continue to expand over time given the inherent operating leverage in our business and the return to be realized from our near-term investments and synergies to be generated from the integration of our acquisitions.

I continue to be pleased with the profitability and the free cash flow delivered by our business. In the quarter, we achieved non-GAAP adjusted net income of $38.6 million or $0.38 per share as compared to $33.4 million in income or $0.34 per share in the first quarter of last year.

Our GAAP net income was $14.9 million or $0.15 per share based on 102.7 million diluted shares outstanding compared to our first quarter of 2022 net income of $14.2 million or $0.14 per share. Healthy free cash flow from the quarter grew 120% to $31.5 million in the quarter, up versus prior year $14.3 million.

We exited the quarter with $89.3 million in cash after paying down $60.5 million in debt using free cash flows from operations to further deleverage our debt position. Our debt balance ended the quarter at $47.1 million, drawn on our revolving credit facility.

And as our business continues to produce strong cash flow, we would expect to continue to pay down our revolver. We are confident in our balance sheet and our capital position, with a low-cost credit facility, strong free cash flows, combined with the strategic acquisitions integrated on the platform.

We're excited and poised to execute on our growth plans for fiscal 2023 and beyond. Now let me turn to our outlook.

As we consider the ongoing macro environment, we currently expect revenue for Q2 to be between $170 million and $180 million; and adjusted EBITDA to be between $46 million and $50 million; and non-GAAP adjusted net income per diluted share to be between $0.32 and $0.34 based on approximately 104 million diluted shares outstanding, with an effective tax rate of 25% on our non-GAAP adjusted net income.

With that, let me hand it back to the operator to open the call for questions.

Operator?.

[Operator Instructions]. Today's first question comes from Dan Day at B. Riley FBR..

Yes. As it relates to SingleTap, maybe just talk about any incremental progress on the direct side you've talked about. I appreciate the commentary on the licensing. You laid out the number of advertisers using the product, the monthly spend per advertiser in the Investor Day last November. Just any updates on that.

Is that generally trending in line with what you guys have expected so far?.

Yes, Dan, sure. Yes, as we think about SingleTap, there's really 4 different ways we're currently approaching the market with it today. One is, you've mentioned, with SingleTap licensing, and we talked about the progress of that in my prepared remarks. I know there's a lot of investor interest around that. Secondly is direct.

Third is working on SingleTap through our Fyber exchange, which we're just in the process of launching right now, and we're excited about that. And the fourth is in leveraging our prior AdColony relationships. So we're working at across all 4 of those items.

On the SingleTap direct side, if I want to look at the comps for that, year-over-year, we actually generated more margin dollars, but it was really focused on improving margins versus the top line. As you're well aware, we arbitrage CPMs for CPI. And so last year, we're really focused on top line growth. This year, we're much more focused on margins.

So I've been pleased with the progress that we're making there. But we really think about SingleTap more as an enablement capability across all 4 of those things and just kind of one single element. We really think it's a nice differentiator for us in the market..

Great. And then one more for me. Just maybe I think the midpoint of guidance for the third quarter is like 5%-ish year-over-year revenue decline.

Maybe just break that out between the -- and just give any detail you can in between the On-Device side and the ad growth segments, just would be helpful after quarter end and how things have trended a little more specific on where you're seeing some of the macro weakness between those 2 segments?.

Yes. Let me start at a high level of kind of how I'm thinking about it, and then I'm going to let Barrett kind of chime in on some of the specifics of your question. I think what we've seen right now is some of the COVID dynamics really created what I'll call supply slowdown for us.

And as I mentioned in my prepared remarks, we've seen that really improve over the last month or 2 as we start get more face-to-face and travel and some of the recessionary concerns that, I think, our O&R partners have to drive more revenue. So we've seen that really improve recently.

And I think that will really be a driver for us of results as we go forward. But in the very current time, that's created some supply headwinds for us because we weren't able to make some of the progress that we wanted to. And then we were able to kind of work through that because of the demand strength.

And with some of the demand slowing down and the macro headwinds, I think it's created a trough for our business in the present, but we really view that as a temporary thing going forward for us. So it's kind of like a -- just that combination of the supply demand dynamics are -- have been a little bit problematic in the very, very short term for us.

But I don't really want to emphasize on how we believe those are temporary.

But as far as some of the specifics, Barry, you want to take that?.

Yes, sure. So we called out on the call, between Bill's comments and my own, Dan, really 3 factors. The first one being macro conditions. We saw some dampening across demand, across both our businesses. And while others may have been harmed a bit worse, we weren't insulated from that.

The second piece -- the second 2 pieces were largely centered around our own Vice business, which we anticipated in our guidance in last quarter and have been planning for this. twofold. One is on our content business.

Bill referenced this on -- as we're migrating to -- migrating our products towards tailored to more post-pay devices, we've changed those products and begin to migrate during -- migrate to ramp new partners, and that's created a bit of a headwind.

The second one is, we've looked at when we've -- a focus for this year was to look at our growth in margins and expand those margins. There are certain areas where we tightened things to increase our margin profile. And that came at a reduction in revenue in some areas, top line revenue, but an absolute growth in gross profit dollars.

But those are the 3 areas that gave us a headwind, and we're mostly planned for with respect to the On-Device segment..

And our next question today comes from Darren Aftahi with ROTH Capital Partners..

Two, if I may. It's encouraging to see the focus on the margins. I'm curious if you could quantify perhaps the revenue opportunity you may have given up in the quarter. And then I just wanted to further understand the content piece on the media side with prepaid versus postpaid.

When you say kind of headwind, could you just dive a little bit more into that to clarify?.

Yes. So why don't I start, Darren, on the content opportunity, and Barrett can talk some about the revenue margin trade-offs. Yes, on Content Media, our legacy Content Media business has been largely prepaid. I think more than 90% of our revenues had come on prepaid.

We made some material investments of really going after postpaid just because of the larger addressable market, both in terms of users as well as advertising dollars. And so I'm excited about some of the progress we've made on that front.

But it's come at the expense a little bit of prepaid and slowing down in prepaid because we haven't been focused on that as much. So that's really about the commentary there. And now we're starting to see some much more engagement from our larger U.S.

carrier partners around that, again, given some of their desires to drive increased revenue engagement from their users. So that's been a positive development. But the offset has been a little bit less of a focus on prepaid for us..

Yes. And then just regarding the trade-offs in revenue and margin, just as a reminder, when we launched the acquisition of Appreciate and our DSP and SingleTap strategy, we had a broad reach there. And so while we've seen growth in those areas, we've refined our approach in certain areas to increase those margins.

And so those have -- Darren, to quantify that, you would see our margins expand. I mentioned 300 basis points year-on-year. Some of that is related to that effort and that initiative. I wouldn't break out or comment on what's the specific revenue impact, but you can get an idea of how we're expanding our margins and what areas were driving those..

Great. And if I could just squeeze one more in.

Your comment about the 5 partners in September and then 10 in December for the licensing business on SingleTap, are those broad-based? Meaning, once a licensing deal is signed, it's applicable across the entire entities platform? Or is it kind of piecemealed out?.

Yes, I think it's going to -- you're going to see it. It's going to be somewhat dependent upon partner. Obviously, the intention is to go 100% across the platform.

But I think what you'll probably see is -- similar to how we started with our carrier partners, where we do dynamic installs and we go then we go to Wizard and we go to SingleTap and we add things over time, I think you'll see something kind of similar here. We'll start, we'll get go, and then we'll continue to ramp it broader and broader.

But I think that's the intent of both parties involved. If you're going to go through the technical work and integration to do it, you're not doing without the intent of trying to go across to everything you're doing because it's improving conversion and efficiency.

But obviously, you want to make sure that everything out of the gate is working as advertised..

And our next question today comes from Anthony Stoss from Craig Hallum..

Pretty solid execution, especially on EBITDA in a tough environment, so hats off on that.

Bill, of the 10 SingleTap licenses that you expect to have live by the end of the December quarter, how many are you planning will be Tier 1? And what impact, as you ramp SingleTap licensee revenue, will that have on overall gross margins? Would take it up or take it down? Then add a couple of follow-ups after that for Barrett..

Yes, sure. So the first point is on the gross margins. We absolutely expect it to be accretive since this is more of a licensing SaaS model for us and something we're excited about. In terms of kind of the breakout of the partners, it's definitely a mix of partners in there in terms of what I would call kind of Tier 1s and Tier 2s.

But if you think about our business today on our device business, we have Tier 1 partners like AT&T and Verizon and Samsung, and then we have a variety of Tier 2 partners as well. And I wouldn't sleep on the Tier 2s in terms of paying the bill and generating that EBITDA you're just talking about.

So it's really going to, be for us a blend of both on SingleTap licensing as well..

Okay. And then Barrett, not asking for a guide for the December quarter, but December is typically strong seasonally for you guys.

And if you expect to ramp quite a bit of SingleTap licensing revenue in the December quarter, should we expect December to be up sequentially from September as you see things right now?.

Yes. I think it would be unusual to not have a December quarter above September, absent something odd. That would be our normal kind of plan for that seasonality. So yes..

And then lastly, just kind of OpEx going forward.

I know it bumps around, but are we generally now in a range, there's not an additional significant investments on the OpEx side?.

Yes. So for those that have followed the Digital Turbine story and even pre the material acquisitions last year, we've been able to drive scale and operating leverage and do that while we make investments. So those efficiencies have been masking some of the investments we're making.

But on the surface, you would only see modest increases and expenses relative to revenue, certainly. But we're still actively making investments, as I mentioned on the call, that will drive future returns. And -- but there's not any transformative expenses we're making. We're actually anticipate savings from unifying the systems onto one platform..

If I could sneak in one more for Bill. On the last quarterly conference call, you talked about revenue synergies with the acquisitions being about 10%.

I know it's tough in a tougher economic environment, but where do you say you're at on that 10% revenue synergies?.

Yes. I think we're hanging in that ballpark. But really, what we're seeing, especially since we moved from the gross to net reporting, is really where you're seeing the benefit is on the margin side, Tony, on the synergies. So I talked about my remarks is we saw pro forma margins go from 67% to 71% year-over-year.

And the biggest driver of that is those -- are those revenue synergies. So it started to really start paying some dividends for us..

And our next question today comes from Tim Nollen with Macquarie..

Great. I've got a couple as well, actually. First, just curious about pricing in the ad market. It looks like maybe a little bit of volume pressure, but it looks like pricing may be holding on.

Could you just talk a bit more about how that developed in the quarter? And maybe what you're seeing in the current quarter? And then secondly, there's been quite a lot of consolidation on the ad mediation side over the last several months.

Could you just speak a bit to your ability to compete and win revenues on that side of things?.

Yes, sure. So I'll start on the mediation side. So one of the things that I think most people are aware is, you saw -- you've seen some consolidation in the space announced recently with IronSource and Unity. Unity had a mediation solution on. IronSource had a mediation solutions, so there's consolidation there.

About a year ago, you saw a consolidation with Twitter selling their MoPub mediation service over to Applove, and so there's consolidation there. So there's actually fewer players now in the market. And we've been able to add publishers. I think with kind of 2 primary things, there have been our differentiation in that space.

Number one is our independence. A lot of the other players in the markets have their own app publishing titles. And so the ability for us not to have that and really, truly be independent for the publishers is something that I think that resonates with them.

And the second is our ability to offer them new users and user acquisition and leveraging things like our relationships with Verizon, AT&T, Samsung, but also with SingleTap. So having some differentiators in the market, there is something that's really allowed us to compete.

We're not a major player in the space, though, relative to some of those others, but we are seeing some nice traction there in growth. As far as your question on the pricing in the ad market goes right now, yes, it's kind of varied. We're seeing some nice pricing with social media companies, streaming video companies.

I mentioned some in my remarks, some of the verticals that are growing, utilities such as Weather, financial apps and so on, where the pricing power has been very strong.

But if we want to look at certain geographies such as Europe or other certain programmatic DSP players that may have some softer spends from their advertisers, that definitely flows through onto our exchange. So kind of it's a little bit of a mixed bag around right now.

I think the thing I was probably most proud of on our On-Device business was the fact that we're well north of $5 here in the U.S. for revenue per device. And so if you don't have strong pricing, you're not going to be able to put those kind of results up on the board with a 20% year-over-year growth. So that's something we're pretty proud of..

Okay.

And would you be able to comment on how things are going in the quarter now? I mean if you're talking about macro risk and things and some advertisers maybe holding off on spending, does that weaken your pricing ability?.

Yes. I think it's -- again, it's kind of -- I think we're seeing kind of similar trends. And as we think about our guidance, we always want to think about it in the sense of things don't improve versus do improve. I think you saw with our guide last quarter in terms of how we thought about things, and I think similar philosophy here and now.

But I think it's kind of similar commentary that it varies by vertical. It varies by market. It varies by operating system. It varies by brand spend versus performance or direct response spend. So it's kind of a mixed bag. Right now, there's definitely some headwinds and tailwinds we're seeing in the press on all those variables right now..

And our next question today comes from Mitch Pindus with Wells Fargo Private Bank..

Actually, my question was just answered. So thank you, and nice quarter, gentlemen..

Okay. Thank you..

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn this conference back over to Bill Stone for closing remarks..

Yes. Thanks, everyone, for joining the call today. We look forward to reporting on our progress against all the points we made on today's call, and we'll talk to you again on our fiscal 2023 second quarter call in a few months. Thanks, and have a great night..

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day..