Good afternoon and welcome to the Digital Turbine Reports Fiscal 2024 Second Quarter Results Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Brian Bartholomew, Senior Vice President of Capital Markets. Please go ahead..

Thank you. Good afternoon and welcome to the Digital Turbine fiscal year 2024 second quarter earnings conference call. Joining me today on the call to discuss our results are CEO, Bill Stone; and CFO Barrett Garrison.

Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements.

These forward-looking statements are based on our current assumptions, expectations, and beliefs including projected operating metrics, future products and services, anticipated market demand and other forward-looking topics.

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 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 our CEO, Mr. Bill Stone..

Thanks, Brian. And thank you all for joining our call tonight.

For the September quarter, we finished in line with our guidance range and I was pleased with the cash flow generation in the quarter with sequentially higher EBITDA and free cash flow and we still have much work to do to reach both our internal expectations and the potential of our broader total addressable market or TAM.

I continue to be encouraged with our effort and execution uncontrollables and believe they will pay dividends in the future as we work through some of the uncontrollables with soft U.S. device sales and also being able to expand the reach of popular Chinese applications on our U.S. supply.

I was also pleased with the tangible progress on a variety of capital investments against the future with new technology platforming, new ad tech capabilities, our hub initiative, alternative app distribution and SingleTap.

We believe these investments will prove to be well-served against our future growth and also have the added benefit of being able to reallocate many of those resources against shorter-term revenue initiatives over the next few quarters to drive growth.

I'll provide updates on those future growth drivers after providing some operational updates and commentary on the business. For the September quarter, we had $143 million of revenue, $28 million of EBITDA, $0.13 of non-GAAP earnings per share and our gross profit margins were 47%. Our EBITDA improved sequentially driven by reduced controllable costs.

Barrett will talk about the details in his remarks, but it was positive to also see us reduce our debt in the quarter by $22 million, driven by improved sequential free cash flow. From a segment perspective, despite continued soft device sales here in the United States, our on device business grew revenue sequentially to just over $99 million.

Operationally, I was pleased with our improvement of revenue per device or RPD in the U.S., which continues to be over $6 for all of our partners and for two of our U.S. postpaid carriers we almost hit $10 for the first time.

Over the past five years, our RPDs have accretive from just over $2 in fiscal year '20 to $3 in fiscal year '21 to $4 in fiscal year '22 to $5 in fiscal '23 and today is over $6. We continue to see strong demand for our platform both from advertisers and new products contributing more revenue to each device. Expanding global demand to our U.S.

device supply has also been a big driver of those improved RPD results as U.S. demand is less than 20% of revenues on our U.S. supply despite some continued headwinds on being able to run all the Chinese media dollars that we have budgets for. While we expect the current quarter to experience continued device softness here in the U.S.

going into 2024 we will be expanding our global telco and OEM relationships to help offset weakness in device sales from our existing partners.

As an example to this point, many of you've seen our announcement with Xiaomi that is focused on growing in Europe, Middle East, Africa and Asia Pacific and we're also adding new operator in Latin America in this current quarter and our global pipeline remains robust.

Regarding our content media business, as we've discussed on prior calls, we expected it to trough in the June quarter and that is what happened as we showed sequential growth quarter-over-quarter in September. On our App Growth Platform segment or AGP business, we finished with $46 million in revenues.

We're seeing sequential improvements in eCPMs rates on both our brand demand and DSP from advertisers and in particular it was encouraging to see our brand business continue to grow nearly 10% sequentially as we saw eCPMs improved by nearly 25% in the quarter.

The macro market has stabilized and our execution is improving but there's still on some uncertainty baked into our outlook given some of the global macro and geopolitical issues others have mentioned in their commentary.

Our exchange offer wall business was roughly flat in the quarter and the exchange business continues to be well diversified globally with approximately 37% of our publishers in North and South America, 51% in Europe, Middle East, Africa and 20% in Asia-Pacific.

We have nearly completed our consolidation of multiple exchanges into a single DT exchange. The main benefit of this consolidation is the efficiencies and new products such as STK bidding that will helps - will help us capture more ad dollars from companies such as The Trade Desk, Google and Amazon into the future.

And as part of that migration, which will be complete in the current quarter, we've also chosen not to migrate some of the many thousands of long tail publishers on the legacy exchanges over to the DT exchange, which will create headwinds on past comps even as we grow our DT exchange into the future.

We've also beta launched our evolution of our Demand Side Platform or DSP that we brand as DT Direct.

This allows us to have more intelligent buying and selling of ad dollars across the DT Network which means better margins and better return on ad spend for our customers as we can better leverage SingleTap, our first-party data, data science machine learning and AI at better scale and performance than our legacy DSP.

These enhancements mean that DT Direct will be a growth driver for us in 2024. In addition to leveraging SingleTap on the DSP, we continue to utilize it in many other ways across our Device Solutions as an enablement technology.

The first is direct demand via the DSP, where we leverage our own AI and machine learning to target advertising to SingleTap devices. The second is enabling other third-party demand partners from companies who can buy advertising on our SingleTap-enabled supply.

Third is licensing mobile web traffic from brands such as Epic Games' Fortnite title which end use a single to convert web visitors to native applications. The fourth is distributing alternative versions of the applications such as what we do with our hub and Amazon version and so on for our direct distribution of the device.

And finally, it's enabling large distributors of applications such as large social media players to leverage the conversion rate benefits of SingleTap across your network. We continue to make progress on all fronts, including with multiple social media companies.

In particular, I'm encouraged by the number of publishers who wanted to use SingleTap to distribute alternative builds other applications, which fits nicely with our strategy of alternative app distribution hub that I'll talk later in my remarks.

And as the market expands with alternative builds SingleTap will be a primary differentiator from others for distributing those new versions of applications. Turning to future, I want to spend a few moments highlighting our longer-term growth drivers.

We believe we're uniquely positioned with our on-device technology including our first-party data, our AI machine learning tools, SingleTap and our extensive publisher relation and operator and OEM relationships.

We have launched our first alternative app distribution products which we brand as DT Hub with five operators here in the U.S., leveraging our Aptoide investment that are generating revenue today. We have increased our equity investment in Aptoide to almost 20%.

The carrier feedback has been encouraging and we expect to be across many tens of millions of devices by the end of this calendar year.

It's still early days and still not yet material to our overall results, but we are seeing incremental and higher revenue per device from devices engaging with our Hub product, which is a combination of in-app purchase revenues and incremental cost per install or CPI revenues helping publishers acquire new users.

So the focus for us is driving more devices, more engagement and more downloads.

We've not yet started leveraging our in-app advertising assets into this alternative app distribution but do expect that to add an additional revenue stream to this opportunity, and all three of these monetization capabilities being drivers of incremental RPD into the future.

Monetizing via cost-per-install and in-app advertising are all very natural extensions of our existing business models. We also believe that global regulatory environment will provide additional thrust to this vision, especially in the EU as the Digital Markets Act becomes effective next March.

Many of you have seen articles in the press talking about a concept of direct distribution of applications that involve mega-cap tech players. This is highly strategic and I want to spend a few moments describing it.

Direct distribution is where any app publishers such as Spotify, Netflix, Epic Games and so on, is running advertising for a user to install its application.

Rather than take the user to the Apple or Google store after clicking on the ad it would direct download the application to the device with its own unique version of an application outside of traditional app stores.

And to achieve this, there are some market pain points that need to be solved such as making it easy for app publishers to port their apps to a new version, managing the payments in advertising inside the application, installing the apps without friction as there may not be a store involved and also managing the creation of the applications.

And these are all things that Digital Turbine is uniquely positioned to deliver on whether directly via our own hub product or indirectly through white labeling our capabilities to large players who want to leverage their large audiences.

And to that end, in addition to Aptoide we're expanding our partnership with Flexion who is the market leader in porting applications into alternative version.

Flexion works not just with us but with all the other major alternative app stores such as the Samsung Galaxy store, Amazon app store, Xiaomi Get Apps, Huawei's app gallery, Aptoide, One Store in Korea and many others.

In addition to paying down our debt, we're allocating our capital to pursue these new investments with a new dedicated team focused on unlocking this future growth opportunity. To recap, we have an enormous addressable market, large customers that want our solutions and operating leverage with our business models.

Our focus is bringing these elements together with all the initiatives underway mentioned earlier in my remarks from alternative app stores, ad tech enhancements, platform modernizations, strategic media relationships and leveraging our global device footprint. This is our formula for future growth and scale.

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. Overall results in the quarter were in line with our expectations for top line and profitability, delivering sequential improvements in EBITDA and cash flow measures. Revenue of $143.3 million in the quarter was lower by 2% sequentially and down 18% year-on-year.

Within ODS revenues were slightly up sequentially from the June quarter and down 9% to the prior year September quarter. And as Bill referenced, while we saw softer device volumes in Q2 this impact was offset by improved U.S. revenue per device which exceeded $6 per device and increased materially year-on-year.

Our content business delivered sequential growth in the quarter, and while this part of our business has experienced headwinds from prepaid the content media from a year-on-year comparison we expect this grow over comp to run off within the December quarter. On our AGP business Q2 revenues declined 32% over prior year.

While we're encouraged by the improvement in the core business, the overall decline in AGP year-on-year continues to be driven largely by the short-term impact of the consolidation and exiting of certain legacy business lines that we have discussed previously and we would expect these revenue lines will be fully consolidated by the end of the fiscal 2024.

I'd reiterate Bill's earlier comments that despite the near-term headwinds we are encouraged by the platform consolidations we're making to bring the businesses together and expect these actions to have a positive return on our future growth.

Our consolidated gross margin was 47% in Q2, which was constant sequentially and was down from 52% in Q2 from the prior year, driven largely by product mix shifts year-on-year, where we experienced an increase in the mix of certain lower-margin products.

As a reminder, while gross margin rates can fluctuate from quarter-to-quarter, we generally anticipate long-term margin expansion as we continue to execute on growth strategies. We remain disciplined with expenses and cash operating expenses were $39.4 million in Q2, a reduction of 7% from prior year and represented 27% of revenues in the quarter.

I'll highlight that we incurred lower-than-normal performance compensation expenses in the quarter, which we would not anticipate recurring in the second half of the fiscal year.

While our expenses have remained relatively constant, we are making important investments that Bill referenced to ensure we capitalize on the full potential of our growth strategy.

These internal initiatives are focused on integrating the technology platforms and back office systems across our assets, developing new ad tech capabilities, and also on strategic growth initiatives, Bill discussed, namely DT hub, alternative app distribution and SingleTap.

While the current and near-term periods will incur increased transformation costs due to the completion of these platform consolidations and new growth initiatives, we expect both the efficiencies and growth to begin to be reflected in our results as we move into calendar year 2024.

And as I've discussed previously during this investment phase we will continue to remain highly focused on operating efficiency. Turning to profitability. Our adjusted EBITDA of $27.7 million in the quarter increased $0.7 million sequentially and was down from $48.2 million in the prior year.

Our EBITDA margin of 19% grew sequentially from 18% in the June quarter and given the inherent operating leverage in our business model, we expect that active focus on expense measures and integration efforts we are taking will strengthen the platform as we return to growth and enable a greater portion of those dollars to fall to the bottom line.

In the quarter we achieved non-GAAP adjusted net income of $13.9 million or $0.13 per share as compared to 35 million or $0.34 per share in the second quarter of last year.

As compared to prior year, we recorded a $2 million non-cash FX loss in the quarter and also incur -- incurred greater interest expense driven by rising rates on our outstanding debt. Our GAAP net loss of $1.61 per share in the second quarter reflects a non-cash goodwill impairment charge of $1.46 per share or $147.2 million in our AGP business unit.

This charge was driven by the recent market-based factors such as the sustained decline in our market cap and increases in interest rates, as well as updates to our forecasted AGP cash flows consistent with our guidance disclosed today.

There was no change to the goodwill for the ODS reporting unit and we remain excited about the AGP segment given the ad tech enhancements we've made and that are underway to enable future growth.

$23.9 million in free cash flows generated for the quarter enabled us to exit Q2 with $58.1 million in cash after paying down an additional $22 million in debt using free cash flows from operations to further deleverage our deposition.

Our debt balance ended the quarter at $386 million drawn on our revolving credit facility and our business --- as our business continues to strengthen, we would expect to continue to pay down our revolver.

We continue to be confident in our balance sheet and capital position given our profit model cash flow generation and access to low-cost credit facility.

Now let me turn to our outlook, we currently expect revenue for fiscal Q3 to be between $144 million and $150 million and adjusted EBITDA to be between $27 million and $31 million and non-GAAP adjusted net income per diluted share to be between $0.16 and $0.19 based on approximately $104 million diluted shares outstanding and an effective tax rate of 25%.

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

[Operator Instructions] Our first question comes from Darren Aftahi with ROTH MKM. Please go ahead..

Hi guys, good afternoon. Thanks for taking my questions. Few if I may, if my memory serves me correct last December quarter you guys guided and I think some of your channel partners maybe had some handset expectations that kind of fell off the cliff second half of the quarter.

I'm just wondering if there's any conservatism baked into this December quarter similar to that.

Second question, Bill, the comments you made about some of the legacy long tail publishers on the DT Shane's not migrating, is there a way you can kind of quantify to the how big and how long that impact may take? And then maybe one for Barrett, your free cash flow was pretty nice in the quarter. Congrats on that.

I look back on the last quarter and there's kind of some variability sequentially, and I'm just trying to understand what maybe is a steady state of free cash flow generation vis-à-vis EBITDA cash flow. Thanks..

Yes, hi, thanks, Darren. I'll take the device sales and the DT exchange and as you said Barrett can take the free cash flow one. Yes, I think on the device sales one of the things we saw here in the U.S. is a lot of carriers back during COVID had moved from two to three-year leases on the devices, both across Android and iOS.

That will burn off next year. And so I think that'll be a good thing in terms of change in some of the trajectory around U.S. device demand. But in terms of the focus on the holidays right now we want to make sure that yes we're pretty conservative in what we're expecting on devices.

And just in the September quarter we saw amongst our large carrier partners down millions of devices between the large carriers from September quarter, last year's September quarter this year.

So I don't know if we would expect anything to dramatically change in the current quarter around that and you can do the math, multiplying it by north of six box in terms of what that impact is to us. So that's something we look forward to getting back on track with the operators next year.

And then on the DT exchange side, yes, we're consolidating and really focused on where the puck is going versus where it's been.

So, I mentioned a lot of things in my remarks around new features on the exchange like SDK bidding and what we see from large brands that are buying advertising through the Trade Desk or Google's TUV360 or Amazon whatever they want to buy through STK bidding.

So again our exchange going into where things are going in the future to capture those dollars is going to be really key and critical.

So that's where we're focused, but as part of that there's probably many thousands of long tail publishers from the legacy companies that are doing very small dollars where it's just not worth the effort to migrate them over.

But in aggregate, we still have to comp over those and that's millions of dollars of revenue a quarter, it's not tens of millions and is something that will burn off and our expectation is we'll go through to where the growth is going with a lot of these brands and larger omnichannel DSPs. And now, I'll turn it over to Barrett, on the cash flow..

Yes. Darren, I think your question on the cash flow was kind of timing and seasonality and kind of the flow through. So we had a little over $27 million in cash from operations in this quarter. As we touched on last quarter, you're right, we mentioned some timing elements on working capital that would push into this quarter, which we saw.

I think that on a quarterly basis over the year, we'd expect the flow-through of EBITDA to our cash from operations to be around 50% and to give or take a quarter or so. Those will - there are some timing elements, especially when we see rises in revenue. But otherwise we see about 50% of our EBITDA turn it into free cash for us..

Great. Thank you. I'll pass it on..

Thanks. Darren..

Our next question comes from Omar Siddiqui with Bank of America. Please go ahead..

[technical difficulty] for Omar. Thanks so much for the question - for taking my question. So I know you guys are were working on - working with some of the supply partners in the U.S. to fill demand from the Chinese e-commerce players like TMall like you guys have touched on that a little bit in the prepared remarks.

I'm just wondering if there has been any progress there. And just in terms of timeline like when should we expect sort of the hurdles to clear out? Thanks..

Yes. So, our expectation is that we're going to see some positive progress in the current quarter, and we do not bake that into our outlook, just because it's not here yet. If it happens, then that's great. But your expectation is we are seeing a positive movement in the current quarter.

But I think as we go into next year, we're going to see some improvements there. We continue to see a lot of popular Chinese apps that want to run on U.S. supply. You were given some of the historical geopolitical things we've seen throughout the balance of this year that's really limited the dollars that we've been able to run on that.

It does vary by partner. So partner X has maybe a little more conservative view then partner Y on these things and then even within the apps themselves. So there's really two impacts there. One is the actual dollars from the Chinese, the popular Chinese applications.

But the other thing is the rising tide lifts all boats, meaning that the rates that others now have to pay when there's higher rates coming in from them. So there's kind of a double whammy there.

So we're obviously working hard to derisk that with our operator partners because our expectation is that's something that could be a material driver for us on our OES business..

Great. Thank you very much..

Our next question comes from Anthony Stoss with Craig-Hallum. Please go ahead..

Hi, guys. Bill, over the last couple of quarters, you've talked about a large social media company expected to go live with SingleTap by the end of this year. Can you update us where they stand? And then I have a couple of follow-ups..

Yes, sure, Tony. Yes. Unfortunately, a large social media company doesn't want me making any statements on their behalf so unfortunately I can't make any statements here today around that. I'd like to - so I kind of say stay tuned, nothing has changed from our prior comments or remarks.

We continue to have good relationships there, but unfortunately nothing I can say specifically on the topic today..

Got it. And then just I'm going to pick one of your SingleTap customers, Amazon. I think they've been live for maybe just short of a year.

Talk to us about what the experience has been, do you expect them to renew? What do you expect pricing? Because it seems like you're not generating a lot of revenue yet from SingleTap, more or less giving it away or attractive prices to get them hooked.

I'd love to hear kind of the experience of your customers who have been using it for, say, a year or less..

Yes, sure. So Amazon specifically today what we do with Amazon is we have a licensing deal with Amazon where they pay us a fixed fee, let's call it you seven figures a year in revenue to distribute the alternative versions of the Amazon apps, so, and then the store itself. So think about things like Prime and Audible and so on.

And that relationship has been going great, with Amazon. Our next step with them is to expand it to third-party applications.

So think Candy Crush, Uber, Starbucks, that kind of thing and that would be kind of next leg of the relationship there that would have a different monetization with them and so we're working through some of those integration details right now. But I characterize relationship is in a good spot.

I think we all want to see things move faster than what we're seeing right now. But in terms of delivering the conversion rate benefits that they expect we're absolutely seeing that in the marketplace..

Got it. And then just trying to get a little bit more info on the Latin American carrier that you talked about that you expect to go live with your RPD. I mean really attractive for carriers.

Where do you stand with kind of interest levels from other international carriers?.

Yes. So the pipeline is really robust and I expect to have some good things to talk about here over the upcoming future because the pipeline is in really good shape right now.

We're in the process of launching with this quarter with some new Latin American operators, which is encouraging to continue to expand our presence down there and then I touched on Xiaomi as well in my comments.

And really the point here is rather than just being only relying upon a few operators here in the U.S., we've got to go ahead and cast a wider net and get a wider footprint so we're not relying upon just upgrade cycles here in the U.S. and that's exactly what we're doing..

Got it. Thanks, Bill. Appreciate it..

Thanks, Tony..

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

Hi guys, thanks.

The last few years, I think your fiscal fourth quarter revenues have been down 10% or so and EBITDA a little bit, any reason it should be different this year?.

Yes. I don't know that it would be much of a different seasonal factor. Tim, one thing we are considering is last December quarter was quite unique and didn't have quite the holiday seasonal lift that many expected in the ad markets. So, we've taken what we think is a pretty prudent approach to how we're thinking about our December quarter.

But I don't think outside of historical trends a seasonal decline, a normal seasonal decline wouldn't be odd for Q4 this year..

Got it. And can you give us a sense of the profitability of the two main lines of business at this point and maybe relative kind of growth rates for '25? Yes..

Tim was your question around -.

Well, can you give us a sense of, is there much difference in profitability for the two different business units on an EBITDA basis and then and how about growth into 2025, maybe in total for the two units? Yes..

Yes, so let me start with the first one on kind of profitability. I'd say there is a difference on profitability, especially when you think about the margin and we have some details in the Q that you will be able to review which breaks out the profitability. It doesn't have all the expenses, but just give you a sense of that.

But as a reminder, much of our exchange business on our AGP business is reported on a net basis. So you will see the margins are slightly higher. Bottom on an absolute dollar basis they are similar profitability. Of course, there are different products within each of those business units that have different economic and profitability profiles.

But typically, I'd say they are similar on an absolute dollar basis, but on a margin basis, our AGP business would be higher.

And then secondly, given the growth profile, we're not guiding to next year, but you would hear optimism around many of the things, the investments we put in place as well as some of the comps that we're growing over that would enable and allow us to grow next year..

Thank you..

Thanks, Tim..

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

Thanks everyone for joining the call tonight. We'll look forward to reporting on our progress against all the points made on tonight's call. We'll talk to you again in our fiscal 2024 third quarter call in a few months. Thanks, and have a great night..

The conference has now concluded. Thank you for attending the presentation. You may now disconnect..