Digital Turbine Inc (APPS) 2015 Q1 法說會逐字稿

Good day, and welcome to the Mandalay Digital first-quarter 2015 financial results call. Today's conference is being recorded.

At this time, I will turn the call over to Andrew Schleimer. Please go ahead.

Thank you, and welcome, everybody, to Mandalay Digital's fiscal 2015 first-quarter earnings conference call. I am Andrew Schleimer, Mandalay's Executive Vice President and Chief Financial Officer. With me today is Bill Stone, our President and Chief Operating Officer.

Statements made on this call, including those during the question-and-answer session, may contain forward-looking statements that are subject to risks and uncertainties. Please refer to the Safe Harbor statement included in today's press release, as well as Mandalay's periodic filings with the SEC, for a complete discussion of the risks and uncertainties that could cause actual results to differ materially from those you may perceive today.

We will be discussing certain non-GAAP financial results. The press release issued earlier today contains a reconciliation of these non-GAAP financial results to their most comparable GAAP measures.

Now it is my pleasure to turn the call over to Bill Stone.

Thanks, Andrew. Appreciate all of you joining our call this afternoon, as well as get to see many of you at our Investor Day last month. We've got a lot of information to share today, and as I know many of you are focused on the future, I'm going to begin there and then work backwards to the present. Then I will end with some comments on our first quarter. And when I'm through, we'll turn the call over to Andrew to discuss our financials and we'll open it up for some Q&A.

I'm excited to kick off the call with some exciting news about our future. We've signed a multi-year agreement with Verizon on their intentions to deploy Ignite across their entire Android device lineup, which historically has averaged approximately 20 million devices per year. Verizon has been very pleased with the performance of Ignite on the LG G3 smartphone, which launched on July 17. Our Ignite software has performed as advertised with respect to installation rates, operational performance, and other metrics, all meeting or exceeding Verizon's expectations.

We anticipate doing some joint press with Verizon in the near future to provide additional public details and information on the benefits of Ignite to both consumers and advertisers. I'll let Andrew update on how we will manage this new positive information into our financial guidance. But in the big picture, this is a major milestone for our business and validation of our broader strategy. We expect this not only to materially drive our future growth with Verizon specifically, but also help us with other customers, as Verizon has a very strong halo effect across the entire global operator landscape.

In addition to this news, we expect launching Ignite on two additional smartphones and one tablet with Verizon over the next 45 days. We are working numerous future implementation details with a Verizon, real-time, so we'll be back to you with those if they develop. Our intention is to provide you with information as it occurs to ensure transparency, but also want to reiterate Verizon is an important customer, so we need to ensure we're not communicating details that they do not want publicly announced.

In the present, we've not only been one working hard supporting the Verizon launch but also preparing for our IQ app [to our] launch with T-Mobile, which we expect over the next 45 days. T-Mobile has been a great partner to work with, and both sides are very excited about the launch.

We've also been busy launching and preparing Ignite launches with a number of other global customers, including MSAI in India, Globe in the Philippines, and Vodafone and Australia. We continue to work campaigns with our existing Ignite customers such as SingTel, Cellcom, and Avea.

And also we had previously announced our launch of DT Pay across the SingTel group, and do expect to deploy that over the next few months. We are pleased to announce that Electronic Arts, or EA, will be our first customer on DT Pay in Southeast Asia as we begin to port EA's titles such as Bejeweled, Tetris, FIFA 14 and so on, to operators in Singapore, Taiwan, the Philippines, Indonesia, and New Zealand.

We continue to have some geopolitical and administrative issues impacting us in both Russia and Thailand. I believe we will ultimately launch in those markets; but, in the short term, there have been some delays that we are working through, real-time.

And finally, our pipeline remains strong and robust. We have said that we look at expanding our pipeline both in terms of breadth of new customers, and depth of new services with existing ones. There are numerous new potential customers that we expect to close and announce over the next 90 days, and a few existing customers wanting to deploy additional services as well. While we are not going to pre-announce any of these deals like we have done in the past, the bottom line is there is strong momentum in the marketplace for our products and services, and we are taking advantage of that.

And finally, in the present, we've been securing advertising with our partners to support current and future Ignite and IQ launches. We announced at our Investor Day that we had commitments for over $5 million in media. In the short time since, we have also gotten commitments for another $1.5 million of media, bringing that number to $6.5 million of media against existing and future Ignite and IQ deployments.

With all that excitement about the future, I did want to provide some commentary on our first quarter. We were disappointed, but not surprised by the results, as they were not materially off our internal budget. This quarter's results do not impact our view of the fiscal year, as we have been consistent that the ramp for our new products was to begin this summer, and the first quarter did not include any revenue from those lunches. We continue to reiterate our guidance for 12 million Ignite installs and 1 million IQ installs.

We have redirected many of our internal resources towards executing against the new priorities in the business, including the Verizon opportunity. We have not implemented things that could have improved the results in the quarter, but focused on those things would have increased the execution risk with Verizon, T-Mobile, and other new customers for future and more material growth prospects.

A few examples of those include delay of our streaming music launch in Australia, new pricing plans for our content management business, some new technology for our Italian business, and the delay of launching a few new DT Pay content providers in Australia.

However, with that being said, we remain excited about the prospects of these businesses. Many of those opportunities I just referenced will be launching over the next 60 days, and we expect them to improve the current trajectory of the content management and DT Pay businesses. So we do not view the past quarter as the new normal, as far as the historical business; but, rather, just us as a small and rapidly growing business, making short-term trade-offs to improve prioritization of activities that will generate higher returns for shareholders in the long run.

Ultimately, we see the convergence of Ignite, IQ, content management, and Pay to build an end-to-end ecosystem for mobile operators, device OEMs, distributors, and other third parties that want to participate in monetizing mobile applications versus the large, over-the-top providers today who are siphoning most of that revenue to themselves. We see Ignite and IQ managing the preload and recommendations, our content management system handling the ingestion, and the Pay handling the commerce and payments.

And finally, before I turn it over to Andrew, I wanted to provide an M&A update. We raised capital in March with the explicit purpose of helping us continue to scale our business. We've been disciplined in our approach, having passed on a few opportunities where we could not come to valuation terms that are in the best interest of our business or our shareholders. There are a couple potential acquisitions that we are excited about, but nothing to report on today. Know that we are in active conversations, and hope to have some news to report soon on the M&A front. And as a reminder, we are looking for companies that can help us with distribution, technology, scalability; and businesses that have a clear strategic fit to what we are building.

With that, I will turn it back over to Andrew for an update on the financials.

Thanks, Bill. Expansion with Verizon is truly a major development, and something we are all very proud to have achieved. With the largest US carrier supportive of all of our efforts, we are in great position to continue ramping our high-growth Ignite and IQ products, both domestically and overseas.

As Bill mentioned, we have been focused on scaling the business for the recent and upcoming Ignite and IQ product launches. We made a conscious decision to leave some short-term opportunities on the table in favor of making sure we flawlessly executed against much larger opportunities. And as you can see from today's news, that decision was clearly the right one.

This decision impacted our results for the first quarter. But, more importantly, it gave us the ability to deliver strong growth, not only for the remainder of this fiscal year, but for a number of years beyond. We are in the process of evaluating the near- and longer-term positive impact of the Verizon expansion, and look forward to providing you with an update as to what this means to our fiscal 2015 guidance, as well as some insight and perspective into fiscal 2016. We will work to come back to you within the next 30 days with more specifics. That said, this is clearly a major accomplishment for Mandalay Digital.

Now shifting focus to Q1. Revenue from continuing operations for the first quarter of fiscal 2015 grew to $5.6 million, up from $4.8 million last year. Recall that we divested Twistbox, a non-core operating business, in the fiscal 2014 fourth quarter, so that business's results are reflected as discontinued operations. Unless otherwise noted, my discussion today will refer to results from continuing operations. This quarter, 88% of our revenue was generated from customers in the Asia-Pacific region, up from 77% last year. Customers in EMEA and the United States made up the remainder of our revenue for fiscal 2015 Q1.

As we've mentioned previously, we believe that customers in the United States will become a much larger percentage of our total revenue base due to the recent and upcoming launches of our Ignite and IQ products in this country.

Gross profit for the first quarter was $1.4 million compared with $1.7 million a year ago. The change related primarily to sales mix, since we realized a higher proportion of DT Pay sales in our Asia-Pac region compared with last year, as the product was in the process of being launched and ramped.

Adjusted gross margin, which is a non-GAAP measure and is defined in this afternoon's press release, was approximately 32% for the fiscal 2015 first quarter, compared with approximately 43% a year ago. We continue to expect adjusted gross margin to be substantially higher for fiscal 2015 as we continue to roll out and install our high-margin Ignite and IQ products. On a GAAP basis, gross margin for the first quarter was 26% compared with 35% last year. Again, the change related primarily to sales mix.

Total operating expense for the first quarter was $6.1 million versus $5.8 million last year. The current quarter included approximately $900,000 of non-cash items, including depreciation in stock-based compensation, compared with $1.3 million of non-cash items in the prior year. We believe that our current cost structure is sufficient to ramp and scale our existing business. And while we do not expect material increases in operating costs, as previously noted, we will be back to you with a more refined view once we fully incorporate the expanded Verizon deal.

This brings our loss from continuing operations, net of income taxes, for the fiscal 2015 first quarter to $4.6 million or $0.12 a share, based on 37.4 million weighted shares outstanding. For last year's first quarter, our loss from continuing operations, net of income taxes, was $5.4 million or $0.29 a share on 18.9 million weighted shares outstanding. Adjusted EBITDA, a non-GAAP measure defined in today's press release, was a loss of $2.9 million for the first quarter of fiscal 2015, compared with a loss of $2.3 million for the same period last year.

Cash and cash equivalents was $18.7 million at June 30, 2014, compared with $21.8 million at the end of the last fiscal year. Reminder that both periods included $200,000 in restricted cash, on top of the stated amounts. Accounts receivable remain stable from the end of 2014, and our working capital position was a positive $15.3 million compared with negative net working capital a year ago.

To reiterate, we are evaluating the immediate and longer-term impacts of our commitment from Verizon, real-time. This is no small task, and our objective is to be as precise as we can be. To that end, we will be back to you within the next 30 days with an update on guidance for fiscal 2015, as well as to insight into fiscal 2016.

Before turning it over to your questions, I'd like to reiterate a number of points that Bill made, and leave you with the following. Number one, our near-term results are not indicative of our ability to generate meaningful revenue growth for this year and beyond. As we discussed, our focus on quickly ramping our Ignite and IQ products opens significant long-term opportunities for Mandalay, and we seized them.

Number two, much of our growth this year focuses on advertising. As we mentioned at our recent Investor Day, we had commitments for more than $5 million of media and now have eclipsed $6.5 million at CPI rates ranging from $0.50 to $3, depending on geography.

Number three, we are preparing for additional product launches through the remainder of this calendar year while also attracting new customers for Ignite and IQ.

Number four, as revenues ramp, the operating leverage we built in our operating model should begin to bear fruit.

And finally, number five, we remain highly confident in our ability to deliver growth and profitability to all of our stakeholders.

With that, I would like to now open it up for questions. Operator?

(Operator Instructions). Jon Hickman, Ladenburg.

I'm pretty impressed with this Verizon opportunity here. Could I maybe flesh out a few numbers on the phone? I know it's on the fly, but I just want to make sure I'm thinking about it right.

Yes, go for it, Jon.

So, if Verizon's sells, say, somewhere between 20 million and 25 million Android devices a year, and you've got four slots on each phone, that's 80 million slots at somewhere around $2 apiece. We're looking at revenue of more than $150 million a year. Am I thinking about that correctly?

Yes, so Jon, I think that, yes, you are definitely thinking about it correctly, assuming that the open rates on those slots are 100%. So right now, you've got to take some haircut for the open rates on that, but I think that the market opportunity that you're talking about is accurate.

Okay. Could you give us any indication of what the open rates have been on your early launches with Verizon?

Yes, yes, sure. So, right now, I don't think that's something that -- I don't want to speak on behalf of Verizon and get myself in trouble on what -- we call those what the attribution is for those. So I'm not going to give you any specific guidance on Verizon's. But what I will say is that we anticipate open rates anywhere from 50% to 80% depending upon that campaign, how surgical and how targeted it is over a 30-day period. That's our expectation internally, and we've got data internally to support that, as well as working with our different partners around the globe on that. But, unfortunately, I'm not going to give you anything specific on Verizon today.

I think the one thing I would really want to emphasize about Verizon -- I said in my comments, but I really want to put it in all caps here -- what Verizon is really looking for to make this decision was less around open rates and a specific campaigns, and it was much more ensuring that deploying this additional monetization opportunity for them did not negatively impact anything in their core business. So, all of us as customers, we go in and get our cell phones, an upgrade, and that's not being disrupted. The network that's delivering the apps isn't being disrupted. The customer service isn't being disrupted. Nothing else on your device is being disrupted.

Those are the things Verizon was really, really interested in. And that's where really Ignite delivered the goods, and where our focus was on a very operational level. I think in terms of the open rates and the apps themselves, you're going to see a lot of segmentation and targeting and increased sophistication of right app to right customer as we go forward in time. And those kinds of things are really what's going to drive the open rates north.

So, one other question. It seems to me like this happened very quickly, since you just got involved with Verizon back in April, I believe. So the decision for them to go from a few phones to all of their phones seems very quick. How long have you been working on that?

Yes, we've been working with Verizon a long time, early on in the process, and understanding the strategic value for both sides. So this is something that took a long time to get us to launch in July. That's where a lot of the legwork was, really in terms of the overall sales process, getting these guys ready to go and getting operational readiness, and all those kinds of things going. But once the results were there, you can see just the speed at which Verizon has moved, I think says a lot. And it's something that we're quite excited about. And for those of you that are familiar with Verizon -- and I can say this, having worked there in my past -- they usually don't move this fast. So to have Verizon move this fast is something we're extremely excited and enthusiastic about, because it shows their commitment to working with us.

And then one last question. Is it going to be a challenge for you to sell that many slots?

Yes, so, on that one, I think that was really the point I made, and Andrew reiterated at the end; we announced the increase in media that's already being sold against it. Right now, we're seeing advertisers wanting to be on the home screen of the device. That's beachfront property for them. And we've already sold all that inventory, even before a lot of these devices have launched because of their excitement around what we're doing, and the opportunity to better monetize through operators versus other channels that these advertisers go through.

So not a problem at all. I think the main issue for us, if I'm going to highlight a risk here, was really about -- we just got to get the devices out there. And the faster we can get the devices out, there the faster the monetization is going to happen. And so I think about it much more on beginning the demand side with the software on the phones, is really the one we've got to focus on. More so than the supply side with the advertisers, because the demand for those guys is definitely there.

Okay. Thanks, I'll let someone else ask a few questions.

Mike Malouf, Craig-Hallum Capital Group.

Let me lend you of big congratulations on the Verizon agreement. That's certainly a huge accomplishment.

Thanks.

I'm going to ask probably a simple and obvious question. But when you gave guidance at your Analyst Day, which was a reiteration of guidance prior to that, of $46 million to $50 million in revenue, I guess it's safe to say that that number is not coming down with this new expanded relationship.

Yes I think, Mike, what we'll do is we'll be back in 30 days, as we evaluate the impact of the Verizon relationship. And we'll be back to the Street with as much detail and precision as possible at that time.

And, Mike, I'll put a little color on that. One of the things we want to do is we want to improve how we continue to manage the Street and manage expectations, and we continue to really want to work at that. So when we come back, we want to really do this in a holistic way. So when we come back and give guidance, I also want to have you guys think about fiscal 2016 as well. We haven't really talked about that, in terms of now we've got some better visibility into what that means to the business -- obviously, what's happening in terms of the immediate term and then the rest of this fiscal year. So I want to come back to you guys with an entire package so you can see the short-, medium-, and long-term value that we're building here.

Right. But I'm just trying to interpret -- it is going to be a positive impact on that; we just don't know what the actual impact is. Is that the right way to think about it?

So, Mike, we're not here to update or change the guidance. I agree, though; it's hard to see that announcing Verizon as a negative, that's for sure.

Okay. You announced that your rates are $0.50 to $3. And I'm just wondering, can you give us just a little color on that? Where would it be $0.50, or what devices or what apps? And where would it be $3? I guess I'd assume that's here in the US, maybe on Verizon. But can you give us some color on that?

Yes, sure. So as we now are launching customers in a variety of different countries around the world, what we basically have in terms of a rate card is a -- think of it almost like a 2 by 2 matrix. Along one side of it, you've got the different types of devices. So think of an LG G3, a Samsung Galaxy S5, and so on, all the way down to a Tier 3 Chinese OEM along one axis. And on the other axis, imagine having the countries that we are deployed in -- from the United States to Turkey to Israel to India and so on -- and then you can basically plot in between.

So I would say a Tier 3 Chinese OEM in a market like India is at the $0.50 range. And then a market like the United States with a high-end device on a Verizon is closer to the $3 range, and then you can kind of plot everything else in the middle, based upon that. Obviously it's somewhat dependent on type of campaign and a lot of other variables, but I like to keep it simple here. That's how we think about it.

And then with regards to the slots, I know that we had always talked about four slots, and that some carriers had thought maybe they would do less or more. Can you give us an update on the thinking there? I know you launched Verizon with, I think, two slots. And I don't know where that's been, or where that's gone, so can you just talk a little bit about the number of slots per phone?

Yes. Yes, you're right. We launched with two slots on Verizon. It's not Verizon's intention, nor our intention, to continue to remain at two slots. Again, I'd go back to what was trying to be proved out from this LG device launch. It was not really about how many slots. It was much more about those other operational metrics.

I think our view is that we can see anywhere from 2 to 8 slots, depending upon the customer. And obviously, more is better for us. But I think that I would not use two and extrapolate that out as they go forward with Verizon. I would say that is kind of a moment in time right now.

Okay, great. Thanks a lot for taking my questions.

Brian Alger, Wedbush Equity Management.

I'll echo the congratulations here. One thing that came out of the Investor Day was clearly a lot of eyes -- not just at Mandalay and the investor base, but also your other customers -- in terms of how the launch with Verizon was going to proceed. I know it's early days at this point, but is there any sense how much attention this development might bring from your other customers, both domestically and foreign?

Yes, no, I think -- great question, Brian. There's no question, as we're building out this ecosystem, we've got to go out and bring tenants into it. Verizon is the anchor tenant of anchor tenants to build that out. And now that we've combined that with customers such as SingTel and Vodafone and so on, we're really now putting ourselves in a great position to create something special here.

So I'd say there's definitely a halo effect whenever we go talk to other operators around the globe and we talk about Verizon. People understand the rigor that Verizon goes through. People understand Verizon does everything first class, that they don't cut corners. So obviously that means that we are fully vetted.

So those are all really positive things, when we go into talk to other operators. And we haven't, obviously, since this news is hot off the press -- we haven't communicated that out to any new customers. This is all happening real-time.

But in terms of the first initial launch on the LG, that was definitely viewed as a positive. And we expect it to be a catalyst for us to continue to grow and scale additional launches that -- stay tuned, and you'll see coming up over the upcoming weeks and months.

Great. Again, congratulations, guys. Great announcement.

Andrew D'Silva, Merriman Capital.

Congratulations on expanding the relationship with Verizon, and I'm actually using the LG G3 right now to talk to you, from Verizon. So, first, the phone is working well in my opinion, and I did some channel checks on the device. Everybody has great reviews about it. I'm just curious, for this next quarter that's coming up, it seemed like LG doesn't have a strong adoption at Verizon, and I was wondering if that is what you are seeing as well.

Yes, so, right now, obviously, I'm not going to communicate any information that's proprietary to Verizon on device sellthrough for a specific device. We're not going to go there. What I will say, though, is that a lot of device sales -- whether it's from LG, Samsung, HTC, or anybody -- a lot of device sales are very seasonally driven. The number-two month for device sales tends to be August after December, in terms of back-to-school and people through upgrades, and so on. It's not traditionally July, as a lot of people are on vacation and doing other things.

But with that being said is that Verizon gave us a forecast on the device based upon their experience from the G2. And so I think we've got pretty good visibility in terms of what we think that is. And, again, back to the 30-day comment Andrew made earlier, to come back to you, those are all kind of things we are going to put in our calculus when we come back to you guys with guidance. Because, as we've mentioned to you multiple times, and most recently at the Investor Day, there is really two key drivers or risk factors that I will highlight here. One is the open rates, which Jon asked earlier. The second is the sellthrough, Andy, that you are talking through. So now, as we're getting smarter on both of those variables, we can put that into our calculus as we go forward in guidance.

Got it. And in previous calls, when you regarded Verizon, you said you would probably be launching IQ also. I was just curious if you had an update on where you are on that.

Nothing I can talk about today. Stay tuned.

Okay. Well, good job, and thanks a lot.

And I will now turn the conference back over to Bill Stone for closing remarks.

All right, great. Thanks for everybody for attending the call today. I appreciate your guys' support in what we're building here. I really want to emphasize the Verizon announcement today as validation of our strategy and what we're building here. And we really believe we're onto something special. We also recognized, with the quarter, that we've got to balance the short-term against the long-term. We have to walk and chew gum here. We get that.

But I really want to emphasize that the long-term value of the business was really enhanced today with this announcement proving out what we're doing. So, I appreciate all your guys' support. And obviously we'll look forward to following up with some of you guys individually as we go forward here over the next few days.

This does conclude today's conference. Thank you for your participation.