Digital Turbine Inc (APPS) 2018 Q1 法說會逐字稿

Good afternoon, and welcome to the Digital Turbine Reports Fiscal First Quarter 2018 Results Conference Call. (Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Brian Bartholomew, Senior Vice President, Capital Markets and Strategy. Please go ahead.

Thank you. Good afternoon, and welcome to the Digital Turbine Fiscal First Quarter 2018 Earnings Conference Call. Joining me on the call today to discuss our results are: Bill Stone, CEO; and Barrett Garrison, our CFO.

Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. These forward-looking statements are based on our current assumptions, expectations and beliefs, including projected operating metrics, future products and services, anticipated market demand and other forward-looking topics. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. Except as required by law, we undertake no obligation to update any forward-looking statements.

For a discussion of the risk factors that could cause our actual results to differ materially from those contemplated by our forward-looking statements, please refer to the documents we file with the Securities and Exchange Commission.

Also, during this call, we will discuss certain non-GAAP measures of our performance. Non-GAAP measures are not substitutes for GAAP measures.

Please refer to today's press release for important information about the limitations of using non-GAAP measures, as well as reconciliations of these non-GAAP financial results to the most comparable GAAP measures.

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

Thanks, Brian. And thanks to all for joining us today. I'd like to start my remarks with some progress against our stated goal. Our goal has been to build a sustainable and profitable business while demonstrating solid execution against our strategy. I'm pleased to report that our June quarter accomplished that goal. We achieved a major milestone and inflection point in the business.

We had our first profitable quarter of EBITDA in the history of Digital Turbine. And as Barrett will describe in his remarks regarding guidance, we expect this trend to both continue and accrete into the future. Diving deeper into the operational details, our O&O business finished at $15.2 million for the quarter, which was up 31% sequentially and 118% up from the June quarter of last year. This was primarily driven by success with our North American operator partners and the successful launch of the Galaxy S8.

In particular, our largest North American partner saw its gross profit nearly double from the June quarter last year to the June quarter this year, but its contribution percentage of our total O&O gross profit dollars actually declined, which showcases the diversification of our revenues.

Our AT&T and Cricket relationship continued to exceed plan and ramp nicely. In particular, our AT&T revenues were higher in the month of June, than all the other months combined before June. We expect to see AT&T revenues continue to grow, as we launch additional devices and slots.

Another success factor was not just the increased sales of more devices, but the improvement of revenue per slot, or RPS, on high-end devices.

Last June quarter in North America, the RPS on the Galaxy S7 was $0.35. This quarter, on the S8, it was $0.42 or 20% higher. In other words, advertisers are paying more. We still have work to do on both lower-end devices and developing markets to achieve these same RPS figures, but the fundamental premise of advertiser demand to pay to be on home screens is proving to be very true.

We continue to see some encouraging trends with our advertisers. One of the largest banking institutions in the United States recently increased their spend with us, as the ROI to them was 3x what they were spending on traditional search advertising. And last week, we heard another public company on their quarterly earnings call, call out Digital Turbine's preload operator inventory as being a positive catalyst to their results. We're making positive progress expanding additional North American opportunities with both TracFone and T-Mobile. And while both have been slower than we like, we do anticipate them contributing revenue this fiscal year.

Our Latin America business also ramped nicely, being up over 800% annually. Our largest Latin American partner saw their first quarter of fiscal '18 revenues greater than all the revenues generated for fiscal '17.

Our OEM partners, including Motorola, Lenovo, BLU, Archos, Micromax and others, saw OEM revenues grow 123% sequentially.

As we've discussed on prior calls, we are focused on increasing our OEM distribution to take advantage of the open market in addition to carrier-distributed smartphones.

In Asia Pacific, we launched advertising in India, on numerous partners, including Reliance Jio, Indus, and Micromax. While not yet material in our aggregate results, it is beginning to ramp in scale. We've added numerous new on the ground resources in India and Southeast Asia to improve local execution.

As many of you may have seen, Reliance Jio has launched a low-end feature phone that sells for approximately $10. The focus on feature phones has been at the expense of their branded smartphones, which impacts our Ignite licensing revenue.

Over time, we expect the focus to switch back to smartphones, but in the near term, this is a headwind on our licensing revenues. Overall, we expect to see continued growth in the O&O business for the current quarter, as advertiser demand, additional flagship high-profile devices, more slots with numerous partners, more licensing revenue and new launch partners, all contribute to increased revenues and more gross profit dollars.

Our Advertisers & Publishers or A&P business, finished at $3 million, which was down 16% sequentially. Gross margins improved to 23% and we continue to run the A&P business profitably as the primary focus area. Our Content and Pay business finished at $7.9 million, which was up 10% sequentially.

The growth is primarily attributed to the Australian market, but we are starting to see growth in a number of countries in Asia.

Our Content and Pay business is also profitable. We continue to strategically review our options on unlocking value in these businesses. We have numerous active conversations going on regarding both, and will continue to provide updates when there are specifics to report.

I now want to turn where we are going with our business. We are not a "me, too" ad tech company, we are a mobile distribution platform. The distinction is important. Once Ignite is installed on a device, we have the opportunity for many revenue streams from media, licensing, delivers, screens, data, payment and so on.

Today, the vast majority of our O&O revenues are on our DT Media business, but we are seeing revenues from other areas as well. The key is getting Ignite to the device to open up those multiple revenue streams. And we are now scaling that. A year ago, we were installing Ignite on a run rate of tens of millions of devices per year.

Today, it is well over 100 million per year run rate, with line of sight to continued expansion beyond that. The monetization of this platform varies by type of device and by geography, but the point for investors is that we will continue to ramp our DT Media business, while also allocating resources against these many new revenue streams around our platform. These are the revenue streams that will be the future catalysts of growth.

Our licensing revenue stream expanded with the launch of AppFlash on Verizon. And we continue to expand to other screens beyond smartphones, including tablets and televisions. We're very excited about launching our Delivers product at scale later this fiscal year, with some high-profile partners.

In other words, growth beyond this fiscal year will come not just from our DT Media business, but also new businesses that are just emerging today.

Before turning it over to Barrett, I want to conclude my remarks with today being a major milestone for our business. But we're not satisfied. It's only a milestone. And while it's been a longer journey than expected to get to this specific milestone, there are many others in our bright future as the secular growth trends of mobile devices and mobile ad spending, is right at the intersection of what we do at Digital Turbine.

My enthusiasm and optimism about our future continues to hit 52-week highs, and with that, I'll turn it over to Barrett.

Thanks, Bill, and good afternoon, everyone. I'm also pleased with the performance in Q1. We delivered the company's first profitable positive adjusted EBITDA quarter, successfully executed the launch of the Galaxy S8, exceeded our Q1 revenue guidance and strengthened our balance sheet through access to additional capital to fuel our growth plans.

We're excited about our continued progress regarding our stated objective and delivering sustainable profitability and generating positive free cash flows. And Q1 was off to a strong start to the year, and ahead of our own internal expectations.

Now let me turn to the specific financial performance in the quarter. In the quarter, our adjusted EBITDA was a positive $200,000, as compared to a loss of $3.1 million in the first fiscal quarter of 2017, representing an improvement of $3.3 million year-over-year in the quarter, on an additional $2 million in revenue during the same time. I'm pleased with the embedded operating leverage of our model, where the level of incremental revenue growth is converting to EBITDA. Revenue of $26.1 million was up 17% sequentially and 9% year-on-year. Advertising revenue of $18.2 million revenue grew 42% year-over-year and within advertising, O&O revenue of $15.2 million grew 118% year-over-year.

O&O Revenue Growth in the quarter stems from the successful launch of the Samsung S8, combined with the impact of newly launched partners ramping on the platform.

Inside Advertising, our A&P business was -- revenues were $3.0 million in the quarter, down 16% sequentially and 48% year-over-year. A&P gross margins continue to expand sequentially and improved by 7 points over prior year.

Content revenue of $7.9 million in the quarter grew 10% sequentially and down 29% year-on-year.

As a reminder, the current quarter had an unusual comp year-on-year, as the fiscal Q1 in the prior year included higher revenues from accelerated marketing activities from our content providers in advance of anticipated revisions to the opt-in policies at our largest DT Pay partner. Q1 marks the second consecutive sequential growth period, as we've seen these policy changes absorb from last year and we are encouraged by the rebounding growth in this area of our business.

Non-GAAP gross margins expanded to 28% in the fiscal quarter of 2018. That is compared to 20% for the same quarter in the prior year and constant to Q4 2017. This year-on-year margin expansion is driven by a continued shift towards our higher-margin O&O business, which was partially offset on a sequential basis by a greater mix of North American O&O carrier revenues and less mix on higher-margin licensing revenues that Bill discussed earlier.

Expanding margins enabled non-GAAP gross profit dollars to increase by $2.4 million year-on-year, to $7.2 million in the quarter, growing 50% over prior year.

Turning to expenses. Total operating expenses for the first quarter were $8.1 million, down 13% year-over-year. And total cash operating expenses in the quarter totaled $7 million, down $0.9 million from the same quarter prior year, and up $100,000 from the preceding quarter. I'm encouraged by the expense scale we're achieving on the platform, delivering 50% growth this quarter year-on-year in gross profit dollars, while reducing cash expenses 11% during the same time.

Overall, the reduction in cash expenses is driven largely from lower employment cost, realizing efficiencies in hosting technology cost and lower G&A costs, which includes seasonal expenses related to accounting cost and investments we're making to improve internal controls.

Beginning this quarter, we have included a non-GAAP adjusted net income or loss metric to help further evaluate our financial performance. We compute this additional non-GAAP financial metric by adjusting net income or loss to exclude the effect of stock-based compensation, amortization of intangibles and changes in the fair value of derivatives related to our convertible notes. We believe that adjusted net income or loss is an important metric that is useful to investors, our Board of Directors and management to provide a meaningful comparison of our operating results over several periods, removing the impact of income and expenses that are not a direct result of our core operations. And we believe adjusted net income or loss measurements are used by investors as a supplemental measure to evaluate the overall operating performance of companies in our industry. Non-GAAP adjusted net loss was $0.9 million or $0.01 per share this quarter. As compared to a net loss of $1.5 million, or negative $0.02 per share in the first -- in the fiscal fourth quarter of 2017.

GAAP net loss for the first quarter was $4.2 million, or negative $0.06 per share, based on 66.6 million weighted shares outstanding, compared to a loss of $7.4 million or negative $0.11 per share for the fiscal first quarter or fourth quarter of 2017. Included in our GAAP net loss for the quarter is a recorded loss of $1.8 million from the impact of the change in the fair value of derivative liabilities, resulting from our convertible notes issued earlier this year.

As a reminder, these derivative liabilities on our balance sheet will fluctuate as our stock price moves and may have a material impact on our reported GAAP financials.

Moving on to the balance sheet. We finished the quarter with $6.3 million in cash, an increase of $200,000 from the fourth quarter. Operations consumed about $1.4 million in cash during the quarter, largely driven by working capital changes due to the revenue growth in the quarter, where accounts receivables increased $3.6 million, and current liabilities were up $2.5 million from prior quarter, excluding the line of credit.

As we discussed during our fourth quarter earnings call, we completed a $5 million secured credit facility with Western Alliance Bank. The facility has 2 -- has a 2-year initial term and an interest rate based on prime plus 1.25%, with a 4% floor. This new credit facility enables the company to deliver on its planned business objectives in fiscal year 2018. At quarter end, our drawn balance was $2.2 million of the total $5 million facility. In conjunction with the new financing, the company amended its convertible notes, as discussed on our last Q4 earnings call and outlined in our 8-K filed on May 24 this year. The total long-term debt at quarter end was $10 million, consisting of the convertible notes maturing September 2020, which includes the outstanding principal of $16 million net of the $6 million unamortized debt discount.

Now let me turn to our outlook on fiscal year 2018. We currently expect Q2 revenue of approximately $27 million, along with continued sequential improvement in adjusted EBITDA. And we expect the company to generate positive full year adjusted EBITDA in fiscal year 2018.

In closing, I want to congratulate our employees on a great quarter and thank them for all their work. I'm excited about our solid performance in Q1, which delivered profitable growth and continue to strengthen our financial profile, including demonstrating the power of the embedded operating leverage in the business. We remain focused on executing on our plans as we continue to build our Digital Turbine platform this year and beyond.

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

(Operator Instructions) The first question comes from Mike Malouf at Craig-Hallum.

Congratulations on your first profitable EBITDA quarter. I wanted to talk a little bit about Ignite Delivers. You talked a little bit about it in the prepared comments, but I'm wondering if I can get a little bit more color on timing and how the launch is sort of scheduled to go. It looks like you've been doing some testing for a while now, and maybe some commentary on that as well, that would be helpful.

Yes, sure. We expect our Ignite Delivers product to launch later this fiscal year at scale. We're working through a variety of technical and operational details with the partners that we're going to be launching with. And so we're excited about the launch, as the demand for this product has been great. We're excited about it, but we've got to be able to make sure we do it at scale. It does involve doing some things differently with Ignite. And so once we open this up to many tens of millions of devices, there's a lot of things that we need to think about and consider. So we're working through those product and operational decisions right now. But the overall demand from the marketplace has been fantastic so far.

Okay. That's great to hear. And then, can you give us an update on open-market, how that's going and how significant it was for the quarter?

Yes, sure. So Mike, we saw sequential growth for the open-market program in the quarter. One of the things that we really wanted to do with our earnings call script this particular quarter is really focus on a lot of the main messages we wanted to get across, and we'll be following up with some of the granular details regarding the specifics with you and others. But suffice it to say that we saw growth, we're excited about the program and having that continue to grow and be a growth driver for us and obviously, we like it at 100% margin. The other thing I'd mention around open-market, it's not just thinking about it in terms of the carrier-distributed smartphones that get different SIM cards popped in them, but also start thinking about the open-market with some of the OEMs, where devices can show up in different geographies and that's also how we're thinking about the open-market as well. So yes, we'll make sure to break those out separately, given they have different margin profiles, but when we're thinking about the open-market, we definitely view it as very strategic for the future of the business.

Okay, great. And then, just kind of looking at cash flow, do you see continued working capital needs going forward? It looks like you had a couple of million need in the, in this quarter. Do you see that continuing to be a source of -- use of cash over the next few quarters?

One thing I'll say is, just draw your attention, we had, we had an increase of $4 million of revenue in the quarter and so that had some implication on our working capital needs. But we don't see anything that changes from where we are today, relative to our growth expectations quarter-to-quarter, and we think that we like the line of credit we have and that's why we put it in place, so we can pay it down when we needed to, or draw in the event we had a small working capital swing.

The next question is from Brian Alger at Roth Capital Partners.

I want to kind of flesh out a little bit more of the concept of platform versus ad tech, because it's something that's come up a number of times, and I'm speaking about others out there. The notion that you're now set to get tens of millions of devices to be monetized through Delivers. Can you maybe talk about where that number comes from? Is that the installed base of products with Ignite, or how do we get to that kind of platform already at this stage of the game?

Yes, sure, Brian. How we think about the platform is, I like to use the analogy of Amazon. If you look at Amazon back in 1999, it was really a book story about Barnes & Noble versus Amazon, and obviously, it built an e-commerce platform, with many revenue streams off the e-commerce platform, and I think about our platform in a similar light. And what I mean by that is, we're starting out today, and our books, if you will, is our DT Media business and we're crossing over some milestones today around that business and continue to show great growth around that business and are very excited about it, its future and its prospects. But the key is once we can get Ignite onto the device, it's not just opening up that revenue stream, but opening up others. So it can be licensing revenue, I referenced our relationship with Verizon and AppFlash, and we do with Reliance Jio in India, Millicom in Latin America and so on. That's another revenue stream that's unique and distinct from advertising. We just talked about Delivers, with the question Mike asked, and some of my prepared remarks as well, that's another revenue stream. The opportunity to expand it to different screens, the opportunity to do it with Pay, there's a fantastic opportunity with the data that we have, if we ever choose to go in that direction in any material way. And so, so really, the point being here is that getting Ignite onto the device and getting it installed on the device, and in my comments, last year, we were installing on a run rate of tens of millions, now we're installing at a run rate of north of 100 million, just in terms of monthly devices that are getting Ignite installed on it. So we're really starting to see the benefits of the scale economics of getting a platform up and going. And then once Ignite is on that device, as long as that device is out in the marketplace, then those revenue streams become open to us in terms of opportunities. So Delivers is one in particular that a lot of large-scaling advertising, other advertising platforms want to take advantage of, because it's very simple, just getting direct app installed versus having to go to the Google Play Store. So that's something we're quite excited about and one of the things we want to be able to communicate out to investors is in the short term, we're going to continue to be very focused on execution with DT Media and continue to show progress and momentum against that. But we don't want to be limited in our thinking that the DT Media business, and how many slots we have on a particular operator, is really the only vehicle of how we will grow this business.

That's good. That's really helpful, Bill. I'm curious if a significant increase in investment is required. I'm inferring from the guidance that we're going to keep the cash OpEx roughly in line with where it is, given the expanding EBITDA projections through the fiscal year here. But is -- are there areas where you have to be investing in the R&D line, to take advantage of this platform? Or are we pretty much there in terms of ad scale capabilities?

Yes, I think it's why you would hear the excitement in Bill and my own voice on the power of the leverage in the business and the technology we've already built. That's not to say there won't be marginal investments in our tech teams and the technology to round this out, but I wouldn't point you to any material increases that would be required.

And Brian, one thing I'd say is, one of the -- I think one of the great things in Barrett's script that he mentioned here was year-over-year, the revenues went up $2 million, but you had roughly $3 million fall to the EBITDA line, just showing the operating leverage of the model. And so I think as you get a lot of operating leverage, that's going to free up additional capital and resources to be able to invest back in some of these things. So that's something that excites me as we continue to get things ramped and scaled here.

Great. And just one bookkeeping one. You guys mentioned that you're expecting O&O business to grow sequentially. I'm curious if you think the Content and Pay business will also see growth?

Yes, you'd see in our comments where, we were, we saw growth in our second quarter of sequential growth in our Pay business. We're excited about that, that momentum we're seeing. So yes, I think we've got a lot of excitement about that business.

The next question is from Sameet Sinha at B. Riley & Co.

This is actually Lee Krowl filling in for Sameet. Couple of questions. First, just kind of curious, you guys mentioned that TracFone and T-Mobile were perhaps pushed out or maybe just a little bit delayed. I guess not specifically on the timing, but is that more of a second half of fiscal '18 opportunity? And then, do they kind of become an opportunity at the same time or what's the timing in terms of when they kind of start to contribute in fiscal '18?

Yes, sure. So we view it as a back half of the fiscal year opportunity for us, and continue to make positive progress there. But just working through the -- a variety of implementation issues with both of them.

Okay. And then also, just on your quarterly guidance, you guys said $27 million. How much of a mix of, I guess, call it, Galaxy S8 is contemplated into that, in terms of ongoing momentum? And then, I guess are there any other new smartphone releases that are contemplated in that guidance as well?

Well, I'll start, and Bill can add. One of the things as part of the overachievement in the revenue versus what we expected, part of that is the tail end of the S8 devices performing better towards the end of the quarter, in the month of June. And so there's some expectation, obviously, that, that trails off, but we think it's still an important volume in the second quarter.

Yes, and then I'll add on top of that, that what we saw with the S8 was more consumer demand than we had anticipated from the device, which was obviously a positive. And that was offset by fewer carrier or operator promotions than were normally seen for, for example, the S7, at the same time last year. So those 2 effects kind of muted each other, to have it perform as we expected it would. We continue to expect to see high-profile devices launch throughout the balance of the year. I know there's some speculation about additional high-profile launches launching later this quarter, as well as getting into the holidays, and so clearly, we'll be beneficiaries from that. But the point I really wanted to make to investors today was not just the unit volume growth, but rather on a per unit basis, the strength in demand we're seeing from the advertisers and our ability to continue to accrete the revenue per slot, or RPS, despite the volumes, whatever those are, and that's a fundamental health metric of our business and something that gives us a lot of excitement and optimism.

Okay. I guess you kind of answered my question. So you guys do have conviction that the RPS has staying power at $0.42. Or is there still an upwards opportunity there in terms of RPS growth?

Yes, there's definitely an upward opportunity for RPS growth. But how I would think about it is if you kind of can visualize in your head a spreadsheet, and going down the rows would be geographies such as North America, Latin America, in India, et cetera, and then across on the columns, you would see high-end devices, mid-tier devices or low-end devices, and you can basically plot your RPSs, because they will vary by geography and device type. So those things can be all over the place, depending upon what type of devices and what type of markets you're talking about. But as it relates to North America and higher-end devices, we definitely continue to see upside on the numbers we talked about today.

Got it. And then last one from me is, just in Content and Media, can you kind of just frame -- I knew you guys had -- said you had several opportunities in Asia. Are those opportunities of similar scale to kind of your largest customer in that business? Or how should we think about those as they come online?

Yes, so I would think about the opportunity as enormous in terms of the amount of devices and consumers, end consumers, that we're touching in markets like, in different markets in Southeast Asia and India. The transaction volume, though, tends to be lower, kind of similar to the point I was making on devices earlier. So in terms of transaction volume, we see it materially higher, but I think on a per unit basis, where we'll see many dollars per transaction occur in a market like Australia, that would be fewer than, less than $0.25, $0.30, in a market like in India or the Philippines or something like that. So those kind of 2 things net off each other. But it was nice in this current past quarter, to see some growth occurring in those particular markets.

(Operator Instructions) The next question is from Ilya Grozovsky at National Securities.

So just wanted to look into the gross margins a little bit. So the GAAP gross margin had a very nice uptick in the quarter. Can you kind of just talk about what's going on there? You had mentioned specifically, I think, that the Content part of the business was profitable, so is the Advertising piece profitable as well?

Let me just make sure -- the -- your comments -- or your question's around GAAP, or the non-GAAP gross margin that we disclosed?

I mean, let's go GAAP.

Yes, so within GAAP, there is a benefit of amortization of intangibles rolling off. As a reminder, that's concluded in the numbers. But what's driving the core operations is we're seeing margins in the O&O space and the -- our Advertising & Publishers space are improving. That's just generally just increasing. The factors that are driving that within O&O are as we see our revenue mix shifting towards licensing; are the open-market margins, which have higher levels; or the -- our new partners launching with -- contributing to that, with greater economics. Those are what are driving, kind of the fundamentals in O&O. And as Bill called out, and I called out, our A&P margins, our legacy Advertisers & Publishers margins have increased.

Okay. And so the run has been probably 5 quarters of sequential GAAP gross margin improvement. Is there more to improve at this point? Or are we sort of, have we topped out at this range?

Yes, we like to think that our O&O business is well above our aggregate margin. And so as we mix and O&O continues to grow and be a larger percentage of the enterprise revenues, our margins will naturally accrete. So we think that's certainly an opportunity, and as well as we think within our O&O margins, we have opportunities as a greater portion of our revenues from open-market and from licensing opportunities mature. So I would answer that with, yes, we have -- we think we have an opportunity to expand our margins.

Okay. And then just shifting over to the Advertising piece. I think I have it at $3 million in the quarter. I kind of felt like last quarter, the March quarter, we had sort of bottomed out at about $3.6 million, now we're at $3 million. Does that continue to slide, in your opinion? Or do you feel like we've sort of hit something that's sustainable run rate going forward here?

Yes, I think that the run rate is stabilized. I think as we go forward, our focus has really not been on the top line of that business, and if you go back and look in time, the margins in that business have been in the teens, and our -- talked about margins in the 20s. And our focus has been on improving the gross margins, running it lean, running it profitably, which we're doing now. As we look forward in the future, some of the earlier questions around Ignite Delivers, we also see Ignite Delivers having a positive impact on this business, and being an opportunity for a positive growth catalyst, both in terms of revenue and margin, as we go forward in the future and get that launched. But in the near term, yes, we really see this thing as fairly stable.

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

Great, thank you. Thanks for everyone, for joining the call day. And 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 second quarter call. Thanks, and have a great night.

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