Digital Turbine Inc (APPS) 2021 Q2 法說會逐字稿

Hello, and welcome to the Digital Turbine Fiscal Second Quarter Results conference call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Brian Bartholomew. Please go ahead.

Thanks, Brandon. Good afternoon, and welcome to the Digital Turbine Fiscal 2021 Second Quarter Earnings Conference Call. Joining me today on our 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 comments. 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 I'll turn the call over to our Chief Executive Officer, Mr. Bill Stone.

Thanks, Brian, and thank you all for joining our call tonight. I'm going to break my prepared remarks into 3 areas. First, I'll summarize our quarterly results. Second, I'll provide some real-time operational updates on many of the exciting new partnerships and initiatives underway. And finally, I'll end with some commentary about the strategic value of the platform and where we're going in the future.

To close out our fiscal '21 second quarter, we continue to build on our breakout momentum from our first quarter with record results across the board. We had $70.9 million in revenue, which represented over 100% annual growth on an as-reported basis and over 50% on a pro forma basis. I was even more pleased with our over 250% growth in adjusted EBITDA and a 200% growth in adjusted earnings per share.

I want to highlight the operating leverage of our platform as EBITDA margins expanded materially, driven by more than 50% gross profit growth and only 8% operating expense growth on a pro forma basis. This record gross profit, combined with continued effective operating expense management, enabled the company to achieve $16.5 million in EBITDA, $21.5 million in free cash flow and non-GAAP earnings per share of $0.15 during the quarter.

Barrett will provide more specifics on the financials, but from an operational perspective, I was also very pleased with our results in both our application and content businesses. Our overall application revenues grew by 50% year-over-year, driven by nearly 40% revenue per device or RPD growth in the U.S., combined with over 100% revenue growth internationally.

This improved revenue per device performance was driven by strong underlying advertiser demand and incremental contributions from our newer platform products. And as a reminder, revenue per device is a core health metric for our business.

We also added over 60 million devices in the quarter, which represents over 60% growth year-over-year. This growth was achieved despite an overall decrease for Android devices in the macro global market. In other words, we're still very much a penetration story against the larger opportunity.

In our content business, revenues for the September quarter organically increased by over 60% year-over-year. This compares to a 5% decline year-over-year in the June quarter, as improved execution, our new content platform being fully deployed in the legacy platform being sunset, and improved advertising rates all drove better operating results. And these results of over $20 million in revenue were achieved against approximately 10 million daily active users, or dows, which is an 18% increase year-over-year and 11% increase sequentially.

It includes very little contribution from revenue synergies on our existing addressable market distribution footprint, which is now over 500 million devices. We have begun generating modest synergy revenues with our content business on our existing distribution footprint and the combination of the recurring nature of those content revenues, plus our global distribution footprint create optimism and excitement for us that the content business will be a major contributor to our future growth plans.

And as you've heard me say on prior calls, diversification is a major strategic priority for the company. Diversification of partners, business models, products, geographies, and advertisers. We continue to have success with our U.S.-based carrier partners with whom we grew revenues healthy double digits year-over-year despite a modest decline in the total number of devices activated. However, our revenues with other partners outside this group increased by over 100% year-over-year.

Turning to the forward outlook. I want to provide some commentary on how we are positioned for continued growth across each of our growth levers, devices, media, and new products. First, on devices, with our quarterly record of more than 60 million new devices globally on-boarded to our platform, we are set up well for the future.

In the U.S., total devices activated with our U.S. partners were modestly down year-over-year. We expect flattish growth over the next several quarters in the United States as elongated upgrade cycles are likely offset by new flagship device launches, along with expanded 5G availability, promotion, and adoption. Given the flattish U.S. device trends at the moment, the overwhelming majority of our growth in devices is occurring internationally as we are currently ramping many of our international partners, such as Samsung, Telefónica, Telecom Italia, Nokia and Xiaomi, to name a few.

Our pipeline remains robust, and we're excited about the many opportunities in front of us to further increase our device footprint. And as you've heard me explain on prior calls, expanding devices beyond smartphones is an exciting opportunity for us and a natural extension of our offerings. We continue to make positive progress on our television offerings, as we discussed in our last earnings call and look forward to those launches occurring in 2021.

On the product front, our revenues from dynamic installs grew by nearly 50% year-over-year and representing 57% of our total revenues compared to over 80% last year. Revenues derived from nondynamic installed products grew over 35% sequentially and over 400% year-over-year with our content products, single tap, and other products showing solid growth. And while this strong growth is exciting, I believe it should be even better as we drive more revenue synergies on our content products, we continue to capture the recent momentum in our single tap business, and other emerging products such as notifications ramp even faster.

Our recurring revenues are now 40%, which compares to less than 10% a year ago. The bottom line here is that we have exciting growth occurring on multiple product fronts, and we're going to continue to make this diversification a major focus area for the business.

On the media front, we are currently very focused on scaling our international demand to meet a significantly greater supply of international devices, while continuing to see international application developers that want to be on U.S. devices. Our international media demand grew over 250% from last year and now accounts for 34% of our revenues across our U.S. and international operator and OEM partners.

We'll continue to work hard and where necessary, add strategic resources overseas to improve our international revenue per device and ensure we scale our partnerships and infrastructure effectively to capitalize on this enormous opportunity. We continue to see the benefits of global scale, where we see partner spending on more geographies and more devices outside their home geography, whether that's, for example, Chinese companies like Alibaba, Tencent, and Bytedance spending in Latin America and Europe and the U.S. or European companies and U.S. companies such as Pinterest, Snap, Uber, McDonald's, King, Walmart, just to name a few, all spending with us outside of their respective home geographies.

And finally, before I turn it over to Barrett, I want to highlight these record results and upbeat outlook are occurring despite all the macro headwinds we're facing as a society. These numbers are a direct result of our DT team's laser focus on our customers, our partners, and the collaboration with each other. And now that we're operating at scale, it's opened up even more material opportunities for our business with many of the largest players in the TMT space.

Our business is growing both the top and bottom lines at impressive rates, but our #1 opportunity and challenge is to grow it, not with just these positive comps against prior quarters or prior years, but grow it against the massive addressable market opportunity set, which is greater than these current growth rates. And that's where we're laser focused.

With that, that concludes my prepared remarks, and I'll turn it over to Barrett to take you through the numbers.

Thanks, Bill, and good afternoon, everyone. Q2 was another record quarter for Digital Turbine, and we were extremely pleased with our financial performance and execution. Before I cover the performance in the period, as a reminder, our content business includes results from our acquisition of Mobile Posse earlier in the year. I will occasionally reference results on a pro forma basis, where appropriate, to provide additional insight into the underlying trends when comparing current performance against prior periods.

Now turning to the quarter. Revenue of $70.9 million in the quarter was up 116% as reported and 53% growth on a pro forma basis. Adjusted EBITDA increased to $16.5 million, growing 265% year-over-year. I will highlight this marks our 10th consecutive quarter in a row to deliver positive EBITDA profitability, all while we continue to invest for future growth.

We experienced accelerating growth across both our application media business and content business. Our application media business delivered revenue of $49.1 million, representing 50% growth in the quarter, and our content business generated $21.8 million, which was up 60% year-over-year.

Gross profit, a key performance metric for us, grew 140% to $30.4 million in the quarter, which was up 50% on a pro forma basis. Gross margin on the platform was 43% in the quarter, up from 39% in the prior year. This continued margin expansion is largely driven by the integration of our high-margin content business and continued margin improvement on our apps business. While gross margin rates can fluctuate from quarter-to-quarter, we anticipate further margin expansion as we continue to execute on our product and partner diversification strategies.

We experienced continued impressive expense scale in the platform as cash expenses were $13.9 million in Q2 or 20% of revenue, down from 25% of revenues in the prior year and increased only 8% year-over-year on a pro forma basis. Total operating expenses were $17.6 million compared to total operating expenses of $9.2 million in the prior year.

I will note that our operating leverage is being achieved even if we make a number of focused investments, primarily in our sales force and our technology teams to support new partners and new products to drive future incremental revenues on the platform. These growth investments are being partially offset by cost synergies realized from the integration of our recent Mobile Posse acquisition and other realized cost efficiencies.

I'm especially pleased with our profitability and free cash flow. Free cash flow delivered in the quarter. We achieved adjusted net income of $14.5 million or $0.15 per share during the quarter as compared to a $4.1 million adjusted net income or $0.05 per share in the second quarter of last year. Adjusted EBITDA of $16.5 million in the quarter was up 265% over prior year, and margins on EBITDA continue to expand to 23% in the quarter from 14% in the prior year. Our free cash flow totaled $21.5 million in the quarter, an impressive increase of more than $17 million as compared to the prior year quarter, enabling us to exit Q2 with a strong cash balance of $33 million.

Our GAAP net income was $0.4 million or $0.00 per share based on 96 million diluted shares outstanding. Compared to a second quarter of last year, net loss of $1.3 million or a $0.02 loss per share. Included in our GAAP net income for the quarter is a recorded adjustment of $10.8 million from the impact of a change in the earn-out liability tied to accelerated performance versus our original expectations of our Mobile Posse acquisition.

Now let me turn to our outlook. We currently expect revenue for Q2 (sic press release "Q3") to grow to between $72 million and $75 million. We expect adjusted EBITDA to grow to between $17 million and $18 million and adjusted net income per diluted share to be between $0.15 and $0.16.

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

(Operator Instructions)

Our first question comes from Tim Horan with Oppenheimer.

Great, great quarter. Can you give a little bit more color on Mobile Posse, what the upgrade to the platform was? And maybe talk about how much contribution came from new customers. And maybe in that regard, where are you with landing other customers?

Yes. Thanks, Tim. Yes, as far as the sequential growth in the quarter, is really driven by 3 things. First is just good execution with the transition to the new platform. So basic blocking and tackling on just improved performance with ad rates, viewability metrics, and the such. Second was, we did put some new ad formats out inside Chrome that delivered some really exciting performance for us.

And then third was really just driven by some of the broader macro things I think we're seeing not just from us but from other companies that are reporting right now. We're seeing a rebound in the September quarter at a macro level from some of the things that we're seeing perhaps in the June quarter. So when you add all those 3 things combined, that's how you generate really solid performance for the quarter. So we're really excited about that.

And what even gets us more excited is very little of that growth came from revenue synergies from new customers. We're live with an OEM and one operator. We're just starting to generate some modest revenues today with some of those Mobile Posse legacy content products. We're very optimistic that we're going to be able to continue to expand those revenue synergies onto our existing distribution footprint. The customer and partner interest is very high on that. So kind of stay tuned for more to come on that. But we're feeling pretty good about where things are going there.

Our next question comes from Darren Aftahi with ROTH Capital Partners.

Great quarter. A couple, if I may. The O&O business, you sort of called out that it was up 50%, but the U.S. is only 30%. So can you kind of talk about some of the international drivers there? And then kind of what you're seeing as an outlook and then maybe one for Barrett.

If my math is right, the marginal flow through sequentially, sales were up about $12 million. I think you had an anomalistic gross margin last quarter. So it looks like it's 25% flow through on adjusted EBITDA. I just want to see if my math is right. And in that vein, where are the places you're effectively spending within tech? And then specifically within the sales force that you called out.

Yes. So I'll take the first one, Darren, and then I'll let Barrett take the numbers one. As far as we think about the drivers of growth in the app media business, #1 was just a real nice increase in devices that we're seeing outside the United States. And so the fact that we're just seeing such an increase in volume there is obviously driving increased revenues.

But what's even making that result even more impressive is that if we look at our RPDs outside the United States, we kind of want to compare that to where we were a year ago versus today, we're seeing nice double-digit growth on the RPDs as well as the increased volume. So when you get the better RPDs and better volumes, obviously, you're going to drive nice performance there.

The one thing I was happy about here in the United States is we basically saw year-over-year flattish devices here in the U.S., but yet our revenue was up $10 million, despite the fact that devices were flat. So that's really solid growth as a result of our new products and the demand from our media partners on the platform. So I think when we think about the future of the app business, we think things are pretty bright right now in terms of continuing to scale this thing.

Yes, Darren, there's a couple of questions you asked. One, on the flow-through rate or the conversion of incremental revenue to EBITDA. Yes, I think on an as reported, we're closer to a little north of 30%. So pleased with that flow through.

And with respect to where we're making investments, I mean, they've been -- you would have heard from Bill, our -- we doubled our international revenues. That's on the backs of expanding our sales force and to generate demand for our global partners outside the U.S. And so that's -- we have a lot more opportunity to go there.

On the tech side, we're continuing to make broad investments of 1 to take the products and in the content space and take those out to our new partners. We're investing in new products. We talked about things such as set-top boxes. We talked about single tap expanding. There's a number of areas that we're making investments with those that have revenue as well as those on the road map for future revenue growth.

If I could sneak in one more. Just Bill, maybe could you update us? I know 2 quarters ago, you guys talked about some maybe technical headwinds with single tap. Then it sounded like last quarter, some of that was starting to kind of work its way through the system, and it sounded like your commentary was a lot more positive. So just updating us this quarter, can you give us a sense for kind of -- it sounds like the demand for single tap is starting to really be realized or maybe perhaps I'm being a little presumptuous there?

Yes. So as we thought about the single tap business, we break it out into 2 categories. One is our social media integration with our large U.S. partner, and that's historically been the driver for us. And that consistently is a 7-figure quarterly business for us.

But the exciting part is the other part of our single tab business, which has recently been ramping in our last earnings call, which was in early August, I made the comment that our current September quarter results that actually exceeded the prior quarter in the first -- basically, month of the September quarter, and that momentum has continued. And so now that business is also a 7-figure business for us and growing nicely.

So we're very optimistic about where we can take this. It's a differentiator out in the marketplace right now for us. And as we continue to grow and scale our demand side platform, we've been working with others on that we think we're pretty optimistic that we can continue that momentum. So I kind of say stay tuned for more, but we definitely see that as a growth catalyst as we go into 2021.

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

Nice execution, guys. Bill, your recurring revenue now up to 40% versus 10% a year ago. I'm curious where you think it will be a year from now. And then secondly, there's been a lot of talk about ad supporter wireless plans within the industry. I'm curious if you can share with us what you're hearing from your customers and how you think you'll participate in that.

Yes. Thanks, Tony. Yes. On the ad supported, I think it's a little bit early in terms of some of the specifics. And I don't want to comment on any forward-looking statements that our partners may have plans to put out in the marketplace. But what I will say is, to the extent they're thinking about that, and we're working with them, clearly, we're engaged. So that's something that I think we can add a lot of value if they choose to go down that path, and I think they know that as well.

As it relates to kind of the broader content business for us, we're pretty optimistic in terms of what we see in terms of the future growth rates on that. And I mean, let me know, Barrett, if you want to comment on anything else on the condo side.

No, I think you covered it.

All right. Thanks, Tony.

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

And echo the congrats on the great execution and quarterly results. I wanted to just dial or drill in on the assumptions around guidance. Obviously, the end of the year has seasonality to it, but there are some cross currents with just kind of a macro uncertainty. So maybe if you guys could kind of dissect some of the underlying assumptions to your guidance, maybe just kind of the sequential thinking around RPD and device growth and then kind of layer in how we think about this new Mobile Posse asset now that we're kind of going into the end of the year.

Yes, surely. Let me start and kind of frame it up and I'll let Barrett put some color on it. As we think about guidance, we think about it in a couple of dimensions. First, at a micro level, we look at the current momentum and trajectory that we've got, which are obviously really strong in the market right now. And so we'd expect to see continued device growth, especially internationally, continue to expect to see growth around our new products as well, both on the content side as well as single tap and other things.

And then we're seeing strong media demand come back from advertisers. So that gives us a lot of confidence and optimism as we put our outlook together. I think the one thing that caused us a little bit of a pause right now is, clearly, there's a lot of macro uncertainty out there with what's going on. And so this Black Friday and holiday season, I think it's going to be different than any of us have ever experienced.

And so where that goes and what happens, I think, is going to remain to be seen. And so we want to make sure that we're considering that as we think about our outlook, specifically for the December quarter. But from a micro perspective, we're feeling pretty good about our execution in the cards that we got right now.

Yes. I think the only thing I'd add to that, Lee, is beyond the -- one of the factors goes into the guidance equation and obviously, the macro uncertainty. But I would say, to the extent the business now has a composition, much greater recurring revenue mix. And so there's a greater visibility to the quarter. And so we've outlined some RPD trends within there. We have device outlooks that Bill mentioned. But we feel fortunate that we've diversified in many areas that both Bill and I talked about. And so it gives us a little more certainty on the guidance.

Got it. That's helpful. And then if we had to think about kind of the net device adds, we thought that $20 million was a big number, then we thought $30 million was a big number, and now we're at $60 million. I kind of want to just figure out -- you categorize the growth in the U.S. as flattish. But geographically, where are you seeing the fastest kind of net device adds? And when you think about the pipeline next quarter and several quarters out, what, geographically speaking, are the biggest opportunities, I guess, between kind of Latin America, Europe, and India?

Yes. So you nailed the regions that we're focused on, Lee. I would say in terms of kind of prioritization, I think we're pretty bullish on Latin America, both as resolved, not just the Samsung relationship, but also Telefónica and Telecom Italia, which also has interest in Latin America and continued expansion with American Mobile and AT&T has got interest as well there plus Millicom. So we've got a really healthy footprint in Latin America. We've got a really nice pipeline on the demand side. So that's one area that we probably put at the top of the list.

But with that being said, I think we got a lot of exciting things happening with other partners in Europe and in India as well. So we're very focused on that. We're making some -- as Barrett mentioned in his remarks, some investments in these areas to really grow and capture the opportunity as the supply growth starts to really materialize in a big way there.

Got it. And last question, I'm just kind of curious if you could maybe provide an update on the T-Mobile relationship. I know, obviously, with bringing Mobile Posse on that that's a priority relationship for you guys from a cross-selling standpoint. You provided a few details last quarter. Curious if you could update us on the progress you've made there.

Yes. So we continue to have a great relationship with the T-Mobile guys, and we're excited about continuing to expand that relationship with them into other areas where we've got a variety of conversation, the dialogue is going about how we can continue to add value to their customers. I think as most of you are well aware, they're very focused on the integration with Sprint. And so how they're going to consolidate and bring those things together and what role we can play to help them do that.

So we feel pretty good about the relationship with T-Mobile, but nothing in terms of specifics to announce here on the call today.

Our next question comes from Austin Moldow with Canaccord.

Congrats. I want to dig into the $60 million device number. Can you sort of talk to it from a customer standpoint? Any customers there in particular that helped that almost $20 million sequential improvement?

Yes. So Austin, I'd say as we think about the trends, it was really driven by international growth. Samsung, in particular, continues to be a material contributor to the device growth number. But yes, we're starting to see other partners starting to contribute. So I rattled off a bunch of them in my prepared remarks that you can add into those figures.

And then here in the United States, now we're basically seeing pretty consistent data across the major U.S. operators. And so that's probably -- I would characterize as steady. But in terms of the growth, I would say it's driven by Samsung and then some of the other international names I mentioned in my remarks.

Got it. And as it pertains to Samsung, can you give an update on that in terms of coverage? How many geographies you're in and the kind of handset depth that you have in those geographies?

Yes. So we're in 75-plus countries today with Samsung. But with that being said, we're laser-focused on a few of the larger ones. Brazil would be one I'd call out specifically there that we're putting a lot of energy into. But as we're thinking about now expanding the Samsung relationship above and beyond what you get at out of the box at first boost, whether that's content products, whether that's single tap, whether that's notifications and so on. That's where we're focused to kind of continue to deepen the relationship there above and beyond just the out of the box experience.

So we're excited about our relationship with Samsung. We expect to continue to grow that and add additional countries to that. But in terms of the drivers for us, what I'm excited about is you're starting to see other names where that Samsung relationship has brought other names to the table. So think about things like Telefónica, Telecom Italia being examples there.

Got it. And my last question is on the sort of your gross margin. Can you give any insight into any partners or products that are particularly helping to keep expanding that within the contracts you already have?

Yes. Well, just keep in mind, the composition, while even prior to the Mobile Posse acquisition, we were expanding as we saw more of our revenues from new customers. And as we've mentioned in the past, those margins are accretive to our kind of aggregate as well as the new products beyond dynamic install, typically have a greater margin profile. And so we're diversifying into new products and new partners. And I'll -- also, I won't speak to any particular partner. But that's kind of the the landscape of what's driving and expanding margins on our application business.

And then as you're aware, and as we talked about before, the Mobile Posse business, our content business now has greater margins than our previous legacy business. So that's -- those 2 -- the combination of those 2 elements. One, our apps business expanding margins on the core business and then the new acquired content business at a richer margin, those 2 things are accreting our margins year-on-year.

Great. And if I can sneak in one last one. Any quick update on upcoming contract renewals that are particularly important?

Nothing specifically to update here on the call, Austin, but we're very excited and confident about the relationships that we have.

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

Yes. Thanks, everyone, for joining the call today. We look forward to reporting out on our progress against all the points that we made on today's call, and we'll talk to you again on our fiscal 2020 third quarter call in a few months. Thanks to all, and have a great night.

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