Digital Turbine Q4 2023 Earnings Call Transcript

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May 24, 2023

There are 6 speakers on the call.

Operator

Afternoon, and welcome to the Digital Turbine 4th Quarter and Fiscal Year 2023 Financial Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. 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.

Operator

Please go ahead.

Speaker 1

Thank you, Gary. Good afternoon, and welcome to the Digital Turbine 4th quarter fiscal year 2023 earnings conference call. Joining me on the call today to discuss our results are CEO, Bill Stone and CFO, Barrett Garrison. Before we get started, I I'd like to take this opportunity to remind you that our remarks today will include forward looking statements. These forward looking statements are based on our current assumptions, expectations and beliefs, including projected operating metrics, future products and services, anticipated market demand and other forward looking topics.

Speaker 1

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.

Speaker 1

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 CEO, Mr. Bill Stone.

Speaker 2

Thanks, Brian, and thank you all for joining our call tonight. I wanted to start my commentary closing out our fiscal 'twenty three results, provide some real time operational commentary on the state of our business today and conclude with some thoughts about our future and specifically the role of AI and machine learning in our current and future business. First, turning to our fiscal 'twenty three results. We closed the year with $666,000,000 of revenue, dollars 163,000,000 of EBITDA and $1.15 of non GAAP EPS. In addition, we reported gross margins of 49% and EBITDA margins of 25%.

Speaker 2

As we stated previously, our view is that the first half of this calendar year is the trough of the business and our expectations are that our improved execution, New products and media relationships combined with increased stability in the macro environment will equate to sequential growth. And today, we are seeing recent positive trends on all of these factors. Also included in our results is a change in the expected timing of a strategic demand agreement that was signed in the March quarter with an app publisher. We do these strategic demand contracts to help drive unique advantages for the publisher on our inventory and also accrete incremental margins for us. Our previous outlook anticipated a portion of the economics from that contract to impact the prior March quarter.

Speaker 2

However, the majority of the economic benefit from this agreement will be realized in fiscal year that we're in right now. This is strictly a timing issue and these agreements actually have a positive impact on the fundamentals and operations of our business And as the total expected revenues and profits from that contract are unchanged. Barrett will provide more detail in his remarks. Turning to our on device business, we put our Ignite technology on over 285,000,000 global devices over the past year, which is a 7% increase year over year. But in the U.

Speaker 2

S, we saw a double digit percent decline in devices year over year. New device sales in the U. S. Were the lowest we have seen since 2019. Offsetting device volume declines in the U.

Speaker 2

S, however, was positive progress on our rates and demand for our platform. And despite continued headwinds being able to Scale nearly 9 figures of demand from Chinese publishers on our U. S. Operator and OEM supply, I was pleased That in the U. S, our revenue per device or RPD increased both double digit sequentially and year over year driven by better rates And more products.

Speaker 2

In particular, I was pleased to see growth return on our DSP that we utilize for direct Single Tap installs Showing double digit growth from the March quarter last year to this year. We expect the DSP to be one of our major growth drivers as we progress into the current fiscal year. Progress also continued with our Single Tap Licensing business. Our installed volume running Single Tap Licensing was double in the March a number of our high profile partners such as Amazon and Epic who expanded both the volume of Single Tap implementations across our portfolio apps, adding additional titles and more traffic sources. We're also excited about the expected launch of our Google Marketplace Integrations where both Digital Turbine and Google are jointly expanding Tier 1 publishers and brands all within Google's ecosystem.

Speaker 2

We have a healthy pipeline of partners looking to adopt Single Tap through Google and the Google Cloud Marketplace. And finally, I'm pleased to report that we've made progress with multiple large social media companies and expect to have them begin the first pilots running Single over their networks in the next few months. Bigger picture for Single Tap Licensing, the product market fit is very strong. And while we're excited about our prospects, I do want to remind investors that while Single Tap Licensing is generating revenue today, it will take time to get to material revenue generation. The operational complexity of bringing together not just the on device technology, but the advertisers, publishers, attribution providers, telcos and OEMs Has many moving parts requiring tight coordination and management.

Speaker 2

It's taken us more time than we like to get to scale, but the good news is that given all of this complexity, Once established, the moat is very difficult to replicate at scale. Similar to the early days of our dynamic install business, Where we launched on one mobile operator with only a slot or 2 in ramped and then added another and so on, it layered on nice sequential growth as we expanded the depth and breadth of carriers and OEMs. It's very early days, but we're seeing those similar trends emerge here. On the App Growth Platform or AGP business, revenue was down 4% from fiscal 2022 to fiscal 2023. However, we expect these results to be a trough for HEP business as we've seen revenue trends improving since the beginning of the calendar year.

Speaker 2

With the integration of our acquisitions now largely complete, the benefit is that our execution in this part of the business has made major strides compared to last year and we now expect that to bear fruit as we scale things like our AI machine learning, our SDK bidding, our video rendering technology improvements and so on. I was also pleased to see Google bidding integrate with our mediation solution FairVid That should continue to improve our share of voice as we add more demand into our publisher supply. Turning to the future, I want to spend a few moments highlighting our new product growth drivers. I mentioned both new enhancements want to build a Shopify for app stores on device. We believe we're uniquely positioned with our on device technology, our publisher relationships and our operator and OEM relationships.

Speaker 2

We have now launched our first alternative app stores with 4 U. S. Operators And also have a very strong international pipeline. We also believe the global regulatory environment will provide additional thrust to this vision. A specific example of the regulations changing is Apple is preparing to support sideloading applications in the EU as part of its future versions of its iOS operating system.

Speaker 2

And to achieve this vision, there are some market pain points We will be solving, including making it easier for app publishers to port their apps to a new platform, managing payments, installing the apps and managing curation of the micro stores. On making it easier to port apps and manage payments, We took the first step in accelerating our efforts in this area. We're taking an equity position in an alternative app store company called Aptoide, which has approximately 430,000,000 users, 10,000,000,000 downloads and over a 1,000,000 apps. Combining these capabilities with things like Single Tap will make installs easier for consumers And we're actually running Single Tap installs on Aptoides alternative app store today. The alternative app stores will also help us With our first foray to this in app purchasing market, which is $100,000,000,000 global addressable market today.

Speaker 2

And here in the U. S, it's over a $50,000,000,000 market today and expected to grow to over $600,000,000,000 by 2,030. You'll see us refer to this business as our DT Hub business and variance on the Hub, whether that be things like DT Games Hub, DT App Hub and so on. And to tie all this past, present and future together, because of the exclusivity and uniqueness of our position with our on device and publishers, We're able to create deeper, more strategic relationships with our partners. And to that end, we secured many tens of 1,000,000 of dollars of revenue bookings We will provide the publishers with an alternative route to market leveraging our on device and Single Tap footprint, whether this through our new DT App hub, our dynamic installs, our DSPs and so on.

Speaker 2

And this has not just the strategic benefit and validation of the DT platform benefit, but also the financial benefit of de risking future revenues. And finally, before I turn it over to Barrett, wanted to spend a few moments discussing our AI and machine learning strategies for investors. And while I do think these terms Getting a bit overhyped in the press right now, they nevertheless are and have been important components of our past, present and future strategies. Our business was actually built a decade ago, creating machine learning models to deliver dynamic experiences to users based upon using first party data from our carrier and OEM Partners. We continue to use AI and machine learning to help us optimize our Single Tap business, automate workflows And curate content in our content media business, leveraging large language model or LLM based conversational AI and ML models To optimize our ad platform, we'll continue to leverage AI as a foundational technology in our business, including our Hubs business, As we build curated privacy preserving experiences based upon AI recommendation engines and port applications that are tailored to specific audiences.

Speaker 2

The important takeaway for investors is that there are 3 key success factors to winning with AI and machine learning. The first is the quantity, quality and uniqueness of the datasets. Companies have access to unique first party data who have material advantages over other players using third party data that is either for sale are generally available on the Internet. Digital Turbine's access to on device data with Ignite present on over a 1000000000 devices globally The second is the quality of the models. We're doubling our investment in dedicated data science teams and machine learning engineers both in Europe and here in the United States, Building these models across all segments of the DT network.

Speaker 2

The final component is the actual application being used commercially to deliver value to the end user. Our applications like Single Tap, Content Media and Hub are all specific use cases of AI and machine learning enhanced offerings, bringing value to all of our stakeholders across end users, operators and OEMs and app publishers. We're very bullish on AI machine learning, both for our future success as well as for society at large, but I caution investors to be able to separate the hype, and storytelling of these new technologies from the actual practical use cases of how AI machine learning is and will be delivering value in the marketplace. Investors should look for companies that have all three of these success factors of unique data modeling and applications being offered. And in conclusion, I'm proud of our team as I've seen a marked improvement in our execution that combined with the stabilization of the macro environment will be catalyst for future growth.

Speaker 2

Our outlook for the long term remains unchanged as the total addressable market for mobile advertising is over $300,000,000,000 The addressable market for in app payments is even larger than that I want to remind investors that in addition to this enormous and growing addressable market, we have products our customers want, a favorable regulatory environment and a profitable business model to drive operating leverage from our revenues and cost structure to attack the enormous market opportunity in front of us. With that, That concludes my prepared remarks and I'll turn it over to Barrett to take you through the numbers.

Speaker 3

Thanks Bill and good afternoon. For the fiscal year 2023, we reported $665,900,000 in revenue, down 11% year on year and generated $163,200,000 in adjusted EBITDA or 25 percent of revenues and delivered $118,200,000 in adjusted net income or $1.15 per share as compared to $1.66 per share in the prior year. Now turning to the financial performance in the quarter. Revenue of $140,100,000 in the quarter was down 24% year on year. Overall revenue performance was driven in large part by continued Within our on device solutions segment or ODS, Revenues were sequentially flat to the December quarter and down 19% to the prior year March quarter.

Speaker 3

However, as Bill referenced, while we saw global devices increase year on year, we experienced greater than 20% declines year over year in U. S. Device volumes, which have a greater overall impact given their higher revenue per device than our non U. S. Global operators and OEMs.

Speaker 3

Impacts from lower U. S. Device volumes were partially offset by improved revenue per device in the U. S, which exceeded $5 per device and increased both sequentially and year on year. In addition to the impact from the near term macro conditions, Our ODS segment experiences headwinds from the prepaid content media that we have discussed in the past.

Speaker 3

And while the year on year decline has moderated, We expect the grow over comps to continue for the next couple of quarters. On our app growth platform, our AGP business, Fiscal 2023 revenues were down 4% over last year and Q4 declined 35% over prior year. Recent declines in the quarter Year on year were driven in part by macro declines in ad rates and the short term impact of the consolidation and exiting certain legacy ad We have discussed previously. I reiterate Bill's earlier comment that despite the near term headwinds, we're encouraged by the early integration benefits we're Before leaving revenues, I would point out that in the quarter we experienced timing differences from our original expectations We entered into a strategic app publisher arrangement within the quarter and the change in timing resulted in the majority of the recognition and other parts of the business offset the shift in revenues, but this program made up several $1,000,000 of change versus our previous expectations and gross profits in the quarter. Our gross margin was 49% in fiscal 2023, up from 47% in the prior year And Q4 gross margin was 44%, which was down from 49% in Q4 from the last year.

Speaker 3

Changes in margin year on year were largely driven by the combination of quarterly product mix shifts where we experienced a decline in the mix of certain Higher margin products or those were revenues are recognized on a net basis after revenue Shares to our partner. And secondly, margins were also affected by exiting certain non core business lines previously discussed. 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 and synergy strategies. We remain disciplined with expenses, especially in the light of the temporary backdrop of the 4th quarter. Cash operating expenses were $38,000,000 in the quarter, decreasing 4% from prior year and represented 27% of revenues in the quarter.

Speaker 3

We would typically experience seasonally higher expenses in Q4, but we had an offset from lower than normal performance compensation expenses and other cost reduction actions. As we discussed previously, we are executing company wide expense reductions to begin to right size the business for the current environment and to fund key strategic investments, including investments in our enterprise wide systems and integrations Without sacrificing catalysts for long term growth, we expect the impact of these actions will become more fully reflected in our results over time And we remain highly focused on operating efficiency. Turning to profitability, our adjusted EBITDA $23,100,000 in the quarter decreased from $50,000,000 in the prior year and our EBITDA margin of 16% compared to 27% in the same period last Given the inherent operating leverage in our business model, we expect the active focus on In the quarter, we achieved non GAAP adjusted net income of $13,600,000 or $0.14 per share as compared to a $40,900,000 or $0.39 per share in the Q4 of last year. As compared to prior year, we incurred greater Interest expense driven by rising rates and higher average outstanding debt. Our GAAP net loss was 13,900,000 or negative $0.14 per share based on 100,700,000 diluted shares outstanding compared to prior year net income of 20,100,000 or $0.21 per share.

Speaker 3

Free cash flow for the quarter of 12,500,000 Enabled us to exit the quarter with $75,100,000 in cash after paying down an additional $12,000,000 in debt Using free cash flows from operations to further deleverage our debt position. Our debt balance ended the quarter at $413,000,000 drawn on our revolving credit facility and our business continues to produce strong cash flows and 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 Now let me turn to our outlook. As we consider the ongoing uncertainties in the macro environment, We currently expect revenue for fiscal Q1 to be between $140,000,000 $145,000,000 and adjusted EBITDA based on approximately 102,000,000 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.

Speaker 3

Operator?

Operator

We will now begin the question and answer session. Our first question is from Darren Aftahi with ROTH MKM. Please go ahead.

Speaker 4

Hey, guys. Thanks for taking my questions. First, I just want to get more clarity. I was just doing some math. It looks like your business fell Actually last year 15%, fell 14% this year on revenue, but the non GAAP gross profit fell quite a More this year versus last year.

Speaker 4

In the context of your comments about the strategic App Publisher relationship, I guess, can you quantify how much in terms of like gross profit dollars Are moving from what would have been the March quarter to maybe down the line. I'm just trying to understand if that's the main reason for kind of the non GAAP gross margin weakness or There's something

Speaker 3

else. Yes. Thanks, Darren. Yes, we I'll give you kind of an indication of the magnitude. I referenced in my In my prepared remarks that it was several $1,000,000 And so I'd also reference that We were basically in line with our expectations, had those not shifted out.

Speaker 3

But those several $1,000,000 of Revenue related to timing will move into FY 2024.

Speaker 4

Got it. And then Maybe could you just talk about the quarter you just came out of and maybe trends in April May, just in terms of impressions and ECPMs and then any kind of Good, bad and different, you've called out I think in the last quarter you talked about regional performance. So anything in that context would be helpful. Thanks.

Speaker 2

Yes, Darren, it's Bill. I'll take that one. I'd say in terms of trends that we're seeing so far in the current calendar year, we continue to see improvement on the AGP Part of our business, I think, which is in line with other players that have already reported. We're seeing rebounds in ECPMs. We're seeing rebounds in Publishers wanting to continue to integrate our products.

Speaker 2

We're seeing really good progress. I referenced In my commentary on the DSP, which we leverage Single Tap 4. So I'd say on the AGP part of the business, the On the ODS side of the business, the 2 major headwinds that we've been dealing with are really just new device sales And then having an enormous amount of insertion orders from these various Chinese publishers that want to run on our O and O supply. But quite frankly due to primarily political considerations in the short term, it's been a little bit of a struggle for us to do that. I think We've got a variety of other things that are in our control, that I think give us optimism in terms of new supply, new products, other strategic demand relationships The headwinds we're facing right now and we wanted to put that consideration in our guidance for the current quarter.

Speaker 2

If some changes on those factors, Obviously, that would be a tailwind for us.

Speaker 4

Great. Thank you.

Operator

The next question is from Omar Dassoci with Bank of America. Please go ahead.

Speaker 4

Hi, guys. Thanks for calling out Fairbit And having Google as one of its partners, could you help us frame the size of that opportunity a little bit and Also understand the competitive landscape and real time bidding?

Speaker 2

Yes, sure, Omar. Yes, we're excited because Google only announced a handful of And we were one of them. So, it's really with the biggest mediation players in the industry. So we're quite proud of that. And our main issue on mediation has not been on the supply side In terms of getting publisher access, it's really having the share of voice on the demand side bidding into the platform.

Speaker 2

And so now Really being able to add the strength of Google's, I'll call it fire hose of demand they can bring into the supply we can mediate really helps Our mediation platform's competitiveness and scale. So that's something we're excited about because it's really about Improving the share of voice that you're running on all these different apps that are on consumers' devices. And so, this is a big win in terms of being able to add More demand to our supply.

Speaker 3

Got it. Thank you.

Operator

The next question is from Anthony Stoss with Craig Hallum. Please go ahead.

Speaker 4

Hey, Bill. A couple of questions related to the timing of the That contract that didn't happen, do you expect any revenue to hit in the June quarter?

Speaker 2

Yes, I'll take it. I'm going to let Barrett take that one.

Speaker 3

Yes. So Just to clarify, we entered into the arrangement in the quarter, in the March quarter. The timing of the recognition of the revenues was different than we anticipated and that shifted into the fiscal 2024, just to clarify that. And that timing erosion will be throughout the year.

Speaker 4

All right. So do you not expect any further June quarter is That is my

Speaker 3

question. Well, so we won't spell out The particular assumption in the guidance, but we do anticipate some of that revenue will flow into June as well as other contracts that we've executed in the past.

Speaker 4

Got it. And then, Bill, late in the quarter, you were at a conference, you're talking about, Digital Turbine signing its biggest contract in history with Timo and you rattled off a whole bunch of others. Where were you able to book revenue from TIMU in March? And what would you expect from them specifically Up sequentially in June.

Speaker 2

Yes. I'd say that right now we're running revenue with some of our O and O partners today on TIMU. But the amount of revenue they want to run versus the amount of supply that's available to be run, is where the mismatch is. And I mentioned that we kind of We signed a greater than mid eight figure deal with Timu that they really wanted to deleverage our platform. But given a lot I'll call it politics around Chinese apps on U.

Speaker 2

S. Devices right now, whether it's 1 player or multiple players, Something I think that our O and O partners are taking a very cautious stance on. I don't expect that to continue. And so if and when that changes, That would be a really nice tailwind for our business because we'd be adding some really good demand onto the platforms at very high rates. But for now, we wanted to be cautious in our approach for the current guide to assume that that doesn't happen at any scale for us.

Speaker 4

Got you. Two last questions and maybe probably for Barrett. When you look at the remainder of fiscal 2024 versus 2023, would you expect revenues to be up Year over year and then also give us a sense on kind of the trajectory on gross margins throughout the year?

Speaker 3

Yes. So as we think about the year, obviously, we don't guide to the for the full year. We provided guidance for the June quarter. That Bill touched on would be the macro environment. And our expectation is that we see improvements In the second half of the calendar year.

Speaker 3

And then on the margin profile, I think what We've commented, we've seen a little bit of fluctuations over time in our margin, our gross margins, if that's what you're referring to are EBITDA margins?

Speaker 4

Gross margins.

Speaker 3

Gross margin. We would expect those to Kind of stabilize in the high 40 range in the near term. But again, our long term growth expectations around margins that they would continue to expand.

Speaker 4

Okay. I'll jump back in the queue. Thanks. Thanks, Tony. Thanks, Tony.

Operator

The next question is from Dan Day with B. Riley. Please go ahead.

Speaker 5

Yes, afternoon guys. Appreciate taking the questions. So maybe just a little more about your expectations for device shipments in the June quarter, what's Embedded in there for the guide, appreciate the commentary you gave around the double digit decline in the March quarter. And then you also talked about U. S.

Speaker 5

RPD. Anything you can provide on international RPD, how that's trended? Anything you're doing to try and close that gap with U. S. RPD

Speaker 2

Yes, sure, Dan. I'll take that. As far as first on international RPD, we're basically flat on our international RPD sequentially. We've got work to do there. So given there was some seasonality in the December quarter, I might say it's not horrible, National RPD, is that it also varies by country.

Speaker 2

So if we're in developing countries versus developed countries on devices that Can skew your international headline number a little bit. So for example, we do more devices in Latin America than Western Europe. The RPDs are lower, so your overalls would be lower, if that makes sense. But on the domestic side, we've Continue to focus in on some modest declines on devices here in the U. S.

Speaker 2

For the current quarter baked into our guide. Obviously, if that changes Here over the next 5 or 6 weeks, that would be a tailwind for our business. But for right now, our assumption is that the trends are going to continue as

Speaker 5

Form line 35% year over year decline. Like how much of that was due to these non core business lines being shut down versus Like what it would have been had those not been in it a year before. I think it would just help us frame up like what you guys are doing organically versus Any of the peers out there in mobile ad tech?

Speaker 3

Yes. So I think you'd think of it as the Well, some of the legacy that we're winding down is in the range of kind of 10% of that historical revenue mix. The other thing that we're doing is as we combine these platforms, there's an impact as they migrate. And those challenges or those revenue headwinds are, I wouldn't spell them out, but They're modest in the particular quarter.

Speaker 5

If I could sneak one more in, just, for another quarter down the line with GamesHub, these alternative app store products you guys are working on. Any better idea of when these might start to be a revenue growth driver? Or is it just kind of still way too early to say?

Speaker 2

Yes. I mean, we're seeing revenue on the products today. They're contributing incremental revenue that we didn't have last year. It's not in a place where it's moving the needle that but it is in a place where it is showing growth. So Our optimism is we're going to hear you talk about it improving sequentially and that's why I kind of referenced, kind of the early days of our dynamic install business many, many years ago, It took a while to get going, but then once you get it going and each partner ramps by themselves and then you keep adding additional partners to it, that's You really drive the top line growth.

Speaker 2

And so our expectations is that something you're going to see as we go forward in time. The product market fit is Been extremely encouraging from what we've seen in the marketplace and now it's just put a matter of kind of putting all the operational touches on it to put it in place to scale and that's where the kind of we're focused on right

Speaker 4

now. Awesome. Thanks, guys. Thanks, Dan.

Operator

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

Speaker 2

Yes. Thanks everyone for joining the call today and we'll look forward to reporting on progress against all the points we made on tonight's call. We'll talk to you again on our fiscal 'twenty four Q1 call in a few months. Thanks and have a great night.

Operator

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

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