Digital Turbine Q4 2024 Earnings Call Transcript

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May 28, 2024

There are 6 speakers on the call.

Operator

Good day, and welcome to the Digital Turbine Reports 4th Quarter and Fiscal 20 24 Financial Results 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 of Capital Markets.

Operator

Please go ahead.

Speaker 1

Thanks, Nick. Good afternoon, and welcome to the Digital Turbine 4th quarter and fiscal 2024 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'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 For a discussion 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 CEO, Mr.

Speaker 1

Bill Stone.

Speaker 2

Thanks, Brian, and thank you all for joining our call tonight. I'd like to break my remarks into 3 areas. First, I want to close out our year end results. Secondly, you may have seen in our outlook that we're beginning to issue annual guidance for the first time, and want to focus the majority of my remarks on our plan to return to growth this fiscal year versus only focusing on a single quarter. And finally, I want to provide some commentary and updates on how we're positioned to profitably grow well beyond just this fiscal year.

Speaker 2

To close out fiscal 2024, we achieved $545,000,000 of revenue, dollars 92,000,000 of EBITDA and $0.58 of non GAAP earnings per share. In addition to the numbers and despite a challenging operating environment, I'm proud of the team and specifically the notable progress we made on numerous investment activities that set us up for the future, including our progress on our new version of Ignite, our migration to our new hosting platform, our launch of SDK bidding and many new back end corporate systems consolidated and launched. We've also seen a number of tailwinds emerge that I'll discuss later in my remarks that will be catalyst for a return to growth. But we also continue to navigate a few short term headwinds that are persistent in our very near term results. Specifically, U.

Speaker 2

S. Device sales continue to be challenging. As some U. S. Operators have publicly reported, post pay upgrade rates were approximately 3 3% of the base for the March quarter or a run rate of 12% per year.

Speaker 2

This would imply more than an 8 year upgrade cycle, which I think all of us would recognize as unsustainable for the long term, but it is a reality in the present. Exacerbating this trend were fewer software updates on the in life devices, which reduced monetization opportunities. The other headwind is our ability to distribute Chinese non gaming applications here in the United States. We're working aggressively and pivoting these spends to other international markets, but nevertheless it does impact revenue here in the U. S.

Speaker 2

Market. But our spend from non gaming Chinese companies has decreased by approximately $20,000,000 from fiscal 'twenty three to fiscal 'twenty four despite those companies wanting to spend more on our U. S. Supply. Our number one priority is returning the business to growth.

Speaker 2

And in order to do that, there are 3 growth drivers. First is growing our device footprint. As mentioned in our earnings press release, we anticipate an incremental 70 plus 1,000,000 devices launching with various Ignite capabilities. Including this in this number is expanding our relationship with Motorola that is both exclusive to Digital Turbine and is also global including on all operators here in the United States. Motorola has been shipping between 40,000,000 to 50,000,000 devices over the past few years and are one of the few OEMs showing positive growth.

Speaker 2

Their shipments roughly approximate to the amount of postpaid devices that all the U. S. Operators combined are selling. In other words, this is a positive material development for us. It is early days, but we are also live with 1 store in Korea that will ultimately add tens of millions more devices with single tap capability.

Speaker 2

Our pipeline remains extremely robust as we are seeing many global operators and OEMs wanting to work with us and we look forward to sharing more device supply opportunities in the future. In addition to these wins, we've heard some recent encouraging reports from chipset suppliers on future device volumes, which tend to be lead indicators for future demand as well as the anniversarying of the 2 to 3 year lease plans later this year offered by U. S. Operators. Thus we are hopeful for better trends here in the U.

Speaker 2

S. Into the future, but for now it's a major headwind and is reflected in our forecast. But returning to growth through new devices on new partners plus existing partners showing momentum are the keys to our first growth driver. Our second growth driver is expanding our product portfolio for both our ODS and AGP businesses. Scaling new ad tech and on device capabilities are critical to our return to growth.

Speaker 2

On our HEP business, as we've mentioned on prior calls, the last couple of years have been focused on investments and consolidating our ad tech assets into a common platform. That's now largely complete and ready to bear fruit. A specific example of this is our exchange, which we brand as the Digital Turbine Exchange or DTX, which we have now been fully consolidated from our legacy fiber and ad quality acquisitions. We believe we're uniquely positioned in mobile with the acquisitions to differentiate with brand dollars to our publishers versus our competitors that are more focused on performance dollars. And conversely, many advertisers spending on brand have not been as focused on mobile, but other channels such as CTV or retail media.

Speaker 2

So we believe the combination of our mobile expertise, access to first party data, product capabilities such as Single Tap and our agency brand relationships and creative capabilities drive attention for advertiser audiences is something that we believe is going to allow us to win. And the early returns are encouraging. Our brand revenues for the March quarter were up 15% from the March quarter of last year. We're also now over 1 third of our revenues on our DT exchange coming from SDK bidding, which is a requirement for many brands and agencies and how they bid for audiences. And this allows us to grow our revenues not just with direct brand, but also with brand omni DSPs like The Trade Desk and Google DV360.

Speaker 2

Our other AGV product growth driver will be increasing our share of voice for leveraging our first party data and our Ignite capabilities via bidding. We do this today through our Appreciate DSP acquisition, which is starting to show renewed growth. Learning enhancements to our new DSP, which we brand as DT Direct, will allow us to improve our bidding on our own supply, allowing us to optimize our own demand over our own supply. We also look to partner with 3rd party DSPs that can help us grow our share of voice. And this all translates not just into top line revenue growth with more demand dollars, but it's also key in driving the flywheel of improving revenues on our other products such as Single Tap, our DTXchange and Fairbid, our mediation product.

Speaker 2

Our primary growth drivers on our ODS business are Single Tap, alternative apps and better leveraging our first party data for our existing ODS products. Single Tap continues to add more devices, more advertisers and have better execution. It's early days for alternative app distribution approach. But as we've discussed on prior calls, we will look to begin showing our progress of distribution, not just on Android and Apple iOS, but also alternative app versions. The interest from large Tier 1 publishers is encouraging and will be a growth driver for us this year.

Speaker 2

And finally, we've historically been focused on leveraging our distribution footprint to drive ODS revenue. We've not optimized our first party data. We are beginning to do a better job here and seeing increased interest from our supply partners to also leverage these insights to help advertisers drive better outcomes. And our 3rd growth driver is our media relationships. We are continuing to expand directly with brands such as Apple, Amazon, Starbucks, P and G and many others as well as their advertising agencies that are driving 15% plus annual growth.

Speaker 2

In particular, I'm pleased to announce that Group M, who is the largest media buying agency in the world under the WPP umbrella, has included us as the only global preferred partner for mobile. This materially expands our addressable market for ad dollars as Group M manages over $50,000,000,000 of media buying and our competition in mobile will not have access to this brand inventory. And as things like cookie deprecation happen in Chrome, it will showcase our mobile app inventory as more attractive offerings to brands than other omni SSPs that have been reliant upon these identifiers in other ad channels. We anticipate that our group end relationship will unlock media dollars from well known brands. And we also continue to have many strategic relationships with large global game publishers.

Speaker 2

And with the tailwind of alternative app distribution, these players are increasingly attracted to Digital Turbine to develop deeper relationships. And the final media growth driver is our change in channel strategy to grow revenue per device outside the United States. Our current distribution approach is optimized to drive stronger RPDs on U. S. Supply.

Speaker 2

And the positive results we've talked about on prior calls of doubling RPDs over the past few years is a result of this. However, that's been at the expense of better execution of working with channel partners who can bring more media dollars to our international device footprint. This is a controllable and a major focus area for us. To summarize, our number one priority this fiscal year is returning our business to growth with 3 main growth drivers. The first is expanding our device footprint.

Speaker 2

The second is growth from new products such as Single Tap, DTX, Alt App Stores and so on. And the third is expanding our media relationships, whether that's via new relationships with behemoths like GroupM, expanding our brand dollars with brand buyers like The Trade Desk and Google or other gaming strategic partners looking to expand their mobile gaming audiences. And beyond this fiscal year, the goal is not just to return to growth, but accelerate it. The key driver here will be the expansion of our alternative app strategy. We've launched our 1st alternative app distribution products, which we brand as DT Hub with 5 operators here in the United States.

Speaker 2

We're leveraging our Aptoide investment and are generating revenue today. We have also taken a minority interest in Flexion so we can prove our partnership on building great alternative app experiences as Flexion is a leading porting source for many alternative app stores such as Amazon, Samsung, Huawei, Xiaomi and many others. And finally, we've also taken an equity stake in 1 store. And as I mentioned earlier, we've just launched Single Tap on devices in Korea this month. This launch has 3 benefits.

Speaker 2

One is it will allow us to leverage our DSP to friction free app downloads of alternative app versions to Korean customers. And second is a way for us to expand scale of developed market supply versus being constrained with the issues I mentioned here in the U. S. And finally, we'll look to enhance our partnership with OneStore into the future outside of Korea and combined with our Aptoide and Flexion relationships, we've got the building blocks to be a dominant force in the alternative app market. And as a reminder for investors, the Digital Markets Act or DMA launched in March in the EU and we would encourage investors to pay very close attention to the details around this such as how the regulators manage Apple compliance and the corresponding opportunities that it will present for us.

Speaker 2

I also want to emphasize that the alternative app strategy is not just about new in app payment revenues, perhaps more importantly, to be the catalyst to accelerate our existing lines of businesses beyond this fiscal year. Today approximately 50% of our business is driven by user acquisition and 50% is driven by in app advertising. Our app providers want to find ways to acquire more users at lower cost with alternative users and we believe that this will also open up new app providers to leverage our ad tech stack as part of this strategy, thereby driving more AGP revenue growth. We're live today running both alternative app user acquisition campaigns and in app advertising leveraging our technology into the current results. In other words, improving our present revenues and cash flow are both closely linked to the future strategy.

Speaker 2

And a key to all this will be the leadership to make it happen. I'm pleased to announce that Michael Ackerman will be joining our team as the Chief Business Officer effective June 3 reporting to May. Michael is joining us from Uber, where he was the General Manager of Advertising across Uber's various businesses. And before that, Michael had executive roles at Pinterest and Cardlytics. I'm excited to have Michael's nice blend of functional skills in product marketing and sales, but perhaps even more excited with his global background and cultural fit with ours.

Speaker 2

Michael's primary responsibility will be the lead executive returning our business to growth. And in conclusion, we've seen some nice tailwinds in our business that should be catalyst returning our business to growth later this year with many specific drivers from devices, products, media partners and cost optimization activities that are all in flight to accomplish this year. Those are the things that are going to return Digital Turbine to a growth company in the short term, while we continue to preserve our very bright long term vision. With that concludes my prepared remarks and I'll take it over to Barrett to take you through the numbers.

Speaker 3

Thanks, Bill, and good afternoon, everyone. For the fiscal year 2024, we reported $544,500,000 in revenue, down 18% year on year and generated $92,400,000 in adjusted EBITDA or 17 percent of revenue and delivered $60,300,000 in adjusted net income or $0.58 per share as compared to 1.15 dollars per share in the prior year. While fiscal year 2024 presented its share of challenges, we are pleased to share that our strategic initiatives are gaining traction and setting the foundation for future growth and I'll cover some of those highlights later within my remarks. Now turning to the financial performance in the quarter. Total revenue of $112,200,000 in the quarter was down 20% year on year.

Speaker 3

On device solutions, our ODS segment revenues of $78,000,000 were slightly below our expectations, largely due to weaker U. S. Upgrade rates that Bill described in his remarks. In our app growth platform, our AGP business, Q4 revenues of $33,800,000 performed generally in line with our guidance expectations. We saw improving signs of spend levels, particularly within brand evidenced by greater than 15% year over year revenue increases.

Speaker 3

The Q4 results in our AGP business reflects the impact of sunsetting certain legacy business lines in early January of this year. I reiterate Bill's earlier comments that despite the near term headwinds, we're encouraged by the completion of our platform consolidation and expect these efforts to be an important catalyst for our future revenue growth. Before leaving revenues, I would point out we completed sunsetting certain legacy business lines marking an important milestone towards our priority of returning to growth and strategic focus. Looking ahead, we anticipate the March quarter revenues to be a period of normalization, free from the transitional impacts of our integration efforts. Drawing from historical seasonality trends, we anticipate modest sequential growth in the June quarter.

Speaker 3

Our Q4 gross margin was 46%, which was up from 44% in Q4 from the prior year. Improvement in margin year on year was largely driven by favorable product mix shifts, where we experienced an increase in the mix towards certain higher margin products. While mix had a positive impact, we also experienced improved margins year on year across both ODS and AGP segments. With our commitment to financial resilience, we proactively pursued expense efficiencies profitability of our growth strategy and remain disciplined with expense plans. Cash operating expenses were 39 $1,000,000 in the quarter, decreasing 5% from prior year and represented 35% of our revenues in the quarter.

Speaker 3

Through our strategic investments, we've integrated our technology platforms paving the way for enhanced operational synergies, scalability and unlocking the full potential of our organization. We're encouraged to see that our efforts are yielding tangible results. One notable area of progress is in our cloud computing expenses, where we've achieved important cost reductions and expenses are now declining as a percent of revenue, a testament to the effectiveness of our initiatives in optimizing costs and driving operational efficiency. Turning to profitability. Our adjusted EBITDA of $12,300,000 in the quarter came in line with our guidance expectations.

Speaker 3

Given the inherent operating leverage in our business model, we expect the active focus on expense measures we are taking will strengthen the platform as we return to growth and enable a greater portion of those dollars to fall to the bottom line. In the quarter, we achieved non GAAP adjusted net income of $12,600,000 or $0.12 per share as compared to $13,600,000 or $0.14 per share in the Q4 of 2023. During the period, we reported a higher than expected non recurring tax benefit. Also as compared to prior year, we incurred greater interest expense driven by rising rates partially offset by lower outstanding debt. Our GAAP net loss of $2.32 per share in the 4th quarter reflects a non cash goodwill impairment charge of $1.86 per share or $189,500,000 in our AGP business.

Speaker 3

This charge was primarily driven by recent market based factors by the decline in our stock price. There was no change to goodwill for the ODS reporting unit and we remain optimistic about the AGP segment given the ad tech enhancements we've made to enable future growth. Our cash balance at the end of the quarter was 32,900,000 dollars Free cash flow from operations of negative $15,600,000 was temporarily impacted primarily due to delays in invoicing timing. While we've completed our back office system implementation to a single accounting platform that we have discussed on prior calls, our billing system migration impacted certain AGP invoicing timing delays in the quarter, resulting in a temporary negative impact on cash flows and working capital in the quarter of approximately $15,000,000 We have corrective actions in motion expect to see our receivable balance and working capital return to normal levels in the coming months and expect to return to generating positive free cash flow in the back half of the calendar year. Additionally, during the period, we completed and funded a $10,000,000 strategic equity investment in our 1 store partnership.

Speaker 3

Our debt balance ended the quarter at $385,000,000 drawn on our revolving credit facility. And as our business strengthens, we would expect to pay down our revolver in larger quarterly increments. Now let me turn to our outlook. Looking ahead to our growth roadmap, we are about the prospects for Digital Turbine. Starting this fiscal year, we are now providing annual guidance.

Speaker 3

This move is aimed at informing our stakeholders about our longer term growth roadmap, intentions and expectations. With the recent addition of new global device supply and the ongoing enhancements to our platform, we are well positioned to capitalize on the emerging opportunities and drive top line growth and free cash flows. We expect revenue to be in the range of $540,000,000 to $560,000,000 for the fiscal year 2025, reflecting our confidence in the underlying trajectory of the business and the momentum we are seeing in the market. Additionally, we project non GAAP adjusted EBITDA of between $85,000,000 $95,000,000 underscoring our commitment to driving operational efficiency and delivering value for our shareholders. In closing, we are working diligently to ensure that we position the company for growth in 2024 and beyond.

Speaker 3

Our business is seeing encouraging signals and evidence implying growth on the horizon, fueled by some of the announcements and growth catalysts that Bill referenced earlier. Operationally, we have made significant strides in modernizing key product functionality and back office system infrastructure and enhancing our leadership team. These initiatives are integral to our long term success and will enable us to unlock growth potential and enhance shareholder value. Furthermore, the recent wins on the media and advertiser side are proof points that our newly reengineered ad tech platform is now performing at a level at which is well positioned to gain market share. As we look ahead to fiscal year 2025 and beyond, we are confident in our ability to capitalize on emerging opportunities, drive top line and free cash flow growth and deliver sustainable long term value for our shareholders and we are excited about the journey ahead.

Speaker 3

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

Operator

The first question comes from Omar DeSouki with Bank of America. Please go ahead.

Speaker 4

Thanks for taking my question. We saw a news article today saying that T Mobile is about to acquire U. S. Cellular. I think U.

Speaker 4

S. Cellular is one of your biggest is one of your customers, but T Mobile is working with one of your competitors. So do you foresee any impact to your business? And how should we think about the potential opportunity and risks relating to the merger, financial merger?

Speaker 2

Yes, sure. Omar, this is Bill. I think that this is something that is where I read it today is that it's going to be about a year plus away from closing. So it's not anything that's imminent, as it has to go through a bunch of regulatory reviews. But with that being said, U.

Speaker 2

S. Cellular has been a fantastic partner for us. For ours, they do our highest revenue per device of any of our partners today, and they've been fantastic for us. Today, they're probably about 1% to 2% of our revenue. I look forward to having that as an opportunity to put another 0 on it, as hopefully T Mobile can see the great

Speaker 4

Apple had begun enforcing the new privacy manifest policy at the beginning of May. So wondering if you've heard anything from clients. I know there's a lot of focus on Android usually, but do we expect to see anything from the Apple side or just read through from some of the customers, would be really helpful. Thanks.

Speaker 2

Yes. I mean I read Yes.

Speaker 1

I mean I read Yes.

Speaker 2

Yes. Yes, sure. So I think as far as Apple's new pricing goes, I think it really depends upon what kind of app developer you are. I think for app developers that have kind of mid to hardcore gaming audiences where maybe there are fewer numbers of people, but they spend more per person, I think the changes are pretty much more of a non event. I think for lower end, casual, hyper casual games that are advertising based and may not generate a lot per user, it's prohibitive.

Speaker 2

So I think our expectation, Omar, is that we're going to see the EU regulators weigh in on this later this year. And I think we'll see a lot of downstream impacts from that, whether that's from telcos, whether that's from OEMs, whether that's from publishers, whether that's from mega cap players. I think you're going to see a lot of downstream impacts depending upon how the EU rules on some of the pricing moves they've made as part of the DMA.

Speaker 4

Okay. Thanks a lot guys. I look forward to catching up later. Thanks.

Speaker 2

All right. Thanks.

Operator

The next question comes from Darren Aftahi with ROTH. Please go ahead.

Speaker 1

Hey, guys. Good afternoon. Billy, you talked about some traction with Tier 1 publishers on the open app distribution side. Could you indulge us a little bit more about kind of the traction you're seeing? And I think you said there may be some contribution this fiscal year like how material is that?

Speaker 2

Yes. So yes, thanks, Darren. So yes, as far as Tier 1 publishers, we're seeing great relationship with some of the gaming folks. I'd call it King, I'd call out Playtica, I'd call out Play Simple, I'd call it Scopely, it's kind of some specific publisher names that we're working with in the alternative space. And so as they are looking to diversify away from paying a 30% tax to Apple or Google.

Speaker 2

Obviously, alternative distribution is something that's highly attractive to them given it's the single biggest line item on their P and L right now. We look forward to being good partners with companies like that and help them achieve their strategic goals.

Speaker 1

Great. Maybe if I could ask one more. Barry, you made some commentary about financial improvement in June relative to the annual guide. I guess maybe I missed or didn't hear correctly if you said anything specifically about the cadence in March I know you guys historically have always given 1 quarter out guidance and given we're sort of 30 days left in the quarter. I'm just kind of curious if you have any thoughts there.

Speaker 3

Yes, Darren. Our focus has been we've been wanting to provide annual guidance for some time now. I think this is a good opportunity. Also wanted to focus on there can be ins and outs in the quarter and we thought this would simplify for stakeholders our approach and intent for growth. I also you'll notice I did comment on some seasonality, flattest to modest growth sequentially between the June March quarter.

Operator

The next question comes from Tim Nollen with Macquarie. Please go ahead.

Speaker 5

Hi, guys. Thanks for taking the question. I'd like to ask about things on the net growth side where you had said previously that some of the longer tail customers that you were kind of not bringing on as part of your consolidation efforts would be, I think you had said, would be kind of cycling out as lost business around this time, kind of early 2025 fiscal 2025. Just wondering if you could update us on that. And maybe comment a bit further on, it's been a very interesting market with the 2 biggest players in the space, AppLovin and Unity reporting very different types of results in ad tech.

Speaker 5

Just wonder if you could talk a bit about your positioning versus them and kind of what you're seeing in terms of demand from your customers to use your DT Exchange and other services? Thanks.

Speaker 2

Yes. Thanks, Tim. Yes. So you're referencing the first part of your question around the deprecation of our AdColony Exchange. Yes.

Speaker 2

The AdColony Exchange had many, many tens of thousands of publishers and a very long tail of publishers, some of which were doing 100 of dollars or 1,000 of dollars. And it didn't make economic sense for us to go out and migrate a lot of those legacy publishers over to our consolidated Digital Turbine Exchange. And so we're rolling through those comps right now. So as we go forward in the year, you'll see that no longer be a negative comp for us like it has been in the rearview mirror. But with that being said, the reason we did that is we wanted to consolidate around Digital Turbine Exchange.

Speaker 2

And we believe we've got something pretty special and unique here, not just with our performance advertisers, but also with brand advertisers. As I mentioned in my remarks, getting certified by GroupM as a global distribution partner, that's a really big deal in terms of unlocking brand dollars, where now those brand dollars has historically gone to other channels where that's retail media or CTV or other places on the web or what have you. So now in terms of in app advertising for mobile, that's something that's unique for us and that's something our competitors do not have. So if you talk to most game publishers and others out there, they'd much rather see a P and G ad or a Coca Cola ad than an ad for competing game that's trying to take their users. So we think this is something that is very sticky and something that has now allowed us to consolidate around in terms of differentiating our exchange versus others that are out in the marketplace.

Speaker 2

So that's something we're pretty excited about. Okay.

Speaker 5

So could I just follow-up on that point then, Bill. So is the momentum in the growth to growth you're talking about for next year, is that maybe more coming from those advertisers? Or do you also see the gaming advertisers using a platform more in the beginning of the year?

Speaker 2

Yes. We'll continue to work with our performance in gaming advertisers. But you'd asked the question on differentiation. And we feel like the brand dollars rolling through, whether those are direct brand dollars, those are PMP to brand dollars or whether those are coming from Omni DSPs like The Trade Desk or Google DV 360. That's something we're really excited about in terms of that's unique to us in the marketplace on our publishers.

Speaker 2

So that's something where we're really focusing on how we can differentiate there.

Speaker 5

Yes, very clear. Got it. Thanks.

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 tonight. I feel the weight of our stock performance on our shareholders, employees and all of our stakeholders and want to make sure everybody knows we as a team are fully committed to returning to growth. We have a number of encouraging activities and growth drivers are going to help us achieve this. We look forward to reporting our progress against all the points that we made on today's call and we'll talk to you again on our fiscal 'twenty five Q1 call in a few months.

Speaker 2

Thanks and have a great night.

Operator

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

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