Digital Turbine, Inc. (APPS) Q3 2016 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Digital Turbine Third Quarter 2016 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ghen Laraya, Vice President, Business and Legal Affairs. Please go ahead.

Thank you. And welcome everyone to Digital Turbine's fiscal 2016 third quarter earnings conference call. I'm Ghen Laraya. With me today are Bill Stone, Digital Turbine's Chief Executive Officer and Andrew Schleimer, our Executive Vice President and Chief Financial Officer. Statements made on this call including those during the question-and-answer session may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations concerning matters that are not historical facts and include for example; statements about guidance, expected revenue and profitability, product sales, market penetration, speed of customer adoption in orders and overall business momentum. We caution investors that any forward-looking statements are based on beliefs and assumptions made by and information currently available to us. Such statements are based on assumptions and actual outcome will be affected by known and unknown risks, trends and uncertainties and factors are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, our actual future results may differ from our expectations and those differences maybe material. Please refer to the Safe Harbor Statement included in today's press release, as well as Digital Turbine's periodic filings with the SEC, for a discussion of such risks and uncertainty. We are not undertaking any obligation to update any forward-looking statements. In addition, we will be discussing certain non-GAAP financial results, including non-GAAP adjusted EBITDA. Non-GAAP measures are not substitutes for GAAP measures. Please refer to the press release issued earlier today for important information about the limitations on using non-GAAP measures as well as a reconciliation of these non-GAAP financial results to the most comparable GAAP measures. Please note that on March 6, 2015 Digital Turbine, Inc., a Delaware corporation acquired Appia, Inc. Digital Turbine's current year results are therefore not comparable to prior year results and this call will include sequential comparisons unless otherwise noted. Now it is my pleasure to turn the call over to Mr. Bill Stone.

Thanks, Ghen. And thanks to all of you for joining our call today. I wanted to focus on five things in my prepared remarks. First is to start with rear view of both last quarter and an update on DT Media. Second, is provide an update on Appia Core. Third, an update on our content business. Fourth, an update on new and existing customers. Fifth, an update on the current quarter and finally will close with some strategic views on our business and our positioning. First on the fiscal third quarter, we finished with $24.1 million in revenue or $24.6 million excluding one-time adjustment from a prior period that Andrew will describe in more detail. While Andrew will also present our revenue growth on a sequential basis. It's important to note, that the third quarter represents an impressive increase from last December of 244% on a reported basis and a 47% increase on a pro forma basis, as if we had owned Appia for all of last year's third quarter. This performance reflects our strong execution during the critical holiday selling season, while also successfully executing our growth strategy. Increasing DT Media's penetration across carrier partners, arising levels of productivity and growing our Appia Core business. The DT Media business represented almost $7 million this December quarter, which compares to $4.1 million, $3.2 million and approximately $1 million over the past three quarters. The DT Media business is now at approximately $2.20 device yield, well in excess of our $2 device guidance earlier in the year. As we've discussed before, this is the most important operational metric in our business to demonstrate the health and demand of what we're building. It is important to note, that monetizing the home screen of the device is a unique and differentiated asset. I think, this is one aspect of Digital Turbine's identity and business model that goes under appreciated. There's only one home screen and our access to it, is very strategic. Targeted campaigns now make up more than 40% of our total campaign count and targeted campaigns have advertising that tend to be approximately 40% higher compared to non-targeted campaigns. Doing this now at scale, is something we continue to get better at and our ability to target more affectively is better for the consumer, the advertiser and the operators and OEMs responsible for the home screen. You'll see some press from us later this month about our Digital Turbine advertiser partners program. This program is where we've established a new program where advertising agencies such as WPP, Dentsu, M&C Saatchi and so on, plus brands and application developers can have a one stop solution to our global on device inventory. Just as media agencies by media on the Super Bowl, Online, Facebook and so on. We envision the advertising partners program being a complementary media channel to those that make it easier for companies wanting access to the home screen of any device at global scale. Look for us to add additional name brands, partners and agencies to the advertising partners program over the upcoming weeks and months and becomes a major part of how we grow our revenues into next fiscal year. Second, our Appia Core business finished at $10.5 million in revenue, which is a quarterly record excluding a one-time event in 2013 and surpasses the September quarter of $9.6 million. Continued strength from advertisers such as Pandora contributed to this growth. We did see some softness in the Appia Core business in January as global brands and application providers work on their 2016 spends. A key for us in Appia Core continued success is expanding the percentage of distribution to Real-Time Bidding or RTB, for future margin expansion in revenue growth of the Appia Core business. We are now running RTB campaigns and will not [ph] material driver of growth for this fiscal year, we do expect to become a material driver into next fiscal year. We will come back with additional details on future calls about our progress. And as noted last month, we have completed a transaction to license our RTB technology to Jud Bowman into his new Sift Media. As you know, Jud was Appia's Founder and CEO and a former Digital Turbine board member. Andrew will provide some commentary on the financial details of the transaction. But I'm very excited to continue to work with Jud as a board member at Sift and helping him from a board perspective build on top of our RTB technology to attack new market segments and opportunities, we are now focused as the RTB space is enormous. For example, just here in the United States, the RTB market is forecasted to grow from $3.1 billion in 2013 to $18.2 billion in 2018. We have an exclusive publisher agreement for one year in which Sift Media will source all advertising exclusively from Digital Turbine, which will also be an incremental revenue source for us. And finally before our transition to the content business, I want to spend a moment on branding. As a result of our acquisitions, we absorb the brands of the company we've acquired including XYO and Appia into our business. Bringing these brands together, under one roof has created some customer confusion as the differences between our products, channels, technologies and branding. Thus going forward, we'll be making changes to our branding to make it easier for advertising partners and publishers to understand our solutions structure and showcase the breadth and synergies of those solutions we're offering. Specifically, we'll be removing both the Appia and XYO names from our branding and simply use Digital Turbine as the primary corporate brand in the marketplace. You'll see these changes and some other product branding changes on our website and other marketing materials, later this week. After this call and going forward, you'll see us refer to our Appia Core business as our advertiser and publisher business or A&P. A&P will be included as part of our Digital Turbine Media business which includes our operator and OEM or O&O for short business. Both which to combine to form our new Digital Turbine Media businesses offering customer focused solutions. From an investor perspective, we'll continue to breakout the A&P and O&O business separately for transparency and how both businesses are performing. Now onto the content business, we finished the December quarter at $6.6 million in revenue. The decline in the September quarter is due to our strategic decision to not invest in the content business and rather focused on harvesting our app store business in Australia and invest in DT Media and pay more broadly in Asia. In the Philippines, we're launching our marketplace with the two mobile operators Smart and Globe. Smart will go live later this month and Globe is expected to launch in April. As part of our relationship with Electronic Arts. We anticipate launching further branded EA marketplace stores with additional operators in South East Asia. To support our advertising partners globally, we're seeing demand for DT Pay in countries where credit card penetration is low and the use of Google Play is less prevalent. These partners need a way to be able to build customers for ongoing services. Our first new DT Pay country launches will be in the Philippines and India in March. The connections to both countries have been completed and we're in the process of on boarding the first services. The first revenue will be generated in March. We will be announcing further country launches in the first quarter of fiscal year 2017. And as we've stated before, we see this business synergistically working with our advertising business to help close the loop, on delivering and monetizing applications, after installation. Fourth, I wanted to provide a few customer updates. We have now launched this month with Millicom in Latin America on our first devices. While it will take some time to fully rent [ph] Millicom. It is important to remember that this is a software licensing deal versus a revenue share agreement, which means it's at 100% gross margin. For AT&T, we expect to launch with Cricket on two existing devices beginning in March and begin with AT&T in the June quarter. As we've stated before, we are very excited about our long-term growth prospects with AT&T for very broad launch across our entire new Android device portfolio but do not yet have a specific date on exactly when installing Ignite on 100% of their devices will begin. AT&T will be launched in our wizard as part of their Ignite 2.0. This will allow customers to self select the applications they want installed versus apps being silently installed on first boot. For America Movil, we expect to launch in our first new device in the June quarter. However, we do expect to be able to target a percentage of existing devices in the embedded base before the first device launches in a few months. America Movil has changed how they preload their existing Container app, late last year. What this mean? Is that existing customers may have the opportunity to receive applications via Ignite as oppose to only new customers on new devices. The ability to launch early with existing customers is a very positive sign of how America Movil use both the opportunity and our relationship. I'm very excited about our prospects in India for both Ignite and Pay. Although nothing specific to announce today, India is moving more than 200 million smartphones a year and we are engaged with many partners including rebooting our MSEI relationship. This is not something that will impact the March or June quarter, but we do expect to see India becoming a more material contributor to our top line growth in the second half of next fiscal year. We anticipate being live in five different countries for Deutsche Telekom over the next few months. This relationship is taken much longer to develop than we had anticipated, but we now have a much clear line of sight to ramping revenues with Deutsche Telekom, that at any other point in our relationship. Next, is one of the trends we're seeing is how more devices are being sold by BYOD or Bring Your Own Device. Today, over 1 billion Android smartphones per year gets sold across nearly 600 different OEMs. There is a tremendous opportunity to preload Ignite and IQ on many of these devices that are not sold directly by mobile operators. We recently announced our first partnership with InfoSonics. You'll see additional announcements in the coming weeks and months from others. Well many of these deals may not be from companies with the same brand recognition as in AT&T, a Verizon, or a Samsung. They will be approximately 60% gross margin deals and a much faster time to launch with very little customization required. We will be launching IQ with T-Mobile USA on the Samsung S7 and will continue to preload on additional Android devices. T-Mobile USA has yet to make a broader commercial decision on its preload strategy, so there's nothing to report today regarding Ignite and T-Mobile USA. We will also be launching our first Ignite device in Russia on MTS next month and expect additional devices, this year. So fifth, let's move on to discuss our fourth quarter outlook. Today, we're reiterating and tightening our revenue guidance range for fiscal 2016 to $90 million to $93 million and reiterating our objective of being adjusted EBITDA positive for the March quarter. The key areas of risk and opportunity being the launch and impact of Samsung S7. Any slot count movements with North American operators, foreign exchange impact from Australia and the performance of Appia Core. We expect sequential revenue growth this quarter compared to last quarter despite the seasonality impacts of December. Although, historically a soft month, we're off a strong start in January particularly in DT Media as we recorded CPI revenues attributed to devices sold over the holiday season plus another month of eight slots. We expect to see DT Media revenues between $10 million to $12 million for the March quarter or approximately 60% quarterly growth at the midpoint. In lastly in the fourth quarter, as Andrew will discuss in more detail achieving positive adjusted EBITDA will be a very important result of our significant effort over the several quarters to run our business efficiently as possible, as we continue to grow revenues and gross margin dollars without increasing operating expenses. This is essential to our long-term success and adjusted EBITDA positive will be a major milestone for the company. Looking ahead to the next fiscal year beginning in April. We expect the first quarter of fiscal 2017 to grow sequentially from the fourth quarter fiscal 2016 fourth quarter, as we continue to drive our growth strategy. For DT Media contributors to the first quarter revenue included full quarter of the next update of Samsung's flagship device, the S7. A full quarter of Millicom. The ramps of Cricket and MTS and the introduction of AT&T and America Movil. The main factors that will create uncertainty for that quarter are the timing and impact of the S7 and the exact contributions of America Movil and AT&T. So while there are some revenues from the S7, may move either way between the fourth quarter and the first quarter depending upon the timing of the device launch and attribution. We think, we have good visibility until the launch is total impact across both quarters. And finally before I turn it over to Andrew. I want to say a few strategic words. Well most of my commentary and all of Andrew's is very focused on specific operational and financial results. I want to make sure investors see both the forest and the trees. The forest is our strategies working. Our business is ramping and this is because of our thesis. That number one, application growth is enormous for end consumers. Number two, the ownership of the space on the home screen real estate is unique, valuable and represents beach front property for the advertising world. And third, our operator and OEM partners and advertisers want to participate with us in this opportunity. These three factors are things that position our company both uniquely and perfectly. We are hyper focused on the short-term ramp, the expectations, the short-term profitability to ensure we execute well, to capture our enormous long-term growth opportunity. This enormous long-term growth opportunity leverage us having the largest operator and OEM partners in the world as partners in the largest advertisers and app developers as customers. There is a reason always companies want to partner with us and we've won them because they see our proprietary software as the critical link in the chain between the device and the application or advertiser. It's important to note, that this is about building a platform business, not an ad tech business, not a software as a service business because platform businesses have much higher barriers to entry and thus can capture more value and are less likely to be commoditized. You'll see some additional announcements from us this month and how we're expanding our platform to additional screen, to include television as well as the Interest of Things. This is a natural extension for us. In the short-term, our execution is critical to building our business. I've never been more excited about our prospects and our competitive position in the industry. With that, let me turn it over to Andrew to take you through the numbers.

Thank you, Bill. I'll start with a review of our fiscal results for the third quarter and then offer some additional color on our full year outlook and touch upon Q1, 2017. Please note that, all comparisons I'll discuss today are being made to the prior sequential quarter and less specifically noted. We believe, that this is a better indicator of how our business is performing given the vast differences between our company today and at this time, last year. Namely as a result of the growth in our advertising business and the March 6, 2015 acquisition of Appia. For those new into Digital Turbine story, we have two segments for financial reporting purposes advertising and content. With advertising comprised of Appia Core and DT Media, which consists of DT Ignite and IQ. Content is comprised of Marketplace and Pay. These segments are the basis for our financial reporting as well as for my discussion today. Note however, that going forward we intend to rename these reporting segments to be consistent with the branding initiatives that Bill previously described. With that said, let's begin. On a GAAP basis revenue for the third quarter increased 16% to $24.1 million as compared with $20.7 million for the second quarter. Advertising revenue increased approximately 28% with DT Media and Appia Core revenue increasing 71% and 10% respectively. DT content revenue decreased approximately 6% stemming from the decline in DT Marketplace. Resource reallocation from the DT content business to our higher growth, higher margin media business adversely impacted content revenues in the quarter. The negative effect of the Aussie Dollar exchange rate was minimal at approximately $50,000. As for the press release, we issued earlier today. Our results for the third quarter included one-time net adjustment of approximately $500,000. This adjustment was a result primarily of a concession with one large advertising partner net of other adjustments including the positive impact of the reversal of the sales allowance resulting from a change in estimate. Excluding the impact of this one-time adjustment, revenue for the quarter was $24.6 million. 72% of third quarter revenue is generating from our advertising business versus 66% in Q2, while 28% of third quarter revenue was generated from our content business as compared to 34% in Q2. This sequential change in mix underscores the continued adoption of DT Ignite as well as Appia Core revenue growth within our advertising business. Advertising revenue in the quarter was $17.5 million, an increase of 28% over Q2. Off this, DT Media revenues were approximately $7 million, up 71% from the second quarter. Growth in Ignite revenues once again shifted the mix towards DT Media resulting in DT Media contributing 40% of Q3 revenue and Appia Core contributing 60% compared to 30% and 70% respectively in Q2. This increase reflects continued penetration of DT Ignite across our US and international carrier and distribution partners and increasing levels of productivity and was achieved even as Appia Core reported a second consecutive quarter of record revenue. DT Media was positively impacted by the seasonally strong holiday selling season, with quarterly growth attributed to an increase in ad inventory units from 4 to 8 in mid-November across US distribution partners. Increasing overall device yield driven by better targeting and more affective campaign management as well as the aforementioned additional inventory. And additional deployments across new distribution partners including ClearTalk and 2degrees [ph] as well as the implementation of Phase 1 with America Movil. All of this offsets, by lower than anticipated device volumes across US distribution partners most notably evidenced in Samsung's earnings approximately one week ago. The Appia Core business delivered $10.5 million in revenue in Q3, an increase of 10% versus Q2. The December quarter was positively impacted by continued growth in Asia Pacific and EMEA. As a result of positive campaign performance in recent months, Appia Core was also able to secure increase budget commitments from key advertisers that contributed to growing revenues. As Bill noted for the March quarter, we expect Appia Core revenues to perform consistent with Indian industry trends in the post-holiday seasonality period and we did see softness in the Appia Core business in January as global brands and application providers work on allocating their 2016 spend. The key priorities for the Appia Core business over the next two quarters will be to continue to scale distribution outside of United States, which will drive incremental revenues and to continue to improve the data signs and products that we believe will in turn create differentiated ad units in the marketplace that carry, better gross margin. Expanding distribution to RTB is a core part of this strategy. Content revenue in the quarter was $6.6 million decline when compared to $7.1 million in the second quarter. This decline was the result primarily of our decision to reallocate investment toward data science, our Ignite business and the Content and Pay business in Southeast Asia and India. Further exacerbating the client in Q3 revenues, where new DCB Regulations in Australia resulting in a moderate slowdown in advertising spend by content partners, while they adjusted their services and a decline in seasonal services that generally happened during the summer holiday period in Australia. Non-GAAP adjusted gross profit and non-GAAP adjusted gross margin which excludes the amortization of intangibles, but includes the variables portion of hosting fees. Where $5.5 million and 23% respectively for the third quarter, compared to $4.6 million and approximately 22% respectively for the second quarter. This sequential increase in gross margin of approximately by the increasing contribution from higher margin DT Media revenue at approximately 40% in the quarter, without the contribution of any professional services revenue, which carries higher margins. Additionally, non-GAAP adjusted gross margin was adversely impacted by high carrier partner concentration and the achievement during the quarter of incentive threshold yielding a less favorable revenue share to the company. Rounding out the advertising business, Appia Core margins were approximately 20%. Appia Core gross margin included, a one-time adjustment related to the positive impact of the reversal of the sales allowance resulting from a change in estimate. Excluding this adjustment, gross margin was 19% versus 19% in Q2. A sustained margin improvement as compared to previous quarters resulting from continued focus on a reduction in credits namely those related to advertise or overspend. Within the content business, margins were approximately 12% for the quarter down versus Q2. A result of lower absolute DT Marketplace revenues and a more meaningful mixed shift to lower margin DT Pay revenues. GAAP gross profit was $3.8 million or 16% gross margin for the third quarter versus $77,000 or 0.4% gross margin for the second quarter. This sequential difference was primarily due to an increase in DT Media revenues as well as the $2.4 million non-cash write-off of intangibles associated with amounts attributable to customer relationships from the September, 2012 acquisition of Logia, which was taken in the second quarter. Total operating expenses for the third quarter increase 10% to $9.1 million compared with $8.2 million for the second quarter. The second quarter included the positive impact related to the reversal of bonus accruals of approximately $0.5 million. Expenses were otherwise modestly on targeted investments in research and development and operations headcount. Total operating expenses include non-cash items comprised of stock-based compensation and depreciation which decreased to $1.5 million from $1.6 million last quarter. Net loss from continuing operations for the third quarter was $5.8 million or $0.9 per share based on 66 million weighted average shares outstanding. Net loss from continuing operations for the second quarter was $8.3 million or $0.14 per share, based on 57.3 million weighted average shares outstanding. The increase in weighted average shares outstanding is attributable to our 8.7 million common share offering completed in October. Non-GAAP adjusted EBITDA loss for the third quarter was $2.1 million and flat with $2.1 million for the second quarter. Excluding the impact of the bonus accrual reversal in the second quarter adjusted EBITDA improved 16% in Q3. Now let's move to the balance sheet, cash and cash equivalents as December 31 were $13.7 million at quarter-end, net working capital improved to $487,000 from negative $10 million at September 30. The increase in cash and equivalents and improved networking capital profile is result of the equity offering completed in early October and the cash received in the Sift transition, which I'll touch upon shortly. We work to settle a portion of our past due payables and revenue share with vendors and distribution partners over the course of the quarter, as many of these trusted partners had previously worked with us to extend payment terms. While we still have some work to do here, we have made meaningful progress to-date to get back to more normalized terms. Total debt at quarter ends to $10.6 million net of discount of which $3.2 million is short-term and there were no new net borrowings under our credit facility at quarter end. Included in short-term debt is $3 million drawn under our receivable base revolver and $150,000 of remaining term loan, which we fully amortized with no amounts outstanding as of April, 1. As previously disclosed in an effort to drive down our overall cost of capital. We've engaged with our senior lender Silicon Valley Bank to work to refinance, our higher cash cost subordinated debt, while we have nothing formal to announce today. Discussions with Silicon Valley Bank remained very productive and collaborative and we'll be back to you, when we have something more definitive to report. Finally, as Bill touched upon on December 28, 2015. We entered into a license agreement with Sift Media, a new co, headed by former Director Jud Bowman. Under which Sift licenses our real-time bidding technology in consideration for $1 million of cash, a 9.9% investment in Sift in the form of convertible preferred stock as well as the appointment of Bill to a seat on Sift's, Board of Directors. This strategic transaction served not only to bolster our balance sheet and increase our economic exposure to the robust RTB market, but provides us near-term revenue potential by our exclusive publisher agreement as well as additional insight and perspective into the many differentiated approaches to capitalize in this market opportunity, as Bill previously alluded to. We look forward to working closely with Jud in this new venture. Turning to our full year outlook, we are narrowing our guidance range provided on our update call in mid-December. We expect fiscal 2016 revenue to be in the range of $90 million to $93 million approximately 60% growth versus pro forma fiscal 2015 revenue of $58 million. Driving our growth in Q4 to achieve this guidance range, our strong start in January which is a normally seasonally low volume quarter, with strong DT Media performance driven by CPI revenue attributable quality devices. Continued productivity gains with eight slots driving yield for device, higher than the $2 we previously forecasted, that we expect throughout the balance of the quarter. Increase breadth and depth of targeted CPP campaigns leveraging distributors data sets, new carrier launches as we recently have launched with Millicom and are on track to launch Cricket, MTS and InfoSonics in March. The contribution from anticipated new material device launches. And the stabilization of our content business, with a revenue run rate back at prior quarter levels of around $7 million. As per our press release and Bill's prior comments. We expect to be adjusted EBITDA positive for the fiscal fourth quarter. As we approach the achievement of positive adjusted EBITDA. We're looking ahead to a logical next best for our company, which is to generate free cash. Becoming self-funding is a key milestone in any rapidly growing enterprise and we'll give more details on future calls about our path to this objective. As we look ahead, uses of free cash flow include investments in high ROI projects and small complementary bolt-on acquisitions. And should valuations be attractive possibly the repurchase of our own common stock. And finally in closing, as Bill briefly touched upon. We are comfortable and confident in our ability to achieve consistent, sequential growth across our businesses. To that end, we expect to realize revenue growth in Q1, 2017 with sustained adjusted EBITDA profitability. To reiterate, Q1 growth over Q4 will primarily be driven by the continued ramp in our high margin DT Media business through a number of known factors including a full quarter of the Samsung Galaxy S7, increase the penetration across the existing US carrier and OEM distribution partners, a full quarter of distributed partners launching in this fiscal Q4 namely Millicom, Cricket and MTS. And the launch of our partnership with AT&T and America Movil. We have a lot to be excited about. The company is successfully moving along its planned trajectory and executing well towards its long-term growth objectives. And with that, our prepared remarks have concluded. Operator, would you give please give instructions for Q&A?

[Operator Instructions] and our first question comes from Mike Malouf of Craig Hallum Capital Group. Please go ahead.

Let's start with, can you just talk a little bit more Bill on this America Movil. It sounded like, you were going to go basically into an existing clients or existing customer base, that sounds pretty expansive and exciting, but you've never done that before. So can you expand a little bit on that opportunity?

Yes, sure. So Mike, we have three ways that we deliver applications to consumers with Ignite. We've got our silent boot, which is what we do with partners such as Verizon and US Cellular and Vodafone. We have a wizard that will be due with AT&T and others and then we have Ignite as an STK, where we preload Ignite inside other applications and in this third case, is what we're doing with America Movil and here you'll see as to with others as well into the future and basically what that means is that, America Movil is preloading this existing app within some special permissions through Google Android operating system and what that will enable us to do when they do a software update and we now include this Ignite STK into that application. It will have us, it will allow us the opportunity to push and recommend applications out to the existing customer base. So America Movil just recently started doing this. So I'm not prepared today to give you guys any specific numbers around, what the impact will be. But really what I wanted to make sure to emphasize for investors today on this is two things. Number one is that, Ignite is not just about going out to new devices. There is opportunities especially emerging markets to go out to existing devices and number two, companies is large and substantial as America Movil 300 million plus subscribers. Their commitment to doing this and changing how they're loading this application in advance of us putting on new devices. I think says a lot around their commitment and views and strategies on the relationship.

Okay, great and then. Just follow-up question, with regards to specifically Verizon, but just your existing account base now. What percentage do you think you're hitting as far as the number of percentage of Android phones now that have Ignite on them, with Verizon. And then when you look out into this March quarter. You're $3 million to $5 million incremental Ignite revenue, does that kind of come from existing clients or is it coming from some of these new clients? Thanks.

Yes, so Mike I'm not going to comment any specific partner, numbers and what specific partners are doings. But what I will say is, across all of our North American partners which is numerous. I'd say right now, we're probably in the somewhere in the 70% plus range in terms of existing devices that were hitting. When the S7 launches, I would anticipate that would take a material step up for us. And one important point I think that is important for investors to understand is that, last year when we launched Ignite on the S6, we were not the S5. And so therefore, we missed that opportunity as people are familiar with whether it's Samsung or Apple or any new handset provider. When those new models come out, the existing models tend to get a bump and so, this year as the S7 launches we anticipate that, should be a benefit to us because we're on the S6, as well. So I would expect that overall percentage to increase just a bit. And then in terms of the increase in Ignite revenues for this quarter. As we stated on our guidance call, last December. We really haircut the impact of the new customers and the haircut that I believe into six figure range versus seven figure range in terms of their impact for the March quarter. So I think anything they do above and beyond that would be upside for us. So we think about the incremental lift. We really see that coming from our existing partners and anything we get from, some of the ones I referenced in my prepared remarks. I would be upside on top of that.

Great, thanks a lot.

The next question will come from Brian Alger of ROTH Capital Partners. Please go ahead.

Lots to go over, a lot of information in here. I guess, I'll start with just a real basic one. With the Sift Media deal there. How is that $1 million cash payment to being accounted for? Is that a royalty, is that a license fee, is that one-time sale? How does that impact the P&L and is that already in the balance sheet for the December quarter?

Yes, so when we bought the Appia business, we put some intangibles on the book associated with the acquired technology of approximately $7 million. Inclusive of that $7 million, were amounts associated with RTB and other assets license to Sift. The overall transaction value was $1 million of cash and 10% or roughly $2 million at the time, that we made our investment and the accounting is to net, the amount of those proceeds against the acquired intangibles first. And in the event, that there is any excess which in this case there aren't or isn't, we would record other income below the line. So the transaction will result in the reduction of acquired intangibles which will have a positive amortization impact in the future quarters. But in no way, will hit the P&L otherwise.

And you guys did a deal on the 28, does this already goes through the balance sheet that we're looking at?

That's correct, yes.

Okay, great and then as we look forward into next quarter. Can you maybe give us puts and takes, as we think about the EBITDA breakeven or EBITDA policy in line. It sounds like, most of content is going to be coming from Pay, which I know is lower margin as oppose to marketplace. But we have some other movement obviously going within DT Media. Can you maybe give us a sense of in terms of how the margins on operating basis flow through with pluses and minuses?

Yes, sure. So without getting too specific on numbers. The positive here will obviously be associated with a much higher percentage of the overall mix related to DT Media, which carried roughly 40% margins in this past quarter without the contribution of any professional services, which as we know we said in the past are lumpy. As we look forward into this quarter, Millicom has already launched and we expect to have a positive gross profit or gross margin impact for the remainder of the quarter, as will the contribution of MTS, Cricket and DT Media revenue is associated with the S7. So as we think about keeping costs in line, at the $7.2 million or $7.3 million cash cost level that we historically run out, sans one-time items. We will need to get at the midpoint of the implicit range of revenues for the remainder of the year. North of roughly 25% of gross margins, 26% which are achievable based upon mix, in order to attain adjusted EBITDA profitability, which by our definition would exclude obviously depreciation, amortization and stock-based compensation.

Right. Okay, so and it seems the incremental margin that we're going to see March quarter relative to December quarter is pretty significant going from a slight EBITDA loss here increasing the revenues implied by the midpoint here, that's a pretty good incremental flow through from incremental dollar to the business point. Is that unique to this quarter as a result of professional fees being lumpy and coming in with four new carriers or is that something, that as we grow scale and gain revenues, we see that sort of leverage coming through, more on an ongoing basis.

Yes, while we expect and the impact of professional services in the quarter will be greater than zero versus Q3. We do not believe, that will be material contributor to the accretion of margin that we expect. And we expect that accretion of margin largely to come from an increase in mix to DT Media as you've noted, while we expect to see growth on absolute basis and relative basis in content, which carries lower margins and obviously Appia Core business which carries about 19% margins that we saw this quarter, as we ramp up DT Media at the 40% plus range. It's going to be a mix issue, which will impact Q4 but then we expect into Q1 in all fiscal 2017 to realize the scale of this business as we diversify way from large US distribution partners and some of the partners that we've discussed make up more material portion of the overall revenue mix for DT Media.

And one last one, if I can. And maybe this is for Bill. How should we think about the linearity in the March quarter relative to the December quarter? Intuitively, I would think December is back end loaded with the attribution windows and the holidays and whatnot, whereas because of that same thing, I would think we're front end loaded here in March. And ultimately, we're getting at is, at the point of the conference call here today. And looking at what's with the guidance for the quarter is, do we have a greater line of sight on that number than maybe we did for the December quarter when so much is up in the air, with holidays and whatnot?

Yes, Brian I think we do and I think there's one wild card and I'll talk about. But I think as we look about the March quarter being sequentially up from the December quarter. There is really four things that are going to drive that. Number one, is an increased slot count that we anticipate having for this quarter, that we only have for half the quarter in December. Number two, is the impact of new customers that you heard about in my prepared remarks, is obviously incremental revenue. Third, is the attribution benefit that we get from the December device sales, their flow into this quarter. And the final one which is the wild card is, what's the impact of the S7 going to be? Most people are speculating that the S7 will launch sometime around the second week of March. Obviously that's not something that we control and what that impact is and what the attribution is, in March versus April, that's where I think we've got a little bit on uncertainty. But that's not uncertainty in terms of what we believe the device will do across the life of the device just only in the context of March 31 versus April 1 and what's going to flow into a particular quarter there. To us, in terms of visibility on the quarter. I'd say, those are really the four drivers that we're focused on right now.

All right, thanks guys.

Our next question will come from Sameet Sinha of B. Riley. Please go ahead.

Bill, I was hoping that you could shed some light on, your targeting efforts as you work with the partner specifically. How are those efforts coming along? And should we expect some sort of step up or should be gradual benefits that we see from these targeted campaigns? Secondly, you spoke about certain revenue share concessions given as you hit certain thresholds. Is that with specific advertisers or carriers, I didn't quite get that. If you can talk about that and is that possible, should we expect something like this to happen on regular basis as some of these customers are partners scale. And my last question related to your RTB platform. Do you have any results or some initiative test on how that's skews one of the benefits to overall volume or pricing or margins, that will be helpful? Thank you.

Sure. Yes, so let me get your first question on targeting. It's - really for us on targeting about 40% of our total campaigns are running. We don't have 40% of the total campaigns meaning, they're hitting all customers rise, 40% of our total. So we've got hundreds of campaigns, 40% of those are being run with targeting data because we don't have the targeting data necessarily for 100% of the customers. But what we're seeing right now, is we're doing at a scale. So no longer, we trialing it on a device or trialing with specific set of targets in a specific market and we're now doing this, scale. As I mentioned in my remarks, what I'm really excited about, is this is something especially is part of our advertising partners program I referenced. Advertisers are, the ability for them to hit a specific segment of the population is netting up cost replacement or CPP rates that are 40% higher than we're now targeting. So that's something that really highlights the importance of doing this and doing the scale. We anticipate, we're going to continue to expand that because it is better for all stakeholders involved. So stay tuned for additional updates on that. But I would say, at this stage. We graduated from trialing it, to now doing at scale until the next step for us as it relates to targeting is going to be our ability to incorporate across more operators, on globally. Secondly on the rev share question. Yes, what we do is. [Indiscernible] gross profit dollars and we want to incent our operator and OEM partners to put our Ignite software across their entire device line up and so we'll incent them with increased revenue shares to do that and as Andrew mentioned in his remarks. We'll cross over threshold from time-to-time with certain partners and that's happened in this case is past quarter, while that could cause a short-term dip in the gross margin for that particular partner on an aggregate basis, remember what we're talking about here. Gross margins that can basically fluctuate anywhere from 30% to 70%. So in all cases, it's accretive to, on what we're already doing across their other businesses. But the goal here is to maximize total gross profit dollars. And then your final question around RTB. Really, what RTB is, our ability to arbitrage buyers and sellers of media for app install. And so today, when we go out to a CNN International or Baidu or other publishers like that. We'll cut revenue share deals with them, that are basically 80-20. And so we'll give that revenue and then we'll turn it around and share it with that publisher after the advertiser pays us and it's pretty standard and pretty consistent in terms of how it operates. With RTB, our ability now to go big on the publishers and guarantee them the rate whether that's done on a click basis or some other means and guarantee that publisher money and then predict how much app install revenue we'll get from the advertiser will allow us to accrete margin. So we know for example, we can go out and spend $100 in guaranteed media to a publisher and we know, we can generate $500 an app install revenue that would basically take your margin up to 80% and it will be a great example of margin accretion. And we're doing this today, we're doing it somewhat limited scale right now and that's why I say, it won't impact to this current quarter, the June quarter but as we go forward just giving the massive growth in this space, the ability to arbitrage buyers and sellers and media, and given our unique focus with the information on the device. I think that opens up tremendous amount of opportunities for us, to accrete our margins over the long-term by leveraging this data science and technology. So still early days, but something we're very excited about and something in terms of where the industry is going.

On quick follow-up, if I may? Can you talk about, when the split of the campaigns between cost per install campaigns versus cost per based on other metrics like open rates and how is that trending, which one would you specifically favor over the other and I guess, you can benefit this particular quarter from the attribution, which was delayed from the previous quarter. Should we expect that sort of this sort of dynamic to continue from here on or was it, you think it was a sort of one or two quarter event?

Sure, so right now in terms of mix of CPI versus CPP. What we see is, more using targeting the vast majority that is CPP and we're using non-targeting the vast majority of that is CPI. And so, since we're only targeting 40% of the campaigns, the vast majority of the revenues today are still oriented towards CPI and that's actually, okay. So, if someone is willing to pay us to heed the math simple here $0.30 CPP rate. And we know, that somebody wanted to pay us $2 CPI rate and I can get, a 20% open rate off a $2 CPI, that's $0.40 CPI, which is better than $0.30 CPP. So its net beneficial for us to have the CPI deal. So we'll continually do that math and calculus to see what's better. But when I say it's a general rule as to the advertiser is willing to take more risk, when they know it's targeted and hence sign up for a CPP. If it's untargeted that's where we role more into CPI campaigns.

Thank you.

[Operator Instructions] the next question will come from Jon Hickman of Ladenburg. Please go ahead.

I just have two. Basically, could you go through this revenue reversal? Exactly, can you give us little more detail, what happened? Did you make some kind of estimate of what the revenues would be for the customers and then it didn't happened, so you had to refund some of their money?

In that, there were two components to the reversal. So the one-time net adjustment that we took was comprised off a concession with a large advertiser, where we had revenues recorded that we from prior periods and this existing period, that we ended up reversing a portion of those, in the quarter as a concession based upon, their views on the way that we approach to the distribution market from a publisher side and some of the publishers tactics, views to ultimately yield the installation. So based upon the size of the advertiser and the materiality of their contribution to our business today and on a go forward basis, we made a concession with that advertiser and hence took a reversal of revenue in this quarter, that was then offset by a change in estimate for sales allowance. We had reserve for sales allowance on our books based upon a prior convention, where we were essentially over reserving for credits and as we got better overtime, we had realized that there was a required to make a change in estimate, which caused us to reverse out that reserve which had a positive impact offsetting the negative impact from the reduction in revenue from the advertiser. So when you net those two against each other, it was roughly $0.5 million in the period.

So none of that's affected in the March quarter, right?

No, not at all. It's purely one-time. One of the reasons, why we actually pursued it this way, was to ensure that we continued on good standing in terms with the large advertising partner for our business. This is absolutely behind us and on the revenue side and the sales alongside, which netted against the revenue adjustment, this obviously was a one-time change in estimate for the way, that we reserved for sales credits. So we had a change in convention, that required us to reverse that, which had a positive impact. So that again, two is behind us.

Okay and you're still working with that large advertiser.

Absolutely.

Okay, my second question is about the Millicom relationship. You said that, Bill said that's a licensing deal, how are you pricing that like an estimate of how many devices?

Yes. Jon, this is Bill. What we do is similar to the stretches out, we were talking about with Sameet on the prior questions, as - we provide incentives for our partners to put Ignite software on additional devices. But rather than doing it as a revenue share on advertising Millicom is looking at this initially as something that's more of an operational opportunity use Ignite for their business. So while we have some discussions in path forward advertising and lectures [ph] around that, what we've done is we structured a deal that, starts out with a licensing fee and then as they continue to add more and more devices, we'll create incentives to take the licensing fee down, overtime as it goes across more devices, consistent with the philosophy I shared before around maximizing gross profit dollars.

So, right now they're trying to get all the advertising dollars and just pay you a licensing fee.

Yes, right now they're not actually doing advertising. They're using it for operational things, for some of their own existing applications, that they want to put on. So it's really not, Ignite is not really an advertising play for them, at this current point in time, that could obviously change in the future and something that we both contemplated. But right now, they're looking as Ignite as an opportunity to help them with the growth of smartphones across their footprint in terms of how they preload applications and manage the customer experience.

Okay, that's it from me. Thanks.

The next question will be a follow-up from Brian Alger of ROTH Capital Partners. Please go ahead.

Following up on the commentary with regard to America Movil and installing the cost there, installed base. Just thinking it through a little bit, if we have the ability to push Ignite onto installed devices and I think you said, utilize app recommendations. It seems like a logical explanation that something, we can or you can do with other carriers. Especially given some of the integration [indiscernible] Ignite 2.0 and start getting into more of a returning revenue stream off of Ignite. Number one, am I interpreting that correctly? And number two, is there resistance anywhere within the ecosystem to such a recurring revenue stream?

What you see from us, Brian as I mentioned, we kind of break it up it into two sections here. So one is, how do we get Ignite to the device. I mentioned before, we can do it through silent, we can do it through wizard and we can do it through STK. So if I double click on the STK, really what that is a software inside another operator application. So if that application is already preloaded in the proper place within the android operating system, when we do push out Ignite as part of that update to that existing operators app, that's when it opens up additional opportunities for recommendations and other applications and different partners will have different views on how aggressive or not aggressive they want to be on that. So it is definitely something that we could do beyond America Movil, as we think about our Ignite 2.0 launch in selling the STK, as a different product from the silent product that we used for example with Verizon and US Cellular in Vodafone and others today. So that would be one piece of it. But the larger question that you're asking around ongoing monetization. Absolutely, we can do that through all three methods. So there's things that we can do buy things like Ignite recommends and notifications and in a variety of other things that, we begun trialing with some partners right now and I would expect to see us to continue to do that in 2017, with kind of overarching strategy here, of how do we move beyond one and done out of the box and develop a much more ongoing consumer relationship. So that's something we're very much focused on as a business. Not getting too much into [indiscernible] on the Q&A, there is multiple paths and ways for us to get there.

Great and then just one last one, if I can. I think you said that, Deutsche Telekom was going to [indiscernible] countries is that from three and if so, what is the two new ones?

Yes, so right now. Stay tuned on some of that. Brian, I want to be respectful of Deutsche Telekom hasn't made any announcements of that. So I want to be respectful of their individual country. So we'll follow back up on that. But I would say that there are five countries that we anticipate being live in the next few months and one of those is not Germany, though just to be clear for investors.

Very well, thanks.

Our next question will be Steven Massocca of Wedbush Equity Management. Please go ahead.

So the last time you talked, there was a technical. One of your partners had a technical snafu on Black Friday, as results some revenues were loss. But could possibly be picked up in December. Do we now know, the amount of those revenues that were lost due to that technical snafu?

Yes, sure Steve this is Bill. Let me first say, that the technical issue is been addressed and it's not a technical on a go forward basis. We've addressed that with the partner and have a very clear line of sight in terms of how the capacity will scale with that partner, who is doing the implementation of their data network and the downloading of the applications are bit different than other partners are globally. So first and foremost the issue is been addressed. What we realized is that, the total impact of this was about $200,000 to $300,000. A little bit of that yes, we did recoup that's been on the user experience of how people power on the phones on Black Friday and then what happened if they opened them up underneath Christmas trees. But I would say, the vast majority of it, we made a business decision with the partner to not push applications out after the customer already had their phone. Our view was that, that's a poor customer experience and the customer experience trump's that short-term revenue gain. But going forward, we don't see this as an issue in terms of what happened.

Bill, my point is the quarter would have been $300,000 better had that problem been fixed, had not happened.

That's correct.

Thank you.

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Bill Stone for his closing remarks.

Yes, thank you all for joining our call and we will be back to you with updates on our progress and be on the lookout for upcoming news flow. And finally, we will be appearing at the ROTH Annual Conference in March and we look forward to seeing many of you there. Thanks again and have a great evening.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line.