Digital Turbine, Inc. (APPS) Q1 2017 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Digital Turbine Fiscal First Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Senior Vice President of Capital Markets and Strategy, Brian Bartholomew. Please go ahead.

Thank you. Good afternoon and welcome everyone to the Digital Turbine's first quarter 2017 earnings conference call. Joining me today to discuss our results are Bill Stone, CEO; and Andrew Schleimer, CFO. 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. 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 or discussion of the specific risk factors that actual results to differ materially from those contemplated by our forward-looking statements please to the documents we filed with the Securities and Exchange Commission. Also during this we will discuss non-GAAP measures of our performance. Non-GAAP measures are not substitutes for GAAP measures. Please refer to today’s press release for important information about the limitations of using non-GAAP measures as well as reconciliations of these non-GAAP financial results to the most comparable GAAP measures. Now, it is my pleasure to turn the call over to Mr. Bill Stone.

Thanks, Brian, and thanks to all of you for joining us today. I wanted to cover our four main areas in my remarks. First is providing an update on some new customer wins, second will be to close out the June quarter, third will operational updates and new launches that will contribute to September and December operating results. And finally, are some strategic comments about our business. Andrew will take you through the numbers and also provide updates on other important financial issues including our anticipated refinancing of the company’s short term debt. We understand this is a material issue for investors to get clarity on. Andrew will give you more details, but now that our 10-Q has been filed I’m very optimistic that this issue will have a solution in the next 30 days. I want to begin my remarks by announcing a few customer wins. First is another win in India with Reliance Jio. I’ve spoken many times about how important and strategic the Indian market is to us. Reliance Jio is another positive data point validating that strategy. Jio is ground up 4G LTE network being funded primarily by billionaire Mukesh Ambani. Morgan Stanley has forecasted to expect Jio to add 30 million smartphones and subscribers this year and another 60 million new smartphones and subscribers over the next 24 months. Thus it is a very material win for us. Similar to our other Indian carrier partner Airtel, it is a licensing deal where Jio will be paying us for the Ignite software at 100% gross margin to us including minimum guarantees. Any potential advertising revenues would be incremental to the software licensing fees. However, where Airtel is leveraging our Ignite SDK Solution exclusively amongst the Indian operators similar to what American Movil has deployed, Jio will be leveraging our Ignite APK Solution that is similar that is similar to the deployments here in North America. We expect Jio to launch this calendar year. Strategically I want to highlight that you will continue to see additional announcements from us in the fast growing Indian smartphone market which has recently overtaken the U.S. as the second largest in the world. We now have line of sight to a material percentage of smartphones in India having Ignite software on them as we get into 2017. Combined with our pay offering in India which I’ll discuss later in my remarks our Indian strategy is beginning to come together nicely. Second is our new relationship with Brightstar, for those of you not familiar with Brightstar, Brightstar is owned by SoftBank and is a largest distributor of smartphones in the world handling device distribution for over 200 global wireless operators and over 40,000 retail locations including retailers such as Wal-Mart, Target, S5 and also Apple stores where Brightstar manages the Apple devices returned to Apple stores which then gets refurbished by Brightstar. We expect to leverage Brightstar’s unparallel distribution footprint over the upcoming months. I’m very excited about this game changing relationship to extend our global reach across new solutions, customers and partners and you will see numerous new wins where we leverage our Digital Turbine product portfolio with Brightstar’s impressive global operator OEM and retail relationships. Next is a new OEM win with Archos. Archos is a European OEM that sells approximately 4 million devices per year primarily in Western Europe. We anticipate launching in the next 90 days with our standard Ignite solutions across their device line up. This agreement is a nice addition that helps us both scale in Europe as well as grow our OEM business. The strategic point I want to make with all of these announcements and others we’ve discussed prior is how we’re improving our time to revenue with these new deals. Verizon, AT&T, Deutsche Telecom and American Movil are all examples of great high profile relationships for us, but also examples of agreements that have taken a material amount of time and resources to launch. We’re now measuring implementation in days and weeks versus months and quarters. I’ll talk more about this later in my remarks. Now to close out June. We finished the quarter at $24 million in revenue which was up 4% sequentially and 29% year-over-year. I’ll breakdown the performance across our three business units, Content and Pay, A&P and O&O. First on Content and Pay, I was very pleased with our DT pay in content business contributing over $11.2 million of revenue which was up 41% sequentially and 59% year-over-year. We started strong marketing from many new content providers in the quarter in events of some operational changes made by Telstra in June. This was recently offset by weaker marketing to see the impact of those changes. To eliminate any bad actors, Telstra has implemented a double opt-in policy for the purchasing of any new mobile services. So for example, if you see EA games for $10 a month, EA asks you to subscribe and then ask you again after you’ve agreed to subscribe to tick a box recognizing your subscribing with additional legal language. Many content providers were concerned that seeing the tick box on a small screen would hurt tick rates and so they paused marketing in June and July until they assessed the impact. While content providers that pause marketing are finally getting comfortable with the tick rates and beginning marketing again, our expectation is that this transitional pause will have an impact of roughly $1 million to $2 million in the current quarter. This impact will be partially offset by our good growth in DT pay in India where we’re now approaching a $100,000 a month run rate. Our A&P business performed below our expectations for the June quarter as the spend of one of our customers continues to be curtail. More strategically there continues to be a fundamental shift in the A&P business as happens to all programs increasingly transition from people to machines. The structural solution to this shift is to pivot our A&P efforts more aggressively to real time bidding or RTB. We’re making solid progress on this pivot but it needs to grow faster to outrun the decline in the traditional A&P business. We were at zero revenue in our RTB business six months ago and are now on a low 7 figure run rate for this business today but we need to accelerate that growth. I’m excited about the possibilities that are unique Ignite data will bring to our RTB initiatives to help us win and differentiate in the marketplace and we’ve early data that validates this excitement. We’ve learned that better targeting with Ignite data equals better results but we need to do it at scale that is the major focus for us in the RTB business today. This involves scaling across more devices, more ad formats, more campaigns, more geographies and more ad exchanges. And finally, our O&O business generated $7 million in revenue for the June quarter. While this was down sequentially for a couple of specific reasons, most notably the timing of our S7 with the large North American operator, we’re encouraged to have witnessed a rebound in the business late in the June quarter and into the current quarter. We’re now live on the S7 with this particular operator as well as with numerous others. In particular I want to highlight some specific operational updates across operators, advertisers and OEMs. First, we’re once again seeing revenue growth with our largest North American operator. Our slide count varies between 6 to 8 depending upon device and time and we’re also now in the S7 edge. We will also be on the upcoming Note 7 launch. But, we’re also diversifying our revenues while also growing revenues without largest operator partner. For example, in April our largest North American partner with 76% of O&O revenue, in July it was 61% but had higher total revenue. Specific international growth including partners such as Bouygues and France, Deutsche Telecom, MTS, BLU, Millicom, SingTel, Vodafone and American Movil are all contributing to these statistics. With Deutsche Telecom we’re working on launching embedded based pushes this quarter in both Austria and Greece. Millicom continues to be a steady performer and we recently put a plan in place with them to expand both their devices and countries. This is important as it a license in Jio had a 100% gross margin to Digital Turbine. We’ve also completed embedded based pushes across numerous operators and OEMs in the Americas including American Movil and the AR contributing to revenue. We’re seeing device shields on embedded based pushes of roughly $1 here in the United States and roughly $0.50 in Latin America. We’ve now done pushes across many millions of devices to-date and expect to do many millions more in the remainder of the quarter. Regarding AT&T, we expect to launch with AT&T in the next few weeks on multiple devices and continue to launch as a stated feature on all new android devices as the year progresses. AT&T has branded the Ignite product as out select, we’ve been working hard to integrate our software into their standardized device launch processes which is taking a bit of time but ensures we’re part of their business as usual processes which is a big positive. While lengthening the time to revenue, I want to say that AT&T has been a terrific partner and is pursuing our relationship to a very strategic lens. Regarding Note 7 our software has been approved and it is on the device, but the exact timing is finalized some detailed internal AT&T production tests in addition to some testing on non Digital Turbine applications and these are being worked real time. This means I cannot provide an exact date today on when we’ll be live with app select on the Note 7, but we will be on the device. We should have visibility on that exact date over the next 7 to 10 days. We also continue to expand our horizons behind mobile operators. BLU, InfoSonics, Archos and Vizio are all examples of this. We expect to continue to add global OEM partners over the next 90 days as many OEMs are now calling us into accounts that were not even in our pipeline to practically approach. The good news is that these implementations are vanilla with little customization which means faster time to revenue and strong gross margins. Ignite Direct is now live and generating revenue in South East Asia. We’ve seen recent inbound interest for additional Ignite Direct deployments with multiple partners across multiple continents. Globally, OEMs and operators want to solve for open devices or devices that get distributed unlocked and the customer can simply pop a SIM card into the device versus it being locked to one operator. Ignite Direct solves this problem about app delivery to these devices for both the Apple iOS platform as well as android. We see this solution as solving a big problem in the marketplace and see it as filling in natural gap in our portfolio between a traditional A&P publisher and our traditional Ignite deployments. We’re very encouraged that we’re seeing inbound interest for this product as it is solving a very clear problem in the marketplace. Our revenue per device or RPB is consistent from our commentary on the June’s earnings call, it maintains at a $1.70 per device. We’re seeing revenue per slot or RPS of approximately $0.35 here in the United States and Australia, $0.28 in Europe and approximately $0.10 I emerging markets such as India and South East Asia. I expect to see accretion in these markets overtime as seasonality, increased breath and improved scale all provide us better pricing. On our June call, I talked about our strategic ad partners including brand such has Uber, Starbucks, eBay, Hulu and others that continue to be customers of ours. We continue to add brands and advertisers to the Ignite platform while existing brands spend additional dollars with us. The major focus area now is working locally in international markets in Europe, Asia and Latin America to bring local and international campaigns to our international partners. This is key for improved user experience and then scaling those international revenues. Specifically lift has been a great case study. Lift started modestly with a $60,000 month spend a few months ago. After they saw the data and our Jio targeting capabilities they recently increased the rate they pay us plus increased our total spend by 2.5x as their current activated user metrics are now lower than other acquisition channels including Facebook and Google. We hear frequently that when app developers see diminishing returns from their Facebook and Google investments that we’re in natural next step in terms of better performance and volume. In the immediate term we remain entirely focused on the building blocks of profitable top line growth, namely, enhanced user experience, higher slot counts, additional partners and devices and incremental bid rate increases with advertisers. So from a guidance standpoint it remains challenging to accurately forecast so many moving variables on a quarter-to-quarter basis. Given the momentum of recent and expected launches with existing and new carrier and OEM partners as well as the healthy demand from app developers and advertisers particularly as the holiday season nears, we’re comfortable forecasting sequential revenue growth for the remainder of 2016. While margins and profitability will continue to be mix dependent, we expect to be profitable on adjusted EBITDA basis as we exit the September quarter and more importantly we expect to be generating positive cash flow in the December quarter. Before I turn it over to Andrew, I know investor focus is on the immediate term with addressing the refinancing and solid execution being the top two priorities. We know this and agree with it and that’s why we’re taking a very Blue collar, bring out of lunch bell to work attitude on the day-to-day business. And as you’ve heard me say many times before I view my job not just to solving immediate term issues but also being able to look around the next corner and ensure work position for the future. On our last call I had spent some time in my prepared remarks talking about the data insights we’re able to gather from our products and how our data science will drive artificial intelligence or AI and predictive analytics that will enable us to differentiate and win. But the win also requires execution at global scale and as you can see with our launch in American Movil, our relationships with Brightstar, our new wins in India you’re now seeing additional data points of our global strategy and focusing on the right markets. We’re laser focused in North America, Latin America and India being some of the highest gross smartphone markets in the world while continuing to be opportunistic in South East Asia, Australia and Europe. On upcoming calls and conferences you will continue to see additional data points, honest focused approach validating our strategy as we continue to grow and diversify our revenue streams. So with that I’ll turn over to Andrew.

Thanks Bill. I’ll start with the review of our financial results for the first quarter of fiscal 2017 and then focus on our balance sheet and outlook. Please note that as we completed the acquisition of Appia on March 6, 2015, all fiscal first quarter comparisons are on the same basis with prior periods noted. Therefore, as first quarter fiscal 2017 is the first quarter in which we owned Appia for the entirety of all periods mentioned, we’re making no references to prior year pro forma results. Revenue for the fiscal first quarter of $24 million increased approximately 4% sequentially and 29% year-on-year. These variances represent apples-to-apples comparisons and fully organic growth. Advertising revenue of $12.8 million declined approximately 15% quarter-over-quarter. Within advertising, O&O revenue increased 117% year-on-year to $7 million as we continued to scale Ignite across a greater number of operators in OEMs that we partnered with over the past 12 months. Sequentially O&O declined 13% due to the lack of the seasonal benefit experienced in the March quarter from revenues directly related to holiday season attribution which we estimate at approximately $1 million. Revenue is otherwise flat on a sequential basis despite growth we incurred by the delayed Ignite launch on the Samsung Galaxy S7, which represented a large percentage of total device sale through in the quarter and a lower average slot count with a large North American carrier. Excluding this particular partner, O&O revenue grew approximately 150% sequentially as we made significant progress toward diversifying the business across carriers and OEMs particularly outside of the United States. Driving this growth during the quarter we saw our first meaningful contributions from successful embedded based pushes of Ignite. We delivered the software and subsequently applications to devices already live in the marketplace with carriers including Cricket and U.S. Cellular. As Bill mentioned we expect this trend to continue as operators in OEMs become more aggressive in seeking to monetize their devices and as their end users demonstrate more acceptance of additional apps which of course they can remove if they wish so long as the application is relevant to them. So far such acceptance varies by demographic and in turn by mobile operator and we expect embedded based pushes of our technology to be a more meaningful source of higher margin revenue going forward. Further, our slot count with our major North American partner has largely rebounded and as you know we’re now fully deployed on the S7. A&P revenue was $5.8 million in the quarter down 17%. The quarter was down primarily due to a significant temporary shift in the percentage of budget allocations by two large advertisers from mobile user acquisition to other digital media and from a general law from mobile user acquisition budgets and rates related to seasonality as well as increased competition installed networks. On a more positive note we continue to see momentum within our problematic real time bidding initiatives for both user acquisition and reengagement campaigns. The industry continues to get increasingly sophisticated in the ability to measure and focus on lifetime value as the primary driver for marketing investments. As a result we continue to invest in our data science, real time bidding and user engagements technologies that are rapidly evolving our proficiency to optimize on downstream quality metrics and deliver quality users at scale for our advertising partners. As we mentioned in June, we expect stabilization in our core syndicated network business and contribution from RTB in the coming months similar to the levels they are alluded to. Content revenue during totaled a $11.2 million representing 41% sequential growth and achieving a second consecutive all-time high for this business up 59% from last year’s second quarter. Growth was driven by robust DT pay revenue which grew 43% quarter-over-quarter and 89% year-on-year. DT pay generated record revenue of $10.7 million or approximately 95% of total content revenue during the quarter. As Bill mentioned, we did see content providers pause in marketing in July following Telstra’s operational changes which we estimate will likely impact fiscal Q2 revenue. As discussed a large increase in pay revenue in Australia resulted in record content revenues. This increase was primarily attributable to extra advertising activity by a number of content partners who increased their spend versus prior month holdbacks as well as holdbacks at the end of their financial year. The launch of DT pay in India is progressing well and we now have four partners live and revenue is growing meaningfully month-on-month as we start to ramp up our operations in this market. We’ve also launched electronic arts with Idea and Vodafone as well as two local OEMs. The market in India is predominantly an open market for devices and we’re starting to work more closely with the local OEMs for distribution of our suite of products. Marketplace revenues in Australia have somewhat stabilized this quarter, this is mainly due to some increased traffic to the services driven by our largest services on Telstra. GAAP gross margin during the quarter was 12% below the 16% reported in our fiscal fourth quarter. Excluding the amortization of intangibles non-GAAP adjusted gross margin was 20% in the first quarter as compared to 25% for the fourth quarter, which included the benefit of approximately 300 basis points related to certain accrued cost of goods sold reversals and other one-time items. Excluding this fiscal Q4 benefit, the sequential decrease of approximately 2-percentage points in our non-GAAP adjusted gross margin was primarily driven by the mix ship towards content revenue from advertising revenue. We expect gross margin to expand going forward at absolute O&O growth resumes to both growth with a major North American partner and greater diversification across additional carrier partners and OEM launches. With such growth, we'll come accretion in gross margin as diversification will result in more favourable revenue terms as the larger share of our mix. Total operating expenses for the quarter were 9.4 million, up slightly from 9 million in the preceding quarter. Total operating expense including non-cash items comprise the stock-based compensation and depreciation. Total cash-OpEx in the quarter was 7.9 million as compared to operating expenses on a cash basis of 7.3 million for Q4. Including in first quarter OpEx among other things were approximately $450,000 in audit related costs which we incur each year in Q1. Furthermore, in April, we booked the reversal of the remainder of the purchase price from the Xyo acquisition as part of the settlement that absolved us from any further cash liability to the sellers. The benefit from Xyo was subsequently offset by higher than expected bad-debt expense from an A&P advertising partner who is taken over by its creditors and other one-time costs related to the various extensions of an our short terms debt. We expect to see operating expenses return to Q4 levels on a sequential basis, leveraging our top line growth at higher gross margin to build towards turning the corner to positive adjusted EBITDA exiting the September quarter. Our demonstrated ability to scale our model while keeping cost in line underpins our confidence in achieving this objective. Net loss for the first quarter was 7.4 million or $0.11 per share based on 66.3 million weighted average shares outstanding. This compares to a net loss of 5.8 million or $0.09 per share for the fiscal fourth quarter of '16. Non-GAAP adjusted EBITDA loss for the first quarter was 3.1 million as compared to a loss of 1.6 million for the fourth quarter of '16. The decrease in adjusted EBITDA as just mentioned was a result of the inclusion of our audit related costs in Q1, higher than anticipated bad-debt expense partially offset from the Xyo settlement benefit, cost associated with the extension of debt as well as the shift in revenue mix towards lower gross margin products. An absent any end of period benefit that we say yielding a 300 basis point improvement in gross profit in Q4. We do not expect to see these one-time and audit related fees in Q2 through Q4 and expect to resume growth in O&O at a higher overall margin profile. Let's now move to the balance sheet. Cash and equivalence as of June 30th were 9.4 million and net working capital was -13.7 million. If we excluded the classification of our North Atlantic subject net of its discount, our working capital deficit would have been approximately 6 million. Reflecting our efforts to maintain responsible investments in our future while collecting receivables and managing our payables and in turn managing our liquidity. We continue to remain laser focussed on maximising our cash on hand through efficient working capital management. Total debts stood at 10.7 million, net of discount, all of which a short term and there were no new net borrowings under our credit facility at quarter end. Our short term debt at June 30 is comprised of two facilities. First, a 3.3 million asset back revolver with Silicon Valley Bank. We have previously received an extension to the June 30 maturity to August 14th, and are pleased to announce that we have reached an agreement to extend the maturity for another 45 days through the end of September. We are in a process of finalizing documentation with SVB who continues to be a terrific partner and we'll file an 8-K upon closing. And second of course, 8 million of subordinated debt with North Atlantic, that is due to mature next March 2017. With respect to refinancing our short term debt, we have been working on solutions both temporary and short term and holistic and long term for a while. While we are somewhat constraint in what we can discuss publicly today, the fact that we're driving forward revenue momentum and diversifying our revenue streams offers us a variety of financing options to consider. As you can understand because of timing, some of these options rest on a release of updated financials including the filing of our 10-Q which is now complete. Further, the options we are considering seek to avoid the exercise of North Atlantic's Penny Warrant which we have successfully differed until the end of August. We are continuing diligently in the refinancing process and are confident based on the tenor and late stage of the discussions we are having that we will have a solution in place eminently. Now, onto our outlook. On the strength of launches underway and plan throughout the remainder of our fiscal year with current and new carrier and OEM partners as well as continue demand from app developers and advertisers, we expect to drive quarter-by-quarter sequential revenue growth through the remainder of 2016. Further as I alluded to above, we are targeting exiting the September quarter, adjusted EBITDA positive and based on continued revenue growth and building operating leverage expect to generate positive cash flow in our December quarter. That includes our prepared remarks for today. Operator would you please give instructions for Q&A.

[Operator Instructions] Our first question is from Mike Malouf with Craig-Hallum. Please go ahead.

Great, thanks. Thanks for taking my questions, guys. Can you hear me okay?

Yes, we got you Mike.

Right. So, could you talk a little bit about Appia, that's obviously come under a lot of pressure. And I know there's a couple of clients who'd have been pulling back. But as you look out over the next year, can you give us a little bit of color on how you see this RTB sort of reinvigorating that growth. Or is this, kind of continued you think draw down from here just because of the competitive nature of the business and the change that happened in particular in how people are going to market. Thanks.

Yes, sure. So, as we think about our old Appia core business to what we now we call on my comments the A&P business. I really see that going in three directions over the next 12 months, Mike. In number one I do expect that the core business of how that's been running, I do expect that to stabilize, you're correct that it is a very competitive business and the world is moving towards more machines versus traditional business development to do those deals with companies like CNN or Baidu or The Weather Channel and so on. But I think that given our broader traction in O&O and the relationships that we had, there is so on opportunity to win in that space. But in terms of how we grow it and I really see it growing through two predominant vehicles. The first one is RTB and our ability to add scale, be able to use our ignite data sets and the information that we know about consumers in terms of what apps are on the phones, what they've installed, what they deleted, how much time they spent, and so on. And our ability to use that for increased targeting, that gives us an advantage and gives our machines and our data science an advantage in the market place. We need to run faster and jump higher in that part of the business and we are putting a lot of energy and resource and focus on it. And then we are seeing some growth relative to where we were six months ago. They need to be more and we're going to continue really lean in because we know that's where it's going. But I don’t want to just tell how difficult that is. There is some heavy lifting there but we are seeing some encouraging results out of the gain. And then the third part I touched on is a little bit around ignite direct. If you really think about ignite direct is, it really is almost like an Appia publisher deal but rather than having many different providers that would go into a traditional publisher, would be just us on the phone. So, whether that's with your operators in South East Asia, some of the inbound demand that we have. You can almost think of those as exclusive publisher deals on Appia. Yes, so that I think will give us some pricing power in the marketplace and not have to be subject some of the pricing and commodity pressures you see in the traditional part of that business. So, I really see those being a two growth vehicles for the A&P business going forward and has been able to renew relationships continue to stabilize how we've been operating the core business over the past six months or so.

Okay, thanks. And then with regards to the push side of the business, particularly with some of these new clients ramping. You mentioned a lot of data. I'm just wondering if you could just go a little bit deeper in to that, you said $0.50 per phone on the, was it Latin America side and then a $1 per phone in the U.S. Is that what you're getting, you said there is going to be millions of phones with that. So, can we, you play that for a second?

Yes. So -- sure. So, yes so we've done pushing out millions of phones here in the United States, Latin America and other countries. And in terms of just some early stats from the past quarter so of doing this, we are seeing rates approximately of a $1 here in the United States, about $0.50 in Latin America for those pushes. And we've got plans to touch on some of the things happen in Europe, specifically around this. But we anticipate both in, here in America and the United States increase in that too many millions more as we go to the balance of the current quarter.

So, I mean, if you did 10 million phones, you could do between $5 million and $10 million in that business. Is that how we should think about it?

Yes, I think it really going to come down to the take rate, Mike, on the pushes, so there is different devices and devices may have different memory requirements or different accesses to the network or it is a variety of factors that will impact to take rate. So, it's not like we do push out the one device and you get a 100% take rate on this pushes. The take rates can vary anywhere from 25% to 75% depending on the market. The device, how many campaigns your slots were running on those pushes etcetera. So, it's probably something we can take you through from a modeling perspective offline.

So, it's sort of like an open rate, I get it, I understand now.

Yes. But the take rates on it can be can vary depending on how it's pushed and all of our this consumers know is that when we get notifications on our phone are done differently depending upon how the app developer, the operator or the operating system provider or app or Google choose to do it. Those are will impact the take rates. But in terms of the addressable market of devices, it's going to be many millions of more that we anticipate pushing to just in the current quarter and then will do more into the December quarter.

Okay. And then one last question for Andrew. On the free cash flow for the December quarter, can you just help me understand what your definition of free cash flow is?

Yes, so. Very simply will end the quarter with more cash than we start with the quarter. And we will have revenues to cover our cash cost and add the benefit of positive working capital.

Got it, okay, I appreciate it, thanks a lot guys.

Thanks, Mike.

Our next question is from Brian Alger with ROTH Capital Partners. Please go ahead.

Hi guys, good afternoon. Can you hear me?

Yes.

Great. All our folks on the content business, obviously DT Pay is taken off for since obviously shining light on this court. But you mentioned that you think there may be a bit of a hangover in the current quarter due to the pull back in advertising and in Australia which tells just specifically. I'm wondering as we look at this puts and takes within content and the rapid growth that we're getting with DT Pay, is that reasonable to think that on the whole the content business would be up in this current quarter realizing that Telstra is going to be a headwind what we have in the growth coming from DT Pay in India?

Yes, sure, Brian. Yes, a couple of thoughts, let me cover up Australia and growth outside of Australia. I think that the wildcard here is a lot of the DT Pay growth that we saw in the June quarter was really fueled by increase marketing spend from the content providers in the market, the new Telstra implementing this change and then they backed off of that waiting to see what the take rates were going to be from some of these legal language double octane etcetera, things that I mentioned in my remarks. And so starting to the marketing pick up, how much it picks up is happening in real time, we'll probably have visibility to that over the next 30 days in terms of what the impact are but we're starting to just hear over the past week starting to this revenues rebound again in that business. But how much the content providers who are in the market on that as well. I think it is a big driver in Australia in terms of the topline number for the content business in the September quarter. And what we're seeing, we're encouraged though by it, we're starting to see some nice growth in India with Pay. We also have some content opportunities and in other markets in South East Asia as well on this quarter. So, the question was can those outrun anything we're going to see on the risk from the marketing side in Australia. As I mentioned in my remarks, I think for right now the prudent thing for us to do is look at it as a $1 million to $2 million down on the content business from the September to June quarter. But we'll be smarter on that and provide updates as we get going here over the next few weeks into September as that marketing activity picks up from the Australian content guys.

Okay, that's helpful. And then working through on the A&P business, the RTB just getting started. It's small, so the percentage out there is going to be pretty big. But when you look at your opportunities over the next call it six months or so, seasonality improves pretty dramatically where it has in the past. Do you think that business is going to be able to get back to prior revenue levels or is this something where we've seen a dynamic shift in the end market where that's not really achievable?

Yes, I guess I'll break that into two elements. I do think that there is a seasonality element that we're historically seeing going back many years in the Appia business where historically the June quarter is softer than what you see as you go into the fall and to the holiday season. So, I expect that seasonality to help benefit us in the A&P business. As far as RTB goes, the important point I want to make here is that we're trying to go revenues in that business and we want to as I mentioned in my remarks, run faster and jump higher there but equally it focus in terms of building a platform and a product that can scale. So, what I mean by that is we can have an advertiser come to us and say "Hey, let's go spend a $100,000 in RTB and we could go blow that out." But I don’t necessarily know in terms of the data and the insights in the broader platform, so we're not a one here wonder just on that one campaign that we can build that across 100s of campaigns and we can do that different geographies, leverage our Ignite DT and so on. So, we're making some conscious decisions right now to not have revenue be the end all and go, the end all and be our goal of that business in the immediate term ultimately needs to translate into revenue. But it's really important right now that we're focusing on building that platform in terms of how we handle the big data coming in from Ignite, we're able to digest it, we're able to process it across multiple geographies, multiple campaigns. So, it’s a lot of infrastructure heavy lifting that we're really focused on in the current time in that business. But again ultimately it's got to translate into revenue but I want to make sure that that's not the end on be our goal from a day-to-day basis, in terms of how we're thinking about it.

What to that end, to build up the resources to deliver that performance at scale, is this some question of needing to purchase more hardware, is it more guys writing code, is it more time running error dif, learning machine, learning algorithms, what is it that you need to get it up the scale and what how should we interpret that in terms of the need to deploy resources. We get this it seems is now we've known RTB was going to be a big thing for a while but because we've been cash constraint, it hasn’t really got the development that apparently was needed to take advantage of the market shift.

Yes. No, that's right, Brian. And so, we are running a lean but we're also running it very efficient as well. And so, it's a combination of hardware and infrastructure, it's a function of having the processing power to look at 100s of millions of impressions at any single point in time for multiple exchanges coming in across multiple geographies. And there is a lot of just data, hardware, processing things that go into a data piece of it. Ensuring we have multiple data scientists, PhD data scientists on the payroll today helping us get those algorithms right in terms of how we leverage the data and the math to be able to take advantage of this. So, that's another component that we invest in. And then finally it's just the integration and we're working with a lot of third parties versus taking a strategy of we're going to build this ourselves. So, in many cases it makes sense for us to lease or work with other providers or exchanges out there that can help us accelerate our efforts. And so, it's a bit on versus us trying to build the hardware ourselves as people we can license it from, they consist your things more efficiently than we can. And so, those are examples of how we're leveraging others and leveraging our third parties be efficient with the resources. As Andrew talked about regarding the profitability, our view is that as the business continues to ramp on the O&O side, that will give us additional resources to be able to continue to invest in this part of the business because we know what a macro perspective this is where the world's going and we've got the data set to win. We just need to put all pieces together to go execute against it.

Okay. And then finally on the O&O side of things, there's obviously just a ton of moving parts. Is it fair to say that when you look across the multitude of carriers that the number of slots per device relative to where we were in the first half of this calendar year is going to be better in the second half and within that we should be also looking at because of seasonality and improved targeting rates per slot being better just in terms of a macro approach?

Yes. So, I'd say a couple of things. It’s one thing is why you were starting to breakout this stats by geography. And maybe some we can do offline, like I double click on the per geography, something it's a near little bit nuance based upon geography. But in the macro global level, I guess what I'd say is that we expect as we continually add additional demand partners and you've got fixed supply. That should allow prices to rise. It's the economics 101 and we're seeing that as we can do to add additional demand partner. So, that comes with seasonality that comes with us launching a desirable devices like the Note 7 and new customers like AT&T and American Mobile. So, I'd expect to see accretion there that's definitely our expectation, I'm on it. As far as number of slots go, a number of slots is going to be depending upon partner and geography, some of the phones may have lower memory and certain emerging markets maybe have fewer slots, certain new phones coming into the marketplace, you'll have more memory, it's an opportunity for more slots. With the app select product from AT&T, our customer will be able to choose I think up to 25 applications or 25 slots if they just did select all the way down to zero. So, we'll see how the slot count varies with AT&T and we'll provide update on that on the next call. So, I think we're thinking about it as on a very geography-by-geography and partner-by-partner basis. But we're feeling very encouraged in terms of the pure number of devices that was our visibility too that will go on. And that in and by itself will definitely draw our topline.

Okay, and then I guess more of a statement than a question. And I think you've addressed it a number of times on this call but I'm sure Mike and I would echo the realization that getting the refinancing done and just puts up in is of a critical importance to a lot of the investors that we speak with on a daily basis. I think it's very positive to hear that this is something that should be in the very near term and I think the term was eminent. I look forward to seeing an 8-K there because I do believe it's been largely a distraction for the stock and hopefully will be able to start focusing on the growth opportunities that you're describing today instead of worrying about this balance sheet issue. Thanks, guys.

Thanks, Brian.

Our next question is from Sameet Sinha with B. Riley. Please go ahead.

Yes, thank you very much. A couple of questions. So, seems like the way you're guiding in a content down A&P, been a probably down more than up despite the seasonal benefits in the second half. So, Ignite continues to do well. Now, you give us some stats of a $70 revenue per device. My guess is that's for when it's installing new devices and for embedded or ships more like a dollar and that's in the U.S.. Which of these two from a revenue per device perspective do you think it will grow faster, you mentioned in number of factors which can help the accretion there. Which of these have more upside opportunity. That's my first question. Secondly, going back to the RTB issue. Obviously, it's a comparative feel, your RTB offering will enter where there are many of amateur solutions that are out there. The one comparative advantage that you mentioned was Ignite. So, my two part question here, is that would you be able to use your Ignite data because those are two separate business. Ignite is a separate carrier driven business, Appia is more of in advertising & monetization business. That comingling of data and utilization across the business segments is that allowed by your carrier partners, and secondly, apart from that Ignite as a competitive advantage, do you have anything else that separates your solution and your platform from the others that are out there? Thank you.

Thanks Sameet. So let me cover up the first question around visibility on revenue per device over the immediate term and upcoming quarters, and then I will hit on some of the unique aspects of the Ignite data and what we are doing with it. First regarding revenue per device we are seeing lower revenue per device on an embedded based push than on a new subscriber. That is predominantly due just to the fact that a lot of the devices on pure volume tend to have lower memory requirements, and therefore have lower slot counts, and some of the higher CPI, or CPP game titles in particular that we get from many providers tend to very thick and rich files. So therefore we are looking more limited in delivering those applications to consumers on a lower memory phone. So I continue to expect the new customers, the new devices, the $1.70 number that you referenced to be the predominant higher driver than an embedded based push, but in terms of visibility into just pure number of devices over the next 30, 60, 90 days, we expect that to really be tilted in favor of an embedded based pushes. We have good visibility to a number of carriers in Latin America, here in the United States, OEMs in Asia and Europe with many opportunities in front of us. So I think on a pure volume of device basis, even though it will be lower on revenue per device we see that as a very material revenue driver, and remember those are all 50% plus gross margin deals to us, so they are very profitable as well. But in terms of just the actual yield per device we expect that to be higher on the new device deployments that will come out here in the fall and into the holiday season. To answer your second question just regarding the Ignite data and how we are using it and leveraging it, so we are able to understand what apps have been delivered to what customers, what apps have been deinstalled, which ones have been installed, which ones have been used, and so we are able to then be able to take that data and build profiles around it. And so that allows us opportunities when we go see advertising out in the marketplace to know more than a potential other bidder on that advertiser would be. So, for example, [we can see] DraftKings come to us and say we want to target sports users, well, one way to do that would be easily to go buy media from ESPN, and you could pay a lot of money to do that. Another way would be, we know that you have also had two other apps, maybe it is a solitary app or something that maybe has perceived very low value from an advertiser perspective, but we know you have those other sports apps, we can bid on that very cheaply and so you can get the app installed from DraftKings at the same exact rate. So those kinds of arbitrage opportunities because of our unique data set would be a simple example of how we win and how we have differentiated information that I think will allow us to be successful out in the marketplace. As I mentioned to Brian’s question earlier, we got to run faster and jump higher and be able to do it to scale and there is a lot of resources involved to be able to go out and do that, but we are showing progress against them. We are seeing that directionally. This is all happening, this is real and it is working. So now it is just a question of how we can ramp and scale it, but I think the key strategic point here is, that is unique, that is differentiated, those are things that, unless you have named Facebook or Google, very, very few companies have that out in the marketplace and we are one of them.

Okay, thank you.

Our next question is from Ilya Grozovsky with National Securities. Please go ahead.

Thanks guys. Just had kind of a two follow-up questions, you talked about the licensing deal, obviously that is a very different way for you guys to generate revenues as opposed to becoming sort of partners with the operators you are just licensing the software, yes, you get the 100% gross margin, but definitely very different, can you just talk about kind of the difference between the two and where you see it going for you guys down the road and what the impact will be?

Sure. As you know Ilya, we have got a variety of different business models as we partner with carriers and OEMs globally, and as we make our foray into the Indian market, we believe it was prudent to start on a license fee model at 100% gross margin. That being said, the expectation is once we are able to get Ignite deployed on a whole host of devices with both Airtel and Reliance Jio, that there will be a meaningful advertising opportunity. So we certainly don't view the Indian market as solely dollars per device upfront, with no revenue opportunity. We do obviously outside of license fee model have both our rev share model as well as hybrid models that we look at with other distribution partners, but [candidly] there is no one set way in stone that we generate revenue in. At the end of the day, we are in the business of allowing these operators and OEMs to ultimately leverage our demand side platform, as advertisers don't want to go one by each of the operators and OEMs, just like the operators and OEMs don't want to go one by each to each of the advertisers.

Ilya, this is Bill, I will just jump in on that and I think this important distinction is Ignite having a lot of dimensions of how it can be used. One way it can be used is to deliver third-party applications. I talked about Lyft and Uber and [Hulu] and eBay et cetera, and that has been the model we have used and a lot of the things we have talked about on this call. But what we are also seeing is that operators see Ignite as an operational benefit. They have their own applications, their own internally built applications that they want to deliver out to devices. So for that case that is the 100% gross margin. We did that with Millicom in Latin America and in the Indian carriers Andrew mentioned. So really when we go in and we talk to operators we want to understand what their needs are, and if their needs are to use Ignite as an operational tool to help create a lot of flexibility of just delivering software once versus having to embed it on multiple devices and OEMs et cetera, which is operationally difficult, then we get into the licensing model at 100% gross margin. We have numerous other active conversations going on around that model around the world, where operators are interested in that. And then what we will do is we will layer in the advertising or third-party apps on top of that. So in other words if we get $0.10, $0.20, $0.50 whatever it happens to be per device, then any advertising revenue we will share on top of that. So we really like that business model. We think that is a winning business model because we are solving multiple problems for the operator and obviously providing strong gross margins for us.

Okay, got it, and then on – just coming back to the RTB business, so we have been talking about it for some time now, what exactly is the gating factor for you guys to be able to starting today or for RTB in a large-scale way as opposed to just sort of incrementally, to get up each quarter?

I would say right now – it is for us it is a variety of different things. It is not one. We just want to make sure there is just so many variables and moving parts, we can't pursue every single variable and moving part at the same time. Even if we had unlimited resources, we wouldn't do that. It is really making sure that, A, we have got the – first and foremost the insight on what we are actually trying to target. Second, making sure we got all the campaigns from the advertisers and we are aligned on goals that they are trying to do. Third is we got the ability to then have the right mathematics in terms of using the right formulas to target the right advertisers, where we think there is an arbitrage opportunity to be able to buying that for much, much less than we are getting paid from the advertiser to get the install. And then finally as all of the operational infrastructure to be able to process hundreds of millions of impressions simultaneously, many, many billions per day of impressions that are going all over the globe in different geographies across different ad formats, whether those are native, or video or banners or whatever it happens to be able to do it across iOS and android. I mean, I can go on and on about the different variables that are associated with it, but for us it is really being able to prioritize what is going to give us the biggest bang for the buck to leverage our Ignite data set, and so that is really where we are focused today is where we want to place those bets, so we are efficient with how we are spending our resources accordingly.

And how long do you think this takes?

The short answer is I don't know, I don't know how long it takes. I know is that every week when we sit down with the team we have an operations review on this topic. We are going very deep. We have very specific KPIs and metrics and goals, and things we are trying to achieve and we are measuring ourselves against those KPIs and metrics, and we want to just continue to see progress every single week against it, and how long, I don't know the answer to that, but I do know is that we are seeing progress week over week in terms of what we are doing and how much smarter we are getting at doing it.

Great. Thanks guys.

There are no further questions. So this will conclude our question-and-answer session. I would now like to turn the conference back over to Bill Stone for any closing remarks.

Great. Thank you very much. As we stated we are laser focused on execution and to convert all these opportunities we discussed in the pipeline and to scale our revenue and to drive growth for the long-term profitability of this business. We look forward to reporting on our progress as we grow and diversify our revenue streams and we will talk to you again in our fiscal second quarter call coming up in a few months. Thanks and have a great night.

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