Digital Turbine, Inc. (APPS) Q4 2019 Earnings Report, Transcript and Summary

Good day, and welcome to the Digital Turbine's Fourth Quarter and Fiscal 2019 Results 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 this event is being recorded. I would now like to turn the call over to Brian Bartholomew, Senior Vice President, Capital Markets and Strategy. Please go ahead.

Thanks John. Good afternoon and welcome to the Digital Turbine fourth quarter and fiscal full year 2019 earnings conference call. Joining me on the call today to discuss our results are CEO Bill Stone, and CFO Barrett Garrison. Before we get started, I would 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. For a discussion of the risk factors that could cause our actual results to differ materially from these contemplated by our forward-looking statements, please refer to the documents we file with the Securities and Exchange Commission. Also, during this call, we will discuss certain non-GAAP measures of our performance. Non-GAAP measures are not substitutes for GAAP measures. Please refer to today's press release for important information about the limitations of using non-GAAP measures, as well as reconciliations of these non-GAAP financial results to the most comparable GAAP measures. Now I will turn the call over to Mr. Bill Stone.

Thanks, Brian. And thank you all for joining our call today. Our stated goal has been to build and sustain a profitable growth business. With this objective in mind, we had a very strong fiscal 2019 as the company set all time annual records in revenue, gross profit, EBITDA, non-GAAP net income, device installs, and revenue per device or RPD. I'm going to breakout my prepared remarks into three areas. First, summarize our fiscal 2019 accomplishments, second I'll provide some real time operational updates on many of the exciting partnerships and initiatives underway and finally will end with some commentary about the strategic value of the platform and how we are positioned for fiscal 2020 and beyond. To close out fiscal 2019, want to add a bit broader perspective than just the March quarter and compare our fiscal 2019 performance against fiscal 2018. We finished fiscal 2019 with $103.6 million in revenue which represented 39% growth compared to fiscal 2018. Our non-GAAP gross margin which has been an area of focus for us improved to 36% for the year and reached 42% in the March quarter, an improvement of nearly 600 basis points year-over-year. This resulted in 40% annual growth in gross profit including over 50% growth in the March quarter and along with discipline cost management enabled us to generate a record $8.9 million in adjusted EBITDA showcasing a strong operating leverage of the business. Barrett will provide more specifics on the financials, but from an operational perspective, I was very pleased with our revenue per device performance driven by strong advertiser demand and incremental contributions from newer products. As I've emphasized in the past, RPD is a fundamental health metric of the business. As a specific example of this point, if we compare the launch of the flagship Samsung S8 in March 2017 to the S9 in March 2018, and then the S10 in March 2019 on Digital Turbine platform we saw more than 50% accretion in RPD from the S9 to the S8 and then the S10 was 50% higher than the S9. An additional key strategic focus area for us in fiscal 2019 was diversification of revenue, diversification of partners, diversification of advertisers, business models, and products. For our O&O partners revenue from our top four U.S. partners grew36% year-over-year but their contribution percentage of our total revenues decreased from fiscal 2018 to fiscal 2019. This growth was due to a 44% lift in annual RPD as our global medial team did a fantastic job executing in the headwinds of declining U.S. smartphone sales. Meanwhile, much of our 30% annual revenue growth was due to 66% annual growth from all other partners such as American Mobile, TracFone, Motorola, our Open Market channel and numerous others. In other words in aggregate all of these other partners had faster growth than our big four U.S. partners that is helping to add diversification to the platform. For our advertisers, we continue to have strong diversification of application partners as we launched thousands of campaigns across hundreds of application developers with no single individual app provider being more than 10% of our revenues. We also saw improvements in our diversification of products. We grew our new product revenues by almost 4x, which equates to over $11 million year-over-year increase. So that $50 million of our revenues were comprised of non-dynamic installs and including contributions from products like Single Tap, Folders, App Wizard and Notifications. And although these numbers are trending in the right direction, it is a major focus area for us to continue to improve results here. And finally, we saw improvement in our diversification of business models and in particular, the amount of recurring revenues we receive. In fiscal 2018 about 1% of our revenues were recurrent. In fiscal 2019 we saw that grow to nearly 5% including positive sequential growth in March from December. Now turning to the forward outlook, I want to provide some commentary on how we are positioned for continued growth across each of our growth levers; devices, media demand, and new products as we now have entered our new fiscal year. First on devices, as I mentioned on our prior earnings call, I know there's been a lot of negative press surrounding slowing smartphone replacement rates in the U.S. and other mature smartphone markets. While our business model is certainly sensitive to the overall smartphone market, we are not at all fully dependent upon it at the current time. One thing we are still largely a penetration story and that even with an annualized install rate greater than 100 million devices we are still on fewer than 10% of the android smartphones sold globally today. We are however continuing to add key strategic partners to the platform to mainly grow this penetration figure in future quarters, particularly on the international front. For example, while revenues are not yet material, we are now live and generating revenue with Samsung. We are focused on improving both the breadth and depth of this strategic relationship. Specifically, we are improving the breadth by continuing to add new markets and are now live in approximately 15 countries in Europe and Latin America while also improving depth as we add new device models in the countries we have already launched. Scaling this relationship is a key strategic priority for the business. And before I leave the discussion on devices, I want to note a few possible positive catalysts for devices in 2019, the most significant of which is the recent launch of 5G here in the United States. We are now live on the Samsung S10 5G device with Verizon and expect many more launches with other devices and partners this year. And as we have witnessed with previous network upgrades we anticipate some incremental demand as both smartphone users look to take advantage of the benefits of 5G and operators look to take advantage of the cost savings and advantages. And as has been publicly reported, it is anticipated that 5G for 2019 and 2020 will be exclusively on android with no Apple 5G devices expected in the immediate term. I also want to again repeat that we continue to assess opportunities to extend our platform on the new device types beyond smartphones such as televisions which would also foster incremental growth. Shifting to our other key drivers of the business for fiscal 2020, first on the new product front, while our Single Tap revenues outside of our social media partner and large U.S. operator integration are not yet material, I'm pleased we are now live with Single Tap on more than 130 million devices worldwide, including 50 million here in the United States. It has taken us a longer time to get to that scale that we anticipated, but now that we are here, it is made signing up demand partners much easier. On-boarding new partners, such as Twitter, Pinterest, Pandora and many others is the top priority of the Single Tap team. And although the conversion rates continue to perform well with improvements anywhere from 30% to 200% versus non-Single Tap or the traditional flow via the App Store, the partners needed to see device volumes to justify the investment of resources on their side. That is now happening and is largely an operational and distribution demand exercise from this point forward to scale. Our recent press announcement on leveraging the infrastructure and relationships of our mobile measurement partners, including Branch, Kochava, AppsFlyer, and Singular, is a focus area for the business to scale Single Tap as this represents 85% of the top applications in the global app install market. And finally, I want to call out our new sub products. We're excited to offer this non-app installed product which is a natural extension of our product portfolio that leverages both the secular tailwind of customers consuming content on their device versus traditional outlets like magazines, television and newspapers and our strong distribution footprint of operator and OEM partners. We anticipate launching this product later this summer and to report out on our progress on future calls. And finally, before I turn it over to Barrett, I want to conclude my remarks with a shout out to our team. I know most investors usually only see Barrett, Brian, and myself, but the real work is not happening with us, but happening with the broader team. I've been in the telecom, media and technology or TMT space for over 25 years and the hustle and the passion that our global team demonstrates each day is superior to any other place I've been. It’s a differentiator for us and become a core part of our company culture. For investors, this ultimately translates into fiscal 2019 financial results, setting many all time firsts for us and our future growth levers of devices, media demand, and new products, are all coming together to drive continued profitable growth into fiscal 2020. With that, this concludes my prepared remarks and I'll turn it over to Barrett to take you through the numbers.

Thanks Bill and good afternoon everyone. As Bill mentioned, we're very pleased with the results delivered in the quarter and for the full fiscal year 2019 which exceeded our own expectations. My comments today will refer to comparisons on a year-over-year basis and results for continuing operations unless otherwise noted. For the fiscal year 2019 we reported $103.6 million in revenue growing 39%, generated $8.9 million in adjusted EBITDA compared to near breakeven levels in the prior year and delivered $5.9 million in adjusted net income or $0.08 per share as compared to a loss of $0.05 per share in the prior year. Now let me turn to the specific financial performance in the quarter. Revenue of $27.2 million in the quarter was up 30% and as Bill mentioned, we continue to experience positive trends in RPD yields across all regions. Revenue growth and expanding margins enabled non-GAAP gross profit dollars to increase 50% year-over-year to $11.3 million in the quarter. Non-GAAP gross margin was 42% in Q4 expanding from 36% in the prior year. Our margin expansion is largely driven by continuing partner and product diversification that Bill referenced earlier. We also experienced some positive one-time margin improvement from a recent carrier contract renewal. Overall, we're pleased with the expanding margin levels we're exiting the year with and as a reminder, our gross margin rates can be sensitive to future changes in partner mix and revenue type and these fluctuations may vary from quarter-to-quarter. We experienced continued impressive expense scale in the platform. Total operating expenses were $9 million compared to $8.2 million in the prior year and our cash expenses in the quarter were $8.1 million, an increase of 7% over prior year during a period of revenue and gross profit growth of 30% and 50% respectively. These results continue to demonstrate the inherent operating leverage in the business. Adjusted EBITDA was $3.3 million up from breakeven in Q4 of last year and represented an EBITDA margin of 12%. This resulted in a marginal EBITDA conversion rate of greater than 50% on incremental revenues year-over-year, further highlighting the embedded operating leverage in our business. Non-GAAP adjusted net income in the quarter was $2.4 million or $0.03 per share as compared to a net loss of $0.6 million or $0.01 loss per share in the fourth quarter of 2018. And turning to our GAAP net income, as a reminder, included in our GAAP results we see the impact of the changes in the fair value and liabilities resulting from our convertible note. That is highly sensitive to the company's stock price which increased significantly in the quarter. For this reason among others we offer the previously mentioned supplemental non-GAAP adjusted net income measure, which we believe is more indicative of the recurring core business operating results. Our GAAP net income loss from continuing operations for Q4 was $6.8 million or $0.09 loss per share based on 79.4 million weighted shares outstanding compared to our fourth quarter 2018 net loss of $4.2 million or $0.06 loss per share. Included in our GAAP net income for the fourth quarter is a recorded loss of $7.8 million from the impact of the change in fair value of derivative liabilities resulting from the convertible note which is highly sensitive to the company's stock price that I referenced earlier. Moving over to the balance sheet, I'm very pleased with the progress in the quarter. To further bolster the strength of our balance sheet, we generated $1.9 million in positive free cash flow and repaid the remaining $1.6 million balance on our revolving credit line, thus finishing the quarter with $10.9 million in cash and exited the period with zero debt. In the quarter, our debt balance was reduced to zero as we converted the remaining $4.7 million principal balances on our convertible notes, which these notes are now retired. During this time, we also improve our net working capital position in the quarter, exiting with a positive $0.7 million from continuing operations which is a $3.4 million improvement over prior year. Following the retirement of our convertible notes, we recently extended our credit facility with Western Alliance Bank and increased the line of credit from $5 million to $20 million to support and scale the growth of the company. With a clean balance sheet, strong cash position and ample access to liquidity, we've exiting fiscal 2019 poised to execute on growth plans for fiscal 2020 and beyond. Now, let me turn to our outlook. The momentum leading into the new year has positioned us for a strong fiscal 2020. In that context, we currently expect revenue for Q1 to grow to between $28 million and $28.5 million and expect adjusted EBITDA to grow to between $2.2 million and $2.6 million. With that, let me hand it back to the operator to open the call for questions. Operator?

Thank you. [Operator Instructions] Our first question comes from Darren Aftahi with ROTH Capital Partners. Please go ahead.

Hey guys, good afternoon. Thanks for taking my question and nice job on the quarter. A couple if I may, Bill maybe, I know you talked about Telefonica to be very confident, just kind of curious, when you look at the pipeline and you think about Samsung and live you said in 15 countries, I mean are there other deals like that you feel kind of confident in fiscal 2020 if you can kind of get over the finish line? Two, your partnership and some of these attribution and analytic companies on the app side, one what kind of the timeframes would - actually started to generate revenue and as for the other partners, maybe to make up the other 15%, is there an opportunity to kind of capture that? And then perhaps, Barrett, two. One, the one-time benefit on gross margin from the carrier renewal, if you could maybe quantify that, it would be helpful? And then two, I think you said OpEx grew 7%. We are sort of curious as you kind of continue and grow the business, is that OpEx number kind of sustainable or do you need to grow faster in light of kind double-digit growth? Thanks.

Yes, now, and hey thanks Darren for the questions, so just to make sure I caught it. The first is around Samsung, second one is around scaling Single Tap, third one around gross margins impact, and then fourth around OpEx. So assuming I got that right, I'll take the first two and then turn it over to Barrett for the last two. Yes on Samsung, yes we're excited. And I mentioned in my comments, we're looking at the relationship from a breadth perspective and a debt perspective and breadth meaning more markets for Open Market, more geography that I touched on. On the breadth, also as you alluded to, means additional mobile operator relationships such as Telefonica. And so, I think this is a great proof point of the relationship getting off to a great start and expanding. We expect to continue to scale additional markets as well as scale with additional operators. So, yes we feel like we're just getting started here, but off to a good start. And then the depth side, we started with one model and we've added another model, started with our Wizard product. We anticipate launching additional products as well with Samsung. So I think we're off to a good start in terms of that relationship being a very material driver for our future business. Yes, and your question on Single Tap, yes, we expect that some of those mobile measurement partners that we announced in our press release, we'll start seeing some of those start getting live this summer. We're just getting started with them, but I think that's going to be a key driver for us to accelerate our scaling efforts on Single Tap, so that's a major focus area for us. And then secondly, that remaining 15% of the market, that partner that wasn’t part of that press release, we're engaged in to talk with about how to get them on board with what we're doing. And what I'm really pleased with is, you're seeing Digital Turbine taking industry leadership role here versus just working with one to two of these to be able to bring the entire market to bear something that I think shows the scale of our platform now being the third largest distributor of android applications here in the United States after Google and Facebook. So, you'd start to see us have a little bit more pull in the industry I think is also a positive sign. I'll turn over to Barrett for the other…

Darren, on your second question on OpEx, I think you were asking is the 7% growth we experienced something we should expect for the future, did I hear that correctly?

Correct.

Yes, so on the OpEx, I think we've made a number of investments across our sales force as well as our technology team. So I think rather than kind of year-on-year growth I think what we'll see is, we'll probably see low single-digit of sequential growth for the balance of the year. And as we think about our guidance for Q1 that we gave, we'd certainly see some increase in expense over Q4 largely targeted to sales force and some of our technology investments we're making. Regarding the margin question, outside of, we had kind of the perfect combination, both some of the diversification efforts that Bill referenced that came together that improved our margin in the quarter as well as the one-time item I mentioned with one of the client. We would expect margin without some of that benefit to be in the high 30s and probably what we can expect in the near-term here is high 30s without that one-time benefit.

And if I could just sneak in one more, so I think Bill, you said that fiscal 2018 and fiscal 2019 recurrent revenue is at 1%, it was almost 5, if you look to fiscal 2020, not necessarily looking for guidance per se, but is the linearity of that growth the same? How should we kind of think about that going forward? Thanks.

Yes, so yes, absolutely. That is a focus area for us and we anticipate that to grow. So I'd say that we would be disappointed if we do not see that 5% continue to be a bigger number for us and that's driven by the new products that we're launching like Single Tap, and Folders and so on. And then it's also driven by, now we're starting to through our dynamic installed product, put more revenue share applications on such as Netflix or Amazon and even advertising and apps like things like the weather channel and Yahoo Mail. So those are things that we would expect to continue to grow as devices grow. So I'm pleased, I'd recommend that you focus on that for us because that is a higher margin revenue and a growing area for us.

Great, thank you.

Our next question comes from Mike Malouf with Craig Hallum. Please go ahead.

Great, thanks guys, for taking my questions. If we could just explore a little bit more on Single Tap, it sounds like you are going live with some of these demand partners this summer. Can you talk us through how that penetration will work as you look out with some of these large demand partners? I know that it's a little bit of a chicken and the egg as you said before with getting them on enough phones to get them engaged, but now they are on a number of phones, how does the penetration work with regards to their percentage of adds that you'll be able to satisfy with Single Tap?

Yes, so as we think about Single Tap, I touched on my comments the first thing we're trying to get the supply of devices out and we've done that. So now the question is how do we bring the demand partners on board and there's kind of really three parts to that, and the first one is our own direct relationships being example of some of the ones I referred like Twitter, Pinterest or someone like that, we want direct relationship and then we'll do direct integrations with them and that's great, but that's hard to scale. That is more of a brick by brick approach. So we put this, we talked about this press release out with these mobile measurement partners where we can now enter into the next two phases are out, one is actually leverage in their business and all the relationships with different advertisers and partners where we are already talking to them and they are just going to become an extension of our sales force, so that would be one. And then the second part of that would be leveraging some of their plumbing and infrastructure to help accelerate our efforts, so we're able to get some of these partners live more quickly. So you anticipate we'll start seeing some of that show up in the summer timeframe and we anticipate that will be a driver for us to really start scaling the Single Tap revenues.

Okay great, and then maybe a question for Barrett as we look out over the next couple of years with all these new initiatives really driving the growth from here including the Single Tap which is what Bill was just talking about. How do you think of incremental gross margins over the next couple of years with all of this curve, because I imagine that it is a lot higher than your existing corporate average?

Yes, that's a nice thing. I mean the diversification is obviously great for the revenues and expanding the new revenues, but it certainly has got a better margin profile. We still, Mike we think about our kind of long-term targets in the low 40% as far as gross margin, especially on incremental revenues it will be highly, the add will obviously be highly dependent on how quickly we ramp and scale these new products and new partners and we like where we are. We think we're in a good place and while – and over the near term these margins may fluctuate quarter-to-quarter long term. We think we're in a nice place on tracking towards our margin targets.

Okay, thanks guys, I appreciate the help.

Thanks Mike.

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

Yes, thank you very much. A couple of questions, you know specifically details around the Samsung deal, you mentioned addition of new devices into the partnership, can you talk about the profile of the previous device and how the new device, how does it add to potentially your RPD and other such metrics? Secondly, if you can give more details around RPD in international and domestic and if you can help us think about kind of the key drivers that you have for those, for RPD primarily and how we should think about it over the next couple of years? And then I have a followup. Thank you.

Yes so, we've added as you referenced to me we added additional device meaning the A series, devices, their multiple models, and so those are kind of what I call mid range, mid tier devices. They are not the high end flagships and at the low-end devices and so we're starting to add additional ones in the markets. There have been, I'm really pleased so far with the RPD results. On the wizard we're seeing north of a dollar on those devices which is encouraging, but that's with the wizard product and so don’t get a 100% take rate on that. That's something we work with Samsung on how we improve take rate on the wizard, but the take rate that we are seeing, we're seeing really solid RPD results, so that's encouraging. And so if you look at our RPD we've talked about in the past, we've talked about RPD north of two dollars here in the United States compares to $1.50. A year ago it was about 44% accretion year-over-year with our top four U.S. partners, so we expect that to continue to go up into the right. From an international perspective, we've got some work to do. I'm not happy with where we are at, although we are showing with Samsung we can generate RPD which is encouraging, but more broadly that's a major focus area for us this upcoming fiscal year.

Our next question comes from Jon Hickman with Ladenburg. Please go ahead.

Hello, can you hear me?

Yes, hey Jon.

Oh hi. Hey congratulations on the quarter. I was just wondering if you could talk a little bit about what is driving that RPD, like why is it moving higher here? Is it like the take rate for the new products, because what more average…

Yes Jon, there's really about there's three different drivers for that, one of it we just touched on is new products right, so new products above and beyond our dynamic install grew pretty nicely last year, grew pretty nice on the quarter and we expect that to continue to grow. So that's accretive to RPD, that's driver number one. Driver number two is recurring revenues that Darren was referring to earlier. As we get more recurring revenue on older devices versus the new ones we sell each quarter, that's obviously going to be accretive to us, that's a positive. And then number three, just more demand from advertisers. So as we continue to add more advertisers to the platform we're continuing to see better performance and them having to compete with each other on the platform which allows us to raise prices or add inventory or some combination thereof. So the advertiser demand, the recurring revenues and new product really is what's causing the RPD to go trend in the right direction.

Okay, thank you. I appreciate it.

At this time, there are no further questions in the question queue. I would like to turn the conference back over to Bill Stone for any closing remarks.

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

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