Good day and welcome to the Digital Turbine Report Fiscal 2023 Third Quarter Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brian Bartholomew, Senior Vice President, Capital Markets. Please go ahead, sir.

Thanks, Chad. Good afternoon and welcome to the Digital Turbine fiscal year 2023 third quarter earnings conference call. Joining me on the call today to discuss our results are CEO, Bill Stone; and CFO, Barrett Garrison. Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward-looking statements. These forward-looking statements are based on our current assumptions, expectations and beliefs, including projected operating metrics, future products and services, anticipated market demand and other forward-looking topics. 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 statement. For a discussion of the risk factors that could cause our actual results to differ materially from those contemplated by our forward-looking statements, please refer to the documents we filed 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 our Chief Executive Officer, Mr. Bill Stone.

Thanks, Brian, and thank you all for joining our call tonight. I'm going to talk about both the macro economic landscape and our micro operational details in my remarks. But before getting into those specifics, I want to summarize our view on the business and begin with the most important takeaway for investors to have versus getting lost in any one specific detail later in the remarks. Our conviction on our strategy and our long-term financial and operational view on the business has not changed. We're also not satisfied with our near-term results. We have work to do to improve those results against our near-term expectations. There are many things for us to do, but one of the things investors do not need to worry about is ensuring we have laser focus on the controllables and accountability for their improvement. As a CEO, I own that. But also want investors to know that we do the macro situation is temporary, and it will change positively in the near future. And the micro situation issues we're dealing with are largely comprised of extraneous, non-strategic things that are not critical to our long-term success, but are nevertheless headwinds when comparing year-over-year results against the past performer results of some of our prior acquisitions. The foundation of the DT investment thesis has not changed. The core building blocks of the moat around our on device platform, the strategic interest advertisers have for monetization on the platform. The ability to leverage the macro secular trends in digital advertising and having a highly scalable and profitable operating leverage for our business are all in place. That's the underlying investment thesis for Digital Turbine that we believe will power long-term results. Successful businesses are built on years of success, not built on any one quarter of…

Thanks, Bill, and good afternoon, everyone. Our Q3 results reflect our continued focus to deliver sustainable profitability as we make conscious efforts to expand margins and focus on what we can control during this challenging operating environment. Revenue of $162.3 million in the quarter was down 25% year-over-year. Revenue performance was impacted by deceleration in our advertising spending, which was greater than expected during the holiday season. Also, as Bill referenced, while we saw global devices increase year-over-year, we experienced material declines in U.S. devices, which have a greater overall impact given their higher revenue per device than our non-U.S. global operators and OEMs. In addition to the impact from the near-term macro conditions, we also continue to experience headwinds from our prepaid content media products. Our margin expansion efforts enabled non-GAAP gross profit margin on the platform to increase to 50% in Q3, up from 46% as reported in the prior year. Non-GAAP gross profit of $81.2 million decreased 18% year-over-year. Continued focus on margins enabled expansion year-over-year across both business segments. And as a reminder, while gross margin rates can fluctuate from quarter-to-quarter, we generally anticipate long-term margin expansion as we continue to execute on growth and synergy strategies. We continue to remain disciplined with expenses, especially in the light of the temporary worse-than-expected backdrop in the third quarter. Cash operating expenses were $41.3 million in the quarter, decreasing 3% from prior year and represented 26% of revenues in the quarter. Total operating expenses were $69.8 million, which compared to prior year. Given the challenging environment, we continue to examine all of our spending to ensure the best use of our resources. We have executed company-wide expense reductions to begin to rightsize the business for the current environment and to fund key strategic investments. We aim to reduce…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Darren Aftahi with ROTH. Please go ahead.

Two, if I may. So Bill, you mentioned you kind of called out financial mix outside of the macro is just on the device number, particularly in the U.S., that number coming in kind of lower being down versus kind of flat assumption. So I kind of have two questions regarding that. First one is really, how much visibility does that estimate have that's given to you? And my second question is, what is the underlying assumption for the March quarter on devices? And does that assume declines in devices and kind of like further characterize your carrier partner numbers they've given you?

Yes. Yes. Thanks, Darren. Yes, so for the -- first, on the December quarter, yes, we usually take our forecast from our device partners in advance in our current -- on that past quarter, excuse me, we had already had visibility on the October numbers, but I think that our carrier partners were expecting larger holiday season and a little bounce back in Black Friday shopping from COVID and obviously didn't see that in some of their results. So, I think they were disappointed as well, although I won't paint all of them with the same brush. And then as far as the assumptions in the current quarter, we've haircut those. That's baked into our guide. And as I'm sure you're aware, the Samsung S23 was announced earlier, that will be launching later this month. And so, our expectations are that, that will be down from prior quarters. So, we want to bake that in our guide. And if it is lower than that, then there might be a little risk, but we've already baked some of that in. So there's upside to it, there will be upside to our guide.

Great. That's helpful. And I'll just squeeze one more in. Your licensing partners on SingleTap, like you kind of spoke to kind of the scale of the downloads. I guess as you look further down the road, like how does your pipeline look even though the macro is weak? Is this something that people are chomping at the bit because conversion and efficiency or it's a back burner issue for them to kind of take on this product?

Yes. The product market fit is strong. We don't have a problem convincing people that, hey, this is a more efficient way for you to run your business. Really, the largest issue we have are more dealing with last mile operational things. And a lot of the companies that we're talking to and working with have made their own cuts. And so getting them to work and get the data lined up and a lot of last mile operational issues have been the long pull there. But I would say the overall interest in the product, the opportunity to increase conversions and have a more efficient spend of the dollars is absolutely something that we're seeing right now in the market.

The next question will come from Omar Dessouky with Bank of America. Please go ahead.

Two questions on SingleTap. Since there's probably a lot of new investors that are new to the story, just on the challenges to the patent by IronSource, could you maybe give us a little bit of like a factual background as to how long there's been back and forth between IronSource, whether the latest round of challenges to enforceability has anything novel to it and some of the puts and takes around whether your strategic position would be maintained even if the patent was deemed unenforceable? And then I have a follow-up.

Yes. Sure, Omar. So let me start with our view on SingleTap is that we have a moat around this business and the moat is not necessarily because of anything on the IP side. The moat is the fact that we've got many, many hundreds of millions of devices already deployed with SingleTap on them out in the field. And then we've integrated that with the ad tech around it. That's really difficult to do. And for investors that have been around our story for a long time will know that that's taken us many years to perfect and get this into now a sustainable business that we're excited about. So that's really the moat is I think that it's not just about the, okay, I can use the technology in the background to download an app. That matters. And to that end, we actually have two patents on SingleTap, not one and there was a ruling on one of the patents that we disagree with, and we're in the process of working through right now how to get that squared away. But the second patent is not impacted. So our view right now is we're going to defend our IP, and we're proud of our IP, and we're going to go after it. But I think the message I'd say I keep for investors is really one around the moat of getting the technology integrated in with the ad tech and the embedded base of devices. That's where I think the real secret sauce is.

And again, just for investors that are new to the story, have these patents been challenged before several years ago? Or is this the first time this is happening?

Yes. This is the first time this has happened. And it's actually the patent is not -- the Company that you referenced is not -- does not have a patent. It's actually coming from another third party.

And then the second question is in terms of early learnings from SingleTap licensing, is there anything you can share about the economics of these early licensing deals? We realize it's still early stage, but wanted to get a sense of how you're thinking about the economics both in the next year and or so and going forward?

Yes, we're going to have a variety of different business models with that, and it really is going to come down to a risk-sharing exercise with our partner in terms of do they want to share their incremental revenue with us or do they just want to pay us a SaaS fee to leverage the technology. And we see a combination of both. What we've basically guided investors and analysts to is to think about this business is getting a flat fee for every download that leverages the technology, although we'll have variations around the business model as we ramp and scale it.

The next question will come from Timothy Horan with Oppenheimer. Please go ahead.

Can you give us a sense of how much of the 25% decline is from pricing and how much from volumes? And can you just talk about the trajectory on pricing because it sounds like you think pricing has stabilized at this point? Or maybe just talk like monthly what's happened with pricing would be great.

Yes. Sure, Tim. Let me kind of break out our on-device business from our ad tech business. What we're seeing right now on pricing on the ad tech side is that's the major driver more so than volumes. Volumes were relatively flat from quarter-over-quarter. So the pricing I referenced in my remarks, 10% to 20% is across the board regardless of ad type or pretty much regardless of geography, whether that's banners, interstitials, videos or what have you. So, it's primarily a pricing story on the demand side. On the ODS side, the major drivers is not pricing. Our revenue per device actually went up from December of this past year, December of the prior year. So that's something we're proud of that we're able to hang in there on pricing. Issue there was much more around volumes on the device side. So, the reduction in volumes is really would hurt us from a macro perspective.

And just the trends on pricing, sorry, on both segments -- or I guess, more on the ad tech side?

Yes. So our expectation right now is we're in the trough. Our expectation is we're going to see some rebounding as we get into later parts of this year, but we're dealing with at the beginning of the year, a lot of advertisers thinking about their ad spends for the year. We're also seeing variations in verticals. I touched on some big brands that we're spending more dollars with us in my remarks. We're proud of that. But some of the gaming providers and gaming performance providers have pulled back and those kind of operating some headwinds and tailwinds against each other.

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

Yes. I didn't hear anything. You talked a little bit about challenges with the prepaid content media. I didn't hear anything on the update on the Verizon and AT&T content media partnerships that we've talked about. So just an update there and when you sort of expect to get that segment back to growth?

Yes. So I'm not going to make any comment on one specific partner on the call, Dan, here today. What I'll just say is we have some work to do. We've got a lot of interest from partners and doing a lot of different things on content media, but we're not where we need to be right now. It's a focus area for us to get improved. But at the same point in time, we're not prioritizing that above other things like the potential of things like Games Hub and getting our alternative app store things launched. But we've got some work to do there. We're not satisfied where we need to be and it needs to get better.

Yes. Understood. Another one I've heard from investors lately. And I'm just curious -- and it's mostly an issue for other ad tech companies, I think, but curious if you're seeing any concerns. People are starting to talk more about the SDK run time changes and how that's created some challenges for the kind of mobile ad tech networks out there. And that might be driving some of the weakness that we've seen in recent quarters. Just curious if you're running into any challenges with that, as that gets rolled out to more and more devices or if there's any I think it would be confined mostly with the legacy AdColony assets, but just curious in general, what you're seeing anything there?

Yes. So no, we're not seeing that as a headwind on our business right now. As you mentioned on the AdColony side, we are in the process of consolidating our exchanges. And so given the overlap of publishers in some cases and not in other cases, that's putting a little pressure on short-term revenues, but it's the right thing to do for our partners, not to have to deal with multiple exchanges. So I think that's something that will be a tailwind for us next year, but not right in the current quarter. What we're actually doing though is putting in a lot of different type of ad tech enhancements, whether those are new renderings, new bidding methodologies and so on, and that started to bear some fruit for us. And that's something I'm excited about because it's commonplace in the industry. And there are things that the legacy companies we acquired had not done. So our view right now is that will provide some nice thrust and opportunity for growth in our business.

Your next question will come from Anthony Stoss with Craig-Hallum. Please go ahead.

I wanted to follow up on your comment about helping launch App Store. You said one is live and another one is going to go live sometime this quarter. Can you help us understand like perhaps your goals by the end of the year, how many you think are going to be up, how big a business this could become? And what's the business model for apps to get paid on helping folks launch these app stores?

Yes. Thanks, Tony. It's a business we're excited about. It's clearly early days. We just recently launched with our first partner. As I mentioned in my remarks on some of the macro issues, there is tailwinds, right? You've got a lot of operators and OEMs that are looking for new revenue streams in these environments, and this obviously provides that. So for us, we really see three revenue streams for us. It would be incremental opportunities. One is just being able to get a new way to get apps to the phone and get paid on CPIs for that. Another way is for us to extend our ad tech assets into more publishers on more devices. So that's a nice synergy from our acquisitions. But the third one and the one that probably has got the most attention right now, especially from a regulatory perspective is on the payment side. That's a $100 billion market today. And if you think about the marketplace where I paid a 1% from a Visa paid 3% from Amex and you're paying 30% with the current app store environment. So, our view is that's going to get disrupted. And that's just a when question, not an if question, and I think we've put ourselves in a really good position to go do that. And there's a lot of interest out there from a variety of stakeholders. So that's our first foray into it, and hence, the investment we took in Aptoide, who already has a lot of these capabilities built. So something we're excited about strategically early days, but there is a lot of interest out there. That's for sure.

This concludes our question-and-answer session. I would like to turn the conference back over to CEO, Mr. Bill Stone for any closing remarks. Please go ahead, sir.

Yes. Thanks for all joining our call today. We look forward to reporting on our progress against all the points that we made on today's call, and we'll talk to you again on our fiscal '23 fourth quarter call 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.