Good day, and welcome to the Digital Turbine second quarter fiscal 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Brian Bartholomew. Please go ahead.
Thank you, Sarah. Good afternoon, and welcome to the Digital Turbine fiscal 2020 second 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 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 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 to Mr. Bill Stone.
Thanks, Brian, thank you all for joining our call tonight. Our stated goal has been to build and scale a profitable growth business. With this objective in mind, we continued our strong start to fiscal 2020 with our second quarter results setting all-time quarterly records for revenue, gross profit, EBITDA, and device installs. I'm going to break out my prepared remarks into three areas. First, I'll summarize our quarterly results. Secondly, I'll provide some real-time operational updates on many of the exciting new partnerships and initiatives underway. Finally, I'll end up with some commentary about the strategic value of the platform and where we're going into the future. To close out the September quarter, we finished with $32.8 million in revenue, which represented 37% annual growth. I was even more pleased with our 57% growth in non-GAAP gross profit.
This record gross profit, combined with continued effective operating expense management, enabled the company to achieve $4.5 million in EBITDA, $5.7 million in free cash flow, and non-GAAP earnings per share of $0.05 during the quarter. Barrett will provide some more specifics on the financials. From an operational perspective, I was really pleased with our revenue per device performance, or RPD, driven by strong underlying advertiser demand and incremental contribution from our newer platform products. Revenue per device is a core health metric of our business. Our RPD with our four longest-tenured U.S.-based partners once again increased more than 30% year-over-year. As you have heard me say on prior calls, diversification is a major strategic priority for our company. Diversification of partners, business models, products, geographies, and advertisers.
We continue to have success with those four tenured U.S.-based carrier partners with whom we grew revenues healthy double digits year-over-year, despite a modest decline in the total number of devices activated. However, our revenues with other partners outside of this group more than tripled year-over-year and represented approximately 24% of our total revenues in the quarter, compared to less than 8% in the prior year. Also, our revenue from new products outside of our Dynamic Installs grew 32% sequentially and represented 18% of total revenues during the quarter. Although this marks solid improvement, not satisfied with the results, as the opportunities for these products are enormous and the market reception has been tremendous. Now turning to the forward outlook, I want to provide some commentary on how we're positioned for continued growth across each of our growth levers: devices, new products, and media.
First on devices, we set a quarterly record with more than 36 million new devices onboarded onto our platform globally. In the U.S., we continue to see a flattening out of the broader smartphone market during the September quarter. Total devices activated with our largest four partners were basically flat sequentially. We expect this trend to continue over the next several quarters as elongated upgrade cycles are likely offset by new flagship device launches, along with expanded 5G availability, promotion, and adoption. Given the flattish U.S. trends at the moment, the overwhelming majority of our growth in devices occurred internationally as we ramp new partners, such as Samsung.
Our partnership with Samsung is now moving into the next phase as we continue to install our software onto more devices and more markets and more products. We began with two devices across 12 countries in the March quarter, have expanded the footprint to more than 50 countries today, and expect to be in more than 20 different Samsung device models across more than 70 countries over the next few months. We also have reached an agreement with Samsung to launch SingleTap, which we anticipate beginning in 2020. We also anticipate launching with Telefónica this fiscal year, which is a direct result of our Samsung partnership. For those U.S. investors not familiar with Telefónica, they have more mobile subscribers than AT&T and Verizon and are focused primarily in Europe and Latin America.
As you've heard me mention on prior calls, expanding devices beyond smartphones is an exciting opportunity for us and a natural extension of our offerings. We've made some material progress on our TV offerings as we see the secular tailwinds of Android TV and other over-the-top streaming offerings gain in popularity. We expect to begin to see revenue from our TV efforts in 2020 with a variety of tier 1 partners. All in all, the prospects for us to continue to expand the reach of our platform and grow our business with additional device types like television looks very promising. On the new product front, our revenues derived from non-Dynamic Installs products grew 32% sequentially, with newer products such as SingleTap, Wizard, Notifications, and our Media News Hub product all showing healthy sequential growth.
In the June quarter, they were collectively 15% of revenue. For this past quarter, they were 18% of our total revenue. While this strong growth is positive, I'm not satisfied with those results as our internal expectations are higher. We need to improve our ability to scale these products as the opportunity continues to be massive, we have great product-market fit and solid commercial models to not just drive incremental revenue growth, but also expand overall profit margins for the business. This is a major focus area for us, and we've made some organizational tweaks to better refine our focus and improve our execution as delivering results against our core Dynamic Installs business has cannibalized some management focus away from scaling the new products. I'm happy to report that these changes are already yielding improved new product and international performance just over the past 30 days.
On the media front, we are currently very focused on scaling our international demand to meet a significantly greater supply of international devices while continuing to see international application developers that want to be on U.S. devices. Our international media demand grew 58% from last year and now accounts for 32% of our revenues across our U.S. and international operator and OEM partners. We'll continue to work hard and, where necessary, add strategic resources to improve our international revenue per device and ensure that we scale the partnerships and infrastructure effectively to capitalize on the enormous opportunity in front of us. Here in the United States, many of you saw the Disney+ and Verizon news, and I'm pleased to announce that we will be the partner delivering that application to Android devices for the upcoming holiday season and beyond.
We're proud that Verizon trusts us to handle distribution and management of their very high-profile applications such as Facebook, Netflix, Apple Music, and now Disney. In addition to Verizon, we're just beginning to work directly with Disney on distribution of their applications to other partners around the globe. We continue to work with well-known US brands such as Twitter, Snap, Uber, Netflix, and so on, that are focused on expanding their international presence and emerging international brands such as Alibaba, TikTok, and Tencent as they look to expand their presence here in the United States. Finally, before I turn it over to Barrett, I want to highlight now that we are operating at scale. It's opened up even more material opportunities for our business with many of the largest players in the TMT space.
Our business is growing both the top and bottom lines at a nice 30-plus% rate. Our number one opportunity and challenge is to grow it, not with just these positive comps against prior quarters or prior years, but grow it against a massive addressable market opportunity set. That's where we're focused. With that, this concludes my prepared remarks, and I'll turn it over to Barrett to take you through the numbers.
Thanks, Bill. Good afternoon, everyone. We're pleased with our results delivered in the second quarter. 37% top-line growth along with expanding profit margins enabled us to generate adjusted EBITDA of $4.5 million and free cash flow of $5.7 million during the quarter. As a reminder, my comments will refer to comparisons on a year-over-year basis and results for continuing operations unless otherwise noted. Revenue of $32.8 million in the quarter was up 37% versus the prior year and benefited from the strength across all three of our focused platform growth drivers, device volumes, product expansion, and media demand. While we're excited about the continuing top-line growth in our business, I want to make sure to highlight our expanding profit margin.
Non-GAAP gross margins increased nearly 500 basis points year-over-year to 39% in the quarter, enabling us to generate $12.6 million in gross profit, representing a growth of 57% year-on-year. Our growth margin expansion is largely driven by the successful diversification of partners and products on the platform. Overall, while we're pleased with the overall expansion of gross margins in the business over the last several periods, we want to remind investors that our gross margin rates can be sensitive from quarter-to-quarter based on changes in partner mix and revenue type. We are also continuing to make significant progress expanding our operating margins as we scale the platform. Total operating expenses were $9.2 million during the second quarter as compared to $7.2 million in the prior year.
Cash operating expenses totaled $8.1 million, representing an increase of 27% year-on-year, considerably below our revenue and gross profit growth rates of 37% and 57%, respectively, over the same period. It is important to note that this operating leverage is being achieved even as we make a number of focused investments to support new partners and products to drive future incremental revenues on the platform. Turning to net income and cash flow. We achieved non-GAAP net income of $4.1 million or $0.05 per share during the quarter. Adjusted EBITDA was $4.5 million in the quarter. EBITDA margins roughly doubled to 14% from 7% in the prior-year quarter. Free cash flow totaled $5.7 million as compared to $1.6 million in the year-ago period. Turning to our GAAP net income.
As a reminder, included in our GAAP results, we see the impact of changes in the fair value and liabilities resulting from our recently retired convertible notes that is highly sensitive to the company 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 loss from continuing operations for Q2 was $1.3 million or $0.02 loss per share based on 83.9 million weighted shares outstanding compared to a second quarter of 2019 net income of $2.1 million or $0.02 per share.
Included in our GAAP net income for the quarter is a recorded loss of $4.5 million from the impact of the change in fair value of derivative liabilities connected to the outstanding warrants issued related to our previously retired convertible notes. We would expect these remaining 1.1 million warrants outstanding to be retired soon, as the expiration window is now less than one year out. With respect to the balance sheet, the positive cash flow trends that I noted earlier contributed to a much stronger balance sheet at quarter end. We finished the quarter with more than $25 million in cash and zero debt on the balance sheet, and we continue to feel very comfortable with our balance sheet and access to capital at this time. Now let me turn to our outlook.
We currently expect revenue for Q3 to grow to between $37 million and $38.2 million and expect adjusted EBITDA to grow to between $5 million and $5.5 million. With that, let me hand it back to the operator to open the call for questions. Operator?
We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Mike Malouf with Craig-Hallum. Please go ahead.
Great. Thanks for taking my questions. Well done this quarter, guys. I'm wondering if we could just dig into the Samsung opportunity. It seems like you're having a lot of success driving that one. You talked about 20 devices over 70 countries here pretty soon. Can you give us a sense as you look into calendar 2020, how many devices that you think that you're going to actually be on? Can you give us a sense of what kind of products you expect to eventually have on all these phones?
Yeah, sure. Thanks, Mike. As we think about the Samsung partnership, we're excited for many reasons. The first reason is, you referenced, is more products, more devices, more markets. The second reason we're excited is the opportunity it opens up for other operator relationships for us globally. We talked about Telefónica briefly, and then the third one is how it really helps us with international media demand, having Samsung in as an anchor tenant, to provide inventory to. Those are at a high level, the three reasons we're excited about Samsung. As it relates to the specific comments made in my prepared remarks, we continue to expect a nice steady drumbeat of positive momentum.
The September quarter was better than the June quarter was better than the March quarter, and we expect the December quarter and future quarters to continue to build on that momentum as we add more devices and more markets. As people know publicly, Samsung moves 200 million plus devices, and our goal is to eventually get onto all of those at some point in time. We don't have a target on that in terms of this quarter in 2020, but we're making nice steady progress and working with Samsung as we plan out the acceleration of our efforts globally with them. Our expectation is it will be not just in more markets but also more devices in the existing markets.
As I referenced, SingleTap as a product extension from our core offerings with Samsung, we'd expect to continue to add additional products with them as well and we're talking with them. That's how we think about the opportunity. As similar as we saw with Verizon in the past, AT&T in the past, Cricket in the past, U.S. Cellular and so on, now with TracFone, we'd expect Samsung to follow those similar trajectories with a nice steady drumbeat quarter-over-quarter.
Okay, great. Just a follow-up question with regards to Disney. It sounds a pretty good opportunity here for you. Is this going to go just on new installs for new phones as you provision the phones or as Verizon provisions the phone? Are you going to be installing this on basically existing phones? You're going to take Ignite and install Disney+ on a phone that has already been provisioned.
Yeah. Unfortunately, I can't comment on any kind of plans or forward-looking statements that Verizon may or may not do, so that's probably not my place. I will say technically we can do it. It's not a technical issue or a Digital Turbine issue. It's just a decision how Verizon intends to go to market with the product and service, and I don't think I've seen anywhere publicly them talk about that.
Okay, great. Thanks for the help, guys.
Yes.
Our next question comes from Darren Aftahi with Roth Capital. Please go ahead.
Hey, guys. Thanks for taking my questions. Nice quarter. Can we circle back to your measurement partners? I think in particular, last quarter you said you guys had been making traction with Branch. I'm just kind of curious if we can get an update on that.
Yeah, sure. Right now we're in the process of implementing. We've made a fix with our software and Branch's software, to be able to enable deep linking capabilities onto consumer devices. In other words, I check the ESPN sports score, and I can directly link into the app to get that. We've now worked through Branch on a variety of software issues to put that out in the marketplace. Now it's just a matter of us deploying it across our partners here in the U.S., and we're in flight of doing that. I expect that to happen over the next few months.
Great. Your comments on Android TV, can you just walk us through a little bit go-to-market strategy there? Is this something that potentially could work on things outside the Android ecosystem?
Yeah. As we think about our company and our products, I know historically we've taken a very smartphone-centric view of the world because that's where the volumes are. Now we're increasingly seeing the set-top box being increasingly replaced with these over-the-top offerings, whether that's in Android or other operating systems that may exist around the world. Our platform's architected to be able to support those. In addition to Android, there's nothing magical about Android. We see Android as a natural given we're already on that. There's a lot of momentum behind that. While there's a lot of momentum around this broader space and just over-the-top offerings in general, a lot of the app recommendations and management and media management and other kind of operational things that have to go with the television are very similar. It's just another screen to a smartphone.
It's a natural extension for us. We're excited about a number of opportunities that we've got that have made some pretty major progress over the past couple quarters. As we look into 2020, this is a nice natural adjacency for us to start to get into.
Great. This last one, if I may. We've heard from a couple, I wouldn't call them competitors, but just peers in the space, that maybe there's been some weakness in advertising demand. I'm just curious if you're seeing any of that, either domestically or abroad.
Absolutely not. For what we're doing, we've got tremendous media demand out there. We saw some of those similar headlines from companies that are doing different things than what we're doing. I can't speak to those companies or their offerings. I can just speak to our media demand as we look into the holiday quarter. We're very excited about it here in the U.S. and internationally. Our platform's really operating at scale right now. I think the question for us is gonna be, what's going to happen with device volumes? That's the one for us that we're more focused on. The media demand has been really strong, especially on high-end devices.
Great. Thanks, Bill.
Our next question comes from Austin Moldow with Canaccord. Please go ahead.
Hi. Thanks for taking my questions. My first one is on Q4 revenue guidance. Your number, your range suggests kind of a somewhat meaningful slowdown sequentially. Just wondering if you can elaborate on what's being incorporated into your projections.
Yeah. Let me do this, Austin. Let me take kind of the macro headwinds and tailwinds that we're seeing, and I'll let Barrett comment a little bit more on the specifics here. As we look at the December quarter, right now, as I think most everyone's well aware, there's six fewer days of the holiday season of this year compared to last year, that Black Friday's almost a week later. We don't know what kind of impact that's gonna have or not. I think it's just proper to be conservative around that if there's six fewer days than last year on that. Secondly, I'll touch on the device forecast as well in terms of what's gonna happen here in the U.S. market. We want to make sure that we're pretty conservative on that.
On the tailwind side, we've got a lot of exciting new partnerships and comps that we didn't have before. I already touched on the media demand. I think at macro level, there's ins and outs on it, but I think it's important for us to be prudent on some of the things that are somewhat uncontrollable or we don't know. With that, I'll turn it over to Barrett for any other color.
Yeah, Austin, I think the only other thing I'd add there is I'd put a finer point on launches that we had last year that we're lapping. Bill and I, we think it's prudent to plan out and guide out on things that are known. While we have many partners that are launching or have launched and are growing very rapidly, we focused on the known items. As Bill mentioned, while we've seen a lot of growth, we've also
Have line of sight to device volumes in the near term, but we want to understand how the holiday season plays out. All those things combined have compiled our guidance for Q4, or Q3 rather, for our fiscal period.
Got it. I know you talked about your four major U.S. carriers sort of flattening out that device growth, or those devices should kind of flatten out over the next couple of quarters. Can you maybe comment on what kind of RPD you're seeing from them? Is there still room there to expand RPD to continue the top-line growth for those customers?
Austin, we expect that RPD, that's a health metric, and as I mentioned in my prepared remarks, we saw nice improvement on revenue per device. I think it was 30% year-over-year with those guys, despite flattish device volumes. As we get these new products scaled and the strong media demand, that's something we expect to continue to see improved performance there. 5G and higher-end devices and those kinds of things will also be tailwinds against that.
Okay. My last question is on investing in the product. In the quarter, there was nice expense leverage, but just wondering if you can talk through kind of what your philosophy is in terms of realizing some of that expense leverage and whether you think you're investing adequately or where you might invest more for further innovation and sort of extending the runway for growth.
Yeah, Austin, I'll start and let Bill add in color. I'd start with the fact that we're taking a kind of a measured approach to it. We've got a number of growth initiatives on the horizon, and we're focused primarily in building and supporting those products and those partner launches. If you think about where we've centered our resources, at least our incremental resources, they're around our sales force and sales support teams and then our technology teams in order to launch, drive the demand needed for these expanded partners, as well as new products that we're either launching or bringing to market in the near future. Those are the things we've been focused on. When I mention measured approach, we've seen a lot of growth. We're very excited about the inherent operating leverage in the business.
Amidst our investments, the team's been able to drive some efficiencies that can somewhat offset or mask the increased investments we're making for future growth.
Got it. Okay. Thanks very much for taking my questions.
Thanks, Austin.
Our next question comes from Lee Krow with B. Riley FBR. Please go ahead.
Great. Thanks for taking my questions, guys. First one, you guys kind of alluded to some changes, either strategically or headcount-wise, as it relates to scaling the new products. Curious if you guys could maybe provide a little bit more detail on what changes you guys made and kind of what that translates to you guys in terms of either execution or revenue growth?
Sure. We've made a few strategic investments and really just matching a lot of the broader strategies we're doing around diversification. Specifically, we've made some pretty material investments in our international sales force and our international channel partnerships. We're working with different advertising and media agencies in many overseas markets, specifically in Europe and Latin America, to really help increase our focus as a lot of the device growth is coming from those areas. Those media partners don't want to just be in those areas. They also want to be in the U.S., as I referenced in my comments. We're making some material investments there. Also in our technology, we continue to invest our technology at a pretty nice clip to help go against the opportunity, but with discipline, as Barrett just mentioned in his prior remarks.
Specifically, we'll continue to invest in our technology stack and ramping these new products. I'd say those are the two primary focus areas for us.
Got it. Specifically on News, did it contribute to revenue in the quarter? I guess, kind of tailing it back to findings with SingleTap, is there kind of a chicken and the egg problem associated with the News product, or is there a way to scale revenue in that business where you don't have to go out and push so aggressively to drive kind of the monetization element of it?
Yeah. The News Hub did contribute revenue in the quarter. I wouldn't consider it material revenues, it contributed revenue. It's ramping, it's going up into the right, in the right direction, which we like. One of the things I'm really been excited about the News Hub product is, we've preloaded other news products to other partners as we've done this throughout the years. Our news product is showing materially better retention rates than what we've seen from other products that have been loaded on. In other words, apps that are news product we did in August, looking at the results here in November and the % of people that are still engaging with the product, it's off to a good start. That's a big driver as we think about this longer term as a recurring revenue story for the business.
We're off to a good start. We're heading in the right direction, but not yet anything material to get too excited about.
Got it. Then can you just remind us as you have these new products come online, maybe just talk to the margin profile of these products relative to the install product?
Yep. Barrett, you want to take that one?
Yeah, sure. I think we've said this before. What we like about the new products is, in each individual case, they contribute at or above the aggregate gross margin that we're experiencing today. Those can escalate over time. I'm talking about pure gross profit. If we think about operating margins, we're investing important dollars towards those to get those programs launched. From a gross profit standpoint, they accrete to the aggregate margins that we see today.
Got it. Thank you for taking my questions.
Our next question comes from Jon Hickman with Ladenburg. Please go ahead.
Hey, Bill. Thanks for taking my questions. Nice quarter. Could you talk a little bit more about the Telefónica? When do you expect that to launch?
Yeah. We expect that to be in the fiscal year for us. We're working through a variety of just coordination efforts between Telefónica, Samsung, and ourselves. It's in what we call the go-to-market process right now. I'd expect to see that show up this fiscal year.
Okay, I couldn't write as fast as you were talking. You said that you were about to launch SingleTap with somebody new or across the Verizon family?
Yeah. In our master Samsung agreement, we signed an addendum to add SingleTap to the portfolio of products with them. We're working through them right now on what does that look like from a go-to-market perspective.
That also you think will occur this fiscal year? You'll get that part done?
Yeah. I think our prepared remarks, I said, expect it in 2020. I don't want to put a specific timeline on it, but we've reached agreement on what it looks like.
Okay. With the Disney thing and the Samsung thing and the new products, as you go into the March quarter, I know the March quarter is always kind of a weaker quarter from an advertising standpoint. Do you think you can kind of grow through that normal downturn? How much of a falloff, could you give us any opinion there?
Yeah. We're not providing any guidance specifically on the March quarter. In terms of media demand, there's definitely nothing in the media demand or landscape right now that has us concerned. We're seeing tremendous demand for our products, and we've just got to go out and get it. We talked about the resources and scaling to make that happen.
Okay. One more question. In your prepared remarks, could you tell us what the revenue per device was for the four carriers in the U.S.?
I don't believe we broke out a specific number other than in the prepared remarks.
Okay.
I think I said it was up 30% year-over-year.
Yeah. Okay. Hey, thanks. Really nice quarter. Take care.
Thanks, Jon.
This concludes our question and answer session. I would like to turn the conference back over to Bill Stone for any closing remarks.
Great. Thanks everyone for joining our call today. We look forward to reporting our progress against all the points we made on today's call, and we'll talk to you again on our fiscal 2020 third 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.