Day, everyone, and welcome to the Digital Turbine First Quarter Fiscal 2020 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, Please also note today's event is being recorded. And at this time, I'd like to turn the conference call over to Mr. Brian Bartholomew, Senior Vice President of Capital Markets.
Please go ahead.
Thanks, Jamie. Good afternoon, and welcome to the Digital Turbine fiscal 20 2Q1 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 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 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 tonight. Our stated goal has been to build and sustain a profitable growth business. With this objective in mind, we had a very strong start to our fiscal 2020 with our Q1 results, continuing to set all time quarterly records in our continuing operational revenue, gross profit, adjusted EBITDA, non GAAP net income, earnings per share, device installs, and U. S. Revenue per device.
I'm going
to break out my prepared remarks into 3 areas. 1st, I'll summarize our quarterly results. Secondly, we'll provide some real time operational updates on many of the exciting new partnerships and initiatives underway. And finally, we'll end with some commentary about the strategic value of the platform and where we're going into the future. To close out the June quarter, we finished with $30,600,000 in revenue, which was a 38% annual growth rate.
I was even more pleased with our 78% annual growth in non GAAP gross profit on the strength of 40% gross margins in the quarter. Record gross profit, combined with continued effective operating expense management, enabled the company to achieve over $4,000,000 in non GAAP net income, EBITDA, and free cash flow during the quarter. We also reached a new high for quarterly non GAAP EPS at $0.05 per share. Barrett will provide more specifics on the financials, but from an operational perspective, I was very pleased with our revenue per device performance or RPD, driven by strong advertiser demand and incremental contributions from new products. Our RPD with our 4 largest U.
S.-based partners increased 38% year over year and currently exceeds $2.75 per device. As you've heard me say on prior calls, diversification is a major strategic priority for the company, diversification of partners, business models, products, geographies, and advertisers. Regarding our partners, we continue to have success with our top 4 U. S. Based carrier partners with whom we grew revenues 18% year over year.
However, our revenues with other partners outside of this group grew nearly 4x year over year and represented approximately 21% of total revenue in the June quarter, up from less than 8% in the prior year. Our revenue from new products outside of dynamic installs grew from 13% of total revenues in the March quarter to 15% in the June quarter. Although growing, I'm not satisfied with this result as we still have more work to do. We expect this figure to continue to grow as products such as our wizard, notifications, Single Tap and folders become a greater part of the story. I'll provide more information later in my remarks, but overall, I'm excited about the opportunity with all the new products and the validation we are getting in the marketplace from our partners and customers and have been pleased with our execution so far with Wizard and Mediahub, but want to see faster operational progress against our BYOD single tap notifications and folders.
Now turning to the forward outlook, want to provide some commentary on how we're positioned for continued growth across each of our key growth levers: devices, media, and new products as we now enter the new fiscal year. First on devices, we set a quarterly record of over 30,000,000 new devices onboarded to our platform. For context, Apple just reported global iPhone shipments estimated at just over 33,000,000 for their June quarter. So, we are now operating at real global scale. In the U.
S, we saw a flattening out of the broader smartphone market during the June quarter. 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 5 gs availability, promotion and adoption. We are also seeing nice growth internationally as we ramp new partners such as Samsung. Our partnership with Samsung is now moving into the next phase as we install our software in more devices in more markets. We expect our Samsung partnership to grow to approximately 50 countries in the September quarter compared to 12 in the June quarter.
We also anticipate launching our first devices with Telefonica this fiscal year that is also a direct result of our existing integration work with Samsung. We have numerous other operator and OEM partners very deep in the pipeline and contract process and expect more to have to communicate soon. All in all, the prospects for us continue to grow our top line with additional devices and partners looks very promising. On the new product front, while our Single Tap revenues outside of as we work to integrate more partners. Conversion rates as we work to integrate more partners.
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. Partners who are weighing enough device scale to justify the investment of resources on their side are now starting to take progressive action. It's now an operational and distribution demand exercise moving forward. Our recent press announcement on leveraging the infrastructure and relationship 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. We are working most actively with Branch to integrate their deep linking capabilities into Single Tap.
So for example, you could be researching a restaurant on a Yelp mobile web page and with Single Tap, if taken to the richer Yelp application experience directly to the restaurant you're researching versus having to start at the homepage of the application. You can imagine this deep linking capability for many other types of applications like news, weather, social media, sports, airlines and so on. And finally, I do want to call out our new sub product that will go into beta release with multiple partners this quarter. We're excited about the potential of this non app installed product, which is a natural extension of our product portfolio that leverages both the secular tailwind of customers consuming information and entertainment content directly on their device versus traditional outlets like magazines, televisions and newspapers and also leverages our strong distribution footprint of operator and OEM partners. Assuming successful beta testing, we anticipate more broadly launching this product throughout the remainder of the fiscal year and we'll report out on our progress on future calls.
And on the media front, we continue to show nice diversification of applications as no single application is more than 10% of our revenues. We are currently very focused on scaling our international demand to meet a significantly greater supply of international devices. We are continuing to work hard and where necessary add strategic resources to improve our international revenue per device and ensure that we scale our partnerships and infrastructure effectively to capitalize on the enormous opportunity in front of us. Specifically, I can report incremental increases in spending by some high profile multinational advertising clients such as Pinterest, Twitter and Uber. And finally, before I turn it over to Barrett, I want to take a personal moment and thank many of you that have been patient and stuck with us.
I know it hasn't always been the smoothest of pass towards the development and adoption of our platform,
but
we're now beginning to really bear fruit from the original vision. I'm more excited than ever about our future and believe we're just getting started. And 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. We're pleased with the results delivered in the quarter and off to a great start to our fiscal year. 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 $30,600,000 in the quarter was up 38%, experiencing strengthening momentum as the quarter progressed. This accelerating rate of growth was driven by positive momentum from all 3 major growth drivers across our business: media demand, product expansion and device volumes on the platform.
While we are excited about the top line growth in our business, I am particularly pleased with our expanding margins, which drove 78 percent increase in non GAAP gross profit dollars over prior year to $12,300,000 Non GAAP margin was 40% in Q1, expanding from 31% in the prior year. Our continued margin expansion is largely driven by the successful diversification of our partners and products. We also experienced continued positive margin benefit in the quarter from a recent carrier contract renewal, which is not expected to continue beyond Q1. Overall, we're pleased with the expanding margin levels in the business over the last several periods. 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 $9,000,000 compared to $7,600,000 in the prior year and our cash expenses in the quarter were 8,100,000 That $8,100,000 represented 26 percent of revenues compared to 30% in the prior year during a period of revenue and gross profit growth of 38% and 78%, respectively. I will highlight that these results are achieved while Adjusted EBITDA was $4,200,000 up from $200,000 in Q1 of last year and represented an EBITDA margin of 14%. This resulted in a marginal EBITDA conversion rate of almost 50% on incremental revenues year over year and further emphasizes the embedded operating leverage in our business. Non GAAP adjusted net income in the quarter was 4,200,000 dollars or $0.05 per share as compared to a net loss of $600,000 or $0.01 loss per share in the Q1 of 2019.
Turning to our GAAP net income. As a reminder, including our GAAP results, we see the impact of changes in the fair value and liabilities resulting from our recently retired convertible note that is highly sensitive to the company's stock price, which increased significantly in the last 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 result. Our GAAP net loss from continuing operations for Q1 was $1,700,000 or a $0.02 loss per share based on 81 point 8,000,000 weighted shares outstanding compared to a Q1 of 2019 net income of $1,500,000 or $0.02 per share. Included in our GAAP net income for the quarter is a recorded loss of $5,200,000 from the impact of the change in fair value of derivative liabilities, resulting from our recently retired convertible note, which is highly sensitive to the company's stock price that I referenced earlier.
Moving on to the balance sheet, we generated $4,300,000 in positive free cash flow. Finishing the quarter with $16,200,000 in cash and exited the period with 0 debt. This represents an improvement in our net cash position of approximately $15,000,000 year over year. And during this time, we also improved our net working capital position in the quarter, exiting with a positive $5,500,000 balance, which is a $13,800,000 improvement over prior year. Now let me turn to our outlook.
We currently expect revenue for Q2 to grow to between $31,000,000 $32,000,000 and expect adjusted EBITDA to grow to between $3,200,000 $3,700,000 With that, let me hand it back to the operator to open the call for questions. Operator?
Our first question today comes from Mike Malouf from Craig Hallum. Please go ahead with your question.
Thanks for taking my questions and let me offer my congratulations. It's a very impressive quarter from you guys.
Thanks Mike.
First off, I'd like to just kind of explore a little bit on the new product side, going from 13% in March to 15% in June, certainly a nice improvement. And I would like to get a little bit more color on the Single Tap side. Is it more of a chicken and egg thing with regards to ramping that? Basically, the advertisers didn't want to put, as you said, put the resources into it and tell you we're at scale. And then, of course, trying to get to scale with no advertisers is all the top.
But can you just talk us through that process and where we are currently with that?
Yes, sure Mike. So, first, let me just talk about new products in aggregate. As I mentioned in my remarks, we did grow those sequentially low 7 figures in revenue quarter over quarter. So we're pleased with that, but by far from satisfied. We expect that to continue to go up into the right as a lot of products, such as a wizard notifications and others continue to scale.
And also I'm excited about the potential that the MediaHub product has. We're seeing a lot of demand out there for that. Regarding Single Tap specifically, yes, we've had a chicken or egg problem in regards to first getting the devices launched with our partners. We've now accomplished that. And then as a matter of working through scaling our demand partners, by demand partners, we're talking about companies like Twitter, Pinterest and so on.
And now we're in a place where we're doing that and it's largely an operational scaling game. So we've been going, what I'll call brick by brick to do that, seeing nice progress. And most importantly, we're seeing the conversion rate lift versus the traditional flow that you get through the Google Play Store, you'll be anywhere from 30% to 200% better. So as long as those metrics continue to show the products working as advertised, we're excited. But we've just got to scale it.
I touched in my remarks around how we're doing that with these mobile measurement partners, most notably, one called Branch out on the West Coast that we're excited to work with as a partner. We see a tremendous amount of opportunity for these mobile measurement partners to accelerate our efforts and we look forward to continue to report on that in subsequent quarters.
Okay, that's great. And then just a follow-up on Samsung. You said you're going from 12 countries to 50 countries in by September. Can you talk a little bit about what's the most important part of that Samsung arrangement? Is it countries or is it actual devices?
And maybe you can give us an update on which devices that you're on or at least how many devices you're on? Just give us a sense of where that's scaling relative to the number of devices that Samsung sell?
Sure. Yes. So when I think about the Samsung relationship, I think of 4 key benefits that it brings us. Number 1 is what we talked about, just expansion of devices in countries with Samsung Open Market Devices. And we talked about how we're expanding into many more countries, primarily in Europe and Latin America with them from the prior quarter to the current quarter, expect that to continue to grow.
So that's important. But the other benefit is, I'd reference Telefonica in my remarks. And the second benefit of the Samsung relationship is our integration with them is really opening up a lot of opportunity with other international operators. So we think Telefonica is the tip of the iceberg here and so we're quite excited about that. And that integration with Samsung is key, not just to get on those Samsung devices, but other OEMs as well because those operators want one stop shop.
They don't want to go to multiple providers. So that's good for us. The 3rd benefit with the Samsung relationship is how that helps us with our media partners. So having the credibility now of having an anchor tenant like Samsung just like we internationally is important. So we have anchor tenants here in the United States with Verizon and AT and T to help pull through other U.
S. Demand. Same thing of having Samsung internationally with advertisers. So we think that bodes well for our broader international revenue per device efforts to help us really scale the international business. And then the final benefit is just our pipeline with other OEMs.
Obviously, having operators is great, but having Samsung as OEM brings us additional credibility as we work with those other global OEM partners. So in aggregate, that makes us really excited about the Samsung relationship. But taking a very near term operational focus, yes, it's really about more devices, more markets and just continue to execute well and a nice slow steady drumbeat of ramp as we've seen with other partners over the
years. Okay, got it. Thanks a lot for the help. Appreciate it.
Our next question comes from Darren Aftahi from Roth Capital. Please go ahead with your question.
Good afternoon. Thanks for taking my questions and my congratulations as well. Just a couple, I want to follow-up on, nice question on Samsung. Bill, maybe it's too early, but when you've launched new devices, I'm kind of curious how fast you've kind of launched actually seeing kind of real revenue when you call out 12 to 50 countries? What kind of lag can we expect in terms of when this starts to move the needle on the top line?
Yes. So, as I think about
the Samsung relationship, one of the things that we've got in our business is we go back and we look at time and we look to when we started Verizon and we look to when we started AT and T and we look when we started Cricket, we go down the line and most recently, TracFone. What we see is a pretty stable, steady drumbeat of ramping. Those things as they go quarter over quarter, we see nice top line growth. And we'd expect Samsung to mimic those prior data points that we've gotten and we're starting out of the gates to see that as we go from 1 figure to 2 to 3 to 4 to 5 and so on of daily revenue with these guys, we'd expect to see that trend continue. And now it is really a ramp and scale game.
We'd expect to see that start showing up in more material ways each quarter going forward.
Great. And then on your on Single Tap, so when you talk about demand partners and then you've got kind of the 3rd party ecosystem of analytics and attribution partners. I guess two questions there. What is causing a branch to maybe scale faster than some of those other partners? And then the second question is, where do you expect to see more kind of demand from that product?
Is it going to be from the 3rd party partners or is it actually going to
be from your demand partners?
Yes. So, yes, I think regarding branch specifically, I think they've got some unique technology that I know they're excited about and their investors
are excited about, but so
are we. It's really deep linking capabilities. Most of us go to mobile web pages today and want to check a sports score, an airline flight or what have you. And the ability to deep link right into that and get the app and the richer experience, I think it's something that's natural for all of us as consumers. So integrating Single Tap into that capability is a natural.
And so I think the ability to really do 2 things. 1 is that technical integration, but then also leverage the business development footprint of their existing partners and our existing partners is another natural. So it's not something that's going to necessarily show up and baked into our guidance here for the September quarter. But I think as we think about subsequent quarters, this is a key piece of the ramp and scale part of the Single Tap story. So we're excited about our branch partnership and look forward to giving you guys updates on future calls.
Then maybe one for Barrett. I think if I'm looking at the right things, the last two quarters, your marginal dollar of EBITDA on the revenue ramp year over year has been 50% roughly. How do we think about that marginal operating leverage longer term? I mean, I don't can you sustain it at that level? Or what's kind of the right way to think about it?
Yes. We've been pleased with the progress and that trajectory. I wouldn't say that we count on that same level ongoing, but I think it is proof that there's strong operating leverage in the business model. We would think that would hover probably between 30% 50% over time. And it also, Darren, as you know, can change with if we were to structure any kind of different pricing models with the arrangements.
But on the business as it is, I think we'll see it weigh in a little bit, but it'll still be strong.
Great. Thank you.
Our next question comes from Austin Moldow from Canaccord. Please go ahead with your question.
Hi. Thanks for taking my questions and congrats on the quarter. The device installation growth accelerated pretty nicely. So wondering if we could just dig into that a little bit and maybe you can talk about if possible what kind of contribution you saw from carriers versus OEMs in the quarter and maybe if there is anything that was particularly successful in the quarter?
Yes, sure, Austin. Yes, we saw a nice growth internationally with devices. So that's something that really contributed towards strong device growth in terms of getting to the all time record quarter. We also saw a real stabilization of our big four partners. As you and others are aware, those have been in decline for a while.
So now we're starting to see that flattening through a combination of flagship devices, beginning to 5 gs being offset by some of these elongated upgrade cycles. So that's encouraging and a trend we expect to continue. And then we've got the comp of new partners. So people like Samsung and TracFone and so on are also helping to contribute to the incremental device growth and we'd expect that see that
continue. Great. And on the international side, I know you mentioned Telefonica, but wondering if you could maybe talk about what you're seeing a progress that you're seeing with other large international operators like maybe America Movil or something like that?
Yes. So, as it relates to kind of pipeline, nothing too specific to report out on the call today other than to say we're encouraged and very excited and upbeat about the future. In terms of existing partners, American Mobile is someone that we expect see benefit from the Samsung relationship and it's really just a shopping mall concept. You bring on more anchor tenants into a shopping mall, everyone benefits in terms of more traffic into it. And same concept here where now demand partners or advertising partners that want to work with us in Latin America.
And as we expand our Samsung relationship and the quality of the Samsung brand will allow us, in my opinion, to help pull through American mobile demand as well and that is we just increase our footprint and our scale in those markets. So that's something that we're encouraged and excited by.
Got it. And last one for me is on the additional resources going into improving your international RPD rates. Can you talk about specifically what kind of resources you're referring to?
Yes. So really 3 different types of resources. 1 is incremental demand is really the number one priority. So that's a combination of direct sales folks as well as folks that can help us on account management and partnerships with other advertising agencies would be bucket 1. Bucket 2 would be on the supply side as we now launch these new operator and OEM partners ensuring that we've got account management to really develop strong relationships in market with these operator and OEM partners in terms of getting our software on the device.
And then third is really just on the technical and the operational side as we onboard more devices and more partners. In aggregate, we don't view it as a material number in the state of our overall headcount, but definitely we're making investments across those three areas.
Great. Thanks very much for taking my questions.
Thanks Austin.
Our next question comes from Lee Cole from B. Riley FBR. Please go ahead with your question.
Yes. Thanks for taking my questions and congrats on a solid quarter and outlook. Just wanted to jump into North American RPD. Obviously, you guys signaled for flattening device growth in the U. S.
I don't think anyone is surprised by that. But could you maybe talk about some of the growth drivers underlying the RPD growth? And kind of what gives you the confidence that you can continue to grow RPD such a solid rate throughout the year?
Yes. So I'll start with that and Barrett, if Barrett wants to add any color, jump in. I think as we think of RPD growth, we think of it really across 3 levers. The first one is just media partners that are seeing results in ROI on the platform and therefore we're able to continue to charge higher rates because they're getting a higher ROI for their customers, whether that's more incremental listeners for Pandora or more incremental riders for Uber or more rewards members for Starbucks or whatever. As long as those folks continue to see an ROI on the platform, that allows us to continue to garner higher rates.
So that would be number 1. Number 2 is we continue to expand a number of applications on the device with some of our partners, which obviously drives more real estate, which allows us to get a higher revenue per device. And then the final one, which we talked about a little bit in Mike's first question, is the ability to continue to add new products to the story as we grow from 13% of revenues to 15% of revenues, and we expect that to continue to grow, that will continue to drive accretive RPD for us. So I think those three factors are exciting. I know when I kind of put as a sub bullet around that would be recurring revenues as we do more of that.
But in aggregate, those are all helping to drive positive RPD performance.
Got it. And then maybe it's no comment or maybe no impact, but just kind of your thoughts on the recent consolidation in the U. S. Carrier space and the impact that potentially has on your business?
Yes. So, we see a few benefits of that as we think about our business. We've recently established a partnership with a company called Inmovi, who's handling a lot of the advertising distribution for Sprint. We've actually just launched with them on new devices with Sprint and are seeing revenue on that. We expect to continue to grow that partnership.
That would be a specific one opportunity. We continue to have, I think, positive relationships and dialogue with T Mobile. Obviously, they're focused more on getting the merger closed out right now. But I think long term that has a potential opportunity for us. And the final one is we'll see what happens with Boost and DISH.
We've got good relationships there. So to the extent that becomes a 4th operator in the market, that could be something that's encouraging and we can leverage our strong prepaid presence right now with that we've got with folks like Cricket and TracFone, for example, and continue to leverage that into those markets as well.
Got it. Thank you for taking my question.
Our next question comes from Ilya Grozovsky from National Securities. Please go ahead with your question.
Thanks. Just wanted to talk about the gross margins a little bit. Barrett, I think you had said that the gross margin trend, the results were from a contract renewal. But if I heard you correctly that, that trend was not going to continue. Can you just kind of elaborate on what's going on with that contract that it wouldn't continue?
Yes. We got a we had a renewal at the end of last year, one of our major partners. And as part of that renewal, we had a higher amount percentage of revenue that we retained at a certain volume. And then we just recently crossed the volume tier where it resets back to where the legacy rates were back to prior year. So that's what I was referencing in that comment.
And is that reset on an annual basis or on a fiscal basis? How does
that work?
No, it's on a it's a one time on a contract basis. So it's we renewed that contract. It was a multi year contract. So we got a benefit at the beginning of the contract period.
Got it. And so if we think about gross margins going forward for the next year, kind of where you see them heading and kind of what's the ceiling for them?
Yes. So without that benefit, we would have that benefit was worth 1 to 2 points of gross margin in the quarter. And it will keeping the product mix the same, I would assume the margins are in the high 30s on a normalized basis. And then as Bill talked about the traction, the growth we're seeing in some of the higher margin products, they may or may not move the needle in the next quarter or 2, but our expectation is our margin profile will be at or above 40 percent on an ongoing basis. But over the next few quarters, we're probably in the high 30s.
Great. And then just on the new product, given your high level of comfort and confidence in the September quarter guidance, what percentage of revenues do you think new products will be in September?
Well, I think they'll be above where we are, whether it's a point or 3 points, I'm not certain yet. We're still early in the quarter. But the bright spot here is we continue to move this portion of our revenues to more towards our new product mix.
So it will be up sequentially, right?
We would expect it to move up. Yes, we would expect it to continue to move up.
Great. Okay. Thanks,
Our next question comes from Chip Richardson, who is a private investor. And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to Bill Stone for any closing remarks.
Thanks, everyone, for joining the call tonight. Look forward to reporting against our progress on all the points made on today's call and we'll talk to you again on our fiscal 20 22nd quarter call in a couple of months. Thanks and have a great night.
Ladies and gentlemen, that will conclude today's conference call. We do thank you for attending. You may now disconnect your lines.