Good day, and welcome to the Digital Turbine Reports Fiscal Q2 Results Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Brian Bartholomew, Senior Vice President of Capital Markets and Strategy. Please go ahead.
Thank you. Good afternoon, and welcome to the Digital Turbine fiscal Q2 2018 earnings conference call. Joining me on the call today to discuss our results are Bill Stone, CEO and Barrett Garrison, our CFO. Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward looking statements. These forward looking statements are based on our current assumptions, expectations and beliefs, including projected operating metrics, future products and services, anticipated market demand and other forward looking topics.
Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. Except as required by law, we undertake no obligation to update any forward looking statements. 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 it is my pleasure to turn the call over to Mr. Bill Stone.
Thanks, Brian, and thanks to all for joining us today. I want to start my prepared remarks with our progress against our stated goal. Our goal has been to build a sustainable and profitable business while demonstrating solid execution against our strategy. I'm pleased to report that we continued our momentum in the September quarter, which was more profitable than the June quarter. We expect the December quarter to continue this favorable trend.
I'll break out my remarks into an operational review of the September quarter, some customer and partner updates, and finally some strategic comments about the future direction of our business. First on the operational performance, our overall revenues were 27,900,000 which compares to $26,100,000 in the June quarter and $22,800,000 in September a year ago. In particular, our operator and OEM or O and O business finished at $15,900,000 for the quarter, which was up 61% from the September quarter last year. This was primarily driven by success with our North American operators and the successful launch of the Samsung Galaxy Note 8. We have very good momentum with our O and O business and expect that momentum to continue in the current quarter.
Our advertiser and publisher or AMP business finished at $2,200,000 As I said on prior calls, there's been an intentional refocusing of our resources away from A and P to the higher margin O and O business combined with structural issues that we need to address. Despite the revenue declines, margins have grown from 15% last September to 26% this past quarter. Our content business was up 23% sequentially. This represents our 3rd consecutive quarter of double digit sequential growth. Our Australian merchants continue to have success driving new revenues.
We do expect some modest negative revenue impact in 2018 as the Australian mobile operators transition away from subscription services for traditional content types such as games, videos and music and migrate those services to event based charging. This change has already been in effect at Vodafone for most of 2017 and will go into effect in the December quarter for Telstra and we expect the March quarter for Singtel's Australian subsidiary Optus. We expect to see new types of content such as parking, tolls, magazines, newspapers and so on become a future driver of pay growth in Australia. And while still a small percentage of total revenues when compared to Australia, we continue to expand new connections in the broader Asia Pacific region and our revenues sequentially more than doubled outside of Australia. Next, let me shift to some customer updates.
First, I want to discuss our advertisers. I've been pleased with the diversification of our advertisers. Our advertisers are comprised of 4 main groups. 1st, our brands such as Starbucks, Bank of America and McDonald's. Secondly, our commerce players such as Amazon, eBay and Yelp.
And 3rd are gaming providers such as EA, Zynga, King, Machine Zone. And the final category are utilities like weather, stocks, flashlights and so on. And while O and O advertising growth increased by more than 60%, our gaming providers contribution actually declined from 69% of revenues a year ago to 39% today. In other words, gaming revenues were approximately the same last year and this year. Thus, one can attribute 100 percent of our O and O advertising increase to non gaming revenues.
This was highlighted in the most recent AppsFlyer performance index. Digital Turbine was ranked in the top 5 in North America for the largest distributors of Android non gaming applications just behind companies such as Facebook and Twitter. Our revenue per slot or RPS on high end devices continues positive momentum as we continue to have strong demand for those devices. The RPS for the Note 8 in the 1st month in North America was $0.44 This compares to the 1st month of the Galaxy S8 launch at $0.42 and the 1st month of the Galaxy S7 launch being $0.35 We still have work to do to improve our RPS performance both outside the U. S.
And on some lower end devices, but I'm optimistic the combination of regional salespeople, additional third party relationships and improved global campaigns will drive results. Next, I want to make some comments about our operator and OEM partners. I continue to be pleased at the overall advertising revenue growth of our largest North American operator, which grew revenues over 30% annually, but what is also encouraging is that operators percentage of our overall O and O gross profit is declining. Last year it was more than half of our gross profit. This year it was less than 40% as higher margin partners have begun to ramp.
We've seen a major ramp of our other large North American partner revenues and expect that to continue. As many longer term investors know, this relationship took many years to bear fruit, but is now a material part of our O and O story. I feel the same about T Mobile and TracFone as both accounts have taken longer expected time to get to market, but I'm enthusiastic about our future prospects with them. Our Indian footprint continues to expand. We continue to expand our advertising relationships with Jio, Micromax and Indus.
Jio's device volumes have slowed from prior quarters as they are focused on a lower end feature phone. We expect to see additional smartphones from them in 2018. Also in the Asia Pacific region, we also anticipate launching Ignite with Telenor in Thailand later this quarter as our first market to launch with them. Telenor is one of the top 10 largest global mobile operators with over 175,000,000 subscribers in 12 markets, including approximately 25,000,000 in Thailand. Our Latin America revenues have nearly doubled annually.
The pipeline in the region is very strong and we expect to add scale in the region in 2018 with both new relationships and the launch of our APK with American Mobile. We've also seen some increased pipeline in Europe as our platform story is resonating well with many potential partners. And finally, our OEM growth continues. And while still a small percentage of our overall O and O revenues, our OEM revenues more than tripled annually driven by improved performance with companies such as Motorola, Acer, Blue and Arcos. We are making a major business development push to improve our OEM footprint to take advantage of the broader trend towards open market or unlocked devices.
And this leads to the final section in my prepared remarks. The platform story has really generated traction in the marketplace. We are now at scale with over 110,000,000 devices with Ignite and are growing that number each quarter in a material way. This is the key to get the flywheel going and in our view a key metric for investors to look at our future business into 2018 beyond. When investors ask me how big can Digital Turbine be in a few years, our response is that we are here to build a meaningful business that is much, much larger than today's results.
And to accomplish this, building scale with devices and adding new revenue streams off the platform are the catalyst for that potential step function growth. The key is not just having a single revenue stream from a product, but how do we get multiple revenue streams from the same platform and not just 100,000,000 devices, but on hundreds of millions of devices. We're seeing a few major macro trends that we're extremely well positioned for to capture these. First is a trend of overall smartphone growth of 1,500,000,000 smartphones to be sold this year and growing from there. And secondly is application growth as the application market is now at $88,000,000,000 growing at a 22% compound annual growth rate.
Delivery of those applications on our Ignite platform via our DTE Media business today is one avenue of growth, but a much larger opportunity is through our Delivers product that can provide one click access to consumers from any advertising platform, whether that is Facebook, Snap, Twitter, Oath or any advertising company. We've trialed this earlier this year and while not at scale, the results were encouraging. We've been working with 1 of our large North American advertising partner to trial this capability with them exclusively. We need the remainder of the fiscal year on the tech side to get the tech launch to scale across all of our partners, but this is a major internal priority of the business and an opportunity we're excited about as part of the growth story into the future. Next is the trend of open market.
Today, many operators don't have the ability to get their applications to the device as customers just buy SIM cards from the operator versus the device itself. With Ignite on the device from the OEM, this solves that problem. This is why we are now changing our open market focus to embrace the operator versus dealing it as an independent approach. We believe this is a better longer term approach as operators pay us a license fee for open market devices to deliver their experience to these customers that are hard to reach today. So for illustrative purposes, we envision a future where a device that could have $0.50 of gross profit today to be able to accrete to multiples above that current run rate.
And multiplying all these different revenue streams off the platform by multiples more of device yields some very large potential numbers. And this is why we are very excited about the future in our strategy. We anticipate having an Investor and Analyst Day in early 2018 where we can spend some dedicated and focused time on how we will build this additional shareholder value. I want to conclude my remarks by saying that September was another solid profitable quarter that beat our internal expectations. So the short term is in good shape, but the long term is what I'm really enthusiastic and optimistic about.
And with that, I'll turn it over to Barrett to take you through the numbers.
Thanks, Bill, and good afternoon, everyone. I'm pleased with the solid performance in Q2. We delivered the company's 2nd consecutive profitable adjusted EBITDA quarter and experienced an accelerating rate of revenue growth. We continue to make progress toward our objectives in delivering sustainable profitability and generating positive free cash flow. Turning now to the financials.
All of our comparisons are on a year on year basis unless otherwise noted. Total Q2 revenue of $27,900,000 was up 22%. Advertising revenue of $18,100,000 grew 19% and within advertising our O and O revenue of $15,900,000 was up 61%. O and O revenue growth in the quarter stems from continued revenue traction from recently launched partners ramping on the platform. Combined with the successful launch of the new Samsung Note 8, Inside our advertising, our AMP revenue was $2,200,000 in the quarter, down 59% and now represents less than 8% of total revenue mix.
Content revenue of $9,800,000 in the quarter grew 28%. Q2 marks the 3rd consecutive sequential revenue growth period from this business. In the quarter, our adjusted EBITDA was positive $400,000 as compared to a loss of $3,000,000 in the 2nd fiscal quarter of 2017. This improvement of $3,400,000 year on year in the quarter on an additional $5,000,000 in revenue during the same time period is a testament to the embedded operating leverage of our business. Non GAAP gross margin expanded to 29% in the 2nd fiscal quarter of 2018 as compared to 22% for the same quarter in the prior year.
This year on year margin expansion is largely driven by continued mix shift toward our higher margin O and O business, combined with improving gross margins across all of our business units versus prior year. Expanded margins enabled non GAAP gross profit dollars to increase by $3,000,000 year on year to $8,000,000 in the quarter. Let me leave the discussion on gross margin by noting that while we are pleased with our continued improvement in this area and encouraged about our opportunity to expand margins overall, our gross margin rates can be sensitive to changes in partner mix and revenue type between advertising, licensing or content, and these fluctuations can be accentuated during seasonally high periods and may vary from quarter to quarter. Now turning to expenses. Total operating expenses for the 2nd quarter were 8 $600,000 down 10% year over year.
Expenses excluding stock compensation and depreciation or our cash operating expenses in the quarter totaled $7,600,000 down $100,000 from the same quarter prior year. Overall, the reduction in cash expenses is driven largely from realizing continued efficiencies in hosting technology costs and lower G and A expenses. These reductions are partially offset by an accrued expense for the company's annual employee bonus plan tied to the company's financial performance through the first half of the year. It's important to point out this type of expense was not earned or recorded in the prior fiscal year. We continue to experience impressive expense scale on the platform, delivering 60% growth in the quarter in gross profit dollars, while holding cash expenses constant during the same time.
Non GAAP adjusted net loss was $600,000 or $0.01 per share this quarter as compared to a net loss of $900,000 or 0 point 0 $1 share loss in the Q1 of 2018. Our GAAP net loss for the Q1 was $6,500,000 or $0.10 per share based on 66,800,000 weighted shares outstanding compared to a net loss of 7,300,000 dollars or $0.11 per share for the fiscal Q2 of 2017. Included in our GAAP net loss for the quarter is a recorded loss of $4,500,000 from the impact of the change in fair value of derivative liabilities resulting from our convertible note, which is highly sensitive to the company's stock price, which increased almost 50% from $1.03 at the end of June to $1.51 at the end of the September quarter. As a reminder, the derivative liability on our balance sheet will fluctuate as our stock price moves and may have a material impact on our reported GAAP financials. Moving on to the balance sheet.
We finished the quarter with $5,900,000 in cash, a decrease of $400,000 from the Q1. Cash from operations generated modest positive cash during the quarter, inclusive of a semiannual $700,000 interest payment, which was offset by capital expenditures of $400,000 in the quarter. $6,000,000 of convertible notes were converted by noteholders at the end of the quarter, resulting in a reduction in the gross principal amount of these notes from $16,000,000 at June 30 down to $10,000,000 as of September 30. Associated with these conversions, approximately 5,000,000 shares of common stock were issued to these noteholders. Within our short term debt, at quarter end, our balance drawn was $2,500,000 of the total $5,000,000 revolving facility.
Now let me turn to our outlook on fiscal 2018. We currently expect Q3 revenues of approximately $31,000,000 representing a projected year on year growth of 39%. We expect continued sequential improvement in adjusted EBITDA and we reaffirm our expectation to generate positive full year adjusted EBITDA in fiscal year 2018. In summary, Q2 was a strong quarter. We delivered another quarter of profitable EBITDA growth and continue to strengthen our financial profile.
With that, let me hand it back to the operator to open the call for questions. Operator?
Thank you. We will now begin the question and answer Our first question comes from Brian Alger with ROTH Capital Partners. Please go ahead.
Hi, thank you and congratulations guys. Nice quarter. Good guidance as well. I want to get some clarity on what's going on within the content business in Australia. It sounds as though we should be expecting a bit of a pause there after the past couple of quarters of growth.
Yes. So Brian, we've seen a nice ramp up of growth over the past few quarters and we're really in a transition as the Australian operators and us are working with new content merchants. So touch on things like parking, tolls, small businesses, magazines, newspapers, etcetera. So I really see that being something that we're going to be focused more on 2018 and some of the traditional subscription activities will get migrated over to events. So we anticipate this could have a modest impact in 2018, but nothing at this phase that we want to materially affect our guidance or direction to you guys.
Well, obviously, the O and O business has become a bigger percentage of revenues and that's masking obviously the content fluctuations as well as
A and P.
Just curious within the 9.8% reported for content, how much is tied to Australia?
The vast majority is tied to Australia.
Okay. Just making sure. Great. And then as we look forward and we're looking at that delivers, it sounds as though you've had some trials, but we're not quite ready to go at scale yet. Can you maybe walk us through the next maybe milestone steps that you need to do before you'll be ready to go at scale?
Yes. So we basically earlier this year trialed it, had some nice encouraging results albeit not at scale. We've just recently been working with 1 advertising partner and one of our large North American partners to trial it. And so again, results are encouraging. But the key here is to be able to do it across all of our partners all over the world and with any advertising partner.
We still have a little bit of work on the tech side to do. I anticipate in the December quarter and kind of early into the March quarter to have some material progress against that. But I think in terms of moving the needle this fiscal year from a results perspective, I wouldn't anticipate anything and expect it to be much more of the story for next fiscal year. But there's some technical just time and material things that we've got to do to operate this thing at scale.
Okay. And is that something that's going to be tied business wise into your focus on the open market? You talked about working with the carriers more from the aspect of licensing from an open device. Is that tied into the same thing or are they separate?
Yes. So they're separate, but I would think of them as different revenue streams. So one revenue stream would be from an advertising partner. So you could think of a Facebook, a Snap, a Twitter, an Oath or a whole long tail of advertising partners that really want to deliver one click access to their deliver that capability through Ignite and I would view that as one revenue stream. The second revenue stream is really a pain point we hear from every operator all over the globe, which is, hey, we've got all these phones coming on our networks, The SIM cards don't have the capability to get our experience to these customers.
How can we get our experience to our customers? So if you have an AT and T phone that comes on to Verizon or vice versa or goes into the same analogy to other geographies, how can the operator deliver their experience out to these customers to get a better sticky relationship. We view having Ignite on those open market devices as a licensing opportunity back to those operators that would want to pay us to be able to do that and it's solving a big pain point in the marketplace right now. So something we're really excited about.
Yes, it's funny. It's one of the original pain points that going back several years that we've been involved that you guys were looking at targeting way back when. So it's great to see that moving along. And you mentioned 100 and was it 116,000,000 devices with Ignite in the marketplace today. I would assume that most of those are domestically here in the United States.
Do you have a rough geographic breakdown in terms of where those might be
Yes, yes. So we didn't break them out by geography. I think as we go forward in time, we get to our Investor and Analyst Day and we brought a lot more context and texture around it. We'll do that going into the future. But for today, I wouldn't conclude that they're all in North America.
I mean, we've made a lot of progress in Latin America and India and a lot of other geographies. But yes, we're not breaking out today, but it's something we want to really plant the seed of investors to think about this as a metric of our business because once we can get the platform on the device, then it's the opportunity to get multiple revenue streams off that device. So looking at the device metric on a go forward basis will be something we think is important. So stay tuned for more on that.
So it sounds like we should be thinking about delivers not so much as just going on new phones when it's ready to go at scale, but also at that potentially at that insult base?
That's right.
Great. Thanks guys.
Our next question comes from Mike Malouf with Craig Hallum Capital Group. Please go ahead.
Great. Thanks for taking my questions guys. If we could
just focus a little bit
more on Latin America, can you just talk a little bit about the timing with the APK? And as you look out to calendar 2018, we always thought that America Movil was going to be a big contributor and a big impact. And because of the software, we had a little bit of a delay in that. And then wondered if you can talk about the traction that you expect there as we go into next year?
Yes, sure. Yes, let me talk about Latin America more broadly versus just one partner and I'll double click a little bit on that Mike in a second. We've got a pretty nice pipeline in Latin America right now and so a lot of good things happening there around our footprint. And I'm excited about that because that will help us in terms of scaling some of the advertiser demand as well. So you stay tuned for that as well as a lot of the OEM traction that we see right now in Latin America.
That's one of the fastest growing smartphone markets in the world. So some of the OEM deals I referenced in my prepared remarks, I think will be another nice catalyst in Latin America. Regarding American Mobile specifically, yes, you're correct. We launched with them with a SDK solution that had some limitations with it. We anticipate in 2018 migrating them over to an APK solution, but that will be on their new devices.
It won't be out to the embedded base. So that's important distinction there. But that APK solution will deliver much better install rates, much better performance, much better data, and that will yield improved results. So we're extremely bullish in Latin America and our relationship with American Mobile and that APK I'd expect to kind of see in the marketplace in the first half of next calendar year.
Do you think it'll be out before the S8 or the S9 or whatever the new Samsung is?
Yes. No comment on that.
Okay. And then just a follow-up on your comments with regards to T Mobile and TracFone. Can you talk a little bit about when you expect that to start to ramp?
Yes, sure. So as I said in my prepared remarks, some of these relationships for those investors that have been following the story for a long time, it's taken a long time to bear fruit and we're finally seeing them bear some fruit, which is rewarding. And that's why I'm so excited about the TracFone and T Mobile relationships because I think it's just the opportunity they can bring to the business. But both relationships have taken longer than we've liked with it. As we've said in earlier prepared remarks, we expect to see some traction on that this fiscal year with both of them.
But they've taken longer for different reasons, but they've taken longer than we've been like to get going.
So does that still stand or are you sort of moving that to next?
No, I think that yes, that still Okay, great.
Thanks a lot.
Our next question comes from Sameet Sinha with B. Riley. Please go ahead.
Hey, guys. This is actually Lee Kroll filling in for Sameet. Could I just give some more commentary on RPS? It seems like you guys are making great progress with the new product launches in the U. S.
But just wanted to dig into kind of the GM profile differences between domestic and international and kind of maybe the margin opportunities there in terms of growing international and
kind of the steps you guys are taking? Yes, sure. So I think when I think about growing international, I think about it not just in the context of RPS. I think about it in the context of all the revenue streams we've talked about. So we talked about RPS as one, but licensing business, for example, we do internationally with operator partners such as Millicom and then Reliance Jio today as additional one delivers from Brian's earlier question would be another example of that and then there's some lifecycle services, things around notifications and folders and other things that we think will be additive to that.
So when I think about the revenue streams on international devices, I think about it a little bit broader than just RPS. But just double clicking on RPS specifically, yes, the key challenge there is we've got to get scale in these markets. And so as I said in my prepared remarks, we're going to do that through 3 primary avenues. Number 1 is we're hiring additional local salespeople on the ground to bring those local popular campaigns and we've done in Latin America and India and Europe specifically. That's number 1.
Number 2 is really helping drive RPS through 3rd party relationships. So those can be local advertising agencies or other local third party major distributors of applications in those markets. And then 3rd is just through improved global demand. As we get scale, I talked about a lot of companies that were driving RPS here in North America. As we get global scale, then we'll be able to bring some of that global scale to some of these international markets.
So those are really the 3 areas of focus for us to improve RPS internationally. But I don't want to get I don't want to leave with international RPS as the only way to drive value on these devices. We see revenue streams coming off of them.
Got it. Thank you. And then just second, last quarter you guys spoke about a large banking institution kind of increasing spend. More broadly on that sense, can you just talk about how you're reaching kind of beyond the usual gaming, social and consumer opportunities, is that through agency relationships or is that a direct sales effort?
Yes, it's a combination of both. So our direct sales team has done a fantastic job bringing new brands and not just continuing the gaming activities, but also the non gaming. So they've done a nice job ramping. But yes, we brought in a lot of different agency relationships and those have starting to bear some fruit with us.
Got it. And then just kind of I know you guys mentioned that you guys were able to grow revenue on a fairly fixed expense base. What kind of leverage can you continue to drive on the top line in regards to that as a fixed cost basis? Because I would have to assume as you guys grow, you're going to have to invest a little bit. Just kind of curious what kind of leverage you can drive with this sales growth?
Yes. No, we've been as you would have concluded from our remarks, we've been impressed with the scale from the business. We are we have been making investments in the technology teams and our sales force both domestically and globally. But we expect to continue to have a large amount of scale and operating leverage here. I think about where our expense increases will be.
We do have some variable costs related to the hosting environment. Those will increase and we will continue to make investments in our technology as we deploy some of the things like delivers. But overall, we're optimistic about the scale we'll continue to achieve.
Got it. Thanks, guys.
Thank you.
Our next question comes from Ilya Grozovsky with National Securities. Please go ahead.
Thanks, guys.
Can you hear me?
Yes.
Can you? Okay, great. So I just had a couple of questions. I think, Bill, you had mentioned in your prepared remarks about September. Did you mean October, where you gave some additional color on the month?
Or was that supposed to be September?
Yes, it was September. We didn't really provide any color on the current quarter.
Okay. And then given the sequential growth in Ignite of 25 1,000,000 devices in the quarter. Can you just kind of give me a little bit of color on
So you would think about our growth coming in Ignite from a number of different regions, right, and at different stages in each of those regions. But as Bill alluded, our device growth, while we're not breaking it out, came across all regions and all areas and both in our legacy partners as well as new partners we've launched over the last several quarters. But we're seeing growth fortunately in our large North American partners as well as Latin America and India and other rest of the world. So I'd say we've seen in this sequential growth across most all areas.
My question refers to the sequential revenue growth because if I look at what you did in June quarter, you're about $15,000,000 in O and O and now you're $15,900,000 I just would have thought it would have been a larger sequential growth given that your unit growth was probably 20% sequential growth and just kind of how that translates to revenue growth? Thanks.
Yes. Well, one thing to recall, we had the S8 launch in the June quarter, which contribute kind of an unusually high lift in our Ignite revenues. And then the Note 8 launched in the September quarter, which gave some lift, but just as a reminder, that was late in the September quarter. But I don't want to I don't want the fact that the O and O revenue grew over 60% year on year to be missed here. So while the sequential was modest growth, year on year is substantial obviously.
Okay. Thanks.
This concludes our question and answer session.
I would like to turn the
conference back over to Bill Stone for any closing remarks.
Great. Thank you. And thanks everyone 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 Q3 call. Thanks and have a great night.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.