Digital Turbine (NASDAQ:APPS) Q1 2027 Earnings Call

0:00 Good day, and welcome to the Digital Turbine Reports Fiscal twenty twenty seven First Quarter Financial Results 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'll 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 2.

0:30 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. Please go ahead. Thank you. Good afternoon, and welcome to the Digital Turbine fiscal twenty twenty seven first quarter earnings conference call. Joining me today on the call to discuss our results are CEO, Bill Stone and Interim CFO, Josh Kinzel. 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.

1:15 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 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'd like to turn the call over to our CEO, Bill Stone.

2:02 Thanks, Brian, and good afternoon, everyone. I want to open my remarks by recognizing our team for delivering another quarter of strong results that exceeded our expectations. The results are even more encouraging as they are not due to any single factor, but due many factors. And I'll break those down in my prepared remarks, which will be across three areas.

2:25 First, we'll be looking back at our June quarter results. Second, will be some commentary on the operational and strategic elements of our business that are enabling us to raise our guidance for the remainder of the fiscal year. And then finally, I want to provide some commentary on AI and macroeconomic trends in our business. Revenue for the June quarter came in at $166,000,000 representing 27% year over year growth. We also achieved nearly 70% year over year growth in adjusted EBITDA during the same period, demonstrating significant operating leverage in our model as we scale. I'm also pleased with the dramatic improvement in our balance sheet that benefits from our strong results. Last June quarter, our net leverage ratio was greater than five turns.

3:13 Today, we're at a healthy 2.5 turns And as implied in our increased outlook, we expect this positive trend to continue. If we break our results down by segment, our On Device Solutions business generated $110,000,000 in revenue in the June quarter, which was up approximately 15% from last year. In particular, it was encouraging to see double digit year over year growth in global devices despite macro headwinds on global device volumes due to DRAM pricing issues in the supply chain. Growth in international ODS continues to be a bright spot, as higher device volumes combined with higher revenue per device, or RPD, drove nearly 80% year over year growth. Our Application Growth Platform, or HEP, business results were another bright spot.

4:05 It was our fourth consecutive quarter of year over year double digit growth and our second consecutive quarter of more than 50% year over year growth. Meanwhile, this compares to a global digital advertising market that is growing in the high single digits. In other words, our AGP business is consistently growing many multiples more than the global industry growth rate each quarter. In June quarter, I was particularly pleased with our direct brand business growing over 70% and our DTX or SSP business growing over 40% year over year. It took longer than anticipated, but the combination of strong conviction to stay the course on our strategy, combined with the hard work to integrate our legacy SSP tech stacks with our brand demand into a data driven marketplace and AI first platform is now paying dividends.

4:59 Our key growth drivers in June quarter were both rates and volume that powered our improved performance. On rates, we saw higher advertiser demand, which translated into improved pricing and fill rates, particularly for premium placements on our platform. This strong advertiser demand drove incremental international RPD expansion in our ODS business, resulting in nearly 80% growth year over year. We also had strong demand with our brand and DTX businesses, each growing rates by more than 40%. This is due to our platform delivering better return on ad spend for advertisers, which in turn allows for higher rates. This improvement in ad spend is being driven by AI for two reasons.

5:46 First, our platform's first party data is able to leverage our AI tools and machine learning models to drive better advertiser outcomes. And secondly, is a tailwind we are seeing brands migrate their spend away from the open web to other channels like apps, given traffic declines in the open web, which are caused by AI and resulting in app usage growth as brands and agencies adopt the power of AI in the mobile app channel. In addition to these positive pricing trends, we continue to see strong diversification of our demand with percent of our advertiser spend on DTX coming from non gaming partners.

6:28 The second driver was increased supply. Our global devices grew double digits year over year, driven by strong volumes from our international partners. And within the devices we have our technology integrated, we are seeing operators and OEMs wanting to use our technology on new screens for monetization. In addition, our AGP supply continues to add new apps and publishers by expanding distribution of our SDK footprint. We're seeing this globally with the growth in publishers, but in particular, it's helping driving strong performance with APAC, publisher supply, as well as adding non gaming publishers and AI publishers looking for monetization.

7:11 Turning to the future, we're increasing our guidance today for the fiscal year, and there are five drivers for this increased forecast. The first is AI and data. Our ability to leverage our unique first party data across our platform with DTIQ and IgniteGraph drives better outcomes. This, in turn, drives more revenue because of better return on spend for advertisers. I'll provide some additional commentary later in my remarks on the macro impact of AI on our business. Second is the flywheel. Connecting our diversified demand and supply drives each other. We have nearly 3,000,000,000 devices and more than 80,000 apps using our AdTech technology. The opportunity for these apps to drive more user acquisition to our platform, and hence, more monetization will be a growth driver.

8:02 The third driver is brand. Our brand business showed impressive 70% year over year growth. Our focus is leveraging the macro tailwinds of more time in apps, combined with our micro first party data and audience targeting to drive even more scale and growth. There are a variety of product and operational improvements being implemented real time that are improving our ability to scale this important part of our business. Fourth driver is Ignite. Our international ODS momentum has been fueled by Latin America and Europe, and current and future supply wins are expected to mitigate concerns around the global device supply chain. In addition, our Ignite platform is showcasing there's more opportunity to not just grow device supply, but also leverage the platform capability as a software enabler for distribution of other products on the screens of devices versus our current products, such as single tap, out of the box setups, and notifications.

9:02 We're doing this today in The US with an AI first partner distributing AI agents to devices, and we see this expanding into other areas, such as e commerce, lock screens, and other forms of content distribution. And finally is the growth of alternative applications. We continue to ramp and scale more and more partners, distributing their versions of applications, helping them get to devices, whether this is via our data targeting, single tap, our DSP, and so on. The recent outcome of the Epic Google case and the Google rulings in The EU are expected to open up opportunities for increased alternative distribution. Publishers are now seeing real time what is happening to their businesses because of the impacts of AI on the open web and want to have more control over their destiny for the future versus being reliant on only one or two sources of distribution.

9:56 These five things are important because it showcases our business is not reliant upon any single factor to drive future growth. We've got many shots on goal that provide optimism in our ability to drive top and bottom line growth.

10:10 To close out my prepared remarks, I want to provide some commentary on the impact of AI and other macroeconomic factors to our business. Regarding AI, it's clearly transformational, an exciting time and a tailwind for our business. It's reinventing businesses, including ours, in three main ways. First is the automation and simplification of workflows and processes, which is now showing up in our results. A year ago, our revenue per employee was about $800,000 Today, it is in excess of $1,000,000 The driver of this efficiency is the ability to use AI and automation activities to scale our business. We've implemented numerous new AI and automation simplification activities and processes from areas such as quality assurance, our back office, campaign management, software development, and data management, just to name a few.

11:04 We're seeing an acceleration in these activities as we organize our people, our systems, and our processes for this AI first world. The second is leveraging AI in our data to improve outcomes for our customers. As you've seen in our recent Google and Databricks press announcements, we're combining our unique first party data signals with AI enhancements to drive better outcomes for customers, leveraging our DTIQ and IgniteGraph capabilities. These are not just impacting our strong results today, but will be revenue and EBITDA drivers for us in the future. And the final area is how the broader AI landscape will leverage DT's distribution and on device footprint and data to help their businesses grow.

11:49 And there are three important macro trends that we expect to be tailwinds for us. The first is more applications. According to recent analysis from market intelligence provider AppFigures, worldwide app releases in first quarter of twenty twenty six were up 60% year over year across both Apple's App Store and Google Play. AI makes it easier for anyone to create apps, driving both growth in app stores as creators no longer need technical skills to build mobile software. And these applications all need distribution to reach consumers, given the inherent discovery limitations in the legacy two app stores. The second trend is the increase in time spent in applications. Today, the average consumer is spending about five hours per day inside applications, which is up about an hour over the past decade.

12:40 This trend is accelerating as integration of AI chatbots creates a shift in the channels of how we consume information, leaning towards apps and away from the open web. Multiple measurement sources have reported that AI has likely caused a 10% open web traffic to decline so far, with some informational categories seeing anywhere from 20% to 40% declines. The final trend bringing all of this together is monetization. And for centuries, one trend's been consistent. Media dollars follow eyeballs. And as our eyeballs continue to spend more and more time in applications because of enabling technologies like AI, which is creating more breadth of apps and more depth of time and spend in apps, this is a positive for us.

13:28 In addition to AI, I've also been receiving many questions on potential macroeconomic impacts to our business, you know, given wider fears around inflation, tariffs, and geopolitics. One of my favorite things about our mobile AI cloud business is that we are more insulated than the vast majority of companies, as our business is a digital one without the traditional input cost pressures many companies must navigate. Plus, the majority of our customers are using our platform to sell their digital goods and services versus goods that may be more sensitive to those risks.

14:00 Of course, no single business is 100% insulated from macroeconomics. But as we saw during the pandemic, our business is a resilient one, insulated from these factors, given our mobile first, high operating leverage approach, matching where consumers are spending their time. We expect AI to only accelerate versus slow down these trends. And with that, I'll turn it over to Josh to take you through the numbers. Thank you, Bill, and good afternoon, everyone. Let me turn to our first quarter fiscal twenty twenty seven results. We are off to a strong start to the new fiscal year with growth across both segments. Total net revenue for the quarter was $166,000,000 up 27% year over year, extending our strong fiscal twenty twenty six exit momentum.

14:46 On Device Solutions net revenue was $110,000,000 up 15% year over year. Growth was again driven by our international business where higher device volumes and higher revenue per device continued to drive strong results. App growth platform net revenue was $56,600,000 up 56% year over year, continuing the growth we highlighted last quarter. This was led by DTX, where revenue increased by 54%. These results reflect both continued onboarding of publishers and demand partners, particularly in Asia Pacific, and the performance of our AI powered optimization capabilities. Turning to profitability. Non GAAP gross margin was 49.4% in the quarter, up from 47.3% in the year ago period. This was driven by favorable segment and product mix as AGP continues to grow as a share of our business.

15:42 Cash operating expenses were $39,500,000 up 7% year over year, reflecting a continued expense discipline even as we invest in our highest priority growth initiatives. Notably, we reached a significant milestone this quarter as our run rate revenue per employee has risen to over $1,000,000,000 on an annual basis. The combination of strong top line growth, favorable mix and expense discipline drove another quarter of substantial adjusted EBITDA. Adjusted EBITDA totaled $42,500,000 up 69% year over year, with margin expanding nearly six forty basis points to 25.6% versus the year ago quarter, evidence of a meaningful operating leverage beginning to emerge in our model.

16:28 On the bottom line, we reported a GAAP net loss of $3,200,000 or $03 per share, an improvement from a net loss of $14,100,000 or $0.13 per share in the first quarter of fiscal twenty twenty six. It should be noted that we're finalizing a non cash adjustment in our Form 10 Q that may be recorded against beginning retained earnings. This adjustment would impact the GAAP net loss, but not our non GAAP results. Onto our non GAAP net income of $24,100,000 or $0.19 per share based on 125,600,000 diluted shares outstanding. This is more than tripling our non GAAP net income of $7,000,000 or $06 per share in the year ago quarter, driven by strong top line growth and continued operating expense discipline.

17:20 Moving on to the cash flow and the balance sheet. We generated $17,900,000 of cash from operations in the quarter, more than double the 8,800,000 we generated in the first quarter of last year. Non GAAP free cash flow was $11,300,000 an improvement of approximately $10,000,000 versus the prior year period. We also made progress in strengthening our balance sheet. We ended the quarter with cash and cash equivalents of $43,200,000 an increase of more than $5,000,000 from the start of the fiscal year. Our total debt, net of debt issuance costs and discounts, reached approximately $352,900,000 which was down by more than $8,000,000 during the quarter. We amended our financing agreement during the quarter to secure more favorable terms. This reflected an improved leverage profile we have built over the past several quarters.

18:11 Subsequent to quarter end, as a result of achieving certain leverage thresholds under that agreement, the applicable margin on our largest loan tranche was reduced by 50 basis points. We continue to remain focused to further strengthen the balance sheet as we move through the fiscal year. Turning to our outlook. Given our strong start to the year and the continued momentum we are seeing, we are raising our fiscal twenty twenty seven guidance. We now expect revenue in a range of $650,000,000 to $670,000,000 for the year and adjusted EBITDA in a range of $145,000,000 to $155,000,000 both up from the initial ranges of $630,000,000 to $650,000,000 and $135,000,000

18:52 to $145,000,000 we provided last quarter. With that, let me hand it back to the operator to open the line for questions. Operator? Thank you. We will now begin the question and answer session. Session. Our

19:26 first question comes from Anthony Stoss of Craig Hallum. Please go ahead. Hey, Bill and team, congrats on the strong execution yet again. So Bill, you talked about having many shots on that with your different product offerings. How do you prioritize the growth drivers for this year and next? And then I had a couple of follow ups. Yes. Thanks, Tony. If we kind of look in the rearview mirror, I think they're really the three stars of the show were the international ODS business up 80%. And I know we've talked in the past around concerns around device headwinds on DRAM prices as you've seen Apple and others raising prices devices. And in fact, we were able to grow our devices almost 15% in the quarter. And then our RPDs were up 40 plus percent. I think it's an 80% growth rate.

20:14 I think that was star number one. But star number two and three were really on the AGP side. And you're seeing second consecutive quarter of more than 50% growth in that business with our brand business, our DTX business, really starting to show some nice momentum out in the marketplace. And we started the journey many years ago and the belief that we could create this mobile first channel for brand dollars coming on to the exchange where it's been largely focused on games. And so that bearing fruit is just something it's great to see. It's kind of turning forward

20:47 and looking into the future on the increased guide today, if I was going to prioritize, I think data and AI is at the top of the list for us. We've got a lot of untapped potential in that part of the business. Our brand business as well has got a lot of momentum behind it. So I'd probably put those in the short term as the top two priorities. And the other three things I talked about with Flywheels and Ignite and AltApps will be the catalyst to keep it going in the future.

21:15 Got it. And then there's been a lot of media reports about the whole saga between Google and Epic and the jury trials, etcetera. Is that affecting at all your alternative app initiatives? And then after that, I have one last question. Yes. So we think that this is going to open up a lot of opportunities now that that injunction has been settled and Google has opened up their app store to other app stores. So we think that's a tailwind. I actually just put a blog out on that. Think it was earlier today, they got published. And so I'd encourage everyone to go take a look at that for the details. But net net is it's just showing more democratization of App Stores. And so I think that's a positive for companies like us.

22:01 Got you. Last question, you kind of alluded to on the Ignite section of your call here about more deals coming and international business being strong. I'm just curious, it's been a month and a half or so since your Orange deal has been announced. Has that kind of rattled the cage, if you will, with some of the other European carriers to go in either on Ignite or Single Tap? I'd love to hear. Yes, we've got a lot of momentum right now in that part of the business and momentum gets momentum. And I mentioned in my prepared remarks that the pipeline is looking really good. So I'd say stay tuned for more momentum coming there. Great job, Bill. Thank you. Thanks.

22:40 Our next question comes from Dan Kurnos of Stonix. Please go ahead. Yeah. Great. Thanks. Good afternoon, Bill. Definitely a fun one to jump into here. Nice print. Just first, maybe can you give us a little bit more color and unpack the international ODS device growth, just any areas of strength, OEMs, just any additional color you can give, especially given the broader backdrop that you have? And then I want to follow-up with several AGP questions. Thanks. Yes, sure. On the international ODS front,

23:18 we really saw growth from really the OEM partners in particular. So Motorola and Samsung were encouraging. And then some of our international operator partners also showed nice growth. And so that's a good news story given again some of the broader macro things that we're all reading headlines around just chipset prices and so on. So the fact to see growth in that part of our business

23:42 is really something else also helps us bring more demand to the platform. So more supply actually brings more demand. And then you get a cumulative effect, which is showing up in the results of the 80% year over year growth.

23:55 Got it. And then to that point on demand, so brand up 70%, not that DTX is a slouch up 40%. We know that brand budgets can be a little lumpier and more seasonal and programmatic. Mean, is obviously an uneven ad market to say the least, although mobile's been doing particularly well in digital out of home. So, I mean, how much of this is durable share gain, and and how should we kind of model that split, for the next pick a number three, four, five, six quarters because the momentum in AGP has been really strong? Yes. So we can probably spend some more time offline on some of the details around how to model it. But I think in terms of just kind of more generally speaking, we expect the growth to continue. A lot of the hard work we had to do to establish brand as a channel for mobile has been done.

24:47 As you're well aware, a lot of this digital brand dollars disproportionately go to things like CTV or go to things like retail media. So we had to establish this mobile first channel for brand, and that required a lot of legwork externally with holding companies and agencies and a lot of the big names, the Procter and Gamble's and Apple's and Target's and Amazon's and so on that are spending money with us today. So it took time to get those budgets and get those relationships, and we've done that externally. And then internally, getting the tech stacks aligned, getting some of the legacy acquisition assets integrated together to be able to deliver those experiences, that's now paying dividends for us. And as long as we continue to leverage our data and our ability to target audiences, our expectation is that brands are going to continue to spend. So we're pretty optimistic about that being a growth driver for us.

25:39 And is there any way, Bill, because you brought up AI and yield execution here, is there any way to kind of parse out how much of the fill rate in CPM growth is kind of market wide versus company specific? Yes. I don't have anything specific to talk about on the macro side other than what we've seen is kind of mid to high single digit growth from a macro perspective. And like I mentioned in my prepared remarks that our rates are kind of closer to north of 40% year over year. And that's driven by just better targeting, better outcomes, better formats, all helping to drive better rates.

26:19 And last one is just what's the monetization lag on newly signed distribution? And you talked about your SDK footprint expansion in APAC and non gaming verticals. And I assume you've already kind of spent the CapEx build out associated with this? Yes. So what we're seeing right now that's really encouraging is the trend on the spend is encouraging, which is part of what's powering the 40% growth in DTX. And you mentioned non gaming specifically. So those are those could be news, weather, sports, e commerce, AI. There's a whole variety of categories that all of these fall into that we're starting to see encouraging trends for. And we believe we're taking share from competitors as a result of that. And it's something that's really great to see it showing up in the results.

27:07 Got it. Thanks for bearing with me and congrats on the quarter. Yes. Thanks. This concludes our question and answer session. I would like to turn the conference back over to Bill for any closing remarks. Yes. Thanks all for joining our call tonight. We'll look forward to connecting in a few months to update you on our fiscal twenty seven second quarter earnings call. Have a great night. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.