Mandalay Digital Group (APPS) Q4 2019 Earnings Call Transcript

Mandalay Digital Group (NASDAQ: APPS)Q4 2019 Earnings CallJun 03, 2019, 4:30 p.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Digital Turbine's fourth-quarter and fiscal 2019 results conference call. [Operator instructions] Please note this event is being recorded. I would now like to turn the call over to Brian Bartholomew, senior vice president of capital markets and strategy. Please go ahead.

Brian Bartholomew -- Senior Vice President of Capital Markets and Strategy

Thanks, Sean. Good afternoon, and welcome to the Digital Turbine fourth-quarter and fiscal full-year 2019 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 these contemplated by our forward-looking statements, please refer to the documents we file with the Securities and Exchange Commission.

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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.

Bill Stone -- Chief Executive Officer

Thanks, Brian. And thank you, all, for joining our call today. Our stated goal has been to build and sustain a profitable growth business. With this objective in mind, we had a very strong fiscal '19 as the company set all-time annual records in revenue, gross profit, EBITDA, non-GAAP net income, device installs, and revenue per device or RPD.

I'm going to break out my prepared remarks into three areas. First, I'll summarize our fiscal '19 accomplishments. Second, I'll provide some real-time operational updates on many of the exciting new partnerships and initiatives under way. And finally, we'll end with some commentary about the strategic value of the platform and how we are positioned for fiscal 2020 and beyond.

To close out fiscal '19, I want to add a bit broader perspective than just the March quarter and compare our fiscal '19 performance against fiscal '18. We finished fiscal '19 with $103.6 million in revenue, which represented 39% growth compared to fiscal '18. Our non-GAAP gross margin, which has been an area of focus for us, improved to 36% for the year and reached 42% in the March quarter, an improvement of nearly 600 basis points year over year. This resulted in 40% annual growth in gross profit including over 50% growth in the March quarter, and along with disciplined cost management, enabled us to generate a record $8.9 million in adjusted EBITDA, showcasing the strong operating leverage of the business.

Barrett will provide more specifics on the financials, but from an operational perspective, I was very pleased with our revenue per device performance driven by strong advertiser demand and incremental contributions from newer products. As I've emphasized in the past, RPD is a fundamental health metric of the business. And a specific example of this point, if we compare the launch of the flagship Samsung S8 in March 2017 to the S9 in March 2018 and then the S10 in March 2019 on the Digital Turbine platform, we saw more than 50% accretion in RPD from the S9 to the S8, and then the S10 was 50% higher than the S9. An additional key strategic focus area for us in fiscal '19 was diversification of revenue, diversification of partners, diversification of advertisers, business models, and products.

For our O&O partners, revenue from our top four U.S. partners grew 36% year over year, but their contribution percentage of our total revenues decreased from fiscal '18 to fiscal '19. This growth was due to a 44% lift in annual RPD as our global media team did a fantastic job executing in the headwinds of declining U.S. smartphone sales.

Meanwhile, much of our 30% annual revenue growth was due to 60% -- 66% annual growth from all other partners such as American Mobile, TracFone, Motorola, our open-market channel, and numerous others. In other words, in aggregate, all of these other partners have faster growth than our big four U.S. partners that is helping to add diversification to the platform. For our advertisers, we continue to have strong diversification of application partners as we launched thousands of campaigns across hundreds of application developers with no single individual app provider being more than 10% of our revenues.

We also saw improvements in our diversification of products. We grew our new product revenues by almost 4x, which equates to over $11 million year-over-year increase so that $15 million of our revenues were comprised of non-dynamic installs and including contributions from products like Single-Tap, Folders, App Wizard, and Notifications. And although these numbers are trending in the right direction, it's a major focus area for us to continue to improve results here. And finally, we saw improvement in our diversification of business models and, in particular, the amount of recurring revenues we receive.

In fiscal '18, about 1% of our revenues were recurring. In fiscal '19, we saw that grow to nearly 5%, including positive sequential growth in March from December. 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, media demand, and new products as we now have entered our new fiscal year.

First, on devices. As I mentioned on our prior earnings call, I know there's been a lot of negative press surrounding slowing smartphone replacement rates in the U.S. and other mature smartphone markets. While our business model is certainly sensitive to the overall smartphone market, we are not at all fully depend upon it at the current time.

For one thing, we are still largely a penetration story. And that even with an annualized install rate greater than 100 million devices, we are still on fewer than 10% of the Android smartphone sold globally today. We are, however, continuing to add key strategic partners to the platform to mainly grow this penetration figure in future quarters, particularly on the international front. For example, while revenues are not yet material, we are now live and generating revenue with Samsung.

We are focused on improving both the breadth and depth of this strategic relationship. Specifically, we're improving the breadth by continuing to add new markets and are now live in approximately 15 countries in Europe and Latin America while also improving depth as we add new device models in the countries we have already launched. Scaling this relationship is a key strategic priority for the business. And before I leave the discussion on devices, I want to note a few possible positive catalyst for devices in 2019, the most significant of which is the recent launch of 5G here in the United States.

We are now live on the Samsung S10 5G device with Verizon and expect many more launches with other devices and partners this year. And as we've witnessed with previous network upgrades, we anticipate some incremental demand as both smartphone users look to take advantage of the benefits of 5G, and operators look to take advantage of the cost savings and advantages. And as been publicly reported, it is anticipated that 5G for 2019 and 2020 will be exclusively on Android with no Apple 5G devices expected in the immediate term. I also want to, again, repeat that we continue to assess opportunities to extend our platform on the new device types beyond smartphones, such as televisions, which would also foster incremental growth.

Shifting to our other key drivers of the business for fiscal 2020. First, on the new product front. While our Single-Tap revenues outside of our social media partner and large U.S. operator integration are not yet material, I'm pleased we are now live with Single-Tap on more than 130 million devices worldwide including 50 million here in the United States.

It's taken us a longer time to get to that scale than we anticipated. But now that we are here, it has made it -- signing up demand partners much easier. Onboarding new partners such as Twitter, Pinterest, Pandora, and many others is a top priority of the Single-Tap team. And although the 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, the partners needed to see device volumes to justify the investment of resources on their side.

That's now happening and is largely an operational and distribution demand exercise from this point forward to scale. Our recent press announcement on leveraging the infrastructure and relationships 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. And finally, I want to call out our new subproduct. We are excited to offer this non-app installed product, which is a natural extension of our product portfolio that leverages both the secular tailwind of customers consuming content on their device versus traditional outlets like magazines, television, and newspapers and our strong distribution footprint of operator and OEM partners.

We anticipate launching this product later this summer and report on our progress on future calls. And finally, before I turn it over to Barrett, I want to conclude my remarks with a shout-out to our team. I know most investors usually only see Barrett, Brian and myself, but the real work is not happening with us but happening with the broader team. I've been in the telecom, media and technology or TMT space for over 25 years, and the hustle and the passion that our global team demonstrates each day is superior to any other place I've been.

It's a differentiator for us and become a core part of our company culture. For investors, this ultimately translates into fiscal '19 financial results, setting many all-time firsts for us and our future growth levers of devices, media demand, and new products are all coming together to drive continued profitable growth into fiscal 2020. With that, this concludes my prepared remarks, and I'll turn it over to Barrett to take you through the numbers.

Barrett Garrison -- Chief Financial Officer

Thanks, Bill. And good afternoon, everyone. As Bill mentioned, we're very pleased with the results delivered in the quarter and for the full fiscal year 2019, which exceeded our own expectations. My comments today will refer to comparisons on a year-over-year basis and results for continuing operations, unless otherwise noted.

For the fiscal year 2019, we reported 103.6 million of revenue growing 39%, generated 8.9 million in adjusted EBITDA compared to near breakeven levels in the prior year and delivered 5.9 million in adjusted net income or $0.08 per share, as compared to a loss of $0.05 per share in the prior year. Now let me turn to the specific financial performance in the quarter. Revenue of 27.2 million in the quarter was up 30%. And as Bill mentioned, we continue to experience positive trends in RPD yields across all regions.

Revenue growth and expanding margins enabled non-GAAP gross profit dollars to increase 50% year over year to 11.3 million in the quarter. Non-GAAP gross margin was 42% in the -- in Q4, expanding from 36% in the prior year. Our margin expansion is largely driven by continuing partner and product diversification that Bill referenced earlier. We also experienced some positive onetime margin improvement from a recent carrier contract renewal.

Overall, we're pleased with the expanding margin levels we're exiting the year with. And as a reminder, our gross margin rates can be sensitive to future changes and 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 million, compared to 8.2 million in the prior year, and our cash expenses in the quarter were 8.1 million, an increase of 7% over prior year during a period of revenue and gross profit growth of 30% and 50%, respectively.

These results continue to demonstrate the inherent operating leverage in the business. Adjusted EBITDA was 3.3 million, up from breakeven in Q4 of last year and representing an EBITDA margin of 12%. This resulted in a marginal EBITDA conversion rate of greater than 50% on incremental revenues year over year, further highlighting the embedded operating leverage in our business. Non-GAAP adjusted net income in the quarter was 2.4 million or $0.03 per share, as compared to a net loss of $0.6 million or $0.01 loss per share in the fourth quarter of 2018.

And turning to our GAAP net income. As a reminder, included in our GAAP results, we see the impact of the changes in the fair value and liabilities resulting from our convertible note that is highly sensitive to the company stock price which increased significantly in the quarter. For this reason, among others, we offer the previous mentioned supplemental non-GAAP adjusted net income measure, which we believe is more indicative of the recurring core business operating results. Our GAAP net income loss from continuing operations for Q4 was 6.8 million or $0.09 loss per share based on 79.4 million weighted shares outstanding, compared to a fourth quarter 2018 net loss of 4.2 million or $0.06 loss per share.

Included in our GAAP net income for the fourth quarter is a recorded loss of 7.8 million from the impact of the change in fair value of derivative liabilities resulting from the convertible note, which is highly sensitive to the company stock price that I referenced earlier. Moving over to the balance sheet. I'm very pleased with the progress in the quarter. To further bolster the strength of our balance sheet, we generated 1.9 million in positive free cash flow and repaid the remaining 1.6 million balance on a revolving credit line, thus finishing the quarter with 10.9 million in cash and exited the period with zero debt.

In the quarter, our debt balance was reduced to zero as we converted the remaining 4.7 million principal balances on our convertible notes, which these notes are now retired. During this time, we also improved our net working capital position in the quarter, exiting with a positive $0.7 million from continuing operations and at -- which is a 3.4 million-dollar improvement over prior year. Following the retirement of our convertible notes, we recently extended our credit facility with Western Alliance Bank and increased the line of credit from 5 million to 20 million to support the -- and scale of the growth of the company. With a clean balance sheet, strong cash position and ample access to liquidity, we've exited fiscal 2019 poised to execute on growth plans for fiscal 2020 and beyond.

Now let me turn to our outlook. The momentum leading into the new year has positioned us for a strong fiscal 2020. In that context, we currently expect revenue for Q1 to grow to between 28 million and 28.5 million, and expect adjusted EBITDA to grow to between 2.2 million and 2.6 million. With that, let me hand it back to the operator to open the call for questions.

Operator?

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Darren Aftahi with ROTH Capital Partners. Please go ahead.

Darren Aftahi -- ROTH Capital Partners -- Analyst

Hey, guys. Good afternoon. Thanks for taking my questions, and nice job on the quarter. A couple if I may.

Bill, maybe -- I know you talked about Telefonica at the B. Riley Conference. Just kind of curious, when you look at the pipeline and you think about Samsung and live, you said, in 15 countries, I mean, are there other deals like that you feel you kind of confident in fiscal '20 that you can kind of get over the finish line? Two, your partnership and some of these attribution analytics companies, well, on the app side, one, what kind of a time frame would -- actually started to generate revenue? And then for the other partners, maybe to make up that other 15%, is there an opportunity to kind of capture that? And then perhaps, Barrett, too. One, the onetime benefit on gross margin from the carrier renewal, be good if you quantify that.

That would be helpful. And then two, I think you said opex grew 7%. Just sort of curious as you kind of continue and grow the business. Is that opex number kind of sustainable as you need to grow faster in light of kind of double-digit growth? Thanks.

Bill Stone -- Chief Executive Officer

Yes, I know. Hey, thanks, Darren, for the question. So just to make sure I caught it. The first one was around Samsung; second one around scale on Single-Tap; third one around gross margins impact; and then a fourth around opex.

So assuming I got that right, I'll take the first two and then turn it over to Barrett for that -- for the last two. Yes, on Samsung, we're excited. And I mentioned in my comments, we're looking at the relationship from a breadth perspective and a depth perspective. And breadth meaning more markets for open market, more geographies that I touched on.

But breadth also, as you alluded to, means additional mobile operator relationships such as Telefonica. And so I think this is a great proof point of the relationship, getting off to a great start, and expanding. We expect to continue to scale additional markets, as well as scale with additional operator, so yes, we feel like we're just getting started here but off to a good start. And then on the depth side, we started with one model.

We've added another model. Started with the -- our Wizard product. We anticipate launching additional products, as well with Samsung. So I think we're off to a good start in terms of that relationship being a very material driver for our future business.

Yes. Your second question on Single-Tap. Yes, we expect that some of those mobile measurement partners that we announced in our press release, we'll start seeing some of those start getting live this summer. We're just getting started with them and -- but I think that's going to be a key driver for us to accelerate our scale and efforts on Single-Tap, so that's a major focus area for us.

And then secondly, that remaining 15% of the market, that partner that wasn't part of that press release, we're engaged in to talk with about how to get them onboard with what we're doing. And what I'm really pleased with is you're seeing Digital Turbine taking industry leadership role here versus just working with one to two just to be able to bring the entire market to bear something that, I think, shows the scale of our platform now being the third largest distributor of Android applications here in the United States after Google and Facebook. So you'd start to see us have a little bit more pull in the industry, I think, is also a positive sign. I'll turn over to Barrett for the other ones.

Barrett Garrison -- Chief Financial Officer

Darren, on your second question on opex, I think you were asking is the 7% growth we experienced, something we should expect for the future. Is that -- did I hear that correctly?

Darren Aftahi -- ROTH Capital Partners -- Analyst

Correct.

Barrett Garrison -- Chief Financial Officer

Yes. So on the opex, I think we've made a number of investments across our sales force, as well as our technology team. So I think rather than kind of year-on-year growth, I think what we'll see is we'll probably see low single digits of sequential growth for the balance of the year. And as we think about our guidance for Q1 that we gave, we'd certainly see some increase in expense over Q4 largely targeted to sales force and some of our technology investments we're making.

Regarding the margin question, outside of -- we had kind of the perfect combination, both some of the diversification efforts that Bill referenced that came together that improved our margin quarter, as well as the onetime item I mentioned with one other client, we'd expect margin without the -- some of that benefit to be in the high 30s. And probably what we can expect in the near term here is high 30s without that onetime benefit.

Darren Aftahi -- ROTH Capital Partners -- Analyst

And if I could just sneak in one more. So I think, Bill, you've said that fiscal '19 or fiscal '18 to fiscal '19 recurring revenue is at 1% versus almost 5%. As you look to fiscal '20, not necessarily looking for guidance per se, but is the linearity of that growth the same? How should we kind of think about that going forward? Thanks.

Bill Stone -- Chief Executive Officer

Yes, so -- yes, absolutely, that's a focus area for us. We anticipate that to grow. So I'd say that, yes, we would be disappointed if we don't see that 5% continue to be a bigger number for us. That's driven by the new products that we're launching like Single-Tap and Folders and so on.

And it's also driven by -- now we're starting to, through our dynamic installed product, put more revenue share applications on -- such as Netflix or Amazon and even advertising apps like -- things like the Weather Channel and Yahoo! Mail. So those are things that we would expect to continue to grow as devices grow. So please, I'd recommend that you continue to focus on that for us because that is a higher-margin revenue and a growing area for us.

Darren Aftahi -- ROTH Capital Partners -- Analyst

Great. Thank you.

Operator

Our next question comes from Mike Malouf with Craig-Hallum. Please go ahead.

Mike Malouf -- Craig-Hallum Capital Group -- Analyst

Great. Thanks, guys, for taking my questions.

Bill Stone -- Chief Executive Officer

Thanks, Mike.

Mike Malouf -- Craig-Hallum Capital Group -- Analyst

If we could just explore a little bit more on Single-Tap, it sounds like you're going live with some of these demand partners this summer. Can you talk us through how that penetration will work as you look out with someone -- some of these large-demand partners? I know that it's a little bit of a chicken and the egg, as you said before, with getting them on enough phones to get them engaged. But now that you're on a number of phones, how does the penetration work with regards to their percentage of ads that you'll be able to satisfy with Single-Tap?

Bill Stone -- Chief Executive Officer

Yes, so as we think about Single-Tap, I touched on my comments, the first thing was we had to get the supply of devices up, and we've done that. So now the question is how do we bring the demand partners onboard? And there's kind of really three parts to that. The first one is our own direct relationships. So being an example of -- some of the ones I referenced like Twitter, Pinterest or someone like that.

We want a direct relationship, and then we'll do direct integrations with them. And that's great, but that's hard to scale, that's more of a brick-by-brick approach. So we put this -- as we talked about this press release out with these mobile measurement partners where we can now enter in the next two phases at. One is actually leveraging their business development relationships with different advertisers and partners where they're already out talking to them, and they basically become an extension of our sales force.

So that would be one. And then the second part of that would be leveraging some of their plumbing and infrastructure to help accelerate our efforts, so we're able to get some of these partners live more quickly. So you anticipate we'll start seeing some of that show up in the summer time frame. And yes, we anticipate that will be a driver for us to really start scaling the Single-Tap revenues.

Mike Malouf -- Craig-Hallum Capital Group -- Analyst

OK. Great. And then maybe a question for Barrett. As we look out over the next couple of years with all of these new initiatives really driving the growth from here, including Single-Tap, which is what Bill was just talking about, how do you think of incremental gross margins over the next couple of years with all of this growth? Because I imagine that it's a lot higher than your existing corporate average.

Barrett Garrison -- Chief Financial Officer

Yes, that's a nice thing. I mean these -- the diversification's obviously great for the revenues and expanding the new revenues, but it certainly has got a better margin profile. We still -- like we think about our kind of long-term targets in the low 40% as far as gross margin. On -- especially on incremental revenues, it will be highly -- the aggregate will obviously be highly dependent on how quickly we ramp and scale these new products and new partners.

We like where we are. We think we're in a good place. And while with the near term, these margins may fluctuate quarter to quarter. Long term, we think we're in a nice place on tracking toward our margin targets.

Mike Malouf -- Craig-Hallum Capital Group -- Analyst

OK. Thanks, guys. Appreciate the help.

Bill Stone -- Chief Executive Officer

Thanks, Mike.

Operator

Our next question comes from Sameet Sinha with B. Riley FBR. Please go ahead.

Sameet Sinha -- B. Riley FBR -- Analyst

Yes. Thank you very much. A couple of questions. Specifically details of the Samsung deal, you mentioned addition of new devices into the partnership.

Can you talk about the profile of the previous device and how the new device, how does it add to potentially your RPD and other such metrics? Secondly, if you can give more details around RPD in international and domestic. And if you can help us think about kind of the key drivers that you have for those, for RPD primarily, and how we should think about it over the next couple of years. And then I have a follow-up. Thank you.

Bill Stone -- Chief Executive Officer

Yes, so we've added -- as you referenced, Sameet, we added additional device. And these are the A Series devices. They have multiple models. And so those are kind of what I'll call midrange, mid-tier devices.

They're not the high-end flagships. They're not the low-end devices. And so we're starting to add additional ones in the markets there. I've been really pleased so far with the RPD results on the Wizard.

We're seeing north of $1 on those devices, which is encouraging. But that's with the Wizard product, and so you don't get a 100% take rate on that. It's something we worked with Samsung and how we improve take rate on the Wizard. But the take rate that we are seeing, we're seeing really solid RPD results, so that's encouraging.

And so if you look at our RPD that we've talked about in the past, we've talked about RPD north of $2 here in the United States, compares to $1.50 a year ago, it's about 44% accretion year over year with our top four U.S. partners. So we expect that to continue to go up into the right. From an international perspective, we've got some work to do.

I'm not happy with where we're at, although we are showing with Samsung, we can generate RPD, which is encouraging. But more broadly, that's a major focus area for us for this upcoming fiscal year.

Operator

Our next question comes from Jon Hickman with Ladenburg. Please go ahead.

Jon Hickman -- Ladenburg Thalmann -- Analyst

Hey. Hello. Can you hear me?

Bill Stone -- Chief Executive Officer

Yes. Hey, Jon.

Jon Hickman -- Ladenburg Thalmann -- Analyst

Hi. Hey, congratulations on the quarter. Bill, I'm just wondering if you could talk a little bit about what is driving that RPD. Like why is it moving higher here? Is it like the take rate for the new products, just what, more advertisers?

Bill Stone -- Chief Executive Officer

Yes. Yes. So -- yes, Jon, there's really about -- there's three different drivers for that. One of -- we have touched on is new products, right? So new products above and beyond our dynamic install grew pretty nicely last year, grew pretty nice on the quarter.

We expect that to continue to grow, so that's accretive to RPD. That's driver No. 1. Driver No.

2 is the recurring revenues that Darren was referencing earlier. As we get more recurring revenue on older devices versus the new ones we sell each quarter, that's obviously going to be accretive to us, that's a positive. And then No. 3 is just more demand from advertisers.

So as we continue to add more advertisers to the platform, we're continuing to see better performance and them having to compete with each other on the platform, which allows us to raise prices or add inventory or some combination thereof. So those -- the advertiser demand, the recurring revenues, and new products are really what's causing the RPD to go trend in the right direction.

Jon Hickman -- Ladenburg Thalmann -- Analyst

OK. Thank you. Appreciate it.

Bill Stone -- Chief Executive Officer

Thanks.

Operator

At this time, there are no further questions in the question queue. I would like to turn the conference back over to Bill Stone for any closing remarks.

Bill Stone -- Chief Executive Officer

Great. Thanks, everyone. And thanks for joining on 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 2020 first-quarter call in a few months.

Thanks and have a great night.

Operator

[Operator signoff]

Duration: 35 minutes

Call participants:

Brian Bartholomew -- Senior Vice President of Capital Markets and Strategy

Bill Stone -- Chief Executive Officer

Barrett Garrison -- Chief Financial Officer

Darren Aftahi -- ROTH Capital Partners -- Analyst

Mike Malouf -- Craig-Hallum Capital Group -- Analyst

Sameet Sinha -- B. Riley FBR -- Analyst

Jon Hickman -- Ladenburg Thalmann -- Analyst

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