Digital Turbine, Inc. (APPS) Presents at 35th Annual Roth Conference (Transcript)

Digital Turbine, Inc. (NASDAQ:APPS) 35th Annual Roth Conference March 14, 2023 3:00 PM ET

Company Participants

Bill Stone - CEO

Conference Call Participants

Darren Aftahi - Roth MKM

Darren Aftahi

Great. Welcome, Darren Aftahi, the Internet and Media Analyst here at Roth MKM. Bill Stone, CEO of Digital Turbine. Good to see you again, Bill.

Bill Stone

Yes. Good to see you.

Question-and-Answer Session

Q - Darren Aftahi

So I think you just returned from Mobile World Congress, just kind of how was the conference and maybe kind of lay the land of the industry?

Bill Stone

Yes. You know, we came back a couple weeks ago and it was really encouraging. We've been really having a hard time with COVID, getting out to meet a lot of our international partners and getting out and having the face time and build the relationships, and really seeing a lot of need out there from operators, OEMs, publishers, all looking for new revenue streams and looking for solutions like ours. So really, really encouraging.

Darren Aftahi

Can you -- when we talk about ad tech, it just seems like an acronym, there's so many companies’ kind of do the same thing. But I think there's real value in business models. And so talk about running an advertising technology company, where software is actually sitting resident on a device. You've made some acquisitions kind of 12 months maybe in, how the acquisition is going, kind of shots on goal, having that kind of Swiss Army knife versus been following the company a while now that kind of digital end cap space you started with, with the carriers. I guess, just tell me about the value proposition, what you're seeing in the market in terms of being able to have clients take on more than just one product and kind of what is your entrée into that with the software stack?

Bill Stone

Yes. One of the things that we're really excited about in the ad tech space is we've got a moat and that moat is our software gets put on the device at the factory. And then once that software is on the device then we work with our carrier OEM partners to decide what happens. There's not a bunch of people competing to get on that device and so that's highly strategic to what we're doing. And so we see this demand and advertisers want to pay to get on that, because it gets them access to the home screen of the phone. And one of the things that we're really excited to see is a lot of demand dollars coming back. And one of the things that's new for today is I'm excited to announce we've going to be working with TIMU, I think it's the fastest growing app in the app store, we got a high eight figure deal for them to be the exclusive partner for us here in the United States. We just signed up Walmart as well. So we're starting to see these demand dollars come back to take advantage of that unique space on device. And so we think that's pretty special and shows the value that we bring to the advertisers as well as obviously the value that we bring to the carriers as well.

Darren Aftahi

That’s fantastic. And congrats and good to hear that. Look, I know digital advertising isn't the greatest of space. So I guess maybe talk about some of the puts and takes in the industry, maybe specific to your business, how long you think some of these trends might last, what could kind of change it? They always say digital advertising kind of the first to turn off and first to turn back on.

Bill Stone

Yes. So I'll cover it from a macro perspective and then we'll take it to Digital Turbine specifically. From a macro perspective, the dollars are there. There's a hundreds of billions of dollars of an industry and as long as we're all looking at our mobile devices, the media dollars are going to follow. I do think we've seen some advertisers kind of rethinking some of their spends and that's -- we talked about our eCPMs in the December quarter down like 10% to 15% and that's an industry trend. But from a Digital Turbine perspective, what we've been able to do, I just referenced the new demand deals coming in on our on device business, but we're casting a wider net. And so now we're seeing new demand dollars come in from other verticals and that diversification is starting to help us see our numbers come up. And it was great to see that our March is shaping up better than our February, or February is better than our January. And we told you and the rest of the street that our expectations were that we would see is this be a trough and we start seeing this thing kind of rebound out and that's how it's planned out for us right now. But in terms of the broader market, we're starting to see some of that, I would call it, panic that we -- that people were thinking that was back in the December quarter. We're starting to see things return back to a little more normal environment now.

Darren Aftahi

And you guys have been in the past over indexed some, call it, what was kind of new economy during COVID, so the gaming and the streaming and social. Some of that is a little bit more mature now. So I guess are you seeing further demand from that because it's almost more competitive today than what it was say two or three years ago?

Bill Stone

Yes. No, for us, what we've seen is that a lot of things during the pandemic you would see gaming advertisers spending more money inside games and we benefited from that like many other companies did. So casting that wider net to those dollars is really important strategic, because a lot of those companies now are much more focused on profitability. So now us going out to more traditional brands like we're growing our relationship with Starbucks, we're growing our relationship with many of the Proctor and Gamble brands, we're growing our relationship with Chick-fil-A, those kinds of names now that are spending more money on the platform that reduces that reliance upon maybe some of those COVID names that benefited from stay at home.

Darren Aftahi

Yes. And I mean, what are you guys seeing globally? Maybe North America, Latin America, Europe, your exposure in Asia-Pac, just puts and takes where there's some good things happening, maybe not so good.

Bill Stone

Yes. So when I look at our on-device business, what we're seeing is really strong supply of devices outside the United States and specifically in places like Latin America. And where we've needed to get it better was on the demand side in those places and we've made a lot of progress on that. In the US, we saw the December quarter was a little bit disappointing for Android devices, and I think a lot of the carriers were expecting return to shopping and normal Black Fridays that they had in the past, that didn't materialize and that created a problem for us. Now in this current quarter, we've seen the S23 launch here and there's been a lot of public reports out there about that device doing well. And obviously companies like us benefit from that here in the US market. In APAC, we continue to be -- see really strong demand on the publisher side and our ad tech business. Our team in China and Singapore does a really good job there. So we've seen a lot of good traction. And in Europe we continue to have great relationships with our publishers. I'd like to see us accelerate our efforts in Europe on the on device side in terms of adding additional supply as we ramp carriers like Telephonica and Telecom Italia and names like that.

Darren Aftahi

On the distribution side with Samsung, you guys signed that deal, I can't recall, maybe it was three or four, or five quarters ago. I know, you've done well in Latin America, Europe, kind of ahead of schedule behind schedule, just -- and what are your long term thoughts about Samsung as a strategic partner?

Bill Stone

Yes. We like our relationship with Samsung, I think, in particular, we're excited about working with them more closely on single tap specifically. And so it's in Samsung interest to economics for any app that gets downloaded on a device. Obviously, now we've expanded our demand in terms of the people that we can bring to that. So that's something that we're excited about working with those guys in the future. But we've got additional work to do with them specifically as a company but a lot of other OEMs that we're seeing a lot of improved traction with right now as well.

Darren Aftahi

And you guys -- on the on-device side and then on the content side, so you've kind of expanded some relationships product wise specifically on the content side with some of your carrier partners. Can you kind of talk about that? And I know, you've had a little bit of a shift of kind of prepaid to postpaid kind of that strategy and kind of where we're going to see fruit bear kind of this year or is it next year?

Bill Stone

Yes. We only have so many resources of business to invest. So we’ve made a strategic decision and we really wanted to invest our resources and our content media business against the postpay market. Here in the US, for example, there's roughly a 100 million prepay customers, but there's over 200 million postpay customers. So that market opportunity is much bigger for us. So we made a decision to really invest against that. And so we expect the current quarter to be really the trough of that business and start seeing some of those other investments start bearing some fruit as we go forward in the year.

Darren Aftahi

And then I guess on single tap, just can you speak to the strategic importance of that product to your whole entire platform? And I want to say shifting but maybe a pivot from selling à la carte to a licensing model?

Bill Stone

Yes. So in our single tap business, for those that may not be as familiar with it, we have a -- single tap's really an enablement capability. And how I like to think about it as single tap is to app installs as Amazon OneClick is to e-commerce. It's really just about making the consumer experience easier and with less friction. And we've historically monetized that by arbitraging the market where we know single tap is on a device and we can buy advertising on behalf of Uber or Starbucks, or Twitter or whoever and then we can collect money on the installs, because we know which devices will have single tap and which ones haven't. And we've built that up into a really nice business and we're excited about that business continuing to grow. We did an acquisition of a demand side platform called Appreciate to really help us scale in that area. But where we really see the opportunity, if you think about the app install market, it's a $100 billion market. And how do you go after that? We're not going to be able to do that on our own. So we've got to figure out where the app installs are actually happening. So we've started licensing our technology out to other providers. Most notably we've launched with Amazon and we've launched with Epic Games, the maker of Fortnite and those have been going really well. I mean, we've seen Amazon has seen up like to 80% conversion improvements as they've launched. So that's really exciting to see the products is working as advertised.

Another really big opportunity we see for singlet tap is really taking advantage of all of the traffic that we all use, when we go to mobile Web sites and we may go to check our flight later today or we may go check a sports score, or may check the price of a house, or we may get a link to a social media feed, we don't have a social media app on our phone. Well, in all those cases, all of those companies want you to have that app on their phone, because there's more value for them. But we as customers are just going there for a specific purpose. We don't want to go get linked out to an app store, wait to download. We just want to get, hey, what's the sports score, what's my flight on time. So we see a tremendous opportunity going out to a variety of different brands to basically improve their number of users on the app, because all of us as user are already interacting with those brands as it is. So as I mentioned, we do that. We've done that with Twitter in Europe. We're in the process of doing that with like financial firms like Chime and working with companies like LinkedIn and Zillow, and names like that. But you can expand that to many, many other brands where you're making the experience better for all of us as end customers but then you're making it better for the brands themselves. And so that would be an example how we can license the singlet tap capability out to make a better experience for everybody.

Unidentified Analyst

[Technical Difficulty]

Bill Stone

Yes. So you could see -- so you would be on a mobile webpage, let's say, you don't have the app of the airline that you're flying with on your phone, you're just on the mobile webpage and you'll see like just a button that says install the app. And so rather than install the app, the phone will then look and say, is singlet tap on the phone. If yes, then download it in the background. Then you just go onto to what you're doing. If you don't have singlet tap on your phone then it would just take you to the app store and then you would just download it.

Unidentified Analyst

[Technical Difficulty]

Bill Stone

Yes. So we're starting to see -- to Darren's question, we're starting to see increased traction leveraging that capability out in the marketplace right now.

Darren Aftahi

So how big of a opportunity is licensing relative to what, I'll call it, legacy single tap was, multitudes bigger and like why is that? And then in terms of just sales cycle, because you're licensing versus selling a product, is that a longer sales cycle?

Bill Stone

Yes. You know our hope here is we want to always continue to under promise and over deliver, especially when it comes to new things. So our expectations internally are very high for this product. We've got big expectations for this product. How we turn that into your models, we're going to make sure to manage those expectations accordingly for it. But internally, if you think about the app install market as a $100 billion market and you're making it easy or for customers to get apps on the phones, it's clearly enormous.

Darren Aftahi

Help me understand something. So when you think about like TAM for your business, so you always refer to RPD for those who don't know that revenue per device, but you also have opportunities outside of RPD, whether it's sell side platform, et cetera, et cetera. So how do I think about honestly an ARPU number per device? And is the right way long term, and I know devices get turned over, but is the right way to think about a TAM of device as a software could be on and then multiplying that by an ARPU or is it too hard because multiple products might be touching kind of the same thing, i. e., single tap?

Bill Stone

Yes. So this is something we talk about a lot internally. But just at the highest level, we think about the market to get apps on phones at first boot is a $10 billion market. We think about the app install market as a $100 billion market. We think about the overall mobile advertising market as a $300 billion, $400 billion market. So enormous, enormous markets and we're participating in all of those. So that's how we want to go attack it. How we want to break it down for investors? RPD has been a good metric for our legacy business. It's something simple and easy for everyone to understand. You just raised a few complexities, by how we want to break it out. So we want to be really thoughtful. The worst thing we can do is introduce a metric and then pull it back and then introduce another one and pull it back, and then investors are kind of being whipsawed around, around what to look at. So we talk a lot about internally how we can get those metrics out but we want to be really deliberate about it. So we'd end up don't screwing something up by confusing people and we're just trying to educate people. But the TAM is the TAM and it's clearly enormous and we're well positioned.

Darren Aftahi

Two things that you kind of announced the strategic initiatives, you made an investment in an alternative Android based app store and then you've talked about payments in the past. Can you kind of talk about, I guess, one, why you made that investment? And then two, how does payments kind of fit into the broader picture of Digital Turbine?

Bill Stone

Yes. I want to spend a couple minutes on this. This is, I think, really important point for investors who are thinking more beyond Silicon Valley Bank and the March quarter, and really thinking a little bit more strategically around what's the next corner. And so when we look at the space, today, apple and Google basically get about a $100 billion of free cash flow from the 30% that they take off the app stores. And our view is that is going to be disrupted. It's just a question by who and by when. And so there's a lot of things underway organically in terms of alternative app stores or publishers where there's some high profile things you've seen with Spotify and match.com and Fortnite and others. But there's now a desire that people don't want to pay 30 points. I pay 1% of my Visa, I pay 3% on my Amex. Why is -- why are these companies taking 30%? So our expectation is there's going to be a lot of regulation where you're going to see an unbundling of the Android operating system from the Google Play Store or the iOS operating system from the Apple App Store and offer choice. Because basically how it works today is it's almost like you can only buy light bulbs from the electric company and you don't have the opportunity to go to Target or Walmart or wherever to buy those. So we've already seen it in the EU with the Digital Markets Act. There's some legislation here in the United States that has bipartisan support called the Open Markets App Act that will basically do this and allow the opportunity to put different side loading apps onto these platforms.

And so obviously, Apple specifically is -- has some issues with that and they're lobbying hard. But it's a difficult question for Apple to answer why can you side-load apps on your Macintosh and then claim it's safe and secure but it's not on the iPhone, right? So our expectation is that's going to open up an enormous amount of possibilities, but there's a lot of plumbing that needs to happen to accomplish it. You have to figure out how to port a different version of the app, you've got to put payments in -- the Darren's referencing into it, you have to take the install friction away, which is something like singlet tap does and you have to have the AI machine learning to get these curated right app stores to the right people and that could be a Microsoft store, it could be a Disney store, it could be an Amazon store, it could be just games, it could be streaming audio, streaming video, whatever. So we're live with an operator here in the United States and we're anticipating being live with a tier one operator here in the United States in the current quarter. So it's not academic whether you can actually go in and download an app as alternative payments in it for the customer, and that's something we're extremely bullish on. And we think there's a there, there with that. And we took an equity stake in a company in Portugal called Aptoide that's helping partner on porting the applications and the alternative payments that go with that. So if you want to, for example, link out to PayPal to pay a dollar to get to the next level or what have you.

And so this is a space we're really excited about as we look forward in the company and what's going to be a growth driver in the future of the company, because we have the opportunity to monetize at three levels. We can monetize [beginning] the apps on the phones just like we do today and getting those new apps on the phones. We can monetize now by pulling through our ad tech assets and now having a distribution channel for ad tech assets that we haven't had before. And then we can monetize through payments, which is a complete greenfield opportunity for us as well. So we're really excited about it. Again, not necessarily from a March quarter or June quarter, but also I do want to make sure investors know this is live in the market today. So it's something that we're putting a lot of energy and investment against.

Darren Aftahi

You guys are fairly tightly integrated with Google. I feel like last year our conversation was all centered around that. I guess just reiterating how’s the relationship with Google, and do either of the DOJs lawsuits against Google on the ad tech side maybe doesn't exactly affect you? Does that have any impact good/bad and different, if that was the wind was to blow the wrong way?

Bill Stone

Yes. I think, I’d characterize our relationship with Google right now as a 52 week high. They continue to be very supportive of us, they're actually a channel partner reselling single tap licensing out into the marketplace for us, they continue to be a great partner as we work with Verizon and AT&T and others right now. I do think the regulatory overhang is having them to really reflect upon their actions knowing that there's a lot of pressure on them, not just in the app world but much more broadly right now. So I think for a whole variety of reasons, we're continuing to work and partnering with Google. And we’d like to remind people we've made Google over a billion dollars distributing their applications over the years. So when we take an Uber or Candy Crush or a Starbucks app that's a Google app and then whatever is purchased is Google's getting the benefit from that. So Google likes to refer to us as what their -- their kind of buzzword as an ecosystem enabler to basically help cast a wider net and almost think of us almost like is Uber Eats for Google as they are the restaurant, right, to cast that wider distribution net.

Darren Aftahi

You’ve about five minutes left. Do you want to open it up if there's any questions in the audience? Lively crowd. So two more maybe for me. I guess, you've made some fairly large acquisitions in the past 24 months. I guess, what have you learned from that? And there's definitely a theme within ad tech of consolidation. Do you see yourself as a consolidator, consolidatee, just kind of humor me on that one?

Bill Stone

Yes. So I think from an M&A perspective, first, we want to continue to look at companies and opportunities. We're going to do that but in a very responsible way. And we think about it really on two dimensions. We want to think about things that can add growth to our platform. So I just talked about the alternative app source space, for example. There maybe things that can add an accelerator efforts in that space that we want to look at. And then we also want to add scale to our platform. And then we believe our ad tech assets have scale but scale really matters in ad tech. And so we want to think there are opportunities we can add additional scale to it, and we're going to absolutely do that, but again, in a very responsible accretive manner. So we've built this company on acquisitions. We're comfortable doing acquisitions. I think we've done a good job doing this many acquisitions over the years to add a lot of value for shareholders. And we're going to continue to do that. Nothing imminent to talk about today but we're gonna always think about it.

In terms of what we've learned from the acquisitions, I think the big thing is don't try to acquire three companies at once during COVID. That's hard. I think we made it extra hard on ourselves doing that and we learned a lot about integration. But the good news is we're out of that phase. And when we think about how we return this business to growth and start showing sequential growth out to shareholders, a lot of it's now we're building features on top of the integrations that we've done, and a lot of this is very tried and true ad tech tactics. We're not trying to do any moonshots or any big, these are just kind of really standard basic things that we're now launching out into the marketplace, whether they're in machine learning, enhancement on the DSP or different bidding methodologies, or different ad formats, and things that are really tried and true, but we're able to build on what we've acquired now. And so we're seeing some encouraging results that we expect to be growth drivers for us in the future. But acquiring companies and integrating them is definitely a challenge, that's for sure.

Darren Aftahi

And I guess, so last two from me. One, we're sitting here in 12 months, how are we grading Digital Turbine in terms of strategic performance a year from now? Number two, even in softer times, your business still generates a fair amount of free cash flow. Talk to me about capital allocation strategy, your stock no different than a lot of tech stocks have taken it on the chin, anything you can do to be more shareholder friendly?

Bill Stone

Yes. So let me start and take the capital allocation one first. Right now, I think, we're really proud of the operating leverage that we have in our business. And one of the great things about being a mobile cloud software business is that you don't have input costs in factories and raw materials and all those kinds of things. So there's a tremendous amount of leverage that goes with every incremental dollar of revenue that can flow to the bottom line. And so we really like that about our business model. And we historically have been paying down our debt as our capital allocation strategy. We have about $300-ish million plus of net debt right now and we've been consistently paying down, let's call it, $20 million, $30 million a quarter of that debt. We think that's the prudent thing to do in this market in terms of prioritizing our capital to give us maximum flexibility and whatever we will choose. Is there something where the stock is irrational and would we ever look at doing something else? Sure, we're going to always be rational people to look at things that maybe irrational out in the marketplace.

Right now our view is we want to invest against the strategy we talked about and we want to invest in paying down our debt in terms of capital allocation, but we're also not tone deaf to what's going on out in the marketplace either. And as far as just judging us in the future on strategy, I think there's two things. One is just, hey, roll up our sleeves, blue collar, execute on the day-to-day, show the street that we can execute, show the street that we can continue to beat and exceed expectations that are out there for us. We've got to do that, that's really critical in terms of establishing that. But at the same point in time, we got to walk but then we got to chew gum of looking around the next corner to say, hey, there's these bigger opportunities out there with single tap, there's these bigger opportunities out there with alternative app stores, and we want to be part of that and we want to part -- define where that is going. And so when we sit a year from now, let's say, were we able to do both of those things and show this execution and show some material progress on some of these strategic things that can really catapult the company into a different place.

Darren Aftahi

Great, I think we're just about up on time. So, Bill thanks, good to see you as always.

Bill Stone

Yes, thanks Darren.