Digital Turbine, Inc. ($APPS)

Good day, and welcome to the Digital Turbine Fourth Quarter and Fiscal 2026 Financial Results Conference Call. [Operator Instructions] 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.

Thanks, Nick. Good afternoon, and welcome to the Digital Turbine Fourth Quarter and Fiscal Year 2026 Earnings Conference Call. Joining me today on the call to discuss our results are CEO, Bill Stone; and CFO, Steve Lasher. 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 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.

Thanks, Brian. Good afternoon, everyone. I want to open my remarks by recognizing our team for delivering another quarter of strong results that exceeded our expectations, both for the March quarter and for the fiscal year. Our current June quarter is off to a positive start, and combined with the broader business momentum, is enabling us to issue an annual outlook for fiscal year '27, guiding to another year of double-digit top and bottom line growth. I'm going to break my prepared remarks into 4 areas. First, we'll be looking back at our fiscal '26 results in March. Second will be some commentary on the operational and strategic elements of our business, driving our expectations for continued double-digit growth this fiscal year. Third, I want to provide some commentary on AI and macroeconomic trends in our business. And finally, I wanted to provide an organizational update. Revenue for fiscal '26 came in at $565 million, representing 15% 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 the model as we scale. Breaking our results down by segment, our On-Device Solutions or ODS business generated $382 million in revenue in fiscal '26, up approximately 12% from last year. In particular, it was encouraging to see over 20% growth in global devices for the year. Growth in revenue per device, or RPD, continues to be the bright spot with over 20% year-over-year growth in both U.S. and international. Our Application Growth Platform or AGP business was another bright spot for the year, with revenue for the March quarter, growing 57% year-over-year and over 20% year-over-year for fiscal '26. This compares to a global market that is growing in the high-single digits. In other words, our AGP business is growing 2x more than the global industry growth rate. In the quarter, I was particularly pleased with our brand business growing over 50%, and our DT Exchange or SSP business growing over 60% year-over-year. The hard work we did over the past 3 years to stay the course and integrate the legacy tech stacks into a common platform is now paying dividends, and we expect the momentum to continue into the future. There were 3 key growth drivers powering our improved performance in the March quarter. First was higher advertiser demand, which translated into improving pricing and fill rates particularly for premium placements on our platform. This strong advertiser demand drove international RPD expansion in our ODS business, resulting in over 40% growth year-over-year. We also had strong demand with our brand and DT Exchange businesses, each growing over 50% in the March quarter compared to the last March quarter. And as I'll discuss later in my remarks on AI, we are seeing brands migrating spend away from the open web to applications as brands and agencies adopt the power of AI. The second driver was increased supply. Our global devices grew more than 20% year-over-year driven by strong volume from our international partners. In addition, our AGP supply volumes increased impressions by over 15% year-over-year, driven by expanding distribution of our SDK footprint, strong performance in the APAC region and strong increases in non-gaming inventory. And finally, we made meaningful progress leveraging first-party data in our AI and ML platform, which is setting the foundation for smarter targeting, higher return on ad spend for advertisers and improved user experiences are the direct benefits of us better leveraging our data. Specifically, our rates were up 40% year-over-year in our AGP business, which is a direct result of better targeting AI capabilities as our advertisers are willing to pay more for better outcomes. Looking to the current fiscal year, we're guiding today for continued double-digit growth, both on the top and bottom lines. The drivers for these growth rates are first AI and data. I'll provide some additional commentary later in my remarks on the macro impact of AI on our business and how leveraging unique first-party data across our platform with DTiQ and Ignite Graph drives better outcomes which in turn drives more revenue. The second driver is the flywheel. Connecting our diversified demand and supply drives each other. We have nearly 3 billion devices and more than 80,000 applications using our ad tech technology today. The opportunity for these apps to drive more user acquisition to our platform and hence, more monetization will be a growth driver. The third driver is our brand business. Our brand business showed impressive 50% year-over-year growth. Our focus is leveraging the macro tailwinds of more time being spent in apps combined with our data and audience targeting capabilities to drive even more scale and growth. The fourth driver is our Ignite platform. Our international ODS momentum has been fueled by Latin America and Europe, and the recent wins with partners like Orange, who have more subscribers than AT&T and Verizon combined, should accelerate our momentum in the EU. In addition, our Ignite platform is showcasing there is more opportunity to not just grow device supply with these new wins but also leverage the platform capability as a software enabler for distribution of other products on the screens of devices versus just our products today, such as Single-Tap, Out-of-the-Box Setups, Notifications and so on. We're doing this today in the U.S. 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 the final driver is 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 and targeting capabilities, Single-Tap, our DSP and so on. Mainstream partners like King, Zynga, Playtika and others are customers today, leveraging our platform to distribute their own alternative direct-to-consumer billing options to customers. To close out my prepared remarks, I wanted to provide some commentary on the impact of AI and other macroeconomic factors to our business. Regarding AI, it's clearly transformational and an exciting time and a tailwind for our business. It's reinventing businesses, including ours in 3 main ways. First is the automation and simplification of workflows and processes. Over the past year, we grew our revenues by more than $70 million but we accomplished this with 4% less headcount as we were able to use AI and automation to drive efficiencies in our business. We have implemented numerous new AI automation and 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. And we're seeing acceleration in these activities as we organize our people, our systems and our processes for this AI-first world. The second is leveraging AI and our data to improve our outcomes for customers. As you have 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 Ignite Graph capabilities. These will be revenue and EBITDA drivers for us into the future. And the third area is how the broader AI landscape will leverage our distribution and on-device footprint and data to help their businesses grow. And there are 3 unique 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 the first quarter of 2026 were up 60% year-over-year across both the Apple App Store and Google Play. AI makes it easier for anyone to create apps, driving growth in both 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 2 legacy app stores. The second trend is the increase in time spent in applications. Today, the average consumer is spending 5 hours per day inside applications, which is up an hour from the past decade. And this trend is accelerating as the integration of AI chatbots creates a shift in the channels of how we all consume information leaning towards apps and away from the open web. Multiple measurement sources have reported that AI has likely caused a 10% drop of open web traffic so far with some informational categories seeing 20% to 40% declines. And the final trend, bringing all this together is monetization. For centuries, one trend has been consistent. Media dollars follow eyeballs. And as our eyeballs continue to spend more and more time in apps because of enabling technologies like AI, which is creating more breadth of apps and more depth of time spent in apps, this is a positive for us. In addition to AI, I've also been receiving many questions on potential macroeconomic impacts to our business. One of my favorite things about our mobile AI cloud business is that we are more insulated than the vast majority of companies to things like tariffs, energy prices, recessions, inflation, any single geography and so on. 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 these risks. 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 approach matching where consumers are spending their time. And finally, I wanted to provide an organizational update. Steve Lasher will be stepping down from his role as CFO and will support a transition in June as he pursues another opportunity outside of DT. One of my favorite expressions is leave it better than you found it, and Steve embodies this. I want to thank Steve for his significant contributions in particular, his leadership and strengthening our balance sheet through the refinancing of our debt as well as his role driving improved operating and business performance. And on a personal level, I've enjoyed really getting to know Steve and look forward to continuing to keep in touch with him during his next chapter. Josh Kinsell, our Chief Accounting Officer, will assume interim CFO duties. With that, I'll turn it over to Steve to take us through the numbers.

Thank you, Bill, and good afternoon, everyone. Before I turn to our financial results and our outlook for fiscal 2027, I'd like to say a few words about my time at Digital Turbine. As Bill mentioned, I will be leaving the company to pursue another opportunity, and I want to take a moment to reflect on what we've accomplished together. I'm exceptionally proud of where Digital Turbine stands today. It is a meaningfully stronger company than the one I joined. The platform's performance has improved dramatically, and that improvement is now drawing greater spend from advertisers and publishers who are looking for a stronger return on advertising spend. The balance sheet is significantly stronger, following an important refinancing and subsequent deleveraging. And on a personal note, I've genuinely enjoyed the camaraderie of this team. I leave with many valued friendships and colleagues that I carry with me and I'm grateful. With that, let me turn to our fourth quarter and full year fiscal 2026 results. Our fourth quarter results reaffirm the momentum we have been building throughout the year. Starting with the top line, we delivered 20% year-over-year net revenue growth, with total net revenue for the quarter of $142.5 million. On-Device Solutions net revenue was $91 million, up 5% year-over-year. while App Growth Platform net revenue was $52.1 million, up 57% year-over-year. With On-Device, growth was once again driven by our international partnerships, where we expanded both the number of international devices and revenue per device year-over-year. The standout in the quarter was App Growth Platform, the 57% year-over-year growth was the segment's highest growth rate in more than 3 years. These results reflect our strategic focus on better utilizing first-party data and on showcasing our AI-driven capabilities to deliver stronger outcomes for our publishers and advertiser partners. The combination of strong top line growth and sustained operational execution delivered 53% year-over-year adjusted EBITDA growth in the quarter. Adjusted EBITDA totaled $31.4 million, with margin expanding nearly 500 basis points to 22% versus the year ago quarter. Non-GAAP gross margin reached 50% in the quarter, up 48% -- up from 48% in the prior year, driven primarily by favorable product and segment mix. Cash operating expenses were $40.5 million, up 12% year-over-year, reflecting continued expense discipline, streamlined business processes and targeted investments in our key growth initiatives. We will continue to identify additional efficiency opportunities while making the tactical investments needed to support future growth. On the bottom line, we reported a GAAP net loss of $7.3 million or $0.06 per share in the fourth quarter. On a non-GAAP basis, we generated net income of $19.7 million or $0.16 per share based on 122.8 million shares outstanding. Let me comment briefly on the full year. Total net revenue was $565.3 million, up 15% year-over-year. Adjusted EBITDA was $122.5 million, up 69% year-over-year. GAAP net loss was $37.3 million or $0.33 per share. Non-GAAP net income was $64.9 million or $0.56 per share. And free cash flow was $11.8 million for the year, an improvement of more than $21 million versus the prior year. Moving to the balance sheet. We ended fiscal 2026 with cash of $38 million, and total debt net of issuance costs of $361 million, down from $409 million at the start of the year. The improvement reflects positive cash flow generation, supplemented by proceeds from the at-the-market offering, which we terminated earlier this year. We are pleased with the progress we have made on the balance sheet in recent quarters. and we intend to continue deploying free cash flow towards further deleveraging in fiscal 2027. Turning now to our fiscal 2027 outlook. Given our stronger-than-expected fiscal 2026 performance and the continued momentum we are seeing in the June quarter to date, we expect another year of robust revenue and EBITDA growth. We are introducing fiscal 2027 guidance today with revenue in the range of $630 million to $650 million and adjusted EBITDA in the range of $135 million to $145 million. With that, let me hand the call back to Nick, our operator, to open the line up for questions. Nick?

[Operator Instructions] Showing no questions. This will conclude our question-and-answer session. I'd like to turn the conference back over to Bill Stone for any closing remarks.

Yes. Thanks, Nick, and thanks for everybody for joining the call tonight. We look forward to connecting with you in a few months to update you on our fiscal '27 first quarter earnings call. Have a great night. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.