Mandalay Digital Group's (MNDL) Q1 2015 Results - Earnings Call Transcript

Aug.14.14 | About: Digital Turbine, (APPS)

Mandalay Digital Group, Inc (MNDL) Q1 2015 Earnings Conference Call August 14, 2014 4:30 PM ET

Executives

Andrew Schleimer - EVP & CFO

Bill Stone - President & COO

Analysts

Jon Hickman - Ladenburg Thalmann

Mike Malouf - Craig-Hallum Capital Group

Brian Alger - Wedbush Equity Management

Andrew D'Silva - Merriman Capital

Operator

Welcome to the Mandalay Digital First Quarter 2015 Financial Results Call. (Operator Instructions). At this time I will turn the conference over to Andrew Schleimer. Please go ahead.

Andrew Schleimer

Thank you. And welcome everybody to Mandalay Digital’s fiscal 2015 first quarter earnings conference call. I’m Andrew Schleimer, Mandalay’s Executive Vice President and Chief Financial Officer. With me today is Bill Stone, our President and Chief Operating Officer.

Statements made on this call including those during the question and answer session may contain forward-looking statements that are subject to risks and uncertainties. Please refer to the Safe Harbor Statement included in today’s press release as well as Mandalay’s period filings with the SEC for a complete discussion of the risks and uncertainties that could cause actual results to differ materially from them those you may perceive today. We will be discussing certain non-GAAP financial results. The press release issued earlier today contains a reconciliation of these non-GAAP financial results to their most comparable GAAP measures.

Now it is my pleasure to turn the call over to Bill Stone.

Bill Stone

Thanks Andrew. I appreciate all of you joining our call this afternoon as well as get to see many of you at our Investor Day last month. We have got a lot of information to share today and as I know many of you are focused on the future I’m going to begin there and then work backwards to the present then I will end with some comments on our first quarter and when I’m threw I will turn the call over to Andrew to discuss our financials and we will open it up for some Q&A.

I’m excited to kick off the call with some exciting news about our future. We have signed a multi-year agreement with Verizon on their intentions to deploy Ignite across their entire Android device line-up which historically has averaged approximately 20 million devices per year.

Verizon has been very pleased with the performance of Ignite on the LG G3 smartphone which launched on July 17. Our Ignite software has performed as advertised with respect to installation rates, operational performance and other metrics all meeting or exceeding Verizon’s expectations. We anticipate doing some joint press with Verizon in the near future to provide additional public details and information on the benefits of Ignite to both consumers and advertisers.

I will let Andrew update on how we will manage this new, positive information into our financial guidance but in the big picture this is a major milestone for our business and validation of our broader strategy. We expect this not only to materially drive our future growth with Verizon specifically but also help us with other customers as Verizon has a very strong halo effect across the entire global operator landscape. In addition to this news we expect launching Ignite on two additional smartphones and one table with Verizon over the next 45 days.

We’re working numerous future implementation details with Verizon Real Time. So we will back to you with those that they develop. Our intention is to provide you with information as it occurs to ensure transparency but also want to reiterate Verizon is an important customer so we need to ensure we’re communicating details that they do not want publically announced.

In the present we have not only being work hard supporting the Verizon launch but also preparing for our IQ app store launch with T-Mobile which we expect over the next 45 days. T-Mobile has been a great partner to work with and both sides are very excited about the launch. We have also been busy launching and preparing Ignite launches with a number of other global customers including MSAI in India, Globe in the Philippines and Vodafone in Australia. We continue to work campaigns with our existing Ignite customers such as SingTel, and Avea.

And also we had previously announced our launch of DT Pay across the SingTel Group and do expect to deploy that over the next few months. We’re pleased to announce that Electronic Arts or EA will be our first customer on DT Pay in South-East Asia as we begin to port EAs titles such as Bejeweled, Tetris, FIFA ’14 and so on to operators in Singapore, Taiwan, the Philippines, Indonesia and New Zealand. We continue to have some geopolitical and administrative issues impacting us in both Russia and Thailand. I believe we will ultimately launch in those markets but in the short term there have been some delays that we’re working through real time.

And finally our pipeline remain strong and robust, we have said that we look at expanding our pipeline both in terms of breadth of new customers and depth of new services with existing ones. There are numerous new potential customers that we expect to close and announce over the next 90 days and a few existing customers wanting to deploy additional services as well.

While we’re not going to preannounce any of these deals like we have done in the past, the bottom line is there is strong moment in the marketplace for our products and services and we’re taking advantage of that. And finally in the present we have been securing advertising with our partners to support current and future Ignite and IQ launches. We announced at our Investor Day that we had commitments for over $5 million in media.

In the short time since we have also gotten commitments for another $1.5 million of media bringing that number to 6.5 million of media against existing and future Ignite and IQ deployments. With all that excitement about the future I did want to provide some commentary on our first quarter. We were disappointed but not surprised by the results as they were not materially off our internal budget. This quarter’s results do not impact our view of the fiscal year as we have been consistent that the ramp for our new products was to begin this summer and the first quarter did not include any of review from those launches. We continue to reiterate our guidance for 12 million Ignite installs and 1 million IQ installs. We have redirected many of our internal resources towards executing against the new priorities in the business including the Verizon opportunity.

We have not implemented things that could have improved the results in the quarter but focused on those things would have increased the execution risk with Verizon, T-Mobile and other new customers for future and more material growth prospects. A few examples of those include delay of our streaming music launch in Australia, new pricing plans for our content management business, some new technology for Italian business and the delay of launching our few new DT Pay content providers in Australia. However with that being said we remain excited about the prospects of these businesses. Many of those opportunities I just referenced we will be launching over the next 60 days and we expect them to improve the current trajectory of the content management and DT Pay businesses.

So we do not view the past quarter as the new normal as far as the historical business but rather just us as a small and rapidly growing business making short term tradeoffs to improve prioritization of activities that will generate higher returns for shareholders in the long run. Ultimately we see the convergence of the Ignite, IQ, content management and Pay to build an end to end ecosystem for mobile operators, device OEMs, distributors and other third parties that want to participate in monetizing mobile applications versus the large over the top providers today who are citing most of that revenue to themselves.

We see Ignite and IQ managing the preload and recommendations, our content management system handling the ingestion and the Pay handling the commerce and payments. And finally before I turn over to Andrew I wanted to provide an M&A update. We raised capital in March with the exclusive purchase of helping us continue to scale our business. We have been disciplined in our approach having passed on a few opportunities where we could not come to valuation terms that are in the best interest of our business or shareholders. There are couple of potential acquisitions that we’re excited about but nothing to report on today. We know that we’re in active conversations and hope to have some news to report soon on the M&A front. And as a reminder we’re looking for companies that can help us with distribution, technology, scalability and businesses that have a clear strategic fit to what we’re building.

With that I will turn it back over to Andrew for an update on the financials.

Andrew Schleimer

Thanks Bill. The expansion with Verizon is truly a major development and something we’re all very product to have achieved. With the largest U.S. carrier supportive of all of our efforts we’re in great position to continue ramping our high growth Ignite and IQ products both domestically and overseas. As Bill mentioned we have been focused on scaling the business for the recent and upcoming Ignite and IQ product launches. We made a conscious decision to leave some short term opportunities on the table in favor of making sure we flawlessly executed against much larger opportunities and as you can see from today’s news that decision was clearly the right now.

This decision impacted our results for the first quarter but more importantly it gave us the ability to deliver strong growth not only for the remainder of this fiscal year but for a number of years beyond. We’re on the process of evaluating the near and longer term positive impact of the Verizon expansion and look forward to providing you with an update as to what this means to our fiscal 2015 guidance as well as some insight and perspective into fiscal 2016.

We will work to come back to you within the next 30 days with more specifics. That said this is clearly a major accomplishment for Mandalay Digital.

Now shifting focus to Q1. Revenue from continuing operations for the first quarter of fiscal 2015 grew to 5.6 million up from 4.8 million last year. Recall that we divested Twistbox, a non-core operating business in the fiscal 2014 fourth quarter so that business’s results are reflected as discounted operations, unless otherwise noted my discussion today will refer to results from continuing operations. This quarter 88% of our revenue is generated from customers in the Asia-Pacific region up from 77% last year. Customers in EMEA and the United States made up the remainder of our revenue for fiscal 2015 Q1. As we have mentioned previously we believe that customers in the United States will become a much larger percentage of our total revenue base due to the recent and upcoming launches of our Ignite and IQ products in this country.

Gross profit for the first quarter was 1.4 million compared with 1.7 million a year ago. The change related primarily to sales mix since we realized a higher proportion of DT Pay sales in our Asia-PAC region compared to last year as the product was in process of being launched and ramped.

Adjusted gross margin which is a non-GAAP measure and is defined in this afternoon’s press release was approximately 32% for the fiscal 2015 first quarter compared with approximately 43% a year ago. We continue to expect adjusted gross margin to be substantially higher for fiscal 2015 as we continue to roll out and install our high margin Ignite and IQ products. On a GAAP basis gross margin for the first quarter was 26% compared with 35% last year, again the change related primarily to sales mix. Total operating expense for the first was 6.1 million versus 5.8 million last year, the current quarter included approximately 900,000 of non-cash items including depreciation in stock based compensation compared with 1.3 million of non-cash items in the prior year. We believe that our current cost structure is sufficient to ramp and scale our existing business and while we do not expect material increases in operating costs as previously noted we will be back to you with a more refined view once we fully incorporate the expanded Verizon deal.

This brings our loss from continuing operations net of income taxes for the fiscal 2015 first quarter to $4.6 million or $0.12 a share based on 37.4 million weighted shares outstanding.

The last year’s first quarter our loss from continuing operations net of income taxes was 5.4 million or $0.29 a share on 18.9 million weighted shares outstanding. Adjusted EBITDA non-GAAP measure defined in today’s press release was a loss of 2.9 million for the first quarter of fiscal ’15 compared with a loss of 2.3 million for the same period last year. Cash and cash equivalents was 18.7 million at June 30, 2014 compared with 21.8 million at the end of the last fiscal year. Remainder that both periods included 200,000 in restricted cash on top of the stated amounts.

Accounts receivable remained stable from the end of 2014 and our working capital position was a positive 15.3 million compared with negative net working capital a year ago. To reiterate we’re evaluating the immediate and longer term impacts of our commitment from Verizon Real Time. This is no small task and our objective is to be as precise as we can be. To that end we will be back to you within the next 30 days with an update on guidance for fiscal ’15 as well as the insight into fiscal ’16.

Before turning it over to your questions, I would like to reiterate a number of points that bill made and leave you with the following. Number one, our near term results are not indicative of our ability to generate meaningful revenue growth for this year and beyond as we discussed our focus on quickly ramping our Ignite and IQ products open significant long term opportunities for Mandalay and we seize them. Number two, much of our growth this year focuses on advertising. As we mentioned at our recent Investor Day we had commitments for more than 5 million in media and now have eclipsed 6.5 million at CPI rates ranging from $0.50 to $3 depending on geography. Number three, we are preparing for additional product launches through the remainder of this calendar year while also attracting new customers for Ignite and IQ.

Number four, as revenues ramp the operating leverage we have built in our operating model should begin to bear fruit and finally number five we remain highly confident in our ability to deliver growth and profitability to all of our stakeholders With that I would like to now open it up for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). We will go first to Jon Hickman with Ladenburg Thalmann.

Jon Hickman - Ladenburg Thalmann

I’m a little impressed with -- I am pretty impressed with this Verizon opportunity here. Could I maybe press out a few numbers on the phone? I know it's on the fly but I just want to make sure I’m thinking about it right. Did Verizon sold say somewhere between 20 million and 25 million Android devices a year and you have got four slot on each slot on each phone, that’s 80 million slots that’s somewhere around $2 a piece. So we’re looking at revenues more than a $150 million a year. I guess am I thinking about that correctly?

Andrew Schleimer

Yes Jon, you’re definitely thinking about it correctly assuming that the open rates on those slots are a 100%. So right now -- you got to take some hair cut for the open rates on that but I think the market opportunity that you’re talking about is accurate.

Jon Hickman - Ladenburg Thalmann

Could you give us any indication of what the open rates were given on your early launches with Verizon?

Bill Stone

Yes, sure. So, right now I don’t think that’s something that -- I don’t want to speak on behalf of Verizon and get myself in trouble on -- we call those what the attribution is for those. So I’m not going to give you any specific guidance on Verizon but you know what I will say is you know we anticipate open rates anywhere from 50% to 80% depending on the campaign and how search [ph] -- targeted it is over a 30 day period. That’s our expectation internally and we have got data internally to support that as well as working with our different partners around the globe on that but unfortunately I’m not going to give you anything specific on Verizon today.

I think the one thing I really would want to emphasize about Verizon is, I said in my comments but I really want to put it in all caps here. What Verizon is really looking for to make this decision was less around open rates in a specific campaign and it was much more ensuring that, deploying this additional monetization opportunity for them did not negatively impact anything in their core business. So all this is customers -- we go and get our cellphones and upgrade and that’s not being disrupted, the network that’s deliver on apps isn't been disrupted. The customer service isn't being disrupted; nothing else on your device is being disrupted. Those are the things Verizon was really interested in and that’s where really Ignite delivered the goods and our focus was on a very operational level. I think in terms of the open rates and the apps themselves, you’re going to see a lot of segmentation and targeting and increased sophistication of right apps to right customer as we go forward in time and those kinds of things are really what’s going to drive the open rates north.

Jon Hickman - Ladenburg Thalmann

So one of the question, I think like this happened very quickly since you just got involved with Verizon back in April, I believe, so the decision for them to go from a few phones to all Android [ph] seems very quick, how long have you been working on this?

Bill Stone

Yes we have been working with Verizon a long time early on the process in understanding you know what the strategic value for both sides. So this is something that took a long time to get us to launch in July that’s where a lot of the leg work was, really in terms of the overall sales process getting these guys ready to go and getting operational readiness and all those kinds of things going but you know once the results were there you can see just the speed at which Verizon has moved I think says a lot and something that they were quite excited about and for those of you that are familiar with Verizon and I can say this having worked there in my past. They usually don’t move this fast. So to have Verizon move this fast it's something we’re extremely excited and enthusiastic about because it shows their commitment to working with us.

Jon Hickman - Ladenburg Thalmann

And then one last question, is it going to be a challenge for you to sell that many slots?

Bill Stone

On that one I think that was really the point I made and Andrew reiterated at the end, you know we now see increase in media that’s already being sold against it. Right now we’re seeing advertisers you know wanting to be on the home screen of the device that’s feature on [ph] property for them and then we have already sold all that inventory even before a lot of these devices have launched because of their excitement around what we’re doing and the opportunity to better (indiscernible) operators versus other channels that these advertisers go through. So not a problem at all. I think the main issue for us from -- I am going to highlight a risk here was really -- we just got to get the devices out there and the faster we can get the devices out there the faster the monetization is going to happen and so I think about it much more on getting the demand side with the softer on the phones is really the one we got to focus on more so than the supply side with the advertisers because the demand for those guys is definitely there.

Operator

We will go next to Mike Malouf with Craig-Hallum Capital Group.

Mike Malouf - Craig-Hallum Capital Group

I’m going to ask sort of a probably simple and obvious question but when you gave guidance at your Analyst Day which was a reiteration of guidance prior to that 46 million to 50 million in revenue. I guess it's safe to say that that number is not coming down with this new expanded relationship.

Bill Stone

Yes I think Mike, what we will do is we will back in 30 days as to evaluate the impact of the Verizon relationship and we will back to the street with as much data and precision as possible at that time.

Andrew Schleimer

And Mike, I will put a little color on that. One of the things we want to do is we want to improve how we continue to manage the street, manage expectations and we continue to really want to work at that and so when we come back we want to really do this in a holistic way so when we come back and give guidance also want to have you guys think about fiscal ’16 as well we haven't really talked about that in terms of now we have got some better visibility as to what that means for the business. Obviously what’s happening in terms of the immediate term and then the rest of this fiscal year. So want to come back to you guys with an entire package so you can see the short, medium and long term value that we’re building here.

Mike Malouf - Craig-Hallum Capital Group

Right, but I’m just trying to interpret I mean it is going to be a positive impact on that we just don’t know what the actual impact is, is that the right way to think about it?

Andrew Schleimer

So yes, Mike, we’re not here to update or change the guidance. I agree it's hard to see announcing Verizon is a negative that’s for sure.

Mike Malouf - Craig-Hallum Capital Group

You announced that your rates are $0.50 to $3 and I’m just wondering, can you give us just a little color on that, you know where would it be $0.50 or what devices or what apps and then where would it be $3 I guess I would assume that’s here in the U.S. maybe on Verizon but can you give us some color on that?

Bill Stone

Yes sure, so as we now are launching customers in a variety of different countries around the world what we basically have in terms of a rate card is you think of it like almost like a 2 by 2 metrics along one side of it you have got the different types of devices. So think of an LG G3, Samsung Galaxy S5 and so on, you know all the way down to a Tier 3 Chinese OEM along one axis and on the other axis imagine having the countries that we’re deployed in from United States to Turkey to Israel to India and so on and then you can basically apply in between. So I would say a Tier 3 Chinese OEM in a market like India’s at the $0.50 range and then a market like the United States with high end device on a Verizon, it's closer to $3 range and then you can kind of apply everything else in the middle based upon that. Obviously it's somewhat based on type of campaign and a lot of other variables but I would like to keep it simple here that’s how we think about it.

Mike Malouf - Craig-Hallum Capital Group

And then with regards to the slots, I know that sort of always talked about four slots and some carriers had thought maybe they would do less or more. Can you give us an update on sort of the thinking there? I know you launched Verizon what I think two slots and I don’t know where that’s been or where that’s gone, so can you just talk a little bit about the number of slots per phone?

Bill Stone

Yes you’re right, we launched with two slots on Verizon. It's not Verizon’s intention nor our intention to continue to remain at two slots. Again I go back to what was trying to be proved out from this LG device launch. It was not really about how many slots -- who has brought those other operational metrics and our view is we can see anywhere from kind of 2 to 8 slots depending upon the customer and obviously more is better for us but I think that we’re not used to and extrapolate that out is a go forward with Verizon. I would say that that’s kind of a moment in time right now.

Operator

And we have time for one more question, that question comes from. Brian Alger with Wedbush Equity Management.

Brian Alger - Wedbush Equity Management

One thing that came out of the Investor Day was clearly in a lot of eyes not just at Mandalay Digital and the Investor Base but also your other customers in terms of how the launch with Verizon was going to proceed. I know it's early days at this point but is there any sense how much attention this development might bring from your other customers both domestically and foreign?

Bill Stone

There is no question as we’re building out this ecosystem, we got to go out and bring tenants into and Verizon is the anchor tenant of anchor tenants to build that out and now that we have combined that with customer such as SingTel and Vodafone and so on. We’re really not putting ourselves in a great position to create something special here. So I would say there is definitely a halo effect whenever we go talk to other operators around the globe and we talk about Verizon. People understand the rigor that Verizon goes through, people understand Verizon does everything first class, you know, they don’t cut corners. So obviously that means that we’re fully vetted [ph]. So those are all really positive things we go into and talk to other operators and we haven't obviously since this news hot up the press we haven't communicated that to any new customers. This has all happened in real time.

But in terms of the first initial launch on the LG that was definitely viewed as a positive and we expect it to be a catalyst for us to continue to grow and scale additional launches -- you know stay tune and then you will see coming up over the upcoming weeks and months.

Operator

And we do have an additional question from Andrew D'Silva with Merriman Capital.

Andrew D'Silva - Merriman Capital

So first off phone is working well in my opinion and I did some channel checks on the device, you know everybody has great reviews about it. I’m just curious for this next quarter that’s coming up it seemed like LG doesn’t have a strong adoption app rise-in and I was wondering if that it is what you’re seeing as well?

Bill Stone

So right now obviously I’m not going to communicate any information that’s proprietary to Verizon on device sell through for a specific device. We’re not going to go there. What I will say though is that a lot of device sales whether it's from LG, Samsung, HTC or anybody, a lot of device sales are very seasonally driven. The number two month for device sales tends to be August after December in terms of back to school and people do upgrades and so on, it's not traditionally July as a lot of people are vacation and doing other things. With that being said is that Verizon gave us a forecast on the device based on their experience from the G2. So I think we have got pretty good visibility in terms of what we think that is and again back to the 30 day comment Andrew made early, it will back to -- those are all kind of things we’re going to put in our calculus when we come back to you guys with guidance because as we have mentioned to you multiple times and most recently at the Investor Day, you know there is really two key drivers or risk factors that I will highlight here. Whether we want it to be open rates which Jon asked earlier and second is if sell-through ended it [ph], you’re talking to, so now as we’re getting smarter on both of those variables we can put that into our calculus as we go forward in guidance.

Andrew D'Silva - Merriman Capital

And in previous calls when you were regarding Verizon you said you probably would be launching IQ also and I was just curious if you had an update on where you’re on that?

Bill Stone

Nothing I can talk about today. Stay tuned.

Operator

And I will now turn the conference back over to Bill Stone for closing remarks.

Bill Stone

Thanks for everybody for attending the call today. I appreciate your support and what we’re building here. I really want to emphasize you know the Verizon announcement today as validation of our strategy and what we’re building here and we really believe we’re on to something special. And we also recognize with the quarter that we have got a balance the short term against long term, we have to walk and chew gum here, we get that. But I really want to emphasize that the long term value of the business was really enhanced today and with this announcement proving how we’re doing. So, appreciate all you guys support and obviously we look forward to following up with some of you guys individually as we go forward here over the next few days.

Operator

This does conclude today’s conference. Thank you for your participation.

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