Digital Turbine, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2018 (the first quarter of fiscal 2019). Unless noted, amounts are in U.S. dollars; financial statement amounts below are in millions. The company’s continuing business is its Operator and OEM (O&O) advertising platform, including Ignite.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Continuing-operations revenue | $22.112 | $15.153 |
| Gross profit / margin | $6.389 / 28.9% | $5.152 / 34.0% |
| Operating loss | $(1.260) | $(1.517) |
| Continuing-operations net income (loss) | $1.528 | $(4.087) |
| Discontinued-operations net loss | $(1.044) | $(0.088) |
| Consolidated net income (loss) | $0.484 | $(4.175) |
| Continuing-operations cash used | $(2.395) | $(1.608) |
Continuing revenue increased 45.9%, which management attributed to higher Ignite demand, increased CPI and CPP advertising revenue across existing deployments, expanded carrier distribution, and new services. Gross profit rose 24.0%, but gross margin fell from 34.0% to 28.9%, primarily because partner revenue shares increased as certain partners reached volume thresholds. Operating expenses grew 14.7% to $7.649 million: product development and sales and marketing rose, while general and administrative costs declined.
Continuing operations recorded a $1.260 million operating loss. Reported continuing net income included $3.190 million of gains from revaluing the convertible-note embedded derivative and warrant liabilities; these non-cash gains were driven by the decrease in the share price and materially affected the period’s bottom line.
Cash, debt and liquidity
Cash was $8.638 million and restricted cash $0.331 million at June 30, down from combined cash and restricted cash of $13.051 million at March 31. Total operating cash used, including discontinued operations, was $3.619 million; capital expenditures were $0.452 million, and financing activities used $0.011 million.
Debt carrying value was $5.428 million: $1.437 million of short-term debt and $3.991 million of convertible notes. The notes had $5.700 million principal outstanding and bear interest at 8.75%, with maturity in September 2020; the Western Alliance facility had $1.600 million principal outstanding and a $5.000 million total facility. The company reported compliance with the credit facility’s covenants at quarter-end.
Working capital, excluding assets and liabilities held for disposal, was a deficit of $4.615 million, compared with a $2.678 million deficit at March 31. Management stated it believed available cash and capital resources were sufficient to operate for at least 12 months from the filing’s issuance date. The filing also notes that additional financing may not be available on acceptable terms or at all.
Material changes, outlook and risks
- Business disposals: The A&P assets were sold effective June 1, 2018; the Direct Carrier Billing asset sale closed July 1, after quarter-end. Both businesses were classified as discontinued operations. The company said the exits would streamline operations and allow resources to focus on O&O growth. Consideration includes profit-sharing or other contingent participation rights rather than a clearly stated fixed cash sale price.
- Revenue concentration: Verizon Wireless generated 50.7% and AT&T, including Cricket, 37.9% of quarterly revenue. Oath represented 29.0%. One customer accounted for 33.1% of net receivables at quarter-end. Loss, reduced activity, delayed payment, or less favorable terms from major counterparties could materially harm results.
- SEC matter: The company was discussing a proposed settlement concerning previously disclosed internal-control reporting matters. Proposed terms included a $100,000 fine and a cease-and-desist order; the settlement was not final and remained subject to SEC approval. Management did not expect a material operational or financial impact.
- Accounting and controls: ASC 606 was adopted effective April 1, 2018 using the modified retrospective method, with no adjustment to accumulated deficit or the opening balance sheet reported. Management concluded disclosure controls were effective and reported no material changes to internal control over financial reporting during the quarter.
- Other risks and outlook: The filing gives no specific revenue or earnings guidance. Risks include customer and carrier concentration, continuing operating cash outflows, foreign-exchange exposure, and non-cash earnings volatility from Level 3 derivative and warrant valuations. Management cautioned that interim results are not necessarily indicative of full-year results.
Key facts for investors to verify
- Whether O&O revenue growth can be sustained while improving gross margin amid rising partner revenue shares.
- Cash conversion, receivables collection, and progress in reducing the working-capital deficit.
- Revenue and receivables dependence on Verizon, AT&T, and other major customers, including any changes in commercial terms.
- Actual cash or other value received from the A&P and Direct Carrier Billing disposals, and the performance of contingent participation rights.
- Final terms and resolution of the proposed SEC settlement, and any related control or compliance developments.
- Convertible-note and credit-facility obligations, covenant compliance, and the effects of future share-price movements on reported earnings and derivative liabilities.