Digital Turbine, Inc. — Form 10-Q Summary
Business context and period. This report covers the three months ended June 30, 2019, the first quarter of the company’s fiscal 2020 year. Digital Turbine’s continuing business is its Advertising segment, principally the Operator and OEM (O&O) business and Ignite platform, which helps mobile operators and device manufacturers manage and monetize applications. The company reported more than 2 billion application pre-loads across more than 260 million devices and 30-plus operator and OEM partnerships.
Financial performance and liquidity
- Revenue: $30.553 million, up 38.2% from $22.112 million a year earlier. Management attributed growth to stronger advertiser demand across existing Ignite deployments, expanded carrier distribution, and new services and products.
- Gross profit and margin: $12.000 million and 39.3%, compared with $6.389 million and 28.9%. Management cited improved yield from a higher mix of non-dynamic installs, partly offset by higher partner revenue shares at volume thresholds.
- Operating expenses: $8.960 million, up 17.1%. Product development declined 10.1% to $2.794 million; sales and marketing rose 24.1% to $2.278 million; general and administrative rose 43.8% to $3.888 million.
- Operating income: $3.040 million, versus an operating loss of $1.260 million in the prior-year quarter.
- Net results: Continuing-operations net loss was $1.671 million, compared with income of $1.528 million. A $5.226 million noncash loss from remeasuring warrant liability was the principal drag on current-quarter results. Including discontinued operations’ $0.148 million loss, total net loss was $1.819 million, or $0.02 per share, versus net income of $0.484 million, or $0.01 per share.
- Cash flow: Continuing operations generated $5.044 million of operating cash, versus $2.395 million used in the prior-year quarter. Including discontinued operations, operating cash flow was $4.814 million. Investing cash outflow was $0.783 million, principally capital expenditures; financing cash inflow was $1.199 million from option and warrant exercises.
- Cash and working capital: Cash and restricted cash totaled $16.387 million at June 30, up from $11.059 million at March 31. Working capital, excluding assets and liabilities held for disposal, was $5.504 million, compared with $0.713 million at March 31.
- Debt and liquidity: No principal was outstanding under the company’s credit facility. The amended Western Alliance Bank facility allows up to $20 million, subject to eligible-receivables borrowing limits, and matures May 22, 2021. The company reported compliance with its covenants. Management said available resources should support operations for at least 12 months from the filing date.
Material changes versus the prior comparable period
- Revenue grew 38.2% and gross margin improved 10.4 percentage points, producing a substantial turnaround in operating results.
- Net income shifted to a loss largely because the warrant liability’s fair value increased by $5.226 million as the stock price rose from $3.50 to $5.00 during the quarter. The warrant liability was $12.525 million at June 30 and is measured using Level 3 inputs.
- The prior-year quarter included a $1.620 million gain on a convertible-note embedded derivative and $0.319 million of interest expense. The convertible notes and their related derivative liabilities had been extinguished by March 31, 2019.
- Operating cash flow improved, while capital expenditures increased to $0.783 million from $0.411 million.
Outlook, risks, contingencies, and unusual items
- Management expected the positive product-demand trend to continue, but gave no quantitative revenue or earnings guidance and cautioned that results depend on risks outside its control.
- Revenue remains concentrated among channel partners: Verizon Wireless generated 42.1% and AT&T, including Cricket, 32.8% of quarterly revenue. Verizon Communications, primarily through Oath, represented 18.5% of revenue; GSN Games represented 11.7%. Management warned that reduced activity, payment delays, or termination of key relationships could materially harm results.
- The company’s 2018 divestitures of its Direct Carrier Billing and Advertising and Publishing assets are reflected as discontinued operations. The Direct Carrier Billing purchaser’s termination of a material partner contract reduced the estimated earn-out to zero. The company cited an approximately $0.194 million net exposure if all remaining related receivables and payables were deemed uncollectible and unpayable; discussions were ongoing and mediation had been requested.
- The company adopted lease accounting standard ASC 842 in the quarter, recording a $2.168 million right-of-use asset and $2.827 million lease liability; management said the effect on operating results was negligible.
- Other disclosed exposures include approximately $0.970 million of additional liabilities related to uncertain tax positions, for which expected payment dates could not be reliably estimated. Management reported no material change in the risk factors in its latest Form 10-K and stated disclosure controls were effective.
Important facts for investors to verify
- Whether revenue growth and gross-margin improvement persist, particularly as partner revenue-share thresholds affect margins.
- The extent of dependence on Verizon and AT&T as distribution partners and on major advertisers as customers.
- How much of operating cash generation reflects sustainable operations versus working-capital movements and noncash adjustments.
- Changes in the $12.525 million warrant liability and its potential earnings impact, given its sensitivity to the stock price and other valuation assumptions.
- Resolution and collectability of the discontinued-operations balances, and whether the estimated $0.194 million net exposure changes.
- Availability of the amended credit facility under its receivables limits and continued compliance with its financial covenants.