Business Context and Reporting Period
Digital Turbine, Inc. filed this Form 10-K for the fiscal year ended March 31, 2019. Although the request metadata refers to “2018 Q4,” the filing covers fiscal 2019 and also provides unaudited quarterly results, including the quarter ended March 31, 2019.
The continuing business is its Advertising segment, primarily the Operator and OEM (O&O) business and Ignite platform, which enables application delivery and management on mobile devices. The company reported more than 2 billion application preloads across over 260 million devices and 30-plus operator and OEM partnerships.
In 2018, the company sold its Direct Carrier Billing-related assets and its Advertising and Publishing business. These activities are presented as discontinued operations; prior periods were recast for comparability.
Financial Performance and Liquidity
Unless otherwise noted, amounts below are in millions of U.S. dollars.
| Metric | FY ended Mar. 31, 2019 | FY ended Mar. 31, 2018 |
|---|---|---|
| Revenue | $103.6 | $74.8 |
| Gross profit / margin | $35.6 / 34.3% | $25.1 / 33.5% |
| Operating income (loss) | $3.4 | ($5.8) |
| Continuing-operations net loss | ($4.3) | ($19.7) |
| Net loss, including discontinued operations | ($6.0) | ($52.9) |
| Continuing-operations operating cash flow | $5.0 | $7.3 |
| Cash and restricted cash at year-end | $11.1 | $13.1 |
| Working capital, excluding assets and liabilities held for disposal | $0.7 | ($2.7) |
FY2019 revenue rose 38.6%. Gross profit increased 41.9%; gross margin improved 0.8 percentage points. Operating expenses rose 4.1% to $32.1 million. The reported net loss includes $1.7 million of discontinued-operations losses; FY2018 included a $34.0 million goodwill impairment associated with the divested businesses.
Capital expenditures were $2.3 million, primarily for internally developed software. Total operating cash flow, including discontinued operations, was $1.3 million. Cash alone was $10.9 million at year-end; the $11.1 million cash-and-restricted-cash figure includes $0.2 million of restricted cash.
During FY2019, holders converted the remaining $5.7 million principal of the 8.75% convertible notes into common stock; no convertible-note principal remained at March 31, 2019. The company had drawn none of its $5 million bank facility at year-end. A May 2019 amendment increased the facility to up to $20 million, subject to eligible-receivables borrowing limits, and extended it to May 2021. The company reported $8.0 million of warrant liability, which is not debt.
For the March 2019 quarter, revenue was $27.2 million versus $21.0 million a year earlier; gross profit was $11.0 million versus $6.9 million, and operating income was $1.9 million versus an operating loss of $1.3 million. The quarter’s continuing-operations net loss was $6.8 million versus $4.2 million, reflecting, among other items, changes in fair value of derivative liabilities.
Material Changes, Outlook, and Risks
- Business mix and concentration: Oath represented 28.6% of FY2019 revenue and 25.7% of net accounts receivable at year-end. Verizon Wireless generated 45.9% of revenue and AT&T, including Cricket, generated 38.7%. The filing says the company was not aware of material changes to those relationships, but partner or customer reductions could significantly affect results.
- Dispositions: The two business exits were intended to streamline operations and focus management on O&O. The Direct Carrier Billing asset sale involved a purchaser principally owned and controlled by a former company officer. A material contract assigned in that sale was later terminated; the company estimated no earn-out. Disputed discontinued-operation receivables and payables had potential net exposure of approximately $0.2 million.
- Management outlook: Management attributed revenue growth to stronger Ignite demand, improved revenue per placement, expanded activity with existing partners, and new partner deployments. It expected the positive demand trend to continue as it onboarded and scaled partners. No quantified revenue or earnings guidance is provided. Management stated it believed resources were sufficient for at least 12 months from the filing’s issuance.
- Liquidity and debt risks: The amended secured facility is collateralized by company and subsidiary assets and includes financial covenants. The company cautioned that covenant breaches could result in default and acceleration. Additional financing may not be available on acceptable terms; equity financing could dilute shareholders.
- Other risks: Mobile advertising demand, seasonal spending, device launches and sell-through, competition, Android-platform dependence, privacy and data regulation, cybersecurity, and the company’s reliance on a limited number of carriers and advertisers could affect performance. The company has a history of losses and remains exposed to volatility in noncash warrant fair-value charges.
- Audit and controls: The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting as of March 31, 2019. Management also concluded disclosure controls and internal financial controls were effective.
Important Facts for Investors to Verify
- Whether Ignite growth and partner expansion continue, and how revenue and margins develop quarter to quarter.
- Revenue and receivables exposure to Oath, Verizon Wireless, and AT&T, including renewal, termination, and payment terms.
- Actual borrowing availability under the amended $20 million facility, covenant compliance, and related secured-debt terms.
- Whether disputed discontinued-operation balances are collected or offset, and whether any proceeds arise from the divestiture agreements.
- The impact of warrant fair-value remeasurement, potential warrant exercises, and share issuance on reported earnings and dilution.
- Cash conversion, working-capital movements, and the basis for management’s stated 12-month liquidity assessment.