Digital Turbine, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2017. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise. Digital Turbine provides mobile advertising and content services through its Advertising and Content segments.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2017 | Prior-year quarter | Nine months ended Dec. 31, 2017 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $38.0 | $22.3 | $92.0 | $69.2 |
| Gross profit / margin | $9.7 / 25.4% | $3.4 / 15.1% | $23.6 / 25.7% | $9.5 / 13.7% |
| Operating loss | $(0.6) | $(5.4) | $(3.4) | $(18.2) |
| Net loss | $(3.8) | $(2.6) | $(14.4) | $(17.3) |
| Basic and diluted loss per share | $(0.05) | $(0.04) | $(0.21) | $(0.26) |
- Quarterly revenue rose 70.7%; nine-month revenue rose 33.1%. Growth was led by Ignite and Pay. For the nine-month period, Ignite revenue increased 93.5% to $53.6 million and Pay revenue increased 30.8% to $30.9 million.
- Advertising revenue increased 49.3% for the quarter and 36.8% year to date. A&P Syndicated Network revenue declined 66.5% and 56.4%, respectively, as advertiser demand weakened and the market shifted toward programmatic advertising. Management expected that trend to continue.
- Quarterly operating loss narrowed substantially, but net loss increased year over year, reflecting fair-value losses on convertible-note and warrant liabilities. These noncash charges are sensitive to the Company’s share price. For the nine months, net loss improved year over year.
- Nine-month operating cash flow was positive $0.5 million, versus negative $7.8 million a year earlier. Capital expenditures were $1.3 million, implying approximately $0.8 million of negative operating cash flow less capital expenditures. Cash increased $0.7 million to $6.9 million; restricted cash was $0.3 million.
- At December 31, current assets were $40.4 million and current liabilities $48.2 million, yielding a $7.8 million working-capital deficit. Accounts receivable was $32.5 million, up from $16.6 million at March 31, 2017.
- Reported debt was $7.4 million net of discounts and issuance costs: $5.8 million of convertible notes and $1.7 million of short-term secured debt. Notes had $8.6 million principal outstanding, bear 8.75% interest, and mature in September 2020. The Western Alliance facility allows up to $5.0 million; $1.9 million was drawn gross. The Company reported covenant compliance.
Material changes and management commentary
- Revenue growth and gross-margin expansion reflected a greater contribution from higher-margin O&O/ Ignite advertising and lower intangible amortization. Total gross margin increased to 25.4% in the quarter from 15.1%.
- Content revenue grew, mainly from Pay, while Marketplace continued to decline as users shifted away from carrier-specific content stores. Management attributed quarterly general and administrative expense growth partly to a $1.5 million company-wide bonus accrual.
- During the nine months, holders converted $7.4 million principal of notes into common shares; the Company issued approximately 6.2 million shares in the conversions. The remaining notes and associated warrants create potential dilution and fair-value earnings volatility.
- Management believed available resources were sufficient to operate for at least twelve months from the report’s issuance. It also noted that additional financing may not be available on acceptable terms and that equity financing could dilute existing holders. No quantitative revenue or earnings guidance was provided.
Risks, contingencies, and unusual items
- Customer and partner concentration is significant. Verizon generated 29.6% of quarterly revenue and AT&T 24.0%. Singapore Telecommunications, Oath, Telstra, and Machine Zone each represented more than 10% of quarterly revenue. Significant customer or carrier changes could affect results and collections.
- After quarter-end, Telstra said it would not continue using the Pay service after its contract ends in March 2018. The Company expected substantially lower activity between the parties but said the affected revenue had nominal gross-profit contribution and would not materially affect operating results.
- Disclosure controls and procedures were deemed ineffective at December 31, 2017 because previously identified material weaknesses in financial close and reporting remained. Management cited staffing and systems issues, described remediation efforts, and said effectiveness must be tested before the weaknesses can be considered remediated.
- No legal matters requiring disclosure or accrual were reported. The filing described no material new risk factors beyond those in the prior Form 10-K.
Important facts for investors to verify
- Whether receivables and unbilled revenue are collected as expected, given the sharp increase in accounts receivable and customer concentration.
- The revenue and gross-profit effects of Telstra’s Pay non-renewal and the continuing decline in A&P and Marketplace.
- Cash generation and liquidity, including the working-capital deficit, credit-facility availability, and note interest and maturity obligations.
- Potential dilution from remaining convertible notes, warrants, and equity awards, and the earnings impact of share-price-sensitive fair-value liabilities.
- Progress and independent evidence of remediation of the material weaknesses in internal controls.