Digital Turbine, Inc. — Q1 FY2018 Form 10-Q
Reporting period: Three months ended June 30, 2017, compared with the three months ended June 30, 2016. Financial amounts below are in U.S. dollars; figures are shown in millions unless stated otherwise. Digital Turbine provides mobile advertising and content services through its Advertising and Content segments.
Financial performance and liquidity
- Revenue: $26.12 million, up 8.7% year over year. Advertising revenue rose 42.0% to $18.19 million, while Content revenue fell 29.4% to $7.93 million.
- Profitability: Gross profit increased to $6.62 million from $2.94 million; gross margin was 25.3%, versus 12.2%. Operating loss narrowed to $1.52 million from $6.45 million. Net loss was $4.18 million, or $0.06 per diluted share, compared with $7.41 million, or $0.11 per share.
- Costs and unusual earnings items: Operating expenses declined 13.3% to $8.14 million. Net interest and other expense increased to $2.62 million, including $1.31 million of loss from revaluation of the convertible-note embedded derivative and $0.46 million of warrant-liability revaluation loss.
- Cash flow: Cash used in operating activities was $1.40 million, compared with $1.10 million used a year earlier. Capital expenditures were $0.37 million, making operating cash flow less capital expenditures approximately negative $1.78 million. Financing activities provided $1.94 million, including $2.25 million of short-term borrowings.
- Balance sheet and liquidity: Cash was $6.30 million, with an additional $0.33 million of restricted cash. Working capital was negative $7.73 million, versus negative $7.11 million at March 31, 2017. Current assets were $27.47 million and current liabilities $35.20 million. Accounts receivable rose to $20.14 million.
- Debt: Reported debt carrying value totaled $11.97 million: $1.94 million under a new secured credit facility and $10.03 million for convertible notes. The notes have $16.0 million principal, bear 8.75% interest, and mature in September 2020. The new Western Alliance facility has a $5.0 million limit, a two-year maturity, and is secured by company assets.
- Segments: Advertising operating loss was $0.42 million, compared with $5.04 million. Content operating loss was $1.10 million, compared with $1.41 million.
Material changes versus the prior comparable period
- Ignite revenue more than doubled to $15.06 million, reflecting increased demand and expanded distribution with existing and new carrier partners. Advertising growth was partly offset by Syndicated Network revenue falling 47.4% to $3.04 million.
- Content revenue declined primarily because Pay revenue fell 28.2%, amid revised opt-in policies at a major Australian partner and reduced content-provider marketing spend. Management also cited continued Marketplace decline as consumers shift to other app-delivery options.
- Gross margin improvement reflected the greater contribution from higher-margin Advertising revenue and lower intangible amortization. Content gross margin percentage decreased to 9.6% from 10.6%, including a mix shift toward lower-margin Pay.
- Cash increased modestly from March 31, but the working-capital deficit widened. Excluding the new facility’s current-liability classification, management said the deficit would have improved to $5.78 million.
Outlook, risks and other notable matters
- Liquidity outlook: Management said it believed available cash and capital resources were sufficient to operate for at least twelve months from the report’s issuance. It expected to rely on cash on hand and remaining credit availability until cash-flow positive, and noted additional financing might not be available on acceptable terms or at all.
- Operating outlook: Management expected the market shift away from non-automated syndicated advertising networks to continue, as well as continued Marketplace revenue decline. No specific revenue or earnings guidance was provided.
- Customer and partner concentration: Four customers each accounted for more than 10% of quarterly revenue; Verizon Wireless generated 33.0% and AT&T 14.0% through carrier relationships. The filing warns that reduced activity, delayed payment, or loss of significant customers or partners could materially harm results.
- Financing and dilution: Amendments to the convertible-note and warrant terms provide for a future measured-price adjustment, potentially increasing shares issuable. The company expected to determine any adjustment by the end of September 2017 and was obligated to seek stockholder approval to remove a 19.9% issuance cap. The filing also describes anti-dilution provisions and restrictions on additional debt.
- Controls: Management concluded disclosure controls and procedures were ineffective at June 30, 2017, due to previously identified material weaknesses in financial close and reporting, including staffing, accounting-system, and manual-process deficiencies. Remediation actions were underway or planned for fiscal 2018.
- Legal matter: A court approved a settlement in the Coral Tell matter and dismissed third-party notices against the company; an appeal of that dismissal remained possible. The company had not accrued a liability and did not consider liability probable.
- Credit covenants: The company reported compliance with the Western Alliance facility’s monthly financial covenants at June 30, 2017.
Important facts for investors to verify
- Whether Ignite growth can continue and offset declines in Syndicated Network, Pay, and Marketplace revenue.
- Whether operating cash use, receivables growth, and the working-capital deficit improve, and how much credit-facility availability remains.
- The measured-price adjustment to the convertible notes and warrants, required stockholder approval, and potential dilution.
- Progress in remediating material weaknesses and whether controls are later determined to be effective.
- Revenue dependence on major customers and carrier partners, including the potential impact of changes in their activity or payment timing.