Digital Turbine, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2015 (the first quarter of fiscal 2016). Amounts below are in millions of dollars unless otherwise noted. Comparisons are with the three months ended June 30, 2014, except balance-sheet comparisons, which are with March 31, 2015.
Business context
Digital Turbine provides mobile advertising, application distribution, content-store and carrier-billing products. It reports two segments: Advertising and Content. Results include a full quarter of Appia Core following the Appia acquisition in March 2015.
Financial results and liquidity
| Metric | Q1 FY2016 | Prior-year quarter |
|---|---|---|
| Revenue | $18.686 | $5.554 |
| Gross profit / margin | $2.274 / 12.2% | $1.414 / 25.5% |
| Operating expenses | $9.425 | $6.094 |
| Operating loss | $(7.151) | $(4.680) |
| Net loss | $(8.119) | $(4.610) |
| Basic and diluted loss per share | $(0.14) | $(0.12) |
| Cash used in operating activities | $0.359 | $3.135 |
- Revenue grew 236.4%. Advertising revenue was $11.616 million, versus $0.679 million; Content revenue was $7.070 million, versus $4.875 million.
- Gross margin fell to 12.2%, primarily reflecting acquired-intangible amortization of $2.191 million versus $0.344 million a year earlier. Content margin also declined with a mix shift toward lower-margin DT Pay; Advertising margin was affected by Appia Core’s lower-margin revenue.
- Cash and cash equivalents were $6.180 million, plus $0.200 million restricted cash, at June 30. Working capital was negative $8.334 million, compared with negative $3.760 million at March 31.
- Total debt was approximately $10.657 million: $3.450 million current debt and $7.207 million subordinated debenture, net of discount. The debt includes $3.000 million drawn on a $5.000 million revolving facility and a $0.450 million term loan. The $8.000 million debenture principal is due March 2017.
- Investing activities used $0.318 million, primarily for internally developed software; financing activities used $0.140 million, primarily for debt repayment. Cash declined $0.889 million during the quarter.
Changes, outlook and risks
- Management attributed revenue growth to organic DT Ignite and DT IQ deployments, growth in DT Pay, and a full quarter of Appia Core. Content growth was partly offset by termination of the company’s Israel DT Marketplace contract.
- Operating expenses rose 54.7%, chiefly due to the full quarter of Appia expenses, added headcount in Germany and Singapore, and higher stock-based compensation.
- No specific revenue or earnings guidance was provided. Management said available resources were expected to support operations through June 30, 2016. It said additional capital could be needed for acquisitions or other growth opportunities; financing may not be available on acceptable terms. A $100 million shelf registration was effective April 24, 2015.
- Liquidity is a key risk: the company had a working-capital deficit and stated that positive operating cash flow was important to asset recoverability. It expected to rely on cash and access to its revolving facility until cash-flow positive. The facility matures June 30, 2016; the company reported compliance with debt covenants at quarter-end.
- Two customers represented 26.5% and 8.2% of quarterly revenue; two customers represented 20.4% and 11.7% of accounts receivable at June 30. Management also cited foreign-exchange exposure, particularly to the Australian dollar.
- Disclosure controls and procedures were deemed ineffective at June 30 because of previously identified material weaknesses in internal control over financial reporting. Management described remediation efforts, including accounting-system improvements, added staffing and documented controls.
- A $0.381 million accrual was recorded for a potential investor settlement; the settlement was finalized July 30, 2015, for 117,000 shares. The company recorded no liability for the Coral Tell-related matter, which it considered remote and not probable or estimable.
Important facts for investors to verify
- Whether revenue growth, particularly advertising growth, is sustainable and how Appia contributes to future margins.
- Cash conversion, receivables collection, working-capital trends and funding needs relative to management’s stated liquidity horizon.
- Debt-facility availability, borrowing-base capacity, maturity and covenant compliance.
- Progress in remediating material weaknesses and the timing of effective internal controls.
- Customer concentration, the effects of the terminated Israel contract, and resolution of the investor settlement and other legal matters.