Digital Turbine, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended March 31, 2017. The request refers to “2016 Q4,” but this filing is the annual report for FY2017; its fourth-quarter results are for the three months ended March 31, 2017. Amounts below are in U.S. dollars.
Business context and key financial metrics
Digital Turbine provides mobile advertising, application distribution, content storefront and carrier-billing services. Its reportable segments are Advertising (Operator and OEM, including Ignite, and Advertiser and Publisher) and Content (Pay and Marketplace).
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $91.553 million | $86.541 million |
| Gross profit / margin | $13.363 million / 14.6% | $9.819 million / 11.3% |
| Operating loss | $22.020 million | $25.936 million |
| Net loss | $24.264 million | $28.032 million |
| Net loss per share, basic and diluted | $0.36 | $0.46 |
| Cash used in operating activities | $6.995 million | $7.069 million |
| Cash at year-end | $6.149 million | $11.231 million |
| Working capital | $(7.109) million | $(9.308) million |
FY2017 fourth-quarter revenue was $22.397 million, gross profit $3.907 million, operating loss $3.854 million, net loss $6.925 million and loss per share $0.10.
At year-end, the company had $16.0 million principal amount of 8.75% convertible notes due 2020, carried at $9.685 million net of discounts and issuance costs, plus $4.294 million of derivative and warrant liabilities. It had repaid approximately $11 million of prior secured debt using note proceeds. Total assets were $107.580 million, total liabilities $45.535 million and stockholders’ equity $62.045 million.
Material changes versus the prior year
- Revenue rose 5.8%. Advertising revenue increased 2.9% to $59.439 million; Content revenue increased 11.6% to $32.114 million.
- Ignite revenue rose 81.8% to $39.235 million, supported by higher CPI/CPP advertising and expanded carrier distribution. Pay revenue increased 34.4% to $30.540 million.
- Syndicated Network revenue fell 46.6% to $18.990 million amid weaker advertiser demand and fewer publisher partners. Marketplace revenue declined 73.9% to $1.575 million as consumer demand shifted to other content stores.
- Gross margin improved to 14.6%. Management said the year included a $0.757 million intangible impairment; FY2016 included approximately $2.4 million of accelerated amortization. Excluding those items, management reported adjusted gross margin of 15.4% for FY2017 versus 14.1% for FY2016.
- Operating expenses were nearly flat at $35.383 million. Product development and sales and marketing expenses increased, while general and administrative expenses declined.
- Net loss narrowed to $24.264 million from $28.032 million, while operating cash use remained approximately $7.0 million. Cash declined by $5.082 million during the year.
Outlook, risks and unusual items
- The filing gives no numerical revenue or earnings guidance. Management stated it believed available cash and capital resources were sufficient for at least 12 months from the report’s issuance, while noting continued operating losses and reliance on liquidity and financing.
- In May 2017, after year-end, the company entered a secured credit facility of up to $5 million. It carries monthly financial covenants, including a minimum current ratio of 0.65 and revenue of at least 85% of projected quarterly revenue. The filing describes changes to note and warrant terms made in connection with obtaining lender consent, including a revised conversion-price mechanism and a requirement to seek new stockholder approval for full potential share issuance.
- Management expects the shift from non-automated syndicated advertising networks toward programmatic advertising to continue, potentially weighing on A&P. The company also faces seasonal advertising spending, customer and carrier concentration, competition, mobile-platform dependence, foreign-exchange exposure and privacy, cybersecurity and regulatory risks.
- Four customers represented 21.6%, 12.2%, 11.5% and 11.1% of FY2017 revenue, respectively. Loss or reduced spending from a major customer could materially affect results.
- Stock-price-sensitive embedded note and warrant liabilities generated $0.622 million of combined non-cash gains in FY2017. Their remeasurement may cause substantial fluctuations in GAAP results. The company also recorded a $0.293 million debt-extinguishment loss and a $0.757 million intangible impairment.
- The financial statement auditor issued an unqualified opinion on the statements, but management and the auditor concluded internal control over financial reporting was ineffective at March 31, 2017 due to a material weakness in financial-close/reconciliation controls and IT controls. Remediation work was underway and not yet fully tested. The company also disclosed an informal SEC inquiry regarding internal and disclosure controls; its outcome was not known.
- A Coral Tell-related third-party notice in an Israeli class-action matter was described as not probable or reasonably estimable; the company had not accrued a liability and considered potential liability remote.
Important facts for investors to verify
- Whether Ignite and Pay growth can offset continued declines in Syndicated Network and Marketplace, and whether the shift toward programmatic advertising affects margins.
- Current cash, borrowing availability and compliance with the Western Alliance facility’s covenants, together with the company’s ability to fund operations while cash flow remains negative.
- The full dilution and accounting consequences of the convertible notes, warrants, revised conversion provisions and required stockholder approval.
- Progress in remediating and independently testing the material weakness in internal controls, and any developments in the SEC inquiry.
- Customer and carrier concentration, receivable collection and exposure to foreign-currency movements.