Digital Turbine, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2014. Unless stated otherwise, financial amounts below are in millions of dollars; the filing presents financial statements in thousands. The company provides mobile application management, discovery, content and carrier-billing solutions to wireless carriers and OEMs.
Financial performance
| Metric | Three months ended Dec. 31, 2014 | Three months ended Dec. 31, 2013 | Nine months ended Dec. 31, 2014 | Nine months ended Dec. 31, 2013 |
|---|---|---|---|---|
| Revenue | $7.006 | $6.809 | $18.023 | $18.352 |
| Gross profit | $1.983 | $1.933 | $5.200 | $5.984 |
| Gross margin | 28.3% | 28.4% | 28.9% | 32.6% |
| Operating expenses | $7.375 | $5.621 | $19.915 | $17.617 |
| Operating loss | $(5.391) | $(3.688) | $(14.714) | $(11.633) |
| Net loss | $(5.484) | $(4.176) | $(15.294) | $(16.084) |
| Basic and diluted loss per share | $(0.15) | $(0.13) | $(0.41) | $(0.63) |
- Revenue mix: Third-quarter advertising revenue rose to $1.867 million from $0.068 million, and content-billing revenue increased 10% to $3.056 million. Non-billing content revenue fell 46% to $1.923 million. For the nine months, advertising grew to $2.549 million, but content and services revenue declined; total revenue decreased 1.8%.
- Profitability: Third-quarter net loss widened 31% year over year as operating expenses rose 31%, including a 66% increase in general and administrative expense. Nine-month gross margin declined, which management attributed to product and sales mix. Nine-month net loss improved partly because the prior-year period included discontinued-operations losses and other financing-related charges.
- Cash flow: Net cash used in operations was $8.705 million for the nine months, versus $6.906 million a year earlier. Investing activities used $2.107 million, including $2.125 million for the Xyologic asset acquisition; financing provided $0.375 million from warrant exercises. Cash and cash equivalents fell $10.421 million to $11.384 million.
- Balance sheet and liquidity: At December 31, cash was $11.384 million, current assets $17.592 million, current liabilities $11.680 million, working capital approximately $5.9 million, total assets $33.346 million, total liabilities $11.680 million and stockholders’ equity $21.666 million. Working capital was $15.6 million at March 31, 2014. The balance sheet reports no conventional debt balance; the prior $0.238 million contingent liability was settled and is no longer recorded.
- Taxes and equity: The company recorded a $0.469 million income-tax provision for the nine months despite its pretax loss, and maintained a full valuation allowance against net deferred tax assets. Weighted-average shares rose 47% year over year for the nine-month period, to 37.576 million.
Changes, outlook and notable matters
- Management attributed advertising growth to new DT Ignite customers and content-billing growth to new DT Pay customers. Services revenue fell as the company shifted focus toward advertising. The Xyologic acquisition added app recommendation, search and discovery intellectual property for $2.5 million cash; its preliminary allocation included $1.5 million of developed technology and $1.0 million of goodwill.
- Management stated that existing cash was expected to fund planned operations for at least the next 12 months, while noting that additional capital might be needed for acquisitions or licensing and may not be available on acceptable terms. No numerical revenue or earnings guidance was provided. The company remained cash-flow negative.
- The filing discusses a planned Appia acquisition and associated legal and accounting costs; it does not provide a clear value for those costs. The filing includes a November 2014 merger agreement with Appia among its exhibits.
- Management disclosed that disclosure controls and procedures were ineffective at December 31, 2014 because of material weaknesses in the financial close and reporting process, including insufficient systems and technical resources, manual procedures and lack of a single accounting platform. Remediation plans included ERP implementation, additional accounting expertise and control documentation; certain efforts were expected to be completed by fiscal year-end.
- Risks include dependence on mobile-device sell-through, limited carrier relationships, revenue variability and customer concentration. Three customers represented 59.0% of gross receivables at December 31, 2014; four customers accounted for 80.3% of nine-month gross revenue. A pending Israeli matter includes a third-party notice alleging involvement in a class-action dispute; management considered liability remote and recorded no accrual.
- Lease commitments totaled $2.431 million, with additional employment-contract commitments of $1.440 million. The company reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether operating cash burn and the decline in working capital remain consistent with management’s stated 12-month liquidity assessment.
- Whether advertising growth and new customer deployments can offset declines in non-billing content and services while supporting improved gross margins.
- The status, financing and dilution implications of the Appia transaction and any other planned acquisitions or capital raising.
- Progress and independent evidence of remediation of the disclosed material weaknesses in financial reporting controls.
- Exposure to major customers and carriers, device sell-through variability, and developments in the pending Israeli litigation.