Digital Turbine, Inc. — Q1 FY2023 (quarter ended June 30, 2022)
Digital Turbine operates a mobile growth and advertising platform serving advertisers, app publishers, carriers and device manufacturers. This fiscal first-quarter 10-Q compares the three months ended June 30, 2022 with the prior-year quarter. Unless noted, dollar amounts below are in millions.
Financial results and liquidity
| Metric | Q1 FY2023 | Prior-year quarter | Change |
|---|---|---|---|
| Net revenue | $188.6 | $158.1 | +19.3% |
| Income from operations | $24.4 | $19.1 | +27.6% |
| Net income attributable to Digital Turbine | $14.9 | $14.3 | +4.5% |
| Diluted EPS | $0.15 | $0.14 | — |
| Operating cash flow | $36.6 | $(29.0) | Improved |
- Operating margin was approximately 13.0%, versus 12.1% a year earlier. License fees and revenue share were 46.1% of revenue, down from 53.0%; management attributed the decline mainly to AGP revenue presentation and mix. Segment profit, defined as revenue less license fees and revenue share, was $101.3 million, up from $74.3 million.
- Cash and restricted cash totaled $89.8 million at quarter-end ($89.3 million in cash and $0.5 million restricted), down from $127.2 million at March 31, 2022. Accounts receivable was $257.6 million.
- Revolver borrowings were $476.1 million; carrying debt, net of issuance costs, was $473.0 million. The company reported $123.9 million of remaining borrowing capacity, a 3.38% interest rate, and compliance with credit covenants. The facility matures in April 2026.
- Investing cash outflow was $6.4 million, primarily capital expenditures. Financing cash outflow was $64.6 million, including $60.5 million of debt repayments. Interest expense, net, rose to $4.1 million from $1.2 million.
Material changes and operating trends
- App Growth Platform (AGP) revenue grew 83.3% to $72.4 million, primarily reflecting a full quarter of AdColony and Fyber operations. On Device Solutions (ODS) revenue declined 1.5% to $118.6 million, with lower active daily users and content-media revenue share partly offset by higher revenue per device and additional app-media distribution slots.
- Costs and operating expenses increased 18.2% to $164.2 million. General and administrative expense rose 57.2% to $37.7 million, reflecting acquired operations, employee-related costs, stock compensation, and depreciation and amortization. Other direct costs nearly doubled, partly due to higher AGP ad-request volume.
- Operating cash flow improved from an outflow in the prior-year quarter, primarily due to working-capital changes and higher non-cash charges. The prior-year comparison included acquisition spending and financing activity; the current quarter had no acquisition cash outflow.
- Effective April 1, 2022, the company combined its two in-app businesses into AGP and renamed On Device Media as ODS. Prior-year segment figures were presented on the revised basis; the organizational change was intended to support operating efficiencies and revenue synergies.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management said it expects cash flows and available resources to meet business requirements for at least 12 months from the filing date, while noting liquidity depends on operating performance, borrowing capacity and capital-market access.
- Management reported a slowdown in digital advertising spending, which it believes is partly related to inflation and recession concerns. It said inflation had not materially affected results to date, though wage pressures and carrier/OEM supply-chain challenges were present. COVID-19-related economic uncertainty also remains a potential risk.
- Variable-rate secured debt exposes the company to higher interest expense; covenant breaches could trigger default and acceleration. The company also disclosed approximately $205.3 million of hosting minimum purchase commitments over five years.
- Two shareholder class-action complaints filed in June and July 2022 allege federal securities-law violations and seek unspecified damages and costs. The company denies wrongdoing; management said the early-stage cases’ outcome and potential liability could not be assessed.
- Disclosure controls were deemed ineffective at June 30, 2022 because of a material weakness in controls over accounting for acquired businesses, including aligning acquiree accounting policies and presentation. Management reported remediation work was ongoing.
- Fyber’s $50.0 million acquisition purchase-price liability was settled with 1,205,982 company shares in May 2022. Separately, the filing reports full achievement of a Fyber earn-out and issuance of 24,120 shares to a former executive, disclosed in July 2022 as effective May 19.
Important facts for investors to verify
- Whether AGP growth and lower license-fee burden persist beyond the acquisition-comparison effect, and how ODS user and revenue trends develop.
- Debt reduction, variable-rate interest exposure, covenant headroom and remaining revolver availability.
- Progress and effectiveness of remediation for the material weakness in internal controls.
- Developments in the securities litigation and any resulting liability or disclosure.
- Cash conversion and the effects of hosting commitments, acquired-business integration and digital-advertising market conditions.