Digital Turbine, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2020. The filing also reports the quarter ended March 31, 2020 (fiscal Q4). Financial amounts below are in U.S. dollars; annual and quarterly comparisons are year over year unless noted.
Business context and reporting period
Digital Turbine provides an on-device media distribution platform for mobile operators and device manufacturers, supporting application delivery, advertising, and related services. It reported one segment, Media Distribution, and said its platform had been adopted by more than 40 operators and OEMs. The company acquired Mobile Posse on February 28, 2020; its results were included from the acquisition date.
Financial and operating performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $138.7 million | $103.6 million |
| Gross profit / margin | $53.7 million / 38.7% | $35.6 million / 34.3% |
| Operating expenses | $40.5 million | $32.1 million |
| Operating income | $13.2 million | $3.4 million |
| Continuing-operations net income (loss) | $14.3 million | ($4.3 million) |
| Net income (loss), including discontinued operations | $13.9 million | ($6.0 million) |
| Diluted EPS from continuing operations | $0.16 | ($0.06) |
- Revenue increased 33.9%; management attributed growth mainly to stronger core-service demand, higher CPI and CPP revenue per available placement, expanded placements with existing partners, and new partner deployments. Mobile Posse contributed $4.8 million of revenue after closing.
- Gross margin rose to 38.7%, which management linked to improved yield and a higher mix of non-dynamic-install revenue. Operating expenses increased 26%, slower than revenue; sales and marketing and general and administrative costs rose, including costs related to Mobile Posse.
- FY2020 operating cash flow from continuing operations was $33.7 million, versus $5.0 million. Total operating cash flow, including discontinued operations, was $31.4 million. Capital expenditures were $4.8 million, primarily internally developed software.
- At March 31, cash was $21.5 million, plus $0.1 million restricted cash. Working capital was negative $24.4 million, excluding assets and liabilities held for disposal. Current liabilities included a $23.7 million Mobile Posse earn-out accrual.
- Debt was $20.0 million gross ($19.7 million net of issuance costs); the company also had an undrawn $5.0 million revolving facility. Total assets were $184.0 million and stockholders’ equity was $77.5 million.
Fiscal Q4: Revenue was $39.4 million, gross profit $15.3 million, and operating income $2.9 million. Continuing-operations net income was $14.0 million, including a $10.4 million income-tax benefit.
Material changes versus prior periods
- Revenue growth continued, while gross margin improved 4.4 percentage points and operating income increased substantially from FY2019.
- FY2020 continuing-operations earnings benefited from a $10.4 million income-tax benefit, primarily reflecting release of valuation allowance associated with deferred tax liabilities recognized in the Mobile Posse acquisition. Results also included a $9.6 million non-cash loss from remeasurement of warrant liability; all remaining warrants were exercised by year-end.
- Mobile Posse was acquired for $41.5 million cash at closing plus an estimated, performance-based cash earn-out of $23.7 million. The earn-out is subject to final calculation. The acquisition added $27.0 million of goodwill and $44.1 million of intangible assets in the preliminary purchase accounting.
- Cash flow from continuing operations increased sharply, but the filing attributes the change partly to non-cash items and working-capital movements, including a rise in accounts payable. Capital expenditures also more than doubled.
- Carrier revenue concentration remained significant: Verizon Wireless generated 37.3% and AT&T/Cricket 30.0% of FY2020 revenue; America Movil/Tracfone contributed 10.7%. Oath represented 15.3% of revenue, down from 28.6% in FY2019.
Outlook, risks, contingencies, and unusual items
- Management stated that available cash, operating cash flow, and credit resources were expected to support operations for at least 12 months from the filing date. No specific revenue or earnings guidance was provided.
- The new Western Alliance Bank facility bears interest at LIBOR (or replacement index) plus 3.75%, subject to a 1.75% floor. It is secured by substantially all company and subsidiary assets and includes fixed-charge coverage and funded-debt-to-adjusted-EBITDA covenants. Quarterly principal repayments began in July 2020; excess-cash-flow repayments may also apply.
- Management described COVID-19 effects as uncertain, with potential impacts on device sales, advertising demand, customers, partners, and employees. The company reported operating with modifications and said it would continue monitoring developments.
- Key risks include reliance on a limited number of carriers and advertising customers, short or terminable customer arrangements, competition, dependence on Android and third-party platforms, privacy and data regulation, acquisition integration and earn-out performance, and debt covenant compliance.
- The filing reports discontinued-operations losses of $0.4 million in FY2020 and $1.7 million in FY2019. Remaining Pay-business receivables and payables were fully reserved amid collection disputes; management described the potential remaining impact as immaterial.
- The independent auditor issued unqualified opinions on the financial statements and internal controls. Mobile Posse was excluded from the internal-control assessment because it was acquired late in the year; it represented approximately 51% of consolidated assets and 3.5% of revenue for FY2020.
Important facts for investors to verify
- Final Mobile Posse purchase-price adjustments and earn-out amount, and the acquired business’s subsequent revenue and cash contribution.
- Compliance with credit-facility covenants, required principal payments, and availability of the undrawn revolver.
- Whether carrier concentration and customer dependence decline, and whether key contracts renew on acceptable terms.
- Cash-flow sustainability after accounting for working-capital timing, acquisition-related obligations, and higher capital spending.
- The assumptions supporting the tax benefit, deferred tax asset realization, and valuation of goodwill and acquired intangible assets.
- Integration of Mobile Posse’s systems and controls, which were excluded from the year-end internal-control assessment.