Digital Turbine, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2019. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.
Business context
Digital Turbine operates one continuing reportable segment, Advertising, centered on its Ignite platform and related products and services for mobile operators, device manufacturers, and advertisers. The company reported more than 3 billion application pre-loads across over 369 million devices and 35 operator and OEM partnerships. Its former Content and A&P businesses are reported as discontinued operations.
Financial performance
| Metric | Three months ended Dec. 31, 2019 | Year-over-year | Nine months ended Dec. 31, 2019 | Year-over-year |
|---|---|---|---|---|
| Revenue | $36.0 million | Up 18.4% | $99.4 million | Up 30.1% |
| Gross profit / margin | $14.0 million / 39.0% | Margin: 35.1% prior year | $38.3 million / 38.6% | Margin: 32.2% prior year |
| Operating income | $4.1 million | Prior year: $2.5 million | $10.3 million | Prior year: $1.5 million |
| Net income (loss) | $3.3 million | Prior year: $(1.3) million | $0.1 million | Prior year: $0.8 million |
| Diluted earnings (loss) per share | $0.04 | Prior year: $(0.01) | Less than $0.01, reported as — | Prior year: $0.01 |
For the nine-month period, continuing-operations net income was $0.3 million; discontinued operations recorded a $0.2 million loss. Operating expenses rose 20.5% in the quarter and 21.5% year over year for the nine months, led by higher sales and marketing and general and administrative costs. Management attributed revenue growth primarily to stronger Ignite demand, increased advertising-partner revenue on existing deployments, expanded carrier distribution, and new services and products. Improved partner mix and more non-dynamic-install revenue contributed to higher gross margins.
Cash flow, balance sheet, and liquidity
- Cash and restricted cash totaled $33.9 million at December 31, 2019, including $33.7 million of unrestricted cash; cash and restricted cash were $11.1 million at March 31, 2019.
- Operating cash flow was $20.0 million for the nine months, including $20.2 million from continuing operations, compared with $0.9 million used overall in the prior-year period. Management said the increase primarily reflected working-capital changes. The period’s operating cash flow also included a $10.6 million noncash warrant revaluation loss and a net increase in current liabilities.
- Capital expenditures were $3.2 million, mainly for internally developed software. Financing activities provided $6.4 million, principally from option and warrant exercises.
- No debt principal was outstanding. A Western Alliance Bank revolving facility provides up to $20 million, subject to eligible-receivables borrowing limits, and matures May 22, 2021. The company was in compliance with its covenants. The facility is secured by company assets.
- Current assets were $64.2 million and current liabilities were $54.4 million. Current liabilities included a $6.3 million warrant liability; total liabilities were $56.4 million.
- Operating lease liabilities had a present value of $2.6 million. Contractual cash obligations totaled $4.1 million, primarily operating leases. The filing also discloses approximately $1.0 million of additional non-current uncertain-tax-position liabilities, for which payment dates could not be estimated.
Management stated that cash, operating cash generation, and available credit were sufficient to fund operations for at least 12 months from the filing date.
Changes, outlook, risks, and unusual items
- Earnings volatility: The nine-month results included a $10.6 million noncash loss from remeasuring warrants, driven primarily by the rise in the company’s share price. This outweighed much of the improvement in operating income. The warrant liability was $6.3 million at December 31, 2019. The warrants are classified as a liability and are subject to fair-value changes through earnings.
- Revenue concentration: Verizon Wireless generated 37.5% of quarterly revenue and 40.3% for the nine months; AT&T and affiliates generated 29.8% and 30.9%, respectively; America Movil generated 12.4% and 10.0%. Verizon Communications, primarily through Oath, represented 14.4% of quarterly and 17.7% of nine-month revenue. Management cautioned that reduced activity, delayed payment, or termination by major customers or partners could materially harm results.
- Proposed acquisition: On February 6, 2020, a subsidiary agreed to acquire Mobile Posse for estimated consideration of $66.0 million: $41.5 million in cash at closing, subject to adjustments, and an estimated $24.5 million contingent earn-out tied to future revenue targets. If the acquisition does not close by March 16, 2020, a $5.0 million termination fee may apply in specified circumstances. Closing, integration, and realization of anticipated benefits are uncertain; transaction costs may be incurred even if it does not close.
- Discontinued operations: The company continued to negotiate settlement of certain receivables and payables retained after the Pay business disposition. Collectability and payment amounts were uncertain, but the company stated the maximum net exposure if both were deemed uncollectible or unpayable was immaterial.
- Guidance: The filing provides no specific revenue, earnings, or cash-flow guidance. Management expressed confidence in liquidity for at least 12 months but cautioned that actual future results may differ materially from forward-looking statements.
- Other: The company adopted lease accounting during the period, recording right-of-use assets and lease liabilities; management said the adoption had no material net effect on results, financial condition, or cash flows. Disclosure controls were assessed as effective, with no material changes in internal control over financial reporting reported.
Important facts for investors to verify
- Whether Mobile Posse’s acquisition closed, the final cash and earn-out consideration, and any termination-fee exposure.
- Whether revenue growth and margin improvement persist, particularly across the largest carrier partners and advertising customers.
- How much reported operating cash flow reflects repeatable operations versus working-capital timing and liability increases.
- Potential earnings and dilution effects from the remaining warrants, stock-based compensation, and continued share issuance; weighted-average diluted shares increased to 92.5 million in the quarter from 77.6 million a year earlier.
- Compliance with credit-facility covenants and the availability of borrowing capacity, which is limited by eligible domestic receivables.