Digital Turbine, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2018 (fiscal 2019 third quarter). Financial amounts below are in U.S. dollars; figures are rounded to millions unless otherwise stated. Comparative periods are recast to reflect discontinued operations.
Business context
Digital Turbine operates one continuing reporting segment, Advertising, focused on its Operator and OEM (O&O) business. Its Ignite platform supports application distribution and monetization through mobile operators and device manufacturers. In 2018, the Company sold assets associated with its Direct Carrier Billing/Content business and its Advertising and Publishing business; those operations are reported as discontinued.
Financial performance
| Metric | Three months ended Dec. 31, 2018 | Prior-year quarter | Nine months ended Dec. 31, 2018 | Prior-year nine months |
|---|---|---|---|---|
| Net revenue | $30.4 | $22.7 | $76.4 | $53.8 |
| Gross profit / margin | $10.7 / 35.1% | $7.4 / 32.6% | $24.6 / 32.2% | $18.2 / 33.8% |
| Operating income (loss) | $2.5 | ($1.5) | $1.5 | ($4.5) |
| Continuing-operations net income (loss) | ($1.1) | ($4.8) | $2.5 | ($15.5) |
| Consolidated net income (loss), including discontinued operations | ($1.3) | ($3.8) | $0.8 | ($14.4) |
| Basic and diluted earnings (loss) per share | ($0.01) | ($0.06) | $0.01 | ($0.21) |
Quarterly revenue increased 33.8%; nine-month revenue increased 42.0%. Quarterly gross margin improved, while the nine-month margin declined, which management attributed mainly to higher partner revenue-share rates as certain partners reached volume thresholds. Nine-month operating performance improved to a profit from a loss in the prior-year period. Quarterly net loss persisted despite operating income, partly because rising share prices produced noncash fair-value losses on convertible-note and warrant liabilities totaling approximately $3.1 million.
Cash flow, debt and liquidity
- Cash and restricted cash totaled $10.5 million at December 31, 2018, down $2.5 million from March 31, 2018.
- For the nine months, operating cash flow was $2.5 million from continuing operations, but $0.9 million used on a consolidated basis after $3.4 million of cash used by discontinued operations. Capital expenditures were $1.8 million, primarily for internally developed software.
- Working capital, excluding assets and liabilities held for disposal, was negative $2.8 million, compared with negative $2.7 million at March 31, 2018. Net accounts receivable increased 42.1% to $24.2 million.
- Debt carrying value was $4.8 million: $3.3 million of convertible notes and $1.5 million of short-term secured borrowing. The notes had $4.7 million principal outstanding, bear 8.75% interest, and mature in September 2020; the secured credit facility had $1.6 million gross principal outstanding.
- The Company reported compliance with credit-facility covenants at December 31, 2018, following a subsequent covenant amendment. Management said resources were sufficient for at least 12 months from the report’s issuance date.
Changes, outlook and risks
- Growth commentary: Management attributed Ignite growth to increased advertiser demand across existing deployments, expanded distribution with new carrier partners, and new Ignite services and products. It expected the positive product-demand trend to continue; the filing provides no numerical revenue or earnings guidance.
- Customer and partner concentration: Oath accounted for 28.8% of quarterly and 31.1% of nine-month revenue. Verizon generated 43.7% and 47.6%, respectively, and AT&T, including Cricket, generated 38.5% and 38.4%. One customer represented 36.2% of net receivables. The Company warned that loss, reduced activity, payment delays, or less favorable terms involving major customers or partners could materially harm results.
- Disposals and contingency: The Direct Carrier Billing purchaser terminated a material partner contract; the Company estimated no earn-out from that sale. A dispute over retained receivables and payables related to delivered content remained unresolved; the stated net exposure if all remaining amounts proved uncollectible was approximately $0.9 million. The A&P asset sale provides for a share of gross profit from transferred customer agreements for three years.
- Debt and valuation risk: Convertible-note and warrant liabilities are valued using Level 3 models sensitive to the Company’s share price and other assumptions, creating potentially volatile reported earnings. The notes carry 8.75% interest and include conversion and change-of-control provisions.
- SEC settlement: On January 29, 2019, the SEC accepted a settlement concerning a previously disclosed internal-control matter. The Company agreed to a $100,000 civil penalty and a cease-and-desist order. Management stated disclosure controls were effective at quarter-end and reported no material changes in internal control over financial reporting during the quarter.
- Accounting: The Company adopted ASC 606 effective April 1, 2018 using the modified retrospective method and reported no material adoption impact.
Important facts for investors to verify
- Whether Ignite growth and management’s stated demand trend continue, and how revenue growth translates into sustainable margins and cash generation.
- Developments in customer and carrier concentration, receivable collection, and the status and potential resolution of the discontinued-operations dispute.
- Cash conversion and liquidity, including the working-capital deficit, facility covenant terms and amendment, and the Company’s ability to meet obligations through the 2020 note maturity.
- Potential earnings volatility from fair-value remeasurement of the convertible-note embedded derivative and warrants, as well as potential share dilution from conversions, warrants, and equity awards.
- Compliance and remediation developments following the SEC settlement and related internal-control matter.