Digital Turbine, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2018. Although the request references “2017 Q4,” this filing reports the full fiscal year ended March 31, 2018; quarterly figures for the quarter ended March 31, 2018 are included below. Financial amounts are in U.S. dollars.
Business context and reporting period
Digital Turbine provides mobile application management and distribution services for mobile operators and device manufacturers. Its continuing business is Operator and OEM (O&O), primarily the Ignite platform, which supports app installation and monetization through advertising arrangements. Following planned dispositions announced in April 2018, the company presents O&O as its sole continuing reportable segment; prior periods were recast for discontinued operations.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Continuing-operations revenue | $74.751 million | $40.207 million |
| Gross profit / margin | $25.055 million / 33.5% | $11.258 million / 28.0% |
| Operating loss | $5.809 million | $16.971 million |
| Net loss from continuing operations | $19.697 million | $19.138 million |
| Net loss from discontinued operations | $33.160 million | $5.126 million |
| Total net loss | $52.857 million | $24.264 million |
| Operating cash flow, continuing operations | $7.290 million | $(11.589) million |
| Capital expenditures | $1.992 million | $1.418 million |
| Cash at year-end | $12.720 million | $6.149 million |
For the March 2018 quarter, continuing-operations revenue was $20.961 million, gross profit was $6.885 million, operating loss was $1.339 million, and net loss from continuing operations was $4.212 million.
At March 31, 2018, working capital excluding assets and liabilities held for disposal was a deficit of $2.678 million. The company reported $5.7 million principal outstanding on its 8.75% convertible notes due 2020 and $1.65 million gross outstanding under its secured credit facility; the balance sheet carried these borrowings at $3.873 million and $1.445 million, respectively, net of discounts and issuance costs. Total stockholders’ equity was $27.672 million.
Material changes versus the prior comparable period
- Continuing revenue grew 85.9%, driven by increased CPI and CPP advertising revenue across existing carrier deployments, new distribution partners, and Ignite services.
- Gross margin increased to 33.5% from 28.0%, which management attributed to a stronger mix of O&O contracts and lower intangible amortization.
- Operating loss narrowed by $11.162 million as revenue growth substantially exceeded the 9.3% increase in operating expenses.
- Continuing-operations net loss was slightly higher despite improved operating performance. Interest and other expense rose to $14.839 million, including $7.559 million of non-cash convertible-note derivative remeasurement loss, $3.208 million of warrant-liability remeasurement loss, and a $1.785 million debt-extinguishment loss.
- Total net loss increased sharply, primarily reflecting a $34.045 million goodwill impairment associated with businesses designated for disposal. The discontinued businesses generated $48.877 million of revenue in FY2018, but their reported loss included that impairment.
- Operating cash flow from continuing operations improved to positive $7.290 million. Cash was also affected by working-capital movements, including higher accounts payable and accrued amounts.
Outlook, risks, contingencies, and unusual items
- Business exits: In April 2018, the company agreed to dispose of Direct Carrier Billing assets and its Advertising and Publishing customer relationships. The transactions were expected to close in June 2018 and remained subject to closing conditions. Consideration includes license fees, profit sharing, and equity-equivalent rights for the billing assets, and a three-year gross-profit revenue share for the A&P assets. The billing-asset purchaser is principally owned and controlled by an officer of the selling subsidiary, who was to leave the company at closing.
- Management outlook: No numerical revenue or earnings guidance is provided. Management said the dispositions should streamline operations, focus resources on O&O, and generate cash for O&O growth initiatives. Management believed cash and capital resources were sufficient to fund operations for at least twelve months after issuance of the report.
- Debt and liquidity: The secured facility is backed by substantially all company and subsidiary assets and includes monthly financial covenants: a minimum current ratio of 0.65 and quarterly revenue of at least 85% of projections. The company reported compliance at March 31, 2018. A covenant breach could trigger default and acceleration, potentially cross-defaulting the notes. Working-capital deficit and dependence on cash generation remain relevant risks.
- Concentration: Verizon Wireless generated 51.5% of FY2018 net revenue and AT&T, primarily through Cricket, generated 34.3%. Oath represented 23.5% of revenue and Machine Zone 16.1%. Loss or reduction of major carrier or advertiser relationships could materially affect results.
- SEC matter and controls: The company received a Wells Notice on April 17, 2018 concerning a potential SEC enforcement action related to reporting and internal-control matters. The company was seeking settlement, but gave no assurance of outcome; it believed resolution was unlikely to materially affect operations or financial position. Management and the auditor concluded internal control over financial reporting was effective at March 31, 2018, following remediation of a prior-year material weakness. The auditor issued unqualified opinions on the financial statements and internal controls.
- Other notable risks: The business is exposed to mobile-market competition and platform changes, seasonality, foreign-exchange movements, privacy and data-protection regulation, litigation and intellectual-property claims, and stock dilution from convertible notes, warrants, and equity compensation. Derivative-liability valuations use significant unobservable assumptions and can cause substantial non-cash earnings volatility.
Most important facts an investor should verify
- Whether both announced asset-sale transactions closed, their final proceeds and contingent-payment terms, and the effect on continuing revenue and cash flows.
- Current liquidity, working capital, cash conversion, and compliance with the secured facility’s current-ratio and revenue covenants.
- Updated debt balances, repayment or conversion activity, potential share dilution, and the sensitivity of derivative liabilities to the share price and valuation assumptions.
- Whether the company can maintain or diversify its heavily concentrated carrier and advertiser relationships.
- The status and resolution of the SEC Wells Notice, and whether remediated controls remain effective.
- The discontinued-operations presentation and the $34.045 million goodwill impairment, including any further disposal-related adjustments.