Digital Turbine, Inc. — Q2 FY2018 Form 10-Q
Reporting period: Quarter and six months ended September 30, 2017. The company provides mobile advertising and content products through Advertising and Content segments. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless noted.
Financial performance
| Metric | Quarter ended Sep. 30, 2017 | Prior-year quarter | Six months ended Sep. 30, 2017 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $27.9M | $22.8M | $54.0M | $46.9M |
| Gross profit / margin | $7.4M / 26.4% | $3.2M / 13.8% | $14.0M / 25.9% | $6.1M / 13.0% |
| Operating expenses | $8.6M | $9.5M | $16.8M | $18.8M |
| Operating loss | $(1.3)M | $(6.3)M | $(2.8)M | $(12.8)M |
| Net loss | $(6.5)M | $(7.3)M | $(10.6)M | $(14.8)M |
| Loss per share, diluted | $(0.10) | $(0.11) | $(0.16) | $(0.22) |
- Quarterly revenue increased 22.2%; six-month revenue increased 15.2%. Advertising drove growth, particularly Ignite/O&O, while traditional A&P syndicated-network revenue declined sharply.
- Quarterly Advertising revenue was $18.1M, up 19.1%; Content revenue was $9.8M, up 28.3%. For the six-month period, Advertising rose 29.6% to $36.3M, while Content fell 6.1% to $17.7M.
- Gross margin expansion reflected the mix shift toward higher-margin O&O/ Ignite advertising and lower amortization of acquired intangibles. The filing reports quarterly and six-month total gross margins of 26.4% and 25.9%, respectively.
- Quarterly net loss improved despite substantial non-cash fair-value charges related to the convertible-note derivative and warrants. Those charges, plus debt-extinguishment loss, materially increased interest and other expense.
Cash, debt and liquidity
- At September 30, cash was $5.9M and restricted cash was $0.3M. Six-month operating cash use was $1.4M, investing cash use was $0.8M, and financing provided $1.9M. Cash declined $0.3M from March 31.
- Current assets were $30.5M and current liabilities $39.0M, producing a $8.5M working-capital deficit. Management noted that excluding the net $2.2M current credit-line balance, the deficit would have been $6.2M.
- Reported debt carrying value totaled $8.7M: $6.5M for convertible notes and $2.2M for the secured line. The notes had $10.0M principal outstanding, bear 8.75% interest and mature in 2020. The $5.0M Western Alliance facility had $2.5M drawn and a two-year term.
- In September, holders converted $6.0M principal of notes. The company issued 5,043,018 common shares and paid $0.247M cash; it recorded an $0.882M extinguishment loss. The conversion increased outstanding shares and diluted existing holders.
- The credit facility is secured by company assets and includes monthly financial covenants. The company reported compliance at September 30. Management stated it believed available cash and capital resources were sufficient for at least 12 months from the report’s issuance, while noting that additional financing might not be available on acceptable terms.
Changes, outlook and risks
- Business trends: Ignite revenue increased 70.4% for the quarter and 91.6% for the six months, driven by advertiser demand and expanded carrier distribution. Syndicated-network revenue fell 57.8% and 52.4%, respectively; management expected the shift away from non-automated networks toward programmatic advertising to continue.
- Content trends: Pay revenue rose 32.6% in the quarter, but was down 3.8% year to date. Management attributed the year-to-date decline to revised opt-in policies at a major Australian partner and lower Marketplace revenue; it expected Marketplace’s decline to continue.
- Customer and partner concentration: In the quarter, Singapore Telecommunications, AOL, Telstra and Machine Zone each accounted for more than 10% of revenue. Verizon generated 30.8% of revenue and AT&T 16.7%. The filing warns that reduced activity, delayed payment or loss of significant customers or carrier partners could materially harm results.
- Debt-related earnings volatility and dilution: Mark-to-market liabilities for embedded note derivatives and warrants rose with the share price, producing six-month losses of $4.7M and $1.6M. Their Level 3 valuations depend on unobservable assumptions. Note and warrant terms include anti-dilution provisions; the company also said it must seek renewed shareholder approval for full share issuance under those instruments and may have to settle some attempted conversions in cash until approval is obtained.
- Controls: Management concluded disclosure controls were ineffective as of September 30 because of previously identified material weaknesses in financial close and reporting, including staffing, accounting expertise, systems and reliance on manual processes. Remediation was underway, but management said it could not conclude the weaknesses were eliminated until controls were operated and tested.
- Legal matters: The company reported no significant legal proceedings and no accrued legal liability. It reported no subsequent events.
- Outlook: No numerical revenue or earnings guidance is provided. Management cited sufficient resources for at least the next 12 months, but also identified dependence on operating cash flow and possible future financing.
Key facts for investors to verify
- Whether Ignite/O&O growth can offset continued declines in syndicated-network and Marketplace activity, and how those trends affect gross margin.
- Cash conversion and receivables collection: accounts receivable rose to $23.8M, including $9.4M unbilled, while operating cash flow remained negative.
- Liquidity and covenant headroom, including access to the remaining credit facility and the impact of working-capital needs.
- Potential cash, dilution and earnings effects of the convertible notes, warrants, anti-dilution provisions and required shareholder approval.
- Progress in remediating material weaknesses and whether disclosure controls and internal financial reporting controls become effective.
- Exposure to major customers and carrier partners, and the assumptions underlying Level 3 derivative and warrant valuations.