Digital Turbine, Inc. — Q3 FY2016 Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2015. Financial amounts are in thousands of dollars unless stated otherwise. The 2014 comparison excludes Appia, acquired March 6, 2015, so growth rates are not fully comparable.
Business context and results
Digital Turbine provides mobile advertising and content products through its Advertising and Content segments. Advertising includes DT Ignite, DT IQ, DT Media and Appia Core; Content includes DT Pay and DT Marketplace.
| Metric | Three months ended Dec. 31, 2015 | Three months ended Dec. 31, 2014 | Nine months ended Dec. 31, 2015 | Nine months ended Dec. 31, 2014 |
|---|---|---|---|---|
| Revenue | $24.089 million | $7.006 million | $63.509 million | $18.023 million |
| Gross profit / margin | $3.816 million / 15.8% | $1.983 million / 28.3% | $6.167 million / 9.7% | $5.200 million / 28.9% |
| Operating loss | $(5.265) million | $(5.391) million | $(20.560) million | $(14.714) million |
| Net loss | $(5.763) million | $(5.484) million | $(22.204) million | $(15.294) million |
| Net loss per share, diluted | $(0.09) | $(0.14) | $(0.37) | $(0.41) |
Financial position, cash flow and debt
- At December 31, 2015, cash and cash equivalents were $13.679 million; working capital was $0.485 million, versus a $3.760 million deficit at March 31, 2015. Accounts receivable was $16.743 million.
- For the nine months, operating cash use was $5.491 million, investing cash use was $0.101 million, and financing provided $12.228 million. Cash increased by $6.610 million to $13.679 million.
- Reported debt was approximately $10.595 million: $3.150 million current debt and $7.445 million net long-term subordinated debenture. The revolving facility had $3.000 million drawn of a $5.000 million maximum; it matured June 30, 2016. The $8.000 million debenture principal is due March 6, 2017.
- The October 2015 public offering generated $12.627 million net proceeds and issued 8.740 million shares. The company reported 66,074,519 common shares outstanding as of February 2, 2016.
Material changes and unusual items
- Revenue rose 243.8% for the quarter and 252.4% for the nine months, driven substantially by Appia Core inclusion, alongside organic Advertising growth. Content growth was led by DT Pay; DT Marketplace declined following termination of an Israel contract.
- Gross margin percentage fell substantially, reflecting Appia Core’s lower margins, higher acquired-intangible amortization, Content mix shift toward lower-margin DT Pay, and, in the quarter, carrier-partner concentration and a less favorable revenue-share threshold.
- Nine-month cost of revenue included approximately $2.404 million of accelerated amortization for a terminated customer relationship. Excluding this charge, management said nine-month gross profit would have been approximately $8.567 million, or 13.5% of revenue.
- Quarter revenue included a one-time net reduction of approximately $0.500 million from a $0.700 million advertising-partner credit, partly offset by a roughly $0.200 million sales-allowance estimate change.
- On December 28, 2015, the company licensed intellectual property to Sift Media for $1.000 million cash and 9.9% of Sift’s preferred stock. The transaction was related-party: Sift’s founder and CEO was then a Digital Turbine director, who left the board effective January 25, 2016. The investment was carried at $0.999 million.
Outlook, risks and contingencies
- Management stated that, following the offering, it believed available cash and capital resources were sufficient to operate at least through December 31, 2016. It expected to rely on cash on hand and access to the revolving facility until cash-flow positive. This is management’s liquidity assessment, not earnings guidance; no specific revenue or profit guidance is provided.
- The company remained loss-making and used operating cash. Management noted that further acquisitions, investments or organic growth initiatives could require additional financing, which may be unavailable or dilutive.
- The company and DTM reported compliance with debt covenants at December 31, 2015. The amended credit agreement requires an adjusted quick ratio of at least 0.90:1.00 under specified conditions and includes revenue-performance provisions; substantially all company assets, including intellectual property, support guarantees to lenders.
- Customer concentration is significant: the largest customer represented 22.0% of quarterly and 26.6% of nine-month revenue. Two customers represented 14.2% and 8.2% of receivables at quarter-end. Foreign-exchange exposure, particularly the Australian dollar, may affect results.
- Management found disclosure controls and procedures ineffective at December 31, 2015 because material weaknesses in internal control over financial reporting remained. Remediation was underway, including staffing and system enhancements; the SAP implementation’s targeted June 2016 go-live could be delayed.
- The filing reports no material change to previously disclosed risk factors. A described Israeli third-party claim involving Logia was not accrued because management considered liability remote and not probable and estimable. Operating lease commitments totaled $4.432 million.
Important facts for investors to verify
- Whether the company achieves positive operating cash flow before the stated liquidity runway expires, and whether additional capital is required.
- Revolving-facility renewal or repayment by June 30, 2016, covenant compliance, and the ability to repay the $8.000 million debenture in March 2017.
- Underlying margins and revenue growth after separating Appia acquisition effects, amortization charges, one-time adjustments and customer concentration.
- Progress and independent effectiveness testing of internal-control remediation, including the planned accounting-system implementation.
- Terms, valuation and governance safeguards for the Sift related-party transaction, and the outcome of the pending Logia-related proceedings.