Business context and reporting period
Digital Turbine, Inc. filed this Form 10-Q for the quarter and six months ended September 30, 2015 (its fiscal second quarter and first half of fiscal 2016). The company provides mobile advertising and content products through its Advertising and Content segments. Comparisons with 2014 are not like-for-like: the September 2014 periods did not include Appia, acquired in March 2015.
Key financial metrics
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended September 30, 2015 | Six months ended September 30, 2015 |
|---|---|---|
| Revenue | $20.734 | $39.420 |
| Gross profit | $0.077 | $2.351 |
| Gross margin | 0.4% | 6.0% |
| Operating loss | $(8.144) | $(15.295) |
| Net loss | $(8.322) | $(16.441) |
| Basic and diluted loss per share | $(0.14) | $(0.29) |
- Quarterly revenue grew 279.6% year over year; first-half revenue grew 257.8%. Advertising contributed $13.664 million and Content $7.070 million in the quarter.
- For the six months, operating cash use was $1.688 million, investing cash use $0.587 million, and financing cash use $0.251 million. Cash declined from $7.069 million at March 31 to $4.582 million at September 30.
- At September 30, current assets were $19.760 million and current liabilities $29.841 million, a working-capital deficit of $10.081 million. Total debt was $10.626 million, including $3.300 million current debt and a subordinated debenture with $8.000 million principal ($7.326 million net carrying value).
- Interest expense was $0.405 million for the quarter and $0.896 million for the first half. No clear adjusted EBITDA or other profitability guidance is provided.
Material changes versus the prior comparable period
- Revenue growth reflects both organic expansion and the inclusion of Appia Core, which was absent from the 2014 comparison. Management cited DT Ignite deployments and DT Pay demand as growth drivers; Content growth was partly offset by the termination of an Israel Marketplace contract and Australian-dollar weakness.
- Gross margin fell from 33.0% to 0.4% for the quarter and from 29.2% to 6.0% for the first half. The company recorded $2.404 million of accelerated amortization tied to a terminated customer relationship. Excluding approximately $2.4 million of this amortization, management estimated quarterly gross margin at $2.477 million (11.9%) and first-half gross margin at $4.751 million (12.1%).
- Content margins weakened, primarily because revenue mix shifted from DT Marketplace to lower-margin DT Pay. Advertising margins benefited from Appia Core revenue, but management noted Appia Core has lower gross margins than DT Media.
- Operating expenses rose 27.5% for the quarter and 40.7% for the first half, largely reflecting Appia, international staffing and higher stock compensation. Reported operating and net losses increased year over year.
Outlook, risks, contingencies and unusual items
- No formal revenue or earnings guidance is stated. After the October 2, 2015 public offering, which generated $12.833 million net proceeds, management said it believed resources were sufficient to operate at least through September 30, 2016. The company anticipated relying on cash and its revolving facility until it becomes cash-flow positive and warned additional financing may be needed and may not be available on acceptable terms.
- The $5.000 million revolving facility had $3.000 million drawn at quarter-end and matures June 30, 2016; the $0.300 million term loan is due by April 2016. The $8.000 million subordinated debenture matures March 6, 2017 and bears interest at 10% for its first year and 14% thereafter. The company reported covenant compliance at September 30, 2015; substantially all company assets, including intellectual property, support debt guarantees.
- Management concluded disclosure controls were not effective at September 30, 2015 because of identified material weaknesses in internal control over financial reporting. Remediation was underway, including accounting hires, systems improvements, and added review and documentation controls.
- Customer concentration is significant: the largest customer represented 29.2% of quarterly revenue and 29.4% of first-half revenue. Three customers represented 18.1%, 12.4% and 10.5% of quarter-end receivables.
- The filing identifies foreign-exchange exposure, particularly to the Australian dollar, and dependence on continued operations and positive operating cash flow. It reported no material new risk factors beyond those in the prior 10-K.
- A third-party notice related to an Israeli class action remained pending; management considered liability remote and did not accrue a loss. A potential investor dispute was settled in July through issuance of 117,000 shares; a $0.098 million expense reversal was recorded after settlement below the previously accrued amount.
Important facts for investors to verify
- Whether revenue growth and cash generation can persist after separating Appia acquisition contributions from organic growth.
- Whether gross margins recover, particularly in Content, after accelerated amortization and the shift toward lower-margin DT Pay and Appia Core.
- Post-offering cash, actual use of proceeds, borrowing-base availability, debt maturities and continuing compliance with credit covenants.
- Progress and effectiveness of remediation of the disclosed material weaknesses in financial reporting controls.
- Customer concentration, receivable collections and exposure to foreign-exchange movements.
- Share dilution: the filing reported 66,072,271 common shares outstanding as of November 3, 2015, following the offering.