Digital Turbine, Inc. — Form 10-Q Summary
Reporting period: Second quarter of fiscal 2019, the three months ended September 30, 2018; year-to-date figures cover the six months ended September 30, 2018. Unless noted otherwise, amounts below are in U.S. dollars.
Business context
Digital Turbine’s continuing business is Operator and OEM (O&O), centered on its Ignite platform for application distribution and monetization through mobile carriers and device manufacturers. The company sold selected assets of its Direct Carrier Billing/Content business and its Advertising and Publishing business during the quarter, and reports those businesses as discontinued operations.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $23.9 million | $15.9 million | $46.0 million | $31.1 million |
| Gross profit | $7.5 million | $5.6 million | $13.9 million | $10.8 million |
| Gross margin | 31.6% | 35.3% | 30.3% | 34.7% |
| Operating income / (loss) | $0.3 million | $(1.5) million | $(0.9) million | $(3.0) million |
| Net income / (loss), including discontinued operations | $1.7 million | $(6.5) million | $2.2 million | $(10.6) million |
| Basic and diluted earnings / (loss) per share | $0.02 | $(0.10) | $0.03 | $(0.16) |
- Revenue increased 50% in the quarter and 48% year to date, primarily from greater Ignite demand, higher advertiser activity on existing carrier deployments, expanded distribution, and new services and products.
- Gross profit grew, but gross margin declined as partner revenue-share costs rose when certain partners reached volume thresholds.
- Operating expenses were $7.2 million for the quarter, up 2.2% year over year. Higher product development and sales and marketing costs were partly offset by lower general and administrative expenses.
- Net income benefited materially from noncash fair-value gains on convertible-note embedded derivatives and warrants: $1.9 million in the quarter and $5.1 million for the six months. The gains reflected a lower share price and are not operating earnings.
- Cash from operating activities was negative $3.3 million for the six months, including $3.1 million used by discontinued operations; continuing operations used $0.2 million. Capital expenditures were $1.1 million, mainly for internally developed software.
Balance sheet, debt and liquidity
- Cash and restricted cash totaled $8.8 million at September 30, down from $13.1 million at March 31, 2018. Total assets were $80.7 million and stockholders’ equity was $32.2 million.
- Debt carrying value was $4.9 million: $1.5 million of short-term secured debt and $3.4 million of convertible notes. The notes have $4.9 million principal outstanding, carry 8.75% interest, and mature in September 2020; the credit facility is a $5.0 million facility with $1.6 million gross principal outstanding.
- Management reported working capital of negative $5.5 million, excluding assets and liabilities held for disposal, versus negative $2.7 million at March 31. The company was in compliance with its credit-facility covenants at quarter-end.
- Management stated that it believes available resources are sufficient for at least 12 months from the report’s issuance. The company also noted that additional financing may not be available on acceptable terms or at all.
Material changes, outlook and risks
- Asset sales: The Advertising and Publishing asset sale closed June 28, and the Direct Carrier Billing/Content sale closed July 1. Management said the exits are intended to simplify operations and focus resources on O&O growth. Consideration includes a share of gross profits from the A&P customer agreements for three years, and license-fee, profit-sharing and equity participation rights from the Content transaction.
- The Content purchaser reported termination of a material partner contract; the company estimated no earn-out from that transaction. It also disclosed uncertainty over collection of certain retained receivables. If all related remaining receivables and payables prove uncollectible, the stated net exposure is approximately $0.9 million.
- Customer and partner concentration is significant: Oath represented 39.0% of quarterly revenue; Verizon Wireless generated 49.7% and AT&T, including Cricket, 38.8%. One customer represented 41.4% of net receivables. Loss, reduced activity, delayed payment or less favorable terms could materially harm results. Management said it expected to maintain key relationships and did not expect material reductions or delays.
- No numerical revenue or earnings guidance was provided. Results may be affected by customer concentration, partner revenue shares, competition, foreign-exchange movements and the company’s ability to generate positive operating cash flow.
- The company was discussing a potential SEC settlement concerning a previously disclosed internal-control matter. Proposed terms included a $100,000 fine and a cease-and-desist order; the settlement was not final and remained subject to SEC and company approval. The company expected no material impact, but gave no assurance of settlement on those terms.
- The company adopted ASC 606 in fiscal 2019 using the modified retrospective method and said the adoption had no material financial-statement impact. Management concluded disclosure controls were effective and reported no material change in internal controls over financial reporting.
Important facts for investors to verify
- Whether Ignite revenue growth continues and whether gross-margin pressure from partner revenue shares persists.
- Cash conversion, receivables collection and the trajectory of working-capital deficits, particularly given the large customer receivable concentration.
- Actual proceeds and ongoing economics from the asset sales, including the Content contract termination and the $0.9 million potential net exposure.
- Convertible-note and credit-facility repayment, covenant compliance, and the potential impact of future share issuance or dilution.
- Resolution and final terms of the SEC matter, and any updates to the company’s liquidity assessment or outlook.