Business context and reporting period
Digital Turbine, Inc. filed this Form 10-Q for the quarter and six months ended September 30, 2016, the second quarter of fiscal 2017. Its mobile advertising and content businesses serve carriers, device manufacturers, advertisers, publishers and consumers. Reporting segments are Advertising and Content. Unless noted, amounts below are in millions of dollars.
Financial results and liquidity
- Quarter: Revenue was $22.8 million, up 10.1% year over year. Gross profit was $3.2 million and gross margin 13.8%, versus $0.1 million and 0.4%. Operating loss was $6.3 million; net loss was $7.3 million, or $0.11 per share, compared with a $8.3 million net loss, or $0.14 per share.
- Six months: Revenue was $46.9 million, up 18.9%. Gross profit was $6.1 million and gross margin 13.0%, versus $2.4 million and 6.0%. Operating loss was $12.8 million; net loss was $14.8 million, or $0.22 per share, compared with a $16.4 million net loss, or $0.29 per share.
- Cash flow: Operating cash use was $3.6 million for the six months, versus $1.7 million a year earlier; capital expenditures were $1.1 million, versus $0.6 million. Cash and equivalents were $9.4 million at September 30, down from $11.2 million at March 31; restricted cash was an additional $0.3 million.
- Liquidity: Current assets of $27.9 million were below current liabilities of $31.4 million, a $3.5 million working-capital deficit. Management said available cash and resources should support operations for at least 12 months, while noting that cash on hand is expected to be the main funding source until cash-flow positive and further financing may not be available on acceptable terms.
- Debt: The company issued $16.0 million principal of 8.75% convertible senior notes due September 2020, receiving net proceeds of $14.3 million, and used about $11.0 million to retire its SVB and North Atlantic Capital secured debt. Notes had a $9.4 million net carrying value after discounts and issuance costs. The notes include conversion and repurchase provisions and restrictions on additional debt.
- Other balance-sheet measures: Total assets were $117.1 million, total liabilities $47.1 million, and stockholders’ equity $70.0 million. Goodwill was $76.6 million and net intangible assets $8.7 million.
Material changes versus prior comparable periods
- Advertising revenue rose 11.3% in the quarter and 10.8% over six months; Content revenue rose 7.9% and 33.4%, respectively.
- Ignite revenue increased 133.7% in the quarter and 139.1% over six months, reflecting stronger carrier/OEM demand and expanded distribution. Pay revenue increased 15.4% and 50.5%, respectively, supported by demand and launches in Australia and India.
- Syndicated Network revenue fell 45.6% in the quarter and 38.9% over six months as advertiser demand weakened. Management said market movement toward programmatic advertising was expected to continue, making RTB development important.
- Operating losses narrowed year over year, while operating expenses increased 15.1% in the quarter and 6.8% over six months. Product development spending rose, including investment in personnel and hosting.
- Comparisons of gross profit are affected by approximately $2.4 million of accelerated amortization recorded in the 2015 comparable periods for customer relationships. Excluding that item, prior-year gross margin was approximately 11.9% for the quarter and 12.1% for six months, versus 13.8% and 13.0% in 2016.
- Weighted-average shares increased about 16% year over year in both periods; the quarter-end share count was 66.6 million outstanding.
Outlook, risks and unusual items
- No quantified revenue, earnings or cash-flow guidance was provided. Management identified investment opportunities in RTB, integrating Pay into advertising infrastructure, and product development.
- The notes and related warrants created Level 3 derivative and warrant liabilities, measured using models with significant unobservable inputs. Fair-value changes generated $0.6 million of expense in the quarter; these are non-cash and can fluctuate with the stock price and other assumptions. Debt extinguishment also produced a $0.3 million loss.
- Revenue concentration is material: three customers represented 21.3%, 16.7% and 13.7% of quarterly revenue. The filing also reports concentrated receivables, including one Advertising customer at 21.1% of net receivables.
- Management concluded disclosure controls were ineffective at September 30 because of material weaknesses in financial close and reporting, including staffing, systems and manual-process deficiencies. Remediation was underway; the filing does not report that the weaknesses had been resolved.
- The company disclosed an informal SEC Division of Enforcement inquiry received in May 2016 concerning internal financial-reporting and disclosure controls. It said it was cooperating and that the significance or outcome could not yet be determined.
- A third-party notice in an Israeli class-action matter names a company affiliate; management considered liability remote and did not accrue a loss. The company also cited Nasdaq minimum-bid-price compliance risk and potential dilution and earnings volatility from conversion of notes and exercise of warrants.
Important facts for investors to verify
- Whether operating cash use declines and the company achieves its stated goal of becoming cash-flow positive.
- Whether customer and carrier demand sustains Ignite and Pay growth, and whether RTB can offset continued syndicated-network declines.
- The detailed note, conversion, warrant, anti-dilution and repurchase terms, including potential dilution and future cash obligations.
- Progress and independent evidence of remediation of material weaknesses, and any developments in the SEC inquiry.
- Customer concentration, working-capital needs, and the adequacy of liquidity given the company’s funding requirements and note restrictions.
- The assumptions behind the Level 3 derivative and warrant valuations and the resulting effects on reported earnings.