Digital Turbine, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the three months ended June 30, 2016; comparisons are with the three months ended June 30, 2015 unless stated otherwise. Financial amounts below are in millions of dollars unless noted.
Business context and results
Digital Turbine provides mobile advertising, app discovery and distribution, content storefront, and carrier-billing services. It reports Advertising and Content segments. Revenue grew 28.6% to $24.039 million, while the company remained loss-making.
- Revenue by segment: Advertising was $12.809 million, up 10.3%; Content was $11.230 million, up 58.8%.
- Revenue by service: Pay revenue increased 88.9% to $10.721 million; Ignite increased 146.8% to $6.825 million. Syndicated Network declined 31.3% to $5.779 million.
- Profitability: Gross profit was $2.935 million, up 29.1%; gross margin was 12.2%, unchanged. Operating loss was $6.449 million versus $7.151 million. Net loss was $7.412 million, or $0.11 per diluted share, versus $8.119 million, or $0.14 per share.
- Operating costs and interest: Operating expenses were nearly flat at $9.384 million. Net interest and other expense increased to $0.667 million from $0.496 million, primarily due to debt-related fees and the debenture’s higher interest rate.
- Segment operating losses: Advertising lost $5.044 million and Content lost $1.405 million.
Cash flow, liquidity, and debt
- Cash and equivalents were $9.412 million at June 30, down $1.819 million from March 31. Operating cash use was $1.096 million, compared with $0.336 million a year earlier; capital expenditures were $0.472 million.
- Working capital was negative $13.747 million, compared with negative $9.308 million at March 31. The company said the deficit included $7.678 million of net subordinated debenture classified as current; excluding that amount, the deficit was $6.069 million.
- Reported short-term debt was $10.476 million, including $3.0 million drawn on the Silicon Valley Bank (SVB) revolving facility and the debenture, net of discounts and issuance costs. The debenture has $8.0 million principal due March 6, 2017 and bears 14% annual interest after its initial 12-month period.
- The SVB facility was reduced to $3.3 million and its maturity extended to August 14, 2016; $3.0 million was drawn at quarter-end. The company reported covenant compliance at June 30.
- Management stated it believed cash and capital resources were sufficient for the next 12 months, but also said additional financing might be needed and might not be available on acceptable terms. Contractual cash obligations totaled $16.831 million, including $11.0 million of principal payments due within one year.
Material changes, outlook, and risks
- Growth reflected strong Ignite and Pay performance. Ignite benefited from increased advertising revenue across existing and new carrier partners. Pay benefited from greater demand and launches in Australia and India; management cautioned that a portion of the quarter’s higher content-provider marketing spend was not expected to continue at the same level.
- Advertising growth in O&O was partly offset by lower A&P/Syndicated Network revenue as advertising partners reduced budget allocations. Content gross margin declined to 10.6% from 11.3%, largely because of a mix shift toward lower-margin Pay; Advertising gross margin rose to 13.6% from 12.7%.
- Two Content customers represented 32.9% and 11.0% of quarterly revenue. One major customer was 17.9% of net receivables at quarter-end, creating customer concentration exposure.
- After quarter-end, the North Atlantic warrant-related deadline was extended to August 29, 2016 for a $75,000 fee. If the debt was not refinanced by that date, the lender could receive a warrant for 400,000 shares and a board observer right.
- The company identified no new material risk factors beyond those in its fiscal 2016 Form 10-K. It cited exposure to variable interest rates and foreign-exchange movements, particularly the Australian dollar, and warned that additional capital may be unavailable or dilutive.
- Management concluded disclosure controls were ineffective at June 30 because of material weaknesses in financial close and reporting, including insufficient accounting resources and systems and reliance on manual processes. The previously hired Chief Accounting Officer had resigned; the company was using an Acting CAO and described remediation plans.
- The company reported no material legal proceedings in Part II. It disclosed a Coral Tell matter in the notes, said it considered liability remote and not probable or estimable, and recorded no accrual.
Key facts for investors to verify
- Whether the SVB facility was repaid, renewed, or otherwise refinanced before its August 14, 2016 maturity, and the company’s liquidity after quarter-end.
- How the $8.0 million North Atlantic debenture will be repaid or refinanced by March 2017, and the consequences of the extended warrant deadline.
- Whether Pay’s revenue growth persists after the unusually high content-provider marketing spend, and whether the low gross-margin mix affects profitability.
- Whether customer concentration changes, especially the contribution and collections associated with the largest Content customers.
- Progress in remediating internal-control material weaknesses and whether management later determines the controls are effective.