Digital Turbine, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2021, the company’s fiscal first quarter of fiscal 2022. Comparative figures are for the three months ended June 30, 2020. Amounts below are in U.S. dollars; financial-statement figures are converted from thousands to millions where applicable.
Business context
Digital Turbine provides mobile advertising and monetization technology. During the quarter, it completed the acquisitions of AdColony and a majority interest in Fyber, adding in-app advertising businesses to its legacy On Device Media business. It now reports three segments: On Device Media, In App Media–AdColony and In App Media–Fyber. The acquired companies contributed for only part of the quarter, so reported year-over-year growth reflects both acquisitions and organic growth.
Financial results and liquidity
| Metric | Three months ended June 30, 2021 | Prior comparable period |
|---|---|---|
| Net revenue | $212.6 million | $59.0 million |
| Income from operations | $19.1 million | $10.6 million |
| Net income attributable to Digital Turbine | $14.3 million | $9.9 million |
| Diluted earnings per share | $0.14 | $0.11 |
| Cash from operating activities | $(29.0) million | $6.0 million |
| Capital expenditures | $4.4 million | $2.0 million |
- Revenue increased about 260% based on the consolidated financial statements. On Device Media revenue rose 104% to $120.4 million; AdColony contributed $44.9 million and Fyber $49.6 million.
- Income from operations was 9.0% of reported revenue; net income attributable to Digital Turbine was 6.7%. License fees and revenue share were $138.3 million. Revenue less those fees was $74.3 million, or 34.9% of revenue; this is the segment-performance measure identified by management, not a stated GAAP gross margin.
- Operating cash flow was negative despite net income, principally reflecting acquisition-related increases in receivables and other working-capital movements. Cash used in acquisitions, net of cash acquired, was $126.6 million.
- At June 30, cash was $83.1 million, with another $0.9 million classified as restricted cash. Current assets were $323.8 million and current liabilities $618.5 million; current liabilities included $313.4 million of acquisition purchase-price liabilities.
- Debt included $237.1 million drawn on the senior revolving facility and $20.4 million of short-term debt assumed with Fyber. The balance sheet reported $254.2 million of total debt, net of issuance costs. The company had $162.9 million of revolver capacity available at quarter-end and said it was in compliance with covenants.
Material changes and transactions
- AdColony was acquired April 29, 2021. Consideration was estimated at $400–$425 million, including $100 million paid at closing, another $100 million due by October 29, 2021, and an estimated $200–$225 million cash earn-out. The quarter-end estimated fair value of the earn-out was $213.4 million.
- Fyber’s initial acquisition closing occurred May 25, 2021, with at least 95.1% ownership then. Consideration was estimated at up to $600 million, including cash and Digital Turbine shares. A potential earn-out of up to $50 million was valued at zero at quarter-end because management considered achievement unlikely. Subsequent to quarter-end, ownership had reached at least 98.6% as of August 6, 2021, and the remaining-share tender offer was expected to conclude in fiscal Q2 2022.
- The acquisitions materially expanded goodwill and intangible assets: goodwill rose from $80.2 million to $572.6 million, and net intangible assets from $53.3 million to $488.4 million. Purchase accounting remained preliminary.
- The company amended its credit agreement on April 29, 2021, increasing the revolving facility to $400 million, with maturity on April 29, 2026. It also issued shares as part of the Fyber consideration, increasing common shares outstanding.
Outlook, commentary and risks
Management stated that it believed available liquidity was sufficient to meet business requirements for at least 12 months from the filing date. It also disclosed a subsequent $30 million revolver draw to fund the Fyber tender offer. The filing provides no quantified revenue or earnings guidance. Management described growth in the legacy business as driven by demand, higher revenue per available placement, expanded advertising relationships and broader distribution. It said costs were increasing with growth and acquisitions, and that acquired businesses had higher contractual revenue-share rates than the legacy business.
Key risks include successful integration of the acquisitions; funding the AdColony deferred payment and earn-out and the Fyber tender offer; leverage, variable interest rates and compliance with debt covenants; customer and carrier concentration; competition and changes in mobile platforms or device identifiers; privacy and data-protection regulation; and foreign-exchange exposure. Management reported effective disclosure controls and procedures, while noting that integration of AdColony and Fyber into internal financial controls was ongoing. The filing reported no legal proceedings.
Unaudited pro forma results assuming AdColony and Fyber had been acquired at the start of the comparative periods showed revenue of $292.0 million and a net loss attributable to controlling interest of $18.4 million for the 2021 quarter, versus revenue of $142.9 million and income of $3.6 million for the 2020 quarter. These figures are not the reported results and are not necessarily indicative of future performance.
Important facts for investors to verify
- Revenue discrepancy: The financial statements and segment note report quarter revenue of $212.6 million, but an MD&A revenue table states $214.961 million and describes a 264.3% increase. The filing text does not reconcile this difference; verify the correct figure and growth rate.
- Track the AdColony earn-out estimate and payment, the $100 million deferred cash payment, and the final Fyber tender-offer costs and funding.
- Review acquisition integration, final purchase-price allocations, acquired-business performance and any updates to goodwill, intangibles or contingent consideration.
- Monitor operating cash conversion, receivables and collection trends, debt draws, available revolver capacity and covenant headroom.
- Assess dilution from acquisition shares and any additional equity issuance, alongside the acquired businesses’ contribution to sustainable margins and earnings.