Digital Turbine, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2016. Financial amounts below are in millions unless otherwise noted. The company provides mobile advertising and content services through its Advertising and Content segments.
Key financial results
| Metric | Three months ended Dec. 31, 2016 | Year-over-year | Nine months ended Dec. 31, 2016 | Year-over-year |
|---|---|---|---|---|
| Revenue | $22.285 | Down 7.5% | $69.156 | Up 8.9% |
| Gross profit / margin | $3.368 / 15.1% | $3.816 / 15.8% | $9.456 / 13.7% | $6.167 / 9.7% |
| Operating expenses | $8.778 | Down 3.3% | $27.622 | Up 3.3% |
| Operating loss | $(5.410) | Prior year $(5.265) | $(18.166) | Prior year $(20.560) |
| Net loss | $(2.586) | Prior year $(5.763) | $(17.339) | Prior year $(22.204) |
| Loss per share, diluted | $(0.04) | Prior year $(0.09) | $(0.26) | Prior year $(0.37) |
Nine-month revenue growth was led by Ignite, up 103.4% to $27.697 million, and Pay, up 32.6% to $23.611 million. Syndicated Network revenue fell 46.1% to $15.377 million. In the quarter, Ignite growth did not offset declines in Syndicated Network and Content revenue. The nine-month gross-margin comparison benefited from approximately $2.4 million of accelerated intangible amortization in the prior-year period; excluding that item, prior-year gross profit was approximately $8.567 million, or 13.5% of revenue.
Quarterly net loss improved partly because of non-cash gains from remeasuring the convertible-note embedded derivative and warrant liabilities: $2.853 million and $0.937 million, respectively. Nine-month gains were $2.423 million and $0.797 million. These fair-value gains depend on stock-price-sensitive valuation assumptions and do not represent operating cash generation.
Cash, debt, and liquidity
- Cash and cash equivalents were $5.705 million at December 31, 2016, down from $11.231 million at March 31, 2016; restricted cash was an additional $0.323 million.
- Working capital was negative $5.480 million, compared with negative $9.308 million at March 31. Management said the March deficit included debt subsequently repaid; excluding that debt, the deficit increased from $1.876 million.
- Net cash used in operating activities for the nine months was $7.788 million, versus $5.460 million in the prior-year period. Capital expenditures were $1.381 million.
- The company issued $16 million of 8.75% convertible senior notes due September 2020, receiving net proceeds of $14.316 million, and used approximately $11 million to repay its SVB and North Atlantic secured debt. Notes had a $9.460 million net carrying value at period-end; principal outstanding was $16 million. The notes are senior unsecured, and the indenture generally restricts additional indebtedness while they remain outstanding.
- Management stated it believes cash, cash equivalents, and capital resources are sufficient to operate for at least the next 12 months, but noted it expects cash on hand to be its primary liquidity source until cash-flow positive. Additional financing may not be available on acceptable terms or at all.
Outlook, risks, and notable matters
- Management expects the market shift away from non-automated syndicated advertising networks toward programmatic advertising to continue, posing a risk to A&P revenue. O&O/Ignite growth was attributed to increased advertiser demand and expanded carrier distribution.
- Management attributed the quarter’s Pay weakness partly to revised opt-in policies at its largest Australian partner, which reduced content-provider marketing spend; Marketplace revenue continued to decline.
- Customer concentration is significant: three customers each contributed more than 10% of nine-month revenue (13.4%, 11.4%, and 23.7%). The filing warns that customer activity reductions, payment delays, or loss could materially affect results.
- Disclosure controls were deemed ineffective as of December 31, 2016, due to material weaknesses in financial close/reporting, including insufficient finance resources and inadequate systems/manual processes. Remediation actions included hiring a CFO and completing SAP and stock-option-accounting implementations; further actions remained planned.
- Potential dilution is material: the notes have an initial conversion price of $1.364 per share and were issued with warrants, with anti-dilution provisions. Stockholders approved issuance of the full potentially issuable shares in January 2017.
- The company reported a Coral Tell-related third-party claim; management considered liability remote and immaterial and recorded no accrual. No subsequent events were reported.
- No numerical revenue, earnings, or cash-flow guidance is provided in the filing.
Important facts for investors to verify
- Whether Ignite/O&O growth can offset sustained Syndicated Network and Marketplace weakness, and whether programmatic advertising can replace declining legacy-network demand.
- Cash burn, working-capital trends, and the assumptions behind management’s 12-month liquidity assessment.
- Convertible-note terms, future interest and principal obligations, warrant/conversion dilution, and the effect of any future financing.
- Customer concentration and the status of the largest Australian Pay partner relationship.
- Progress and effectiveness of remediation for the disclosed material weaknesses in financial reporting controls.
- The portion of reported earnings improvement attributable to recurring operations versus non-cash fair-value gains and prior-year amortization items.