DIGITAL TURBINE, INC. The following discussion should be read in conjunction with, and is qualified in its entirety by, the Financial Statements and the notes thereto included in this Quarterly Report on Form 10-Q (the "Report"). The following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements involve substantial risks and uncertainties. When used in this Report, the words "anticipate," "believe," "estimate," "expect," "will," "seeks," "should," "could," "would," "may," and similar expressions, as they relate to our management or us, are intended to identify such forward-looking statements. Our actual results, performance, or achievements could differ materially from those expressed in, or implied by, these forward-looking statements as a result of a variety of factors, including those set forth under "Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 , as well as those described elsewhere in this Report and in our other public filings. The risks included are not exhaustive, and additional factors could adversely affect our business and financial performance. We operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Historical operating results are not necessarily indicative of the trends in operating results for any future period. We do not undertake any obligation to update any forward-looking statements made in this Report. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends. This Report and all subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. All numbers are in thousands, except share and per share amounts. Company OverviewDigital Turbine, Inc. , through its subsidiaries, simplifies content discovery and delivers it directly to the device. Its on-device media platform powers frictionless application and content discovery, user acquisition and engagement, operational efficiency, and monetization opportunities. ThroughSeptember 30, 2020 ,Digital Turbine's technology platform has been adopted by more than 40 mobile operators and device original equipment manufacturers ("OEMs"), and has delivered more than 4 billion application preloads for tens of thousands of advertising campaigns. The Company operates this business as one operating and reportable segment - Media Distribution, which was previously referred to as the operating segment O&O (which refers to operators and OEMs) and the reportable segment Advertising. As the Company's suite of product offerings expands, both organically and through acquisition, we believe that this renaming of our reporting and operating segment better reflects the way management views the business. There are no changes or historical differences to product offerings and financial information that were referred to as the Advertising segment in prior periods. While advertising, in general, remains a focus of our Media Distribution segment, we feel that this change in name more accurately conveys to the reader what we do for our customers and partners. 26 -------------------------------------------------------------------------------- The Company's Media Distribution business consists of products and services that simplify the discovery and delivery of mobile application and content media for consumers. •Application Media represents the portion of the business where our platform delivers apps to end users through partnerships with carrier networks and OEMs. Application Media optimizes revenues by using the developed technology to streamline, track, and manage app install demand from hundreds of application developers across various publishers, carriers, OEMs, and devices. •Content Media represents the portion of the business where our platform presents news, weather, sports, and other content directly within the native device experience (e.g., as the start page in the mobile browser, a widget, on unlock, etc.) through partnerships with carrier networks and OEMs. Content Media optimizes revenue by a combination of: •Programmatic Ad Partner Revenue - advertising within the content media that's sold on an ad exchange at a market rate (CPM - Cost Per Thousand); •Sponsored Content - sponsored content media from 3rd party content providers, presented similarly to an ad, that is monetized when a recommended story is viewed (CPC - Cost Per Click); •Editorial Content - owned or licensed media, presented similarly to an ad, that is monetized when the media is clicked on (CPC - Cost Per Click). With global headquarters inAustin, Texas and offices inDurham, North Carolina ;San Francisco, California ;Arlington, Virginia ;São Paulo, Brazil ;Mexico City, Mexico ;Mumbai, India ;Singapore ; andTel Aviv, Israel ,Digital Turbine's solutions are available worldwide. For additional information, please visit www.digitalturbine.com. Recent Developments OnFebruary 28, 2020 , the Company completed the acquisition ofMobile Posse, Inc. (the "Acquisition") fromACME Mobile, LLC ("ACME"). The Company acquired all of the outstanding capital stock of Mobile Posse in exchange for an estimated total consideration of: (1)$41,500 in cash paid at closing (subject to customary closing purchase price adjustments) and (2) an estimated earn-out of$23,735 , to be paid in cash, based on Mobile Posse achieving certain future target net revenues, less associated revenue shares, over a twelve-month period (the "Earn-Out Period") following the closing of the Acquisition, noting that the earn-out amount is subject to change based on final results and calculation. Under the terms of the earn-out, over the Earn-Out Period, the Company will pay ACME a certain percentage of actual net revenues (less associated revenue shares) of Mobile Posse depending on the extent to which Mobile Posse achieves certain target net revenues (less associated revenue shares) for the relevant period. The earn-out payments will be paid quarterly with a true-up calculation and payment after the first nine months of the Earn-Out Period. The acquisition of cash is not reflected in the total consideration detailed above. Final working capital adjustments were determined during the quarter endedJune 30, 2020 and resulted in additional purchase price consideration of$453 , which is reflected on the balance sheet as an increase in goodwill. As ofSeptember 30, 2020 ,$10,757 was added to the previous estimated earn-out of$23,735 . Of the amounts recorded and accrued related to the Acquisition,$16,080 had been paid to the seller and$18,412 remains accrued as of the balance sheet date. See Note "Commitments and Contingencies" for more information regarding the estimated earn-out. OnFebruary 28, 2020 , the Company entered into a Credit Agreement (the "New Credit Agreement") withWestern Alliance Bank (the "Bank"), which provides for (1) a term loan of$20.0 million , the proceeds of which the Company used to pay a portion of the closing cash purchase price for the Acquisition, and (2) a revolving line of credit of$5.0 million to be used for working capital purposes.DT Media and Digital Turbine USA, Inc. ("DT USA ") are additional co-borrowers under the New Credit Agreement. The term loan must be repaid on a quarterly basis beginning inJuly 2020 until the term loan maturity date ofFebruary 28, 2025 , at which time the remaining unpaid principal balance must be repaid. The quarterly principal payment amounts increase from$0.25 million to$1.25 million over the term of the term loan. The revolving line of credit matures onFebruary 28, 2025 . No amount was drawn on the revolver as ofSeptember 30, 2020 . The Company's Business Finance Agreement, datedMay 23, 2017 (the "Credit Agreement"), with the Bank was terminated onFebruary 28, 2020 . 27 --------------------------------------------------------------------------------
Media Distribution Business
The Company's Media Distribution business is an advertiser solution for unique
and exclusive carrier and OEM inventory, which is comprised of first boot and
recurring life-cycle products, features, and professional services delivered
through our platform.
Our software platform enables mobile operators and OEMs to control, manage,
and monetize devices through application installation at the time of activation
and over the life of a device. The platform allows mobile operators to
personalize the application activation experience for customers and monetize
their home screens via revenue share agreements such as: Cost-Per-Install (CPI),
Cost-Per-Placement (CPP), Cost-Per-Action (CPA) with third-party advertisers; or
via Per-Device-License Fees (PDL) agreements, which allow operators and OEMs to
leverage the platform, its products, and other features for a structured fee.
Setup Wizard, Dynamic Installs, or Software Development Kit ("SDK") are the
delivery methods available to operators and OEMs on first boot of the device.
Additional products and features are available throughout the life-cycle of the
device that provide operators and OEMs additional opportunity for media delivery
revenue streams. The Company has launched its software with operators and OEMs
in North America , Latin America , Europe , Israel , and Asia-Pacific .
The acquisition of Mobile Posse provides an additional platform option,
outside of our core platform, to monetize user actions over the life-cycle of a
device by delivering media rich advertising content to the end user and
providing operators and OEMs with an additional opportunity for revenue streams
synergistic with our core platform.
The Company's Media Distribution business consists of products and services that
simplify the discovery and delivery of mobile application and content media for
consumers.
•Application Media represents the portion of the business where our platform
delivers apps to end users through partnerships with carrier networks and OEMs.
Application Media optimizes revenues by using the developed technology to
streamline, track and manage app install demand from hundreds of application
developers across various publishers, carriers, OEMs and devices.
•Content Media represents the portion of the business where our platform
presents news, weather, sports and other content directly within the native
device experience (e.g., as the start page in the mobile browser, a widget, on
unlock, etc.) through partnerships with carrier networks and OEMs. Content Media
optimizes revenue by a combination of:
?Programmatic Ad Partner Revenue - advertising within the content media that's
sold on an ad exchange, at a market rate (CPM - Cost Per Thousand),
?Sponsored Content - sponsored content media from 3rd party content providers -
presented similar to an ad - that is monetized when a recommended story is
viewed (CPC - Cost Per Click)
?Editorial Content - owned or licensed media - presented similar to an ad - that
is monetized when the media is clicked on (CPC - Cost Per Click).
Disposition of the Content Reportable Segment and A&P Business
On
DT APAC and DT Singapore (together, "Pay Seller"), each wholly-owned subsidiaries of the Company, entered into an Asset Purchase Pay Agreement (the "Pay Agreement"), datedApril 23, 2018 , withChargewave Ptd Ltd ("Pay Purchaser") to sell certain assets (the "Pay Assets") owned by the Pay Seller related to the Company's Direct Carrier Billing business. The Pay Purchaser is principally owned and controlled byJon Mooney , an officer of the Pay Seller. At the closing of the asset sale,Mr. Mooney was no longer employed by the Company or Pay Seller. As consideration for this asset sale,Digital Turbine is entitled to receive certain license fees, profit-sharing, and equity participation rights as outlined in the Company's Form 8-K filedMay 1, 2018 with theSEC . The transaction was completed onJuly 1, 2018 with an effective date ofJuly 1, 2018 . With the sale of these assets, the Company exited the reporting segment of the business previously referred to as the Content business. 28 -------------------------------------------------------------------------------- DT Media, a wholly-owned subsidiary of the Company, entered into an Asset Purchase Agreement (the "A&P Agreement"), datedApril 28, 2018 , withCreative Clicks B.V. (the "A&P Purchaser") to sell business relationships with various advertisers and publishers (the "A&P Assets") related to the Company's Advertising and Publishing business. As consideration for this asset sale, we are entitled to receive a percentage of the gross profit derived from these customer agreements for a period of three years as outlined in the Company's Form 8-K filedMay 1, 2018 with theSEC . The transaction was completed onJune 28, 2018 with an effective date ofJune 1, 2018 . With the sale of these assets, the Company exited the operating segment of the business previously referred to as the A&P business, which was previously part of the Advertising segment, the Company's sole reporting segment (which is now Media Distribution).
These dispositions have allowed the Company to benefit from a streamlined business model, simplified operating structure, and enhanced management focus. Discontinued Operations
As a result of the dispositions, the results of operations from our Content reporting segment and A&P business within the Media Distribution reporting segment, previously referred to as the Advertising segment, are reported as "Loss from discontinued operations, net of taxes" and the related assets and liabilities are classified as "held for disposal" on the prior comparative period Consolidated Financial Statements in Item 1 of this Quarterly Report. The Company has recast prior period amounts presented within this report to provide visibility and comparability. Results of Operations
All discussions in this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, unless otherwise noted, relate to the remaining continuing operations in our sole operating segment after the dispositions, the Media Distribution business.
RESULTS OF OPERATIONS
(Unaudited)
Three months ended September
30, Six months ended September 30,
2020 2019 % of Change 2020 2019 % of Change
(in thousands, except per (in thousands, except per share
share amounts) amounts)
Net revenues $ 70,893 $ 32,795 116.2 % $ 129,905 $ 63,348 105.1 %
License fees and revenue share 40,532 20,146 101.2 % 72,832 38,421 89.6 %
Other direct costs of revenues 662 344 92.4 % 1,222 622 96.5 %
Gross profit 29,699 12,305 141.4 % 55,851 24,305 129.8 %
Total operating expenses 17,583 9,190 91.3 % 33,113 18,150 82.4 %
Income from operations 12,116 3,115 289.0 % 22,738 6,155 269.4 %
Interest income / (expense), net (287) 41 (800.0) % (593) 59 (1,105.1) %
Change in fair value of warrant liability - (4,505) (100.0) % - (9,731) (100.0) % Other income / (expense) (38) 84 (145.2) % (38) 474 (108.0) % Income / (loss) from continuing operations before income taxes 1,034 (1,265) (181.7) % 11,350 (3,043) (473.0) % Income tax provision / (benefit) 661 72 818.1 % 1,037 (35) (3,062.9) % Income / (loss) from continuing operations, net of taxes 373 (1,337) (127.9) % 10,313 (3,008) (442.9) % Net income / (loss)$ 373 $ (1,425) (126.2) %$ 10,313 $ (3,244) (417.9) %
Basic net income / (loss) per common share $ -
(100.0) % $ 0.11 $ (0.04) (375.0) %
Weighted-average common shares
outstanding, basic 88,035 83,909 4.9 % 87,712 82,860 5.9 %
Diluted net income / (loss) per common
share $ - $ (0.02) (100.0) % $ 0.11 $ (0.04) (375.0) %
Weighted-average common shares
outstanding, diluted 96,057 83,909 14.5 % 94,988 82,860 14.6 %
29-------------------------------------------------------------------------------- Comparison of the three and six months endedSeptember 30, 2020 and 2019 Net revenues During the three and six months endedSeptember 30, 2020 , there was an approximately$38,098 or 116.2% and$66,557 or 105.1% increase in overall revenue, respectively, as compared to the three and six months endedSeptember 30, 2019 . The Company's Media Distribution business is an advertiser solution for unique and exclusive carrier and OEM inventory. During the three and six months endedSeptember 30, 2020 and 2019, the Media Distribution business, primarily through silent application delivery, was the main driver of our revenues. Application Media revenue totaled$49,057 and$93,290 , respectively, for the three and six months endedSeptember 30, 2020 , while Content Media revenue, primarily related to the Acquisition, totaled$21,836 and$36,615 , respectively. Our application delivery and management software enables operators and OEMs to control, manage, and monetize applications installed at the time of activation and over the life of a device. This increase in net revenues was attributable to increased demand for our core services, which led to higher CPI and CPP revenue per available placement, and which was driven primarily by increased revenue from advertising partners as placement across existing commercial partners expands, as well as expanded distribution with new partners and the deployment or expansion of new services and features. With respect to customer revenue concentration, the Company defines a customer as an advertiser or a carrier that is a distinct source of revenue and is legally bound to pay for the services that the Company delivers on the advertiser's or carrier's behalf. During the three and six months endedSeptember 30, 2020 , no single customer represented 10.0% or greater of the Company's net revenues. During the three and six months endedSeptember 30, 2019 , Verizon Communications Inc., primarily through its subsidiaryOath Inc. , represented 20.6% and 19.6%, respectively; andGSN Games, Inc. represented 10.1% and 10.9%, respectively, of net revenues. With respect to revenue partner concentration, the Company partners with mobile carriers and OEMs to deliver applications on our platform through the carrier network. During the three and six months endedSeptember 30, 2020 ,Verizon Wireless , a carrier partner, generated 19.6% and 20.0%, respectively; AT&T Inc., a carrier partner, including its Cricket subsidiary, generated 23.4% and 23.2%, respectively; T-Mobile US Inc., including Sprint and other subsidiaries, generated 26.4% and 24.5%, respectively; andAmerica Movil Inc. , a carrier partner, primarily through its subsidiaryTracFone Wireless Inc. , generated 9.6% and 10.5%, respectively, of our net revenues. During the three and six months endedSeptember 30, 2019 ,Verizon Wireless , a carrier partner, generated 43.3% and 43.5%, respectively; and AT&T Inc., a carrier partner, including its Cricket subsidiary, generated 31.4% and 32.7%, respectively, of our net revenues. A reduction or delay in operating activity from these customers or partners, or a delay or default in payment by these customers, or a termination of the Company's agreements with these customers, could materially harm the Company's business and prospects. 30 --------------------------------------------------------------------------------
Gross margin
Three months ended September
30, Six months ended September 30,
2020 2019 % of Change 2020 2019 % of Change
(in thousands) (in thousands)
Gross margin $ $ 29,699 $ 12,305 141.4 % $ 55,851 $ 24,305 129.8 %
Gross margin % 41.9 % 37.5 % 11.7 % 43.0 % 38.4 % 12.0 %
Total gross margin, inclusive of the impact of other direct costs of revenues
(including amortization of intangibles), was approximately $29,699 or 41.9% and
$55,851 or 43.0% of net revenues, respectively, for the three and six months
ended September 30, 2020 versus approximately $12,305 or 37.5% and $24,305 or
38.4% of net revenues, respectively, for the three and six months ended
September 30, 2019 . The increase in gross margin over the comparative periods
was $17,394 or 141.4% and $31,546 or 129.8%, respectively. Of the increase in
gross margin dollars, application media delivery drove approximately $7,744 and
$14,567 , respectively, of the period-over-period increases driven by continued
organic expansion of our platform while content media delivery contributed the
remaining $9,650 and $16,979 , respectively, of the period-over-period increases
largely driven from the additional content delivery solutions provided by the
Acquisition. The increase was primarily attributable to an increased yield from
an improved mix of partner diversification and non-dynamic application media
install revenue on our Media Distribution platform and from a full two quarters
of accretive gross margin contribution from content media distribution, the
Acquisition, as compared to the prior comparative periods.
Operating expenses
Three months ended September
30, Six months ended September 30,
2020 2019 % of Change 2020 2019 % of Change
(in thousands) (in thousands)
Product development $ 4,217 $ 2,735 54.2 % $ 8,625 $ 5,529 56.0 %
Sales and marketing 4,835 2,441 98.1 % 9,153 4,719 94.0 %
General and administrative 8,531 4,014 112.5 % 15,335 7,902 94.1 %
Total operating expenses $ 17,583 $ 9,190 91.3 % $ 33,113 $ 18,150 82.4 %
Total operating expenses for the three and six months ended September 30, 2020
were approximately $17,583 and $33,113 , respectively, and for the three and six
months ended September 30, 2019 were approximately $9,190 and $18,150 ,
respectively, an increase of approximately $8,393 or 91.3% and $14,963 or 82.4%
over the comparative periods, respectively. This change was a result of
continued growth, including the acquisition of Mobile Posse. Company-wide cost
control measures show the Company's ability to scale revenue at a greater rate
than operating expense.
Product development expenses include the development and maintenance of the
Company's product suite. Expenses in this area are primarily a function of
personnel. Product development expenses for the three and six months ended
September 30, 2020 were approximately $4,217 and $8,625 , respectively, and for
the three and six months ended September 30, 2019 were approximately $2,735 and
$5,529 , respectively, an increase of approximately $1,482 or 54.2% and $3,096 or
56.0%, respectively, over the comparative periods. The increase in product
development expenses over the comparative periods was primarily attributable to
increased product development headcount, both organic and through the
Acquisition, and other employee-related and third-party development-related
costs as the Company continues to scale its product development organization to
support the Company's growth.
Sales and marketing expenses represent the costs of sales and marketing
personnel, advertising and marketing campaigns, and campaign management. Sales
and marketing expenses for the three and six months ended September 30, 2020
were approximately $4,835 and $9,153 , respectively, and for the three and six
months ended September 30, 2019 were approximately $2,441 and $4,719 ,
respectively, an increase of approximately $2,394 or 98.1% and $4,434 or 94.0%,
respectively, over the comparative periods. The increase in sales and marketing
expenses over the comparative periods was primarily attributable to the addition
of new personnel in existing markets related to the Company's continued
expansion of its global footprint and increased commissions associated with the
sales team generating more revenue through new and existing advertising
relationships and markets.
31
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General and administrative expenses represent management, finance, and support
personnel costs in both the parent and subsidiary companies, which include
professional and consulting costs in addition to other costs such as rent,
stock-based compensation, and depreciation expense. General and administrative
expenses for the three and six months ended September 30, 2020 were
approximately $8,531 and $15,335 , respectively, and for the three and six months
ended September 30, 2019 were approximately $4,014 and $7,902 , respectively, an
increase of approximately $4,517 or 112.5% and $7,433 or 94.1%, respectively,
over the comparative periods. The increase over the comparative periods was
primarily attributable to employee-related expenses as a function of higher
headcount, increased stock option expense, increase in depreciation and
amortization related to capitalized internal-use software, and continued growth
including the acquisition of Mobile Posse.
Interest and other income / (expense), net
Three months ended September Six months ended September
30, 30,
2020 2019 % of Change 2020 2019 % of Change
(in thousands) (in thousands)
Interest income / (expense), net
(800.0) %$ (593) $ 59
(1,105.1) %
Change in fair value of warrant liability - (4,505) 100.0 % - (9,731) 100.0 % Other income / (expense) (38) 84 (145.2) % (38) 474 (108.0) % Total interest and other income / (expense), net$ (325) $ (4,380) 92.6 %$ (631) $ (9,198) 93.1 % Total interest and other income / (expense), net, for the three and six months endedSeptember 30, 2020 was approximately$325 and$631 , respectively, and for the three and six months endedSeptember 30, 2019 was approximately$4,380 and$9,198 , respectively, an increase in interest and other income / (expense), net, of approximately$6,702 or 92.6% and$2,190 or 93.1%, respectively, over the comparative periods. The increase in interest and other income / (expense), net, over the comparative periods was primarily attributable to the change in fair value of warrant liability, due to the conversion of all warrants during fiscal year 2020, as well as the adjustment to the earn-out due to ACME recorded in other income / (expense). Interest and other income / (expense), net, includes net interest income / (expense), change in fair value of warrant liability, and other ancillary income / (expense) earned or incurred by the Company. Interest income / (expense), net The Company recorded$(287) and$(593) , respectively, of interest income / (expense), net, during the three and six months endedSeptember 30, 2020 . This is comprised of amortization of annual facility fees and interest accrued on drawn amounts under the New Credit Agreement, partially offset by interest income earned on cash balances. In the prior fiscal year, the Company recorded$41 and$59 , respectively, of interest income / (expense), net, during the three and six months endedSeptember 30, 2019 . This is comprised of interest income earned on cash balances. Liquidity and Capital Resources Our primary sources of liquidity are cash from operations and debt. As ofSeptember 30, 2020 , we had cash totaling approximately$32,967 and$5,000 available to draw on the New Credit Agreement. 32
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