Digital Turbine Inc

Previous wording

The following discussion should be read in conjunction with, and is qualified in its entirety by, the condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q (this “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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) , 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 ended March 31, 2024, 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.

Current wording

The following discussion should be read in conjunction with, and is qualified in its entirety by, the condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q (this “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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements involve substantial risks and uncertainties. When used in this Report, the words “anticipate,” “believe,” “estimate,” “expect,” “will,” “seek,” “should,” “could,” “can,” “would,” “may,” “might,” “intend,” “plan,” “target,” “project,” “contemplate,” “predict,” “suggest,” “potential,” and “continue” and the negative of these words and other 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 ended March 31, 2024, 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 estimates based on assumptions, known historical 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.

Previous wording

This is a multi-year project that includes various costs, including software configuration and implementation costs that would be recognized as either capital expenditures or deferred costs in accordance with applicable accounting policies, with certain costs recognized as operating expense associated with project development and project management costs, and professional services with business partners engaged in the planning, design and business process review that would not qualify as software configuration and implementation costs. In addition, the Company is incurring duplicative personnel and other operating costs to maintain legacy systems and operations during the deployment of the new systems and certain other ancillary platforms and systems. The Company completed the first deployment phase in the third quarter of fiscal year 2024. Costs are anticipated to be incurred through various deployment phases that are expected to continue through early fiscal year 2026. The Company incurred $1,072 of business transformation costs in the three months ended June 30, 2024. These costs are recorded in General and Administrative expenses and Product Development expenses in our Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income.

Current wording

This is a multi-year project that includes various costs, including software configuration and implementation costs that would be recognized as either capital expenditures or deferred costs in accordance with applicable accounting policies, with certain costs recognized as operating expense associated with project development and project management costs, and professional services with business partners engaged in the planning, design and business process review that would not qualify as software configuration and implementation costs. In addition, the Company is incurring duplicative personnel and other operating costs to maintain legacy systems and operations during the deployment of the new systems and certain other ancillary platforms and systems. The Company completed the first deployment phase in the third quarter of fiscal year 2024. Costs are anticipated to be incurred through various deployment phases that are expected to continue through early fiscal year 2026. The Company incurred $1,309 of business transformation costs during the six months ended September 30, 2024. These costs are recorded in General and Administrative expenses and Product Development expenses in our Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income.

Previous wording

The following table sets forth our results of operations for the years ended June 30, 2024 and 2023 (in thousands):

Current wording

The following table sets forth our results of operations for the three and six months ended September 30, 2024 and 2023 (in thousands):

Previous wording

Net revenue decreased by $28,377 or 19.4% for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. See the segment discussion below for further details regarding net revenue.

Current wording

Over the three-month comparative periods, net revenue decreased by $24,531 or 17.1%, and over the six-month comparative periods, net revenue decreased by $52,908 or 18.3%. See the segment discussion below for further details regarding net revenue.

Previous wording

On Device Solutions revenue decreased by $17,600 or 17.9% for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Revenue from content media increased by approximately $753 primarily due to increased activity with a carrier that resulted in higher daily active users on prepaid devices. Revenue from application media declined by approximately $18,352 due to lower new device volumes in the US and internationally, which was partially offset by an increase in revenue-per-device in the US. Additionally, the decrease is partially due to the winding down of certain strategic demand contracts in the current period.

Current wording

ODS revenue for the three months ended September 30, 2024, decreased by $16,646 or 16.8% compared to the three months ended September 30, 2023. Revenue from content media increased by approximately $565 primarily due to increased activity with a carrier that resulted in higher daily active users on prepaid devices. Revenue from application media decreased by approximately $17,211. The decrease was primarily driven by lower new device volumes and revenue-per-device in the US region and the Europe, Middle East, and Africa regions. These decreases were partially offset by higher device volumes and revenue-per-device in the Asia Pacific and China regions.

Previous wording

Costs of revenue and operating expenses decreased by $17,004 or 11.3% for the three months ended June 30, 2024 compared to the three months ended June 30, 2023, primarily due to lower revenue share, which is the result of lower revenue over the same comparative periods. This decrease was also partially due to lower operating costs, primarily for product development activities. Costs of revenue and operating expenses included severance costs as well as business transformation and acquisition-related costs of $557 and $1,072, respectively, for the three months ended June 30, 2024, compared to $367 and $36, respectively, for the three months ended June 30, 2023. See below for further discussion regarding changes in costs of revenue and operating expenses.

Current wording

The decrease in total costs of revenue and operating expenses for both comparative periods, after excluding the impairment of goodwill, was primarily due to lower revenue share and product development costs, partially offset by higher general and administrative costs. The reduced revenue share is the result of lower revenue over the same comparative periods. Costs of revenue and operating expenses included total business transformation, severance and transaction costs of $505 and $2,134 for the three and six months ended September 30, 2024, respectively, compared to $3,416 and $3,819 for the three and six months ended September 30, 2023, respectively. In connection with the Company’s transformation efforts, business transformation and severance costs are expected to increase in the future remaining quarters of fiscal year 2025.

Previous wording

License fees and revenue share are reflective of amounts paid to our carrier and OEM partners, as well as app publishers and developers, and are recorded as a cost of revenue. In addition, when indirect arrangements exist through advertising aggregators (ad networks) and revenue is shared with our carrier and app development partners, the shared revenue is also recorded as a cost of revenue.

Current wording

Revenue share includes amounts paid to our carrier and OEM partners, as well as app publishers and developers, and are recorded as a cost of revenue.

Previous wording

Other direct costs of revenue decreased by $1,823 to $7,790 for the three months ended June 30, 2024 and was 6.6% as a percentage of total net revenue compared to $9,613, or 6.6% of total net revenue, for the three months ended June 30, 2023. The decrease in other direct costs was primarily due to lower hosting costs as a result of both a strategic switch in web hosting providers during fiscal year 2024 and a comparable decrease in total net revenues between comparable periods. Other direct costs as a percentage of total net revenue remained flat between comparable periods.

Current wording

The decrease in other direct costs was primarily due to lower amortization of developed technology intangible assets, lower hosting costs as a result of both a strategic switch in web hosting providers during fiscal year 2024, and a comparable decrease in total net revenues between comparable periods. The increase in other direct costs of revenue as a percentage of total net revenue was due to the decline in total net revenue.

Previous wording

Product development expenses include the development and maintenance of the Company’s product suite. Expenses in this area are primarily a function of personnel.

Current wording

Product development expenses include the development and maintenance of the Company’s product suite. Expenses in this area are primarily a function of personnel. Additionally, product development expenses include certain integration and business transformation costs, which may impact the comparability of product development expenses between periods.

Previous wording

Product development expenses decreased by $5,086 to $10,714 for the three months ended June 30, 2024 compared to $15,800 for the three months ended June 30, 2023. Product development expenses included severance costs of $71 and $183 for the three months ended June 30, 2024 the three months ended June 30, 2023, respectively. Excluding severance costs, product development expenses decreased by $4,974 for the three months ended June 30, 2024.

Current wording

Product development expenses decreased by $9,690 or (32.5)% to $20,147 for the six months ended September 30, 2024, compared to $29,837 for the six months ended September 30, 2023. Product development expenses included severance costs of approximately $180 for the six months ended September 30, 2024. Product development expenses included severance, acquisition-related, and business transformation costs of approximately $1,682 for the six months ended September 30, 2023.

Previous wording

Sales and marketing expenses represent the costs of sales and marketing personnel, advertising and marketing campaigns, and campaign management.

Current wording

Sales and marketing expenses represent the costs of sales and marketing personnel, advertising and marketing campaigns, and campaign management. Additionally, sales and marketing expenses include certain integration and business transformation costs, which may impact the comparability of sales and marketing expenses between periods.

Previous wording

General and administrative expenses represent management, finance, and support personnel costs in both the parent and subsidiary companies, which include professional services and consulting costs, in addition to other costs such as rent, stock-based compensation, and depreciation and amortization expense.

Current wording

General and administrative expenses represent management, finance, and support personnel costs in both the parent and subsidiary companies, which include professional services and consulting costs, in addition to other costs such as rent, stock-based compensation, and depreciation and amortization expense. Additionally, general and administrative expenses include certain integration and business transformation costs, which may impact the comparability of general and administrative expenses between periods.

Previous wording

General and administrative expenses increased by $3,018 to $43,517 for the three months ended June 30, 2024 compared to $40,499 for the three months ended June 30, 2023. General and administrative expenses included severance costs of $76 and business transformation costs of $1,072 for the three months ended June 30, 2024. General and administrative expenses included severance costs and acquisition-related costs of $181 for the three months ended June 30, 2023. Excluding severance costs, acquisition-related costs, and business transformation costs, general and administrative expenses increased by $2,051 for the three months ended June 30, 2024.

Current wording

General and administrative expenses increased by $791 or 1.9% to $42,176 for the three months ended September 30, 2024 compared to $41,385 for the three months ended September 30, 2023. General and administrative expenses included severance and business transformation costs of approximately $300 for the three months ended September 30, 2024. General and administrative expenses included severance, acquisition-related, and business transformation costs of approximately $1,333 for the three months ended September 30, 2023.

Previous wording

For the three months ended June 30, 2024, interest expense, net, increased by $860 or 11.6% compared to the three months ended June 30, 2023, primarily due to an increase in interest rates of 112 basis points offset by lower average outstanding borrowings of $13,967 over the comparative period.

Current wording

For the three and six months ended September 30, 2024, interest expense, net, increased by $1,388 or 17.7% and $2,248 or 14.8%, respectively, compared to the three and six months ended September 30, 2023. The increase was primarily due to an increase in interest rates of 112 basis points for the three and six months ended September 30, 2024. Further, average outstanding borrowings for the three months ended September 30, 2024 increased $5,433 compared to the three months ended September 30, 2023, contributing to the increase in interest expense, while the average outstanding borrowings for the six months ended September 30, 2024 decreased $4,267 compared to the six months ended September 30, 2023, partially offsetting the increase in interest rates for the six month period.

Previous wording

Our primary sources of liquidity are our cash and cash equivalents, cash from operations, and borrowings under our New Credit Agreement. As of June 30, 2024, we had unrestricted cash of approximately $35,042 and $29,000 available to draw under the New Credit Agreement with BoA, excluding the accordion feature, subject to the required covenants. We generated $(1,352) in cash flows from operating activities for the three months ended June 30, 2024.

Current wording

Our primary sources of liquidity are our cash and cash equivalents, cash from operations, and borrowings under our Credit Agreement (“Amended and Restated Credit Agreement”) with Bank of America, N.A. (“BoA”). As of September 30, 2024, we had unrestricted cash of approximately $32,081 and restricted cash of approximately $684. Restricted cash consists primarily of cash held by a bank in a collateral account as collateral to cover the Company's corporate credit cards. The Company had $14,000 available to draw under the Amended and Restated Credit Agreement with BoA, excluding the accordion feature, subject to the required covenants. The Amended and Restated Credit Agreement matures in 2026. We incurred a net loss of $(24,986) and $(50,142), respectively, and used cash in operating activities of $(8,719) and $(10,071), respectively for the three and six months ended September 30, 2024.

Previous wording

Our ability to meet our debt service obligations and to fund working capital, capital expenditures, and investments in our business will depend upon our future performance, which will be subject to availability of borrowing capacity under our credit facility and our ability to access capital markets as well as financial, business, and other factors affecting our operations, many of which are beyond our control. These factors include general and regional economic, financial, competitive, legislative, regulatory, and other factors such as health epidemics, economic and macro-economic factors like labor shortages, supply chain disruptions, and inflation, and geopolitical developments, including the conflict in Ukraine, the political climate related to China, and the conflict in Israel. We cannot guarantee we will generate sufficient cash flow from operations, or that future borrowings or capital markets will be available, in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs.

Current wording

We believe our existing cash and cash equivalents, cash flow from operations and undrawn available balance under our Amended and Restated Credit Agreement will be sufficient to meet our working capital and other business requirements for at least 12 months from the filing date of this Report. However, our ability to meet our debt service obligations and to fund working capital, capital expenditures, and investments in our business will depend upon our future performance, which will be subject to availability of borrowing capacity under our credit facility and our ability to access capital markets as well as financial, business, and other factors affecting our operations, many of which are beyond our control. These factors include general and regional economic, financial, competitive, legislative, regulatory, and other factors such as health epidemics, economic and macro-economic factors like labor shortages, supply chain disruptions, and inflation, and geopolitical developments, including the conflict in Ukraine, the political climate related to China, and the conflict in Israel. We cannot guarantee we will generate sufficient cash flow from operations, or that future borrowings or capital markets will be available, in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs.

Previous wording

Our outstanding secured indebtedness under the New Credit Agreement is $396,000 as of June 30, 2024. The maturity date of the New Credit Agreement is April 29, 2026, and the outstanding balance is classified as long-term debt, net of debt issuance costs of $2,209, on our consolidated balance sheets as of June 30, 2024. For further description of the terms of the New Credit Agreement, see Note 10—Debt under the heading “Revolver” in the notes to our condensed consolidated financial statements under Part I, Item 1 of this Report.

Current wording

Our outstanding secured indebtedness under the Amended and Restated Credit Agreement is $411,000 as of September 30, 2024. The maturity date of the Amended and Restated Credit Agreement is April 29, 2026, and the outstanding balance is classified as long-term debt, net of debt issuance costs of $3,380, on our consolidated balance sheets as of September 30, 2024. For further description of the terms of the Amended and Restated Credit Agreement, see Note 10—Debt under the heading “Revolver” in the notes to our condensed consolidated financial statements under Part I, Item 1 of this Report.

Previous wording

As of June 30, 2024, we were in compliance with all covenants under the New Credit Agreement. Additionally, the Company entered into a Fourth Amendment to the New Credit Agreement on August 6, 2024 to

Current wording

The Company entered into a Fourth Amendment to the Amended and Restated Credit Agreement on August 6, 2024 to renegotiate its required covenants. Refer to Note 10—Debt for further discussion. As of September 30, 2024, we were in compliance with all covenants under the Amended and Restated Credit Agreement.

Previous wording

We enter into hosting agreements with service providers, and, in some cases, those agreements include minimum commitments that require us to purchase a minimum amount of service over a specified time period (“the minimum commitment period”). The minimum commitment period is generally one year in duration, and the hosting agreements include multiple minimum commitment periods. Our minimum purchase commitments under these hosting agreements total approximately $261,359 over the next six fiscal years.

Current wording

We enter into hosting agreements with service providers, and, in some cases, those agreements include minimum commitments that require us to purchase a minimum amount of service over a specified time period (“the minimum commitment period”). The minimum commitment period is generally one year in duration, and the hosting agreements include multiple minimum commitment periods. Our minimum purchase commitments under these hosting agreements total approximately $252,866 over the next six fiscal years.

Previous wording

Our cash flows from operating activities are primarily driven by revenue generated from user acquisition and advertising activity, offset by the cash costs of operations, and are significantly influenced by the timing of and fluctuations in receipts from customers and payments to our carrier and publisher partners as well as other vendors. Our future cash flows from operating activities will be diminished if we cannot increase our revenue levels and manage costs appropriately. Cash provided by (used in) operating activities was $(1,352) for the three months ended June 30, 2024, compared to $1,318 for the three months ended June 30, 2023. The decrease of $2,670 was due to the following:

Current wording

Our cash flows from operating activities are primarily driven by revenue generated from user acquisition and advertising activity, offset by the cash costs of operations, and are significantly influenced by the timing of and fluctuations in receipts from customers and payments to our carrier and publisher partners as well as other vendors. Our future cash flows from operating activities will be diminished if we cannot increase our revenue levels and manage costs appropriately. Cash provided by (used in) operating activities was $(10,071) for the six months ended September 30, 2024, compared to $28,772 for the six months ended September 30, 2023. The decrease of $38,843 was due to the following:

Previous wording

•$19,994 increase due to changes in operating assets and liabilities, driven primarily by working capital changes, specifically accounts receivable;

Current wording

•$4,631 decrease due to changes in operating assets and liabilities, driven primarily by working capital changes, specifically accounts payable and other current liabilities;

Previous wording

Our primary investing activities have consisted of acquisitions of businesses, purchases of property and equipment, and capital expenditures in support of creating and enhancing our technology infrastructure. For the three months ended June 30, 2024, net cash used in investing activities decreased by $1,345 to $5,931. Our cash used in investing activities for the three months ended June 30, 2024 and June 30, 2023, was primarily comprised of capital expenditures related to internally-developed software.

Current wording

Our primary investing activities have consisted of acquisitions of businesses, purchases of property and equipment, and capital expenditures in support of creating and enhancing our technology infrastructure. For the six months ended September 30, 2024, net cash used in investing activities decreased by $869 to $13,408. Our cash used in investing activities for the six months ended September 30, 2024 and September 30, 2023, was primarily comprised of capital expenditures related to internally-developed software.

Previous wording

For the three months ended June 30, 2024, net cash provided by financing activities was $9,966, which was comprised of: (1) the repayment of debt obligations of $7,000, and (2) payment of payroll withholding taxes for net share settlement of equity awards of $48. These cash outflows were offset by cash inflows comprising of proceeds from borrowings of $17,000 and stock option exercises of $14.

Current wording

For the six months ended September 30, 2024, net cash provided by financing activities was $23,372, which was comprised of: (1) the repayment of debt obligations of $13,000, (2) a payment of $1,561 for debt issuance costs, and (3) payment of payroll withholding taxes for net share settlement of equity awards of $160. These cash outflows were offset by cash inflows comprising of proceeds from borrowings of $38,000 and stock option exercises of $93.

Previous wording

For the three months ended June 30, 2023, net cash used in financing activities was $8,951, which was comprised of repayment of debt obligations of $10,000, payment of payroll withholding taxes for net share settlement of equity awards of $931, partially offset by cash inflows from proceeds from borrowings of $5,000 and stock option exercises of $731.

Current wording

For the six months ended September 30, 2023, net cash used in financing activities was $29,195, which was comprised of repayment of debt obligations of $44,136, payment of payroll withholding taxes for net share settlement of equity awards of $1,037, partially offset by cash inflows from proceeds from borrowings of $17,000 and stock option exercises of $2,729.

Previous wording

Management’s discussion and analysis of our financial condition and results of operations is based on our unaudited financial statements. The preparation of these financial statements is based on management’s selection and application of accounting policies, some of which require management to make judgments, estimates, and assumptions that affect the amounts reported in the financial statements and notes. For more information regarding our critical accounting policies and estimates, please see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies,” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2024, and Note 2—Basis of Presentation and Summary of Significant Accounting Policies,” of this Report on Form 10-Q for our fiscal first quarter ended June 30, 2024.

Current wording

Management’s discussion and analysis of our financial condition and results of operations is based on our unaudited financial statements. The preparation of these financial statements is based on management’s selection and application of accounting policies, some of which require management to make judgments, estimates, and assumptions that affect the amounts reported in the financial statements and notes. For more information regarding our critical accounting policies and estimates, please see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies,” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2024, and Note 2—Basis of Presentation and Summary of Significant Accounting Policies,” of this Report on Form 10-Q for our fiscal second quarter ended September 30, 2024.