Another look at Digital Turbine (APPS)

One of the readers of this board asked me what I now think of Digital Turbine (APPS), since I last wrote extensively about it back in August (message #78746). The short answer is that I found today’s price attractive enough to add significantly more shares to my position. Here’s why.

I love that management is transparent about what their organic growth is. They said that their revenue last quarter grew 338% YoY as reported, but “only” grew 63% YoY on a Pro Forma basis. Unlike many other companies that grow by acquisition, where the organic growth number is hidden or hard to calculate, we know right away that the core business grew revenues 63% YoY organically. That’s a higher rate of growth than Cloudflare, which I also own.

We also know that this company is forecasting a positive $0.44 EPS for next quarter, which they will most likely beat, based on their past history. That annualizes to $1.76 EPS, which, at today’s closing price of $48.85, gives them a forward P/E ratio of under 28.0. At their current earnings growth rate, that looks like a bargain to me.

Their NTM revenues look like they’ll be within the $1.2B to $1.4B range. If we take $1.3B as the mid-point, the stock currently trades at a forward P/S ratio of only 3.6! It’s trading more like a low-margin retailer than a high-growth ad tech stock.

Why is that? Well, unlike our SaaS stocks, APPS is in the advertising business, and currently has a low gross margin of only about 31%. This has shrunk from 42% last year, and is a big part of why the stock’s performance has been lackluster this year.

Here’s what management said about margins on the earnings call. The key point is that they have a lot of operating leverage :

----- Begin remarks from transcript --------------

Allen Klee

“With your relatively newer business mix, how do you think about your long-term margin opportunity?”

Barrett Garrison

"Yes, Allen. We see enhancements to our margins coming from a few different places. We would see those margins expanding over time as we saw with the existing core device business over time. A couple of areas that we see as catalysts: One is we put new products on; two, as we realize the synergies we’re talking about within our vertical integration strategy, we have more opportunities to expand those margins.

And as we continue to launch and ramp our products like SingleTap and others, we’ll also begin to optimize the yields in those businesses. But to answer your question, we see those margins expanding north of 30%. We do anticipate talking a bit about – more about kind of our growth model on our Analyst Day. But you should expect, over time, those margins to accrete north of 30%, certainly.

The second point I’d make is beyond gross margins is we’re thrilled, as you can tell from our comments about the operating leverage in the business and the expanding EBITDA margins and operating income margins. We see a lot of opportunity in those margins continuing to expand, especially as the new acquisitions begin to kind of fuel some of that increased operating leverage from where they stand today."…

— End of remarks from transcript -----

There are, of course, risks with this stock, one of them being that Digital Turbine does not have recurring revenues, like a SaaS company. For me, the risk is mitigated by the fact that I purchased the bulk of my shares at around $6 back in 2019.

Good luck to all,


I will take a stab at it, although I haven’t followed the company since the summer, and I could be wrong or have out-dated thoughts.

I had a starter position in the summer but sold out after their Q1 2022 report which came out 10 Aug 2021. In my notes to myself I wrote:

One theme that has popped up reading through my notes from previous quarters is COMPLICATED. It’s a complicated story. And it continues. Is high revenue growth really enough? The market is trying to figure all this out.

And then I wrote:

Revenue grew 260% YoY to ~$213 million from $59 million. But that’s complicated b/c of the acquisitions. Pro - forma revenue (as if they had owned all the companies last year too) was 104% YoY.

Now if I glance at their most recent earnings report (Q2 2022 reported 2 November):…

… I see the headline is:

Second Quarter Revenue Totaled $310.2 Million, Representing Year-over-Year Growth of 338% on an As-Reported Basis and Year-over-Year Growth of 63% on a Pro Forma Basis

So in my head I see organic growth went from 104% YoY to 63% YoY in one quarter. That’s a big slowdown.

And then, again, sorry these numbers are from Q1 2022 (released 10 Aug), but looking at the margins I wrote:

  • ADJ gross margin fell to 34% from 45%. Those are both bad gross margins, but it’s also going the wrong direction

  • ADJ net margin fell to 16% from 21%. Not what we want!

  • Adj EPS of 34 cents vs 13 cents last year

And then I wrote:

The balance sheet looks ugly compared to my other companies. Long term debt of ~ $234 million on cash of ~ $83 million. The long-term debt relative to the cash seems like an issue

They also show short-term debt of ~ $21 million. So they are running low on cash to pay the short-term debt in the next year. This means there may be a capital raise.

And on the cash flow statement:

  • Cash from operations was negative ~ $29 million. That’s an Op cash flow margin of minus 14% compared to 10% last year. So they are burning cash.

  • FCF margin at minus 16% compared to 7% last year

  • Adj EBITDA margin fell to 19% from 24%. Bad!

Now coming back to the most recent quarter. If I glance at the balance sheet I see ~ $95 million in cash on the same debt. So it has improved and seems lumpy. It still leaves me asking questions. Compare that to a company like ZoomInfo which has a good amount of debt on their balance sheet relative to it’s size, but which has a ridiculously high FCF margin.

So from a high level I see a company with rapidly decelerating organic revenue, margins going in the wrong direction and maybe possibly a capital raise needed? And with the acquisitions it’s now 3 businesses in one. Too complicated for me. I’m not smart enough to figure it out! That’s not to say there isn’t tons of value, I just can’t figure it out. So I moved on.