APPS acquisitions and my opinion

1. APPS acquire AdColony, Triapodi Ltd

APPS made two acquisitions in the past week: Adcolony for $400M and Triapodi Ltd (Appreciate) for $22.5M

I am not in the digital advertisement industry so please correct me if I have misunderstood their products. Everything here is based on public information.

AdColony(https://www.adcolony.com/) is a mobile app DSP i.e. an ad exchange. When app marketers say “I want to get 10,000 impression on this ad” they can go to AdColony and pay for the impressions. On the other side, app developers can sell their ad slots on their app to AdColony for monetization. An example would be a “free to play mobile game” that shows you an ad each time you beat a level. This ad is hosted by AdColony and the game developer gets paid based on how many times the ads are shown.

Triapodi Ltd’s main product Appreciate (https://appreciate.mobi/) is a marketing campaign management platform for app marketers. You can see in their “ad exchange partners” familiar names including AdColony, which APPS acquired, and Rubicon Project now known as MGNI.

Link to press releases

https://ir.digitalturbine.com/press-releases/detail/601/digi…
https://ir.digitalturbine.com/press-releases/detail/602/digi…

Numbers

AdColony made about $50M in the last quarter with 15% YoY growth rate. Gross margin is low, around 30%. Large chunk of revenue goes into paying developers to show ads that they are selling (probably >50% based on Otello’s income statement).

AdColony’s parent company, Otello, seems to be struggling as their other major line of business is seeing YoY decline.

I couldn’t find much about Triapodi Ltd but they seem to have $5M in annual revenue.

2. My opinion

APPS’s strategy

When APPS said they got a $200M credit from Bank of America in the last earnings call, I thought they were going to use that to acquire companies to expand into CTV. Instead, both companies they acquired had to do with Mobile DSP.

It looks like they are becoming the one-stop shop for mobile application ads by vertically integrating the industry.

They are no longer the one-trick pony in March 2020 when 90% of their revenue depends on App Install. With the addition of AdColony, App Install is likely a 25-30% or lower business going forward.

Example: adcolony and Single-Tap integration

This is an example of Adcolony hosted ads:
https://www.reddit.com/r/badads/comments/ijs2t1/these_adcolo…

This seems to be the current stage of mobile app ads: you need to go to either Google Play on Android or App Store on iOS in order to install an app. Digital Turbine’s Single-Tap removes this extra step. Phone users can tap on the ad and install without going to Google Play.

This is a revenue synergy for APPS as now the AdColony business will be able to sell ads at a higher rate (clicks per 1,000 impressions, or CPM). This should improve AdColony’s gross margin. I have no idea what the impact on TAM is, but they are clearly building a growth flywheel that different lines of businesses feed on each other.

I don’t know how fast they can grow this line of business either, but they were able to grow MobilePosse, another acquisition that was failing before with negative YoY growth, to the tune of >50% YoY growth in 3 quarters which was really impressive to me.

I’m long APPS. It is currently a 30% position in my portfolio.

Rant: I underestimated the ad industry

A trend I’ve observed in the last few years was that the ad industry’s profitability tends to get underestimated. I suspect that, as consumers, most of the ads we are seeing are irrelevant and hijack our attention, and it has a psychological effect on me seeing ad industry as “evil” and in turn, I tend to underestimate the ad companies.

But the reality is that ad industry is enormous: two of the biggest tech firms, Google and Facebook, are ad companies. The whole TV industry was built on ads and TVs are essentially advertisement machines.

(Even the research in AI, the hype word of the decade, is largely driven by advertisement - Google and Facebook.)

The gap between the disgust we feel as consumers and the enormous TAM they represent seems to make ad companies great investments in the market, or in Munger’s words, mispriced bets. I saw this with people underestimating the profitability of Google and Facebook when they first showed up. The same thing happened recently with ROKU, TTD, APPS, MGNI, etc.

My developer bias as an investor

As a developer, I love DDOG. They solve a problem that feels like a complete waste of my time: how to build the infrastructure to monitor cloud app containers.

As a consumer, I couldn’t care less about 99% of the ads on my phone. (1% of the ads do make my screen time increase significantly.)

As an investor, however, DDOG has been a terrible investment compared to APPS. I have been thinking why did I buy into DDOG last summer (~$80 per share) even though it already had a high valuation (>50 P/S) instead of buying more APPS. When I think about it, I realize that I have a lot of bias as a developer and it clouded my judgment as an investor. This had been proven once with FSLY as I fell in love with their technology and story but wasn’t following the numbers. I’m still learning to see the business as is and not falling in love with technology.

I have been learning to draw. Some people say that one of the most important things about learning to draw is to “draw what you actually see.”

This board has taught me to see business as what they are and for that I’m deeply grateful. Thank you Saul and other board members for discussions.

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I am being very careful with any app advertising businesses right now. The new Apple iOS 14.5 will make IDF (Identifier for Advertisers) 100% opt-in. Some estimates think it will be as low as 20%. This means marketers and developers will no longer be able to track an app install. Marketers will be flying blind. And businesses like apps, which usually charge on a per-install basis, won’t be able to.

You can read more here.
https://developer.apple.com/app-store/user-privacy-and-data-…

Ad Colony and Digital Turbine could be hit hard by this as the primary use case is driving app downloads. I sold off all my shares in Snap, I won’t touch Facebook right now and got our Zynga a while back because of it this. I think mobile gaming will get hit the hardest as they both sell app downloads and need the technology to market their apps.

While some in the media have positioned this as the apocalypse, it may be. There are some caveats.

  1. It doesn’t affect Android
  2. Marketer still need to drive app downloads, they just are limited on reporting now

This all goes into effect later this year as it will take time for the adoption of the new iOS to work its way through the system.

No one knows the exact outcome. There may be workarounds. Or marketers may have to give up on tracking and just buy ads to drive downloads, which how direct response advertising worked in the pre-internet world. It could be great for publishers that have struggled for so long.

Magnite and The Trade Desk will also be affected but not as much.

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