APPS (Digital Turbine) beats and raises

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APPS (Digital Turbine), a leader in mobile advertising, has been brought up many times on this board. It’s a 10-bagger since May of last year. The latest quarter continues its torrid streak of revenue and earnings growth.

  • Revenue of $212M beats by $21M

  • Pro-forma revenue of $292M grew 101% YoY

  • Net income grew more than 150% YoY to $33M, or $0.34 per share (beat by $0.03)

  • Raises revenue guidance for next Q to $303M at the midpoint, vs previously expected $295M

So the company is on a $1.2B annual revenue run rate, but its market cap is only $6.2B. Or, to look at it another way, assuming it earns $1.50 per share over the next 12 months, it has a forward P/E ratio of 43, which is reasonable for a company growing at this pace.

Quoting from the announcement:
“We are off to a fast start in fiscal 2022 with more than 100% year-over-year pro forma revenue growth and more than 150% year-over-year growth in both EBITDA and non-GAAP EPS,” said Bill Stone, CEO. … We are capitalizing on a unique opportunity to leverage our extensive on-device software presence and long-term partnerships with global carriers and OEMs to significantly expand our addressable app ecosystem market opportunity, and we are already witnessing a very positive initial reaction from advertisers all across the platform.

Mr. Stone concluded, “With respect to our financial performance during the June quarter, escalating global demand from app publishers and advertisers for a growing number of product offerings across the full range of the platform drove On-Device Media revenue growth and In-App Media revenue growth of 93% and 117%, respectively, on a year-over-year basis. Scale efficiencies and disciplined expense controls enabled us to translate this top-line growth into EBITDA growth of 183% and non-GAAP EPS growth of 151% on a year-over-year basis. Looking forward, we expect to continue to demonstrate additional profitable operating leverage, particularly as we expect to realize considerable acquisition synergies – revenue synergies as well as cost synergies – in the coming quarters and years.”

-Ron
Long APPS

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I was reading their 10-Q and couldn’t figure out why they have such a high cost of revenue this quarter.

In the 10-Q they reported $212M revenue (AdColony and Fyber only contributed half of the quarter) and $193M cost of revenue - which means their gross margin this quarter is only 9%!! This is extremely low.

This is a huge drop compared to their On Device business’s margin in the last 4 quarters which is in the 40-43% range.

If I remembered correctly Fyber’s margin was around 15% and AdColony around 30% - therefore I was expecting a margin in the 30% range, certainly not 9%.

Does this mean AdColony and Fyber are creating net loss for each dollar of revenue they bring in? I can’t seem to find a satisfactory explanation of this. I haven’t had a chance to listen to the conference call.

Any insight on what’s going on here?

Link to 10-Q

https://ir.digitalturbine.com/press-releases/detail/618/digi…

See page 4 and page 27

Thanks

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Sorry - I made a dumb mistake. The cost of goods in this case is “License fees and Revenue Share” which is 138M. The 193M figure includes operating expenses. So their gross margin was 35% - the 9% was income. This is in line with their historical performance and margin actually expanded. It looks like Fyber has higher margin now.

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In the 10-Q they reported $212M revenue … and $193M cost of revenue - which means their gross margin this quarter is only 9%

No, that line item in the 10-Q says “cost of revenue and operating expenses”

That’s a big “and”. Operating expenses, like the sales and marketing expenses shown, should not be subtracted from revenue to calculate gross profit.

This is a profitable company with positive earnings. After you subtract all expenses last quarter, you are left with $14 million of profit. This is called net profit, not gross profit.

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So:


Net revenues                                 $ 212,615        $  59,012

Costs of revenues

License fees and revenue share                 138,348           32,300
Other direct costs of revenues                   2,533              560
                                               -------          -------
                                                71,734 (34%)     26,512 (44%)
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So their gross margin was 35% - the 9% was income

In one of the Q&A answers they state 34%.

Cash expenses were 15% of revenues down from 21% previously…

I also continue to be pleased with the profitability and free cash flow delivered by our business. In the quarter we achieved non-GAAP adjusted net income of 33.4 million or $0.34 per share as compared to a 12.5 million or $0.13 per share in the same quarter last year. Adjusted EBITDA was 39.8 million in the quarter, up 183% over prior year. And our non-GAAP free cash flow totaled 14.3 million, enabling us to exit Q1 with a cash balance of $83.1 million. Our GAAP net income was 14.3 million or $0.14 per share, based on 98.8 million diluted shares outstanding compared to our first quarter 2020 net income of 9.9 million or $0.11 per share. I would also highlight with respect to the recent acquisitions each of these new businesses are high revenue growth companies and profitable on a standalone basis and are accretive to both our earnings and free cash flow, further improving the profile of the Digital Turbine enterprise.…

Ant

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I’m trying to figure out the full pro-forma revenue story and was wondering if anyone else managed to figure it all out, as I want to see the trends for the combined entity and if the combined entity is accelerating. I listened to the conf call and the CEO sounded like he really understood the old DT business but not yet the Fyber and Adcolony businesses to the same extent. The CFO didn’t want to (or couldn’t) answer an analyst question about what part of the guide was attributable to Fyber.

I have pieced together the following proforma combined co rev going from fin year Q4 to Q1:

FY Q4 2020 (Jan-Mar): $119m
FY Q1 2021 (Apr-Jun): $143m - up 21% sequentially
FY Q4 2021 (Jan-Mar): $256m
FY Q1 2022 (Apr-Jun): $292m - up 14% sequentially

So it looks like the sequential growth is lower this year than last for the combined business.

For this Q it is clear that Adcolony was a drag on overall revenue growth, but I have not been able to unearth the qarterly numbers for Adcolony.

From Fyber’s own IR site, I have revenue numbers which differ from what DT supplied, but they go like this for calendar quarters:

2020 Q1: $30.7m
2020 Q2: $34.5m
2020 Q3: $55.5m
2020 Q4: $89m
2021 Q1: $86m
2021 Q2: $94m

So Fyber had a fantastic run but the last 3 quarters have been a bit flat. In 2020 Q3 calender last year (i.e. the one included in the current guide) there was a substantial sequential acceleration.

What really stumped me therefore was the guide.

They are guiding to go from $292m proforma this Q to $303m at the midpoint next Q. That’s only 4% sequentially. And they will already have 1 month actuals to bake into the guide.

So what’s going on? Are they just massively sandbagging to the point of being silly, is there some seasonal impact that I’m missing, or should we buy the guide and read it as the business hugely decelerating?

I really like the mobile ad space that they’re going after and the differentiator of having their software on device. (the latter is similar to NET, CRWD) and the potential tailwinds from Tiktok, Samsung and expanded coverage from carriers. But I find the story difficult to get my head around fully. And the guide really threw me off. I’m surprised no analyst asked about it.

Anyone have thoughts/insights here?

-WSM

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With regard to guidance -

This is their guidance history 4 quarters after the Mobile Posse acquisition completed. I’m taking the midpoint of the guidance range here.

2021 Q1 Actual 59
2021 Q2 Guide 60 Actual 71
2021 Q3 Guide 73.5 Actual 88
2021 Q4 Guide 82 Actual 95 (Q4 guidance was lower than Q3 actual. It was hidden in the annual revenue forecast of 298-300)

2022 Q1 has acquisition revenue so I didn’t include

It seems that the management is of the extreme sandbagging type. This doesn’t answer other questions about the acquisition but only a record of the past.

About AdColony

To me that AdColony wasn’t growing fast was expected. When they acquired it from Otello group, it was only growing at like 25% if my memory was correct. The other half of Otello was posting negative growth. Fyber seems to have slow down quite a bit though.

I added a little more to the dip in the morning.

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I added to my shares in APPS (Digital Turbine) today. I see the current price as a gift.

There is a poster on Yahoo Finance who goes by the handle “FT” who said it better than I could in the following summary.

"Pros:

  • Digital Turbine software now installed on over 700,000 devices.
  • Extended Samsung agreement sees around 250,000 devices per year, an incremental 150,000 per year compared to now.
  • Will overtake TTD for Revenue this fiscal year, and for Free Cash Flow next fiscal year. TTD is 7.5 times the MarketCap of Digital Turbine.
  • Largest discount to average analyst consensus at 101 percent
  • Highest return on capital amongst peers
  • Exceeds ‘Rule of 40’ with a figure in the 200’s
  • Highest profit per employee amongst peers at $230k per employee, and over $1.1m Rev per employee
  • RPD is going up over 50 percent
  • Products are being cross-sold
  • Guiding for between $300 and $306m Rev next quarter, higher guidance than TTD.
  • Tracking well in excess of $1bn Rev this fiscal year.
  • Growing over 100 percent per year, and over 150% YoY growth in EBITDA and non-GAAP EPS
  • Beat revenue and EPS forecasts for the last 6 quarters
  • Limited competition
  • SingleTap growing 600 percent YoY
  • App Media and Content increasing 93 percent YoY
  • Next quarter (Q2) APPS will bank nearly as much revenue as the entire previous fiscal year, in a single quarter alone.
  • Patent protection on SingleTap
  • $4 per device valuation and growing (in both handset numbers and RPD)
  • Counts TikTok among strategic partners
  • Grew handsets 10 percent in the US, but over 60 percent internationally in most recent quarter compared to prior June quarter.
  • DT have acquired 7-8 companies over life and returned over 5000 percent SP growth in last 5 years

Cons:

  • We will see margin compression for a few quarters until synergies kick in
  • There are one-off hits on the balance sheet to acquire the new companies
  • Despite being up over 5000 percent in 5 years, and over 10 percent in last 1 year, recent SP performance has been weak."

-Ron

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