For $50 you can buy a meal for two in a restaurant with your other half, a garish Christmas jumper, or a share in Digital Turbine. Which has the best ROI, I’ll leave you to decide.
If when you think of Digital Turbine you think of ‘bloatware’ or a ‘shi*co’ then you should probably stop reading now, because it’s unlikely that you’ll change your mind.
Similarly if your criteria in high growth investing is to only consider companies with very high gross margins, or revenue that’s ‘predictable’, or ‘SaaS’, then again you should probably stop reading.
However, sometimes an opportunity comes along that slaps you in the face, and I’d argue that this might be one of them now. I’ve only felt similarly this year twice before, once with $DDOG at $75 in May where I more than doubled my allocation and Upstart after Q1 earnings when it dropped to $80 where I again doubled down. With Digital Turbine’s share price touching a low of $45 just yesterday, I have again shifted my portfolio to meet the opportunity. I’ve sat and watched this company for over 18 months and feel that it is reaching a critical inflection point in the coming quarters. Although there are of course risks.
This will likely end up being a long, but not an all-encompassing, post. To save yourself time, you can just read a short summary: https://twitter.com/thinking_stocks/status/14643730309105745…
But if you want some more detail….
I said before that I’d not argue Apps is a ‘great business’, but maybe that’s a little harsh on the company. That was really more a reference to the wider hyper growth community’s perception of a ‘great business’. One that places an understandable premium on a SaaS business model for example. Whether or not Apps is a ‘great business’, one thing that it definitely does have is positioning.
"Digital Turbine is a toll collector on the most valuable per-square-inch real estate in the world - cell phones. They sit between consumers and the companies desperate to reach them and have an increasing arsenal of monetisation tools" (Greenhaven Road Capital)
Anthonyms captured this positioning succinctly in his latest portfolio review: “Uniquely positioned without direct competition with long term exclusive OEM and carrier contracts deriving revenues from preloaded apps and media advertising on Android mobile devices which is going through a massive 5G upgrade boom and at the sweet spot of Adtech, digital and mobile”
With 750m devices as of Q3 and adding 50-60m devices per quarter, the footprint is vast. CEO Bill Stone loves to analogise that ‘we put our technology on more devices in the last 90 days than Roku has subscribers in its history’. While hyperbolic, this does give some relative context to DT’s scale.
Digital Turbine has deeply entrenched relationships built up over many years with its OEM’s and partners, with high entry and exit barriers that act as a moat:
Bill Stone: "One of the things about our business that has been frustrating for years is the barriers to entry are really high to be able to do this. And so for investors that have known us for many, many years, and it’s just seen the progress, it felt like it was very slow, it was because of this, to go get certified and get your software on device and to go through all of the things that go with that because there’s great responsibility that comes with that.
There’s obviously a tremendous amount of scrutiny that goes through the operators and the OEMs to do that to make sure that everything is safe and secure, reliable and stable and all those kinds of things. And so that takes a long time. So the barriers to entry are high. The time to revenues historically had been high. That’s the bad news.
But the good news is that once that software is on device and now we’ve built up credibility with our partners, we have relationships. We’re on the embedded base now of many, many hundreds of millions of devices around the globe. The barriers to exit are also equally as high, meaning that now it becomes very sticky. And those relationships become very sticky. And so we’ve had our partners for many, many years and one now just announced today for people looking for something new is we just renewed our AT&T contract for another 3 years. Because that’s something that they see the value of what we’re doing, and it’s been validated, trusted and secured for a while. It’s something we take very, very seriously. And we think that becomes part of the secret sauce and differentiation of what we’re doing."
We can see these sticky relationships demonstrated with the recent expansion of their TikTok partnership (an advertiser):
“Our platform allows large global companies like TikTok unmatched global distribution. This efficiency is extremely difficult for any publisher to duplicate by negotiating and managing multiple individual carrier and OEM relationships."https://ir.digitalturbine.com/news-events/press-releases/det…
And from their expansion of their Telefonica strategic partnership on Monday (an operator): https://ir.digitalturbine.com/news-events/press-releases/det…. Telefonica have 365m ‘accesses’ and are rolling out SingleTap (along with the recent Samsung deal). Scale.
Digital Turbine’s operator and OEM (Original Equipment Manufacturer) partnerships are with the who’s who of Telcos, including: Verizon, AT&T, Samsung, Panasonic, T-Mobile, O2, America Movil and Telefonica.
Their advertiser relationships include the likes of: TikTok, Uber, Starbucks, Ebay, Bank of America, YouTube, HBO, BBC, Pinterest, Linkedin, McDonalds, Zynga, Spotify and WhatsApp.
Background - company and investment history
‘The Leading Independent Growth and Monetisation Platform’
Mission: “We’re changing the mobile advertising landscape to create an independent mobile advertising platform that levels up the playing field for advertisers, publishers, operators and OEMs”
Bill Stone became CEO in 2014, but it wasn’t until 2017 that the company’s fortunes really began to change. In that time Digital Turbine amassed a vast footprint of mobile devices, with their Ignite software installed on 365m devices with a 40m quarterly run rate by their Feb 20 quarter. While it had an enormous footprint, at only a $120m annual revenue run-rate Digital Turbine didn’t have the capability to effectively monetise it beyond ~35% YoY growth. Yet. Its revenue growth was driven by pre-installed apps on new devices, and each quarter the % of new devices of total devices would grow smaller. However, Q3 FY20 became a defining quarter - with the announcement of the acquisition of Mobile Posse while Digital Turbine was $5 a share.
(Around this point, I was fortunate enough to stumble across the company and to take a small position).
Mobile Posse was a platform to help monetisation for Digital Turbine’s OEM’s and carriers, and therefore Digital Turbine itself, and the acquisition was a success. Driving platform improvements and monetisation, increased ROI for its partners and increased RPD (Revenue Per Device), a year later in Feb 21 Digital Turbine’s revenue had 3x’d to a $350m run-rate, with accelerating 70% pro-forma YoY growth, and the share price had 17x’d to $88.
Then in Feb 21 the (growth) market crashed, Digital Turbine (at an extended valuation) along with it. Meanwhile, in the space of a few weeks, Digital Turbine announced three acquisitions of 1. Fyber, an advertising monetisation platform for app developers (with 179% YoY growth at the same scale of DT (~$350m run-rate) and a reach of 650m monthly active users) 2. AdColony, a mobile advertising platform with a reach of 1.5bn monthly users and 3. Appreciate, a demand side platform with 60bn daily auctions.
The goal of these acquisitions? To further monetise Digital Turbine’s footprint across the life of the device, to accelerate growth synergistically and to enable SingleTap scaling
Here’s a quote from former Fyber President and now Digital Turbine CMO, Offer Yehudai, talking about the acquisition in a podcast:
"Look. This is a kind of an accelerator, a shortcut, a way for us to reach our vision before I’m way too old. The goal here is to build something very, very big. I can think about one company that came into our lives several years ago, it came to disrupt what we knew about desktop, programmatic advertising, this company is doing very, very well.
What we’re trying to do now is to do the same on the mobile side, make it definitely easier, introduce scale, leverage the unique assets we have in the group; carriers, own-device, brands, video programmatic - take all those buzzwords and actually put a product in front of marketers and publishers that works. I could not be more excited, this is my goal, this is why we are here. And by the way, this is why all of Fyber’s management is here to stay and execute on that goal, because we believe. Sometimes you see an acquisition and people exit - no - we are committed to build this; we love it, we like it, we believe in it".
Digital Turbine had just tripled in size, with a revenue run-rate of $1bn and accelerating pro-forma revenue growth of 101% (Q1 22), with three business purportedly aligned in their DNA and set up to extend and monetise Digital Turbine’s vast reach; a confluence of hypergrowth, secular tailwinds and synergies. And Digital Turbine had just demonstrated the year before how effectively it could integrate a new acquisition to monetise its footprint. A $5bn business, with over 750m devices, at a $1bn revenue run-rate and a stated TAM of >$500bn by 2023. Even if Digital Turbine could penetrate just 1% of that market, that’s 5x their current revenue.
However the share price was down about 50% of its pre-acquisition price, trading down to a $47 low. It seemed that no one had noticed. Around this point I built up my position. DT gathered momentum ahead of its Q2 22 earnings trading back towards an all time-high of $100.
Digital Turbine reports gross revenues and then breaks out what the revenue share portion is with its partners to give net revenues (important to split out if comparing EV/S ratios like-for-like), which in turn drives their gross margins.
Pro-forma YoY revenue growth of their last 6 quarters, most recent last: +28%, +53%, +73%, +101%, +104%,+63% (Q2 22)
Pro-forma YoY EBITDA growth of their last 6 quarters, most recent last: +250%, +265%, +303%, +200%, +183%, +130% (Q2 22)
Revenue Share (to partners) % of revenues of their last 6 quarters, most recent last: 55%, 57%, 56%, 59%, 65%, 69%
Gross margins of their last 6 quarters, most recent last: 44%, 42%, 43%, 41%, 34%, 30%
EBITDA margins of their last 6 quarters, most recent last: 20%, 18%, 24%, 19%, 16%, 13%
From the income statement, we might observe that revenue has suddenly decelerated in its most recent quarter, that revenue share to its partners is trending in the wrong direction and that this is having a negative impact on Digital Turbine’s margins. Not good, directionally. However, what this lacks is context.
We’ll come to revenue growth and what this might look like forward looking. The drop in margins is due to the mix of acquisitions but will improve going forward due to: 1. Increasing their revenue share creating an economic flywheel, where Digital Turbine owns the DSP and Exchange and omits third parties (and fees), and keeps more for itself, advertisers and publishers. 2. SingleTap roll out (higher margin) reflecting historical margin growth of their On Device product and 3. Operating leverage driving stated 3-5 year EBITDA margins of 25%.
The Balance Sheet could be in better condition with $95.5m of cash and current liabilities of $642m, however this dynamic reflects their acquisitions this year. Digital Turbine has been remarkably un-dilutive with shares outstanding growing only 13% in a 2 year period that the top line has 10x’d, with over $30m of free-cash flow in its latest quarter (12% FCF margin) and is not a capital intensive business.
Decreasing customer concentration risk. Their acquisitions have diversified their revenue streams significantly. No partner or customer represents more than 10% of their revenue for the first time in their last quarter, compared to 67% of their revenues being driven by their top 3 carrier partners in the year ended 31/3/21.
Recurring revenue over the life of the device is 80% of total revenue in Q2, up from 70% in Q1 and up from 40% a year ago. This will only increase going forwards as pre-installs become a smaller and smaller part of the business (15% of revenue as of Q2).
Ahead of their last quarter, Q2 22, there was optimism of their standard big revenue beat. All businesses seemed to be full steam, and Digital Turbine has one of if not the best beat and raise history in tech, with an average revenue beat of 21% in FY21 (!!!). However, in hindsight using past beat histories might not be the most prudent approach considering the acquisitions. How aligned was Digital Turbine across the new companies, how much more difficult was it for them to forecast/sandbag accurately?
How accurately can anyone forecast Digital Turbine now quarter to quarter? Pre-acquisition, the inputs and assumptions needed were limited around RPD and device numbers (and revenue share) to requiring…. dozens? It is now complicated and unpredictable.
It’s perhaps this uncertainty and complexity why very few analysts cover the stock, and of those who do only one bothered to send out an update to their shareholders after the acquisitions with the business tripling in size (source: Greenhaven Road Capital).
But even if the forecasting is complicated, the investment thesis does not need to be.
Then the week before Q2 21 I came across the AppsFlyer Performance Index XIII and noted that in all the growth rankings Digital Turbine had slipped notably compared to the previous index the quarter before (XII), and the only benchmark was for no.1 in the index Adjoe (clients +60% YoY and non-organic installs +150% YoY). At the same time a series of adtech earnings results were underwhelming the market. With those considerations and the history of the stock, I lowered my expectations and trimmed my position.
Even so, Q2 21 revenue of $310m was disappointing, representing only 7% QoQ growth down from 21% QoQ growth the quarter before. Fyber growth had dropped from +190% to +93%, AdColony from +46% to +19% and Digital Turbine from +93% to +73%. This felt like a material deceleration and I did not feel like these dynamics were addressed adequately on the call. I was expecting some SingleTap scale (core to the thesis) but it was difficult to quantify the impact if any of the new Samsung roll-out. Had I underestimated the acquisition risk? However, the guidance for Q3 was significant with guidance of $355m at the top end, forecasting reacceleration to +14% QoQ (note a deceleration YoY to 30% due to tough comps), especially considering their usual flat guidance. Perhaps Q2, the first full quarter post acquisitions, was just a one-off impact of integrating the businesses? Unsure, I sold more of my position.
After Q2 there was a lack of clarity over Digital Turbine’s long-term high growth potential - is the business decelerating or accelerating going into FY23? What does their growth look like 2 years from now?
Then a week later, on Analyst Day, management gave us three key bits of information which provided conviction and context on sustained high growth and profitability:
1. SingleTap to x10 revenue in 12-18 months. 2. Revenue to 4x in 3-5 years and 3. EBITDA to 10x in 3-5 years. This is tangible insight into long term high growth that not many companies with a proven track record offer, or at least that I know of. Let alone a company facing such a seemingly uncertain industry and regulatory landscape.
Let’s break that down.
This hyper-growth patented product has grown like a rocket ship over the last year, now at a ~$100m annual run rate up from a $10m run rate only a few quarters ago. SingleTap does what it sounds like, installing apps on the device with a single tap on an ad. There is a clear value proposition to advertisers, driving cost per install down by up to 75% and improving advertising efficiency by several volumes, and for Digital Turbine this drives a material increase in conversion rate.
In H1 21, SingleTap was about 10% of revenues and growing up to 600%+ YoY. That is based on 15 advertisers currently using the technology at an average monthly spend of ~$500k. Digital Turbine have 750+ advertisers they are partnered with, so have a vast base to sell into.
Management say that SingleTap will 10x to a ~$1bn revenue run-rate, based on 150 advertisers with an average monthly spend of $750k ($1.4bn). They’ll then have an additional $150m from publishers such as Instagram, Snapchat and Facebook. So management guided to a total of $1.5bn SingleTap revenue.
But how long will that take?
"When you think about how quickly we’ve grown to that 9-figure business, it’s quite phenomenal in terms of the magnitude of kind of growth rates there. But let’s talk about how we really accelerate this into a $1 billion plus business over the next few years.
And the way we see this is a very relatively moderate growth from 15 advertisers to 150, which, by the way, represents only a subset of our total advertiser customers today at Digital turn amongst all the companies. We still plan on focusing on the top 500 apps. But we also expect that through better integration, better technology improvements, et cetera, that we’ll be able to magnify and expand the spend per advertiser per month to about $750,000. Now that’s the beginning.
We’ve got another piece that’s very exciting, which is what we call just typical publisher, but that’s probably kind of underselling it. You can see some of the logos here we believe that we’ll be able to strike partnerships with a sample of these types of publishers you see here, where we via single tap can power and make more efficient their app install businesses on their properties. And we think that per publisher here, that’s worth about $1.8m per month. So this quickly, when you add this whole stack up rapidly becomes a $1 billion-plus business in very, very short order. So that’s the optimism that we have for a single tap, and we have a relatively, we think, moderate kind of an outlook here. That’s not too aggressive, maybe not too conservative, but we feel is very achievable in very, very short order."
How emphatic can you get! But what does ‘very, very short order’ mean then?
Mike Ng, Chief Revenue Officer
"So I would roughly estimate from getting to 15 to 150, I would estimate that conservatively, we think in the next 1.5 years, we could reasonably expect that, maybe even at a more accelerated pace. Bill likes to say, I position in sandbag properly. But I think in the next 12 to 18 months, which would be a reasonable expectation. There’s been nothing that’s been to your comment earlier, nothing that’s slowing us down. I think we want to be methodical. It’s, of course, a new technology across the open Internet. So because of that, we want to be methodical. We want to make sure the campaigns are performing properly or scaling properly, and we’ve seen that right in those 15 advertisers. I think it’s just more about making sure that we do the blocking and tackling right. And then now, I think we’re feeling like we’re at that tipping point where we can accelerate."
Ok, so any more detail on that?
Brandon Ayers, VP of Strategy:
"Yes, for sure. So yes, so in short order, I mean, listen, Mike talked about kind of going from 15 to 150 advertisers. – over the course of the next number of quarters and years here. And so 1 of the things that we did early on and for those who’ve been along with the digital turbine and the SingleTap story, it took us a long time to put together the pipes and fit together everything that we do in to take place to make SingleTap successfully work in a DSP environment like we’re running today. And so recently, we made a similar decision, "Hey, listen, we’re going to work with some really smart intelligent folks who actually have a panel here to are highly skilled in their craft in UA and performance to leverage SingleTap.
And we took kind of a small approach here to make sure that everything was dialed in with those advertisers. And then now in the process where Mike Sean is now out there selling more advertisers about every couple of days, we’re launching a new campaign, launched a new advertiser and scaling from there. So our first kind of shot out of the gate was to make sure that everything was controlled, everything was working nicely. And now we’re just in a path to ramp up more advertisers. So constraints. I wouldn’t point constraints really significant strength on the table, listen, we’re hitting those advertisers that we know can grow and scale with the platform first and then expanding out there from that.
Ok, what’s the SingleTap Go-To-Market strategy then?
"So the path to 150 advertisers, we don’t feel will be terribly difficult because they’re not net new customers in all cases, right? Some will be, no doubt. But of that 150, you may have heard me reference, we have over much more than 150 advertisers active in our system today various other products, which then, by the way, leads into what you asked, which is how many customers or how instruments are at Colony and fiber to that extremely because, number one, AdColony brought a host of advertisers via the acquisition into the DT ecosystem. So cross-selling them into SingleTap is of paramount importance. And Fyber was very important because they’re the ad exchange that we’re running empowering SingleTap today. So very important from a kind of eyeballs and how we activate and where we activate SingleTap. And certainly, from an AdColony perspective, very important from a net new advertisers but now in-house for us to cross-sell more seamlessly"
What’s the value proposition of SingleTap from a customer’s perspective (Pandora)?
”Yes, absolutely. So again, to my consistent theme and performance, right? So I look at when we buy ads on levers in which we can essentially move to make an ad work, right? And so 3 – or a couple of different major levers that we can look at to actually make ad campaigns perform are conversion rates, right? And then looking at scalability, can we actually scale this channel. – and then cost, right? And so the beauty about Single-Tap is we’re able to leverage those 3 components, improve conversion rates scale as well as be able to bid appropriately therefore, adjusting our cost, right? And so the beauty of Single-Tap other folks have mentioned, it’s really leveraging the technology from digital turbine and then accessing programmatic inventory in the open exchange, right? So out in the wild.
And so in the open wild has a ton of different inventory and a ton of ability, but you have to make sure you have the right capabilities to match up with those inventories to make an ad campaign work. And so that’s the beauty of what SingleTap has been doing for us is being able to match their technology, the conversion along with all that large inventory set. And so on our side, we’ve been buying programmatic ads on the Pandora side as long as I’ve been with the company for now 4 years. And we’ve seen amazing growth and amazing performance. And so we continue to see that. And for us, it’s a easy transition to work with Single-Tap because we want that inventory, right? And this inventory allows us again to have the ability to move levers and have granularity and also more ability to understand what’s going on because it’s actually the same inventory as Facebook and actual Google uses. The difference is now we have greater granularity, we have greater visibility and when we have greater control over the assets and conversions. So on my side, begins on performance driven, it’s kind of a no-brainer in that sense.”
It’s clear that SingleTap is reaching a critical inflection point of ‘hyper-scalability’ in the coming quarters. But let’s be prudent, and take the top end of their given timeframe and the bottom end of the revenue contribution (ie not the full $1.5bn implied) and use that as our core assumption that: SingleTap will reach $1bn revenue run-rate in 18 months.
(The best case might be $1.5bn revenue run-rate in 12 months, and the medium case in between. But this can be upside to our view).
Let’s round it up a little, allowing for a few months delay to this timeframe for contingency, and say that by Q1 FY24 SingleTap will hit $250m (=$1bn run-rate), with a 2 year forward growth rate of about ~250% CAGR.
This is therefore a seemingly ‘de-risked’ or lower end expectation based on management comments.
At a ~$1bn revenue run-rate today, with SingleTap reaching a ~$1bn+ run rate at some point in the next 12-18 months, Digital Turbine will double its revenue even if the Digital Turbine’s other businesses that make up 90% of their current revenue and that have been growing at a combined 100%+ organic run-rate over the past year stopped growing altogether. This is our core assumption.
Is there an over-reliance on SingleTap? What if something goes wrong with the product?
Bill Stone, Q2 call "We’re also looking to many other products to generate growth, such as Notifications, Discover Bar, FairBid, Offer Wall and Marketplace. In other words, diversification is working well to drive both top line growth and no reliance on any single product to drive growth."
So let’s move to the next bit of information, that revenue will 4x in 3-5 years at a CAGR of 25-30%. Hang on, we immediately spot a gap here. How can total revenue 4x in 3-5 years at that CAGR when we know that SingleTap will grow to $1bn of revenue and double its current revenues within 18 months at a forward growth rate of ~250%?? What’s the catch here? The maths doesn’t add up.
$1bn today to $4bn in 3 years is a CAGR of 60%.
$1bn today to $4bn in 4 years is a CAGR of 42%.
$1bn today to $4bn in 5 years is a CAGR of 32%.
SingleTap will grow to 1/4 of that target at over 250% CAGR in just 1.5 years, which combined with the current $1bn run-rate will be ½ of the total target.
The current pro-forma growth of the company is 63% (Q2) and re-accelerating sequentially.
Something does not add up. What?
The 25-30% CAGR guide implies a material deceleration in rest of their business. While their acquisitions (Appreciate in particular) were partly aimed at enabling SingleTap scale, it seems unlikely that DT only underwent 3 acquisitions at cost of over $1bn purely to scale a $10m product (at the time) and at the cost of genuine high organic growth in their other businesses. I can’t see their finance/M&A team signing off on that one. And I’ll come to the prospective synergies, already at 10% of their revenue run rate…
Something smells off in their CAGR assumption, but I would want to be cautious and not to disregard it altogether. Let’s be frank, “Bill likes to sandbag properly” but it wouldn’t be prudent to assume a sandbag in our model. Because we can only go on what management says, not what they don’t say.
So are they expecting a slowdown in the rest of their business? What are their risks?
What is the market seemingly missing and why is Digital Turbine trading at a substantial discount to its pre-acquisition valuation (about 1/5th the EV/S ratio)? I have categorised these into:
- Acquisition risk
- Privacy/regulatory risk
- Adtech inertia
- Bloatware (addressed in addendum)
Digital Turbine is a company that has grown through acquisition, successfully, in the past and all indicators from management is that their new acquisitions are integrating effectively and are culturally aligned. The synergies, as stated in the Q2 earnings call, are already running at a run-rate of 10% of total revenue. After just one quarter. The expected synergies from the acquisition can be broken into:
- Leveraging SingleTap, by driving more direct demand to publishers.
- Increased third party demand through their unified ad marketplace.
- Increased revenue share for partners and for DT, cutting out third parties share by owning full process.
- Flywheel effect. Advertisers now using DT as a revenue generator, not just cost centre: doubled sided partnership through owning whole exchange.
- Leveraging brand and expanding relationships with P&G and Unilever for the AdColony platform, matched with the DT eyeballs = increased brand advertising dollars.
- Cross-selling. ”We expect it to only accelerate”
Flywheel model. "What this really all means is we’ve historically talked about our growth drivers being getting on more devices, adding more products and then continuing to grow our media relationships. And when you’re able to do all 3 of those things simultaneously, that’s how you get network effects."
Bill Stone has been clear that there will likely be further acquisition going forwards.
Privacy and Google risk
The adtech regulatory and privacy landscape is unpredictable and constantly evolving. There is an increasing long term trend and awareness towards data privacy and ensuring the integrity of personal data.
This past year with IDFA privacy changes on Apple, Digital Turbine have benefited with an increase of advertising dollars to Android devices (75% of their revenue is from Android devices). They were affected immaterially by IDFA on their IOS side (<1% of revenues).
However, new Android privacy changes are coming: https://www.zdnet.com/article/google-this-major-app-change-i…
How these changes might impact Digital Turbine and how they are positioned to respond is something I’m still looking into (I’m not an industry insider). However, it’s worth noting that they have given their guidance with full knowledge of impending changes, and perhaps the reduced CAGR reflects prudence over future regulatory changes. They have navigated such privacy changes in the past effectively (such as in August with Google Play AAB file format changes: https://www.digitalturbine.com/blog/tech-updates/google-play…)
However, going back to their 10-k:
"The Company’s business may depend in part on its ability to collect and use location-based information about mobile connected device users.
The Company’s business model will depend in part upon its ability to collect data about the location of mobile connected device users when they are interacting with their devices, and then to use that information to provide effective targeted advertising on behalf of its advertising clients. The Company’s ability to either collect or use location-based data could be restricted by a number of factors, including new laws or regulations, technology or consumer choice. Limitations on its ability to either collect or use location data could impact the effectiveness of the Company’s platform and its ability to target ads."
And so seemingly Digital Turbine would be impacted by the restriction of location-based data. However:
Bill Stone, Q2 call. ”On the regulatory front, we are seeing legislation around the globe about regulating big tech firms to offer more consumer choice and control. Society is in the midst of a debate around antitrust versus privacy and whether we want to consolidate power in the hands of a few in the spirit of privacy or offer customers the ability to choose the products they want versus being forced to use the products that the big tech firms want them to use.
There’s bipartisan legislation here in the United States, looking at that – looking at these dynamics closely. And from a DT perspective, we view this debate of privacy versus antitrust is a bit of a false narrative as we can be an option of choice for consumers with Verizon, AT&T, Samsung or whoever, while simultaneously protecting privacy on device. We are closely monitoring these regulations and have already partnered and supplied input to regulatory authorities. But given our unique position with operators and OEMs, we see today’s regulatory environment as a tailwind, not a headwind for our business
And so from a Digital Turbine perspective, why all this is important is if you think about how we’re positioned. And we’re positioned with these deep relationships with telcos and OEMs. They’re going to be looking for the picks and shovels to go after that opportunity. And obviously, we’re already providing a lot of that to them today as their monetization engine into the space. So I think it’s a natural extension if they choose to be part of those solutions to offer more customer choice.”
10-k:“The Company’s ability to maintain and grow its business will be impaired if mobile connected devices, mobile operating systems, networks, standards and content distribution channels, which are run by operating system providers and app stores including those controlled by the primary competitors of the Company, develop in ways that prevent the Company’s products and services from being delivered to their users.”
Digital Turbine relies on Google for much of its business, and Google is a competitor as per their 10-K, and is subject to its privacy changes. This is a clear risk.
Bill Stone has a different view though of this competitor dynamic with Google: (BOA conference, June 21):
“Yes. I think at the highest level, what we’re – I wouldn’t say, competing with because we augment the ecosystem for Google because when we put applications on devices they’re Google applications. And so almost think of us as like an Uber Eats, if you will, where we’re delivering things from their store, their restaurant to customers. So we’ve made Google over $1 billion. But in one case – so people would like to think, “Oh, we’re competing with Google.” And we’re really not. We’re actually making Google more economics because we’re distributing their apps and making their ecosystem more broadly. But we’re now trying to get those dollars increasingly as that ecosystem gets broader to the Verizons and AT&Ts”
And from the Head of Growth at Lyft, an advertising partner of Digital Turbine’s (Analyst Day, Nov 21), on whether DT is positioned for the new landscape:
"I think with the advent of Apple moving more property-centric and really who knows what’s going to happen with Google and how they move. Digital Turbine, other preload sources, some of it became a lot more interesting to us. I think it already had just because when you become quite ubiquitous brand, right, like preloads, Wizard push notes, all these products that DT’s focused on suddenly become a lot more reasonable, right? Pureplay UA no longer makes as much sense for larger organizations. I do think OEMs, carriers, telcos will continue to double down in this space.
I think DT is well positioned in that sense just with as much progress that you all have already made with developing around how you service preloads, how you have on device visibility. It will continue to grow and regardless of whether Google takes away deterministic attribution, right? Your DT is still going to have that level of visibility and can communicate those performance results to the buyers at the end of the day. And there’s certainly this, I think, larger shift in UA managers where formerly, we want a device level, very, very clean attribution. There’s no more of this – there’s more of an appeal to work directly with the Facebooks, the Googles, and DTs to say, “Hey, we can’t see this level of granularity anymore. We’re now relying on you guys. And so that’s one of the major changes that we’re seeing”
Complicated and adtech inertia
The Digital Turbine CMO has on his Twitter bio ’15 years in adtech and still don’t get it’ https://twitter.com/offeryehudai, which while presumably tongue in cheek still says volumes about the layers of complexity in the industry. Digital Turbine is aiming in part to simplify the industry through consolidation and to offer an independent alternative to the walled gardens (eg Google/FB).
The wider supply chain issues affecting adtech are not having a meaningful impact on DT and is included in their Q3 guide:
Bill Stone, Q2 call. “One of the great things about our business as a cloud-based mobile software company is we don’t have input or hard cost. Thus, our exposure to supply chain and inflation risks is muted relative to others.
We’ve seen a couple of advertisers rethinking their spends for the December quarter, given supply chain constraints. But to date, we estimate this to be a low single-digit percentage of overall spend. In other words, it’s not material.”
So cognisant of some of the risks facing Digital Turbine and of the uncertain regulatory environment, can we place faith in management’s guide of $4bn revenue in 3-5 years?
How much faith can we place in management comments? A year or so ago we had a whole thread on placing faith on Datadog’s management comments and listening to them has proved successful.
What is Digital Turbine’s track record?
In June 2018 at $1.50 a share Digital Turbine management clearly laid out their vision to 4x revenue to $300m in 3-5 years. In June 2021, just 3 years later, they reported $316m for FY21. Now in November 21 Digital Turbine are again saying they will 4x revenue and 10x EBITDA in 3-5 years.
It’s worth noting, however, that much of that growth was achieved through acquisition, which enabled DT to come in at the top end of their target (ie in 3 years, as opposed to closer to 5). And at the time they had guided for 30-60% CAGR (which is more logical given the 4x of revenue in 3-5 years than the 25-30% in November 21).
So how confident are management in delivering on their latest growth model?
Bill Stone, Analyst Day."Unlike 3 years ago, we have far greater differentiated capabilities, impressive market positioning and even larger opportunities on the horizon to give us even greater confidence in delivering on our growth model.
Our determined belief is on our outlook is due to many catalysts in our path. We’ve touched on all these earlier in the presentation. We’re in a space with significant TAM and secular tailwinds. We’re executing on a differentiated strategy with an on-device presence and independent platform. We’ve expanded our presence in the mobile ecosystem and have global partners like the ones you just heard from. We also have a powerful financial engine creating both operating leverage and a flywheel business model. And lastly, our team has a long track record that I discussed of execution and delivery.
We have been given a range: 3- 5 years. Delivery within 3 years would constitute ‘hypergrowth’ (60% CAGR) and 5 years probably wouldn’t (30% CAGR) – just. Although you have to consider the growth curve will not necessarily be linear, with a potential hockey stick look as SingleTap reaches scale (>25% of revenue) somewhere mid next financial year.
Let’s remind ourselves of our two core assumptions. That 1. SingleTap will reach a $1bn run-rate by Q1 FY24 and 2. That $4bn Trailing Twelve Months revenue will be achieved in ~3+ years. I have modelled out these two assumptions here:
(n.b. typo - first column should read Q4 21)
Note this model is meant to be indicative of management’s expectations, not necessarily mine, to come back to their two targets and to their Q3 FY22 guide. It assumes a material deceleration in Digital Turbine’s businesses excluding SingleTap from next quarter and a terminal growth rate of ~35% YoY. (This might be interesting to track/re-evaluate in coming quarters, as we’d expect SingleTap to become clearly broken out going forward now >10% of revenue).
What this model demonstrates to me is that even if SingleTap comes in at the lower end of expectations and grows to a $1bn run-rate by Q1 FY24 before then materially decelerating right away, and even if its pre-install business slows from 30% (lowballed) to 4% YoY growth, and if Fyber slows from 91% YoY growth to 22% and AdColony (lowballed at 27%) slows to 13% - even if that all happens, Digital Turbine would hit their $4bn revenue target in ~3 years and have a 3 year forward CAGR of ~50-60%. The rest seems to me to be upside, acknowledging the risk factors talked about earlier.
Generally I don’t like management talking too much about adjacencies down the road rather than what’s right in front of them, but it’s worth keeping in mind the optionality Digital Turbine has to further monetise and expand its footprint longer term, which I’m sure we’ll here more about in coming quarters. To paraphrase Bill Stone quoting Wayne Gretzky, their aim is to ‘skate to where the puck is going to be, not where the puck is’.
"There’s all kinds of opportunities and adjacencies that we can pursue, and we can think about it organically and inorganically as we go forward in time. But it’s all hinged on our unique position that we have with our operator and OEM partners, device and as well as our independents. And so what does that mean specifically? That means there might be opportunities for alternative app stores. It means there’s opportunities for in-app payments, given our unique position on device and with the carriers OEMs
It can mean things like going after other operating systems beyond Android. It can mean connected devices and how those devices all interact with each other. As we think about the business, not just on a quarterly results basis or just on next year’s basis, but how are we going to grow this business at the rates that we’ve been familiar with over the past few years, these new opportunities are ones that are very real. They’re happening. There’s a lot of catalysts happening in the macro environment that really put us in a very unique spot to capitalize on those."
Growth meets Value
I won’t model out valuation in detail here with assumptions on risk-reward because that’s not in keeping with the philosophy of this board. However there’s a post from a few days ago titled ‘an evolving perspective on valuation’ where rmtzp asked the question: “which company do you think investors think that might have a better chance at surprising the market in the coming years?” https://discussion.fool.com/an-evolving-perspective-on-valuation…
Clearly an investment in Digital Turbine has both a growth and a value consideration to it. An investment after all is a probabilistic bet on a return, which valuation is one factor to inform your risk/reward. Valuation might also give you an indication of the market’s expectations of a company’s growth prospects, its perceived dominance of its industry and its business model. If your expectations are higher than the market’s, then perhaps that is where there is opportunity to surprise the market.
So asking why Digital Turbine is trading at 4x this year’s revenue (in line with the industry average) but with a 3 year forward CAGR of up to 60% versus an industry average 11% next twelve month revenue growth*,* or trading at 13x gross profit (versus for example The Trade Desk at 43x GP), or at 5x its FY25 (2024) EBITDA, versus an industry average of 25x current year EBITDA, helps inform what the market expectations are. Then factor on your own assumptions and you can begin to build a picture of growth adjusted risk reward.
There is a level of uncertainty in an investment in Apps of course, but at what point does that become factored into risk reward. In uncertainty there is opportunity; if you take a step back and can simply believe management with a proven track record of executing above and beyond the expectations that it sets, when it says that in 3-5 years Digital Turbine (a $5bn company today) will 4x revenue and 10x EBITDA to $4bn and $1bn respectively, and if that happens then it should be a profitable investment from today. This is your base expectation, and you can derive certainty from there. Everything else is just filling in the gaps.
And yet it’s also worth considering that the market can continue to be ‘irrational’ going forwards, even if your assumptions are correct. Digital Turbine is approaching a quarter or two that although its underlying revenue growth is accelerating, the YoY %’s will likely decelerate as it laps tough comparatives, especially before SingleTap reaches enough scale. We could get another Datadog situation because next quarter’s Q3 guide only represents ~30% growth on a YoY basis versus an underlying annualised sequential growth rate of 68%. We know the market doesn’t like tough comparatives.
Bill Stone, BOA conference (June 21)
”Yes. I mean, what I’ll tell you is there’s very few times in life you get a chance to build what we’re building right now. And we sat here February of last year, talking about $100 million business. That was just becoming profitable. Today, we’re over $1 billion business. And so how many companies can go from $100 million to $1 billion in 15-plus months in terms of the trajectory. And oh, by the way, doing it at enormous profitability where the profitability is growing faster. And I think what’s happened, especially over the last few months, is there’s kind of this thing of value versus growth, value versus growth that’s been going out there for investors. And our answer to that is, yes. We view ourselves as growth, but also is the profitability and accelerating profitability that we’ve demonstrated, we think that’s very compelling out there.
And as we look at kind of light companies that are in our space and we compare the valuations of those companies, we’re excited about our ability to deliver and continue to execute, which I think our team has just done an amazing job of just attention to detail and executing quarter-over-quarter. And hopefully, that credibility of just a company knows how to execute and continues to execute and continues to exceed expectations, we continue to do that with the secular tailwinds that are behind us right now, with the mobile media dollars, and you combine those secular tailwinds with great execution. We think that’s something investors should really like.”
So what’s it going to be – a meal out for two, a Christmas jumper or a share in Digital Turbine?
I just want to address this because I see DT dismissed as ‘bloatware’ whenever it’s referenced. It’s almost immediate and that’s the end of the conversation. People are entitled to that opinion of course, but I don’t share it.
Let’s use a definition of bloatware as ‘unwanted pre-installed software’. Only about 15% of Digital Turbine’s revenue now comes from pre-installed apps. Although seemingly ‘bloatware’ transcends its pre-installed product in some investors’ perception. But is it ‘unwanted’? DT might argue that it isn’t, and that this is demonstrated by a measurable ROI for its ‘Dynamic Installs’. What I would say - how ‘wanted’ is any advertising really?
Advertising is intrinsically intrusive in all its forms, with the aim to capture your attention for as long as possible or to be as impactful as possible - it is invading your time.
I think in part Apps is perceived differently to other advertisers because it primarily lives on your phone, which is innately more personal to you - it lives in your pocket and by your bed when you sleep. You have your whole life on there, and all sorts of data to be accessed or potentially compromised. People are therefore hostile to the idea of an app that is trying to capture your attention on your phone or which might be using your data; privacy is paramount. So how much does this actually play into people’s perception of Apps as bloatware? I don’t place much distinction there between different types of advertisers. Apps has a connected tv product and is increasingly available across other devices. So is DT ‘bloatware’ only in relation to its phone, or its underlying technology?
Digital Turbine would tell you that their technology, for example SingleTap, actually benefits the end user (ie you) by creating frictionlessness on your device. You have the apps you might want already there, tailored to you, you can download an app with a single click and save yourself time. Given 50% of your time on the phone is when you’re looking for something, how can APPS help enable that and help you in that subliminal search? You might then cite to me reddit articles citing examples of DT downloading apps without people’s knowledge, as they began to trial and error their SingleTap technology.
(Despite ‘psychoanalysing’ bloatware, I’d argue all that isn’t actually very important to an investment in APPS. If you invest in the market, you implicitly are capitalist. In capitalist society, in advertising, money follows eyeballs. Your eyeballs follow your phone, and there is always going to be technology on your phone to capitalise on that as far as regulations allow. Do I believe that people spending most their time on their phone is a good thing? No I don’t, but I don’t think Apps is the problem here either. The problem is a little more societal, in my opinion. And that’s just my opinion.)
WARNING - Managing Expectations
Digital Turbine is presenting in the Oppenheimer 5G summit on December 14th, it might be worth tuning in and to listen out to any business updates if you’re interested. https://ir.digitalturbine.com/news-events/events/detail/3667…
This is not meant to be a recommendation, although I recognise that I have characterised it as an opportunity because that’s my belief. It’s my thesis and I wrote it out here in the hope to make it stronger and because I don’t see this stock covered in much detail anywhere at all. If you do feel compelled to buy a position, I would caution you to keep it only small, to keep a close eye on how SingleTap and other risk factors are trending in the coming quarters, and not to expect me or anyone else to guide your conviction. Please do your own due diligence.
I probably have a different strategy to you, am likely less risk adverse, could change my mind at any point - and I could well be wrong about just about anything. I won’t commit to keeping regular updates, although I might do if time allows. And I wouldn’t want to be responsible for anyone ‘losing’ any money. If in doubt, stay out - there are other companies out there, particularly with this latest market crash and this board has a great track record in finding them.