Reflecting on My Investment in Digital Turbine (APPS): Assessing the Future Potential Despite Past Challenges
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Why I Remain Invested
I was asked to share my thoughts on Digital Turbine (APPS) in light of ongoing discussions on X. As a long-term shareholder who has closely followed the company, I feel compelled to explain my rationale for persisting as an investor despite challenges.
I initially purchased APPS shares around $30, witnessing the stock rise above $90 before helplessly watching it plummet to just $5 over three years. While I sold a small portion in the $8-10 range, the bulk of my position remains deeply unrealized. It once comprised a sizable allocation that has now dwindled considerably due to further declines rather than averaging down.
|Chart of Digital Turbine over last 5 Years. From SeekingAlpha|
However, quarterly earnings calls leave me less optimistic, as commentary lacks substance. The near-identical prepared remarks of Q1 FY24* and Q2 FY24* earning transcripts signals an absence of meaningful progress.
*Please note that the fiscal year for APPS is consistently one year ahead of the calendar year.
Here are 3 main issues that I had observed:
The leadership and strategic direction of CEO Bill Stone have disappointed over the past three years. Rather than a cohesive long-term vision, I have witnessed a series of reactive maneuvers from Ignite to SingleTap to AGP to DT Exchange, and now, DT Hub. This instability is concerning.
Two major acquisitions in particular left me baffled - AdColony and Fyber, when APPS has now taken an impairment after taking on massive debt and having to pay large interest Meanwhile, Mobile Posse that was bought in 2020 only to be put aside after APPS tried to pivot from prepaid to postpaid customers proved unsuccessful.
At the core, APPS's technology and relationships within the app ecosystem remain compelling. However, questionable M&A activity and inconsistent messaging have undermined the potential of these strong foundational aspects.
Going forward, I believe the management team must articulate a prudent strategic plan focused on optimizing existing operations before diversifying further. Their decision-making requires more foresight versus the reactive tendencies of the past three years. With improved guidance and follow-through, APPS stands to realize its full value over the long-term. But substantive changes are needed to regain shareholder confidence.
Integration and Execution Timelines
When announcing new strategic partnerships, APPS’s CEO will routinely highlight their potential. However, fully integrating technologies and realizing revenue at scale tends to take a considerable amount of time.
Platform integrations involving codebases merging requires extensive planning, testing through small samples, and gradual deployment to wider audiences. This process can span 2-3 years as seen with Meta (yet to fully implement) and TikTok (revenue just coming in). While these represent valuable long-term opportunities, shorter-term financial impacts are muted as integration progresses.
Additionally, the stickiness of carrier relationships could be overstated. Losing a major US carrier, rumored to be T-Mobile, as a US partner dealt APPS's revenues a major blow, demonstrating partnerships are not immune to disruption once terminated.
Management should provide realistic integration timelines and milestones to investors. Quarterly updates on partner progress, rather than just announcements, would improve guidance accuracy. While the business model relies on complex technical partnerships, better communication around execution variables can optimize expectations.
Overall, APPS possesses compelling offerings but shareholders need a balanced understanding of both the advantages and challenges inherent to its operating model. Transparency on timelines will be key.
Recent Changes to the App Growth Platform (AGP)
A new concern has arisen with APPS approach to managing its ad exchanges. While stating the goal of consolidation is to leverage large partners, such as The Trade Desk, Google and Amazon, more efficiently, management has acknowledged not migrating all publishers.
As the CEO detailed in Q2 FY24 earning transcript, “We have nearly completed our consolidation of multiple exchanges into a single DT exchange…And as part of that migration, which will be complete in the current quarter, we've also chosen not to migrate some of the many thousands of long tail publishers on the legacy exchanges over to the DT exchange, which will create headwinds on past comps even as we grow our DT exchange into the future.”
Further clarification noted that, “…as part of that there's probably many thousands of long tail publishers from the legacy companies that are doing very small dollars where it's just not worth the effort to migrate them over. But in aggregate, we still have to comp over those and that's millions of dollars of revenue a quarter, it's not tens of millions and is something that will burn off…”
This change could reduce already modest AGP revenue levels. It prompts reconsidering the 2020 acquisitions of AdColony and Fyber, which added debt but whose contributions are now being scaled back a few more years later.
Investors require clearer justification of APPS long-term consolidation strategy and how it will sustain growth. Vague direction and inconsistent initiatives undermine confidence in leadership's strategic vision and execution abilities.
Potential Tailwinds on the Horizon
While near-term performance of APPS has faced obstacles, certain strategic pursuits discussed by management could drive growth in FY25 (APPS start reporting Q1 FY25 after Mar 2024) if realized.
Over the past two earnings calls, APPS outlined plans to leverage SingleTap across solutions. Efforts converting mobile web users to native apps, distributing alternative app stores, and enabling social media platforms to benefit from SingleTap conversion rates appear to be progressing faster.
This was further emphasized in a discussion with an analyst in Q2 FY24 earning transcript – where the example is Amazon and the details are breakdown to be:
- Having a licensing deal where they pay a fixed fee (about 7 figures a year) to distribute the alternative versions of the app;
- and then the store.
- The next step with them will be to expand it to third-party applications.
One significant catalyst behind the notable surge in progress could be the influence of regulatory shifts, such as the anticipated enforcement of the EU's Digital Markets Act in March 2024 (within the calendar year). These regulatory changes have the potential to disrupt the established dominance of Google and Apple, and if a prominent social media platform ventures into this field, it might encourage others to follow suit. Consequently, this situation presents an opportunity for APPS to capitalize on and expand its market share.
Returning to the topic mentioned earlier within X, it is possible that Amazon has established partnerships with SNAP and META, enabling direct purchases could potentially be facilitated through a seamless SingleTap purchase process that automatically adds the item to the Amazon cart.
Other than Amazon, here is a compilation of the partnerships that APPS has disclosed and that I have come across:
- Distribution of TikToks and running campaigns using Single Tap.
- LinkedIn's initiative to convert their mobile web users into native app users.
- Anticipating a revenue-generating pilot with another prominent social media company, expected to cover their entire U.S. user base later this calendar year of 2023 (presumably META).
- The launch of DT Hub, an alternative app distribution platform, in collaboration with five U.S. operators, leveraging the Aptoide investment. Although generating revenue, it is not yet considered significant.
- Integration of Epic Games' Fortnite title, utilizing SingleTap to convert web visitors into native application users.
- Through the partnership with Flexion, mobile game developers can effortlessly onboard their games to DT Hub, benefiting from an end-to-end store alternative provided by major mobile carriers.
- Users purchasing new Xiaomi devices in multiple markets across EMEA, LATAM, APAC, and MENA will receive premium app and mobile game recommendations directly accessible on their devices.
I have indeed written a comprehensive valuation analysis regarding the initial article, as per the stipulated requirement for a paid piece. However, at present, I am hesitant to foster excessive optimism towards this company. Having observed numerous aspects, I remain unconvinced and prefer to exercise caution. All I can suggest is to maintain a sense of hopefulness moving forward.
APPS appears well-positioned to capitalize on opportunities arising from industry shifts due to possessing valuable assets and partnerships not replicated by competitors (IronSource, that acquired by Unity and Applovin).
Specifically, leveraging over 800 million ignited-enabled devices globally and SingleTap capabilities through various channels as outlined could drive meaningful growth. However, as past experiences demonstrate, effective execution will be paramount. Progress updates on pipeline integration and partner milestones will be important indicators of their vision being realized.
For now, I remain vested as downside is limited while upside potential still exists if the company can realize its potential. My view remains one of cautious optimism yet open-mindedness regarding APPS journey ahead.
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