On this week’s pod, we deep dive Digital Turbine, a mobile ad-tech innovator specialising in targeted app installation and programmatic advertising to mobile devices. Digital Turbine invented the market for app installation and have a patent on ‘single-tap’ app installation to Android devices, but the business model is controversial, and the company have been accused of pushing ‘bloatware’.
Revenues are multiplying at triple-digit rates year over year as the company rides the wave of the 5G rollout cycle and continually increasing usage of mobile devices, but do they have what it takes to be an ad-tech winner in the long term? Albert and Luke arrive at different conclusions by the end of this in-depth discussion.
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Transcript
Albert: Hi, this is Albert.
Luke: And this is Luke.
Albert: Today is Monday the 1st of November.
Luke: Welcome to the Telescope Investing podcast.
Intro
Luke: Hey Albert, we have had a ton of interview episodes back to back for the last couple of months almost. I’ve noticed that we’ve picked up quite a few new subscribers recently.
Albert: Yeah, we had the opportunity to speak to some fantastic guests over the last few months, so a big thank you to our recent guests, Prantik Mazumdar, Simon Erickson, and Renee Conklin.
Luke: Yeah, it was really great chatting to all of our guests, but for the benefit of our new subscribers, we’re going to try and get back for the next few months to a bit more of our core material, particularly as we’re running up to year-end. At the beginning of this year, we launched our 2021 model portfolio where we picked out our 15 best stock picks for this year. And it’s almost time to start planning our 2022 model portfolio, so that’s going to be a bit of a focus over the next few weeks.
Albert: Yeah, so to explain a bit more about that, our core material is actually just analyzing companies that we want to invest in, in our own portfolios, and then sharing that information with our listeners.
Luke: We’re definitely going to try and find some investments in sectors like alternative meat and climate change, both areas where we couldn’t find good investments at the start of this year.
Albert: But didn’t you just sell your Beyond Meat shares, Luke?
Luke: Yeah, I did. With a bit of a heavy heart, I sold them about a week and a half ago, along with SolarEdge and Netflix. Yup.
Albert: So I guess next year you’ll just buy them back then.
Luke: That is definitely not the plan, but if they end up forming part of the model portfolio, then yes, I guess I do.
Albert: Alright then. Shall we just say thanks to some of our new subscribers, Luke? A big thank you to Sachin, Raf, Hannah, Christian, Henrik, Pavlos, David, Davey, and Sarah.
Luke: Yeah, great to have you guys join the Telescope Investing family. New subscribers and I hope our material is fun and interesting and helps you with your own investment journey.
Albert: Speaking of investment journeys, Luke, what is the next stage of your investment journey?
Luke: Nice segue, Albert. I wrap up my formal career working for one of the world’s biggest banks on November the 10th and my global travels start immediately on the 11th. So over the following at least six months, probably longer, I’m going to be taking the Telescope Investing podcast on the road and I’ll be recording my end of the interview, hopefully, from different countries month to month.
It might be a chance to connect with some of our subscribers in the countries I’m visiting. So keep a lookout on Twitter and I’ll give you a ping if I think I’m coming through.
Albert: Yeah, you can go and see Luke and berate him over his poor stock choices.
Luke: Share a Beyond Meat burger with me and rue the fact that I sold the company.
Digital Turbine
Albert: Anyway, shall we go straight into the episode, which is a deep dive into a company called Digital Turbine, which at the time of recording, neither Luke nor I own, but we’re genuinely considering this stock for our own portfolios, and we’ll share our own personal conclusions at the end of this episode.
Luke: Yeah, Digital Turbine. So these guys fit into the advertising technology, the ad tech space, alongside companies that we already hold, like Magnite, The Trade Desk, Integral Ad Sciences, and DoubleVerify.
Albert: It’s actually Integral Ad Science, Luke. It’s not plural.
Luke: I’ve owned that company for 4 months and just like the day we recorded the episode, I still struggle with their stupid bloody name.
Albert: Getting back to Digital Turbine, the original company was founded in 1998. It went through a number of name changes, which is a bit of a red flag, but the company, as it is today really started when Mandalay Digital Group, as it was known then, acquired Digital Turbine in 2011 and assumed that name in 2015. So we’ll start from there and not bother with anything that happened before that. I think Digital Turbine is a great name that tells you almost nothing about what the company does. What does it do, Luke?
Luke: They’re headquartered in Austin, Texas, and from their own website, they say they are “the leading independent growth and monetization platform. 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.” That is basically gobbledygook. Doesn’t say a lot about what they actually do. So what are they actually?
Albert: As you said, they are in the ad tech space and they basically have two businesses. One is app installation software and the other is mobile advertising. And looking at the first one, app installation software, app developers pay Digital Turbine to include their app on a smartphone’s initial setup. And that sounds like pre-installed software also known as bloatware, the bane of Windows PCs 20 years ago. Actually, I haven’t bought a PC in the last 10 years, so it could still be a problem.
Luke: Yeah, let’s just be really clear about what actually happens. You buy a brand new phone in the US let’s say where Digital Turbine have a big footprint. And when you power up your Android phone, there’s a whole bunch of applications magically pre-installed, and that’s Digital Turbine behind the scenes using what little information they have about you to target you individually with applications that they think are beneficial for you.
Albert: So it’s dynamic – the apps you get depend on who you are. So in that sense, it’s a little bit better than Windows PCs which just give you the same set of useless apps each time you buy new one.
Luke: But I think your term bloatware, not to be too prejudiced against the company right from the outset, is the right term. I’ve only ever owned native Google Android phones because I hate all of that junk that comes on other manufacturers’ versions of Android. You end up getting security updates much later and they overload it with a load of crap that really doesn’t help you at all and just makes the phone perform worse.
Albert: Yeah, likewise, Luke, I haven’t seen much bloatware myself because I’ve been in the Apple ecosystem for the past 12 years, and I’ve only seen Apple bloatware, none of this Digital Turbine stuff.
Luke: But let’s not be too negative on Digital Turbine, right? As you say, they’re targeting the user with applications that they think are going to be useful. Otherwise, the person will just uninstall them straight away, and they’re gaining revenue for the manufacturer or the carrier. And in some cases that could allow phone handsets to be sold at a cheaper rate, perhaps subsidizing lower-cost handsets. So it’s not all a bad thing.
Albert: Yeah, this could be really important as this technology has been pushed out to other nations where cheaper handsets are a bigger part of the market. Android dominates internationally.
Quickly looking at the other business that of mobile advertising, the company has made some recent acquisitions that has boosted the presence in the programmatic ad market.
Luke: Yeah, so their mobile advertising business, I think what happens is when you power up your phone at the start of the day, you get a couple of pop-up adverts and that’s Digital Turbine pushing relevant advertising to you that day. Again, not something that I particularly want on my vanilla Android phone, but if it enables the handset to be sold more cheaply, I guess it could make sense.
Albert: And when we started looking at this a week ago, I had no idea what Digital Turbine does and finding out that a big part of this business is essentially bloatware was not a promising start, but its stock performance is nothing short of amazing. Five years ago, its share price was around 70 cents and as of close of Friday last week, its share price was around $84. 120 times in five years, that’s quite a turnaround.
Luke: Yeah, their current market cap is about $8 billion, so little outside of our normal hypergrowth portfolio realm. And their price-to-sales ratio is around 18, so in line with other stocks in our portfolio.
Albert: And 18, actually, could be quite low when you consider their growth rates that we’ll cover later on in the episode. And I’ve heard Digital Turbine described as the Roku of smartphones, but I think this might be overstating it a little bit.
Luke: It might not be a great comparison for them, anyway. Roku are having a bit of a torrid time right now. Uphill struggle with Google, I think, pulling YouTube from their platform and that’s happened quite recently, and then very recent news they might also be losing Amazon Prime Video. I think Roku could be in a bit of a slump.
Albert: Oh really? I didn’t know that. I thought Roku was the star stock on FinTwit.
Luke: They may have fallen from grace a little bit.
Albert: Let’s describe Digital Turbine’s business in a little bit more detail. And starting with the app discovery services, these are all designed to get users to install and use apps, also known as user acquisition. And as we mentioned before, one of their key products is Dynamic Installs, which is basically pre-loading software based on a user when they activate a new smartphone.
Another product that they use is something called App Wizards, which recommends apps during device setup. This is similar to preload, but the difference is that users get a choice. And finally, they have something called Discover Bar, which is a persistent toolbar in the notification centre showing apps and ads.
Luke: And then they’ve got a patent for something they call SingleTap, which is actually quite innovative, but again, not necessarily a great thing for the end-user. But SingleTap streamlines application installation and removes friction. And so the idea is if you see a Digital Turbine advert mentioning an application, well, with one click you can ask for the app and the whole thing gets installed in the background while you continue what you’re doing. Saves you going to the app store, searching for the app, and then downloading it. And that’s really beneficial for the advertiser because in a world of 3 million-plus applications on the Android platform, getting your application noticed is harder and harder, never mind getting people to actually install it. If you can remove that friction, it could have a huge impact on user acquisition.
Albert: Actually, I’m surprised they have a patent on something so simple as a single-tap install technology, but you can’t argue with the financial results. A little over a year ago, this product generated just a million dollars in quarterly revenue, and now, it’s up to a hundred million annually.
Luke: So why have Digital Turbine been on such an ambitious acquisitions spree? And company leadership say it’s to expand themselves from first-day to lifecycle? So what they mean by that is previously they could only get to consumers on their first day of set up to push out those applications at startup. But now with acquisitions like Fyber, AdColony, and Appreciate, they’ve got ad technology that’s capable of reaching consumers throughout their entire phone lifecycle, rather than just on the first day of using their device.
Albert: Yeah, these acquisitions really boost their capabilities in the programmatic ads market. And I think when we go through each of these acquisitions, we’ll explain a little bit more about how they all fit in together.
So as you said, Luke, Digital Turbine has been on a shopping spree, buying several companies in last two years. The first one, which they acquired in February of 2020, is a company called Mobile Posse. This is a mobile advertising platform and its businesses is quite simple, I guess. They have a product called Firstly Mobile and what they have are things called FirstApp and FirstPage. And the FirstApp is literally the first app that you see when you unlock your phone, and the FirstPage is the first page when you open a web browser.
Luke: They also acquired a company called Appreciate in March 2021, and that brought that SingleTap capability to the platform. And if you’re familiar with Magnite and The Trade Desk, our programmatic advertising stock picks earlier this year, really, Digital Turbine are playing a similar role of being a demand-side and a supply-side platform and running ad auctions to deliver adverts to a targeted pair of eyeballs at any time. And they run apparently up to 60 billion daily auctions on their platform to sell targeted ad spots to consumers.
Albert: And in April of 2021, they acquired a company called AdColony and this is a mobile advertising demand-side platform to help global brands and agencies create ad campaigns, and they specialize in video ads. And AdColony is one of the largest mobile advertising platforms in the world, reaching more than 1.5 billion monthly active users around the world.
Luke: And then to wrap up their acquisitions, they acquired a company called Fyber in May 2021, and this is really the supply-side platform in their whole ad tech space. And Fyber runs one of the largest independent advertising marketplaces for the in-app space.
Albert: So that’s quite a large number of acquisitions in the last two years. And we don’t know if Digital Turbine’s acquisition spree is done for now, but Digital Turbine’s CEO, Bill Stone said, “We believe that now we have all the critical elements to fully establish Digital Turbine as a truly unique next-generation ad tech ecosystem.”
And I think he believes now they have all the parts to become a fully integrated ad stack. And to be honest, it will probably takes some time for them to fully integrate all those businesses they acquired so far.
Tailwinds
Luke: So let’s start going through our Telescope Investing lenses and taking a look at the company in a bunch of different ways to try and understand whether they’re a good investment. And the first lens we always start off with, our most important lens, is tailwinds. Is a company supported by megatrends that are gonna propel it to success?
And as people are spending more and more time on their phones, the value of mobile advertising is going to continue to grow. And last year was driven, just like everything else, by the huge increase in the use of digital services and apps as the world was in lockdown from the pandemic.
Albert: Yeah, I saw an interesting stat from their investor presentation, and they said 50% of the time when consumers unlock their phone, they’re simply looking for something interesting. This seems rather high, but I wouldn’t be surprised if it’s accurate considering all the times you’re looking at your phone on public transport or standing in a queue. And they used this stat to highlight the increasing need for content discovery.
Luke: I buy that one, makes sense. They’ve also benefited from the 5G upgrade cycle in devices all over the world as people are, at a much faster rate, upgrading their phones to take advantage of new 5G capabilities. That means a whole bunch of new handsets coming online in the last year for that first install process.
Albert: And I think I forgot to mention all the times that people look at their phones when sitting on the toilet, but let’s ignore that for the time being. And the next tailwind is the increased spending on programmatic advertising, as we mentioned. And this is coming from companies placing a higher premium on content discovery and also a high return on their advertising spend.
Luke: Advertisers prefer platforms where they can really measure the return on investment of their advertising investment. And they get quite a lot of information from Digital Turbine’s platform that really helps them ensure they’re spending their advertising dollars in an effective way.
And one of the key things that Digital Turbine offers is a fairly robust fraud-free platform. They know that these are real end-users with a real physical handset in their hands, as opposed to potentially being a bot surfing a website and maybe not really getting any benefit for the advertiser when the bot sees the advert.
Albert: Yeah, when you say fraud-free, Luke, it reminds me of our deep dive into Integral Ad Science. They check the placement of ads to make sure that they’re being seen by real eyeballs. Do you think Digital Turbine is competing with those companies?
Luke: I would say not so much. It’s a different kind of technology, but they’re both definitely trying to achieve the same thing – put ads in front of real eyeballs.
Leadership
Albert: So moving on to leadership, the CEO of Digital Turbine is a guy called Bill Stone, and he’s been the chief executive of Digital Turbine since October 2014. He was actually the CEO of Digital Turbine when it was taken over by Mandalay Digital Group in 2011 and he became the CEO in 2014.
Luke: He was previously a senior VP at Qualcomm, so I guess he’s got some experience in the mobile handset space.
Albert: But not just that, he was also a president of its subsidiary, Flow TV. He was a chief executive and president of the smartphone application storefront provider, Handango. And he also served as president of Amp’d Mobile, so he brings a lot of experience in the mobile space, and he’s probably a big reason why they have a lot of agreements with the telecom providers.
Luke: And I suppose it’s interesting, in some ways you might consider Bill to be a founder-operator. He didn’t found the company, but the company has changed so drastically under his leadership, particularly in the last year or two with these acquisitions. And that’s really been him steering the ship.
Albert: You could say that, Luke, but the insider ownership is pretty low. The total insider ownership by management and the board of directors is about 3%, but as you said, it’s not too surprising when it’s not really founder-led.
Luke: They get a pretty good Glassdoor rating, albeit Renee tore apart our focus on Glassdoor just last week, so we definitely need to start looking at other sources to see what employees are saying about the company. But anyway, based on Glassdoor, Bill gets a CEO approval rating of 92% and overall the company scores 4.2 out of five.
Albert: Yeah, they have about 980 employees around the world and offices in 23 countries. And as you said, we talked to Renee about company culture last week. Interesting to see that they actually received the company culture award for a mid-size company last year from the Chamber of Commerce in Austin, Texas.
Luke: Did you read the details about that? Quarterly employee nominated awards recognizing our values of freedom, hustle, laugh, global, results and accountability.
Albert: I can tell you’re tired of corporate life, Luke. When’s your last day again?
Luke: I will be hustling and laughing on November the 11th.
Albert: I’m sure you’re counting down the days.
Luke: In fact, these are my values, now that I look at them again – freedom, hustle, laugh, global, results, and accountability. Maybe you can keep the results. I’ll take the other five!
Albert: Moving onto the total addressable market, and we’re not sure what the total addressable market is for pre-installed software on a smartphone. It’s pretty hard to measure that, but it does seem that they basically created the sector themselves.
Luke: Yeah, they invented it and they’re really the only player in this market. It’s a pretty powerful place to be in. But they do provide some numbers around total mobile ad spend, which this year is estimated to be $340 billion and is projected to rise to $540 billion by 2025.
Albert: But it has to be said that about 80% of this market is taken by Google and Facebook, or should we say Meta now, and they are unlikely to relinquish their share anytime soon. But for the other players, Digital Turbine has an on-device advantage where their software is pre-installed on a huge number of devices, 600 million to date.
Luke: Yeah, that’s massive, but they’re missing that whole Apple side of the market who are still a dominant player in the mobile ecosystem. And I can’t imagine they would ever have access to Apple devices.
Albert: Yeah. I don’t think Apple would give anybody a chance to make any money from their devices that they can’t make themselves.
Brand
Luke: Let’s go on to the next of our lenses which is brand and reputation. And I think here we have to call back to the power of that SingleTap technology, cutting down the number of clicks to install an app from seven down to one.
Albert: Yeah, this has resulted in much higher take-up rates for the very reasons of removing friction, and also because users don’t see competitors’ apps in the app store when you try to install them. So if you’re trying to install Lyft, for example, you don’t see Uber and you might say, oh, Uber might be better, I think I’ll install Uber instead. And removing this friction can make a huge impact on user acquisition. As we said earlier, it’s getting harder and harder to get your app noticed never mind installed. I guess you could say the same for most media these days, for example, podcasts.
Mid-episode promo
Luke: You’re absolutely right, and I think this is a great opportunity to jump in with a quick mid-episode promo for Telescope Investing. If you’re enjoying the Telescope Investing podcast, why not help us remove a bit of our own installation friction and recommend it to a friend or a relative who you think might also get some benefit from our weekly finance wisdom and send them a link to the show.
Albert: Yeah, you can just send them a link on your podcast platform of choice or simply point them towards our website, telescopeinvesting.com. And, actually, if you’re interested in today’s stock, you might want to have a listen to some of our previous episodes of other ad tech stocks. We did a deep dive into Magnite in episode 25 and also Integral Ad Science a bit more recently in episode 47. And we also publish one-pagers on the website and we did one for Magnite earlier this year.
Luke: Yeah, we use the one-pagers to summarize our thoughts on the company, and we highlight the key green and red flags around our investment thesis. And our plan is to come back and review these periodically to see how predictions played out. I’ve got to be honest, I love Magnite the company, but Magnite the stock has been a total bomb for me this year. I’m looking forward to reviewing our one-pager at year-end to see if the thesis is at least playing out in the way we expected.
Albert: Yeah, we also use these one-pagers to remind ourselves of the reasons why we invest in companies. And this actually proved quite valuable last week when one of our stocks, Twilio, dropped about 20%, and I actually went back to our one-pager and re-read it just to remind myself why are we investing in this.
Luke: Yeah, that’s really important. Conviction is so important when a company takes a bit of a minor knock. You need to remind yourself why you’re invested in the company and you shouldn’t just be tracking the stock price.
Customers
Albert: Well, let’s get back to Digital Turbine and looking at their customers, they have two types of customers – the mobile networks and OEMs, original equipment manufacturers, and the second type of customer are the advertisers buying advertising space.
Luke: Yeah, they’ve got over 40 long-term agreements with global partners, like T-Mobile, Verizon, AT&T, Samsung, and other companies all over the world.
Albert: Yeah, basically everyone except a certain fruit company. Actually, Digital Turbine just signed a deal with Samsung to take their platform and SingleTap technology into new markets around the world, markets such as Brazil.
Luke: They’re also the preferred distributor for TikTok on mobile devices and they’re using their preload inventory to drive TikTok take-up in North America. Per the terms of the agreement, TikTok will manage mobile preloads through Digital Turbine’s platform and they’re hoping to become the preferred short-form video platform preloaded on Digital Turbine phones. Mike Goodman, head of distribution, North America at TikTok said, “Having a single point of contact for app distribution will accelerate our growth and simplify management reporting and optimization of spend.”
Albert: I think the fact that TikTok chose Digital Turbine as their means of distribution to new handsets speaks volumes to the reach that Digital Turbine has in the Android world. TikTok is not a small app. They have a massive audience.
Luke: Are they the biggest social network now?
Albert: I’m not an expert in social media, Luke, but I think they’re quite big.
Luke: I’ve been in a couple of my niece’s TikToks, one making toast and the other doing a dance. It’s not my proudest moments.
Albert: Aren’t you giving financial advice on TikTok? Aren’t you a member of FinTok?
Luke: We haven’t taken Telescope Investing there just yet.
Albert: Prior to these acquisitions, they had a problem of customer concentration where most of their revenue came from just four customers, T-Mobile, AT&T, Verizon, and America Movil. However, following these acquisitions, the revenue sources have been diversified and now, no customer accounts for more than 10% of revenue.
Network Effects
Luke: So pretty strong through the customer lens. Let’s have a look through the network effects lens as well. So Digital Turbine have their Ignite platform installed on 600 million devices, but that’s still only 20% of Android devices worldwide. They’ve used that reach to deliver more than 4 billion app preloads for tens of thousands of advertising campaigns.
Albert: And looking at their programmatic ad business, I think we mentioned this earlier in the episode, but going through each of their acquisitions. AdColony reaches 1.5 billion monthly active users, Appreciate run 60 billion daily auctions, and Fyber is integrated into over 10,000 mobile apps, and altogether they reach about 1.2 billion unique monthly users.
Luke: And this is a powerful network effect. More devices and engagement means more interest from advertisers, which really increases the revenue spent with them. And today they have relationships with over 500 advertisers and over 45,000 publishers.
Optionality
Albert: Another interesting part of Digital Turbine’s business is the optionality in the ad space. At the moment, a large part of their revenue comes from the activation of new devices, but there’s probably a limit to this as the sales of smartphones are slowing, but I think the company has well prepared for this as they have diversified to more recurring revenue through the lifetime of the device.
Luke: There’s also the potential of them moving their technology to platforms other than phones, things like smart TVs, maybe even smart glasses. Although that does fill me with horror a little bit to even say that.
Albert: Actually I think they’ve started their move into smart TVs and connected TV. I couldn’t find any information on this, but possibly their recent deal with Samsung could include smart TVs or may do in the future.
Luke: I’ve played with a friend’s Samsung smart TV, and it’s loaded with crapware already, so I guess that’s not going to get much worse. I definitely wouldn’t buy a Samsung TV for my house.
Albert: That’s why I stick to Sony TVs, Luke.
Luke: Have you still got that massive Sony CRT television?
Albert: Have you forgotten, Luke? I gave that to your brother, Matt!
Bloatware on Windows PCs has a pretty bad image. I’m not sure if that’s still a problem, but I do wonder if Digital Turbine could enter that market with a more personalized, less annoying system. It seems unlikely, to be honest.
Luke: Yeah, maybe. Although I suppose there is a benefit here for the manufacturer and trying to avoid being seen as exercising anti-competitive behaviours. For example, Microsoft got in big heat years ago for pushing their own software on Windows PCs. Well if they could actually farm that out to Digital Turbine, they’ve distanced themselves from the decision. And so they could still earn revenue from those pre-installs without actually being on the hook if there’s claims that they’re pushing software inappropriately.
Albert: But I think there is a difference between smartphones and computers because apps are the primary ways that people interact with smartphones, whereas on a PC, most people just want a web browser.
Luke: That anti-competitive argument applies to phones possibly even more, right? Google and Android. Google are in hot water for pushing their Chrome browser and pushing their own search. So again, that could be a benefit for Android if those decisions are being handled by Digital Turbine instead of the manufacturer.
Competitors
Albert: And as for competitors, who are their competitors? And I think we mentioned earlier, they don’t really have any competition in the app installation space, as they have essentially built that market themselves.
Luke: But I guess they are competing against platforms like Magnite and the Trade Desk, albeit they’re doing this on phones specifically. And with their full ad tech stack, it does mean they’ve got both supply-side and demand-side functionality. There is an interesting question here whether this creates a conflict of interest that could degrade the ability to sell adverts at a premium price.
Albert: I think by keeping the demand-side and supply-side businesses separate under different brands, one is at AdColony and one is Fyber, they may skirt over those anti-competitive allegations.
Something interesting happened in June this year when Google announced that apps published in the Google Play Store needed to be published by the Android app bundle, and that is just a file format used for installing apps. And fearing that this would affect Digital Turbine’s business, investors sold off the stock causing the stock price to drop almost 20%. But similar to the way that The Trade Desk has been preparing for the deprecation of third-party cookies with Unified ID 2.0, Digital Turbine said that they had been preparing for this since 2019 and said in a blog post that there will be no impact to its customers or partners.
Luke: I suppose it is dangerous for them that a platform like Google could potentially wipe out their business if they launched their own pre-installation service. I think as we said, that’s probably a move that Google are unlikely to take because of antitrust allegations.
Albert: I think that’s one advantage of Digital Turbine is that they are an independent mobile advertising platform, but Google could make changes to Android to hinder the effectiveness of mobile ads or favour its own mobile ad services. This is similar to what Apple did with its changes to iOS last year, where they ask users to consent to apps tracking them and a lot of users said no. And this decreased the effectiveness of mobile ads and ad-dependent businesses like Snap are feeling the pain. The biggest beneficiary of Apple’s privacy changes in iOS was Apple itself. While it has devastated the ad revenue of many other companies, Apple’s own mobile ad revenue has increased to $5 billion this year and is expected to reach $20 billion within three years. Makes you question the motives behind these privacy changes.
Financials
Luke: Okay, I guess we’ve got to our final lens which is financials, and as you opened at the top of the episode, this is a pretty strong and healthy position for Digital Turbine.
So their full-year revenue was $314 million, which is up 126% year-over-year, more than doubling. They’re also producing a million dollars of revenue per employee, which is quite a remarkable number compared to many other software-as-a-service companies.
Albert: And then can see how effectively the SingleTap technology has been in driving revenue, where they said that SingleTap grew revenues by 100% quarter-over-quarter and 1,000% year-over-year. And each of their individual businesses are growing quickly, some more quickly than others. The main business of Digital Turbine grew 142% year-over-year, and AdColony grew 37% year-over-year, but Fyber grew a massive 179% over the previous year.
Luke: Yeah, they’ve definitely managed to diversify their revenues away from preloads where they started. And today, preloads make up 30% of total revenue, down from 50% of revenues in the prior quarter. And that’s expected to decrease further because non-preload revenue is growing at a much faster rate than preload revenue.
Albert: They have a very impressive CAGR of 51% over the last five years, but most of this has been acquired in the last two years where revenue grew 126% in fiscal-year 2021 compared to 34% in the year before. But if you take out the acquisitions, the organic growth was still 59% year-over-year, which means that organic growth is still accelerating.
Luke: Actually, their last earnings release was just a few months ago for the quarter ending June 2021, and in that quarter, they declared revenues of $212 million, which included the revenue from the acquisitions completed that quarter. So if you wrap in revenues from the acquisitions completed in that quarter, that really rises to $292 million, an increase of 104% year-over-year. So overall that implies an annual revenue of over a billion dollars for the combined business.
Albert: And their next earnings release is actually tomorrow, probably the same time as when we release this podcast episode, and they expect the revenue for their fiscal Q2, the quarter ending the 30th of September of this year, to be $300 million, a 40% increase quarter-over-quarter and a 300% increase year-over-year.
Luke: So these numbers are pretty massive. We’ve really focused on the year-over-year growth there, and don’t remember seeing any company with that kind of growth, but I wonder how much of that is organic and how much of it is acquired growth from all those acquisitions.
Albert: Yeah, a lot of this growth was acquired, so probably you do expect to see some shareholder dilution when they raise money to acquire these businesses.
Luke: And I guess they’re not going to be able to sustain those growth numbers now that they’ve integrated those businesses. It’ll be a return to more normal organic growth, you’d have thought.
Albert: I guess we’ll have to see, Luke. We’ll find out tomorrow if their quarterly numbers are increasing as fast, but judging from their growth rates of the individual businesses, it’s not inconceivable that their growth rate could exceed 100%.
Conclusions
Luke: So we’ve gone through all our lenses. I think we’ve now got a decent sense of who the company are, what they do, what their competition’s like. How do we bring it all together? Because we are going to try and make an investment decision as we wrap up our discussion.
Albert: So what you’re thinking, Luke, are you interested?
Luke: I like the company, and I think they’ve got a strong business model that’s clearly growing well, but if I’m honest, I’ve got this huge aversion to this whole principle of bloatware. I can’t really get over it. And actually, I read a fairly damning Reddit post last night while doing some research that basically described Digital Turbine as being malware. That SingleTap technology, it does sound like, has been exploited by at least one advertiser to run a dark pattern and install an application even though the user declined it. And there’s a bunch of Reddit posts talking about how to suppress and uninstall Digital Turbine’s technology.
Albert: Yeah, I agree, Luke, I think there is a risk that preloaded applications on smartphones will be reduced or eliminated due to consumer pushback, as it has been on Windows laptops. But we said earlier, there are significant differences where apps are the main ways that people use to interact with smartphones and apps are just not as prevalent on computers.
Luke: I’m also a bit concerned about this brand risk. If they’ve got quite a powerful technology that’s really baked into the guts of a phone’s OS, and if Digital Turbine do get hacked or if they install another dodgy app that exhibits some bad behaviours, that could impact, well, hundreds of millions of phones. Suddenly, you could see malware really being pushed out to a ton of phones in a market and potentially compromising consumers’ identity or information. It’s only going to take one failure like that for their whole consumer trust with advertisers to be massively eroded.
Albert: So Luke, given those concerns, and I think I might know the answer, are you going to invest?
Luke: I think I am a firm no, mostly because of the business model. I think it’s going to be a successful business model. I think they’re going to make great money and continue to grow well, and they clearly don’t have any competition, but this steps a bit outside of my zone of comfort if I’m honest.
I joined an interesting Clubhouse yesterday, Indians Invest Globally, and I had a chance to talk about two of our megatrends back to back. We did a deep dive into health tech and then into ad tech, and in prepping for that, it really helped me crystallize how I feel about ad tech companies.
Nobody likes advertising. It’s not like advertising is saving the world, but I can skirt around those concerns by seeing the benefit of platforms like The Trade Desk and Magnite. If you are able to push targeted adverts to a consumer, maybe they’re seeing something that’s more interesting for them. And clearly, they’re on a platform where they’re expecting to get an advert. Maybe a mobile phone, when I start it up in the morning, isn’t a platform where I expect to get an advert. And if I buy a new phone, I don’t expect to have a load of junk pushed at me. So for me, perhaps this steps outside of my zone of comfort around the whole ad tech space.
Albert: You may hate advertising, Luke, but how else would you find out about a new type of toothpaste?
Luke: I don’t buy the toothpaste in my house, Katrina does.
Albert: I agree with you, Luke, I don’t see a lot of this bloatware as an Apple user so maybe I can’t understand the pain that people experience with this kind of user experience, but I do think that this does have benefits. One is that the cost of some of these phones is probably subsidized to some extent as the mobile operators and phone manufacturers get a cut of this ad spend. And this technology is being deployed in more regions around the world, regions where low-cost handsets form a bigger part of the market.
But I agree is a very annoying business model and it might get some pushback by consumers at some point, so I’m undecided about this investment. The bloatware business is still growing, but it’s becoming a smaller part of their revenue. But that part doesn’t really excite me, it’s the programmatic ad business is the reason why I’m interested and their recent acquisitions of AdColony, Appreciate, and Fyber, they could see huge growth as Digital Turbine increases its footprint beyond the 600 million devices it has now.
Quote
So one reason for investing in Digital Turbine is that they could become a monopoly for mobile advertising. And we have a quote today from Peter Thiel that is related to this, and he said, “We want to invest in a company that has a good plan to become a monopoly.” Do you think Digital Turbine has a good plan to become a monopoly in mobile advertising, Luke?
Luke: I do. I think they’ve got that monopoly already. As we said, they’ve invented the market, but it’s not a monopoly that I want to support with my investment dollars. But we don’t have to wait long to see how they’re doing as their next earnings call is just scheduled for tomorrow. Are you sure you don’t want to buy a starter stake today before the earnings release? Just to get some skin in the game.
Albert: Honestly, I don’t. And the main reason for this is that a week ago, I knew nothing about this company, and we’ve done quite a few days of research, but I don’t think it’s enough to really invest into this company. And as you said, the business model is not that great. But I would counter this by saying that advertising is not bad business. It’s probably paying for a lot of free services. It’s not like it’s tobacco where it’s actively killing people. You’re not going to die from seeing too many adverts, hopefully. So in that sense, it’s not that unethical, it’s just more of an inconvenience, but a necessary one in my opinion.
Luke: Yeah, I agree. I used the word unethical when we are chatting on WhatsApp, but that’s the wrong word, it’s not about ethics. I think for me it’s maybe principles. I’ve been so anti-bloatware my entire life really as a proper technology geek, I guess it betrays my principles a little bit to support a business that drives that. But as you say, if this enables low-cost handsets to be rolled out around the world, then actually that is a business I could get behind. So certainly, they are worth watching to see how they start to grow outside of their core market of North America.
Albert: And not just in smartphones, but also in connected TV, that could be a huge driver for growth as well. So I’m undecided, I’m still thinking about it, and I’ll probably listen to their earnings call in detail tomorrow to find out where they are and what their plans are for the future.
Luke: Cool. Let’s check-in in a week or two and see what decision you made in the end, but I’m a firm no.
Wrap
Luke: I think that’s about it for this week. Thanks for listening.
Albert: And it is a future topic you’d like us to cover, you can message us on Twitter. I’m @AlbertTelescope
Luke: And I’m @LukeTelescope, or you can email us at feedback@telescopeinvesting.com.
Albert: And one of the best ways you can show support for the podcast is to leave us a review on Apple Podcasts.
Luke: And if you’ve got a friend who you think would get value from Telescope Investing we’d love it if you take a quick moment now to spread the word and send them a link.
Albert: Thanks, Luke.
Luke: Thanks, Albert.
