November 28, 2018 - 11:18am EST by
2018 2019
Price: 1.70 EPS .04 .09
Shares Out. (in M): 79 P/E 39.7 18.3
Market Cap (in $M): 134 P/FCF 22.8 13.9
Net Debt (in $M): -4 EBIT 6 9
TEV ($): 130 TEV/EBIT 22.8 13.9

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  • Bloatware-as-a-Service


Digital Turbine (APPS) is a niche handset software player with a fast growing business, plenty of operating leverage, and strong relationships with top tier service providers.  The company is small and overlooked, with a $125 million market cap and only five analysts from small shops covering it.  It trades at an Enterprise Value to Revenue ration of 1.2x, which is absurdly low for a company growing at 30% and making money. 

Digital Turbine has software that goes on handsets that perform a variety of functions to enhance user experience while generating revenue from customers.  Its core product, Out-of-Box Device Monetization, installs user-relevant apps on new handsets when they are first activated.  The company is then paid by the app owner (think Amazon, Netflix, Lyft, etc.) for install or when users either click on the app or buy a product through the app.  Then Digital Turbine pays a portion of that money to the service provider and keeps the rest.  Basically everyone wins as the company only installs apps on user phones that they are likely to use based on information the company and the service provider have about the user.  The app owners get prime space on the phones and get to enhance distribution of their products.  The service provider gets monetization it didn’t have before and APPS gets paid.  It is important to note that Digital Turbine only plays within the Android community.  The Apple App Store is a closed ecosystem currently so software such as Digital Turbine’s cannot be installed. 

There a variety of methods that Digital Turbine uses to generate revenue from the app owners.  The most simple is a fee is generated once the app is installed on the phone.  Another method is the generation of revenue when a user clicks on the app.  Finally, there can be a fee when the user does some action once in the app.  More recently, the company has begun experimenting with revenue share opportunities with the app owners.  For example, the company’s model with Netflix is that Netflix shares some of its subscription revenue with Digital Turbine for subscribers who came through a Digital Turbine installed app.  While this method has less revenue up front, it is a recurring revenue stream that will provide stability going forward and a likely higher valuation on Wall Street.    

Digital Turbine has two big partners, AT&T and Verizon.  For the 2017 year, Verizon was 51% of revenue and AT&T was 34%.  This concentration has been declining over time as the company has added new partners to the mix.  It is currently ramping up a relationship with TracFone which will further reduce its concentration with Verizon and AT&T.  Its customer revenue sources are less concentered, with the top one being 20% of revenue last year.     

Revenue growth for the company has been impressive, with 85% growth in 2017 and forecast 33% growth in 2018.  This growth has been driven by a combination of more device installations plus increasing revenue per device.  In the most recent quarter, global revenue per device was $0.96 which is up 32% from the $0.73 in the corresponding quarter last year.  In the US, revenue per device in the quarter increased from $1.25 to $2.00, an increase of 60%.  This demonstrates the success that Digital Turbine has had both increasing its customer base but also increasing user interaction with the apps that it is putting on the handsets. 

In addition to its Out-of-Box Devices Monetization product, the company has added several new products over the past couple of years that are increasing revenue per device and increasing the stickiness the company has with its service provider partners.  Single-Tap Installs is a product that allows users to download apps from an in-app link without having to go through the app store.  This greatly increases conversion as users are not distracted by the app store itself and do not have to click many times to get the desired app.  Another new product is Smart Folder, which lets users characterize and group their apps together and then gives recommendations for new apps based on these groupings. These new products have gone from 3% to 17% of revenue over the past year.

Other carrier partners include Vodafone, T-Mobile, and America Movil.  There is a lot of room for the company to expand its reach globally with other carriers.  Digital Turbine recently developed an important new lubricant for working with additional carriers via its new relationship with Samsung.  While Samsung had little say with Verizon and AT&T about allowing Digital Turbine to install its software on its phones, it held greater sway over smaller carriers and often hindered them in their attempts to work with APPS.  Under the new agreement with Samsung, Digital Turbine’s software will be pre-installed on every phone and consequently, Samsung will get some monetization from every one of its phones where APPS receives revenue.  Thus, if a new international carrier uses APPS software and APPS garners customer revenue, it will remit some of it to the carrier and some to Samsung.  The company expects margins to be accretive to corporate average in this relationship.

This deal with Samsung also opens up the open market for the company where customers buy phones at retail not affiliated with any carrier.  Given that APPS software will be on every Samsung phone the company can immediately begin deriving revenue from these phones and have a two-way monetization split with Samsung.

The current financial model has gross margins at 34% and EBITDA margins at 7%.  The September quarter showed powerful operating leverage as revenue grew 50% but operating expenses only grew 2%.  This allowed EBITDA margins to expand from breakeven last year to 7% this year.  The company thinks that a 30% revenue growth rate over the new three years is not outlandish and with operating leverage and gross margin expansion to 40%, EBITDA margins could end up in the 25% range.

This brings us to valuation.  Currently the stock trades at 1.2x revenue which seems absurdly low for a company growing 50% with positive EBITDA margins.  If the business can grow at 30% for three years it would have a revenue run-rate of $220 million.  Assuming they could get to their 25% EBITDA margin target they would be generating $55 million of EBITDA.  Putting a 15x multiple on that would get you a company valuation of $825 million, or $10.50 per share.  That would result in a 6.5x bagger from the $1.70 stock price today.     




I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


We think the company will continue to prove itself with strong earnings statements and that will act as a catalyst for the share price.  The company could also be sold, perheaps to a financial buyer.

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