Quick Summary

Digital Turbine (APPS) provides software that is pre-installed onto Android-powered smartphones. This software acts as an "always-on" media delivery platform, allowing app and content creators to pay advertising fees for a better chance of their content being seen. The primary way the software works is by "pre-loading" apps onto the device during the setup process (based on user location, age, gender, etc.). Digital Turbine's software also can suggest apps through notifications and install them with a single tap. 75% of the company's revenue is earned through these "Application Media" installations, paid for by app creators and shared with device OEMs (Samsung, LG, etc.) and service providers (Verizon, AT&T, etc.). The other 25% comes from "Content Media", where DT's platform provides interfaces for news, weather, sports, and other content, and content providers pay the company to be included (again shared with OEMs and carriers). Digital Turbine's software is installed on over 450 million devices and has pre-loaded nearly 2.5 billion apps.

Does The Company Have Recurring And/Or Rising Revenues?

SOMEWHAT. Digital Turbine started its current business model in 2016, and since then has generated about 15% average annual growth. Zoom in a bit, though, and this becomes much more impressive, with revenues rising 34% in 2019 and up a whopping 70-90% in the first two quarters of 2020. Clearly the company has hit on a need, providing app creators a way to market their software, and OEMs/service providers another avenue for monetizing devices. There is still growth potential here. DT software still has less than 10% total smartphone penetration, there is the potential for expanding into new device categories (like TV streaming devices), and several untapped carriers remain as well. On the recurring side, most revenue is earned on new device sales (through the pre-load process - 90% of application media sales). The company has been focusing on notification-driven app installs and content interfaces to drive more sales on an ongoing basis through the life of the device. We generally consider ad platforms to be recurring revenue, but we have to ding Digital Turbine for relying on new smartphone sales for a large portion of application media revenues.

Does The Company Have Durable Competitive Advantages?

NO. This is the company's real weak point. It relies heavily on carrier acceptance for a large portion of its sales - Verizon accounts for 37%, AT&T 30%, and America Movil (Tracfone) 11%. Further, Oath Inc., which is Verizon's media business that makes apps and content, represents 15% of app creator sales (not totally unlike an insider deal). Add them up and you get just 3 customers controlling over 90% of Digital Turbine's revenues. This sets up some serious risk scenarios. Should Verizon decide to create its own app install platform, Digital Turbine could see half of its revenues vanish overnight. These are EXACTLY the scenarios we want to avoid. Even if these 3 customers keep using the platform, Digital Turbine has very little pricing leverage when it comes time to renew contracts.

GreenDot Rating: 

Digital advertising platforms are all the rage these days, and many of them are truly attractive businesses that provide substantial benefits to both ad buyers and ad inventory sellers. While Digital Turbine may seem to fit this description at a glance, a deeper look shows a very vulnerable company that is benefiting from what look like unsustainable conditions. The customer concentration is a massive problem here, setting up huge event risk and a distinct lack of pricing power. While the company is doing good at the moment, long-term we don't see it being sustainable. As such, it gets a RED (unattractive) rating.