Digital Turbine Q4 Earnings Preview: Potential Inflection Point (NASDAQ:APPS)

Last February, I upgraded Digital Turbine, Inc. (NASDAQ:APPS) stock based on the expected recovery of smartphone shipments and the improving prospects for global ad spending. I claimed that the worst might be over for Digital Turbine in terms of revenue declines, but I also thought that there was no catalyst to drive the stock higher given that earnings revisions were still trending lower at the time of publication of my previous analysis. APPS stock has declined 40%+ since then to around $2.35, a long way away from the highs of around $100 registered in 2021.

Digital Turbine is scheduled to report fiscal fourth-quarter earnings on May 28. In this analysis, I will evaluate the macro business environment faced by the company to determine if a rating change is necessary before the earnings print.

Wall Street Estimates Point To Troubles

For the fourth quarter of Fiscal 2024, Wall Street analysts are projecting a 16% YoY decline in revenue to $117.69 million. Adjusted non-GAAP earnings per share are expected to come at 8 cents. In my previous article, I highlighted the fact that Digital Turbine’s revenue decline has decelerated in recent quarters, which I claimed was a sign of improving business conditions.

Exhibit 1: Quarterly revenue growth

If Wall Street expectations materialize, the reporting quarter will mark an acceleration of revenue decline, which is very likely to spook investors, resulting in a major sell-off similar to the last time. As illustrated below, APPS stock has historically been very volatile following earnings reports.

Exhibit 2: APPS earnings-related price changes

As an investor with a long-term focus, I will pay close attention to the following data points/commentary in the upcoming earnings release.

1. The management’s discussion on the aftermath of the cloud hosting platform migration. To recap, this migration caused havoc in the previous quarter, impacting revenue growth.
2. Commentary on the progress of changes the company has introduced to its AI models.
3. Management’s view on device sales trends in the upcoming quarters, especially in the United States.
4. New partnerships to grow alternative app store revenue.
5. Revenue trends in international markets.

New findings will help investors get a better idea of the long-term prospects for Digital Turbine and whether the company’s recent strategic initiatives are yielding the desired results.

The Growth Potential Of The Mobile App Ecosystem

Digital Turbine’s prospects are closely tied to the mobile app market. Recent data suggests the global mobile app ecosystem will continue to grow in the next decade, creating new opportunities for mobile app monetization businesses such as Digital Turbine.

An increase in mobile data usage worldwide can be thought of as a positive sign for app developers, given that apps form the backbone of smartphone usage and connectivity. According to Ericsson, the global average monthly mobile data usage will rise to 56 GB by 2029, a notable improvement from just 21 GB at the end of 2023. This mobile data usage growth will vary by region, with the fastest growth expected in Latin America, Sub-Saharan Africa, and North East Asia.

Exhibit 3: Mobile data traffic growth by region

Going a step further, I looked at a timeline of the number of apps available on the Apple App Store to gauge a measure of the growing popularity of mobile app usage. As depicted below, since 2015, the number of apps available for downloading on the App Store has grown exponentially.

Exhibit 4: Number of available apps in the App Store

Digging deeper, I found that the global app economy slowed down for the first time ever in 2022 after a blockbuster 2021. According to data from Data.ai, consumer spending on apps declined by 2% YoY in 2022 but on a positive note, spending rebounded by 3% in 2023 to $171 billion across the App Store, Google Play, and third-party app stores.

The final piece of the puzzle is to look at mobile ad spending. In 2023, mobile ad spending growth slowed down to 7.5% to $362 billion. However, ad spending is expected to accelerate this year to 11%, reaching $402 billion.

Exhibit 5: Global mobile ad spending

Findings in this segment suggest the global app economy is well-positioned to grow. The next step is to determine whether Digital Turbine is poised to benefit from this continued growth.

A Turnaround In Prospects Is On The Cards

Things have not been going well for Digital Turbine since mid-2022.

1. Revenue has declined in each quarter since September 2022.
2. Operating cash flows have swung wildly in recent quarters between a high of $36.6 million and a low of $1.3 million.
3. The company has diluted investors consistently.
4. R&D expenses have dwindled, which raises questions about the company’s ability to innovate and thereby compete with rivals.

All that said, I think most of these challenges are tied to two macroeconomic developments.

1. The lackluster smartphone shipment growth since 2022.
2. Growth challenges faced by the advertising industry.

After taking a careful look at Digital Turbine, I believe these two factors have had the biggest say in the company’s financial performance since 2022. Although I acknowledge execution could have been better, especially when it comes to acquisitions, I believe improvements in the above two factors will have a material positive impact on the numbers.

The good thing is, the outlook is improving.

Global smartphone shipments rose 8% YoY to 289.4 million units in Q1, marking the third consecutive quarter of shipments growth. With that, I feel confident to conclude that smartphone shipments have well and truly seen a bottom. Average selling prices also notched higher in Q1, supporting this premise.

The advertising industry is also recovering. According to Solomon Partners, ad spending will increase by 5.9% in 2024 in the base-case scenario, a notable improvement from around 3.5% in 2023. This acceleration in spending will boost mobile ad spending inevitably.

Amid all this, Digital Turbine is expanding its addressable target market through partnerships. The company’s recent partnership with ONE Store in Korea gives it access to more than 40 million new devices.

As much as Digital Turbine was overvalued at stock prices close to $100 less than three years ago, the company seems grossly misunderstood and undervalued today. At a forward P/S multiple of just 0.4, the market does not project Digital Turbine to return to growth, which, I believe, is a misrepresentation of its growth prospects amid the improving macroeconomic conditions.

I expect the management to strike a less cautious stance on macroeconomic conditions during the upcoming earnings call, but this may not suffice to erase the potential negative impact resulting from an acceleration in revenue decline. That said, as a long-term investor, my focus will only be on future prospects.

Takeaway

Digital Turbine is expected to report quarterly earnings on May 28. Although there is not much for investors to eagerly look forward to, I believe this earnings report may prove to be an inflection point given how macroeconomic conditions are continuing to improve. I expect the company’s management to be more optimistic about what the future holds, and for this reason, I am planning to scoop a few shares of Digital Turbine before the earnings report.