Steve Lasher And SDK Bidding Will Streamline Operations

Key Takeaways

• New CFO Steve Lasher's experience is expected to enhance operational efficiency and financial planning, potentially improving net margins.
  
• Focus on brand relationships and first-party data is driving brand advertising revenue growth, suggesting potential top-line revenue improvements.
  
• Dependence on U.S. device sales and strategic transitions amid intense competition and execution risks may impact Digital Turbine's margins and revenue growth.

Catalysts

Through its subsidiaries, operates a mobile growth platform for advertisers, publishers, carriers, and device original equipment manufacturers (OEMs).

• The addition of Steve Lasher as the new CFO, with his extensive experience in technology and financial leadership, is expected to enhance Digital Turbine's operational efficiency and financial planning, potentially leading to improved net margins.
  
• The company's focus on brand relationships and leveraging first-party data is starting to yield results, with significant growth in brand advertising revenues, suggesting potential top-line revenue growth.
  
• Transformation efforts, including a move to SDK Bidding and expansion into non-gaming sectors, are expected to diversify revenue sources and reduce reliance on commoditized ad tech spaces, which could positively impact gross margins and EBITDA.
  
• The strategic push into alternative app distribution, particularly with international partners like ONE Store, and the regulatory momentum around app distribution, position Digital Turbine to capture more device footprint and drive revenue growth.
  
• Cost reduction initiatives, targeting over $25 million in annual savings through streamlining operations and automating processes, are anticipated to enhance operational efficiency and improve EBITDA margins, supporting future earnings growth.

Digital Turbine Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Digital Turbine's revenue will grow by 5.9% annually over the next 3 years.
• Analysts are not forecasting that Digital Turbine will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Digital Turbine's profit margin will increase from -64.1% to the average US Software industry of 11.7% in 3 years.
• If Digital Turbine's profit margin were to converge on the industry average, you could expect earnings to reach $67.1 million (and earnings per share of $0.6) by about April 2028, up from $-309.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.3x on those 2028 earnings, up from -0.7x today. This future PE is lower than the current PE for the US Software industry at 28.3x.
• Analysts expect the number of shares outstanding to grow by 2.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Digital Turbine Future Earnings Per Share Growth

Risks

• The reliance on improving U.S. device sales amidst current softness poses a risk, potentially impacting revenue, particularly if expected stabilization in device sales does not materialize.
  
• The transition from waterfall bidding to SDK Bidding in the AGP business, though strategic, may take longer to optimize and align with market demands, which could adversely affect net margins due to initial implementation costs and possible inefficiencies.
  
• Intense competition in the ad tech gaming space with the commoditization of that sector and supply path optimization strategies by other DSPs could result in reduced revenues and pressure on earnings.
  
• The integration of new growth strategies and platforms, such as alternative app distribution and first-party data utilization, may encounter unanticipated technical challenges, potentially impacting the expected increase in revenue and net profits.
  
• Although cost reductions are a strategic focus, detailed execution and realization of the $25 million in targeted savings carry risks, potentially affecting overall profit margins if not achieved or if they lead to unintended disruptions in core business operations.

Valuation

• The analysts have a consensus price target of $2.75 for Digital Turbine based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $4.0, and the most bearish reporting a price target of just $1.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $574.9 million, earnings will come to $67.1 million, and it would be trading on a PE ratio of 6.3x, assuming you use a discount rate of 11.4%.
• Given the current share price of $2.2, the analyst price target of $2.75 is 20.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.