Why Digital Turbine Stock Dropped Like a Rock This Morning

What happened

Shares of Digital Turbine (APPS 2.69%) dropped like a rock on Thursday morning after the advertising technology (adtech) company reported financial results that disappointed the market. As of 11:15 a.m. ET, Digital Turbine stock was down 23%.

So what

In the third quarter of its fiscal 2023, Digital Turbine generated revenue of $162.3 million. Not only was this a troubling year-over-year drop of 25% but it also dramatically underperformed management's revenue guidance of $180 million to $190 million. The company operates around the world. And depending on which market we're talking about, advertising rates -- measured with effective cost per mille, or the cost per thousand ad impressions -- dropped 10% to 20% from last year, which is more than management expected.

Digital Turbine's software comes preinstalled on the mobile devices of its carrier partners. And the good news is that, during Q3, the company renewed its partnership with AT&T for three years and with Verizon for four years. Therefore, expect its software to get loaded onto more mobile devices in the future, providing ongoing revenue-generation opportunities.

That said, sales of mobile devices were weak in 2022 and particularly weak during the holiday quarter. And these weak sales contributed to Digital Turbine's weak Q3 results and the big drop in price for this small-cap stock.

Now what

For its fiscal 2023, Digital Turbine management believes it will generate full-year revenue of $670 million at best, which implies fourth-quarter revenue guidance of about $144 million. That Q4 revenue would be a 22% year-over-year decline from the fourth quarter of its fiscal 2022. In other words, the slowdown isn't in the rearview mirror yet.

However, Digital Turbine's management believes that its present struggles are only temporary and are brought on entirely by the slowdown in the industry, not a problem with its business. Moreover, once the industry rebounds, it believes the company will return to growth. Shareholders certainly hope that's true.

In the meantime, the silver lining is that Digital Turbine is profitable and it even paid down $25 million more in debt than it needed to in Q3. Therefore, the company is on good and improving financial footing and should endure its current situation. But it will need to return to growth at some point if it's going to be a market-beating investment.