AppLovin Q1 2023 Earnings Call Transcript

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May 10, 2023

There are 11 speakers on the call.

Operator

Welcome everyone to the AppLovin Earnings Call for the Q1 ended March 31, 2023. I'm David Hsiao, Head of Investor Relations. Joining me today to discuss our results are Adam Farogi, our Co Founder, CEO and Chairperson and Harold Chen, our President and CFO. Please note our SEC filings as well as our shareholder letter discussing our Q1 performance are available at investors. Applevin.com.

Operator

During today's call, we may be making forward looking statements regarding future events, market expectations, the future financial performance of the company and a strategic review of our app's portfolio. These statements are based on our current assumptions and beliefs, and we assume no obligation to update them except as required by law. Actual results may differ materially from the results predicted. We encourage you to review the risk factors and our most recently filed Form 10 ks for the fiscal year ended December 31, 2022. Additional information will also be set forth in our quarterly on Form 10 Q for the fiscal quarter ended March 31, 2023.

Operator

We will also be discussing non GAAP financial measures. These non GAAP measures are not intended to be a substitute for or superior to our GAAP results. Please be sure to review the reconciliations of our GAAP and non GAAP financial measures in our shareholder letter available on our Investor Relations site. This conference call is being recorded and a replay will be available on our IR website. I'll turn it over to Adam for some opening remarks, then we'll open up for Q and A.

Speaker 1

Good afternoon, everyone, and thank you for joining us today. We had a strong Q1 on our software platform business With significant growth quarter over quarter. This was directly attributable to our advertisers seeing improved performance on our platform And returning to more of a growth mindset, leading them to more confidently spend with us. Further, we've always Talked about mobile gaming being a resilient category, and we always believed it would be stable even in weaker economic times. We're seeing just that.

Speaker 1

At Applovin, our teams have been working tirelessly over the past few quarters focusing on several key growth initiatives. Firstly, we have been working on significant upgrades to our advertising technology. This has been a major focus for us And we are starting to see early benefits from these efforts. Secondly, we have been working hard to unlock The synergies from our Whirl acquisition by bringing our advertising platform into CTV. While we don't expect this To have a material financial impact in the near term, we are excited about the early data we are seeing in this area.

Speaker 1

And finally, We're extending our marketing solutions to carriers and OEMs through our array business. Although this is still in the early stages, We are pleased with our progress. At the same time, we have been optimizing our gaming business and are now running at a more efficient level. We are confident that this business will be a stable source of cash flow going forward. Now let's talk a little bit more in detail about Axon improvements.

Speaker 1

We have been discussing the development of Axon II for a year now and have always communicated that our strongest growth We've come from advancements in our own technology. It's been challenging to explain what this means, but with the exploding popularity of consumer facing AI tools, We can draw a simple analogy. Upgrading From Axon 1 to 2 is no different than OpenAI moving from CHaT GPT 3 to 4. Our models can always be improved And our entire business is powered by the evolution of our technology. The enhancements to our machine learning and AI are not a one time thing, but a series of upgrades over time.

Speaker 1

As we make these, there is the potential for significant lifts to both revenue and cash flow. We are currently in the midst of a staged rollout of Axon II and we are very excited about the long term potential of this new technology for our partners and our business. We're extremely pleased with our expectations so far this year. We believe That our technology and innovation will continue to be the driving force behind our success, and we are committed to continuously improving our business. Thank you again for joining us today, and we look forward to sharing more updates with you in the future.

Speaker 1

With that, I'll hand it off to Harold.

Speaker 2

Thanks, Adam, and good afternoon, everyone. I'd like to begin by expressing my gratitude to Ryan Gee for his leadership of our IR activities over the past few years. Additionally, I want to extend a warm welcome to David Hsiao, who joined Applovin in early 'twenty one and has taken on the Head of IRR role for the company. As Adam mentioned, we had a solid Q1 exceeding expectations across revenue, EBITDA and cash flow. Importantly, in addition to financial performance, we're just as pleased With the focused execution and progress achieved by our teams during the quarter, in particular as it pertains to our software platform growth initiatives.

Speaker 2

To touch on a few key financial highlights, in Q1, our revenue reached $715,000,000 and our adjusted EBITDA hit $274,000,000 Surpassing the high end of our guidance. Our adjusted EBITDA margin was 38%, which was the highest run rate margin we've had since 2018. Our software platform segment was a standout performer recording record quarterly revenue of $355,000,000 Which was a 16% increase over the prior quarter. What's more, our software platform adjusted EBITDA grew 18% Quarter over quarter to $219,000,000 translating to a 62% adjusted EBITDA margin. Our software platform growth over Past 2 years has been robust with Q1 'twenty three revenue exceeding Q1 'twenty one revenue by over 4 times.

Speaker 2

This represents a 100% compounded annual growth rate. Additionally, software platform adjusted EBITDA increased from $59,000,000 in Q1 'twenty one To $219,000,000 in Q1 'twenty three, a strong 90% plus CAGR. As Adam noted, while it's challenging to predict the precise timing After our software platform growth initiatives, we are optimistic that they will drive meaningful revenue growth and high margin cash flow. Turning to the App segment. We had $361,000,000 of revenue in Q1, a 9% decline from prior quarter, which includes the impact of optimizing certain studio assets.

Speaker 2

Q1 apps adjusted EBITDA was $55,000,000 and adjusted EBITDA margin was 15%. The margin was slightly lower than recent quarters due to the launch of several new games leading to an increase in user acquisition spend as a percentage of revenue. At the consolidated level, we are pleased to report that we had robust free cash flow of $283,000,000 in Q1, due in part to the growth of our high margin software platform business. We also benefited from several significant customer payments Delayed from prior periods as well as lower cash taxes in the period. With regard to guidance for Q2 'twenty three, we are targeting 7 $10,000,000 to $730,000,000 in revenue with $208,000,000 to $300,000,000 in adjusted EBITDA, which equates to a 39% to 41% adjusted EBITDA margin.

Speaker 2

We anticipate continuing growth from our software platform business offset to some degree by the apps business. The impact of the Axon 2.0 rollout will be a key factor in the quarter. As previously mentioned on our We expect free cash flow to be approximately 50% to 60% of adjusted EBITDA on a normal run rate basis, noting that we may have some deviations from that in any From a cash perspective, at the end of Q1, we had $1,200,000,000 of cash on the balance sheet, a clear testament to our strong financial position and cash generation. During the quarter, we repurchased approximately $76,000,000 of stock. And year to date through May 8, we repurchased $202,000,000 of stock, Leaving $210,000,000 on our $750,000,000 authorized buyback program.

Speaker 2

As we look toward the future, we're determined to maintain our position as a market leader by investing in our team, solutions and key growth initiatives. Our strong financial position and cash generation allows us to take calculated risk We make strategic decisions to keep AppLovin at the forefront of the industry. It's an exciting time for AppLovin and we're excited by our future prospects. Now I invite the moderator to lead us through Q and A.

Speaker 3

Thank you so much. And like you said, we will now begin the question and answer portion of our call. And our first question is going to come from Martin Yang with Oppenheimer.

Speaker 4

Hi, good afternoon, Adam and Harrow. My first question is on the strength for software platform and how much Did Exxon II or was Exxon II a meaningful driver for that performance sequentially?

Speaker 1

Hey, Martin. Thanks for the question. And really Axon II, we talked about, we're now in the midst of Roll out, so that came after the quarter. In Q1, we did see improvements in our core technology. Improvements in our technology is fundamentally core to our business on an ongoing basis.

Speaker 1

We also saw more confidence from advertisers spending on our platform as they were seeing good results and the mindset in Ecosystem is starting to return back to growth. We're seeing good industry momentum as well.

Speaker 4

Got it. So Would you say the sequential improvement was more in line with market as opposed to your taking share from someone else?

Speaker 1

I would talk about it not in line with market, because I don't think the market grew 20% quarter over quarter, much more so Efficiency gains in technology, our advertisers investing more with ourselves, and we don't really think about this market as 0 sums. It's not a We take an extra $0.20 and someone else loses $0.20 We think about it as additive to the market. So our improved efficiency Creates gains in the market for all of our partners and peers by default would benefit from that as well.

Speaker 4

Thank you. My second question It's more on Google's, including Applovin as well as some 3 other players in their open bidding or real time bidding. Can you maybe comment on the long term implication of that and how that help or impacts our business?

Speaker 1

Yes, we're super bullish on this. We've been We really brought Max to the market originally with Facebook, both us and them being early stage adopting bidding, believing that it's a much more efficient way to go. And Google now leaning in for the first time in the industry to external solutions is a huge win for the ecosystem. We think them bringing their demand More efficiently to the market, we'll create upside for the whole market. So we've been a partner of theirs in this movement for a while.

Speaker 1

It's now open to all publishers In the ecosystem, Max obviously is the majority share of mediation and gaming. And so we can extend Their demand in a very efficient manner to the bulk of mobile gaming publishers, and we're excited about that. More broadly speaking, we've got a great relationship with Koole, and we continue to build on that.

Speaker 5

Thank

Speaker 3

you. And moving on to Ralph Schackart with William Blair.

Speaker 6

Hey, Harold. Two questions, if I could, please. Adam, in the letter you talked about partial stabilization in the mobile ad market. Can you maybe talk about the linearity that you saw throughout the quarter and stabilization? How did you Specific order versus how you entered it?

Speaker 6

And then I have a follow-up, please.

Speaker 1

Yes. I mean, we're seeing just generally, and this is true in a lot of my conversations with mobile game developers as well, A lot more confidence in the ecosystem. Now that we've gone through last year, the economy seems a little bit more stable. We feel like we're reaching that trough point. And so mobile gaming developers are starting to be more growth mindset oriented, which is great for our business.

Speaker 1

As those dollars come in, it will lead to growth. And that confidence builds over time. So obviously reflected in our guidance, you saw and in Harold's commentary, A reference to the software platform continuing to perform really well. This isn't a one time event or as that functioned, we're very confident where this business is going.

Speaker 6

Great. Maybe kind of leading to the software business, you talked about the strong growth and it seems like the market is sort of stabilizing. I know you're not giving full year guidance, but Anything that you're seeing currently that would preclude this growth rate sort of persisting through 2023 or just sort of broadly speaking, how should we think about growth this year on the software business? Thank you.

Speaker 1

We're really looking at it to sort of building blocks. Last year, obviously, it was difficult for the whole ad ecosystem and the economy in general. Now we've got one good quarter in place. The biggest change for us in our business today is we're rolling out This is a material upgrade of our core platform, and we're really excited about it. The team working on this is phenomenal.

Speaker 1

And so getting this out to market Could become a catalyst for our own growth, but we've always talked about our position in this market is quite large in the mobile gaming ecosystem. So if we're able to Come more efficient, we'll create growth across the whole sector and that's what we're really excited about. We think this if it continues to go well as we roll this out throughout The rest of the year, we'll be able to create growth in this ecosystem irregardless of what's going on around us.

Speaker 6

Okay. Thank you.

Speaker 3

And we'll move on to David Pang with Stifel.

Speaker 7

Great, thanks. I I was just hoping to see what your expectations are for the ad spend flowing through MAX in 'twenty three. And if you could remind us what your near term and Intermediate targets are?

Speaker 1

Those are not numbers we've really disclosed. We do see Good momentum on MAX as the market becomes more efficient and you get more header bidders live, that usually creates increases to pub spend On the platform, so that creates gains. Those ARPDAU gains that these publishers get allows them to then go market more. And as systems like ours become more efficient, it gives them a better place to go market themselves, creates growth. So we're seeing good momentum on that platform, very high stickiness Across our publisher base, so the MAX product is in a really good spot.

Speaker 1

We're just not disclosing the exact numbers on that product.

Speaker 7

Just as one follow-up, could you provide a ballpark of what portion of the spend is Currently on RTV?

Speaker 1

Now we've talked about real time bidding as being the majority of the platform already and Google taking it to the vast Majority is that product scales up.

Speaker 7

Got it. Thanks.

Speaker 3

And D. A. Davidson's Franco Grande has the next question.

Speaker 8

Hi, thanks for taking my questions here. I'd like to reference Axon 1 as The same way as AMD references its architectures by saying that they age like fine wine. Are you approaching Axon 2 in a similar way where The efficiency continues to build on top of itself as you continue to iterate on it.

Speaker 1

Yes, I mean, the world we're in today with these AI technologies It's the fastest evolution and change in technology we've ever seen in our lifetimes. The rate of innovation is just incredible. And so as we go to Axon 2, There is on an ongoing basis incremental improvements that we can make to the platform. That will fuel our business for some time. And then there's the incremental uptick to Axon III and then Axon IV and Axon V.

Speaker 1

This core expertise is going to drive our business For a very, very long time, these technologies are only going to get more powerful. And because of our market leading position, we've got so much volume flowing through our systems that Efficiency gains from these technologies as they evolve will generate lifts to revenue and we've always talked about how our software business Technology derived lifts to revenue end up very high flow through and that's what we're excited about.

Speaker 8

Awesome. Thanks for the color. And then going to the apps business, it seems like the in app versus then well in the quarter on a relative basis And then the advertising was where it kind of fell off or dipped a little bit. Any trends to note there? Was it just the ad spend softness?

Speaker 2

I think in general, there's some ad trend softness and some seasonality coming off the Q4. Also, we about half the delta on the revenue From core over core on the app side, it actually came from us closing down some studios or divesting studios as well. So there's some, I guess call it one time impacts in terms of the mix there.

Speaker 3

And we'll now hear from Bernie McTiernan with Needham and Company.

Speaker 9

Hi, this is Stefanos Crist calling in for Bernie. Thanks for taking our questions.

Speaker 5

Can you

Speaker 9

just remind us on point number 3 of your growth drivers Extending the marketing platform to carriers and OEMs. What gives you the confidence you have the technology and relationships to do that organically?

Speaker 1

Yeah, I mean, what gives us the confidence there is we're so good on the marketing technologies in our core business and that industry is quite nascent. There's only a couple of players in there. We all end up having to play a similar game in the mobile gaming category. In that category, we've got the market leading technologies and we've proven that For a very, very long time. And so extending that core efficiency out to the carriers and OEM space seems like a very smart thing to do.

Speaker 1

Incremental to that, we're bringing some new products to the carriers and OEMs too that we think will make a material impact to their businesses and then turn to ours. So we're excited about where that can go. I will caveat it with new businesses that we're going after that are related to our core business aren't going to move the needle on a $1,000,000,000 plus software business In the short term, these are businesses that we expect when we're talking to you all in 3 years, we're talking about big parts of our business, but this is not a short term bet. This is one that we're investing into and expect to pay off

Speaker 5

materially in the long term.

Speaker 9

Great. Thank you. And then just speaking of the competitive environment, Have you seen any changes there with the combination of Unity and IronSource you could touch on? Thank you.

Speaker 1

We can't really talk To peers and what they're up to, and we just know that bringing 2 big companies together and integration takes time, it's difficult. We also know that in this ecosystem, we need them to do well. They need us to do well. All marketing companies drive the growth of our partners. And so long as every company is operating efficiently, we'll see growth.

Speaker 1

We did grow a lot in the quarter and so our products have been very, very sticky And we expect that to continue.

Speaker 6

Thank you.

Speaker 3

Eric Sheridan with Goldman Sachs has the next question.

Speaker 5

Thank you so much. Maybe 2 if I could. Coming back to the apps business, is there anything you're calling out in terms of new game launches We should be keeping in mind between now and the remainder of 2023, just so we better understand some of the potential mismatches Between revenue growth and investing behind those game launches and how it might impact on the margin landscape, that would be number 1. And then number 2, coming back to The broader advertising landscape. It sounded like you talked a little bit about it already, but I wanted to know if you can go a little bit deeper into the connected TV opportunity and how you're thinking about That helping widen out potential further advertiser diversity and density in terms of your platform over the medium to long term?

Speaker 5

Thanks so much.

Speaker 2

Yeah, thanks, Eric. I'll take the apps question first. Overall, we're very pleased on getting the other side of our major optimization of that portfolio of apps Down to about 11 studios, which we're investing against. And we do have a number of new game launches coming. I think out of every studio, they've got a game plan to launch new games.

Speaker 2

And This quarter's impact, I think we've always said it'd be in the mid teens margin on a run rate basis. I think we remain there. Eric, if There was a whole bolus of games that we thought were really awesome. That margin could come down. I think it was still be a double digit number.

Speaker 2

But right now, we see it really building into the business model of regularly launching games. We think the margin should remain in that mid teens range.

Speaker 1

On the CTV question, Eric, we obviously invested in Whirl a little over a year ago. They've got pre existing relationships with A lot of the media companies and you think of them as like a CDN for these companies, but they help them bring their content online and schedule the content, build effectively channels On the connected TV devices across all the various devices in that fragmented space, those pre existing relationships were what we were excited about. They also have an SSP business. And so we're already in market. We're plugging in our app discovery solution through their SSP to connected TV inventory.

Speaker 1

This is early, early stage. So we talked about no significant impact to our financial performance in the near term, but the data is Strong. The offering is really cool for mobile app developers. There hasn't been a scaled performance based solution in this category really ever in that manner on a And we charge for performance. And so the advertisers that are leaning into it are leaning into it and very excited by the potential of us scaling that offering.

Speaker 3

And we have time for one additional question, which will come from Matt Coster with Morgan Stanley.

Speaker 10

Hi, this is Dave on for Matt. Apologies if I missed this earlier, but are you able to give a sense of timeline And on the, I guess, full release of Axon II, I know earlier you said that you were rolling it out. And how should we think about the financial impact, if you can share any color there?

Speaker 1

I'll talk about the timeline. Harold can cover financial impact, but we're in market rolling it out in stages. It is a complex technological upgrade that we are excited by the early results and we've reflected confidence in our guidance going forward.

Speaker 2

And just on impact, I think earlier we did say that there was no impact because it had not been rolled out at all in the Q1 for Axon 2.0. And then going forward, it is still difficult to predict the timing of the rollout and then ultimately the impact financially of the technology. But what we do know is the technology It's superior to Axon 1L. Just like Adam said in his script that we see what chat GPT does from 3 to 4, 4 So we know it's better technology, it's more effective, it's more efficient. And so we do believe that there will be Significant impact on the software line when it hits is difficult to predict.

Speaker 2

The other thing we also know though, given the software margins, We do think a significant amount of that revenue does flow through the bottom line, so it would be a very high percentage increase in the margin as well.

Speaker 10

Great. Thank you.

Speaker 3

And this does conclude the question and answer session for this quarter. We thank you all so much for joining us today. Enjoy the rest of your day and we will see you next time.

Speaker 2

Thank you.

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