AppLovin Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 9, 2023

There are 11 speakers on the call.

Operator

Welcome everyone to the AppLovin Earnings Call for the Q2 ended June 30, 2023. I'm David Shao, Head of Investor Relations. Joining me today to discuss our results are Adam Farrugi, our Founder, CEO and Chairperson and Harold Chen, our President and CFO. Please note our SEC filings to date as well as our shareholder letter discussing our Q2 performance are available at investors. Ablovin.com.

Operator

During today's call, we may be making forward looking statements regarding our products and services, market expectations, the future financial performance of the company and other future events. These statements are based on our current assumptions and beliefs, and we assume no obligation to update them except as required by law. Our actual results may differ materially from the results predicted. We encourage you to review the risk factors in our most recently filed Form 10 Q for the fiscal quarter ended March 31, 2023 and in our Form 10 Q for the Q2, which we expect to file later today. We will also be discussing non GAAP financial measures.

Operator

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 to non GAAP Financial Measures and 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 and Harold 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 stellar second quarter, surpassing our revenue and adjusted EBITDA guidance, largely due to the expansion of our software platform business. I'm incredibly proud of our dedicated teams who have worked tirelessly to upgrade our advertising algorithms from Axon 1 to Axon 2. We started talking to you a year ago about the benefits we'd achieved both short and long term by upgrading our technology and now we've executed on it. The launch has not only paved the way for a strong quarter, but also provides us with additional opportunities for future growth.

Speaker 1

The introduction of such a significant change in our technology required many hours of hard work, innovation and risks taken. The result is a true testament to our spirit and commitment and demonstrates that we operate with the same speed and efficiency as we did in our time as a private company. This is what makes me particularly proud of what we have achieved. With cutting edge AI technologies at the heart of our core offering, Our focus will now shift towards continuous enhancement of our technology, expanding our advertiser base and extending Axon II to our We are optimistic that these measures will fuel growth for years to come. In conclusion, we remain committed to providing long term shareholder value.

Speaker 1

We are confident in the potential of our team, our technology and our products and our financial strength. We appreciate your trust and support And we look forward to our journey of growth and innovation with you. Thank you. On to Harold to provide you with our financial highlights.

Speaker 2

Thanks, Adam, and good afternoon. Based on the incredible efforts from our team this year, in particular leading the launch of our Axon 2.0 engine, We had a strong quarter financially across the board with record software platform revenue, high margins, impressive operating leverage and ultimately robust free cash flow. Our strong performance in the quarter illustrates that the highly focused plan we articulated about a year ago is working. As a reminder, we said we'd invest in our core team, improve our AI based optimize our apps business, drive free cash flow and simplify, focus and execute against what we do best. That strategy and plan, which is very similar to the fundamentals on which this company was founded, are working and we are excited about where that can take us.

Speaker 2

Touching on our financial highlights for the quarter, our total revenue reached $750,000,000 with adjusted EBITDA of $334,000,000 Both exceeding the high end of our guidance. Our adjusted EBIT margin, EBITDA margin was 44% and was the highest EBITDA margin we've had in 5 years. Further, for the quarter, we are pleased to have generated $80,000,000 of positive net income. Our software platform segment reached a record revenue of $406,000,000 which represents 2 quarters with consecutive mid teens growth And an increase of 28% over the prior year. Software platform adjusted EBITDA grew 39% year over year and 25% quarter over quarter To $273,000,000 translating to a 67% adjusted EBITDA margin.

Speaker 2

Software platform adjusted EBITDA now represents more than 80% of our company's total adjusted EBITDA. Of note, during the quarter, we were able to increase adjusted EBITDA by an amount slightly higher than the increase in revenue, equating to over 100% flow through. While our flow through will fluctuate in the future, it does highlight the impressive operating leverage from our software platform segment. As our software platform revenue continues to grow, We expect high flow through and further margin improvements for this segment. Looking at this segment over the past 2 years, revenue increased by 2.8 times, Representing a 67% compounded annual growth rate.

Speaker 2

Over that same period, our software platform adjusted EBITDA grew 3 times, a 70% TAGR. We continue to remain optimistic about our opportunities within the software platform segment as we continue to improve our AI based technologies as well as invest in our growth initiatives, Including Connected TV and Carrier and OEM. Turning to the Apps segment. During the quarter, we continued to focus on balancing profitability with revenue. For Q2, we had $334,000,000 of apps revenue and $61,000,000 of adjusted EBITDA, a margin of 18%.

Speaker 2

We continue to invest carefully to drive top line growth both through new game development and user acquisition marketing, while also managing for overall margin, targeting mid teen adjusted EBITDA margin range over the medium term. At the consolidated level, we're pleased to report we had free cash flow of $221,000,000 in Q2, a 66% flow through of adjusted EBITDA to free cash flow. For the first half of twenty twenty three, we generated over $500,000,000 in free cash flow. With regard to guidance for Q3 'twenty three, We are targeting another quarter of growth with revenue between $780,000,000 $800,000,000 adjusted EBITDA between $340,000,000 $360,000,000 And adjusted EBITDA margin between 44% 45%. We anticipate the 1st full quarter of revenue contribution from Axon 2.0 to continue driving our growth as well as see steadier apps performance.

Speaker 2

As previously mentioned on our calls, continue to target free cash flow of approximately 50% to 60% of adjusted EBITDA on a normalized run rate basis, Noting that we may have deviations from that in a particular quarter. From a cash perspective, we ended Q2 with $876,000,000 of cash in the balance sheet. In terms of stock buybacks, we repurchased $507,000,000 of our Class A common stock during the quarter. And year to date through August 8, we have repurchased $601,000,000 We have $107,000,000 of authorization remaining on our repurchase program and we'll be carefully watching the markets. We're also watching the leverage loan markets in real time to see if we can extend, reduce and or lower the cost of return loans.

Speaker 2

If we see an attractive window, we will move quickly to optimize our capital structure. In conclusion, Q2 was incredibly strong financially and exemplifies the strength of our Looking forward, our teams continue to be focused on execution and improving our core solutions and technologies. As Adam said, we're very excited About the opportunities in front of us. And now the moderator will take us through Q and A.

Speaker 3

Great. Thank you so much, Harold. And as always, we will take as And we will go first to Morgan Stanley's Matthew Kost. And Matthew, it looks like Matthew is on audio only, everyone, just so you know. Matthew, go ahead.

Speaker 3

Okay, Matthew, I hear you. I'm sorry. Go ahead. Yes, we sure can. Please go ahead.

Speaker 4

Great. Thanks. Hi. It's Dave on for Matt Coss. And so sorry if I missed this earlier, there were a few technical With the audio here for those of us dialing in.

Speaker 4

But with the strength of the ad network results, I think that speaks pretty positively to the company's execution in the quarter. Are you able to give some color on perhaps what portion Of the quarter's performance you would find attributable to your own execution versus an overall recovery in the market? Thanks.

Speaker 1

Thanks, Dave, for the question. Market's been steady as we've been talking about for a couple of quarters now. So we attribute the growth in our platform really 100% from the advancements in our core technology. The upgrade made our platform a lot more accurate For advertisers and allows us to really monetize more of a breadth of advertisers. So being able to do both things And enabled us to really grow our business on the back half of the quarter as we rolled out this technology.

Speaker 1

And more importantly, We're driving better value to the advertisers. So we expect this not only to contribute to the growth that we have in the short term, But also the long term, and that's what gets us really excited.

Speaker 4

Great. Thanks. And maybe just one follow-up, if I could. If we assume that the gaming continues along the trajectory, The guide implies 45% to 50% software revenue growth year over year. How do you view the sustainability of the gains?

Speaker 4

And should we anticipate a Similar step function that we saw in Axon 1.0?

Speaker 2

Yes, we do view the app side of the business reaching some stability as we've Over the past few quarters that the second half this year, we do see that and we're investing in some new games, we're investing more in user acquisition, In particular, given the fact that we're using a lot of our own solutions there, which has become more efficacious. So we do see our ability to drive some growth Over the second half of the year. In terms of the software side, Axon TIO is relatively new. It was launched this last quarter, full run rate this quarter. And we do see improvement in growth, and that is built into our guide for the Q3.

Speaker 4

Perfect. Thanks.

Speaker 5

All right.

Speaker 3

And we will now hear from Ralph Schackart with William Blair.

Speaker 6

Great. Hey, Harold. Just looking at the really strong margins that you delivered this quarter, I think around 44% and guiding for 44% to 45%, I think, next quarter. Historically, the models contemplated sort of the mid-30s, maybe low 40% or 40% model. Is this a new baseline for margins that we should think about, especially given Expectation for further software margin improvement growth going forward?

Speaker 6

And then I have a follow-up.

Speaker 2

Yes. Thanks, Ralph, for the question. On the software side, 67% margin was a great quarter. As we mentioned in In the introduction, we also had very high flow through. We actually generated more EBITDA than we did relative to the incremental revenue.

Speaker 2

That doesn't necessarily continue going forward, but it's a very high flow through model there. So we do believe that the margin will continue to expand on software as we're able to grow The top line over the medium to long term, maybe not quarter to quarter given vagaries due to timing. And on the app side, we've always said that we Target more in the mid teens range for EBITDA margin, whereas this past quarter, we were in the high teens at 18. As we invest a bit more on the UA side to grow the games, that will probably bring down that margin down into the mid teens. So on a blended basis, As software grows, margin expands on the app side reaching stability with potentially slightly lower margins.

Speaker 2

That's how we end up at the mid-40s margin target.

Speaker 6

Great. Maybe a question for Adam. Adam, can you maybe get some perspective, Maxon 2, how it's performing maybe relative to your expectations and any sense of order of magnitude improvements Compared to 1, obviously very strong results in the quarter, but any more color that would be great. Thank you.

Speaker 1

Yes, for sure. I'd say it's Forming at our expectations, we signaled that a year ago as something that was going to be a big upgrade because we just knew that the technologies available to us We're dramatically better than the technologies that we were using. We put it into power the entire platform in the quarter And it was immediate to start seeing much better performance for advertisers. What that does over time is that will compound And advertisers will be willing to spend more on our platform because they're seeing better return on ad spend on their buys on our platform than they were previously. And that should start to grow over time, get more investment from the base of advertisers we have.

Speaker 1

But even more exciting for us is The implications that we're going to be able to make a wider breadth of advertisers work with this new technology is much more predictive, much more powerful. If we're able to execute on that, we can really broaden out the advertiser base, service new verticals, and that should really fuel our growth for quarters years.

Speaker 3

Our next question will come from Franco Granda with D. A. Davidson.

Speaker 7

Hi, good afternoon guys. Thanks for taking the questions here. I have two quick ones. So with the market stabilizing here and Axon II yielding such positive results So early on, are you ready to provide an updated figure on how many dollars you think could transact through your platform either this year or maybe next? And then, for the second one, can you talk about maybe any trends across your apps portfolio that surprised you in the quarter, perhaps in a category where you

Speaker 1

Yes. In terms of the scale of the platform, we've never provided that. But The advertising business is on a net revenue basis. And we've talked about typical advertising business margins that are known in the industry somewhere in the 20s to 30 Range, and so you could get to a reasonable guesstimate. The marketplace itself is in the 1,000,000,000 of dollars.

Speaker 1

Obviously, our software platform cleared $400,000,000 and the vast majority of that being advertising network net revenue in the quarter. So We're a very large player in the mobile app ecosystem. And if you decide that against the totality of the mobile app Ecosystem understanding a lot of our partners are mobile gaming customers. We're a critical player for almost all of our customers. They really depend on us for growth.

Speaker 1

So the thing that really gets us excited in our ecosystem is this upgrade in technology not only helps fuel our growth, Our customers are spending a better dollar on our platform and we're usually one of their top 1 or 2 or 3 channels that they invest into. So they're spending a better dollar on our platform That will compound for them too. And so as we go forward, we'll start seeing the market of customers that are working with us growing, Hopefully, materially better than the market itself and return helping to return this category as a whole back to growth.

Speaker 2

And, Frederigo, on your second question, as you can tell, our software platform is performing well because we're delivering great solutions and delivering Advertising, that's effective for those customers. And so we're doing the same thing for our apps portfolio. So I wouldn't say we have any Outperformance in the apps portfolio for the Q2, but we do believe in the second half of this year as we invest more in user acquisition and more on our own platforms So we should be able to drive additional growth for those apps.

Speaker 7

Great. Thank you.

Speaker 3

And moving on to Martin Yang with OpCo.

Speaker 5

Hi, thanks for taking the question. If Exxon has performed in line with your expectation, can you Give us a sense of where the outperformance came from in the Q2 results relative to your guidance?

Speaker 1

Relative to our guidance, we rolled out the technology towards the 2nd part of the quarter, right? So This is a brand new technology. We thought it was going to be really powerful. It is very, very hard to measure the impact Of a new technology you replaced entirely replaced an old one, right? So we were very pleased with the short term impact.

Speaker 1

We're more excited about the long term implications on our overall business. And again, this is a it's in infancy stage. Only a couple of months old of the technology. We think it's going to get a lot stronger over time and we think it's going to be able to fuel our growth for quarters years, But we're going to be excited to see what that looks like as we go forward.

Speaker 5

And my follow-up question on Axon II is Throughout, should we expect a continuous improvement throughout the Q3? And when you say Axon 2 is being fully rolled out, does that mean the performance improvement will mainly come from Better algorithm instead of being implemented across more ad inventories?

Speaker 1

Yes. As we go forward, the technology will continue to fuel growth from a couple of different vectors. One is, at the level of scale that we operate at, we drive billions of transactions a year, we're able to the technology itself will learn and self improve. Our team obviously improving the technology every step of the way. So that also happens in parallel.

Speaker 1

Obviously, core of our engineering focus is on this part of our stack. And then you've got the more interesting long term dynamic that if this technology is so good that we're one of the largest channels, if not the largest for all of our gaming partners And it's now working within gaming and outside of gaming. It opens up the door to the possibility of a lot of advertiser expansion, Which will create more density in our auction, more scale to the business. And then to your last point, more inventory will come online as well. We operate and with Max being a core driver, but more broadly in the mobile app ecosystem in a real time environment.

Speaker 1

If our systems are better than they were, in theory, we will get more inventory and our systems will be able to predict more accurate transactions. And we're really excited about how all of this will compound over time and create a much bigger opportunity in market for our core business.

Speaker 5

Thank

Speaker 3

you. Matt, Bernie McTiernan with Needham has the next question.

Speaker 8

Great. Thanks for taking the questions. On the App Discovery announcement that came out on Monday in terms of new products, how should we think about which of those should be most impactful? And then Can you just remind us too on the sales process or the process of signing up other advertisers outside of mobile games? It's Yes, probably pretty clear that as you guys are more successful in increasing return on ad spend for mobile games, they're just going to spend more with you guys.

Speaker 8

But for a new

Speaker 5

advertiser to come in, what's that process of

Speaker 8

getting them on the platform? Yes. So, on the first question, the

Speaker 1

Yes. So on the first question, the release really broke down the whole offering into some of the valuable sub vectors What we rolled out with the core product offering is to fully automate the marketing problem and power it with these new AI technologies that we rolled out. In totality, all of the components that we broke down in the article sum up to the value of the whole. And so there's not one part of it It's more exciting or not. All of it is exciting to us.

Speaker 1

On the second question, sales cycle for NU, in particular non gaming, It is slower than ramping gaming customers that are already used to our platform and have been buying on our platform. They've been live for years And they see an improvement in the return on ad spend that they're able to achieve on our platform, they'll invest more. That's actually mostly automated as it is today. A new customer usually takes a quarter or 2 to ramp up and we're now seeing a lot more interest in joining the platform because Already only a couple of months into this platform rolling out, there's a lot of word-of-mouth spreading amongst app developers, both within gaming and non Our platform is working really well for their peers.

Speaker 7

Great. Thanks, Adam.

Speaker 3

And we will now hear from Vasily Karasov with Cannonball. Vasily, do you want to go ahead and turn your video for us? Vasily, would you like to go ahead and unmute and ask your question? We are not getting any response from the Sealy, so we can go ahead and move on to David Karanovsky with JPMorgan.

Speaker 9

There we go. Hey, thanks. Adam, just wanted to see if you could update on whether you see any Expected privacy changes either on the iOS or Android side in the next, I don't know, call it 6 to 12 months that might impact your execution at all? Or from this point on, do you kind of expect just more incremental changes?

Speaker 1

Yes. I think we've constantly mentioned this. We think, of course, Privacy, both on the operating system level and amongst regulators, will continue to evolve. It's been something that's been evolving as we've operated this business for the last 5 to 7 years. We don't see anything in the 6 to 12 month term that you referenced that's going to be a material change to how we would be able to operate our business.

Speaker 1

And one thing that really has defined our company since we launched, we moved really fast. Our core engineering team is Strong, the culture of the company is to operate as a startup at all times. And so when it comes to these changes, we've always been able to adapt And operate within the boundaries of the guidelines. And that gives us a lot of confidence. No matter what we're faced in the future, We're going to be able to move faster than peers and we're going to be able to continuously improve what we're offering to the advertiser base we work with.

Speaker 5

Okay, great. Thank you.

Speaker 3

And our next question will come from Luke Mott with Wolfe Research.

Speaker 10

Hi. This is Luke Mott on for Josh Great. Thanks. Just a quick one here. Any update to the competitive dynamics and mediation With the launch of Axon 2.0, are you seeing any update there or progress or differences?

Speaker 1

Really in mediation, a couple of things are happening. We referenced this in a Prior call, we believe the majority of the mobile gaming market is on our MAX Mediation product. We've seen nothing changed there. The company is utilizing our toolset both on the mediation side and on our app discovery side are seeing better growth than peers in the market Because our products work so well and both sides really come together for the publishers that are utilizing our mediation. So not that we've seen a lot of change because we're already so much to the market, but continued strength amongst our publisher base.

Speaker 1

The other changes coming in mediation is Google Bidding. Google as a partner is a close partner of ours. We were a launch partner for their You Will Bidding product. Over the next few months, we expect that they'll shift entirely to in app bidding and away from more traditional methods. That will be a benefit to our Match product and should be a benefit for publishers and the trueness of that auction.

Speaker 1

And so we're excited as that scales up. That will be a big positive For our business, hopefully theirs and all of our partners.

Speaker 10

Great. Thanks. And I just had one quick follow-up here. In regards to world, just any update there and if you plan to continue maybe focusing on some of these areas outside of the core Continuing to invest in the further iteration of Axon.

Speaker 5

Thank

Speaker 1

you. Yes, totally. In my talk track, I referenced Expanding the technology that we just built Axon 2 over to Whirl and Array. And on the Whirl side, when we did the Whirl transaction, we were really excited about their the competency of their Team and really the relationships that they had with the media companies to be able to get to the connected TV landscape and go get inventory And be able to mediate and serve into that inventory, not dissimilar to how we were able to scale on mobile and the world team has been executing really strongly there. Now as we extend Axon 2 over to CTV, we think it's a really strong extension point for the advertisers that buy on our platform.

Speaker 1

And to be able to Sell performance media on television is something that people have talked about for years, but very few companies have been able to deliver any sort of solution there. And we do know that our Axon 2 offering is cutting edge and as potent as there is in performance marketing as far as the technology goes. So extending it to Connected TV could pose a very big growth channel for our business and that of our partners.

Speaker 10

Thank you.

Speaker 3

And we have time for one additional question from Omar DeSouki with BFA. I do believe he is audio only. Omar, if you can hear me, please go ahead with your question. And Omar, again, if you are We see that you're unmuted, but if you're on a phone, please make sure that's unmuted as well. We can't hear you currently.

Speaker 3

All right, Omar, I'm giving you one more chance. If you can hear me, you're still muted. Go ahead and ask your question. All right. With no response from Omar, that does conclude our question and answer for this quarter.

Speaker 3

Adam and Harold, thank you so much. And to everyone who joined us today, we thank you all for joining us today. Have a great afternoon.

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