AppLovin Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 7, 2024

There are 12 speakers on the call.

Operator

Welcome to the AppLovin earnings call for the Q2 ended June 30, 2024. I'm David Shao, Head of Investor Relations. Joining me today to discuss our results are Adam Fruge, our Co Founder, CEO and Chairperson and Matt Stump, our CFO. Please note, our SEC filings to date as well as our shareholder letter and press release discussing our Q2 are available at investors. Appleven.com.

Operator

During today's call, we will be making forward looking statements regarding our products and services, market expectations, the expected 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 Q1 ended March 31, 2024. Additional information may also be found on our quarterly report and Form 10 Q for the fiscal quarter ended June 30, 2024, which will be filed later today.

Operator

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

Speaker 1

Welcome, everyone, and thank you for joining us. We had another strong quarter in Q2. Our software business had 5% revenue growth quarter over quarter because our models continue to improve. As you'll recall in Q1, we had a big step up in growth, so continuing that trend to continue to grow quarter over quarter is a really promising sign. As we've stated in previous earnings calls, if we keep growing the software business, the flow through to EBITDA and cash is very high and our business margins and cash conversion will continue to improve.

Speaker 1

We've also consistently said that the slower growth market we're in, mobile gaming doesn't constrain our opportunity to grow our software business. We've noticed that at times this concept has needed a little bit more explaining for our shareholders and prospective investors, so I wanted to take the time to do that here. Our platform is entirely performance based. In other words, gaming advertisers who market on our platform generate a measurable revenue and profit from the dollars they spend on our platform. Our customers run marketing campaigns with target return goals, but tend to have a much higher appetite for spend on our platform than we can deliver today.

Speaker 1

And why can't we deliver more today? Because our current system can only find a limited number of users who will meet their revenue goals. As our technology improves, we will continue to find more users who achieve these goals, increasing advertiser spend, resulting in materially higher growth than the growth rate of the mobile gaming market. Last quarter, I talked about a goal of growing our software business 20% to 30% for the long term. I typically don't communicate externally about our goals if I don't have confidence in it.

Speaker 1

I'm communicating it now because I do have strong confidence in it and I see many years of growth ahead of us. Here are the primary drivers of that growth goal: continued improvement from our models as they learn from more data. As our models gather more data, they'll become more accurate and find more good users for our advertisers. Gains that our team delivers to the efficacy of our models through enhancements. Our research science and core engineering team members are exceptionally talented and consistently deliver lifts to the performance of our models.

Speaker 1

Demand expansion into new verticals. We just launched the 1st web advertising campaigns for shops this quarter. And while in pilot right now, we think it will unlock a lot of demand expansion opportunities for us. And then supply expansion, as we broaden out our demand base outside of gaming, we expect the new categories will really help grow our CTV footprint. We continue to be very excited about our prospects and the performance our team is able to deliver.

Speaker 1

We will work tirelessly to achieve the goals we set and hope that over the next many quarters years together you will have a better sense of how an AI driven marketing platform creates growth opportunities that just weren't possible in advertising before because technologies were not this sophisticated. With that, I'll hand it off to Matt to run you through the financial highlights. Thanks, Adam, and good afternoon. I'm pleased to report we had another strong quarter, with total revenue reaching $1,080,000,000

Speaker 2

and adjusted EBITDA of $601,000,000 achieving a 56% adjusted EBITDA margin. This marks a 44% increase in revenue and an 80% increase in adjusted EBITDA from the same period last year, translating to an impressive 81% flow through from revenue to adjusted adjusted EBITDA. In the Q1, we generated $446,000,000 in free cash flow, which is a 74% flow through from adjusted EBITDA. Quarter over quarter, our free cash flow grew 15% compared to 10% growth in adjusted EBITDA over the same period as we benefited from a relatively stable base of cash tax and interest. During the quarter, improvement in our Axon technology, driven by ongoing self learning, contributed to further growth of our software platform, which generated $711,000,000 in revenue

Speaker 3

and $520,000,000

Speaker 2

in adjusted EBITDA, retaining our 73% margin and growing 91% from the same period last year. This represents an 87% flow through of revenue from the prior quarter, illustrating our ability to remain disciplined with our costs, growing revenue while remaining lean and efficient. Our apps revenue for the quarter was $369,000,000 an increase of 7% from last year, with $81,000,000 in adjusted EBITDA, representing a 22% margin. During the quarter, we readjusted our user acquisition return goals, resulting in an 11% quarter over quarter decrease in total app segment costs, while revenue decreased by 3%. We expect our future margin profile to normalize to approximately 15% over the long term, consistent with industry standards.

Speaker 2

Looking ahead to capital allocation, we plan to focus on 3 key areas. 1st, investment in organic growth initiatives, specifically our engineering and business development headcount to support the development of our Axlon technology and expansion into e commerce. We do not expect significant capital investment here since we plan to expand our teams in a very lean and targeted manner. 2nd, continued share management activities with a combination of withhold to cover on future share vesting and strategic repurchases and third, strengthening of our balance sheet to enhance operational flexibility and liquidity while reducing net debt. In Q2, we used $356,000,000 to withhold 4,200,000 shares, allocating about 80% of our free cash flow in the quarter to share management.

Speaker 2

Since 2022, we have invested nearly $3,000,000,000 to repurchase and withhold a combined 83,600,000 shares. Finally, in the Q3 of 2024, we anticipate to deliver between 1.115 $1,135,000,000 in revenue, with adjusted EBITDA between $630,000,000 $650,000,000 targeting an adjusted EBITDA margin of 57%. Now with that, let's move to Q and A.

Speaker 4

Thank you so much, Matt. And again, like Matt mentioned, we will now take your questions. Our first question is going to come from Jason Mezzanine with Citi. Jason, please go ahead with your question. And go ahead and turn on your video as well if you wouldn't mind, Jason.

Speaker 4

Alright, Jason, I see that you're out there. Go ahead, unmute yourself and turn on your video.

Speaker 5

Well, it says the host won't let me do my video, so I can't do that part.

Speaker 4

Got it. All right. You can do it now.

Speaker 5

Sorry about that, Jason. That's

Speaker 4

my fault.

Speaker 5

I just had a quick question on some of the initiatives you guys are pursuing outside of gaming. I know it's still a little bit early, but and you said some of these products were in beta. But can you just sort of refresh us on sort of what your ambitions are and anything that you've learned so far? And when you think it might be sort of something that is large enough where the Street could care about it? Is it a 25, a 26 event, just some sort of dimensionalization of the timing?

Speaker 5

Thanks.

Speaker 1

Yes, good to see you, Jason. In the quarter, Q2, we launched pilot of our web advertising program. This allows let's talk about e commerce first. This allows an e commerce shop that has a website to buy on our in app inventory the 1,000,000,000 plus daily active users we see in mobile gaming, a video advertisement and route that user to their shop and purchase that user in the same way that mobile game companies like purchasing users on our platform. So doing it on a performance basis and then we're delivering them measurable revenue and results.

Speaker 1

This is brand new. I'd say it's been in pilot for a few months now. Results are looking really promising, materially better than what we would have expected this early in our progression in trying to get into web advertising. So this product we think is something that we're going to invest heavily behind, start scaling out and hopefully will show a material impact in 2025 and beyond. And it is not limited to just e commerce.

Speaker 1

It opens the door to advertising for any website of any type that wants to drive transactions that are measurable on a performance basis on our platform.

Speaker 5

Thank you very much. Thanks. Our

Speaker 4

next question will come from Eric my apologies, Clark Lampkin with BTIG. Please go ahead, Clark.

Speaker 6

Hey, guys. Good afternoon. Hopefully, you can see and hear me.

Speaker 3

Good afternoon.

Speaker 6

Perfect. So Adam, if we look at the Q3 guidance and we sort of assume that apps trends are relatively similar to what we saw last year, there's sort of an implied comp adjusted reacceleration in the software business. And I'm going to guess that it's going to be driven by that sort of first primary driver that you mentioned sort of model improvements and sort of the learnings that go on. But one, I guess I'm curious if you could give us a sense of what's actually driving acceleration against tougher comps now. And then maybe what that sort of pretends for the back half into 2025?

Speaker 1

Yes. I mean, like when we've talked about this growth goal, if you just think about the growth goal in terms of mobile gaming and the business that we have today, we just grew 5% quarter over quarter as the numbers are getting pretty big. Q1 was materially more, it was in the teens quarter over quarter. We've always talked about like the model is going to continue to improve itself and pick up a few points of growth every single quarter just from that enhancement. But then the team is also trying to apply enhancements on top.

Speaker 1

When we get lifts from the team, those can be step function. Like we saw in Q1, you wouldn't expect Q1 having double digit growth over Q4. And so we're seeing really good trends in Q3. The business is still very strong. We've got a lot of momentum with our customers.

Speaker 1

They continue to see us as really the main channel now in mobile gaming advertising. And around and behind that, we're also now seeing exciting trends in what we just talked about, the web advertising category. So we've got a lot of optimism going into the next quarter.

Speaker 6

Okay. And if I could, Matt, year to date, you've repurchased around $1,100,000,000 of stock. The guidance implies both an uptick in margins and higher incrementals if we take sort of apps margins at 15%, I think as you just said. How do you think about, I guess, as the free cash flow profile of the business is improving, maybe being a little bit more tactical with the buyback in periods where there is a bigger dislocation between the market price and then what you guys view as intrinsic value? Thanks a lot.

Speaker 2

Yes. Sure, Clark. So our plan currently is to continue kind of the historical trend of continuing to manage our shares through withhold a cover on shares that are vesting each quarter. And then on a supplemental repurchases in addition to the quarterly vesting.

Speaker 4

Thanks, Clark. And we'll move on to James Heaney with Jefferies.

Speaker 7

Great. Hey, guys, and thanks for taking the questions. Could you just talk more about the 20% to 30% long term software platform growth that you referenced. And I'm curious just how dependent that goal is on verticals beyond gaming? And then I just had one more follow-up.

Speaker 1

Yes. We don't think it's very dependent outside of gaming at all. You've got a mobile gaming category. It's got a few percentage points of growth a year now. So let's call that low single digits.

Speaker 1

You've got a business that as these models continue to improve from gathering more data, we think that's an extra 3%, 4% a quarter as well. So that sort of gets you to the low end. And then we've got a team that's constantly working on improving the models and any improvement that's actually developer driven enhancement to the models that makes them more accurate, then steps you up into the higher end of that range. And so we've got a lot of confidence in the growth goal we put out there just on a baseline basis, the current business. Now we do sit on a 1,000,000,000 plus daily active users.

Speaker 1

We've got one of the most sophisticated advertising platforms in the world and we're driving 1,000,000,000 of dollars of performance value in gaming. There's nothing about the technology we have that would disallow it from going outside of just mobile gaming and we're already seeing positive trends in that pilot. So as we start putting these pieces together and broaden out our platform over time, we're really excited about how big the numbers could become.

Speaker 7

Great. And then just one more follow-up on the just the overall health of the mobile gaming market. I think you've in the past talked about 3% to 4% industry growth. So curious if you're seeing any change in those trends?

Speaker 1

No. And we're not seeing any change in the aggregate, but you also have to remember our market is a little bit different. We're driven a large part by advertising based applications growing audience, So that 1,000,000,000 plus daily active users are inside of apps that run advertisements. You monetize those apps partially with games that generate purchases, partially with games that generate purchases and advertising. And so that number isn't documented anywhere, but we're seeing the overall IAP market, everyone can look at industry reports and see it growing low single digits.

Speaker 1

We're also seeing the advertising supported market grow faster than that.

Speaker 7

Great. Thank you.

Speaker 4

We will now hear from Omar Dusukhi with BofA. And Adam and Matt, just to let you know, he is on audio only.

Speaker 8

Great. Hey, Omar.

Speaker 3

Hey, guys. I'm on audio only. Thanks. So, look, I'm just looking at your Q3 guidance, if I were to back out the apps business, I kind of get a number that's sort of 50% year on year in the Q3, which is still pretty far off from the 20% to 30% long term growth that you talked about. So I think myself and a lot of people would kind of want to know like what is potentially that trajectory going from software business of maybe 50% year over year next quarter eventually to that 20%, 30%.

Speaker 3

Do you have any visibility into the 1st couple of quarters of 2025 yet that you're able to share with us?

Speaker 1

So we don't provide long term guidance. Obviously, we're only looking at a quarter ahead. As Clark touched on, you can sort of deduce where that software business we're guiding to on the upcoming quarter. It's still if you start adding up the quarters to get into 20%, 30%, you want to see 5%, 6%, 7% quarter over quarter growth. We think we can be confidently in those ranges for quite some time.

Speaker 1

We see a lot of opportunity to grow. Now that removes any opportunity for step function gains and model enhancements driven by the team. That also does not include really any sort of thought given to what new categories are going to contribute to our business long term because frankly, again, they're in pilot. So we're not backing those numbers into longer term views on the business. So think we're going to be in a place where this business is going to be steady, it's going to be growing at a very nice rate, the conversion to cash flow is only going to improve and we've got a lot of other exciting things that are going on that give us confidence that we could even be above those ranges.

Speaker 3

Okay. Can I just ask you another quick question? So in terms of the opportunity for in app advertising, some of the checks that I did suggest that there were some improvements there. So I think the in app purchase market is somewhere around $100,000,000,000 the in app advertising market a lot smaller, somewhere maybe between 2030 is my estimate. Does your technology really drive advertising revenues for publishers as well and potentially turn that into a growth market and could that make a major difference in your software business?

Speaker 1

Yes, also look that market already is growing much faster than the in app purchasing market because it's just at a smaller base. We're also the Max platform we touched on in the past, the majority of the mobile gaming in app advertising market is running through that Max auction. That Max auction has gone from the inefficient world of waterfall to programmatic bidding. Vast, vast majority of the auction is now in a bidding state and so it's continuously gotten more efficient. Our advertising has also gotten a lot more efficient.

Speaker 1

So as you've seen, our business doubled in the last year, there's 1,000,000,000 of dollars of more investment happening from mobile gaming companies in user acquisition and user discovery. Some part of that is in app advertising advertisers and that's helped be a catalyst to re growing this industry as a whole in app purchasing, but some portion of that also are these publishers that are buying more users now because our systems are more effective for advertising based applications. And so all of this stuff is intertangled together, and we're one of the main catalysts of growth in this category because our scale is so large inside this category on both fronts. Understood. Thank you very much.

Speaker 4

Vasily Karasyov with Cannonball has the next question and is also audio only.

Speaker 9

Yes, apologies for that. Good afternoon. Adam, I think on the previous call, you mentioned that the big publishers started spending with you. And before that, they were not because they see you they saw you as a competitor. So I was wondering how the trend continued this quarter.

Speaker 9

Do you still see them coming in bigger, bigger buckets? And then does that open up a significant corner of the market that you sort of could not address before? Would appreciate your thoughts here. Thank you.

Speaker 1

Yes. I mean, look, like at this level of scale with how big the software business is, have you backed out total advertiser dollars that you think are in our platform, it's in the many 1,000,000,000 of dollars. So we've always worked with some of the very large publishers like we usually have had pretty deep penetration in mobile gaming, but there are some very well known large publishers that did look at us as a competitor. At this point, our platform is so successful in mobile gaming, it's very, very hard for any publisher to look the other way. And so we've gotten a lot more adoption across even those publishers.

Speaker 1

There isn't really a customer that I know of in mobile gaming that does not find success and scalable success on our platform at this point today.

Speaker 9

Okay. Thank you.

Speaker 4

Moving on to Mohammad Khalaf with HSBC. Mohammad, do you want to turn your video on? Mohammed, if you can hear me, go ahead and unmute yourself so we can at least hear you to ask a question. All right. Well, hearing no response, we'll move on to Matt Koss with Morgan Stanley.

Speaker 8

Great. Hi, guys. Thanks for taking the question.

Speaker 7

I guess, when I think about

Speaker 8

as I understand it today because of the AppLovin exchange, which should allow people like Google or Trade Desk to access the inventory on Macs to run e commerce ads today, that should be possible, but it doesn't seem like it's a very big business today. So I guess what are the impediments to running e commerce advertising in an in game or in app environment that are preventing others from doing it already since I believe it should be possible? And then how are you solving those problems or aiming to solve them with your

Speaker 3

e commerce product? Thank you.

Speaker 1

Look, we can't speak to other people's technologies or things that prohibit them from being able to get categories to work in gaming, but Tradest products are nothing like ours. When it comes to succeeding on behalf of advertisers in any category, we want our models to be able to drive measurable revenue. So you've got to have an attribution framework, you've got to have models that can predict revenue and match the user up with the advertiser and you've got to make it all work together. We're in pilot with this product right now. It's looking quite promising.

Speaker 1

And so we think it's something that we're going to be able to build on and build on very aggressively as we go forward.

Speaker 8

And just to follow-up on that, I guess from a data perspective, is it just a matter of iterating on it? I mean, because obviously you have so much data specifically relevant to kind of like the game advertising products being done historically. Is that applicable directly to e commerce advertising or other verticals? Or is it about iterating and kind of building a new data set?

Speaker 1

I think it's a combination of both. I mean, we process tens of 1,000,000,000 of dollars of transactional volume already and we see a $1,000,000,000 plus daily active. So, our platform is not small at this point and that data is able to be used across anything. These are human beings, not just mobile gamers, and the audience skews female and middle aged. And so it's completely different than what people would assume a gaming audience is at a very, very large scale, directly applicable to e commerce is something that we've always hypothesized as possible.

Speaker 1

The models in Axon 2 are so much more sophisticated than technologies we've had in the past that they should enable success there. Now we're in pilot and we're seeing success there. So we're at the point now where we know we put the pieces in place and now it's more of a go to market problem and less of a technology problem.

Speaker 9

Great. Thank you.

Speaker 4

Arsenji Matovic with Wolfe has the next question.

Speaker 10

Hi. Thanks for taking my question. So looking at App Discovery installations growing 77% on a tough comp and revenue per installation accelerating versus last quarter. I guess just is there any strength in installations from non gaming? I know it's small revenue base today, but in terms of app discovery installations, is it a more material portion of that growth?

Speaker 10

And then just aside from that, any types of could you go into a little bit more detail on how you're still seeing that strong strength in installations and revenue per installation? Then just a follow-up on the apps business. Thanks.

Speaker 2

Yes, sure. Sure, Arsenij. So the non gaming continues to grow, but it's still a relatively small portion of the overall installations when you look at the overall software business. So to Adam's previous comments, like it's still a relatively small portion of the existing business and it's still kind of in pilot mode there. So we continue to see kind of promising results, but it's really not needle moving today.

Speaker 10

Got it. And then just on apps, despite the dip in monthly active payers, you saw, I think, when you back it out in app advertising basically flat sequentially. Is this a function of the strength from Exxon 2? And also on apps, do you plan on exploring any divestiture studios? Some people earlier that they were talking about wanting to add more studios.

Speaker 10

Does that would that support some of your capital allocation plans in the medium term? Thanks.

Speaker 8

I mean, like we've said in the

Speaker 2

past about M and A and divesting the apps businesses, we continue to be open to it and we're really just waiting for the market to improve. And we've been optimizing the apps studios over the last year. So you can see that as well right in this quarter where we've adjusted the return goals for our UA spend. We're decreasing cost pretty materially and increasing our margin profile. So we'll continue to maximize those businesses for profit and we'll be open to transactions in the future.

Speaker 10

Thank you.

Speaker 4

We have time for one additional question from Martin Yang with OpCo. Sorry about that Martin.

Speaker 11

Thank you for taking my question. I want to dig a little deeper into your confidence on that 35% constant improvement on a sequential basis. What gave you that type of confidence? Because I look at the underlying market and your customer behavior, it's a very dynamic market for mobile gaming with new game launches, certain games performing worse or better and customers are doing all sorts of things. So what is constant in that type of market that gave you the confidence that your improvement can be pretty consistent on a quarterly basis?

Speaker 1

I think you said 35% sequential quarter over quarter.

Speaker 11

What was that? 3% to 5%. 3% to 5%.

Speaker 1

So there's 2 components, right? Like one is the market growth, which we can all say is low single digits. One is just models getting better every single quarter because they see more data and they get more accurate. And that's these models by definition, this is how they work. And so we see that in real time, the models continue to get more accurate.

Speaker 1

Now, our advertisers, and I said this in my talk track, our advertisers will spend much more today on our platform that we can deliver to them. The limitation is how many users can the models match up on across every single one of those advertisers at those revenue goals. If the models get better, they're able to process more data and find more users for those advertisers. So the spend will go up naturally. And it's not that these advertisers are adding more budget.

Speaker 1

It's not that they're saying we want to buy users at a more expensive cost to them, by definition lowering their goals. It's that the models get better, all else stays equal and these advertisers grow on our platform. And so we're seeing that in real time. And there is a very, very large appetite for incremental spend on our platform because we deliver profits to these advertisers. They're arbitrage marketing on us.

Speaker 1

They're buying at a profit and so they will spend a lot more if our models can do it. And so those two things can build out a very good sustainable growth rate inside the mobile gaming category. And then the 3rd piece is, if you end up having a lift to the form of technology that you're using, you materially enhance that technology. And in the past, I've used like chat GPT 3.5, 4. These are incremental changes that are step functions in these types of technologies and I use that as an analogy because people understand it.

Speaker 1

But in our world, we're constantly making enhancements to the technology. When there is a lift to the technology, that could be a step function in growth for the same reason because these advertisers will spend more and it can make our models more accurate at larger scale on behalf of them. So hopefully that answers for you, Martin.

Speaker 11

Yes. A quick follow-up. So are you saying that the key inputs to your own model improvement is primarily volume driven or the volume data driven?

Speaker 1

Yes, I mean, look, we're a very, very large scale, right? So that data creates a moat. And the more data our models process, the better they're going to get. So every single quarter we launched this system, we just went and lapped the 1 year anniversary, right. So it's been in the market now for a year plus.

Speaker 1

Every month has been bigger than the prior month. So we get more data, processes more data. With those incremental data points, the math gets stronger, the model gets stronger, and can drive more value. And so we've seen that consistently. These AI technologies are very, very new.

Speaker 1

So it's not like in the world we have 10 years of history to look back on and go, when do these models stop improving themselves? They currently are doing that today. That's by nature. That's how this AI technology works, processes immense amounts of data and through that the math gets stronger and more accurate and more predictive. And so we're seeing that in real time and that gives us confidence that this core underlying technology is going to continue to grow over time.

Speaker 11

Got it. You talked about matching. Is there a sense you can give us on how accurately are you matching the users to the apps now and how much more accurate you can be in the future?

Speaker 1

Yes. I mean, look, we're very, very accurate today. When an advertiser says, I want to break even in 30 days on our platform, we achieve that goal for them. When I say increasing the match rate, it means, let's say that advertiser says, I want to spend $1,000 today and I want to get the $1,000 back in 30 days and we get that within a percent of inaccuracy. So they get whether it's $9.90 or $10.10 back in 30 days.

Speaker 1

We have a limit of $1,000 that they can spend today, though the system can only deliver that much with a very low error rate for them. Now let's say tomorrow the system processes more data or a team makes an enhancement and now the system can deliver $2,000 at that same 30 day breakeven. The advertiser is going to say, I got the $2,000 ready to go. You're breaking even in 30 days. I'll put it on my credit card.

Speaker 1

Well, they have unlimited tolerance to spend if all else remains equal. And as our technology continues to improve, that business will continue to grow.

Speaker 11

Thank you.

Speaker 4

Well, this concludes our question and answer session and today's webinar. We thank you all for your participation and we look forward to seeing you all next quarter. You may now disconnect. Enjoy your summer.

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