AppLovin Corporation (NASDAQ:APP) Q1 2024 Earnings Call Transcript

AppLovin Corporation (NASDAQ:APP) Q1 2024 Earnings Call Transcript May 8, 2024

AppLovin Corporation beats earnings expectations. Reported EPS is $0.678, expectations were $0.57. AppLovin Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

David Hsiao: Welcome everyone to the AppLovin Earnings Call for the First Quarter Ended March 31, 2024. I’m David Hsiao, Head of Investor Relations. Joining me today to discuss our results are Adam Foroughi, our Co-Founder, CEO and Chairperson; and Matt Stumpf, our CFO. Please note our SEC filings to date, as well as our shareholder letter and press release discussing our first quarter are available at investors.applovin.com. 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-K for the fiscal year ended December 31, 2023. Additional information may also be found in our quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2024, which will be filed on or before May 10, 2024. 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 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&A.

Adam Foroughi: Welcome, everyone and thank you for joining us. We’re thrilled to report another record quarter in Q1, continuing our pattern of delivering strong financial results. With AXON 2 turning one year old and achieving nearly a full recovery in our share price after a very difficult 2022, I wanted to reflect on some key themes that we’ve consistently stated and now actively proven out. We believe our culture is unique. By staying lean and retaining key contributors, we have built an exceptionally high performing team of subject matter experts capable of innovating faster and more effectively than those at other companies. We believe our business is not limited by the size of the mobile gaming market, but rather that our business can drive market growth.

Advertisers have increased their spend on our platform as a result of the improved performance from AXON. And now, we’re seeing the industry return to growth. We stated the operating leverage of our software platform business is as good as any technology company in the world. In one year, our quarterly software business revenue grew from $355 million to $678 million. Of this incremental $323 million of revenue, 84% or $273 million flowed through to adjusted EBITDA. Now, two more themes that are important to understand as our business goes forward. First, a key driver of our growth will be the ongoing improvements to AXON. Our models are still in an early stage and will continue to improve themselves, but more importantly, our teams are still finding ways to materially improve these algorithms.

While these gains may not be predictable, they may sometimes lead to quarters like Q1 where we far exceed expectations. Second, there is nothing that limits our models to just gaming. By expanding into web based marketing and e-commerce, we expect our AI models to improve with added demand diversity. As we continue to execute on the previously discussed themes, we expect to see further growth in our business. While our early days in the public markets were volatile since we started this company 12 years ago, our business has consistently remained strong and we hope over time, all of our shareholders and prospective investors will gain the same confidence in our business and vision that we have always had. I can promise you that we’ve never been more excited about our prospects.

With that, I’ll hand it off to Matt to run you through the financial highlights.

Matt Stumpf: Thanks, Adam, and good afternoon. I’m happy to share we had another quarter of exceptional financial results, generating total revenue of $1.06 billion and adjusted EBITDA of $549 million, which is a 52% margin. Our revenue grew nearly 50% from the same period last year, while adjusted EBITDA has doubled. During the first quarter, we generated $388 million in free cash flow, that’s an incredible 71% flow through from adjusted EBITDA. Our software platform also had another excellent quarter, with revenue of $678 million and adjusted EBITDA of $492 million, retaining our 73% margin and more than doubling our adjusted EBITDA from the same period last year. This represents a 71% flow through of revenue from the prior quarter.

While we remain diligent about cost discipline, we did have a slight step function increase in our cloud data center costs at the end of Q4 to reserve GPU capacity to support future growth. We saw the full impact of the cost increase during this quarter and expect future flow through to improve. Our business was reinforced by strong market conditions, including expansion in the mobile advertising market and continued adoption of real-time bidding. Our software platform also benefited from technology improvements, including ongoing self-learning, additional data and enhancements by our engineering team. We continue to be optimistic about our ability to drive compounding efficiencies, leading to improved performance for our advertising partners.

Our apps portfolio remained stable from last quarter, maintaining 15% adjusted EBITDA margin. Turning to our capital structure. During the quarter, we amended our term loans, capitalizing on favorable market conditions to further reduce interest expense, while at the same time amending our loans to include outstanding revolver borrowings previously used for share repurchases. Continuing our commitment to share management, in Q1, we repurchased and withheld a total of 14.9 million shares of our stock. Net of issuances during the quarter, we reduced our total shares outstanding by approximately 3%. Since we began our share management activities in early 2022, we have spent nearly $2.6 billion to repurchase and withhold a combined 79 million shares, that’s a remarkable 20% pro forma reduction in our total shares outstanding.

Turning to our second quarter guidance. We expect to deliver between $1.06 billion and $1.08 billion in revenue. Adjusted EBITDA is expected to be within the range of $550 million and $570 million, that represents an adjusted EBITDA margin between 52% and 53%. In conclusion, we continue to have confidence on our ability to drive growth from our core business, while we work to expand our long-term opportunities. Now with that, we’ll move on to Q&A.

See also Hidden Gems: Unveiling the 10 Stocks on Hedge Funds’ Radar and 12 Best Gig Economy Stocks To Buy.

Q&A Session

Operator: Thank you so much, Matt, and now, we will take your questions. [Operator Instructions] Our first question is going to come from Clark Lampen with BTIG. Clark, please go ahead.

Clark Lampen: Okay. Can you guys hear me, okay?

Adam Foroughi: We hear you, Clark.

Clark Lampen: Perfect. Okay. Adam, I’ve got two on software and app discovery. You mentioned in the prepared remarks that this quarter results exceeded your internal expectations. Is there anything specific that you might call out for us amongst the sort of key sources of outperformance? And then I guess sort of second and bigger picture, as we think about the trajectory for software and app discovery after a couple of quarters of really strong sequential revenue growth, I think there’s some concern percolating that once we anniversary the start of the AXON cycle that maybe growth starts to asymptote. Could you help us frame-up, I guess, current momentum and the runway that you see within both the core gaming market and new channels like e-commerce?

Adam Foroughi: Yeah. Thanks, Clark for the question. So on the first one, I touched on this in the script, but we’ve got a few growth vectors. One is going to be adding more advertisers both within gaming and then breaking out to these new verticals that we’re working on and quite excited about. Secondarily and more importantly, anytime we see improvements in our core models, we see gains in our business and there’s two forms of improvements. These models are self-learning. So, we’ve got them in the marketplace. We’re serving a ton of impressions every single day and there’s a feedback loop that gets this data back into the model and it improves itself. So, there’s a component of that, that’s why the system continues to get better since we launched it.

And the second piece is, our team obviously is still working every single day. So, every time our research science team creates some sort of innovation or breakthrough on those models, that ends up a step-function gain in the business because if you think about these models, it’s all math. And if the math gets more accurate, then we’re going to see a gain in the business and these are very high margin gains because there’s no costs associated with that gain. There’s no sales process to go bank that gain, it’s just a gain in the business. And so, I try to tie it back to the first quarter and performing really well against obviously the toughest quarter in advertising against Q4. This — the gain we saw in the first quarter was predominantly due to just enhancements to the models themselves.

And so, that’s going to be one of our core drivers going forward. Now to the question of the software growth slow, look, software is growing about 90%, 100% year-over-year and it’s a 73% margin business. So, we don’t need it to grow double every single year. It’s a net revenue reported business on the vast, vast majority of the revenue. So, every incremental dollar is very, very high margin. We’d love to be in the neighborhood of a 20%, 30% long-term grower for many years to come. In order to do that, how do we think about the business longer term, it’s the same building blocks that we just talked about. We’re going to get more advertisers in gaming that are buying on our platform because now at this point, our platform is the best channel for a mobile gaming customer to go buy advertising.

Now, if we’re the best in the world today at driving value to mobile gaming advertisers and there’s nothing that limits our technology from working outside gaming, how good could we be in other verticals. So, the vertical expansion is a key part of our focus. And then beyond that, we’re in the business of creating improvements to our technology. So, if you start adding all that up, how do we keep growing this business? There’s a lot of levers that we have to pull to be really excited and that’s why it ended with. We’ve never been more excited about the prospects we have in front of us than we are today.

Clark Lampen: Thank you.

Operator: And Ralph Schackart with William Blair has the next question.

Ralph Schackart: Good afternoon, Adam. Thanks for taking the question. Adam, you’ve been fairly consistent in saying that AXON 2 engine, works outside sort of the gaming vertical and you sort of touched on that in your last response. Can you maybe give an update sort of where you are in that sort of effort, outside of gaming? Do you need new sales force? Are you testing any results you could share? Sort of want to get a sense as sort of where you are in that effort. Thank you.

Adam Foroughi: Yeah. Thanks, Ralph. Good to see you. And a couple of things. One is, we look at the advertising world with apps and websites, right? Like, there’s two forms of media that people are buying to the end destination. And today in the app marketing world, we’re very good at gaming. We also work with non-gaming apps, and we’ve seen success once we rolled out AXON 2 across a variety of non-gaming companies growing on our platform too. And I think last call, we touched on that that the non-gaming app space is growing faster than the gaming app space on our platform just because it starts from a lower base. That success hasn’t changed. We still see the same trajectory. Now, what has us excited and what we’ve been working on is launching the first form of web advertising on our platform.

And if you think about a lot of transactional industries, e-commerce in particular, most of the transactions are still done on the website, not the mobile application because a lot of shops don’t even have a mobile application and so, that’s been work we’ve been doing. We will be bringing that product to market this quarter, and it’s something we’re very, very excited about as a way to really build out a lot more demand density into our platform.

Ralph Schackart: Great. Thanks, Adam

Operator: Moving on to Jason Bazinet with Citi.

Jason Bazinet: I’m afraid to ask this question because you guys are doing so well. But would you mind just giving us an update on your sales process? I remember several years ago, you sort of made fun of yourself because you didn’t really have a sales force and didn’t think about it. And I’m just trying to get a sense, you haven’t talked about it as a vector, but is all of this growth we’re seeing a function of sales and the technology or is it just purely the technology and it’s sort of selling itself based on the return to customer?

Adam Foroughi: So, like, since day one, I know that I’m not a very good seller and it was something that we really focus on being product first at the company. We believe if we build great products and we innovate well that if the advertisers are seeing success on our platform, they’re going to tell their peers and their peers are going to come to our platform and this thing could self-sell itself. And we’ve seen that happen in mobile gaming as AXON 2 continues to perform well. A lot of the mobile gaming customers who either hadn’t heard of us or had chosen not to work with us have adopted our platform over the last year. So, we haven’t ramped up sales to go get those relationships. And a lot of those relationships are still in an earlier stage than some of the companies that have been on our platform for years.

So, that will contribute to growth in the gaming vertical over time. When we look at outside of gaming, we’re still — we have no interest in getting into brand advertising. So, everything is performance based. We fundamentally want to play — replay the same playbook where we’re not going to invest heavily in sales now, and some of these transactional categories outside gaming, you do need some presence, some marketing, some sales, but it’s not going to be a heavy investment. And we do believe that if we’re able to go drive the same result where, for instance, in e-commerce, the shops seek a lot of benefit from marketing on our platform and they can measure the result and they see a stronger result on our platform as some of the other channels they buy on, there’s going to be a lot of interest because these other transactionally charged categories desperately need more marketing available to them as those industries are struggling to grow themselves.

Operator: Thanks, Jason. Omar Dessouky has the next question. And just to let you both know he’s on audio only, so you won’t see him.

Omar Dessouky: Hey, thanks. I had a couple of questions about header bidding, aka real-time bidding. I guess those are the same term. What is the quarterly revenue run-rate trajectory for the rest of this year, for that? I think you guys said that you collect a 5% fee on header bidding into MAX supply. I was wondering where that stood and how that’s going to move going forward?

Adam Foroughi: Yeah. So Omar, we don’t disclose that level of detail, the revenue for specifically the MAX business or for header bidding. But we have continued to see that trend that we’ve been talking about historically, the trend of people shifting over to header bidding with an acceleration in Q1. So, we’re continuing to see that positive trend.

Omar Dessouky: Okay. It’s been — I’ve heard that Unity will be bidding into AppLovin and MAX Supply and I was wondering, if you could maybe describe the strategic implications or importance of that to you, right, because they’re viewed as a competitor. Is there any new data that you’ll be getting about your primary competitor as a result of this and why does it take so long for this to happen?

Adam Foroughi: Yeah. So, a bunch of questions embedded in there. But for one, let’s just start with the market. The vast, vast majority of the market bids today, 80% plus. So, the transition that was a multi-year effort to get market to go from traditional ad-tech in mobile app to go to real-time format is nearly complete at this point. Two, MAX is by far the largest mediation solution in mobile gaming. We’ve touched on this in the past and it continues to be a very strong platform. So, as a marketplace, third parties want to buy on our platform in a real-time format. It’s just more efficient. And when any company ends up buying on our platform, they’re an advertising solution that’s competitive with us. And so, I wouldn’t call any one company a primary competitor, we’re all friendly competitors.

And we’ve also talked about what drives this market in particular that’s quite unique to other markets is there’s no zero-sum in this ecosystem. If the whole market is buying efficiently and the publishers are making more, the publishers reinvest more in the user acquisition, the pie grows and all of us advertising companies are hopefully benefiting from that. The last point to make, and I think there’s a misunderstanding in the marketplace on this, we don’t have some sort of data advantage with any of the companies that are buying into our platform. We’re very secure about data. Our partners can audit us when it comes to our data practices. The data that we have available to us is the same data that any bidder on our platform gets available to them.

And so therefore, there isn’t some data advantage from Unity or anyone else buying on our platform. It’s a completely fair, transparent and clean auction and it provides a huge benefit to the publisher. And for us, it’s been a very good product that we have in market and is continuing to do well.

Omar Dessouky: Do you have time for one — just one quick one. I didn’t see net revenue for install growth — or install growth on your letter. Could you update us on that and give us any kind of the puts and takes around that?

Matt Stumpf: Yeah. So, the numbers will be disclosed within our 10-Q, Omar, so you can see all the actual figures there, but similar to prior quarters, we’ve had an increase in both the net revenue per install as well as the volume of installations and that’s through the continued improvement of AXON that we’ve been talking about. As the technology continues to improve, we should see both the growth in the amount of money that we’re making per installation and volume of install as we see more advertisers increasing their spend.

Omar Dessouky: Thanks a lot, guys.

Operator: And we will now hear from Tim Nollen with Macquarie.

Tim Nollen: Hi, guys. Thanks for taking the question. I’d like to pull a few strings together from what we’ve been hearing already. And I’d like to ask about going beyond mobile gaming base of advertising. You answered the question about having access to, sales force and accessing other verticals. And you’ve spoken in the last couple of quarters about expanding your Wurl business into bringing some more demand into CTV. So, can I sort of combine these into a question to ask, why does that need to be focused on performance based advertisers and not brand advertisers? I mean, I understand the difference, but if you’ve got an expanded advertising base, more verticals moving into connected TV, I’m just wondering, if you could update us on what you’re doing with Wurl and why you couldn’t become more of a competitor in that CTV ad-buying space?

Adam Foroughi: Yeah. So, Wurl to us is just added eyeballs. It’s added supply CTV channel versus the mobile app ecosystem we touched on, we have over 1 billion daily actives in the mobile app ecosystem. We’ve got a lot of access to eyeballs, but 5 hours a day of TV watching is inaccessible if we don’t get to an SSP that sits in connected TV. So, that was the idea with Wurl is bring a lot of supply online. Now, it’s our job to go monetize it. We’ve never wavered from being focused on performance advertising at the company in a couple of reasons. One, again, I didn’t want to build out a sales force. And if you’re selling someone to buy a brand-advertised spent dollar, you have to really convince them that that dollar is well spent.

There’s no data that backs it up. The attribution is murky at best. And so, you have to have a salesperson that convinces the other side that dollar spent was well spent. Our model is the advertisers spent a dollar and everything is measurable, it’s all closed-loop, it’s real-time reported and they know if they spend a dollar and they made more than a dollar, they’re buying as an arbitrage marketer and there’s not a whole lot of selling to do in the middle there. If you have someone spend a dollar and earn two, they will spend that dollar as many times a day as you will spend it on their behalf. And so, all of our algorithms, our entire system is predicated on that concept. And what’s powerful about that concept is, when we can create lifts in our business, as you’ve seen over the last year and I touched on the incredible flow-through of this business that we’ve consistently set as a theme in our business model.

We don’t have to go convince advertisers to spend more. They will automatically spend more. So, our constraint is just how many dollars can our systems accurately on their behalf place in the universe. To create growth, the systems have to improve, which we’ve shown can drive a lot of growth and we have to go access more eyeballs. And that’s the goal around the world. We do think in connected TV advertising, as we get into e-commerce and prove an efficient model for shops to advertise on our platform, that will extend very naturally to the e-commerce yet to the CTV landscape because the shopping ad could be very beneficial for consumers in that media.