AppLovin Corp Q3 FY2021 Earnings Call

Greetings and welcome to the AppLovin Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ryan Gee, Head of Investor Relations and Strategic Finance for AppLovin. Thank you. Mr. Gee, you may begin.

Thank you, Jason and welcome everyone to AppLovin’s earnings call for the quarter ended September 30th, 2021. Joining me today to discuss our results are Co-Founder, CEO and Chairperson, Adam Foroughi; and our President and Chief Financial Officer, Herald Chen. Please note that our SEC filings, earnings release, and Shareholder Letter discussing our 3Q performance are available at investors.applovin.com. During today's call, we may be making forward-looking statements regarding future events and the future financial performance of the company. These statements are based on assumptions and beliefs and we assume no obligation to update them. Actual results may differ materially from the results predicted. Please review the risk factors in our most recently filed Form 10-Q as well as elsewhere in our SEC filings for further clarification. We will also be discussing non-GAAP financial measures. Reconciliations of our GAAP and non-GAAP financial measures are included in our earnings press release, Shareholder Letter, and our 10-Q. Please be sure to review these reconciliations as non-GAAP measures are not intended to be a substitute for or superior to our GAAP results. Reminder this conference call is being recorded and replay will be available on our IR website shortly. With that, I will now turn it over to our CEO, Adam Foroughi.

Thanks Ryan. Our headline results and our Shareholder Letter outline our strong Q3 performance. So, I'm going to keep my comments brief to allow more time for Q&A. I want to emphasize three things that really speak to the platform we are building and how our differentiated model is driving our success. First, consider how fast we are growing. Our software platform revenue just grew 385% year-over-year to $193 million. Our growth has been accelerating for four quarters in a row now, largely organic. We quadruple our new specs and our net dollar base retention was 255%. Second, consider the massive opportunity still ahead of us. As the market absorbed IDFA changes, most advertising platforms saw modest sequential gains, yet our software business grew 32% quarter-over-quarter. We were growing fast before platform changes and continue to do so after, which is a testament to the strength of our team and our technologies. Our customers are performance-driven; that means our growth and our scale is a direct reflection of the strong performance of our integrated platform. Our exceptional growth rate is continued proof of the advantages created by our business model and machine learning platform, AXON. You may not realize it, but AXON is only a year old and we've seen rapid acceleration in customer performance and adoption. That's why we're so excited about our future. We think we have a path to grow our software business for over 30% year-over-year for many years to come. Now, there's clearly a lot of execution ahead, but just imagine what it would take for us to grow like that for the next decade. It would only take adding 20% more specs a year and growing a dollar per spec by 10% per year. Today, we have 280 specs on AppDiscovery and MAX accounting for $587,000 per quarter each of GAAP reported software revenue. The count of specs just grew 18% versus Q2, and our dollar per spec just grew 13% versus Q2. We brought on our salesforce for the first time. We have just begun selling our platform, AXON. Our performance is exceptional for our existing clients and we have a huge opportunity to attract new ones. It isn't hard to imagine us being a $10 billion software business in 10 years. And remember, all the incremental dollars are almost all margin. Lastly, consider the potential combination of MAX and MoPub. MAX is already one of the largest and fastest growing ad exchanges powering around $5 billion in media spend. A year ago, 10,000 apps were using MAX as a software platform to manage their ad monetization. As of the end of Q3, that number is almost 30,000 and growing rapidly. We believe our unified platform should surpass $15 billion in advertiser spend across all industry bidders entering 2023. This would make our exchange one of the largest advertising ecosystems in the world. With that, I'll hand it off to Herald to walk you through our financial details.

Thank you, Adam, and thank you to everyone for being here today. As you heard from Adam, we are very pleased with our business performance this quarter, building on the strong momentum we experienced in the first half of the year. We believe we are well-positioned for growth in the fourth quarter and beyond. In Q3, we achieved a year-over-year total revenue growth of 90% and more than doubled our EBITDA. We maintained EBITDA margins of 26% and recorded another figure that remains well below three digits. As Adam mentioned, our software performance was outstanding, and I want to emphasize some additional details found in our Shareholder Letter. Even when excluding Adjust, software platform revenue quadrupled compared to last year and grew organically by 316%. This success is due to the effectiveness of our software solutions, which is evident in the increased number of specifications and the higher take rates we're achieving from each of those specifications. Software now accounts for 27% of our total revenue, and as our software continues to grow, it enhances our margins and cash flow, allowing for reinvestment in our business. On the app side, our portfolio grew by 56% year-over-year, demonstrating robust performance, and our maps also increased quarter-over-quarter. This solid application performance helps us generate more scale of first-party data, which is essential for our AXON Machine Learning Engine that powers our software platform. The additional cash flow generated from software gives us the capacity to invest broadly in our business, including enhancements to studio development and investments in Q3 to support a strong lineup of upcoming titles. As Adam noted, we are experiencing positive tailwinds and are enthusiastic about our market expansion and strategic and financial position as we approach 2022. As mentioned in the second quarter, we anticipate software revenue to exceed $1 billion in fiscal 2022, representing over 60% year-over-year growth compared to our second-quarter target of $600 million. Additionally, with the pending acquisition of MoPub, we expect to see an incremental revenue run rate of $240 million to $260 million by the end of 2022, with minimal costs of about $40 million. We are currently awaiting regulatory approval to finalize the timing for that transaction. Before we take your questions, Adam and I are excited to announce that Alyssa Harvey Dawson has joined our Board of Directors. Alyssa is the Chief Legal Officer at Gusto, a modern HR software platform. Her extensive experience in technology and consumer sectors will greatly benefit our Board. We also want to share that our Board member Cathy Sun has transitioned to a full-time position at AppLovin this past summer to lead new initiatives. In light of her new role, she has stepped down from our Board at our most recent meeting. Now, I'll turn it over to Ryan to guide us through your questions.

We will now begin the question-and-answer session. Our first question comes from Youssef Squali from Truist Securities. Please go ahead.

Thank you very much, and congratulations, team. I have two quick questions. First, regarding the software platform revenues, which have shown explosive growth, how should we anticipate growth for the fourth quarter and fiscal 2022, especially since you recently marked the anniversary of the AXON launch in September? You've already celebrated reaching a $193 million run rate, and your $1 billion target for next year seems achievable. I'm curious if there is potential for upside on that, excluding Admob. Additionally, it appears that about half or perhaps 40 of the net ads came from Adjust, indicating strong interest in upselling those clients to your solution, while the other half were new clients, which aligns with what you achieved in the previous quarter, I believe in Q2. Is this the correct understanding and the cadence we should expect as we look ahead at growth in that segment? Thank you.

Thanks Youssef. Maybe I'll start and Adam you can add on and take in reverse order. Just in terms of the number of specs, we do break it out for you in the Shareholder Letter, we articulate that excluding Adjust, we have 280 specs on our AppLovin software, excluding Adjust, and in the second quarter, we had 237. So that run rate, you're right is about additional 40 excluding Adjust. Now, Adjust obviously gives us access to their salesforce; they're cross-selling our solutions, and ended on themselves by the way that the Adjust product for attribution is growing and adding spec count as well, that gets us to the total of 449. So, we're excited by that progress. We're excited by that salesforce. Ultimately, if we're able to close MoPub, that obviously brings a lot more bandwidth in terms of team as well as technology to sell as well. So, I think that's a good run rate for us to continue to execute against that 40-plus specs for AppLovin alone. It will start to get more confusing those as we do cross-sell, it'll be harder to determine. Was it really just a MoPub customer, as you know, we have over 8,000 customers on our platform, but only the 449, they're at the spec level today. So, there's a lot of existing customers that may not be viewed as new, but will become specs over time. And with your question regarding the software, we gave guidance in the second quarter on software for the first time; we don't intend to update that guidance today. But as Adam said, we're extremely excited by the quarter-over-quarter growth rate, where we had the 18% increase and 13% increase in price quantity respectively. And we think that momentum will continue as Adjust salesforce continues to ramp our technology, our machine learning engine continues to improve and with scale machine learning engines also improve. So, as we add on to the platform, there is a virtuous cycle to that improvement. And then hopefully with MoPub in 2022, sometime, we will be able to accelerate it from there. I think our plan would be to update guidance in general, including talking about our software number when we report the fourth quarter numbers early next year.

Got it. Thanks Herald.

The next question comes from Stephen Ju from Credit Suisse. Please go ahead.

Okay. Thank you. So, Adam, big picture. I think at last quarter's Shareholder Letter, you disclosed that you helped your clients install about 2 billion apps in the first half of the year. So, if we are on track to make that 4 billion installs for all of this year, on the audience that you have around like 2 billion people, that's like two installs per user per year, which seems like a lot of whitespace for you to run into. So, you talked a lot about that the dollar growth that you can drive, but talk about the pieces that are coming together for you to make a more efficient use of your ad impressions that you're showing now. So, we can think about taking the installs from maybe 4 billion this year to maybe 15 billion, 16 billion, 20 billion over some timeframe? Or if your growth is not going to be as volume-driven, like what can help you drive higher effective pricing over time? Thanks.

Thanks Stephen. And really this ties back to some of the stuff I was saying in the lead in, but we're really excited about the many-year outlook on the software business, because AXON is just a year old and it's really easy to forget that in our business. And machine learning platforms get much more precise over time as they accumulate more data and more opportunity. When we started the platform a year ago, we only had in the hundreds of specs. Now, we have 280. Imagine a machine learning software that had one; it couldn't personalize or matchmake very accurately in terms of what it was going to show a customer. Well, we have 280 customers that are spending a substantial amount with us and getting exceptional performance. So, what we're most excited about is bringing more customers online, which will give the platform the capacity to become more personalized in the offering, and then that'll drive up pricing because it'll also drive up competition. We think that can lead to an immense amount of growth over the next decade.

Thank you.

The next question comes from Tim Nollen from Macquarie. Please go ahead.

Thank you very much. I'd like to ask a question about MoPub. Could you elaborate on the scale benefits it provides? It seems obvious that scale is important, particularly in advertising, but could you give more insight into how it really supports you? Additionally, its growth rate appeared to be quite slow prior to your acquisition; how much can you influence its acceleration, and how might it contribute to your growth? Thank you.

Thanks Tim. MoPub itself as a platform has been in the market for about a decade. They built out a lot of tools. They catered to a much broader set of demand. Tools that are successful tools for agencies and brands to bring demand into the mobile marketplace, as well as a robust set of DSPs. Pretty much every DSP in mobile was working with our marketplace. When we launched MAX three years ago, we took a different approach and built a lightweight platform that was really automated and pure for the mobile game developer. And MAX has, we've noticed, has grown immensely. It's processing around $5 billion of advertising spent a year right now on the platform. What we didn't do was layer on this incremental functionality that would bring even more demand into the ecosystem. By bringing MoPub supply in, we'll expand the supply to get to a point of late next year, what we think is a target of over $15 billion of ad spend, which makes it one of the largest platforms in the world. When you have a platform that big, it attracts demand, and we'll be combining in the unified solution the MoPub products to go attract that demand over and we think once that happens, the whole platform will accelerate and grow.

Thanks. And does it expand you much beyond the gaming vertical into other sectors as well?

100%. MoPub works with both games and non-games. And a lot of these technologies and products that they built for a broader set of demand appealed to non-gaming just as much as gaming. So, we're going to go after the entire mobile app ecosystem with this integration and unified solution.

The next question comes from Alexia Quadrani from JPMorgan. Please go ahead.

Thank you. Adam, I wonder if you could just provide an update on how the IDFA changes impacted your software and content businesses through the quarter? And then maybe I'll do a follow-up on MoPub; I'm wondering if you could just talk to the integration of it, how you'll onboard their apps onto MAX and maybe speak to any risk of client attrition during that time? Thanks.

Yes, I'll go reverse order just so I can remember. MAX, in marketplace discussions and talking about a unified MAX MoPub platform, the reception has been exceptionally positive, both in terms of advertisers and publishers. MoPub itself, as part of Twitter, wasn't a focused product; it's been a long-term product that had a lot of retained customers for many years. But there hadn't been a lot of innovation and product investment the way we do when we're focused on a product that's core to our business. And so as we've spoken to the publishers, there's a lot of excitement about the possibility of bringing the two platforms together, and tapping into this immense scale and incremental demand, which we think will create more competition, more publisher yield, and more growth in the ecosystem for all parties that intersect with it. On the first question, the IDFA impact in the marketplace, as you saw in our numbers and a lot of advertising platforms, advertising quarter-over-quarter was mostly muted in terms of growth. So, there is loss in terms of targeting that's possible with IDFA going away, and publisher CPMs did diminish on iOS; that was offset on the publishing side with gains on Android as demand shifted over there. Now, our platform has an advantage in the marketplace because of our scaled first-party data that fuels our AXON machine learning system. And as prices came down and competition lessened, our platform stood stronger than others. And that's what allowed us to grow faster than others. That paired with the fact that we were already on a really fast growth trajectory because of AXON quarter-over-quarter for the last few quarters and that continues to accelerate led to the strong quarter.

Thank you.

The next question comes from Clark Lampen from BTIG. Please go ahead.

Hi, guys. Good evening. I wanted to ask a follow-up on IDFA relative to the last question. When we did some checks into the quarter, one of the biggest sort of points of friction that we sort of came up with as you and peers were seemingly gaining share was the idea that developers were somewhat limited in terms of budget deployment because of scale and reach. The MoPub deal seems to go a long way in sort of reducing that kind of friction. So, I'm curious if we should expect maybe share gains to increase or compound or maybe spending to increase or compound from here? And then separately on the consumer business, I wanted to see you guys just launched Bermuda Adventures at Belka, I wanted to see if you could give us an update on maybe what the pipeline looks like over the balance of this year and into next? And also whether there are specific games or studios where you're expecting to deliver new content that might help you recapture or grow the active player base? Thanks.

In response to the first question, to grow our business as rapidly as we have, we have leveraged technological enhancements, increased our customer base, and gained market share. We've successfully executed strategies across all these areas, which is necessary for the significant quarter-over-quarter growth we've experienced. Companies reliant on identity face greater losses when that identity is based on third-party data that can disappear. In contrast, our identity systems, datasets, and models are built on first-party data, leaving us in a strong position. We also started with a low number of enterprise clients, currently at 280, which presents a vast opportunity for growth given our size and pace of expansion. We've been executing well on all fronts. Changes to the IDFA have reduced market competition, and our business model offers advantages that will be challenging for competitors to replicate, allowing us to continue to gain momentum. The market represents a significant opportunity for us, with more customers expected to join our platform as we unify the MAX and MoPub supply. There are limited opportunities at the scale of $15 billion in ad spend flowing through a single access point, and our exchange will serve that purpose, making us optimistic about our future. Regarding our engagement in games and evergreen titles, which we previously mentioned, we are heavily investing in game development, especially organic game releases, which will be a key focus moving forward. For our software business's growth, data is crucial, particularly first-party data, and we intend to keep our content up-to-date. This past quarter, we launched three titles with reduced investment. An evergreen title is projected to achieve over $100 million in annual revenue and requires substantial development costs. We introduced three such titles this quarter: Ace Defender, Bermuda Farm, and Jackpot Master Slot, all of which we anticipate will reach the $100 million annual run rate within a year and will engage players long-term. As we invest in our team of approximately 3,000 creators worldwide, we will prioritize developing our own content and releasing it frequently to support growth in our app and generate fresh data to monetize through our successful software platform.

Thank you.

Our next question comes from David Pang from Stifel. Please go ahead.

Great. Thanks for the question, guys. Can you talk about the composition of new enterprise clients? Did you see an uptick of non-gaming clients in the quarter?

The new enterprise clients are primarily those who are increasing their spending on our platform and crossing the usage threshold. With around 250% net dollar retention, many of the 8,000 customers in our system will continue to exceed the threshold and expand, as our solution is performing exceptionally well for even the smaller clients. Instead of referring to it strictly as an Adjust cross-sell opportunity, I prefer to think of our salesforce as effectively onboarding new customers. Additionally, a noteworthy point is that our non-gaming customers grew nearly 100% from Q2 to Q3, making it our fastest-growing vertical. While we do not formally break this down yet due to its size relative to our total figures, it represents a significant growth opportunity. As we integrate the MoPub supply with our MAX supply to create scale across both gaming and non-gaming publishers, we believe the non-gaming category will become increasingly attractive. We've recently published a couple of case studies showcasing new non-gaming customers who have experienced substantial success on our platform. Looking ahead, we anticipate that this will continue to be an expanding aspect of our new specifications coming online.

Great. Thanks.

The next question comes from Ralph Schackart from William Blair. Please go ahead.

Good evening. This is Nick Leibold on for Ralph Schackart. I wanted to ask on the MAX mediation platform. More recently, Unity announced its in-app bidding offering and IronSource announced its acquisition of TapJoy, and obviously your MoPub acquisition's been talked about. So, I was hoping you could maybe share your view on the competitive landscape within your mobile ad tech with this recent consolidation. Do you view the growth and consolidation of other mediation platforms as a threat? Or is it a net benefit to the ecosystem and how much crossover is there on clients that are using both yours and IronSource and Unity's offering?

So, clients tend to only use one because these platforms are pretty robust and fairly complicated to integrate. But we're a fan of there being more options for publishers. The more options there are in the marketplace, the more innovation there is, both in terms of demand partners and in terms of publishing partners. What we're focused on is delivering the best solution for publishers. And we put out a blog actually on AppLovin blog yesterday that we linked to off the Shareholder Letter that shows you how fast MAX has been growing. We launched it three years ago. In three years, it's grown to be one of the largest platforms in the marketplace, and almost 30,000 apps have integrated this platform. And as I touched on, they don't usually use another one at the same time. So, you can think of it as almost exclusive integration. The MoPub clients coming over will take that scale and create a lot more, roughly double, and in both terms of apps, audience, and dollar spent through the platform. And so we're really excited about the possibility of unifying the platforms, the products that we're going to be able to enable, and the gains that publishers and advertisers will see from all of that. And so we're very focused on executing our vision going forward.

The next question comes from Brian Nowak from Morgan Stanley. Please go ahead.

Hi, everyone, it's Matt filling in for Brian. Thanks for taking my question. It appears there was around $180 million in acquisitions reported in the quarter's cash flow statement. Can you provide details on the composition of those acquisitions? Did any of the new businesses contribute to 3Q revenue? Additionally, regarding the growth composition, it seems like spending on second specifications increased in 3Q. Adam, you mentioned a potential growth rate of around 10%. While I understand this isn't formal guidance, how do you view the factors driving growth on a per specification level? What are customers spending more on? Are they increasing their investment in your product or utilizing multiple products? How does that expenditure trend over time? Thanks.

Yes, let me answer the second one, the business question, and then Herald will touch on the usage of new capital in the quarter. The driving factors for dollars growing on specs in the platform are really it's very simple; it's just efficiency. Customers are buying on our platform on a performance basis. They're either buying targeting a specific return on ad spend or they're buying targeting a cost per subscriber, a cost per first food order, cost per purchaser, but it is some function of a goal that they have, so they go and target. As customers spend more, they put more data into our system and our system gets more efficient. As it gets more efficient, they want to put more dollars into the system. So, it just creates a very sticky product that gets them to have a desire to continue to invest more dollars into the platform and that's what you saw this quarter, with just quarter-over-quarter, the same clients growing 13% in the dollars that they spent. Now, again, we only have 280 specs in the system. As we get more competition in the platform, if customers are getting the results that they want and competition goes up, inevitably, they're going to have to price more aggressively to continue to spend at a more accelerated clip. And those two factors combined create a function that creates growth on both numbers. And so that's what we're very excited about. That's been a formula that's fueled ad ecosystems that have become very big over time. Consistently, as you add competition, you create growth and so that's the inflection point that we're at. We've got the salesforce, we're bringing the MoPub team as well, super sophisticated team. They'll be able to sell to agencies and DSPs and a lot of app developers. Our team will be selling app developers. And so we think as more clients come in, everything's going to go up into the right from here for many years to come. And Herald can touch on the use of the cash.

Yes, thank you Adam and Matt for the question. Overall, like others in M&A, we are actively seeking the right strategic acquisitions to support long-term growth. We have a clear understanding of asset values which enables us to act quickly and decisively on potential purchases, while avoiding opportunities that do not meet our criteria. We currently possess a strong portfolio in gaming, supported by robust first-party data, and we aim to enhance that further. During the quarter, we identified one asset, approximately valued at $150 million, which was a casual game app that fits well within our portfolio and constituted the majority of our spending for the quarter. We will continue to search for suitable assets, though we are cautious about adding new apps due to high market prices. Additionally, on the software side, particularly with the MoPub transaction, we are looking for the right strategic opportunities as well.

Our next question comes from Martin Yang from Oppenheimer & Company. Please go ahead.

Good afternoon, Adam and Herald. A follow-up question on the previous analysts. Can you maybe talk about how your scaled first-party data that are collected on the platform can inform on your app development and the type of studios you choose to partner with?

Our scaled first-party data is essential for driving growth in our software division. It provides insights into user interests and the preferences of similar users, which is key to our success in that area. However, this data does not influence our app development. For years, our objective in app development was to collaborate with studios across various mobile gaming genres that we believed we could help grow. Many of these studios were at the early stages of their growth, so we partnered with them to drive their growth, which then provided us with data in specific interest categories. This data contributes to our software engine and has significantly fueled our growth. Currently, we are working with nearly 20 studios worldwide and 3,000 creators, giving us expertise across all major mobile gaming categories. We are very optimistic about our current position. We are investing in enhancing existing games and developing new ones to release them organically in the market. As long as we execute our plans effectively, we will continue to have valuable data flowing into our engine, which we are monetizing very well.

Got it. Thanks. The second question is whether or not there's any synergy between MoPub and Adjust that will help you to approach non-gaming customers? Or are they just separate touchpoints to work with the non-gaming customers?

It gives us access to more potential clients, both for Adjust and AppDiscovery and obviously, the unified mediation platform. The MoPub team is also very seasoned. So, they'll integrate with our team; salesforce will integrate and will create a unified offering, both in terms of publisher sales and advertiser sales. And we think just reach and access of market-leading solutions across attribution, growth, discovery, and monetization will let us go get in front of every single major company in the space, which should facilitate more sales.

There are no more questions in the queue. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.