Welcome, everyone, to the AppLovin Earnings Call for the Third Quarter ended September 30, 2023. 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 Herald Chen, our President and CFO. Please note, our SEC filings to date as well as our shareholder letter and press release discussing our third quarter performance are available at investors.applovin.com. During today’s call, we will be making forward-looking statements regarding our products and services, market expectations, our CFO transition, 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 June 30, 2023, and our Form 10-Q for the third quarter, which we expect to file later today. We will also be discussing non-GAAP financial measures. These non-GAAP measures are not intended to be a substitute for or superior to our GAAP results. Please be sure to review the reconciliations of our GAAP and non-GAAP financial measures in our shareholder letter available on our Investor Relations site. This conference call is being recorded, and a replay will be available on our IR website. Now I’ll turn it over to Adam and Herald for some opening remarks, then we’ll have the moderator take us through Q&A.

Good afternoon. Thank you for joining us today. Our team has executed exceptionally well. This quarter’s record-breaking performance is a testament to the success of our new AI-based advertising technology, AXON 2, which has once again driven revenue and adjusted EBITDA above our expectations. I would like to take a moment to commend our outstanding team for their dedication and hard work. A year ago, we faced significant challenges, yet our team's resolve and enthusiasm never faltered. Our efforts this year have not only solidified our short-term growth trajectory but have also set the stage for sustained long-term expansion. The journey with AXON 2 is just beginning with numerous enhancements on the horizon. This quarter, we made strides by integrating AXON 2 into our CTV initiative during its testing phase, and we are planning to scale up these efforts in the subsequent quarters. We are excited about introducing our leading performance marketing technologies to television, where we see a substantial opportunity to fill a gap with the superior performance solution. Additionally, this quarter, we’ll be extending AXON 2 to Array and expect it will materially accelerate the potential to scale that business. Considering the magnitude of our software platform business, we’re investing in our CTV and Array businesses because we believe they have the potential to become meaningful contributors to our annual revenue. Our dedication to creating long-term value for our shareholders is steadfast. We are confident in the capabilities of our team, the potential for the innovation of our technology, the quality of our products, and the strength of our financial position. We are grateful for your trust and support as we embark on the next chapter of our journey, which promises growth and relentless innovation. Before concluding, I would like to express my gratitude to Herald for his many contributions during his tenure as CFO over the past four years. Herald’s ambition to build a strong foundation in our support and operational functions has been realized, setting us on a course for operational excellence. As we transition to provide more opportunities for his team, Herald will continue to offer invaluable strategic guidance in his new advisory role to me. I will now turn it to Herald who will share the financial highlights of the quarter. Thank you again for your continued support.

Thanks, Adam, and thanks for the kind words. As Adam discussed, strong execution across the board led to fantastic financial performance this past quarter. In Q3, we achieved incredible year-over-year and quarter-over-quarter revenue growth, with software platform up 65% year-over-year reaching a $2 billion run rate. Apps posted the first quarter of quarter-over-quarter revenue growth since we started our portfolio optimization program. In total, we generated revenue of $864 million, up 21% year-over-year with adjusted EBITDA of $490 million, up 63% year-over-year, both exceeding the high end of our guidance. Given higher margins and higher contribution from our software platform business, total adjusted EBITDA reached the highest EBITDA margin in five years at 48.5% margin, an improvement quarter-over-quarter of over 400 basis points on top of a 600 basis points improvement from Q2 over Q1 2023. Of note, this past quarter did benefit from approximately 100 basis points of improvement coming from one-time nonrecurring cost benefits. Turning to our segment reporting, we are excited to see our software platform and AI-driven technologies help our advertising partners expand their reach, achieve better returns on their investments, and increase their spending with us. The software platform reached record revenue of $504 million, a 65% increase over the prior year and a 24% increase quarter-over-quarter, which is the third consecutive quarter with double-digit quarter-over-quarter revenue growth. Software Platform adjusted EBITDA grew 91% year-over-year and 33% quarter-over-quarter to $364 million, with a record 72% adjusted EBITDA margin. Our software platform continues to demonstrate high flow-through from revenue to adjusted EBITDA as we scale. Given its extraordinary growth in cash flow generation, software platform adjusted EBITDA now represents nearly 90% of our company’s total adjusted EBITDA. As Adam mentioned, we’re very proud of our software platform team’s hard work and accomplishments to date, but we’re even more excited about where this business can go in the future, both within our core markets and within the new initiatives we have been pursuing with Wurl and Array. Moving on to the App segment, apps revenue grew 5% sequentially to $360 million, the first quarter of growth since we started our portfolio optimization project. Apps adjusted EBITDA was $55 million, a margin of 15%. With the major parts of our portfolio review complete, we are continuing to focus on balancing growth and cash flow to optimize the financial performance and enterprise value of our apps portfolio. Regarding free cash flow, we generated $194 million in Q3. The flow-through from adjusted EBITDA to free cash flow in Q3 is slightly lower than normal, primarily due to a temporary delay in certain cash collections which we expect will reverse itself in Q4. As previously mentioned in our calls, adjusted EBITDA to free cash flow flow-through is typically 50% to 60% on a normalized run rate basis, noting that we typically have some deviations in any particular quarter driven by the timing of tax payments and working capital movements. This flow-through percentage should increase over time as our high cash flow-converting software platform business continues to grow faster than the apps. With regard to guidance for Q4 2023, we are targeting another quarter of growth with revenue between $910 million and $930 million, adjusted EBITDA between $420 million and $440 million and margin between 46% and 47%. Margin outlook is slightly down from Q3’s 48.5% given an approximately 100 basis point benefit from one-time items in Q3 and the potential for further investments in the business in Q4. From a cash perspective, we ended Q3 with $332 million of cash in the balance sheet. In the quarter, we used $582 million of cash to buy back stock and $249 million to pay down our term loan. This was offset by $185 million drawn on the revolver. Regarding stock buybacks, year-to-date, through the end of the third quarter, we have repurchased $1.2 billion of our Class A common stock at a weighted average price of under $25 per share. This is consistent with our asset allocation plan and focus on driving long-term shareholder value. On the debt side, in Q3, we amended a portion of our term loans, extending the maturity to 2030, reducing the principal amount by $250 million and improving our credit spread. With regard to our Board, we’re pleased to add Todd Morgenfeld in the quarter, a seasoned executive who most recently was CFO at Pinterest and prior to that was VP Finance at Twitter. Concurrently, Asha Sharma, COO of Instacart, stepped down from the Board. Overall, our strong Q3 performance showcases the strength and powerful business model underlying our software platform business. Lastly, personally, as Adam mentioned earlier, I’ve decided to transition from a full-time role to an advisory one at the end of this year so I can take some time off and investigate new opportunities. In my new role as adviser to the CEO, I very much look forward to working with Adam and the team on key strategic and financial matters. Further, I will be continuing my service on the AppLovin Board. It has been my privilege to serve as AppLovin President and CFO for the past four years, in particular, getting to help build and work with this truly extraordinary management team. Come January, I’m excited to have Matt and Dimitri step into their new and well-deserved leadership roles. Based on their track record and past contributions, I am confident in their success. Since joining the Board in 2018, under Adam’s leadership, the company has achieved tremendous growth, increasing revenues by over 6x and adjusted EBITDA has multiplied from a couple of hundred million dollars of run rate to over a $1.6 billion run rate today. While the path has not always been linear, nor easy, the team has remained steadfast and executed with expertise to drive this outstanding performance. Thank you to all the AppLovin stakeholders, including our team, customers, partners, shareholders, lenders, and Board who have supported us along our journey thus far. I do say 'thus far' because the opportunity ahead of AppLovin is immense, and I very much look forward to being a part of it in my new role. Now the moderator will take us through Q&A.

Our first question is from Ralph Schackart with William Blair.

First question, just on the overperformance in the quarter. Maybe you could kind of speak to what’s going better with the sort of ramp of AXON 2 than you originally anticipated. And perhaps maybe you could touch on, I think, historically, you talked about it extended beyond gaming, maybe some perspective on how it’s doing in some of the other verticals? And then I have a follow-up, please.

So we talked about last quarter, AXON 2 was rolled out partially in the prior quarter. This is a brand-new technology, and it’s a self-learning type of technology. These AI models, as they get scaled, continuously improve themselves. Our team also is able to continuously improve them. So we’re talking about a new technology that we’ve seen is, one, game-changing for our business, and two, in the first inning. That’s what gets us really excited. The output of the technology delivers better results for advertisers. We’ve seen it, to your question on gaming or non-gaming; it’s agnostic of the category. Advertisers on our platform are spending more dollars in a material way at better returns. That is a model that just compounds on itself. And so that’s what led to the vast majority of the overperformance this past quarter. It works much better for both non-gaming and gaming.

And then during the prepared remarks, Adam, you talked about extending AXON 2 to the Connected-TV business and Array and then will at some point contribute to results. Just kind of carry some perspective in your opinion, when it can start adding to the overall enterprise results?

Yes. I mean, we did the World deal, I think it was last April, right? So it’s been about 1.5 years. World teams integrated, they’ve built out really good product offerings on Connected-TV, part of that is an SSP. So there’s a lot of inventory available on World’s platform now for us to step into it and buy it with our performance marketing model. In the last earnings call, we talked about we’re just going to start migrating AXON 2 over to the Connected-TV offering. We’ve gotten the testing phase on that. As we start scaling that, we’re very excited about the potential of that platform. Obviously, it’s television, and we all know that performance marketing on TV hasn’t really been a thing anywhere near as much as it has been on desktop or on mobile devices. Our technology is truly cutting-edge, and being able to extend into that platform presents a very big opportunity. And then Array is the same deal; Array gets us on Android devices today in a much more intimate way. It presents multiple new ad offerings to the consumer and being able to use the AXON 2 solution there, we think is also going to be game-changing for that business and the prospects of both.

Our next question will come from Clark Lampen with BTIG.

Adam, I was hoping maybe we could unpack a little bit of the sequential uplift that we saw in software revenue. You talked about it being a testament to AXON 2 at the top of your prepared remarks. Was that the key driver in the sort of lift we saw up to $500 million? Or were there other businesses like World or maybe MAX also contributing?

Yes, that’s the vast majority of AXON 2. That powers the App Discovery platform or advertising business, and that’s already the vast majority of the software platform, but AXON 2 is the key catalyst.

Got it. And as we look at, I guess, sort of the forward guidance, if you were to assume, I guess, just for discussion's sake, that the apps business is running flat. We’re sort of seeing like a 9% to 13% uptick in software revenue into the fourth quarter. Is that still expected to be mostly driven by app discovery, AXON, sort of the compounding effect of the improvements that you’ve talked about historically?

Yes, we see both sides of the business growing. As we mentioned, we’ve had the first quarter of growth, quarter-over-quarter growth in the app since we started our portfolio optimization program. But clearly, the vast majority of growth will remain in the software side as well as the transition if we were able to grow that business, transitioning to EBITDA. EBITDA, as we mentioned, there are some one-time items in the third quarter that will come out in the fourth quarter. Then in the fourth quarter, we are considering some additional investments on the growth side, both on the software and app side.

And I’ll step away really quick, but any uplift that you guys were seeing from sort of non-gaming customers this quarter also? Or was this mostly your sort of core game developers' base that was driving most of the improvement we’re seeing?

No, what we’re seeing success at cost, both gaming and non-gaming. Obviously, gaming is a much bigger part of our business. Non-gaming is growing faster because the number that is starting out is materially smaller. It will take a sales effort to substantially grow non-gaming so that it can become a much more material part of the business. But the technology works very effectively regardless of the type of app on dealers.

Wolfe has the next question.

Just very briefly a high-level question. How far ahead is AXON 2’s advantage versus competitors? How long does this persist before competitors maybe catch up? And following up on that, how should we think about the pace of new releases? What that kind of becomes for you guys? And when should we expect like an AXON 3? How much do new requirements and changes in privacy in the ad market drive that new release desire versus, say, competitors improving their competitive positioning against you?

So there’s a bunch of questions in there. Look, these technologies are super complicated. We think ours is cutting edge and one of the leading AI solutions in the market across any of the AI implementations we’ve seen. We have a very large deployment of software and hardware to power it, and we’ve got a material amount of data. These systems themselves, they say, are self-learning. We’re continuing to evolve what we have on an ongoing basis on a regular basis. So this isn’t something where we look at competition catching up. We look at it as we’ve set a new standard, and we’re going to build on that, which hopefully will lead to many quarters of growth coming up. Regarding the privacy question leading to AXON 3, changes in the platform, look, we’ve dealt with privacy changes probably since 2014. Every time there’s a change on the platform or with regulators, we’ve changed something in our stock, but we’re a nimble company, we’ve rewritten our core technology multiple times over the years, and we are always able to adapt and perform in the face of any of those kinds of changes. And as far as AXON 3 goes, we signaled AXON 2 to you all a year ago. We’ve executed really well on putting it together. We’re not talking about AXON 3 right now. We’re focusing on a lot of excitement about multiple quarters of growth coming up from what we put together here.

And we will now hear from Franco Granda with D.A. Davidson.

I had a question around the investments on CTV and OEM. Obviously, last year, you put those investments in cost and these were some areas that suffered. But now that you’re planning on implementing AXON into those categories, can you comment on perhaps the magnitude of this investment and how we should think about those moving forward?

Yes. I mean, I don’t think we’ve ever put them on pause. We’ve been talking about CTV since we acquired World and Array. We launched, I think, a couple of years ago, and we’ve signaled to you all that these are a couple of the growth vectors that we’re really excited about. Our software business, obviously, is really big. We’re in a $2 billion a year run rate. So to have the type of numbers and scale from a new initiative, it takes a while to put a real big dent on those numbers. But we’re very excited about CTV and Array. The foundation is there on both those businesses. By taking this market-leading technology and applying it, we think we’re going to be able to really accelerate the path of both.

And then just very quickly here on the apps business growth based on the quarter, how much of that growth came from perhaps your integration with AXON and leveraging that technology for the UA capabilities there?

Yes. We’re obviously a big customer of our own systems. When we saw AXON 2 in its performance, like a lot of our customers, we invested more in UA, and we expect to continue to do that rolling into the fourth quarter. So that was a big driver of growth.

And moving on to Martin Yang with OpCo.

A question on the share between non-gaming and gaming for software platform. Can you first talk about the general trend on the revenue contribution from non-gaming apps? And then did AXON 2 help either direction of the non-gaming share of revenues to software platforms?

Yes. We don’t break down the percentages, but we’ve talked about a majority of our business is gaming. And I referenced that this technology is working really well for advertisers of any kind, across every category of mobile application. So we’re seeing quite a bit of growth across all, but non-gaming starts from a smaller place. So we’re actually seeing accelerated growth on non-gaming advertisers.

And moving on to Ross Compton with Macquarie.

Looking at the gross margin last year, and then in Q4 '22, this was 47%. In the most recent third quarter, you guys approached 69%. I was wondering if you could expand on the processes that have kind of led us here and how we should think about this into Q4 and beyond? Is there a ceiling? Scale, of course, helps long-term improvement in billing technology with AXON, but any kind of understanding on the operating leverage in the model would be great.

Yes, some of the question was breaking up. But I think you’re asking about the gross margin on software and just the improvement year-over-year. Is that correct?

Yes.

Our business model on the software side, first of all, as you know, we report on a net revenue basis, so we start at that level in the P&L. And then in terms of the cost structure itself, that’s directly related to software. A lot of it is the data center infrastructure that we talked about almost a year ago when we had a big new contract that we needed to get to an initial amount of scale. And we had to grow into that. I’d say now we’re very much on pace if not growing through some of that contract and utilizing the capacity that we’ve had on board. That’s why we’ve been able to really expand gross margin all the way through to EBITDA given a relatively fixed cost structure on the R&D front.

Morgan Stanley’s Matt Cost has the next question.

I guess the first one would just be, there were some media reports in September and October of some advertisers boycotting one of your largest competitors or pulling back spend. Did you see any material impact on your business in the third quarter? Or do you expect any business impact along the lines in the fourth quarter?

It was a little overblown in the media; pretty negligible impact. It was late September to maybe a week or two of noise in the market, but negligible to ours.

Great. And then just on the software platform margins, 72%, a very strong result. I guess, can you give us your latest thoughts on what the flow-through at scale potential is for that business because we’re higher than we’ve been certainly in a while?

Yes, good question, Matt. Every quarter, there are various factors, such as fixed costs, incremental costs, or step-function costs, especially related to the data center. However, we expect our research and development expenses to remain stable, and we anticipate that our software margins will increase as we enhance app discovery, which is a net revenue business. In the long run, as we expand Worlds and adjust the OEM side on Array, we may need to make fixed investments and build teams in those areas, but these are also strong margin businesses that will improve as they grow, although they may not start contributing at the same level as app discovery.

And our final question will come from Omar Dessouky with BofA.

So you guys talked about header bidding and how Google is going to shift to header bidding demand. Shift demand 100% to header bidding. They put out a notice on their website recently that they won’t be shifting entirely after October 31, but we’ll do so partially and expect that transition to happen in the first quarter of next year. So I think you mentioned that your mediation platform can tap the Google demand. What I was wondering was actually, given that Google has been a waterfall bidder for so long and app discovery has been a real-time bidder for so long. Does Google shifting to real-time bidding actually pose competition to your core business because we tend to focus on the idea that you could tap demand from Google doing real-time bidding, but what about the competitive aspect of Google?

Yes. So you’re talking about the cannibalization effect of a mediation network, one as big as Google, particularly going to bidding. We’ve taken most of the market to bidding at this point, and we’re already above, I think, 60%. Once Google goes to bidding, it’s going to be very close to the full market tipping that way. On every network that’s mediated converting to bidding, share moves around only slightly, and possibly the bidder gets more efficient, so it can gain share. But the overall pie grows. That’s the whole point of the MAX platform; our objective with that platform was to build an efficient marketplace where you bring these networks and put them in the most efficient way possible to serve price and serve an ad in a header bidding state, and then the publisher yields more. The publisher yields more so they can spend more on user acquisition. We’re obviously one of their main user acquisition channels, and dollars go back into the ecosystem; the pie grows. Usually, all parties end up benefiting, and that’s the trend we’ve seen now for five to six years since we launched the MAX platform.

Okay. So if I understood correctly, then, it sounds like you’re saying the benefit of Google moving to real-time bidding is to make the entire industry bigger, and that will outweigh any potential competition because you have a new technology in the market from someone other than yourself, which could potentially experience increases in ad spend.

Yes. Look, we never look at share. It’s not a zero-sum game. You need all the marketing companies to do well. That helps the ecosystem grow; user acquisition, dollars come into the space more, eyeballs swell, and consumption goes up. That’s always been our formula for growth. So we look at dollars and the dollars become bigger; it benefits all parties. That’s what we see every time a network goes to bidding.

And with that, that does conclude today’s earnings. We thank you all for attending, and we look forward to seeing you next quarter. Take care until next time, you may now disconnect.