Welcome, everyone, to the AppLovin Earnings Call for the Fourth Quarter and Year Ended December 31, 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 Matt Stumpf, our CFO. Please note, our SEC filings to date, as well as our shareholder letter and press release discussing our fourth quarter and annual 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, 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 September 30, 2023. 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 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.

Welcome everyone, and thank you for joining. We're thrilled to report another outstanding quarter in Q4. We surpassed the high-end of our guidance and established a consistent pattern of exceptional performance throughout 2023. Reflecting on the last year, it's remarkable to consider how much we have grown and evolved in just one year. After a challenging 2022 characterized by stagnant growth, we refocused on growing our existing business and investing in new initiatives. I am immensely proud of our team's dedication and hard work, which has resulted in our software platform revenue growing by 76% in 2023. Despite a challenged economic landscape and mobile gaming sector, we have continued to grow. This is a clear testament to the strength and potential of the updates we have made to our AI advertising engine, AXON. When we embarked on our public journey in 2021, Software Platform revenue was nearly $700 million. And now, only two years later, we have reached close to $2 billion. We also forecast that we would have significant margins on incremental revenue for our software business. I'm proud to state that in Q4 2023, our incremental revenue had an approximate 80% flow through to adjusted EBITDA, culminating in record cash flows. This growth trajectory underscores robust financial health and positions us favorably for diverse opportunities to enhance shareholder value, like ongoing share repurchases. Now, looking ahead to 2024 and beyond, we continue to remain bullish about the potential of our core AI technologies, which stand amongst the most advanced across all markets. Our focus on leveraging these technologies for World in the CTV space and Array in the Carrier & OEM market is just the beginning. We are poised to explore and expand into new applications of our AI technologies in the coming quarters and years, which has the potential to significantly broaden our TAM and opportunities. Now, I'll turn it over to Matt, who will deliver his first financial summary as our CFO. We are incredibly fortunate to have him in this role.

Thanks, Adam, and good afternoon. I'm pleased to step into my first earnings release as CFO with such amazing financial results. So first, I'd like to thank the team for executing so well this quarter and making my job easy. In the fourth quarter, we exceeded the high end of our guidance for both revenue and adjusted EBITDA, achieving $953 million in total revenue and $476 million in adjusted EBITDA. That's an impressive 50% adjusted EBITDA margin. We also exceeded our analyst expectations this quarter by beating the consensus averages for both revenue and adjusted EBITDA. Adjusted EBITDA was nearly 10% higher than expectations. Our revenue grew by 36% from the same period last year and 10% from last quarter. Optimization efforts within our Apps business in the first half of the year resulted in a slight decline in revenue, but it led to improved EBITDA margin. We still grew revenue every quarter this year due to the tremendous performance of our software platform and continued strength and growth in the advertising market. Our Apps portfolio continues to perform well with 5% growth from last quarter, while maintaining a consistent 15% adjusted EBITDA margin. Our Software Platform had another excellent quarter. We achieved a revenue of $576 million and adjusted EBITDA of $420 million, that's a 73% margin. This represents nearly an 80% flow through from revenue, given our relatively fixed cost base and continued cost discipline. All of our businesses were able to grow their revenue this quarter, with AppDiscovery as the primary driver of our success. Our growth stemmed from a combination of market factors and our execution, including a strong holiday season, growth in the mobile advertising market, a market shift to real-time bidding, early contributions from our Array business, enhancement of our technologies like AXON, expansion of our advertiser base, and growth in advertiser budgets. The combination of these factors is contributing to improved efficiency, leading to compounding growth for our company and our partners in the industry. Turning briefly to our annual results. Revenue for the year was $3.3 billion, that's an increase of 17% from last year. Adjusted EBITDA was $1.5 billion, that's an incredible 41% increase from last year at an adjusted EBITDA margin of 46%. Over the last five years, we've been able to achieve remarkable growth in our Software Platform business. We grew from $136 million in adjusted EBITDA in 2019 to nearly $1.3 billion this year. During that time, we had roughly 60% to 70% adjusted EBITDA margin. Free cash flow for the year was $1 billion, representing an impressive 69% flow through from adjusted EBITDA of $1.5 billion. Going forward, we hope to retain roughly 70% flow through on an annual basis, with quarterly fluctuations due to working capital and tax payments. During the year, we extended the maturity of our term loan to 2030 while reducing our interest rate to manage our ongoing costs. In addition to our debt management activities this year, we also repurchased and withheld a combined 54.3 million shares in 2023. After considering share compensation, this represents nearly a 10% reduction in our total shares outstanding. Through the combination of free cash flow generation and share management, we hope to continue to generate significant long-term value for our existing and new shareholders. Our Board has also approved an increase in our share repurchase authorization by $1.25 billion. We plan to use this to continue to manage our outstanding shares. Turning to our first quarter 2024 guidance, we hope to deliver between $955 million and $975 million in revenue in the first quarter. Adjusted EBITDA is expected to be within the range of $475 million and $495 million, representing an adjusted EBITDA margin of between 50% and 51%. We believe these results are achievable, given the various growth factors I highlighted earlier, while taking into account that the first quarter is a seasonally low period for the industry. In conclusion, we're very happy with our financial performance this quarter and for all of 2023, as a result of a strengthening market combined with our team's execution. We look forward to continued growth over the coming year as we continue to expand our business into new verticals and industries such as non-gaming and CTV. Now with that, I'll hand it over to our moderator to take us through the Q&A.

Thank you for taking my question. So, let's see, on the one hand, you're not giving calendar year '24 guidance, but on the other hand, you did talk about in your letter that you're working towards expanding your software platform reach in 2024. So I was wondering if you could unpack those two things for us, especially the software platform reach part. Thank you.

Thanks, Omar. I'll begin by discussing the business side before Matt covers the financials. We launched AXON 2, our upgraded AI platform, in the second quarter of last year. From then until the fourth quarter, our software business grew by nearly 50%. This has positively affected our margins, and we've mentioned a significant increase in revenue with about 80% growth in incremental dollars during that quarter. Although this is still an early-stage technology, having been operational for just over six months, its growth has been remarkable and carries a high margin. We believe the potential applications for this core technology extend far beyond our current offerings. Our team continues to enhance the technology, and we are very optimistic about its future potential. Given the rapid growth of this business and the newness of the technology, it's challenging to predict exactly where we will end up, but we have never been more excited about our growth opportunities ahead.

Yes. Just to echo what Adam said, Omar, given the difficulty in kind of forecasting and understanding the impact of launching a new technology like we did with AXON 2.0, it's very difficult for us to forecast what the impact, what the financial impact of that is. So for that reason, we don't provide longer-term guidance.

And then just a quick follow-up, if I could. So Facebook called out Chinese advertisers, both e-commerce and video game publishers, as one of the reasons their advertising outperformed in Q4. I didn't see it in your shareholder letter, and I was wondering if that's something you guys had seen at all or perhaps expecting in the first quarter.

No, we don't have any specific concentration or change of mix, and we index lower in terms of Chinese partners to rest of the world than I think they do. But this is something we'd called out during COVID. The China lockdown was a huge area of inefficiency in the market. So we've seen the market really hit a trough last year, or two years ago, and then start recovering late last year. A lot of that was because Chinese developers were back in office for a year, coming back online, getting efficient again. We'd signaled that we thought eventually that's going to help bring efficiency back to the market because while we don't index heavily on the revenue side, there is a lot of content that's created out of China that comes out West and does benefit advertising-related businesses. And so that was a good trend that we've seen continue to expand.

Thank you very much. Appreciate it.

Hi, guys. Can you hear me okay?

Yes, we got you, Tim.

Okay, great. Thanks. I had some trouble with the sound on the first part of the presentation. I'm glad you can hear me now. I wanted to ask about some of these big changes coming in the mobile ad landscape this year, namely the DMA, which comes into effect, I guess, in a couple of weeks’ time, three weeks’ time, and also the deprecation of the Google Android ID and then also the iOS 17.4, kind of, a lot of things in there to wonder about how it might impact the mobile ad markets here. I wonder if you could comment on those, please.

Yes. Look, I think we've said this before, when it comes to privacy, Tim, is you don't know dates on a lot of these releases. So when you're talking about Google, like, who knows when the actual rollout will be? Cookies were a lot later than expected and still in a very small percentage rollout. So we don't know when these changes will come. We don't know the exact impact of the changes. What we do know is that, one, the way we've operated traditionally, we're very entrepreneurial, we're very nimble, and we've been able to adapt very well whenever there have been these changes. And number two, we run a much more of a contextual behavioral model than a lot of properties on the Open Web. And so, because we don't interface as much when it comes to really sensitive user data with the consumer, we're in a much better starting point than a lot of other businesses, too. So those two things always give us confidence that no matter what the change is, we're going to be able to navigate it.

Okay, could I ask a follow-up on the DMA, which would be, do you think, you know, allowing much lower App Store fees in Europe at least would be a positive for app development, which might then lead to more ad spending going down the road? Or do you have any opinion on the Apple response to be adding this extra $0.50 charge?

Apple's response indicates that leaving the App Store may not be a sound business decision, as there is inherent value in being on the platform. If we consider the 30% fee and the organic ranking value, we see a decrease in effective cost savings for developers. Currently, the combined costs for developers amount to around 20%, which means there aren't strong financial incentives to exit the App Store. However, we foresee that ongoing global pressures and court scrutiny may eventually lead to advantages for content developers. In our platform's context, most transactions currently generate in-app purchases, with the effective revenue reduced to $0.70. If the revenue split were to shift to 85-15, developers could earn 20% more, potentially increasing their marketing budgets significantly, which would be advantageous for our platform.

Yes. Great. Thanks, Adam.

Thanks. This is maybe a long-winded question, but I can't help but look at your stock and the multiple seems so low to me, given the attractiveness of your business and the growth and the free cash flow conversion. And I saw the $1.2 billion authorization on buybacks. But I don't think you bought back any stock in the quarter, and yet your guidance is good. You knew it was going to be above the street. So my first question is, can you just comment on sort of the tactical pause in the fourth quarter on buybacks? And then my second one, related is, do you think your multiple is low because of the two divergent businesses that you have between the software platform and first-party games? And does that still make sense to hold these two businesses together, given that one is phenomenally attractive and one is just good? Thanks.

Yes, I'll take the buyback piece first.

Yes.

So, Jason, just from a strategic view, our approach to doing buybacks is to do directed large repurchases rather than buy back in the open market. That's how we feel like we can have the most impact. And the opportunity didn't present itself in Q4 to do a large buyback from an existing shareholder. So to the extent that that does present itself in the future, that's the approach that we're going to take.

Yes, we have authorized a significant buyback and are committed to it moving forward. Given our substantial cash flow generation as a company, we believe we can consistently engage in buybacks and return value to our shareholders through this method. Regarding our trading multiples, we can't provide a specific answer because we're not traders, and it's challenging to analyze. We do not think that mobile gaming detracts from our overall company valuation since our core software business is expanding rapidly, and we clearly present our financials. The more challenging aspect of our business was navigating a period of no growth in 2022, which we have now overcome by focusing on execution. This has resulted in four consecutive quarters of outstanding performance. In the software segment, few businesses can match our more than 70% EBITDA margin and the growth we are experiencing, which is impressive. We also convert a high percentage of that EBITDA to cash flow. We believe that as the technologies are new, it may take time for investors to fully grasp their potential. Our powerful technology is driving significant growth beyond the market rate, and our partners are also experiencing rapid growth. Many of the top-grossing games rely on our marketing channels and are succeeding due to the efficiency of our solutions. We are now exploring applications of this technology in several related markets, which excites us. We are firmly committed to buybacks because we recognize the value and can assess it more clearly than investors currently can. We aim to convey this narrative effectively in the coming quarters.

Thank you.

Hey, good afternoon, Adam and Matt. Thanks for taking the question. First one, I know you've talked historically about AXON 2 extending beyond just sort of the gaming vertical. But maybe just sort of give us an update on the progress. Are you starting to get contributions outside of the gaming vertical? And then I have a follow-up.

Yes. Thanks, Ralph. Non-gaming is growing faster. Gaming, it's smaller, so obviously there's more room to grow. It's going to be a commitment of ours to broaden out the platform. We've talked about broadening out to non-gaming, that's a component. We've talked about Connected TV. That was an application that's in progress right now, expanding our reach to the television device. We've talked about delivering marketing solutions to carriers and OEMs powered by AXON 2, that's in progress as well. We're starting to see, as Matt touched on in his script, some benefit from both those initiatives. And we think there are not only those applications, but more beyond that, that we'll talk about in the coming quarters as well. And so, we're very excited about not only what our solution can do within our core category, but the expansion opportunities it presents us.

Great. Maybe you could sort of provide some context of what's really outperforming versus expectations. I'm sure there's an element of conservatism on wanting to guide. But just sort of frame for investors, why is AXON 2 doing better perhaps than you expected?

Look, I mean, what people don't understand about our platform, and I guess we don't tend to articulate to is the MAX business sits on top of over 1 billion daily active users, 1 billion users playing games. So if you think about in the U.S., roughly 170 million daily active users. So you're talking about the majority of American adults are playing games daily in mobile apps, and we're able to service them. Historically, in this channel, the modernization has been very low per 1,000 impressions, compared to what the social networks and search engines and the video apps have gotten to. And those companies had very sophisticated technology and a lot of data. We've been able to get to a point now where our technology has become much more efficient. So we're just monetizing this audience more effectively. What gets us really excited is we're a couple of quarters in. We're really starting from a low monetization point. The whole market is monetizing these users playing games at a low point. When you have that much reach, 170 million daily actives in the states, these aren't people that are just playing mobile games. There's just no way. It's a very, very widespread audience, predominantly adult that are doing other things. And as these technologies get to a point of predicting more broader application of advertising to this audience, not only will it get more efficient, it will expand out the reach for a company like ours to other verticals, and it will create more efficiency for the publisher; we should grow everything. And so that's what gets us really excited is it all comes down to efficiently monetizing a huge audience that we have access to.

Great. Maybe if I could just sneak one more in. We get the question all the time in simple terms, if you could explain what's the main difference from AXON 2 versus AXON 1. Maybe just for simplicity's sake, for investors sort of frame what's the biggest change or observation you see on your end? Thanks, Adam.

Yes, it's just better. I mean just the technology is built to scale better, it's more efficient, more effective. These are predictive technologies at the end of the day. And I'm drawing the analogy to Chat GPT. And the only reason I do that is because we can all type in a box and get a result. And we all know that Chat GPT 3 to 3.5 to 4, 4 was better than 3.5, it was better than 3, right? But we could have seen that. Well, what we can't see in a black box algorithm is a type in and a result. But what we can see is that what we're trying to predict is show an advertisement to a consumer for some advertiser and drive value to the advertiser. And there's a whole bunch of predictions along the way, and AXON 2 makes them better than the prior version. And that creates a lot of efficiency gain, both for our business and that of our partners.

Okay. Thanks, Adam.

Thank you. I have two. First one, can you talk in a little more detail about different trends for domestic and international markets that you see and revenue or maybe metrics? Is there any difference? Do you see different penetration and customer response? And then the second one is, given what you said about extending the software platform, how sustainable are the EBITDA margins in this segment that we saw in Q4? Thank you.

So on the first, we don't see a whole lot of difference domestic to international. There's consumption that drives our value and there's efficiency of the algorithms and partners that are advertising on us that drive the value. And so other than one-off holidays in international locations that would alter the revenue percentages. If you assume the period of engagement is consistent, then the revenue mix would also be consistent. And the other core thing to always remember about our business is, all of our advertising is 100% performance-based. So an advertiser that wants a specific performance of yield in the U.S. is willing to get the same yield in Turkey or in the U.K. or in Germany or in Japan. And so when they advertise with us, they are predominantly global advertisers. So we don't tend to see much variance there.

And on your second question, Vasily, in terms of just margin. We haven't seen any significant difference. I mean, as Adam mentioned previously, it's relatively small at this point, the non-gaming component of the business. But as we push into these other new verticals and industries, we don't see any material difference between the margin profiles of the existing mobile gaming business or non-gaming.

Yes. We've let you all know that when you see roughly 80% flow-through, we don't really expect that to be different as that software business continues to grow. The flow-through should be a really high conversion to EBITDA.

So Q4 is indicative of what we should expect next year? Every quarter?

No. On the incremental revenue growth, yes.

Yes. I mean if you look at just our guidance, Vasily, we're guiding to a similar position, right, in the 50% to 51% overall EBITDA margin.

Hi, everybody. Thanks for taking the questions. Two, if I could. So from a real-time bidding perspective, it looks like I might have frozen. Can you still hear me?

Yes.

Yes.

Okay. Good. Well, then we'll keep going. From a real-time bidding perspective, how much of the market has shifted towards real-time bidding at this point? And then can you talk about the financial impact that, that will have when that process is complete and how investors should think that through? And then I have a second.

Yes. So the first one, the Google announcements on their move to go predominantly real-time bidding in mobile mediated auctions came out, I think it was some point in October. And they had a commitment to do by January. But throughout Q4, the vast majority of the market was traded in a programmatic real-time manner. And the impact of that is twofold for a business like ours. One is we've operated the MAX platform not charging anything to advertising companies when they're not real-time bidding, but charging a take rate of 5% when they are real-time bidding. We've disclosed that number before. That's just a consistent fee that we charge to bid on our platform. Now with the majority of the market moving that way, that's a good economic development for the MAX platform, and that obviously benefits our software segment. On the second point of the impact, what real-time bidding does is clear an auction faster. There's less consumption. So there's just less infrastructural load to process a real-time auction versus a waterfall auction, and there's a quicker ad delivery. By delivering an advertisement more quickly, the publisher benefits because they can show more advertisements to their consumer whenever they want to, instead of waiting for an advertisement to actually clear, it clears faster and more show. By doing that, it creates a world where the publisher starts yielding more in an efficient manner which can then drive up their ad revenue per user. And then the whole formula that we operate on is the publisher makes more, they reinvest more in user acquisition, their business grows, and we enable that growth, and our business grows with it. So we're only seeing positive from this transition.

And then the second question was just on the competitive environment. Obviously, one of different competitors is going through a major restructuring. I guess, are you seeing any shift positive or negative in the competitive landscape year-to-date?

Since we went public, we have maintained a strong position as an independent leader in our sector. Our focus has been on execution, and as our technology has become more efficient, we are providing greater value to advertisers. It’s important to remember that we do not operate in a zero-sum game. When we deliver more value to advertisers who are focused on performance, they don't simply reallocate their fixed budget. Instead, they consider their total budget across various channels and realize that AppLovin has improved significantly. This leads them to increase their budget with us as well. They can reinvest more funds into user acquisition, which supports their business growth, making the industry appealing for everyone involved, whether on the publisher or advertiser side. We have concentrated on our execution, and our team has developed cutting-edge technology that surpasses what others in the sector are offering, which benefits the entire industry. We are excited about this reality.

Great, thank you.

Hi, thanks for taking the question. Adam, maybe relative to your prior shareholder letters, you seem to be describing a mobile market, which is broadly inflecting for the better. So I wanted to see if you could walk through some of the drivers of that, what you're seeing. And then for Matt, wanted to confirm, you said 70% free cash flow conversion expected from here. I think the prior range was 50% to 60%. So maybe what's driving the better flow-through? And then just housekeeping on the Q1 guide, any color in terms of expected apps growth there even on a directional basis? Should you gain sequentially? Or would we see sort of a seasonal decrease? Thanks.

I'll have Matt cover two and three. On the first one, on the mobile market, we put out a blog. I think it was around Thanksgiving. So it was a good one highlighting just CPM growth in the industry, comparing '23 to '22 holiday period. And what we saw in Q4 was that just coming off of weak comps in '22 when every part of the economy was fearful and this sector was particularly fearful we saw brands and performance advertisers more willing to invest marketing dollars. Now what we don't know about that is are the AI-driven advancements in the marketing technologies that you've seen implied by our numbers and our performance and technology and what Facebook has done and what Google has done over the last year driven that acceleration? Or is it just the economy recovering? And we think it's a function of both. And we actually think because we're not brand advertising at all. Ours is entirely due to the technology efficiency, you're seeing this market start recovering. It's coming off from weak comps. So getting back to growth is easier than it was in the past. But the marketing technology is evolving from here and continuing to improve is going to be a really good catalyst for a return to growth for this mobile market.

In terms of free cash flow, David, so we didn't guide to 70% going forward on a long-term basis. On a quarterly basis, we will have fluctuations depending upon just working capital and then also the timing of tax payments. But we are seeing better free cash flow conversion from EBITDA than we were expecting, which is a positive impact that we're seeing from all the technology improvements that we've done. And then in terms of the Q1 guide, your last question, obviously, we don't provide segment guidance, so I won't comment on apps versus software, but we are happy to be able to guide into Q1 with slight growth considering the fact that it is a seasonally low period for the advertising market.

Great, thanks for taking the question. I think we're a bit further on into the CTV testing at this point. Can you just give us some feedback from advertisers on how that adoption is going?

Look, the CTV testing and the rollout is early stage. And we've got a really large software platform business now with net revenue near $2 billion. So for it to become very substantial for these advertisers as the ways out, they're all intrigued by it because traditionally, and I don't know if you do channel checks, you won't find another place where these advertisers can buy on a performance basis, the way we can enable it on Connected TV today. So I'd say it's first inning, everyone is excited by the prospect of being able to go recruit a consumer on a new device that they just had never had the access to before in the way that we can enable it, but it's early and in our business as big as we are and as fast-growing as that business is for any new initiative to make a material impact, we're talking multiple years.

Understood. And maybe just going back to the non-gaming business, I think it's been positioned in the past, there was a bit of a lag between the adoption of AXON 2 from gaming and non-gaming and just the scaling of budgets here within the non-gaming business once those advertisers adopt AXON 2. Can you just talk about, kind of, if that slowness to scale budgets within that non-gaming business if you guys are starting to see that normalize and start to kind of revert to what you're seeing in your gaming business? Thanks.

Yes, it's a good question. Non-gaming we'll probably never get to as quick as mobile gaming. The mobile gaming marketer sees an opportunity and jumps on it. It's just that it tends to be a more commoditized space, and it's a tougher space for content providers to plan, whereas non-gaming enterprises tend to have a brand and they have fixed budgets and they normally plan their budgets in every quarters and years out. And so because of that, it won't ever be a quick to move market, that said, we talked about it growing faster than the gaming segment. We do know the technology application works across any category that we've seen so far. So as we get a fintech advertiser live, or a rentals company or an e-commerce company, we're seeing success across the board. So it's an area we're investing in. We're increasing our headcount there. Now we always operate efficiently and lean. So that doesn't mean a lot of cost, but we are investing in bringing in the right people to really expand these non-gaming verticals because we see a ton of opportunity there.

Okay. And maybe just one housekeeping, if I can squeeze it in. I think you had called out the Software segment outperformance in 4Q, you listed off a handful of factors. I think it started with a strong market and wrapped up with growth in advertiser budgets. Should we be directionally or kind of if we were to stack rank these various impacts? Is that kind of from most impactful to least impactful? Or anything to read into there? Thanks.

No, they're not rank ordered, my list of factors. Yes, it's just a combination.

And I'd say, just given the growth rate we're on, and you've seen for multiple quarters now, the bigger part of our growth is driving more efficient value to advertisers, unlocking more budget and expanding the advertiser total than it is the market. The market isn't growing anywhere near as fast as what we are.

Well, this does conclude our question-and-answer session for the quarter. We thank you all for joining us today. Have a good afternoon. We'll see you next time.

Thanks, everyone.

Thanks.