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.

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.

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 a 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, which represents an adjusted EBITDA margin between 52% and 53%. In conclusion, we continue to have confidence in 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.

Thank you so much, Matt, and now we will take your questions. Our first question is from Clark Lampen with BTIG. Clark, please go ahead.

Okay. Can you guys hear me, okay?

We hear you, Clark.

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?

Thank you, Clark, for the question. Regarding the first point, I mentioned this in the script, but we have several growth opportunities. One is increasing the number of advertisers in gaming and expanding into new verticals, which we're quite excited about. More importantly, whenever we see improvements in our core models, our business benefits, and these improvements come in two forms. Our models are self-learning and are actively operating in the marketplace, serving a large number of impressions daily. This creates a feedback loop where data is fed back into the model, allowing it to improve continuously. This is why the system has gotten better since its launch. Additionally, our team is working diligently every day, and every time our research science team innovates on these models, it results in significant gains for the business. The accuracy of these models, which are fundamentally mathematical, directly influences our business outcomes, and these gains are very high margin since they do not incur additional costs. Thus, when I reflect on the first quarter's strong performance, particularly against the challenges Q4 presents in advertising, the gains we experienced were mainly due to enhancements within the models. This will be a key driver for us moving forward. Now, regarding the software growth slowdown, software is growing about 90-100% year-over-year, and it operates with a 73% margin. We don't expect it to double every year. It's primarily a net revenue business, so each additional dollar contributes significantly to margins. We aim for a long-term growth rate of around 20-30% for years to come. To achieve this, we will build on the strategies we’ve discussed. We plan to attract more advertisers in gaming who will find our platform the best channel for mobile game advertising. Given our current success in delivering value to mobile gaming advertisers and the absence of any limitations on our technology's application outside of gaming, we see great potential in other verticals. Expanding into these verticals is a major part of our strategy. Moreover, we are committed to improving our technology. All these factors combined give us numerous opportunities for growth, and we have never been more optimistic about our future prospects than we are today.

Thank you.

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 a new sales force? Are you testing any results you could share? Sort of want to get a sense of where you are in that effort. Thank you.

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 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.

Great. Thanks, Adam.

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?

Since the beginning, I have acknowledged that selling isn't my strength, and we have concentrated on a product-first approach at the company. We believe that by creating exceptional products and innovating effectively, advertisers who succeed on our platform will share their experiences with others, leading to a self-selling dynamic. This has been evident in mobile gaming, as more customers who were previously unaware of us or opted not to work with us have started using our platform over the past year. We haven't increased our sales efforts to establish those relationships, and many of these are still in the early stages compared to companies that have been with us for years. This will support growth in the gaming sector as time goes on. Beyond gaming, we are not interested in brand advertising; our focus remains on performance-based advertising. We intend to stick to our existing strategy, avoiding heavy investments in sales now. While some transaction categories outside gaming do require marketing and sales presence, we won't be making significant investments. We are confident that if we can achieve similar results as we do in e-commerce—where businesses benefit from marketing on our platform and can measure positive outcomes—there will be strong interest. Many of these transaction-based sectors are in need of increased marketing support as they face growth challenges.

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.

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?

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.

I’ve heard that Unity will be participating in AppLovin and MAX Supply, and I was curious about the strategic implications of this, given that they are considered a competitor. Will you gain any new insights about your main competitor from this, and why is there such a delay in this process?

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 the 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 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 the market and is continuing to do well.

Do you have time for just one quick question? I didn't see any information regarding net revenue for install growth or install growth mentioned in your letter. Could you provide us with an update on that and share any insights regarding the factors influencing it?

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.

Thanks a lot, guys.

And we will now hear from Tim Nollen with Macquarie.

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 a 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?

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: to 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 for 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, and 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 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.

Okay. That makes sense. Thanks. Any comments on Wurl's growth or contribution to revenues or anything you can share?

It's still too small to break out, so we don't talk about it, but they've done a great job of bringing a lot of supply online. So, now the other side is the opportunities bringing the demand on.

Moving on to Eric Sheridan with Goldman Sachs.

Thank you very much. Following up on Tim's question but with a different angle, Adam, when considering entry into new verticals or canvases, you've taken various approaches such as acquiring companies, investing in them, and forming partnerships. How should we view the dynamics of capital allocation in terms of organic versus inorganic growth? Additionally, how can we maximize return on investment as you explore the potential of these canvases in the medium to long term? My second question pertains to incremental margins. Clearly, you continue to achieve very high incremental margins following the investment cycle over the past 12-18 months. Could you share some insights on guidance related to incremental margins as the business maintains strong growth levels? Thank you.

Yeah. I'll start with the first and Matt can answer the second. Thanks, Eric. That really, when we think about our business, we built a very, very compelling implementation of AI, one of the most powerful systems the world has ever seen in this space. And so organically, we have a huge advantage to continue to build on that and how do we build on that? It will come from a few different things: get more partnerships, get more data and get more reach. And so, all of that in terms of like the way we think about it and getting more reach is accessing eyeballs. Well, we have a carrier OEM business now, we have a CTV business and we have our core business and there's over 1 billion daily active users just on the core business. So, we access a lot of eyeballs already. So, the reach is sort of there, sitting there for us to go capitalize on. Demand diversity is we fundamentally believe is an organic problem. The algorithms are going to be able to execute on any transactional vertical. And so, we just have to get this product rolled out. The R&D effort was building the system to be able to do web marketing for the first time. This is that's just not something a company named AppLovin really thought about over the last 12 years. And so, now as we go forward, we've got that technology, we're going to be able to execute in that space. And so, that again is an organically charged effort. And the hardest part of all of this was building the algorithms, building that the AI models are incredibly complex. And a lot of companies obviously in the world today and technology, almost every company will talk about the AI strategy, but very, very few have been able to actually execute on a large scale implementation of complex systems like these. So, having that at our disposal really keeps us excited about this organic path we've got going forward.

And just in terms of expectations around margins, Eric, I mean, we expect the margins to continue to expand to the extent that we see increased development for AXON, right, as Adam has talked about in the past, the improvements to the actual technology because we're already reporting net revenue essentially dropped to the bottom line. So, what you're seeing is as margins grow through that development is that it should continue to expand. Obviously, as volumes grow, then margins should stay relatively flat. So, at this point, we wouldn't expect any decrease from our existing level of partner.

Thank you.

Jefferies, James Heaney has the next question.

Hey, guys. This is Ed Alter on for James Heaney. Thanks for the question. From piggybacking on some of the earlier questions from some of our checks, we're seeing that the bigger the app developer is, the more they actually are kind of spending share of AppDiscovery. So, like besides obviously AXON, what are you seeing that is winning those incremental dollars versus others, and where are the bounds of that?

I mean, in our system, we don't really have a limit to what an advertiser spends. Most all of our partners don't set any sort of budgetary limitation. So, the bigger advertisers obviously by definition have a better base business. They've got probably in mobile gaming, more successful games, so they're a bigger company, then therefore, they can spend more dollars per day. But the really nice thing about our system today is somehow someone on our research science team tomorrow had a breakthrough and our models got twice as effective, the business would double overnight because there isn't a budgetary constraint. So, we think like at this point, our job in mobile gaming to deliver value to the advertiser has been effectively accomplished. And now, a lot of the growth is going to come from new advertisers, both in gaming that we don't work with 100% penetration of the market or even close to that. So, gaming customers around the world now are hearing about this platform that a year ago didn't exist and now is outperforming every other platform in the world. And so, that as we continue to see organic adoption of our platform in the gaming category, we will see growth from these new advertisers, which some are large, some are small, but all add up. And then secondarily, again, this expansion outside the mobile gaming business is something we're really excited about.

Could you share your thoughts on the current state of the mobile gaming market? After a few years of decline, some analysts are predicting growth this year. Is that in line with your perspective, and what factors do you believe are contributing to this trend?

Absolutely. We mentioned this in our discussion, but our platform is extensive. If you consider the net revenue from our advertising network, which makes up the majority of our software business, we've doubled our software revenue over the past year. This means billions of additional dollars have been invested in the mobile gaming sector using our platform. This growth isn’t merely shifting funds from other channels; companies in mobile gaming aren’t just saying they can spend an extra $0.10 and taking that from elsewhere. Rather, they recognize they can increase their spending towards their goals. It takes time for this growth to accumulate and be evident in the total addressable market because the return on user acquisition usually takes between three months to a year to become clear. For instance, AppLovin has doubled its business in a year, leading to billions more invested in an industry that already spends tens of billions on user acquisition. So, there is significant growth in investment due to the AXON breakthroughs, and as these investments start yielding results and users begin returning through their downloaded games, we will see the entire market grow. Much of the current moderate expansion in the total addressable market reflects the positive impact of our technology on driving growth for these advertisers.

Yeah. Thanks. Thanks. Congrats on the quarter.

Thanks.

Moving on to Vasily Karasyov with Cannonball.

Good afternoon. I have a question about your competitive dynamic. Obviously, your results are so good. AXON 2 is working so well. Do you see any competitors ramping up to go after your business and put up a fight against you? And if so, how do you feel about it and obviously, the returns are too good, right, to pass up? Do you see any changes in the competitive situation at this point? And how are you preparing for that? Thank you.

Thank you, Vasily. We've been asked about competition for a long time, and we always emphasize that we don't focus too much on it. Some people view our technology and the industry in a very simplified way, thinking that one company can create an algorithm and everyone else will just catch up. The reality is that these systems are highly complex. We have developed advanced AI technologies, and replicating them is not a straightforward process. By the time anyone is poised to compete with our technology, we will have advanced significantly, as we are continuously evolving. Additionally, we could open-source our code tomorrow and share it with competitors, but that wouldn’t change much. These technologies require data generated in the market to drive their performance. For AI models, their impact comes from usage, and the data they receive from human interactions retrains and enhances the model. A great example is ChatGPT, which improves based on user feedback. Our model is also receiving vast amounts of data every day, leading to constant improvements. We see ourselves as leaders in a substantial category. While it may not be the largest or the fastest-growing, we have a unique opportunity to expand our business outside of mobile gaming and help various companies around the world unlock value through our AI. We are very excited about this and believe it will continue to set us apart from other players in our ecosystem.

Thank you very much.

And our next question will come from Martin Yang with OpCo.

Hi. Thank you for taking my question. In your shareholder letter, you highlighted that the underlying advertising market has grown year-over-year. And can you maybe comment on, what's from your view, how much has that market grown in 1Q and do you have the number; how much has the market grown in 4Q?

You're asking how much of the market grow from quarter-over-quarter or year-over-year?

If you have both year-over-year numbers for 1Q and 4Q, respectively.

It's very hard for us to understand the whole ad market. And it's also like I'm not sure the whole ad market has ever been fairly defined. Is it the global advertising spend? Is it the global advertising spend in mobile apps? Like, what we look at when we talk about growth are the two areas that drive our business. One, IAP category, so we talk about mobile gaming as a vertical a lot. When we talk about the advertising market, in large part, we're talking about the MAX marketplace that's growing quite a lot, double-digit plus year-over-year, but we don't disclose what the annual year-over-year growth is of the actual MAX marketplace.

Got it. So are you assuming that the MAX marketplace is a good representation of the global market?

For mobile gaming advertising, yes, given our leadership position in the category and what we've talked about percentage of market share of the MAX product that we think is so diversified at this point that it is a very good proxy for the growth in advertising-based mobile gaming businesses.

Got it. My next question is on your net revenue per install and volume both install. This quarter, it's 5% and 87% respectively. The net revenue per install change on a year-over-year basis is very different from preceding quarters. How should we interpret those two numbers and the changes? Is there any relationship between the two that tell us underlying changes in the market?

Yeah. So, I think we've talked about this in the past, Martin, that when you see a very large increase in the volume of installations as we were talking about in this quarter, that's correlated to an increase in advertiser spend. So, as a result, year-over-year, comparing to Q1 of 2023 to Q1 of 2024, we saw the AXON on launch during that period. And so, as a result of that, we saw advertisers increase their spend pretty dramatically over the last four quarters.

Got it. Thank you.

That concludes today's question-and-answer session and today's webinar. We thank you all for your participation and we look forward to seeing you next quarter. Take care until then.

Thanks everyone.