Welcome to the AppLovin Earnings Call for the Second Quarter Ended June 30, 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 second 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-Q for the first quarter ended March 31, 2024. Additional information may also be found on our quarterly report and Form 10-Q for the fiscal quarter ended June 30, 2024, which will be filed later today. We will also be discussing non-GAAP financial measures. These non-GAAP measures are not intended to be superior to or a substitute for 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.

Welcome, everyone, and thank you for joining us. We had another strong quarter in Q2. Our software business had 5% revenue growth quarter-over-quarter because our models continue to improve. As you'll recall, in Q1, we had a big step-up in growth, so continuing that trend to grow quarter-over-quarter is a really promising sign. As we've stated in previous earnings calls, if we keep growing the software business, the flow-through to EBITDA and cash is very high, and our business margins and cash conversion will continue to improve. We've also consistently said that the slower growth market we're in, mobile gaming, doesn't constrain our opportunity to grow our software business. We've noticed that at times, this concept is needed a little bit more explaining for our shareholders and prospective investors, so I wanted to take the time to do that here. Our platform is entirely performance-based. In other words, gaming advertisers who market on our platform generate measurable revenue and profit from the dollars they spend on our platform. Our customers run marketing campaigns with target return goals, but tend to have a much higher appetite for spend on our platform than we can deliver today. And why can't we deliver more today? Because our current system can only find a limited number of users who will meet their revenue goals. As our technology improves, we will continue to find more users who achieve these goals, increasing advertiser spend, resulting in materially higher growth than the growth rate of the mobile gaming market. Last quarter, I talked about a goal of growing our software business 20% to 30% for the long term. I typically don't communicate externally about our goals if I don't have confidence in it. I'm communicating it now because I do have strong confidence in it and I see many years of growth ahead of us. Here are the primary drivers of that growth goal. Continued improvement from our models as they learn from more data. As our models gather more data, they'll become more accurate and find more good users for our advertisers, gains that our team delivers to the efficacy of our models through enhancements. Our research, science, and core engineering team members are exceptionally talented and consistently deliver lifts to the performance of our models. Demand expansion into new verticals; we just launched the first web advertising campaigns for shops this quarter. And while in pilot right now, we think it will unlock a lot of demand expansion opportunities for us. And then supply expansion, as we broaden out our demand base outside of gaming, we expect the new categories will really help grow our CTV footprint. We continue to be very excited about our prospects and the performance our team is able to deliver. We will work tirelessly to achieve the goals we set and hope that over the next many quarters and years together, you will have a better sense of how an AI-driven marketing platform creates growth opportunities that just weren't possible in advertising before because technologies were not this sophisticated. With that, I'll hand it off to Matt to run you through the financial highlights.

Thanks, Adam, and good afternoon. I'm pleased to report we had another strong quarter with total revenue reaching $1.08 billion and adjusted EBITDA of $601 million, achieving a 56% adjusted EBITDA margin. This marks a 44% increase in revenue and an 80% increase in adjusted EBITDA from the same period last year, translating to an impressive 81% flow-through from revenue to adjusted EBITDA. In the first quarter, we generated $446 million in free cash flow, which is a 74% flow-through from adjusted EBITDA. Quarter-over-quarter, our free cash flow grew 15% compared to 10% growth in adjusted EBITDA over the same period as we benefited from a relatively stable base of cash tax and interest. During the quarter, improvement in our AXON technology driven by ongoing self-learning contributed to further growth of our software platform, which generated $711 million in revenue and $520 million in adjusted EBITDA, retaining our 73% margin and growing 91% from the same period last year. This represents an 87% flow-through of revenue from the prior quarter, illustrating our ability to remain disciplined with our costs, growing revenue while remaining lean and efficient. Our apps revenue for the quarter was $369 million, an increase of 7% from last year with $81 million in adjusted EBITDA, representing a 22% margin. During the quarter, we readjusted our user acquisition return goals, resulting in an 11% quarter-over-quarter decrease in total app segment costs, while revenue decreased by 3%. We expect our future margin profile to normalize to approximately 15% over the long term, consistent with industry standards. Looking ahead to capital allocation, we plan to focus on three key areas. First, investment in organic growth initiatives, specifically our engineering and business development headcount to support the development of our AXON technology and expansion into e-commerce. We do not expect significant capital investment here since we plan to expand our teams in a very lean and targeted manner. Second, continued share management activities with the combination of withholding to cover on future share vesting and strategic repurchases. And third, strengthening of our balance sheet to enhance operational flexibility and liquidity while reducing net debt. In Q2, we used $356 million to withhold 4.2 million shares, allocating about 80% of our free cash flow in the quarter to share management. Since 2022, we have invested nearly $3 billion to repurchase and withhold a combined 83.6 million shares. Finally, in the third quarter of 2024, we anticipate delivering between $1.115 billion and $1.135 billion in revenue with adjusted EBITDA between $630 million and $650 million, targeting an adjusted EBITDA margin of 57%. Now, with that, let's move to Q&A.

Thank you so much, Matt. And again, like Matt mentioned, we will now take your questions. When I call your name, please turn on your video and go ahead and unmute yourself as well. And we will take as many questions as time permits. Our first question is going to come from Jason Bazinet with Citi. Jason, please go ahead with your question. And go ahead and turn on your video as well if you wouldn't mind, Jason. All right, Jason. I see that you're out there. Go ahead, unmute yourself and turn on your video.

Well, it says the host won't let me do my video; I can't do that part, but I'm...

Got it. All right. You can do it now; sorry about that, Jason, that's my fault.

I just had a quick question on some of the initiatives you guys are pursuing outside of gaming. I know it's still a little bit early, but you said some of these products were in beta. But can you just sort of refresh us on, sort of, what your ambitions are and anything that you've learned so far and when you think it might be sort of something that is large enough where the Street could care about it? Is it a '25 or '26 event, just some sort of dimensionalization of the timing? Thanks.

Yeah. Good to see you, Jason. In the quarter, Q2, we launched a pilot of our web advertising program, and this allows an e-commerce shop that has a website to buy on our in-app inventory. The billion-plus daily active users we see in mobile gaming can now be directed to their shop, allowing for purchases in the same way that mobile game companies purchase users on our platform. So, doing this on a performance basis enables us to deliver measurable revenue and results. This is brand new. I'd say it's been in pilot for a few months now. Results are looking really promising, materially better than what we would have expected this early in our progression into web advertising. So this product, we believe, is something that we're going to invest heavily in, start scaling out, and hopefully will show a material impact in '25 and beyond. It is not limited to just e-commerce; it opens the door to advertising for any website that wants to drive measurable transactions on our platform.

Thank you very much.

Thanks.

Our next question will come from Clark Lampen with BTIG. Please go ahead, Clark.

Hey, everyone. Good afternoon. I hope you can see and hear me. Adam, if we examine the guidance for the third quarter and assume that app trends are fairly consistent with last year, there seems to be an implied adjusted reacceleration in the software business. I would speculate that this is mainly due to the primary factor you mentioned, which involves model improvements and the ongoing learnings. I am curious if you could share what is actually driving the acceleration despite tougher comparisons now. Additionally, what does that look like for the second half of '25?

Yeah. I mean, look, when we've talked about this growth goal, if you just think about the growth goal in terms of mobile gaming and the business that we have today, we just grew 5% quarter-over-quarter; the numbers are getting pretty big. Q1 was materially more; it was in the teens quarter-over-quarter. We've always talked about how the model will continue to improve itself and pick up a few points of growth every single quarter just from that enhancement. But then the team is also trying to apply improvements on top. When we get lifts from the team, those can be step-functions. Like, we saw in Q1, you wouldn't expect Q1 to have double-digit growth over Q4. And so we're seeing really good trends in Q3. The business is still very strong. We've got a lot of momentum with our customers. They continue to see us as really the main channel now in mobile gaming advertising. And around that, we're also now seeing exciting trends in what we just talked about, the web advertising category. So we've got a lot of optimism going into the next quarter.

Okay. And if I could, Matt, year-to-date, you've repurchased around $1.1 billion of stock. The guidance implies both an uptick in margins and higher incrementals if we take sort of apps margins at 15%, I think, as you just said. How do you think about, I guess, as the free cash flow profile of the business is improving, maybe being a little bit more tactical with the buyback in periods where there is a bigger dislocation between the market price and then what you guys view as intrinsic value? Thanks a lot.

Yeah. Sure, Clark. So our plan currently is to continue kind of the historical trend of continuing to manage our shares through withhold to cover shares that are vesting each quarter. And then on a strategic basis, we'll continue to do supplemental repurchases in addition to the quarterly investing.

Thanks, Clark. And we'll move on to James Heaney with Jefferies.

Great. Hey, guys, and thanks for taking the questions. Could you just talk more about the 20% to 30% long-term software platform growth that you referenced? And I'm curious just how dependent that goal is on verticals beyond gaming? And I just had one more follow-up.

Yeah. We don't think it's very dependent outside of gaming at all. You've got a mobile gaming category that's growing a few percentage points a year now, so let's call that low-single digits. You've got a business that as these models continue to improve from gathering more data, we think that represents an extra 3% to 4% a quarter as well. So that sort of gets you to the low end. Then we've got a team that's constantly working on improving the models and any improvement that’s driven or developed for the models that makes them more accurate step you up into the higher end of that range. So we've got a lot of confidence in the growth goal we put out there just on a baseline basis with the current business. Now, we do sit on 1 billion-plus daily active users. We've got one of the most sophisticated advertising platforms in the world and we're driving billions of dollars of performance value in gaming. There's nothing about the technology we have that would disallow it from going beyond just mobile gaming, and we're already seeing positive trends in that pilot. So as we start putting these pieces together and broaden out our platform over time, we're really excited about how big the numbers could become.

Great. And then just one more follow-up on the overall health of the mobile gaming market. I think you've previously talked about 3% to 4% industry growth, so curious if you're seeing any change in those trends?

No. We're not seeing any change in the aggregate, but you also have to remember that our market is a little bit different. We're driven in large part by advertising-based applications growing audiences, so that 1 billion-plus daily active users are inside of apps that run advertisements. You monetize those apps partially with games that generate purchases and partially with games that generate purchases and advertising. And so that number isn't documented anywhere, but we're seeing the overall IP market, everyone can look at industry reports and see it growing low-single digits. We're also seeing the advertising-supported market grow faster than that. Yeah. I mean, look, we're a very, very large scale, right? So that data creates a moat. And the more data our models process, the better they're going to get. So every single quarter we launch the system, we just went and lapped the one-year anniversary, right? So it's been in the market now for a year-plus. Every month has been bigger than the prior month. So we get more data, process more data with those incremental data points, the math gets stronger, the model gets stronger, and it can drive more value. And so we've seen that consistently. These AI technologies are very, very new. So it's not like in the world we have 10 years of history to look back on and go, when do these models stop improving themselves? They currently are doing that today. That's by nature. That's how this AI technology works—processes immense amounts of data and through that, the math gets stronger and more accurate and more predictive. And so we're seeing that in real time. That gives us confidence that this core underlying technology is going to continue to grow over time.

Yeah. Hey, guys. I'm on audio only. Thanks. So look, I'm just looking at your third-quarter guidance. If I were to back out the apps business, I kind of get a number that sort of represents 50% year-on-year in the third quarter, which is still a pretty far off from the 20% to 30% long-term growth that you talked about. So, I think myself and a lot of people would want to know like what is potentially that trajectory going from the software business of maybe 50% year-over-year next quarter eventually to that 20% to 30%. Do you have any visibility into the first couple of quarters of 2025 that you're able to share with us?

We do not provide long-term guidance, as we only look a quarter ahead. As Clark mentioned, you can infer the direction of our software business for the upcoming quarter. To reach 20% or 30% growth over time, we would need to see quarter-over-quarter growth of 5%, 6%, or 7%. We believe we can maintain these growth rates for the foreseeable future, as we see many opportunities for expansion. However, this does not factor in potential significant gains or enhancements from our team's efforts, nor does it account for new categories that may contribute to our long-term business since they are still in the pilot phase. We anticipate that our business will remain steady, grow at a healthy rate, and improve cash flow conversion. Additionally, we have many exciting developments that make us confident we could even exceed those growth ranges.

Okay. Could I just ask you another quick question? So in terms of the opportunity for in-app advertising, some of the checks that I did suggest that there were some improvements there. So, I think the in-app purchase market is somewhere around $100 billion, and the in-app advertising market a lot smaller, at somewhere maybe between $20 billion and $30 billion is my estimate. Does your technology really drive advertising revenues for publishers as well and potentially turn that into a growth market and could that make a major difference in your software business?

Yeah. Also, look, that market is already growing much faster than the in-app purchasing market because it's just at a smaller base. The majority of the mobile gaming and app advertising market is running through that MAX auction. That MAX auction has gone from the inefficient world of waterfall to programmatic bidding. The vast majority of the auction is now in a bidding state and so it's continuously gotten more efficient. Our advertising has also gotten a lot more efficient. So as you've seen our business doubling in the last year, there's billions of dollars of more investment happening for mobile gaming companies in user acquisition and user discovery. Some part of that is in-app advertising, which is helping to be a catalyst to regrowing this industry as a whole in in-app purchasing. But some portion of that also involves publishers that are buying more users now because our systems are more effective for advertising-based applications. All of this stuff is intertwined together, and we’re one of the main catalysts of growth in this category because our scale is so large inside this category on both fronts.

Understood. Thank you very much.

Vasily Karasyov with Cannonball has the next question and is also audio only.

Yes. Apologies for that. Good afternoon. Adam, I think on the previous call, you mentioned that the big publishers started spending with you and before that they were not because they saw you as a competitor. So I was wondering how the trend continued this quarter. Do you still see them coming in bigger buckets? And does that open up a significant corner of the market that you sort of could not address before? Would appreciate your thoughts here. Thank you.

Yeah. I mean, look, at this level of scale with how big the software business is, if you backed out total advertiser dollars that you think are in our platform, it's in the many billions of dollars. So we've always worked with some of the very large publishers; we usually have had pretty deep penetration in mobile gaming, but there are some very well-known large publishers that did look at us as a competitor. At this point, our platform is so successful in mobile gaming that it's very, very hard for any publisher to look the other way. We've gotten a lot more adoption across even those publishers. There isn't really a customer that I know of in mobile gaming that does not find scalable success on our platform at this point today.

Okay. Thank you.

Moving on to Mohammad Azharuddin with HSBC. Mohammed, do you want to turn your video on? Mohammed, if you can hear me, go ahead and unmute yourself so we can at least hear you to ask your question. Well hearing no response, we'll move on to Matt Cost with Morgan Stanley.

Great. Hi guys. Thanks for taking the question. I guess when I think about e-commerce advertising kind of in an in-app environment or an in-game environment, as I understand it today, because of the AppLovin exchange, which should allow people like Google or Trade Desk to access the inventory on MAX to run e-commerce ads today, that should be possible, but it doesn't seem like it's a very big business today. So I guess, what are the impediments to running e-commerce advertising in an in-game or in-app environment that are preventing others from doing it already since I believe it should be possible? And then how are you solving those problems or aiming to solve them with your e-commerce product? Thank you.

Like, we can't speak to other people's technologies or things that prohibit them from being able to get categories to work in gaming, but Trade Desk products are nothing like ours. When it comes to succeeding on behalf of advertisers in any category, we want our models to be able to drive measurable revenue. So you've got to have an attribution framework; you've got to have models that can predict revenue and match the user up with the advertiser properly, and you've got to make it all work together. We're in pilot with this product right now, and it's looking quite promising. We think it's something that we're going to be able to build on very aggressively as we go forward.

Yeah. And just to follow up on that. I guess from a data perspective, is it just a matter of iterating on it? I mean, because obviously you have so much data that's specifically relevant to kind of like the game advertising products you've done historically. Is that applicable directly to e-commerce advertising or other verticals, or is it about iterating and kind of building a new data set?

No, I think it's a combination of both. I mean, we process tens of billions of dollars of transactional volume already, and we see $1 billion-plus daily active users. So our platform is not small at this point. That data is able to be used across anything. These are human beings, not just mobile gamers, and the audience skews female and middle-aged. So it's completely different than what people would assume a gaming audience is at a very, very large scale, directly applicable to e-commerce is something that we've always hypothesized as possible. The models in AXON 2 are so much more sophisticated than the technologies we've had in the past that they should enable success there. Now, we're in pilot and we're seeing success there. So we're at the point now where we know we put the pieces in place, and now it's more of a go-to-market problem and less of a technology problem.

Wolfe has the next question.

Hi, thank you for taking my question. Considering the 77% growth in AppDiscovery installations despite a challenging comparison and the increase in revenue per installation compared to last quarter, can you share if there is any notable strength in installations from non-gaming? I understand this is a smaller revenue source currently, but does it represent a significant part of the overall growth in app discovery installations? Additionally, could you provide more details on the continued strength in installations and revenue per installation? I also want to follow up on the apps business. Thank you.

Yeah, sure. The non-gaming continues to grow, but it's still a relatively small portion of the overall installations when you look at the overall software business. So to Adam's previous comments, like it's still a relatively small portion of the existing business and it's still kind of in pilot mode there. So we continue to see promising results, but it's really not needing today.

Got it. Regarding apps, despite the decline in monthly active payers you experienced, in-app advertising has remained essentially the same. Is this due to the performance of AXON 2? Additionally, do you have any plans to consider selling off any studios? I've heard discussions about wanting to acquire more studios. Would that align with your capital allocation strategies in the medium term? Thanks.

I mean, like we've said in the past about M&A and divesting the apps businesses, we continue to be open to it and we're really just waiting for the market to improve. We've been optimizing the app studios over the last year, so you can see that as well in this quarter where we've adjusted the return goals for our user acquisition spend, decreasing costs pretty materially and increasing our margin profile. So, we'll continue to maximize those businesses for profit and we'll be open to transactions in the future.

Thank you.

Okay. We have time for one additional question from Martin Yang with OpCo. Sorry about that, Martin.

Thank you for taking my question. I want to dig a little deeper into your confidence on that 35% constant improvement on a sequential basis. What gave you that type of confidence because I look at the underlying market and your customer behavior; it's a very dynamic market for mobile gaming with new game launches, certain games performing worse or better, and customers are doing all sorts of things. So what is a constant in that type of market that gave you the confidence that your improvement can be pretty consistent on a quarterly basis?

Yang, you said 35% sequential quarter-over-quarter.

3% to 5%.

So, there's two components, right? One is the market growth, which we can all say is low-single digits. One is just models getting better every single quarter because they see more data and become more accurate. These models, by definition, continue to enhance. So we see that in real-time. The models continue to get more accurate. Now our advertisers, and I said this in my talk track, our advertisers will spend much more today on our platform than we can deliver to them. The limitation is how many users the models can match up across every single one of those advertisers at those revenue goals. If the models get better, they're able to process more data and find more users for those advertisers, so the spend will naturally go up. And it's not that these advertisers are adding more budget, nor are they saying that they want to buy users at a more expensive cost to them, which by definition lowers their goals. It's that the models get better, all else stays equal, and these advertisers grow on our platform. As such, those two components can build out a very good sustainable growth rate inside the mobile gaming category. The third piece is if there's a lift to the form of technology that you're using and you materially enhance that technology. In the past, we used systems like ChatGPT 3.5 for these incremental improvements, and I use that as an analogy because people understand it. But in our world, we're consistently making enhancements to that technology. When there is a lift to the technology, that could be a step function in growth for the same reason because these advertisers will spend more and it can make our models more accurate at a larger scale on behalf of them. So hopefully that answers your question, Martin.

Yeah. A quick follow-up. So are you saying that the key inputs to your own model improvement are primarily volume-driven or data-driven?

Yeah. I mean, look, we're a very, very large scale, right? So that data creates a moat. The more data our models process, the better they get. Every single quarter we launch the system, we just went and lapped the one-year anniversary, right? It's been in the market now for a year-plus. Every month has been larger than the prior month. So we get more data, process more data with those incremental data points, the math gets stronger, the model gets stronger, and it can drive more value. We have seen that consistently. These AI technologies are very, very new. It's not like we're in a world where we have ten years of history to look back on and understand when these models might stop improving themselves. They are currently doing that today by nature. That's how this AI technology works—it processes immense amounts of data, and through that, the math gets stronger and more accurate. Thus, we are witnessing this in real-time, which gives us confidence that this core underlying technology is going to continue to grow over time. Yeah. I mean, look, we're very accurate today. When an advertiser says, I want to break even in 30 days on our platform, we achieve that goal for them. When I refer to increasing the match rate, it means let's say that an advertiser says, I want to spend $1,000 today; I want to get the $1,000 back in 30 days, and we get that within a percent of inaccuracy. So they might get $990 or $1,010 back in 30 days. If we have a limitation of $1,000 that they can spend today, the system can only deliver that much with a very low error rate for them. Let's say tomorrow the system processes more data, or if our team makes an enhancement, suddenly the system can deliver $2,000 at that same 30-day breakeven. The advertiser is going to say, I have the $2,000 ready to go; you hit breakeven in 30 days, I'll put it on my credit card. They have unlimited tolerance to spend, if all else remains equal, and as our technology continues to improve, that business will continue to grow.

Well, this concludes our question-and-answer session and today's webinar. We thank you all for your participation and we look forward to seeing you all next quarter. You may now disconnect. Enjoy your summer.