Earnings Call
AppLovin Corp (APP)
Earnings Call Transcript - APP Q3 2025
David Hsiao, Head of Investor Relations
Welcome to AppLovin's earnings call for the third quarter ended September 30, 2025. 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 financial update and press release discussing our third quarter performance are available at investors.applovin.com. During today's call, we will be making forward-looking statements, including, but not limited to, the future development and reach of our platform, including the expected timing of product launches, our share repurchase program, the efficiency of our operations, 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 second quarter ended June 30, 2025. Additional information may also be found in our quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2025, which will be filed 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 GAAP results and the reconciliations of our GAAP and non-GAAP financial measures in our earnings release and financial update 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.
Adam Foroughi, Co-Founder, CEO and Chairperson
Thank you all for joining us today. First, I'd like to recognize our inclusion in the S&P 500, a huge milestone for our company and a strong acknowledgment of what we built. It's a privilege we do not take lightly. It also means we now carry the expectations of a much broader set of investors, and we must push even harder to continue delivering. Turning to our business. Q3 was another very good quarter. Our performance was strong with gaming advertising continuing on a solid trajectory. Our teams delivered multiple incremental lifts in our core models this quarter. And our MAX supply-side platform, one of the best indicators of our end market growth continues to grow at very healthy rates. We also opened up international traffic for advertisers promoting websites or shops in Q3 ahead of schedule. I'm particularly proud of our team because even while executing a strong quarter, we also delivered our major October 1 launch of our self-service platform and referral form. We did so without any significant hiccups, no major bugs and effective filtering out of low-quality ad accounts, something I was personally monitoring closely. This speaks volumes about our ability to automate and execute. I know everyone wants stats on how self-service is going. And instead of something specific around accounts or ramp-up since we're still very early, I'd like to point out a stat which I watch very closely. While it takes a while for new customers to get going, to integrate, to learn how to use our system and to ramp spend, we're already seeing spend from these self-service advertisers grow around roughly 50% week-over-week. It's too soon to be significant, but this type of early growth gives us even more confidence that our platform will excel at being an open platform to any type of advertiser. Our focus for Q4 and 2026 will be the following, with priority always given to improving our models for all advertisers. We'll continue tuning our onboarding flows and ramping more AI agents into the workflow to support a seamless experience for new advertisers. Once we're satisfied with the quality and experience, we'll open the platform broadly beyond referral basis. We'll be testing generative AI-based ad creatives. Over time, if we can move to mostly automated creative generation, we believe user response rates to more customized ads on our platform will materially improve. We are actively testing paid marketing to promote the Axon Ads platform to new customers. We'll continue tuning this acquisition method so that when we launch the platform beyond referral in 2026, we can scale advertiser count without reliance on a large sales force. If we maintain execution discipline, we are well positioned to acquire a large volume of new advertisers in the coming years. We believe that giving our powerful recommendation engine a more diverse set of advertisers to recommend will dramatically improve conversion rates, paving the way for elevated growth rates for years to come. It's worth noting the backdrop. The market is recognizing our platform, our scalability and the reach we offer our partners and the institutional dynamics that come with the S&P 500 inclusion are already in motion. At the same time, we continue to operate in an environment of heightened scrutiny around data, privacy and ad tech practices. We remain committed to strict compliance, transparency and execution excellence. To conclude, we delivered a very strong Q3. We are executing on our strategic priorities, and we are confident that our best days are ahead as we broaden access to our self-service platform and scale globally. With that, I'll turn it over to Matt for a deeper dive into the numbers.
Matt Stumpf, CFO
Thanks, Adam, and thanks, everyone, for joining us today. Q3 was another exceptional quarter. Revenue was approximately $1.405 billion, up 68% year-over-year due to model updates in the core gaming business, while adjusted EBITDA was $1.158 billion, up 79% at an 82% margin, up 1% quarter-over-quarter from operating leverage and a modest reduction in operational FX. Quarter-over-quarter flow-through to adjusted EBITDA was 95%, slightly above Q2. Free cash flow was $1.049 billion, up 92% year-over-year. Free cash flow margin improved sequentially given no semiannual cash interest paid on our debt this quarter as those payments occur in Q2 and Q4 of each year. We ended the quarter with $1.7 billion in cash and cash equivalents. During the quarter, we repurchased and withheld approximately 1.3 million shares for $571 million funded by free cash flow. Over the last 3 quarters, we have reduced our weighted average diluted common shares outstanding from 346 million in Q4 of last year to 341 million this quarter. During the quarter, our Board of Directors increased our share repurchase authorization by an incremental $3.2 billion. Finally, turning to our financial outlook for next quarter. In the fourth quarter of 2025, we anticipate revenue between $1.570 billion and $1.6 billion, reflecting between 12% and 14% sequential growth. With adjusted EBITDA between $1.290 billion and $1.320 billion, targeting an adjusted EBITDA margin of 82% to 83%. Now with that, let's move to Q&A.
Operator, Operator
Our first question will come from James Heaney.
James Heaney, Analyst
Could you start by discussing the characteristics of the advertisers you have onboarded since October 1? Would you say the GMV of these advertisers is smaller than the initial 600 from the pilot, or are you focusing more on the lower end of the market? Any insights on this would be appreciated.
Adam Foroughi, Co-Founder, CEO and Chairperson
Yes. Sure, James. They are obviously a filtered set of advertisers when we curated the list last year. That was filtered by our team. And then this year, it's filtered through referrals. So these aren't like your local dry cleaner trying to come onto the platform yet. They are predominantly shops. They're not going to be as large as they were in the cohort last year, but they're not going to be materially smaller either. So think of them as comparable in mix. And then it's a broad set of categories. There's no limitation when you're open the way we are through a referral to the type of customer that comes in. So a broad set of shopping categories being represented.
James Heaney, Analyst
Great. And then just one for Matt. Could you just talk about guidance philosophy for Q4? Just curious how you've used e-com seasonality from last Q4 as a proxy for this year? And just interested to hear kind of what's being assumed from sort of the current customers versus new customers on the e-com side?
Matt Stumpf, CFO
Yes, sure. It's not the best comp. Obviously, last year, we had an entirely new e-commerce business that was ramping. And then this quarter, right, we had an existing base. So it's not the best comparison year-over-year. So within the guidance, we took an approach where it reflects a combination of different factors that we have going on at the company, obviously, the optimism around the e-commerce referral program, continued model enhancements, the updates that we talked about previously within the Q3 period and then also kind of normal holiday seasonality. So the combination of those factors led to the larger guidance that we're projecting quarter-over-quarter.
Operator, Operator
Your next question will come from Omar Dessouky with BofA.
Omar Dessouky, Analyst
Adam, I wanted to revisit your comments about significantly higher conversion rates. Should I interpret that to mean that a substantial increase in impressions won't be necessary to accommodate a large rise in e-commerce advertisers in 2026?
Adam Foroughi, Co-Founder, CEO and Chairperson
Yes. I mean, look, we've always said we serve a lot of impressions to a lot of users today, over 1 billion users a day. So we're in a world today where the biggest lever for growth on our business, given we report on a net revenue basis, is increasing the conversion rate. And that happens from a couple of things. You've got the model enhancements, which we always talk about. Those are super impactful in increasing conversion rate. That's a continuous effort. We are in the very, very beginnings of understanding how to work with neural nets and these AI technologies. I mean if you think about this industry, the core AI industry is only a few years old in terms of engineers really being able to extract this kind of value out of these tools and technologies across a broad range of industries. So as this goes forward, we're going to have consistent incremental improvements, and sometimes large, sometimes small, but additive to high impact on driving up conversion rate from technology lifts. Then you're also going to get advertiser density expanding paired with our recommendation system, giving the model the chance to personalize the advertising to the user better. If we have fewer advertisers and fewer categories, we just have less to show. So you can't get a diverse set of content to the customer to maximize that conversion rate. Both those things are just going to naturally happen as we go forward. The third piece that I touched on to your phrase you repeated is that generative AI-based creative. Today, in our advertising system, the advertiser can do almost no targeting. They can pick their country, they can put in their economic goals, they can put in a budget and off they go. The one manual lever is creative. And in particular, in the shopping category, or in this like website advertising business, a lot of the customers come on board and they don't have a creative that's adapted for our platform. The average viewership of our ads is roughly 35 seconds. The average viewership of an ad on social is roughly 7 seconds. So a lot of these customers are coming in and just porting a short ad and trying to replicate what they have on social on our platform, and it's mismatched. It diminishes their possible conversion rate. So what does that mean? Well, when we get into a world where we can use generative AI tools to automatically create ad creatives on behalf of these customers, they're going to get to a point where they can actually expand their conversion rate. We're doing nothing more other than just expanding the count of creatives into our system and ensuring that the types of creatives in our system follow best practices on our platform, and doing that at no cost. And so we're really excited about where the tools in the marketplace are going. That's something we're going to be testing in short order here.
Omar Dessouky, Analyst
I would like to follow up on the conversion rate question you addressed so well. I also want to discuss your thoughts on supply. You've mentioned in the past that there has been double-digit growth in publisher revenue in MAX over the last few years. Do you anticipate this growth will pick up as e-commerce increases? Is supply primarily influenced by higher ad loads set by publishers, greater engagement with mobile games, or enhancements to MAX that you implemented in 2024? Which of these factors do you consider to be the most significant?
Adam Foroughi, Co-Founder, CEO and Chairperson
It's a combination of several factors. The MAX platform ecosystem is expanding rapidly due to various reasons. One reason is that as ad quality improves, particularly in e-commerce and demand density, users are less likely to see repetitive ads for games and instead engage with a wider variety of content. This increased diversity is expected to enhance retention and broaden ad supply, providing a natural advantage in this ecosystem as we attract more demand beyond our current core advertisers. Another aspect we’ve discussed in previous calls is the potential for publishers who primarily focus on in-app purchases and traditionally run very few ads. If you have a high lifetime value game and most gaming customers enjoy these deeper games, you’re hesitant to run ads that promote competitors. Previously, there wasn’t an effective way for them to monetize outside of gaming ads. However, if we can successfully facilitate this significant demand shift, we’ll be able to introduce more supply into the ecosystem, which will benefit it greatly. Additionally, as our models improve, publishers can acquire more retained users for their games, enabling them to expand their audience and access better tools for monetization.
Operator, Operator
Next, we'll go to Jason Bazinet with Citi.
Jason Bazinet, Analyst
So a quick question. I appreciate that 50% growth in week-over-week spend from these e-commerce customers. Is there any sort of context you can give us of like when you looked at that same metric during the pilot phase, what was it? Or how do you know that that's a good number or a bad number? I mean it sounds great.
Adam Foroughi, Co-Founder, CEO and Chairperson
I mean, look, like one of the simpler mathematical functions is extrapolation, right? So like we're starting pretty early here. It's a month in. And it does take a while for these customers to ramp up. Remember, ours is not a plug-and-play solution. They got to come in. They have to integrate pixels. They've got to go live. All of that takes time. So just to get to a point of go-live is a week plus usually. Some can do it very quickly, but it's not common to be able to do it in a day. So you have a period of lag time from October 1 to even a cohort going live. And then this cohort is not as big as what the absolute numbers were that we reported, I think we disclosed in Q1 this year of how big that cohort last year swelled to. But given the ramp-up, the ramp-up is really swift. So we're excited that if this continues to compound at the rate it is and then you keep adding new customers, this thing is going to snowball on itself. And the true value for us right now is not to say how do we extrapolate this out to when customers in this category become a bigger and bigger part of our business. It's more that the fact that it's working already a month in, and we're not getting bombarded with customer complaints, and we're not seeing a ton of issues implies that we're on the right track to eventually get open in '26 and really be able to bring in a ton of advertisers over the following quarters and years.
Operator, Operator
Next, we'll go to Clark Lampen with BTIG.
William Lampen, Analyst
Sorry, I have like 4 mute buttons right that I had to take out.
Adam Foroughi, Co-Founder, CEO and Chairperson
Complex setup over there, Clark.
William Lampen, Analyst
It's a bit complicated. As we consider the potential for significant business growth over time, I wonder how you approach balancing growth and exploring new potential supply while also building demand for that without displacing your core gaming customers. You're introducing a new bidder which could have a higher transaction value or consumer lifetime value. Will improvements in your model and a quicker pace of enhancements address this issue over time? Or how do you plan to manage the growth of this business if needed, to ensure you are still supporting your core customers?
Adam Foroughi, Co-Founder, CEO and Chairperson
Yes. I mean, look, one, we don't try to gate growth. So we sort of look at a platform as it's going to develop and evolve as it does. But understanding these models gives me confidence that as we get more density of advertisers, we're actually going to have expanded spend for gaming customers, not diminished spend. And this is a bit counterintuitive, but here's why. The model today, if you go back a year prior to us getting into e-commerce and shops, you ended up having 1,000 impressions to show a user and you bombarded them with games. Well, that's not a great offering. It's as if you had a social network that was showing short-form video and said I'm only going to show golf videos. Everyone who's on the golf videos at that moment would churn. Well, in our case, the customers aren't churning. They're playing games, but they're not going to convert. And our conversion rates are really low. There are moments when the model knows a user is going to be in the game. When those moments happen, the CPM for a game advertiser is phenomenal. It's really, really high. Our average conversion rate is that 1% that we've given a year plus ago. So maybe it's higher now, but just for this example, let's use 1%. We're driving 10 game installs over 1,000 impressions, but we're probably wasting 80%, 90% of those impressions because the model knows in a tight percentage of impressions, games are going to convert, and this user is ready for something new, and the CPM there will beat anything else that comes along. So you go and bring in demand density. What happens? Now the model can better use all that access impression. And so if it does, what's going to happen is your gaming customer is not going to diminish. It's just going to be more targeted. So maybe impressions go down, CPM goes up for them, but everything is priced to revenue for our customers. So they get the same revenue out. And then these new customers better monetize the user and give them more diversity of content, which hopefully will train them to better engage with our ads. And then you take it to the next level, which is now all of a sudden, we're getting data from way more types of customers. We now know, let's say, tomorrow, someone buys a $5,000 handbag on a website, that's the data point we didn't have a year ago. That data point, to my simple mind, can probably tell you that's a good user for Candy Crush if they haven't played Candy Crush. The neural net is going to tell you a lot more than that based on its correlations. And so you're building up a data set that doesn't just limit itself to the shopping category or the website advertising category. It helps enable better advertising for the gaming customers as well. So you put all those pieces together, and I'm really confident that we're not going to squeeze anyone in our platform. We're probably going to have expansion across the board as we add more demand density and get more data into the system.
William Lampen, Analyst
That's helpful. Maybe just as a very quick follow-up. You guys highlighted tuning the onboarding flows and generative AI creative. How far away are you or sort of at what sort of rate are we making progress to sort of getting one of those tools live? Would either of those things, I guess, be a gating factor to launching or introducing GA at this point? Or are they vital to going to a broader customer base?
Adam Foroughi, Co-Founder, CEO and Chairperson
The Axon Ads site is currently a work in progress. We are gathering inputs to refine an externally facing bot before integrating it internally. This process is underway and should be completed soon, leading to various bot implementations within the site. As previously mentioned, when customers upload ads or websites for promotion, we don’t manually review them; instead, a bot automatically checks for quality to ensure it meets our platform standards for both the creative content and the promoted site or application. We already have multiple bots integrated into the tool and will add more as we collect data, allowing for further refinements to enhance accuracy across the board. The generative AI-based ad creatives are not solely dependent on our input. The release of Sora 2 last quarter marked another advancement, and Veo 3 continues to improve. While we are still a bit away from a model that can autonomously generate more content and ads, we are nearing that capability. I anticipate being able to test generative AI-based creatives that we develop with some support from large language models within weeks or months, which could significantly increase the number of ads on the platform. Regarding your question about whether these tools are necessary for a general release, I don’t believe they are. Our primary focus is on optimizing the customer experience during onboarding and ensuring the conversion funnel is effective. If customers have a smooth experience and we are not overwhelmed with complaints or support requests, we will be ready to proceed with the launch.
Operator, Operator
Our next question will come from Alec Brondolo with Wells Fargo.
Alec Brondolo, Analyst
I appreciate it. I think as we've kind of spoken about direct payments and this transition from kind of paying the App Store and the Play Store 30% to going to an O&O payment product, we've kind of talked about this, I think, historically as more of a medium- to long-term tailwind. Do you think that might be manifesting sooner than expected? And did it contribute to third quarter results?
Adam Foroughi, Co-Founder, CEO and Chairperson
I don't think it's contributing much at all yet. I think it is going to be over the quarters that it's going to take impact. I don't think it's realistic that 30% tax goes to low single digits. So let's just take the midpoint, 15%. That's a material lift in LTV for a lot of these in-app purchasing games, roughly 20%. Some portion of that is going to go into development of more content, which is great. They're going to make better games. Some portion of that, they'll bank into the bottom line. Some portion of that will go to marketing companies. I mean I'll say the one thing about our business always is we don't try to think about what's happening outside of us. This is something that's outside of our control. It's up to the platforms, regulators and then the content creators. It's not up to us. What's up to us and inside our control is how good our tools are. Q3 was driven by what we said on the earnings script. The models continue to get better, iterative improvements in the template, more advertisements on the platform, more advertisers on the platform, all of that's compounding to really quick growth rate, even in the core category. We're still believing very confidently in this 20% to 30% long-term growth rate in our core category. But even in the core, we're beating that. And then now you're layering on, on top of that, all this opportunity with the self-service platform. So we're really excited about where we are focused on what we have underneath our control.
Alec Brondolo, Analyst
Perfect. And maybe if I could ask a follow-up. I think there's always been this talk about eventually extending the reach of supply. Like right now, most of the ads are placed in mobile games and then the idea is perhaps over time, we could go to other surfaces. It seems like some combination of AdX and Google Ads Manager might come up for sale as a function of the Google ad tech, antitrust trial. Would you be interested in those assets if they were available?
Adam Foroughi, Co-Founder, CEO and Chairperson
I mean, without commenting on what else is out there, like commenting about our business, the reality with our business is we think about providing the best solution to our partners. For the advertisers, we believe we're on the track to really give them a good way to access a really large audience playing games. For the game publisher and then expanding publishers as we get to more publishers on our platform, we've built them very good tools to monetize and promote their products and grow their businesses. As we think about going broader than that, the open web publishers and other app publishers that currently can't access our tools the same way could use better monetization. We all know that category is pretty slow growth. And then we talked about CTV in the past, too. Everywhere else is struggling to monetize except in the walled gardens and except on games, predominantly because of the success of our platforms. And so if that's the case, we look at that as our potential prospect clients as well. We should be able to extend our product offering over time to those folks. We need more demand. We're not supply constrained today, we're demand constrained. But if we do our job right and bring on a lot of advertisers, it serves us well because it serves them well to be able to extend our offering out to more publishers.
Operator, Operator
Our next question will come from Vasily Karasyov with Cannonball.
Vasily Karasyov, Analyst
Adam, I wanted to follow up on your earlier comments about LTV calculations that you believe your advertisers use. Given the differences in growth rates between the in-app purchases market and the in-app advertising market, can you share your insights on how your advertisers' LTV calculations have changed when comparing now to a year ago? It seems like the advertising aspect would be significantly higher now. What implications does this have for you?
Adam Foroughi, Co-Founder, CEO and Chairperson
The in-app purchasing market is generally more mature than the in-app advertising market, which is why we're seeing significantly faster growth on the MAX platform. The growth rates are much higher than those in the in-app purchasing market because established publishers are getting better tools for growth and monetization. Newer publishers are also observing the success of these publishers and are integrating more ads, leading to increased supply and better monetization of existing supply. The in-app purchasing market isn't generating many new monetization tools, and its growth largely depends on reducing the current tax rate; for instance, a reduction from 30% to 15% would provide a substantial boost. However, the situation varies across the platform and relies on more in-app purchases games being developed. There are numerous established games in that category that have limited growth potential, while many new games continue to launch. In the top 10 to 20 grossing in-app purchasing games, there's a wide range of titles that have come out within the last two years. Our focus is on where we can make a significant impact. We aim to assist in-app purchasing games with their promotion. The in-app advertising segment is particularly promising for us as it strengthens our core market. The true market pertains to the supply side on MAX. By improving their monetization and growth tools, we're witnessing an expansion in supply, which directly correlates to our growth. Additionally, we hope to enhance our growth further through improvements across other areas of our business.
Operator, Operator
Our next question will come from Matthew Cost with Morgan Stanley.
Matthew Cost, Analyst
Thank you for the 50% week-on-week growth metric that is really interesting. Is that the metric that you're managing to try to find the point at which you're going to go general availability? And if not, what are you looking at? Like what will be the things that you need to knock down for that to happen?
Adam Foroughi, Co-Founder, CEO and Chairperson
Building all these aspects takes time, and while I wouldn't be as concerned if our spending wasn't increasing significantly, the fact that our business is growing by 50% week-over-week is definitely encouraging. My main focus is on optimizing the conversion funnel, similar to launching a B2C product. The initial version of the funnel isn’t always perfect. We’ve already made some improvements, as what we have today is better than what we had four weeks ago, but there's still more work to be done. We can enhance our communication with clients, improve the emails that potential clients receive after signing up, and refine the tools within the dashboard, including the AI bots we've referenced. There are various areas where we need time to ensure that the quality meets our standards before we move forward. If we launch today, we might face challenges, especially with users' feedback as we reduce the size of our target advertisers. It's important to me that a local laundromat, for example, has a great experience reaching the gamer audience on our platform. If we’re not fully prepared today, we’ll take the necessary time to get there. I believe I indicated during our previous earnings call that this wouldn’t be a long wait, possibly by 2026. We're just dedicated to ensuring that our product reaches the level we desire before we proceed.
Matthew Cost, Analyst
Great. And then on the paid marketing front, I think you talked last quarter and maybe even mentioned in passing this quarter, the opportunity to do more of that. It looks like based on your sales and marketing budget in the third quarter that it wasn't something that you started to lean into. So how should we think about the timing and potential magnitude of doing more marketing?
Adam Foroughi, Co-Founder, CEO and Chairperson
Yes, we are currently conducting active testing. The testing budget is not going to be large. Even if we scale this, our business's size is considerable. Some of the largest advertisers only spend a couple of hundred million dollars a year. When you consider the scale of our business, this will never be a significant line item compared to our revenue potential. However, since our lifetime value is so high and we're focusing on optimizing our conversion rate, we believe we can create a compelling offer even though the brand isn't well-known. This sets us up well to promote our product to potential customers. If that proves true, and we know we have a strong lifetime value relative to user acquisition costs, we will invest more. As we scale, we will provide insights into the unit economics so that everyone understands our approach. We are capable performance marketers and will not waste money. We are focused on user acquisition rather than brand marketing. The investments we make will far exceed what we expend on user acquisition. For me, this is about fully automating our sales process. We'll still need some salespeople, but we can maintain a lean sales team aligned with our traditional culture if we can automate onboarding through advertising until go-live.
Operator, Operator
Our next question will come from Benjamin Black with Deutsche Bank.
Benjamin Black, Analyst
Is there any reason to think that the take rate or revenue margin from your e-com spend should be any different to that of the core gaming business? So any structural differences, I guess, to the advertising credits you're offering folks early on, perhaps lower the conversion temporarily. But longer term, are there any differences to be aware of?
Adam Foroughi, Co-Founder, CEO and Chairperson
No. I mean, look, the advertising credits we offer is such a tiny fraction of the overall value of a new customer. So it's no different than like a cost of user acquisition if we got the customer through paid marketing. So it's really low. So consider that immaterial. The business is not built to, say, web advertising or shops is treated differently than games. It's one unified auction. We're a single platform. So when we get a higher conversion rate, whether that comes from gaming or shops or any category, it's going to have a constant take rate across the board. It just implies that more density equals better conversion rate, possibly higher take. Yes, we're pay-as-you-go. So like I mean, we try to project and buy, in particular, GPUs, that being the more lead time-dependent part of the stack. We try to buy those a year in advance. So if you've looked at the financials, you'll see spikes in infrastructure investment, but it runs through the P&L. It's not capitalized, and we do plan it really effectively. And we don't try to really overinvest ahead of revenue. We want to make sure we're really disciplined. And that's completely aligned with our culture where we want to be cost disciplined in every aspect of the business.
Operator, Operator
Next, we'll go to Chris Kuntarich with UBS.
Christopher Kuntarich, Analyst
Hopefully, you can hear me. Just wanted to ask on web-based becoming available to EU advertisers. Any update there? And then, Matt, just a quick follow-up. Are you making any assumptions about advertisers that aren't currently onboarded in the 4Q guide?
Adam Foroughi, Co-Founder, CEO and Chairperson
Yes. On the EU side, we can work with EU advertisers today. We just don't open up our inventory for website or shop advertisers in the EU region of our audience. So just a clarification bullet. It tends to be somewhere in the low teens percentage of our business, if I remember off the top of my head. So it's not a huge priority versus expanding out the business. GDPR rules are more restrictive and require a build-out for us. So we'll get to it in due time. It's not a priority against getting to the general release of our platform and building out the rest of these tools we've talked about.
Matt Stumpf, CFO
Yes. And in terms of guidance, I think we've done pretty consistent to our approach thus far. We've communicated before that we guide to kind of where we feel very comfortable that we could potentially land. So we guide to what we know. We don't guide to try to estimate for something that's unpredictable. And in this case, we can't predict the number or the volume of new advertisers coming on to the system through the referral program and how that potential ramp in spend could happen through the quarter. So there is no incremental assumption built into the guide for onboarding of incremental customers.
Operator, Operator
Next, we'll hear from Rob Sanderson with Loop Capital.
Robert Sanderson, Analyst
I have 2. Just in terms of kind of understanding more of the sort of the current points of friction to bringing people on, it sounds like you're doing a lot of work to tune the onboarding flow. But sort of what other points of friction are necessary to address to just further optimize? And then you've also said that you're not seeing a ton of complaints, but I'm sure you are getting asks for features and things. So maybe what are some common sort of asks for feature add to Axon Ads Manager?
Adam Foroughi, Co-Founder, CEO and Chairperson
Yes. So the first question, I mean, like you've got 2 points of this funnel, pre getting-to-us. So eventually, we've got to get the brand out there. We got to be able to market the platform. We're constrained by how many referral codes we gave out. So like just advertisers coming to the Axon platform and signing up. So let's set that aside because we purposefully constrained that. After the sign-up, we want to make sure we have as little drop-off as possible. Of course, with any product, when you get a sign-up, not every sign-up is going to be qualified, but we think a lot of these are qualified. So we're optimizing to as high a rate as we can from sign-up to go live. In terms of feature requests, surprisingly, not a whole lot. This is like, I would say, hard to guarantee that it will be that going forward because we're only a month in. So like if there's a lag time to integration and ramp up, and we're seeing the swift growth, you don't have time for these customers to really understand the platform yet. So that may change, but we get more feature requests from our current cohort of customers, the ones that went live a year ago, much more so than what we brought on in the last month.
Robert Sanderson, Analyst
Could you provide an update on international expansion? You mentioned launching earlier than expected, but it seems there is no presence in the EU. Can you share the current availability? Have you noticed any surprising behaviors from this new group of customers? Additionally, what are the next steps for expansion? I assume there are plans for language optimization and channel development; what specific steps are you considering to enhance the international aspect of the business?
Adam Foroughi, Co-Founder, CEO and Chairperson
Yes. So first off, it's everywhere in the world, except for EU traffic for web shops and web advertisers. App advertisers are everywhere in the world. We don't operate inside China, but the rest of the world is there. In our business, the customers that we have today are mostly Western shops. And so those Western shops aren't likely to go into Japan or Korea. Japan being our second biggest market and promote themselves. They're just not going to have a localized product offering. So the countries that have really been successful for this current customer base are the obvious ones, Canada, Australia, New Zealand, et cetera. So English-speaking, similar makeup to the U.S. As we go open up the platform, that's when we'll go try to get local presentation inside Japan, Korea and other markets that are more closed off, but very large markets for us. And in the Western markets, we already have a presence. So it will be faster to get going. I think over time, localization is fortunately not a challenge anymore with LLMs. Language is pretty easy to solve. So we're fairly solved over there. It's just much more built around getting the system to be workable the way we're talking about for the West, goes global, right? Like all users around the world that we see playing games, the human beings behave similarly. They might buy a shot from different shops because there's local merchants in each one of these markets, but humans aren't behaving much differently in Japan or Korea or Canada or Australia to the U.S. So the model translates all human behavior to math. Math is universal. And so as we launch and broaden out the platform, we don't think there's going to be some big lift to really see a lot of success internationally. And we haven't seen that as we've opened up these markets and have these same customers expand out.
Operator, Operator
Our next question will come from Martin Yang with Opco.
Martin Yang, Analyst
Sort of related to the last question, can you maybe talk a bit more about your current cohort, how they have been performing in 3Q? For example, are they more actively spending, given your improvement in tools, having more features, et cetera?
Adam Foroughi, Co-Founder, CEO and Chairperson
Yes. Look, over the last year, I mean, it's been a year since we've had this product, right? So the team is continuously improving the product. So the return on ad spend for the customers has gotten better. The tooling has gotten better. We went from the old dashboard to the Axon Ads Manager. So the tools that they have at their disposal has gotten better. The customers' understanding of our platform has gotten better. Just that nuance on ad creative that ours are 35 seconds on average, whereas social is 7 seconds. It took months with a lot of customers to explain that fine detail. And that if you're not building a 45-second ad, you're going to lose to your competitor. So all these things just compound. We're 1 year into a product in a very large advertising market, competing with other companies that are years or decade plus into that same market. So as you build better tooling and as you get a better understanding of your tools, you see the effect compounding, the knowledge compounding, the usage compounding. And so we're seeing trends that are positive. But this thing is going to take time to build at the level that we want to build. We've been in the gaming business for 13 years. We're clearly the best channel for the gaming customers at this point. We think we can replicate that success across all these other categories. And as we build to the scale that we're accustomed to operating at, you'd expect a lot of compounding success over time across knowledge, usage and tooling.
Martin Yang, Analyst
Got it. I have a quick follow-up on the PSU issued in October. That's for engineering employees. Can you maybe give us more context? Is it for a small handful, single recruiting, retention? Any additional details would be helpful.
Matt Stumpf, CFO
Yes. It's a pool, Martin, for a group of engineers, but it's also a future tool that we can use for recruiting as well for new hires into the engineering team.
Operator, Operator
Next, we'll go to Jim Callahan with Piper Sandler.
James Callahan, Analyst
I just had a follow-up on the referral codes. I guess, are all the codes so far given out? Or is this something we can expect the partners to sort of continue doing through early 2026?
Adam Foroughi, Co-Founder, CEO and Chairperson
Yes. Generally, if there's a partner that we gave X codes to and they run through X and they deliver quality leads, we give them more. And we can measure back to every referral partner success of the customers they bring. So we don't want to constrain good referral partners. The gate is solely to slow it down so that we have time to build the tool the way I've been talking about. But if someone is bringing us good leads, we're going to take good leads. So we're going to be dynamic in the codes that we issue across the board if we see success coming in.
James Callahan, Analyst
Got it. That's helpful. As a follow-up, you mentioned being selective about having the right kind of advertisers. How would you define low quality or an advertiser that wouldn't work well with the platform?
Adam Foroughi, Co-Founder, CEO and Chairperson
Yes. Over time, we will be able to attract a wider range of advertisers because we will have more density in our customer base, and customers won't encounter the same ad 200 times. Currently, we lack that density, so it's possible for a customer to see 200 impressions of the same ad. Right now, we determine the quality based on whether our team is willing to purchase the product. If they believe it's a good product and are willing to buy it, then we want to include it on our platform. However, this standard may change in the future. Many companies we currently consider low quality and do not allow on our platform are active in social media and search ads. These are legitimate and often substantial businesses. Our goal is to maintain a consistent and large audience and train them to expect high-quality ads. Without competition, if customers are overwhelmed with singular offers, we want to ensure that each one is exceptionally valuable to them.
Operator, Operator
We'll take our last question from Nat Schindler with Scotiabank.
Nathaniel Schindler, Analyst
I'm going to provide a high-level overview and revisit an earlier question about your interest in any Google assets if they become available. You are experiencing remarkable growth and it seems like you plan to maintain your focus on the gaming sector while also expanding into e-commerce, which presents a significant opportunity. I assume that much of this success is due to your improving conversion rates, which you have managed well over time. However, there is also the factor of inventory. At some point, if conversion rates exceed expectations, and if e-commerce has lower conversion rates compared to gaming, when will you deplete your inventory in the core gaming market?
Adam Foroughi, Co-Founder, CEO and Chairperson
Yes, we don't have a clear answer right now. There's still a long way to go, especially since we currently have low advertiser density. No other company in the advertising space has been structured like ours in history. In Q1, we reported over $11 billion in ad spending, while the number of web and gaming advertisers is still in the low thousands. This means there is a significant amount of spending with very few advertisers reaching over a billion daily active users. As we increase advertiser density, we will gather more data, which will enhance our models and likely improve our conversion rates. In social media, growth has not simply come from user increases but rather from a higher conversion rate driven by advancements in technology. We believe we will experience a similar trend and are focusing on bringing in more advertisers. Starting from such a low point suggests that we could see considerable growth in conversion rates over the coming quarters and potentially years before we need to address supply issues. Additionally, we find it important to assist a broader group of publishers in both the open web and connected TV to improve their monetization. It’s well-known that we excel in performance advertising, and at some point, we aim to expand our supply base. However, our current priority is the demand side of the platform, as there's still much to accomplish there. Eventually, we will address both aspects.
Operator, Operator
And that concludes the question-and-answer session for this quarter. We thank you all for joining us today. Have a good afternoon.
Adam Foroughi, Co-Founder, CEO and Chairperson
Thanks, everyone.
Matt Stumpf, CFO
Thank you.