Q2 2021 Applovin Corp Earnings Call
Greetings and welcome to the App with an earnings call for the quarter ended June 30th 2021.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Mr. Ryan Gee head of Investor Relations and strategic finance. Thank you. Mr. G. You may begin.
Yes, Thank you Alex and welcome everyone to <unk> earnings call for the quarter ended June 30th 2021.
Joining me today to discuss our results and key business initiatives, our co founder CEO and chair person, Adam for Ob, and our President and Chief Financial Officer, Eric Chen.
Please note that our SEC filings and earnings release are available at investors <unk> com.
We have also posted the shareholder letter discussing here.
Q2 performance Alright.
Before I turn it over to Adam I would like to remind you that during the call we may be making forward looking statements regarding future events.
The financial performance of the company.
These statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected or implied today.
For more on these potential risks please refer to our most recent Form 10-Q filed may 14th 2021, and our Form 10-Q for the second quarter 2021 to be filed in the next few days.
That said you should not rely on our forward looking statements as predictions of future events. All forward looking statements that we make on this call are based on.
And beliefs as of the date hereof Knapp loving disclaims any obligation to update these forward looking statements except as required by law.
Discussion today will include non-GAAP financial measures. These measures should be considered in addition to not a substitute for or in isolation of our GAAP results information regarding our non-GAAP financial results, including reconciliation of historical GAAP to non-GAAP results may be found in our shareholder letter furnished with our form 8-K filed.
Today with SEC.
As well as in our Investor Relations website.
Finally, a recording of this conference will be available on our IR website. Shortly after this call.
And with that I'll now turn it over to our CEO from me Adam.
Thank you Ryan we were excited to have you on the Apple IBM team. Thank.
Thank you all for joining us today I hope each one of you has an opportunity to read the shareholder letter we posted this afternoon, highlighting our second quarter business and financial performance.
This is the second earnings period, we've had as a public company and once again I'm extremely proud of the strong execution by our teams this quarter, which resulted in a record financial performance.
And the Q1 earnings call, we spoke a lot about how software powered by our first party data advantage, where the selling in the marketplace. Today, we're very proud to give you data that will show you. The significant gain we've had in the software business. Since then.
Consumers are downloading roughly 150 billion apps, a year and probably half of those through organic discovery on the app stores themselves.
Grew up loving software platforms in the first half of the year consumer's downloaded almost 2 billion installs our market share is growing and we have become one of the largest platforms for developers to market to consumers I'll touch on two topics to demonstrate our strengths.
First is the tremendous performance and prospects for our software business.
Since the launch of our machine learning engine axon, our software platform revenue growth has accelerated for three consecutive quarters.
And during the second quarter, our software platform revenue more than tripled year over year.
Improvement in the efficacy of our software is also accelerated customer adoption in the second quarter, we tripled the number of software platform enterprise customers or specs to 366.
We also saw significant growth in spend with net dollar based retention.
279% from our existing specs.
Even when we exclude adjust growth was just as impressive with stocks more than doubling to 237 and software revenue more than tripling.
Our average quarterly revenue per spec, excluding adjust was also up 51% year over year to an all time high.
We're focused on growing our client base, which in turn drives up pricing in our marketplace as well as most software businesses ours included there is a high flow through of incremental revenue to EBITDA.
This material growth led to us achieving record EBITDA performance.
Looking forward, we're excited to be integrating the adjust team into our business Here's the simple way to think about this opportunity. If every one of the 250 sales and marketing people on the adjust team convert just one client out of their 3000 clients in the next year into an all spec.
Our software business will double.
Given the favorable growth and margin profile of our software business. We believe it will be a key driver of our long term value creation.
The second point I'd like to highlight is our differentiated approach to mobile content.
We are unlike traditional mobile gaming publishers.
Our top priority is to generate scaled first party data across a wide audience larger scale and first party data enhances our targeting capabilities ultimately leading to the exceptional growth in our higher margin software business as we saw this quarter.
We've invested heavily in us over the past three years and now have an annualized revenue of more than $2 billion growing this business organically, 80% year over year.
Even more importantly, we have one of the largest pools of mobile development talent in the world with close to 3000 content creators across 16 Global studios with expertise in nearly all popular mobile gaming categories building content exclusively for us.
We were the number one publisher globally by downloads in the second quarter. According to sensor tower.
While many of the gaming teams we have invested in are relatively new to up weapon. The majority of those teams have been working tirelessly on new content, we have a handful of new evergreen titles planned for launch in the second half of the year.
We use the term evergreen for titles that we believe can have a meaningful impact on our P&L and over $100 million of annual revenue for many years.
This pipeline of content and the ability to scale more hits like project makeover, Wordscapes and many others is what makes us very confident in the prospects of this business for years to come.
To summarize we had a great second quarter. Our record performance was a result of our unique and integrated business model powered by our strong technology and a great team.
The fact that our business and our software run rate grew organically year over year faster than any other scaled advertising solution.
Despite what many in our industry anticipated would be a significant growth headwind with regards to data privacy speaks to the unique insights afforded to our software engine from our proprietary first party data our market share gains and see the tremendous opportunity for growth ahead of us.
Now before I hand, it off to Herald to highlight financial performance I'd also like to announce that auctions Sharma has recently joined our board of directors. All shows the CLO of instant cart and has held successful senior roles at Facebook porch in Microsoft She's a proven tech operator, and leader and we're very excited to be.
Working with her.
With that I'll pass it to Harold.
Thanks, Adam and thanks to everyone for taking time to join us.
Our business performed exceptionally well in the second quarter results driven by the hard work and focus of the global epilepsy team.
This momentum an awesome team bolsters, our confidence in Apple evidenced integrated strategic approach to the market, namely soffer fueled by scaled content and data and in turn our confidence for future growth and expansion.
In addition to all the excellent growth metrics already mentioned by Adam I'd like to highlight a few additional points from the quarter.
First on the software side, our total software transaction value or T. S. T V grew over Forex year over year in the second quarter to an annual run rate of approximately $900 million.
That makes us one of the largest and fastest growing players in the category as a reminder, T. S. T V, which we launched in the first quarter adds back or eliminated intercompany revenue from owned and operated marketing spend.
If we do that in order to give you a comparison of the total scale of our software business on an absolute basis and compared to our peers.
An additional point on software.
Though early we are pleased with the progress we're making on their software platform with non gaming customers, where revenue more than doubled in the second quarter compared to the first.
One relevant customer case study is posted on our website highlighting our success for an app called fast at a leading fasting up where.
Where we drove 125% increase in installs.
Of note adjust whose large customer base as well over half non gaming will also accelerate our growth in this category.
Next as Adam mentioned, we doubled the apps business year over year and have a strong pipeline of new evergreen games coming in the short term.
I want to emphasize and highlight the scale and depth of both our apps portfolio and our development capabilities, which gives us strong diversification.
Business model durability and paths for organic growth in this business.
With regard to cash flow as Adam mentioned, we delivered record adjusted EBITDA, we grew more than 200% year over year and over 40% quarter over quarter to $184 million margins improved to 27%.
A big reason for this expansion into the growth of our software platform, which operates at a much higher margin than our apps related businesses.
Therefore, their software business grows it can drive meaningful adjusted EBITDA growth and margin.
One last quick highlight our combined Q2 revenue growth and EBITDA margin, let us to a rule of measure of 150%.
Moving to <unk> 2021 outlook, we have strong momentum in the and for the second half of 2021 and we are confident that we can deliver against our organic financial outlook provided previously which was revenue between 2.65 billion to $2.7 billion and adjusted EBITDA between 680 million to 700 million.
Importantly, we see several opportunities for added growth over the next several quarters in particular, given the strong momentum in software and from all the investments we made over the past few quarters and years to grow our apps business.
Again, thanks for taking time today operator, please open the line for questions.
Thank you we will now be conducting a question and answer session.
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Our first question comes from Alexia QUADRA, Ronnie with J P. Morgan. Please proceed with your question.
Oh Hi. Thank you. This is David Karnofsky on for Alexia, Adam Your software business clearly accelerating here amid F. Changes can you just talk through some of the drivers what do you think software clients are seeing in your platform versus competing networks or some of the walled garden channels and then can you just discuss a little bit more.
The integration of the just what's been the experience so far utilizing their salesforce cross profit about your core services.
And if he found that he just conserve as an entry point to developers that are just starting out are launching their games.
Great. So the software side obviously.
A lot of acceleration and we touched on it last quarter. When we highlighted what we thought the impact would be the changes really govern how a third party shared data with first parties and how that data is used for advertising and in our case, we have a lot of first party data both scaled 200 million users a month playing our game.
The cross engagement data and then also scaled transactional data, which is very unique we've got millions of customers paying and having paid in our games and then that data we're able to put in our machine learning engine axon to come up with really add recommendations that drive much better performance for the advertiser, we rolled this out.
In Q4 of last year, and you've seen immense amounts of growth on the software side. Both in terms of the dollars that people are spending on our platform, which is reflective of the performance and in terms of new clients coming on which doubled year over year, we're very confident in this trend going forward.
And then in terms of the integration of adjust we close that late April so through Q2. It was more of a work of just integrating them into the team getting them up to speed on how our software solution to operate the average ticket size on an adjust client is tens of thousands a year our average ticket size of App wasn't on our salt.
For our client is roughly $2 million a year of net reported revenue and as you. All know typical AD network margins you gross that up by a factor of three or possibly even more to figure out how much of a typical advertisers spending on our platform per year, and we look at adjusted and I touched on this a second ago.
As an opportunity to go convert 3000 clients to become up 11, specs and we even convert 7% of those clients to become up 11 specs in the next year will double our software business.
Okay, Great and maybe if I could just squeeze in one more just on the decision not to adjust your outlook. After the strong quarter, maybe you could just talk through your philosophy.
You know that you laid out in the shareholder letter acute SEC guidance, just one times at the start of the year. Thanks.
Yes.
I would say is the meeting I've been operating this business since I started it really looking forward with our team to opportunities to execute on the technology and product side years ahead of where we're at in the present and what we didn't want to get into the <unk>.
Return of trying to update numbers every single quarter and shifting our mindset from a long term focus, but we know creates the most long term shareholder value to one that's more short term focused obviously our business is performing exceptionally well we've got a lot of assets in place that we believe will give us a path to growth for many quarters and years to come.
And so we're very confident that we'll continue to put up very strong numbers, but we decided financial financial guidance should match the way we operate and we will update those annually for you all and less where we're gonna diverge materially from that guidance.
Great. Thank you.
Thank you. Our next question comes from Stephen Ju with Credit Suisse. Please proceed with your question.
Hey, Thank you so much so Adam and as a follow up question for just I guess.
You are calling out 2000 gaming and non gaming and marketers spending 11 billion in mobile AD dollar. So can you talk about what incremental work do you think you need to do.
Order to gain more wallet share there. Thank you.
Thanks Steven.
It's interesting because the reason we got really excited to do this transaction. It was frankly really difficult to do during the IPO process that we felt like we had to do it is we went and crossed our clients with adjust clients and there was almost no overlap just had the team that's based in Berlin, and then really they invested going.
East from there so a lot of their clients are international and we realize without a salesforce. We just didn't have.
Any sort of penetration into this international client base, we didn't even know who these customers weren't obviously, they're huge mobile marketers. So that's what got US really excited we saw just greenfield to go operate where you've got 3000, almost clients that they've got and probably 500 plus of those are big enough to become <unk>.
So it's just not going to take a lot of work for us to go convince them if they're already spending substantial dollars on mobile marketing to test out our platform. It's low cost and then creates massive amounts of upside.
And Harold touched on the case of <unk>, which was one of the earliest adjust cross sells but it's something we're going to be investing heavily into going forward because it's such an easy path for us to go tackle to create immense amounts of growth and that's all for our business.
Thank you.
Our next question comes from Jason Bazinet with Citi. Please proceed with your question.
Okay, I'm going to apologize in advance. If this is a dumb question cause I confess I'm still trying to wrap my head around the new Kpis, you gave last quarter, but.
The software platform our revenue year over year grew from 41 to 146 million to up one O five.
Business, perhaps revenue went from 96 to 160 Chew up only 66.
Is there something in the middle there.
It is worth highlighting that may have shrunk.
So business ops just to be clear is advertising from third party.
Typically AD networks within our own mobile game applications, and then business software is obviously, our App discovery solution on the Max solution and now it does so the software net revenue that we report that business grew exceptionally quickly with the advantages that we thought we had going into the changing landscape one of the things.
We touched on in the first quarter earnings call as our other prediction on the idea of Fei changes where their prices in the ecosystem would drop on iOS and that flows through to business publishing now despite that business publishing had quite sizable growth. The mobile gaming ecosystem doesn't tend to grow that quickly on a year over year.
Basis, so despite the lower pricing in the ecosystem, we still were able to generate outsized growth in that business as well.
And maybe I can add onto that I asked.
Yes sure yes, we are within the business category. Originally we had the apps and the software.
We broke it out for you before but now are explicitly showing you the number of customers.
On the software side, we still in the disclosure have the enterprise customers, which could total up to the aggregate business revenue, which includes both the business apps revenue and the software revenue business apps revenues, you'll see in the letter grew 70%.
In the quarter and then of course, the software side grew at a much faster rate of 256.
Okay can I ask maybe one other time question.
If I if I take the the the client since you hired over 125000 and the spend per quarter, if I multiply those two numbers together.
I compare it to the software platform revenue it used to be sort of like a rounding error in this quarter. It jumped up whereas like I don't know $13 million or something like that is that from the adjust acquisition or are you beginning to get more traction from business accounts that generate less than 125000 words, becoming sort of a larger number. Thanks.
Yeah, I can take that one as well so in the letter we do show you what the business did without adjusting with adjust.
So without adjust the average spec client spent 150 honored I'm sorry $519000.
And the revenue for the quarter. So it was a month that's a much bigger increase over the prior quarter, then they adjust specs, which is the incremental 129 customers. They do have a lower average so the total overall average when you combine them was the $3.64.
Okay got it thank you very much.
Thank you. Our next question comes from Youssef Squali with truly Securities. Please proceed with your question.
Alright, great. Thank you and guys congrats on a solid quarter. So two questions one a follow up on the adjust.
Acquisition I was just wondering if maybe you can speak to.
The the rollout of the or the cross selling potential Oh that 250 salespeople.
And just kind of how how quickly do you think he can ramped that up and kind of what's baked into your published guidance, So far and second and obviously the numbers speak for themselves as they just going back to the I T. S. I was wondering if you can comment on the percentage of iOS users that have upgraded to <unk>.
14th at five or later.
And what kind of impact have you seen either an opt in rate or basically on on that on that sliver off the business. Thank you.
Thank you.
I'll answer the second first just because it's quicker.
We've seen about 80% of iOS devices are now updated for 14 five years later and consent rates are coming in quite a bit higher than I think a lot of the folks in the industry had projected it's different by a buy out but anywhere between 20% to 25% on the low end and $60 to 65% on the hire.
And it lands on an average to around 35% to 40% are opting into sharing information. So that's an idea pay changes on the adjust piece. Yeah. Again Q2 was just integration get the team trained up it takes a little bit of time for clients to come on our platform it actually ramp up.
Theres learning costs and the learning timeframe. So it's really we'll start seeing the effects of the dust starting in Q3 really taking shape in Q4 and impacting next year quite materially as such we didn't project too much into our numbers at all from adjust cross sell this year, we're already starting to see though quite a lot of <unk>.
Ross selling activity happening because frankly, it really isn't a hard sell these or mobile marketers. They know how to spend dollars on mobile they are performance buyers and as I touched on in my summary to we've grown to become such a big source of mobile traffic acquisition that it's really easy for their salespeople to commence.
One of their clients, who hadn't heard of us before to go test out our platform.
And then Harold I don't know if you want to if you want to give anything explicit on the guidance there.
In terms of adjust.
In terms of the guidance, we have known we were gonna acquire adjust at a time so our guidance for the year. When we gave it in the first quarter. It was inclusive of of that and the two acquisitions, we announced in the first quarter.
Got it okay. Yeah. So we included their numbers that not much upside from cross sell so that creates quite a lot of upside for us in the future. Okay. Okay. Thanks for that clarification that was actually important.
Okay.
Thank you. Our final question comes from Brian Nowak with Morgan Stanley. Please proceed with your question.
Hi, guys, it's Matt on for Brian Thanks for taking the question.
So I guess you know for the software platform I think you guys said in the letter you had about 40% organic growth sequentially versus <unk> versus <unk>.
How did axon contribute to that growth versus conjectural products and did that change at all in terms of like the strength in the contextual products as you moved through the quarter and maybe more people were upgrading to <unk> 14.5, or higher and then you mentioned software gaining share continuing to grow.
I'm sure this quarter, who.
Who in the ecosystem.
Or are the share donors.
At this stage.
Hey, Matt So let me answer the second first it's top of mind, we think the ecosystem itself is still growing quite quickly.
In our space in the last 24 hours, you've seen unity reported great numbers iron source. The great numbers, we obviously reported industry, leading growth numbers with that triple digit software growth and a 40% sequentially. What we think is happening is that the marketing platforms are just improving and they are improving at a really quick pace, which.
Increases the pie and its not that were taking from another company is that the market is growing we're just outpacing the growth of the market, which is leading to all of the key players in the ecosystem, though growing as well as the publishers themselves, who who lean on advertising to grow their business and then on the first one.
But the 40% growth sequentially.
Can you just rephrase the question for me so I can remember exactly what the answer.
Oh, Yes of course it was just it was just about the contribution to that growth from axon versus contextual advertising it.
Detroit.
Yeah. So if you recall, we touched on in first quarter earnings our advantage, we felt like going into the idea of Fe change was compared to our peers is that we weren't going to fall back from a completely personalized solution to a completely contextual solution that lacked the personalization you got what data are advantaged truly comes from.
Very scaled first party data, we've got 200 million users playing games every single month that we've got good engagement data on we've got millions of customers, having paid us over the history of our gaming business all of that data remains intact and is in our models with or without RT FAA and so going into the quarter. We felt like we had advantage.
As we articulated it for you all in Q1, and then obviously you have seen in the step up in performance.
That three X growth in the software business and about 40% quarter over quarter and the huge ramp up and clients that we're able to outperform in the marketplace because of those investments we've made over the last couple of years.
Great. Thank you.
Thank you. Our next question comes from Andrew song with Oppenheimer. Please proceed with your question.
Hi, Thank you for taking my call I'm actually speaking on behalf of Mark.
Can you talk to us a little bit about your first party game pipeline for 2021 and entering into 2022 and are you planning on expanding into more genres or.
Our market opportunities.
What is your long term revenue mix cool for first party games versus software.
So thanks for the question the game pipeline itself, while we don't talk about games, because we operated as a portfolio. What we can tell you. This we started the game this business three years ago, roughly but most of our investments and creators coming into our ecosystem to build content for us.
Happened in the last 18 months, we've now got 3000, roughly game creators around the world that our expertise across nearly every category of mobile gaming building content for US now we pulled out this notion of an evergreen title is these are titles that take substantial amount of investment to go build usually in the millions of dollars of R&D.
But also more importantly, one to two years of development time since our gaming business is so new you haven't yet seen a pipeline of content rollout from US yes, we're working on it and you've seen it reflected in our expenses. The first game. They came organically launched last year in November project makeover and within tumor.
<unk> was top 20, grossing globally mobile again, one of the fastest growing of all time. So what gets US really excited is that in the second half of the year. We're now going to have a constant pipeline of big games Rolling out one of the handful coming over the next few months that will launch and we believe and have confidence in we will be able to clear this threshold, though.
We define as an evergreen titles at least $100 million of revenue per title.
Per year with an outlook for many years to come of being able to generate that.
And then do you mind repeating the second question as well mix.
The mix of software.
Okay.
You want to answer that one here.
Yes, sure sure sure.
Look where our strategy is to grow both sides of the business and be opportunistic where we can be of course as you can see in this quarter. Our software business has tremendous growth and a big market potential and so that that business and we see quite quite robust growth rates for quite a quite a long time on the IP side look we've gone from zero to.
Several billion dollars in less than three years and as Adam just mentioned a lot of that has come in the very recent few quarters and so that should be accelerating as well as we get more studios launching new games, we improve our live ops behind those games and over time, we don't target necessarily a mix, where we're looking to grow both businesses.
Yes.
As efficiently and as quickly as possible.
We see the software business, though you don't know that it given the margin structure as we mentioned will drive significant EBITDA and if it grows faster than apps will increase margins.
Percentage of overall revenue again, not that we're targeting it I think we were 14% in 2020 for the year in this quarter, where software is now 22% of the business.
Of the accelerated growth.
Yeah.
That was one thing to add to is as we do you think about the two revenue streams. The software revenue stream, but just much higher value in terms of conversion to EBITDA. When you build games at least upfront with our strategy, where we're generating scale. We're investing heavily in their user acquisition now we have cost synergies and for that you can just take.
T S. TV number minus the third party software reported revenue number and that was annualized $300 million a year of UA savings that we have because of our integrated solution, but still we're investing a lot in growing that gaming business, because we want the audience that software business every incremental dollar is exceptional.
High margin so the way we look at our businesses. If we can grow the software business really quickly our EBITDA will continue to improve and that's why when you look at the numbers. This quarter yet you can take the revenue and the EBITDA beat and you noticed the dollar for dollar revenue almost entirely flowed through to EBITDA and that's because software is.
So well.
Great. Thank you for the color and congrats on a great quarter.
Thank you.
This concludes today's teleconference. Thank you for your participation you may disconnect your lines at this time.
Yeah.