Q3 2022 Applovin Corp Earnings Call
<unk> founder CEO and chair person, Adam Pierogi, and our President and Chief Financial Officer, Harold Chen.
Please note our SEC filings as well as our shareholder letter discussing our third quarter performance are available at investors <unk> Dot com.
During today's call, we may be making forward looking statements regarding future events expectations regarding the market the future financial performance of the company and our strategic review of our apps portfolio. These.
These statements are based on our current assumptions and beliefs, and we assume no obligation to update them, except as required by law.
Actual results may differ materially from the results predicted.
We encourage you to review the risk factors in our most recently filed Form 10-Q.
For the fiscal quarter ended June 32022, and in our Form 10-Q for the third quarter, which we expect to file later this week.
We will also be discussing non-GAAP financial measures reconciliations of our GAAP and non-GAAP financial measures are included in our shareholder letter available on our Investor Relations website.
Please be sure to review the GAAP measures and the reconciliations as.
As the non-GAAP measures are not intended to be a substitute for or superior to our GAAP results.
Be advised this conference call is being recorded and a replay will be available on our IR website.
I would now like to turn it over to Adam for some opening remarks, then we'll open it up for Q&A.
Please go ahead Adam.
Thanks, all for joining us today as this market continues to be difficult, it's easy to get disappointed, but youre not going to hear any disappointment for me today I have been building businesses for nearly two decades now and one thing I know is it takes years not quarters to build a great business, we have several things to be excited about.
It up 11 today first in 'twenty, two we're going to generate over $1 billion of EBITDA growing nearly 50% over 'twenty. One we're going to convert the majority of this to cash our ability to generate so much cash allows us to patiently address our market and go after the business opportunities in front of us even in a difficult market.
Second our business is incredibly stable.
It's easy to look at our industry and realize how difficult. It is right now, but it is really easy also to forget how biggest sector. We're in.
Everyone's got a mobile device most people are playing mobile games. Many people are playing mobile games every single day.
The size and stability of our category as well as our market leading technologies give us a lot of confidence in our business long term.
So what are we focused on it up 11 today that gives us a lot of confidence that as we go through this economic downturn and come out we're going to be a stronger business for it.
First and most importantly, we're focused on retaining our core team many of our key contributors have been at the company for many years I've had the pleasure of working with each and every one of you we're going to continue to invest it up loving and make it a great place to work out.
Second we're really focused on attracting new talent over the last decade, there has been a talent crunch and Silicon Valley more recently, we're getting resumes from incredibly qualified individuals better than we've ever seen before the opportunity to attract new talent and pair it with our existing and exceptional team gets us very excited.
Third we're working tirelessly to improve our core technologies, we see a path to doing so and if were successful it will allow us to create growth that we can control.
Fourth we're still investing in new initiatives and we're very excited about these they utilize our core technology and core competencies and will enable us to go into bigger market opportunities. If we're successful here will create immense upside for both our shareholders and team.
And lastly, we will continue to be strategic with our cash we will look at share buybacks. We will also use this moment in time to try to attract new investors shareholders that are going to be focused on our long term vision just as we are.
The market today presents a low multiple entry points into our company.
What's interesting about that is we generate a ton of cash so it gives us a good base and we're also going after very very big opportunities and were successful in executing around our vision over the coming years, we're going to create outsized returns private market like returns that opportunity gets us really excited in fact, we are working harder today at op 11, then.
Ever work before because of that upside.
I'll now hand, you off to Harold Thanks.
Thanks, Adam and as outlined in our shareholder letter.
The challenging backdrop, we are very much focused on what we control firstly bolstering our leadership positions in our core markets in our core products and second using this cash flow that Adam mentioned, it's really invest behind initiatives that are focused on increasing the durability of our business ultimately leading to long term growth, which will then lead to enterprise value creation.
Shifting to the third quarter.
Starting with software business, we grew about 59% year over year.
And based on our guidance from the second quarter as expected. It was generally flat to the third quarter.
EBITDA grew 49% year over year and achieved a 62% margin in the third quarter.
We had 538 specs a record in the quarter and that also had an IRR on that dollar retention revenue retention of 166%.
On the App side, which is the midstream or change operational changes as we've previously discussed the revenue was down 24% year over year, but EBITDA, which is where we're focused was up.
It was up 12% to 17% margin. So on a combined basis. The total revenue was down slightly year over year, but EBIT dollars up 35% to two.
$258 million of $1 billion run rate.
<unk> achieved an EBITDA margin of 36%.
And then shifting to our outlook for Q4, we see Q4 coming in fairly similarly to what we achieved in Q3 and if that's the case then the year will end up at $2 8 billion with a margin structure around 37%, 38% adjusted EBITDA the components of that we see would be software being over 1 billion.
And revenue.
With a mid <unk> EBITDA margin on the application side, we would see a $1 seven plus billion dollar revenue stream with the margin structure in the mid teens.
Of note going forward, we will only be providing our fourth quarter guidance and will not be providing a full year guidance in the future.
We've been talking about cash flow in a little more detail, we do plan on generating $1 billion of EBITDA. This year. We also plan on finishing the year with over $1 billion of cash on our balance sheet and as you. All know we're able to convert a high percentage of the EBITDA or free cash flow.
Very limited amount of Capex as Adam described we're able to then reinvest those dollars and have the financial flexibility and the patients to invest in projects not trying to chase quarter to quarter growth on things that don't yield long term return, but really invest behind our team our talent and our tact to ensure that we're in a great spot going forward.
We also have $400 million.
Of availability over $4 million available of availability on our stock repurchase plan.
And given the stock market environment today, and the re rating of risk as well as our highly leverage able operating structure, where we do have growth in our high margin high cash flow business. We think the combination of todays stock valuations and stock multiples combined with the ability to have high operating leverage when we return to.
Growth those dollars flowing to the bottom line, we think for shareholders and for us and consider stock buybacks could be a very attractive return.
And with that I'll turn it back to Ryan to go through Q&A. Thank you.
Thanks, Daryl So we will now begin the question and answer portion of the call if you'd like to ask a question. Please use the raise hand function on your zim client and for those of you that are joining us by phone.
Please press star nine to raise your hand, and DB shirts, you're on mute your equipment before asking your question and we'll get through as many as we can in the allotted time.
So the first question that we're going to take us from Tim Nolan from Macquarie Go ahead Tim.
Great can you guys hear me.
Good Thanks, NIM excellent. Thanks.
Can I dig in a little bit to the software platform side.
You've said previously that.
Given the integration of MAU pub in the great scale, you've got there all of the integration has got an aviation platform that.
Game maker.
<unk> will simply have to continue advertising to promote use of their games and you've got such a great market position there.
However, it looks like the growth is slowing I was wondering if you could maybe update us on your thought process as to how game developers are going about their advertising or where they are pulling.
And is there any increased risk from some of these being small game developers and therefore in our financial Crunch like this high interest rates, maybe they're running into some sort of.
Near term funding problems of their own and that might lead to them pulling back on spending.
Thanks, Tim So couple of things packed in there that I'm going to address first were on our mediation platform and also App discovery platform. We're market leaders. The Max platform. That's our mediation solution probably has the vast majority of all of the AD inventory in the gaming sector running through it now what's interesting about that is it gives us access to <unk>.
First set of advertisers, where we're not dependent on any individual one and most companies. This year had been going through their P&L and really cutting costs, so marketing and opex. So most companies are at a stable point now where youre seeing the gaming market not growing because of that because of the focus on cash flow, but you've also had that happen.
Because we've got a lot of diversity and because of the sector is so big and consumers are still engaging with mobile games as much as they have ever engaged before and the biggest change was just this handicap of shift from growth investment to cash flow and thats already been baked in and that gives us a lot of confidence in the stability of our business that I referenced in my comments.
Couple of minutes ago.
Tim did you have any follow ups.
Now I will jump back in queue, let some others. Thanks.
Okay.
Next go to Youssef Squali with <unk> Securities.
<unk> go ahead.
Yeah.
Hi, guys can you hear me.
Got you.
Excellent. Thank you so I guess, just as a follow up too.
The comments that typically in the business Adam I know you guys are not guiding obviously to 2023, but how are you guys thinking about the puts and takes as you.
As you go through your own budgeting process do you think at a base level that 2023% growth year or not and then revenues through non snacks was down 34%. Maybe can you just unpack that for us a little bit what drove that.
So I'll touch on the first.
And then we can come back to revenue from non snacks, because frankly, I think thats just a very small percentage of our numbers is just going to be a volatile metric that doesn't frankly matter a whole lot.
When you think about the business as it is again, we're very strong in the market. We've had a very consistent business. So theres no share loss anywhere in our core technologies. They work really well for the mobile game developer and the one thing that we can't control that gives us hesitation on having long term guidance right. Now is this focus on cash flow among.
Our advertiser base and frankly any company in technology today and away from growth that's been baked into a lot of businesses. At this point most managers are savvy enough to now have made the changes there. We just don't know when that reverses out when the economy is going to turnaround when there will be a shift back to growth and sort of when you get to the bottom.
This economic downturn, what we do know and that gives us confidence is we're already there in the business is very stable. We also know that our core technology has a lot of room to improve that was another thing that I touched on is that we're working really hard to improve it and really we have two paths to grow one is advertisers are willing to invest more into growth in <unk>.
Cash flow, so they're going to lower their goals and invest more dollars into our platform. The other is entirely in our control is improving the efficacy of our solution. So that we're able to take the dollar spent and even at a tighter set of goals drive more scale to our advertising partners, we see a path to doing that and that's what we're working on today both of those things give us a lot.
Confidence that we're going to have a strong baseline where we are in terms of the cash that we're able to generate and we have room to grow as well that that both has one factor outside of our control and one factor entirely within our control.
Okay, but at a high level no comment whether 2023 as a growth year for you guys or not I guess youre, saying it really depends on the overall macro environment and our overall ability to improve our core technologies.
Under.
The non <unk> III I was asking is to try to get a sense out.
Whether youre seeing more of the weakness among the smaller kind of Sop.
Software platform clients were among the enterprise because.
Non specs with tends to be the smaller ones correct, yes, honestly, we don't actually look at each individual business. None of these partners make up a big part of our business as a whole we all know that every company's under a lot of pressure right now to cut costs. So there has been just cost cutting and budgetary constraints across the advertising sector that's impacted in those businesses.
Whether small or big.
Hi, Thank you.
Thank you Youssef.
Okay.
We'll next go to Eric Sheridan Goldman Sachs. Eric go ahead.
Thanks for taking the question Hope you can hear me, Okay, maybe two if I can first on the software platform.
Intrigued by the comment you made in the letter about continuing to invest for the long term against.
Potential new use cases away from the dynamic you find yourself in the market today, maybe sketch out a little bit about what youre sort of investing against for the longer term and how you see the software platform.
<unk> to evolve that'd be number one and then number two turning to the apps business felt like based on the letter there was a fair bit of puts and takes in the quarter the relevance of selling non strategic assets.
But being redirected in different elements can you talk a little bit about some of the headwinds and tailwind just historically that business faced as a result of those decisions.
Q3 that impacted the absolute dollar amount we saw thanks, so much I'll take the first question, Eric and Harold will jump on the second when it comes to our core business that we're pretty large scale at this point, we've talked about processing billions of dollars a year of advertising budget, and we're netting quite a bit and well over $1 billion a year in software revenue.
And so at that level of scale, we built very good core technologies. There. We also touched on a couple of letters ago about some investments in new initiatives.
Have option value in our business frankly.
That had been building businesses over a couple of decades. It takes years to be able to build the business to make an impact on a business as large scale as ours, but what gives us confidence going up to these is they use the same core technologies and core competencies as our as our main business. One of those is extending our advertising solution to CTV, we didn't add.
Acquisition, there with the team World that we're very excited about.
Core technologies that are differentiated and as we get our AD technologies to be sophisticated enough to extend in CTV, which is a work in progress that will be our go to market. There are two in the two technologies coupled together.
Initiatives like that we're not baking into any of our forward outlook or thought process around the short term in the business, but we think long term will create immense shareholder value and value for our team.
Eric on the App side, I think we're making very good progress against our initiatives to get our.
Portfolio to the position we want to get in terms of both the margin and then in position for growth. So I'd say it really there's three things that have taken place. There. One was instead of just driving users to game of data, we really cut back on the way to make sure that we are driving strong ROE as soon as we know in this marketplace, where you don't realize is even more difficult to come by and so we manage that UA spend.
So we're taking revenue in exchange for profitability and then the second lever is just going through the portfolio, and saying, which ones actually have the ability to drive real enterprise value for us in the long term and there are some that frankly need more investment and more team and there's others that really won't get there and so we are in the process of winnowing through that some of the studios, we've just shut down or sold back to the file.
Under we're renegotiating some of the earn outs and again, others, where we're actually investing in quite a few new games.
So the third lever will then be ultimately when we get the portfolio that we want we want to own and go forward. We think that will be a healthy portfolio. We hope you get there by the end of this year is what we've talked about.
And then from there it really depends if the market recovers in terms of valuations on whether or not we'd actually be able to monetize any significant portion of the portfolio. We may end up owning all of it or the right bid.
And up selling all of it but given the macroeconomic environment and.
Where purchase multiples might be out there our focus is very much on owning those assets for now optimizing them and then figure out what value creation can be hot down the road and it is a significant amount of value relative to our current enterprise enterprise value and that would be very accretive and deleveraging to us we think.
With.
With the right price for the right assets.
Okay.
Are there any other follow ups for you Eric.
Okay. Thank you okay. Thanks, Eric.
Well next we'll next go to Clark clamp and at BTG Clark go ahead.
Hey, guys. Good evening I have got to Adam you talked a couple of times about improving your own core technologies and you alluded to that a couple of times sort of intra quarter back in August and September I wanted to see if maybe you could give us just a small window into sort of what you're working on how that's progressing and sort of Watson.
Focus and then on diversification and appreciating that you guys are operating in this business with more of a long term mindset right now and I think as you said like a private entity are you comfortable investing more to help scale and drive growth for businesses like world or perhaps also array or vessel next year.
And maybe along those lines has apples change around in App that FTE utility change the priority in terms of which of those new businesses you do want to focus a little bit more on scaling and growing thanks a lot.
Clark I'll go second first and then back to the first question.
We're focused on investing in new initiatives, but we know how to build businesses with the cash flow mindset from the very beginning as a company. It up loving we were profitable on a second month in operation and every one of these new initiatives. We take that same approach into we're excited about the opportunity we leveraged a lot of the resources that we already have in place and the incremental investments that were.
Were making into them or not material given the market opportunities that they present us we'll continue to approach any business opportunity that way, we think of them as startups and the Gms that we have running those businesses also think of them as the CEO of a startup and when you have a new business that you're trying to incubate and build a lot of times you want to do it organically make sure the <unk>.
Market fit is there not over invest early and then we will invest behind growth as we know that we have something that's hot and at that point in time, we will talk about these businesses because in theory, there'll be making an impact to our numbers both revenue and costs.
On the first question when it comes to core technology, we always measure the error rate and our predictive engine. The whole model is predicated on being able to predict what are users going to download to engage with next and driving value to our advertisers value comes from revenue. So we've got to be very very good at predicting the future event, and we know that there's air and our.
System, there's a lot of incremental changes that we as a technology company will do at all times, but very rarely will go and rebuild a lot of our core system. We're doing both right now and the last time, we rebuilt a lot of our core system to try to get an upgrade was actually the initial release of axon, which was now I think about two years ago and obviously facilitate.
A ton of growth in our business, we're very excited about the potential of all of our investments in technology into our future.
That's really helpful and if I could maybe Harold just ask a quick follow up you have north of $400 million in authorization for your buyback right. Now I know that you have a lot of sort of attractive capital excuse me capital allocation opportunities in front of you how does.
The sort of stock buyback option fit into the overall priority sat right now.
Yeah. Thanks Clarke.
It is a high priority for us to allocate our capital wisely particular, when there is opportunities that arise in this market and maybe it's around stock maybe theres on our assets I've gotten a lot cheaper that we'd want to own or it's just hiring a lot of great people that we didn't have access to before and so we're taking advantage of this time in making lemonade out of these lemons.
We're glad to have EBITDA that we do in the cash balance sheet that we have but certainly.
These stock prices and given all of the upside opportunities, we see in the free cash flow characteristics and just the cash on cash yield that we projected out.
We certainly are considering stock buyback and we think the sizing of $400 million wanted to figure out what's the right amount to use or what period of time.
Thanks, guys.
Okay. Thanks Clarke.
We'll next go to Matt cost at Morgan Stanley.
Go ahead.
Hey can you hear me.
Yes, we got you great Adam Hi, Harold.
So it seems like the overall app install AD market has been decelerating over the course of 2022.
But it has not reached the level that we've seen.
<unk> gaming and consumer spending on mobile gaming reach we've got market year on year decline. So is it a fair statement that maybe the AD business here is a lagging indicator to what consumers are spending on mobile games and does that create maybe more risk for next year, which are reacting to it. That's question. One question. Two is are there any.
<unk> or data points that you'll be looking for I know you can't predict the future, but that you will be looking forward to try to assess when the market has bottomed and maybe you'll be looking for opportunities to push harder on investment at that point.
Yes, so I'll take the second first again.
Top of mind look we're investing in our business as it is we run a high margin business because we've got a lean team that we've got an exceptional team that creates a lot of output we've been run entrepreneurial since the get go. So there is no shortage of investment against things that we see as opportunities. We've got new initiatives that we're investing into we've got a technological rewrite.
We're investing into and we're organizing a lot of the acquisitions that we've made over the last couple of years to be more advantageous for our business going forward. So we have not stopped investing and will continue to invest both in growth opportunities that we see in front of US right now and those that we come up with in the future nothing about the market is going to change that because we do generate enough cash.
To be opportunistic enough to be able to invest in things that we deem worthwhile even in today's market now when it comes to the market itself mobile gaming has been declining people our silicon seeming the same amount of mobile game. So the big change there's been two changes one is as we've talked about macro economically a lot of companies are focused on cash flow and away from.
Revenue growth, that's just a requirement that's already baked into the advertising ecosystem. The other changes that came obviously in our sector right around the same time as the economy fell off as that idea FAA change and traditionally mobile gaming companies, we're able to spend a lot of their revenue back into user acquisition, mainly on some big social properties too.
Being able to grow those buyers have the best return on AD spend there were highly targeted and they were able to use those profits to subsidise future growth.
Take that away and you had two things that really hit the category and both of those happen at the same time. So you can't really decouple them. Both are also baked into the business. Our business. We're fortunate enough to have massive penetration in the market. We operate in our mediation product is market, leading and our App discovery product is market, leading and we've got no.
Dependency on any single Advertiser, the nice thing about mobile gaming is that it is a very commoditized industry. When it comes to advertising all of our mobile gaming categories multiple gaming companies that all look very similar to the naked eye. They certainly have different products, but if you think about some of our biggest advertisers they make solitary games.
They make puzzle games and there's 100 other ones of them that look the same and most of them are marketing on our platform. So even if a couple of them start struggling as businesses. The other ones just filling the gap. Therefore, we look at our businesses in a very stable place and we don't see much more deteriorating going forward.
So would it be fair to assume then that your quarter had guidance does not contemplate.
<unk> further deterioration.
Yes, I think we said stable got.
Got it thank you.
Yes.
Hey, Thank you Matt.
Well take our next question from Stephen Ju at Credit Suisse. Steven go ahead.
Alright, thanks, guys. So Adam.
To dig into the axon topic, a little bit more I think you've previously talked about how it has helped you guys drive a.
I think it was a 500% improvement.
The accuracy of what adds you are showing so.
Those improvements has been fairly steady over the last couple of years or do they tend to show up in large steps.
So you think about what kind of effective CPI approve but she could drive over the longer term and also if you can update us on where you are in.
The transition of the mediation solution from I guess, the board waterfall to real time bidding.
Yes so.
On the first obviously when we rolled out the axon upgrade there were huge step ups of growth.
And when you rollout of core technology like that it hasnt yet adopted by all your advertisers. So we had very predictable growth that was in the double digits I think around 30% for for subsequent quarters not accuracy came from the upgrade and the engine that we've had incremental changes every step of the way.
A material upgrade to the engine really is a step function opportunity, whereas your incremental upgrades and up just baked into your numbers.
This isn't to do with CPI, though it's not that we were able to improve the accuracy and drive up CPI. Our goal is to say advertisers have their goals. Our advertisers are willing to spend today in our platform of whatever return on AD spend goals. They have set the amount that they are willing to spend we have a lot of excess budget that we're not able to fulfill today. So.
We're able to improve the accuracy of our predictive engine, we will be able to fulfill that excess budget and maintain advertiser rates similar to where they are so that the advertisers happy and we're growing our business and that's the opportunity that we're excited about that that's a performance business at its core.
<unk>.
On the second question.
And the move from mediation to real time bidding we've talked about this in the past there were some early adopters of real time bidding and.
And a lot of the market is going to move there over time and there's just some technology companies that are still getting to the point of being able to support a real time bidding and since now the biggest and most interesting partner there for us in the future is Google There was an announcement a couple of months ago about their investment and real time bidding their one to one.
One of the launch partners for their efforts there theyre starting to see strong success. There, we love that partnership and together if we can facilitate Google moving towards real time bidding really end up tilting the majority of the market over to it. We're excited about that it'll create efficiency gains for publishers incremental revenue for the publisher that will then flow back into.
User acquisition, obviously, we can charge for it so it improves the business opportunity, we have with the Max product and so we think theres a lot of gains to be had there over the coming quarters and years.
And Harold.
Up to 40% of your revenue base is coming in from international given the strength of the U S. Dollar that had to have but the squeeze on revenue growth for you guys a little bit. So can you talk about the FX headwinds probably separate it for perhaps the software business as well as apps.
Yes for US a lot of the App side is transacted in dollars through App stores, and so really more of the FX headwind is probably more macroeconomic and then if people are just transacting in our currency than it's always translated into dollars for us. So.
So we don't actually for our specific P&L on the software side as well, we don't we don't have a big FX headwind on our P&L. It would be just if there was some currency translation of someone buying a good game itself. For example, you might see it there but for us directly if it's not a big impact.
Gotcha. Thank you.
Okay. Thank you Steven.
We'll next go to Jason Bazinet with.
City.
Jason Please go ahead.
Hey, Jason Please check that your that you are on mute yourself go ahead and ask your question.
Okay.
Yes.
We'll next go to Omar Suki at Bank of America Omar. Please go ahead.
Omar please check that you have and muted yourself.
Okay can you hear me now we cannot yet.
Yes, great you can great. Okay, yeah, so look.
In terms of spin.
Specifically.
These other big players in the market.
You know that had been dominant prior to idea Fei you know, they're making a lot of investments into kind of privacy enhancing technologies and infrastructure and.
Presumably once.
Get around to completing that and have it available.
For general use.
Market share could kind of shift back to them and I was wondering if you had any thoughts on how long like how many years that that would would take before some of these players like Facebook could get there.
Yeah. Thanks for the question on why we can't comment on what other people are investing into or how long those investment efforts will take but the reality of our sector is we want the pie to be growing.
If the pie is growing it means advertisers as mobile gaming companies in general are able to reinvest more dollars into user acquisition and we've got a strong share of that pie. We've always had a strong share of that pie. We had a very strong growing business. Prior to the idea of a change we didn't really change a whole lot. After the idea for a change and now we're just caught up in the macroeconomic.
Cycle, but the reality is that <unk> change is a burden on the growth of the whole sector, we want our advertisers, including our own gaming studios to be able to invest on Facebook and other properties as successfully as they possibly can the deployment of dollars and efficacious.
And <unk> based advertising creates this upside to the category that did fuel a decade of consistent growth take that away and it creates a handicap. So we have no fear that we hope that all of the technologies and the ecosystem continue to innovate and improve we also as a possible growth opportunity are hoping the apple on.
The other and Google and other platforms bring more inventory online because as Apple continues to invest in their advertising efforts and they've talked about bringing more inventory online. It creates more places for the same advertisers to go invest and again grow their business because our business is performance based that never means that we lose budget.
It just means that the businesses of our advertisers will improve which then ends up allowing them to be more stable companies and reinvest back into our platform as well.
Okay. So if I heard you right it sounds like you're saying that.
You know a resurgence of.
Those those dominant companies pre pre idea Fe is actually more of like a tailwind and a benefit for you guys rather than headwind.
Yes, we don't want a growing sector and a growing sector in a predictable youre only one way or companies can reinvest their dollars everyone's winning together and we have market leadership technologies. When it comes to monetization mediation and growth and so we've got a very strong base to our business. We were always totally fine doing very well growing consistently prior.
To the idea of a change and we will see that afterwards, if these companies do make their technologies more efficient again.
Any other follow ups Omar.
No other follow ups. Thank you very much okay, great. Thanks Omar.
Well next go to.
Franco Granda with D. A Davidson Franco go ahead.
Yeah. Good afternoon, everyone and thanks for letting me ask a couple of questions here.
I was wondering how many cities are you are you down to at the moment, how many they own and how should we think about the performance based payments for the studios given the lower expected revenues.
There were about a dozen two years now and we aren't I think I've mentioned before in the process of renegotiating some of those payments. The vast majority have already been paid out.
And some of those studios are obviously, not performing and not going to hit their earn outs either and so the projected earn out payments are not terribly significant we hope that when we restructure them in a way that theres more alignment for the new world and the new expectations that the basic seed and we succeed along the way. So they are very much going to be aligned with our success.
One four.
Awesome, Thanks for that color and then.
Can you speak to what the best inside of World is like at the moment, where do you expect it to end for the year relative to your expectations entering the year and then maybe any color around customer engagements that could translate into revenue next year.
Yes.
We are excited to own world, obviously, the very big category and if you've been looking at some releases of companies that are involved the CTV category. It seems to be the one place that there's some green shoots in some growth. So we're excited to be entering the category and assessing our best strategies. There were all in and of itself in terms of revenue is still relatively small.
Our growth will.
And the $3 $40 million to $50 million range in terms of.
Where it's going to grow to in the near term so not meaningful from our revenue standpoint, but it is very strategic given the inventory that they operate with given all the partners that use them for the distribution of content.
We think it's an interesting way to enter the category instead of US trying to do from a standing start and they've got a team of people that are thinking about it every single day and as I mentioned earlier, we're very much partnered up with them on the technology side, using arent AD Tech technology and their experience and expertise in the CTV category to figure out what our best players are but let's go.
It would be a longer term play for us. It is a big category want to figure out how to get it right.
Very dynamic a lot of players in the space.
<unk> is going up in groups coming together. So it's something we're very focused on and excited about but it's still pretty early.
Thank you and that'll do it for me.
Okay. Thank you Franco.
We'll next go to Martin Yang with Oppenheimer Martin go ahead.
Hey, Ryan can you hear me.
Yeah Martin.
Sure.
Good afternoon, I wonder digging to the.
<unk> one <unk>.
<unk> publisher scaled back UA and focus on ROE as how assuming.
Customers of Yours does the same as you treat your app apps.
Apps and how does it impact your App discovery and Apple of exchange respectively.
Yes, so that's the only directly impactful to us Martin on the discovery side. The <unk> business is third party.
Demand sources that I read a lot of demand that may have the same or different models to us, but on the app discovery product.
As a customer and say for instance wants to spend $1000 a day at 10% return on AD spend we willing to make a $100 a day in the first 24 hours. Our systems are very good at driving advertising for them that will yield that return now that many back into somewhere around let's call. It a day 270 return on AD spend where they breakeven on.
The $1000 spent and they may be looking at this economy, and saying we can't afford to wait 270 days anymore to breakeven on a dollar invested so they pull back that day, what they would do is they'd go we're willing to spend the same dollars, but now get a 20% return on AD spend in the first 24 hours and again that in our system is all programmatic so they.
Change the goal and instantly will flow through the system and the advertising now we'll try to find users that will yield twice the return on AD spend that yesterday's budget and targets would've gone and yielded and so that's really the change that has flowed through the industry is that as advertisers have had to get tighter with the cash that they are able to invest.
Unused or acquisition those just automatically flow through our system. Now also as this economy goes the other way and we get back to a growth period, hopefully at some point into the future. It will go the other way where they lower their goals and automatically we will have a step up in the dollars that we can go spend on their behalf to drive them their new economic goals.
Well thank you.
One more follow up on margins for software platform. So aside from your own investment decisions regarding opex and anything else that are in your control what are the potential factors that could impact your software platform margin.
David Barden, we report on a net revenue basis to start with.
So we do take out the vagaries of having a gross to net and our net revenue.
Below the line there, though it's really the data center costs, which we've talked about before and we have our contract in place and that we have a very good handle on and know what that cost will be our team is in place. Yes, we are trying to add.
Awesome talent, that's available to us now.
But we're not talking about dozens and dozens of people.
So I wouldn't see any real real <unk>.
Significant increase there are new initiatives, we are spending against already so it is in the P&L and part of our operating expenses today now if one of them catches fire do we increase dramatically there potentially but as Adam said, we've always been very cash flow focused and return focus and we'll do the right thing there and by the way likewise on the portfolio.
And we've been targeting to get our margins up but if there is a game that we see in the past we've done that with project makeover and others, but if it's a game that we see that has a great return on AD spend we will spend their two and possibly bring down margins on a quarterly basis as we as we scale our game, but on the software side.
Have a high degree of confidence and visibility into that.
Now mid <unk> margin structure, including a new initiatives.
And if our core technology ramps up theres, a significant amount of flow through per incremental dollar to the bottom line given the fact that our infrastructure is basically fixed at this point as well as R. R.
Our team is paid for as well.
Got it thank you.
Thank you Martin.
Well next go to Ralph <unk> with William Blair Ralph go ahead.
Thanks for taking the question I jumped on late so I apologize. If this has been asked but can you maybe talk about.
The softness that you saw in the quarter and maybe sort of the pace of that and I think on the call. You had said that you feel that stuff is or that the business has stabilized just trying to understand sort of the linearity of the pullback in sort of the comments around stabilization. That's the first one and a follow up please.
Yes, Ralph we referenced in our last call, but we've been pretty stable.
Since our last big step up growth quarter, its not that were seeing any trends change late in the quarter at all since then.
And of course, which we talked about before and we have a contract in place and that we have a very good handle on and know what that cost will be our team is in place. Yes, we were trying to add.
Signaled that we thought it would be relatively flat on the quarter. It was.
We see the same thing going forward right now we're in an ecosystem that sort of is priced in all of this difficulty on the macro side and difficulty on the targeting side.
Awesome talent, that's available to us now.
But we're not talking about dozens and dozens of people.
At a time, so I wouldn't see any real real.
And so we see stability everywhere in this business at the moment.
Significant increase there are new initiatives, we are spending against already so it is in the P&L and part of our operating expenses today now if one of them catches fire do we increase dramatically there potentially but as Adam said, we've always been very cash flow focused and return focus and we'll do the right thing there and by the way likewise on the App.
And that gives us a lot of comfort with where we're at.
Okay, and then just a clarifying question from the shareholder letter you talked about during Q3.
Within the apps business about the sale of nonstrategic assets did you sell off something during the quarter.
Yeah. There was one that actually very very small asset that we sold back to the founders there.
And we've been targeting to get our margins up but if there is a game that we see in the past we've done that with project makeover and others, but if it's a game that we see that has a great return on AD spend we will spend their two and possibly bring down margins on a quarterly basis as we as we scale a game, but on the software side, we have a high degree of confidence and visibility.
Trying to develop a new game that wasn't going to come to fruition. So they wanted to own the entity.
Going forward, so very very small asset.
Okay. Thanks, Alan Thanks, Joe.
Yes.
Okay. Thank you Ralph.
Well go ahead and take our last question from David Pang with Stifel.
I know that.
David go ahead.
Now mid <unk> margin structure, including a new initiatives and and if our core technology ramps up theres, a significant amount of flow through per incremental dollar to the bottom line given the fact that our infrastructure is.
Hey, guys. Thanks for the question just wanted to see if you could provide an update on the DSP is that were transitioning from Mo Pup Max that you highlighted last quarter and then for Harold.
Is basically fixed at this point.
Well as R. R.
How are you thinking about leverage in general in a rising rate environment.
Our team is paid for as well.
Got it thank you.
TSB side.
Thank you Martin.
We use the word stable again super stable, we are cutover on pretty much all of them open DSP is at this point.
Well next go to Ralph <unk> with William Blair Ralph go ahead.
Really the shift is a year ago, there's a lot more brand dollars and the ecosystem a lot of these <unk> are advantageous for us because their hedge on our business. They go tap into brand dollars, where does not something we've traditionally focused on and all of those big Big vendors are live on our platform. They are doing very well they like the new infrastructure and system.
Thanks for taking the question I jumped on late so I apologize. If this has been asked but can you maybe talk about.
The softness that you saw in the quarter and maybe sort of the pace of that and I think on the call. You had said that you feel that stuff is that the business has stabilized just trying to understand sort of the linearity of the pullback in sort of the comments around stabilization. That's the first one a follow up please.
<unk> is over two times bigger than what <unk> was for them. So in terms of the pipes being connected up to the Dsp's, where there in terms of them being able to spend materially more than they werent doing in the past where actually there as well because our business is so much bigger but.
Yeah, Ralph we referenced that in the last call, but we've been pretty stable.
Our last big step up growth quarter, its not that were seeing any trends change late in the quarter at all since then.
In the long term, there's really going to be an opportunity there as the economy recovers for these DSP to flow more dollars through our system.
Signaled that we thought it would be relatively flat on the quarter. It was.
We see the same thing going forward right now we're in an ecosystem that sort of is priced in all of this difficulty on the macro side and difficulty on the targeting side.
Yeah, David Thanks for the questions Yeah. So on the leverage side, we feel very comfortable with where we sit today.
Just over two times net leverage which is very reasonable way of <unk>.
So we see stability everywhere in this business at the moment.
And that gives us a lot of comfort with where we're at.
<unk> in terms of the rating so we feel comfortable there as well and of course interest rates have gone up significantly and something we watch we did hedge out for the year are some of the interest actually more than half the interest to.
Okay, and then just a clarifying question from the shareholder letter you talked about during Q3.
With a maps business about the sale of nonstrategic assets did you sell off something during the quarter.
Fixed for the year our duration also is fairly strong so we have.
Yes, there was one that actually very very small asset that we sold back to the founders there.
Maturities coming in 'twenty five 'twenty eight.
Trying to develop a new game that wasn't going to come to fruition. So they wanted to own the entity.
So we can.
We with our term loans theres, no maintenance covenants or anything like that on it as well. So it does provide us quite a bit of flexibility. So we're we're very very comfortable with the current leverage levels and we still generate after <unk>.
Going forward, so very very small asset.
Okay. Thanks, Alan Thanks, Joe.
Yes.
Okay. Thank you Ralph.
Interest costs, a significant amount of free cash flow as we described before we have a relatively modest tax rate.
Well go ahead and take our last question from David Pang with Stifel.
David go ahead.
Given a bunch of deductions, we have very little capex.
Hey, guys. Thanks for the question just wanted to see if you could provide an update on the DSP is that were transitioning from <unk> to Max that you highlighted last quarter and then for Harold.
And then just a little bit of lease expense.
We are able to flow through.
A very strong percentage even with there.
The amount of leverage we're carrying today.
How are you thinking about leverage in general in a rising rate environment.
David did you have any follow ups there.
He is beside.
We use the word stable again super stable, we are cutover on pretty much all the <unk> DSP is at this point.
No we're good okay.
Thank you everyone for joining that does conclude our call for today. We appreciate you hopping on and we'll speak with you all next quarter. Thanks.
Really the shift as a year ago, there's a lot more brand dollars and the ecosystem a lot of these dsp's are advantageous for us because their hedge on our business. They go tap into brand <unk>, which is not something we've traditionally focused on and all of those big Big vendors are live on our platform. They are doing very well they like the new infrastructure and system.
<unk> is over two times bigger than what <unk> was for them. So in terms of the pipes being connected up to the Dsp's, where there in terms of them being able to spend materially more than they were doing in the past where actually there as well because our business is so much bigger but.
In the long term there is really going to be an opportunity there as the economy recovers for these USPS to flow more dollars through our system.
David Thanks for the questions Yeah. So on the leverage side, we feel very comfortable with where we sit today.
Just over two times net leverage which is very reasonable.
<unk> in terms of the rating so we feel comfortable there as well of course interest rates have gone up significantly and something we watch we did hedge out for the year are some of the interest actually more than half the interest to fixed for the year. Our duration also is fairly strong so we have.
Maturities coming in 'twenty five in 2008.
So we can.
We with our term loans theres, no maintenance covenants or anything like that on it as well. So it does provide us quite a bit of flexibility. So we're we're very very comfortable with the current leverage levels and we still generate after interest costs a significant amount of free cash flow as we described before we have a relatively modest tax rate.
Given a bunch of deductions, we have very little capex.
And they're just a little bit of lease expense.
We are able to flow through.
Very strong percentage, even with there.
Amount of leverage we're carrying today.
David did you have any follow ups there.
No we're good.
Okay.
Thank you everyone for joining that does conclude our call for today. We appreciate you being on and we'll speak with you all next quarter. Thanks, everyone.
Yeah.