Q1 2023 Applovin Corp Earnings Call

At the consolidated level. We are pleased to report that we had robust free cash flow of $283 million in Q1 due in part to the growth of our high margin software platform business.

We also benefited from several significant customer payments delayed from prior periods as well as lower cash taxes in the period.

With regard to guidance for Q2, 'twenty three we are targeting $710 million to $730 million in revenue with $280 to $300 million and adjusted EBITDA, which equates to a 39% to 41% adjusted EBITDA margin we.

We anticipate continuing growth from our software platform business offset to some degree by the apps business.

The impact of the axon 2.0 rollout will be a key factor in the quarter.

As previously mentioned on our calls we expect free cash flow to be approximately 50% to 60% of adjusted EBITDA on a normal run rate basis, knowing that we may have some deviations from that in any particular quarter.

From a cash perspective at the end of Q1, we had $1 2 billion of cash on the balance sheet, a clear Testament to our strong financial position and cash generation.

During the quarter, we repurchased approximately $76 million of stock and year to date through may eight we repurchased $202 million of stock, leaving $210 million on archstone or $50 million authorized buyback program.

As we look toward the future we're determined to maintain our position as a market leader by investing in our teams solutions and key growth initiatives, our strong financial position and cash generation allows us to take calculated risks and make strategic decisions to keep <unk> at the forefront of the industry.

It's an exciting time for <unk> and we're excited by our future prospects.

Now I invite the moderator to lead us through Q&A.

Thank you so much and like you said.

We will now begin the question and answer a question of our call Mr. Todd mute your equipment before asking your question and we'll get through as many questions as we can and the time allotted and our first question is going to come from Martin Yang with Oppenheimer.

Hi, good afternoon Adam.

My first question is on the strengths for software platform.

How much did Exxon to always show a meaningful.

The driver for that performance sequentially.

Hey, Mark Thanks for the question.

Really axon two we talked about we're now in the midst of a staged rollout. So that came after the quarter in Q1, we did see improvements in our core technology the vacs on <unk>.

And incremental improvements in our technology is fundamentally core to our business on an ongoing basis. We also saw more confidence from advertiser spending on our platform as they were seeing good results and the mindset and the ecosystem is starting to return back to growth, we're seeing good industry momentum as well.

Got it so would you say that sequential.

Improvement was more.

In line with market as opposed to you are taking share from someone else.

Talk about it not in line with market because I don't think the market grew 20% quarter over quarter much more so.

Efficiency gains and technology are advertisers investing more with ourselves and we don't really think about this market as zero sum. So it's not a we take an extra 20 and someone else loses 20 <unk>. We think about it is additive to the market. So our improved efficiency creates gains in the market for all of our partners and peers by default would benefit from that.

As well.

Thank you my second questions.

More on Google.

Including a plug on as far as someone so.

So the other players in the bidding or real time bidding can you maybe comment on the.

The long term implication of that and how that helped our impactful business. Thank you yeah. We're super bullish on this we've been really brought back to the market originally with Facebook, both us and them being early stage adopting bidding believing that it's a much more efficient way to go and Google now leaning in for the first time in their history to X.

<unk> solutions is a huge win for the ecosystem, we think them, bringing their demand more efficiently to the market will create upside for the whole market. So we've been a partner of theirs in this movement for a while it's now open to all publishers and the ecosystem. Max obviously has the majority share of mediation and gaming and so we can.

We can extend their demand in a very efficient manner to the bulk of mobile gaming publishers and we're excited about that more broadly speaking, we've got a great relationship with Google and we continue to build on it.

Thank you.

And moving on to Ralph <unk> with William Blair.

Okay.

Two questions if I could please.

In the letter you talked about arps until stabilization in the mobile AD market can you maybe talk about the linearity that you saw throughout the quarter and stabilization you know how did you exit the quarter versus how you entered it and then I have a follow up please.

Yes.

We're seeing just generally and this is true in a lot of my conversations with mobile game developers as well a lot more confidence in the ecosystem now that we've gone through last year. The economy seems a little bit more stable, we feel like we're reaching that trough point and so mobile gaming developers are starting to be more of a growth mindset oriented which is.

Great for our business as those dollars come in it will lead to growth and that confidence builds overtime. So obviously reflected in our guidance.

And then Harold commentary a reference to the software platform continues to perform really well this isn't a onetime event or a step function. We're very confident where this business is gone.

Great and then what kind of lead into a software business. If you could talk about the strong growth and it seems like the market sort of stabilizing I know youre, not giving full year guidance, but any anything that youre seeing currently that would preclude this growth rate and sort of persisting through 2023, or just sort of broadly speaking how should we think about growth. This year on our software business. Thank you.

We're really looking at it.

Sort of building blocks last year, obviously, it was difficult for the whole ecosystem and the economy in general now where we've got one good quarter and place the biggest change for us in our business today as we're rolling out <unk> as a material upgrade of our core platform.

And we're really excited about the team working on this as the nominal and so getting this out to market could become a catalyst for our own growth, but we've always talked about our position in this market is quite large.

The mobile gaming ecosystem. So if we're able to become more efficient we will create growth across the whole sector and that's what we're really excited about we think this.

If it continues to go well as we roll this out throughout the rest of the year, we will be able to create growth in this ecosystem irregardless of what's going on around us.

Okay. Thank you.

And we'll move on to David Pang with Stifel.

Great. Thanks.

So I was just hoping to see what your expectations are for that spend flowing through Max in 'twenty, three and if you could remind us what your near term and intermediate targets are.

Those are not numbers, we've really disclosed we do see good momentum on Max as the market becomes more efficient and you get more header bidders live that usually creates increases to pub spend on the platform. So that creates gains those are dollar gains of these publishers get allows them to then.

Market more and systems like ours become more efficient and it gives them a better place to go market themselves creates growth. So we're seeing good momentum on that platform very high stickiness across our publisher base. So the Max product isn't a really good spot. We're just not disclosing the exact numbers on that product.

And just as one follow up could you.

Provide.

A ballpark of what portion of the spend is currently in our television.

We've talked about real time bidding as being the majority of the platform already and Google taking it to the vast majority is that product scale.

Got it thanks.

And D. A davidson's Franco Granda has the next question.

Hi, Thanks for taking my questions here.

I'd like to reference axon, one as the same way as AMD reference architectures by saying that the H like buy online.

Are you approaching two in a similar way where any efficiency again, it's available at the top of itself as you continue to iterate on them.

The World we live in today with these AI technologies is the fastest evolution and change in technology, we've ever seen in our lifetimes. The rate of innovation is just incredible and so as we go to axon to theirs.

On an ongoing basis incremental improvements that we can make to the platform that will fuel our business for some time and then there is the incremental uptick to axon three and <unk>. Five this core expertise is going to drive our business for a very very long time. These technologies are only going to get more powerful and because of our market leading position.

We've got so much volume flowing through our systems that efficiency gains from these technologies as they evolve we will generate lifts the revenue and we've always talked about how our software business technology derive lifts lifts to revenue and a very high flow through and that's what we're excited about.

Awesome. Thanks italics.

And then going to the AST business. It seems like the NFL purchases, then well in the quarter, but on a relative basis and then the advertising with us Brad I'd kind of fell off our debt.

Any antitrust.

Let's suggest aspirin softness.

I think in general there was some AD trend softness and some seasonality coming off the fourth quarter also about half the delta on the revenue from quarter over quarter on the outside actually came from US closing down some studios or divesting studios as well. So there is some I guess call. It one time impacts in terms of the mix there.

Okay. Thanks.

And we'll now hear from Bernie Mcternan with Needham <unk> company.

Hi, This is stefanos crist, calling in for <unk>, thanks for taking our questions.

Could you just remind us on point number three of your growth drivers that extending the marketing platform with carriers and Oems.

What gives you the confidence you have the technology and relationships to do that organically.

Yeah, I mean, what gives us the confidence there is we're so good on the marketing technologies in our core business and that industry is quite nascent and theres only a couple of players in there.

We all end up having to place a similar game and the mobile gaming category in that category, we've got the market, leading technologies and we've proven that for a very very long time, and so extending that core efficiency out to the carriers and OEM space seemed like a very smart thing to do incremental to that we're bringing some new products to the carriers.

And Oems too that we think will make a material impact to their businesses and then turn to ours. So we're excited about where that can go.

I will caveat it with new businesses that we're going after that are related to our core business arent going to move the needle on our $1 billion plus software business in the short term. These are businesses that we expect when we were talking to you all in three years, we're talking about big parts of our business, but this is not a short term, but this is one that we're investing in to and expect to pay off.

Material in the long term.

Great. Thank you and then speaking of the competitive environment.

Any changes there, but the combination of unity and iron source think et cetera. Thank you.

We can't really talk to peers and what they're up to.

Just know that bring two big companies together and integration takes time, it's difficult.

Also note that in this ecosystem, we need them to do well they need us to do well at all marketing companies drive the growth of our partners and so so long as every company is operating efficiently efficiently. We will see growth we did grow a lot in the quarter and so our products have been very very sticky and we expect that to continue.

Thank you.

Hey, Eric Sheridan with Goldman Sachs has the next question.

Thank you so much maybe two if I could come back to the apps business is there anything you're calling out in terms of new game launches, which can keeping in mind between now and the remainder of 2023, just so we better understand some of the potential mismatches between revenue growth and investing behind those game launches and how it might impact on the March.

<unk> landscape that would be number one and then number two coming back to the broader advertising landscape.

It sounded like you've talked a little bit about it already but I wanted to focus a little bit deeper into the connected PD opportunity and how you're thinking about.

Helping widen out potential further advertiser diversity and density in terms of your platform over the medium to long term. Thanks, so much yes. Thanks, Eric.

The apps question first.

We're all we're very pleased on getting the other side of our major optimization of that portfolio of apps were down about 11 studios, which we're investing against and we do have a number of new game launches coming I think out of every CEO they've got a game plan to launch new games.

This quarter's impact I think we've always said it would be in the mid teens margin on a run rate basis. I think we remain there Eric if there was a whole bolus of games that we bought were really awesome.

Margin could come down I think it will still be a double digit number but right now we see it really building into the business model of regularly launching games, we think the margins should remain in that mid teens range.

On the CTV question Eric.

We obviously invested in world a little over a year ago, they've got pre existing relationships with a lot of the media companies and do you think of them as like a CDN for these companies, but they help them bring their content online and schedule the content build effectively channels on the connected TV devices across all the various devices and that fragmented space those preexist.

<unk> relationships with what we were excited about they also have an SSP business and so we're already in market. We're plugging interop discovery solution through their SSP to connected TV inventory. This is early early stage. So we talked about no no significant impact to our financial performance in the near term, but the data is strong the offering is.

It really cool for mobile App developers, there hasnt been a scaled performance based solution in this category really ever.

In that manner on a performance basis, and we charge for performance and so the advertisers that are leaning into it are leaning into it and very excited by the potential that scaling that often.

And we have time for one additional question, which will come from Matt <unk> with Morgan Stanley .

Now if Youll go ahead and press Star six Floris great. Thank you.

Hi, This is Dave on for Matt.

I apologize if I missed this earlier, but I.

Are you able to give a sense of timeline on the room for like.

A full release of axon too.

Earlier, you said that you were rolling it out.

And how should we think about the financial impact if you can share any color there.

I'll talk about the timeline narrowed can cover financial impact, but were in market rolling it out in stages as a complex technological upgrade that we are excited by the early results and we've reflected confidence in our guidance going forward.

Yes, just on impacting earlier, we did say that there was no impact because it had not been rolled out at all in the first quarter for Exxon to point out and then going forward. It is still difficult to predict the timing of the rollout and then ultimately the impact financially of the technology, but what we do know is the technology is superior to axon, one al just like without them.

Said in his script that we we see what chat GBT does from three to 445. So we know it's better technology, it's more effective more efficient and so we do believe it.

Will be significant impact on the software line when it hits is difficult to predict.

The only thing we also know though given the software margins. We do think a significant amount of that revenue does flow through the bottom line.

To be a very high percentage increase in the margin as well.

Great. Thank you.

And this does conclude the question and answer session for this quarter. We thank you all so much for joining us today and enjoy the rest of your day and we will see you next time.

Thank you.

Yeah.