Q2 2023 Applovin Corp Earnings Call
Okay.
Please standby we are about to begin.
Yes.
Welcome everyone to the App 11 earnings call for the second quarter ended June 32023.
I'm, David <unk> head of Investor Relations joining me today to discuss our results are item for <unk>, our founder CEO and chair person and Harold Chen our president and CFO .
Please note our SEC filings to date as well as our shareholder letter discussing our second quarter performance are available at investors Dot App love and Dot com.
During today's call, we may be making forward looking statements regarding our products and services market expectations for the future financial performance of the company and other future events.
These statements are based on our current assumptions and beliefs, and we assume no obligation to update them, except as required by law.
Our actual results may differ materially from the results predicted.
We encourage you to review the risk factors in our most recently filed Form 10-Q for the fiscal quarter ended March 31, 2023, and in our Form 10-Q for the second quarter, which we expect to file later today we.
We will also be discussing non-GAAP financial measures. These non-GAAP measures are not intended to be a substitute for or superior to our GAAP results.
Please be sure to review the reconciliations of our GAAP to non-GAAP financial measures in our shareholder letter available on our Investor Relations site.
This conference call is being recorded and a replay will be available on our IR website.
I'll turn it over to Adam in House for some opening remarks, then we'll open up for Q&A.
Good afternoon, everyone and thank you for joining US today, we had a stellar second quarter, surpassing our revenue and adjusted EBITDA guidance largely due to the expansion of our software platform business I'm incredibly proud of our dedicated teams who are.
Worked tirelessly to upgrade our advertising algorithms from axon, one to axon too.
We started talking to you a year ago about the benefits, we'd achieve both short and long term by upgrading our technology and now we've executed on it.
The launch has not only paved the way for a strong quarter, but also provides us with additional opportunities for future growth.
The introduction of such a significant change in our technology required many hours of hard work innovation and risks taken. The result is a true testament to our spirit and commitment and demonstrates that we operate with the same speed and efficiency as we did in our time as a private company.
This is what makes me, particularly proud of what we have achieved.
With cutting edge AI technologies at the heart of our core offerings, our focus will now shift towards continuous enhancement of our technology, expanding our advertiser base and extending axon to char world an array businesses. We are optimistic that these measures will fuel growth for years to come.
In conclusion, we remain committed to providing long term shareholder value. We are confident in the potential of our team our technology and our products and our financial strength.
We appreciate your trust and support and we look forward to our journey of growth and innovation with you. Thank you.
On the Herald to provide you with our financial highlights.
Thanks, Adam and good afternoon.
Just on the incredible efforts from our team this year in particular, leading the launch of our axon two O engine, we had a strong quarter financially across the board with record software platform revenue high margins impressive operating leverage and ultimately robust free cash flow.
Our strong performance in the quarter illustrates the highly focused plan, we articulated about a year ago is working as a reminder, we said we invest in our core team improve our AI based platforms and technology Optimizer Abbs business drive free cash flow and simplify.
Simplify focus and execute against what we do best that strategy and plan, which is very similar to the fundamentals on which this company was founded are working and we're excited about where that can take us.
Putting all of our financial highlights for the quarter. Our total revenue reached $750 million with adjusted EBITDA of $334 million, both exceeding the high end of our guidance.
Our adjusted EBIT margin EBITDA margin was 44% and was the highest EBITDA margin we've had in five years.
Further for the quarter. We are pleased to have generated $80 million of positive net income.
Our software platforms segment reached a record revenue of $406 million, which represents two quarters with consecutive mid teens growth and an increase of 28% over the prior year.
Software platform, adjusted EBITDA grew 39% year over year, and 25% quarter over quarter to $273 million translating to a 67% adjusted EBITDA margin.
Sulfur platform adjusted EBITDA now represents more than 80% of our company's total adjusted EBITDA.
Of note during the quarter, we were able to increase adjusted EBITDA by an amount slightly higher than the increase in revenue equating to over 100% flow through.
For our flow through will fluctuate in the future. It does highlight the impressive operating leverage from our software platform segment.
And our software platform revenue continues to grow we expect high flow through and further margin improvements for this segment.
Looking at this segment over the past few years revenue increased by 2.8 times, representing a 67% compounded annual growth rate.
Over that same period, our software platform adjusted EBITDA grew three times, a 70% CAGR <unk>.
We continue to remain optimistic about our opportunities within the software platform segment as we continue to improve our AI based technologies as well as invest in our growth initiatives, including connected television and carrier and OEM.
Turning to the App segment during the quarter, we continued to focus on balancing profitability with revenue for Q2, we had $334 million of apps revenue and 61 million of adjusted EBITDA margin of 18%.
<unk> continued to invest carefully to drive topline growth both through new game development and user acquisition marketing, while also managing for overall margin target of mid teen adjusted EBITDA margin range over the medium term.
At the consolidated level. We're pleased to report we had free cash flow of $221 million in Q2, a 66% flow through of adjusted EBITDA to free cash flow.
For the first half of 'twenty, three we generated over a half a billion dollars and free cash flow.
With regard to guidance for Q3 23.
We are targeting another quarter of growth with revenue between 780 and $800 million adjusted EBITDA between 340, and $360 million and adjusted EBITDA margin between 44% and 45%.
We anticipate the first full quarter of revenue contribution from axon to point out to continue driving our growth as well as see steadier apps performance.
As previously mentioned on our calls we continue to target free cash flow of approximately 50% or 60% of adjusted EBITDA on a normalized run rate based basis, noting that we may have deviations from that in a particular quarter.
From a cash perspective, we ended Q2 with $876 million of cash on the balance sheet.
In terms of stock buybacks, we repurchased $507 million of our class a common stock during the quarter and year to date through August eight we have repurchased $601 million.
We have $107 million of authorization remaining under our repurchase program and we carefully watching the markets.
We're also watching the leveraged loan markets in real time to see if we can extend reduce and or lower the cost of our term loans. So we see an attractive window, we'll move quickly to optimize our capital structure.
In conclusion, Q2 was an incredibly strong financially and exemplifies the strength of our business model looking forward. Our teams continue to be focused on execution, improving our core solutions and technologies as Adam said, we're very excited about the opportunities in front of us and now the moderator, who will take us through Q&A.
Thank you so much Harold and again, we will now begin the question answer session of our earnings please be shirts trainer video AD on mute before asking your question and as always we will take as many questions as we can in the time allotted and we will go first.
Cal Morgan Stanley 's Matthew cost.
And Matthew it looks like Matthews on audio only everyone to.
<unk>. Thank you go ahead.
Sure.
Okay. Sorry go ahead, Amit Yep Yep, Richard Kim. Please go ahead.
Great. Thanks, Hi, its Dave on for Matt cost.
And so sorry, if I missed this earlier there were a few technical difficulties with the audio here for those of a style again, but.
With the strength of the AD network results.
I think that speaks pretty positively to the company's execution in the quarter are you able to give some color on perhaps what portion of the quarter's performance you would find attributable to your own execution versus an overall recovery in the market. Thanks.
Thanks, Dave for the question.
Mark it's been steady as we've been talking about for a couple of quarters now.
So we'd attribute the growth in our platform really 100% from the advancements in our core technology via upgrade meter platform a lot more accurate for advertisers and allows us to really monetize more of a breadth of advertisers so being able to do both things and enabled us to to really grow our business on the back half of the quarter.
As we rolled out this technology and more importantly, we're driving better value to the advertisers. So we expect this not only to contribute to the growth that we have in the short term, but also the long term and that's what gets us really excited.
Okay.
Great. Thanks, and maybe just one follow up if I could.
If we assume that the gaming continues along the trajectory.
The guide implies 45% to 50% software revenue growth year over year, how do you view the sustainability of the gains and should we anticipate a similar step function that we saw in axon one point out.
Yeah, we do view the app side of the business, reaching some stability as we've discussed over the past few quarters that the second half. This year, we do see that and we're investing in some new games, we're investing more on user acquisition in particular, given the fact that it we're using a lot of our own solutions, there, which has become more efficacious. So we do see our ability to draw.
Lives growth over the second half of the year in terms of the software side. The axon T. O is relatively new it was launched this last quarter a full run rate this quarter.
And we do see improvement and growth.
And that is built into our guide for <unk> for the third quarter.
Sure.
Perfect. Thanks.
Alright, and we will now hear from Ralph Shakur with William Blair.
M payout is looking at them at really strong margins that you delivered this quarter the ground, 44% and guiding of 44% to 45% I think next quarter, you know historically the miles contemplated sort of a mid thirties, maybe low 40 or 40% model is this a new baseline for margins that we should think about you know, especially given our.
<unk> for further software margin improvement and growth going forward and then I have made up about.
Yeah. Thanks, Rob for the question on the software side at 67% margin. It was a great quarter as we mentioned.
In a in the introduction, we also had very high flow through we actually generated more EBITDA than we did relative to the incremental revenue.
That doesn't necessarily continue going forward, but it's a very high flow through model. There. So we do believe that the margin will continue to expand on software as we're able to grow the top line over over the medium long term, maybe not quarter to quarter, given our vagaries duty timing and on the apps.
<unk> side, we've always said that we target more in the mid teens range.
For EBITDA margin, whereas this past quarter, we are in the high teens at 18, as we invest a bit more on the U S side to grow the grow the grow the games that will probably bring down that margin down into the mid teens on a blended basis as software grows margin expands on the app side, reaching stability with potentially slightly lower margins.
That's how we ended up at the mid Forty's margin target.
Greg maybe a question for Adam and beam and give some perspective max onto outperforming maybe relative to your expectations and any sense of order of magnitude of improvements.
Compared to one obviously very strong results in the quarter, but any more color that'd be great. Thank you yeah for sure won't I'd say, it's performing at our expectations, we signaled it a year ago as something that was going to be a big upgrade because we just knew that the technologies available to us were dramatically better than the technologies that we were using we put it into the <unk>.
Power the entire platform in the quarter and it was immediate to start seeing much better performance for advertisers with that does over time as that will compound and advertisers will be willing to spend more on our platform because they are seeing better return on AD spend on their buys on our platform than they were previously and that should start to grow overtime.
No more investment from the base of advertisers, we have but even more exciting for us is the implications that we're gonna be able to make a wider breadth of advertisers work with this new technology is much more predictive much more powerful and if we're able to execute on that we can really broaden out the advertiser base service, new verticals and that should really fuel.
Order growth for quarters and years to come.
I don't think so.
Our next question will come from Franco Granda with da Davidson.
Hi, Good afternoon, guys. Thanks for taking our questions here I have two quick ones.
So with the market stabilizing here nice onto yielding such positive results. Early on are you able to provide an updated figure on how many dollars you can transact through your platform.
This year, maybe next and then the second one can you talk about maybe any trends across your apps portfolio that surprised you in the corner, perhaps any category Marty outperformed their respective market.
Yeah and in terms of the.
The scale of the platform, we've never provided that but the advertising business is on a net revenue basis, and we've talked about typical advertising business margins that are known in the industry somewhere in the 20th of 30 range and so you could you could get to a reasonable guesstimate. The marketplace itself is in the billions of dollars obviously our software platform.
Arm cleared $400 million and the vast majority of that being advertising networks ret net revenue in the quarter. So we're a very large player in the mobile app ecosystem and if he decides that against the totality of the mobile app ecosystem understanding a lot of our partners are mobile gaming customers. We're a critical player.
For almost all of our customers they really depend on us for growth. So the thing that really gets us excited in our ecosystem is this upgrade in technology not only helps fuel our growth our customers are spending a better dollar on our platform and we're usually one of their top one or two or three channels of dam burst into so they're spending a better at all.
On our platform now compound for them too and so as we go forward, we will start seeing the market of customers that are working with us growing hopefully materially better than the market itself and returned helping to return this category as a whole back to grow.
In fragrance. Your second question as you can tell our software platform is performing well, because we're delivering great solutions and delivering advertising.
That's effective for those customers and so we're doing the same thing for our apps portfolios I wouldn't say, we have any outperformance of the apps portfolio for the second quarter, but we do believe in the second half of this year as we invest more in user acquisition and more on our own platforms that we should be able to drive additional growth for those apps.
Great. Thank you.
And moving onto Martin Yang with Opco.
Hi, Thanks for taking the question if Exxon has performed in line with your expectation can you give.
You gave us essentials, where the outperformance came from in the second quarter results relative to your guidance.
Relative to our guidance.
We rolled out the technology towards the second part of the quarter right. So there's a brand new technology, we thought it was going to be really powerful.
It is very very hard to measure the impact of our new technologies you replace that can be entirely.
Entirely replaced an old one right. So we were very pleased with the short term impact we're more excited about the long term implications on our overall business and again is this is a it's an infancy stage. It's only a couple of months old of a technology. We think it's going to get a lot stronger over time, and we think it's going to be able to fuel our growth.
For quarters and years, but we're gonna be excited to see what that looks like as we go forward.
And my follow up question on Exxon Shiel.
Is three out should we expect.
A continuous improvement.
Throughout the third quarter, and when you say accenture as being fully rolled out.
Does that mean the performance improvement momentum come from.
Better algorithm instead of implementation across.
More ad inventories.
Yeah as we go forward the technology will continue to fuel growth from a couple of different vectors. One is at the level of scale that we operate out we drive billions of transactions a year, we're able to the technology itself will learn and self improve our team. Obviously is working on improving the technology every step of the way. So that also happens in parallel.
Obviously core of our engineering focus is on this part of our stock and then you've got the the more interesting long term dynamic that if the technology is so good that we're one of the largest channels if not the largest for all of our gaming partners and is now working within gaming and outside of gaming. It opens up the door to the possibility of a lot of <unk>.
Advertiser expansion, which will create more density in our auction create more scale to the business and then to your last point more inventory will come online as well where in we operate in really with Max being a core driver, but more broadly in the mobile app ecosystem and a real time environment, if our systems are better.
When they were in theory, we will get more inventory in our systems will be able to predict more accurate transactions and we were really excited about how all of this will compound over time and create a much bigger opportunity a market for our core business.
Thank you.
That Bernie Mcternan with Ian has our next question.
Great. Thanks for taking the questions.
On the the App discovery announced when they came out on Monday in terms of new products, how should we think about which of those should be most impactful and then.
Please from minus two on the sales process or are the process of signing of other advertisers outside of mobile games. It's Johan.
Hi, Bill, it's pretty clear that as you guys are more successful in increasing return on AD spend for mobile games are just going to spend more with you guys, but for a new advertising to come in what that process of getting them on the platform.
Yeah. So on the first question the release really broke down the whole offering into some of the valuable sub vectors of what we rolled out with the core product offering is to fully automate the marketing problem and power. It with these new AI technologies, though we rolled out.
In totality all of the components that we broke down in that article sum up to the value of the whole.
So theres not one part of it that's more exciting or not all of it is exciting to us on the second question sales cycle for new in particular non gaming is slower than ramping gaming customers that are already used to our platform and have them buying on our platform is that they've been live for years and they see an improvement in the return on AD spend the variable there.
<unk> on our platform they'll invest more but it's actually mostly automated and as it is today, a new customer usually takes a quarter or two to ramp up and we're now seeing a lot more interest in joining the platform because they're already only a couple months into this platform rolling out Theres a lot of word of mouth spreading amongst app developers, both within gaming or not.
On that our platform is working really well for their peers.
Great. Thanks, Adam.
And we will now hear from Vasu <unk> with cannon ball.
Sally do you want to go ahead and turn a video for us.
The Sealy would you like to go ahead and end yet and ask your question.
Well, we are not getting any response from the ceiling. So we can go ahead and move on to David <unk> with J P. Morgan.
Very good.
Thanks, Adam just wanted to see if you could update on whether you see any.
Expected privacy changes either on the iOS or Android child in the next I don't know call. It six to 12 months that might impact your execution at all or from this point on do you kind of expect just more incremental changes.
Yes, I think we constantly mention this that what we think of course privacy both on the operating system level and amongst regulators will continue to evolve it's been something that's been evolving as we've operated this business for the last five to seven years, we don't see anything in the six to 12 month term that you referenced that's going to be a material.
Change to how we would be able to operate our business and one thing that really is has defined our company. Since we launched we moved really fast our core engineering team is really strong the culture of the company is to operate as a startup at all times and so when it comes to these changes we've always been able to adapt and operate within the boundaries of the <unk>.
<unk> and that's due that gives us a lot of confidence in it no matter, what we're face in the future, we're going to be able to move faster than peers, and we're going to be able to continuously improve what we're offering to the advertiser base you work with.
Okay, great. Thank you.
And our next question will come from.
Look Mark Smith.
Ralph Research.
This is Luke <unk> on for Josh that Wil research great. Thank you Greg.
Great. Thanks, just a quick one here.
Any update to the competitive dynamics in mediation with the launch of axon to point out are you seeing any update there or progress or differences.
You really a mediation a couple of things are happening we referenced this in our prior call.
We believe the majority of the mobile gaming market is on our Max mediation product. We've seen nothing changed there then companies utilizing our toolset both on the mediation side and on our App discovery side are seeing better growth than peers in the market because our products works, so well and both sides really come together for the publishers that are.
<unk>, our mediation, so not that we've seen a lot of change because we're already so much of the market Bank continued strength amongst our publisher base. The other changes coming in mediation is Google bidding.
<unk> as a partner as a close partner of ours, we were a launch partner for their Google bidding product over the next few months, we expect that they'll shift entirely to an app bidding and away from more traditional methods that will be a benefit to our max product and should be a benefit for publishers.
And then the true ness of that auction and so we're excited as that scales up that'll be a big positive for our business hopefully theres in all of our partners.
Great. Thanks, and I just had one quick follow up here.
You know in regards to world is any update there and if you plan to continue maybe focusing on some of these areas outside of the outside of the core continuing to invest in a further iterations of axon. Thank you yeah totally in my talk track I referenced expanding the technology that we just built axon two over the world and array and.
On the World side, when we did the world transaction, we were really excited about there the competency of their team.
And really the relationships that they had with the media companies to be able to get to the connected TV landscape and go get inventory and be able to to mediate and serve into that inventory not dissimilar to how we were able to scale on mobile and the world team's been executing really strongly there now as we extend axon to over to CTV, We think it's a.
It's a really strong extension point for the advertisers to buy on our platform and to be able to sell performance media on television is something that people have talked about for years, but very few companies have been able to deliver any sort of solution. There and we do know that our axon to offering is cutting edge and as potent as there is in performance.
Marketing as far as the technology goes so extending it to connected TV can pose a very big growth channel for our business and that of our partners.
Thank you.
And we have time for one additional question from Omar <unk> with B of a I do believe he is audio only Omar if you can hear me. Please go ahead with your question.
And Omar again, if you are we see that growing muted this euro on our phone. Please make sure that's on muted as well we can't hear you currently.
Alright, Omar I'm, giving you one more chance if you can hear me you're still need to go ahead and ask your question.
Yes.
Alright with no response from Omar that does conclude our question and answer for this quarter, Adam and Harold. Thank you so much and to everyone who joined US today. We thank you all for joining us today have a great afternoon.
Thanks Ara.
Okay.