Q3 2023 Applovin Corp Earnings Call
Welcome everyone to the App loving turning call for the third quarter ended September 32023, I'm, David <unk> head of Investor Relations.
And each day to discuss our results are adding fergie are co founder and CEO and Shepperson handheld Chen our president and CFO.
Please note our SEC filings today as well as our shareholder letter and press release discussing our third quarter performance are available at investors <unk> Dot com during.
During today's call, we will be making forward looking statements regarding our products and services market expectations, our CFO transition 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.
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 32023, and our Form 10-Q for the third quarter would you expect to file later today.
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 and 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.
Now I'll turn it over to Adam and held for some opening remarks, then we'll have the moderator to take us through Q&A.
Good afternoon. Thank you for joining us today, our team has executed exceptionally well this quarters record breaking performance is a testament to the success of our new AI based advertising technology axon too.
Which is once again, driven revenue and adjusted EBITDA above our expectations I.
I would like to take a moment to commend our outstanding team for their dedication and hard work a year ago, we faced significant challenges and our team's resolve and enthusiasm never faltered. Our efforts. This year have not only solidified our short term growth trajectory.
<unk> also set the stage for sustained long term expansion.
The journey with axon too is just beginning with numerous enhancements on the horizon.
This quarter, we made strides by integrating <unk> into our CTV initiative during its testing phase and we are planning to scale up these efforts in the subsequent quarters.
We're excited about introducing our leading performance marketing technologies to television, where we see a substantial opportunity to fill the gap with the superior performance solution.
Additionally, this quarter, we'll be extending axon Tudor array and expect it will materially accelerate the potential to scale that business.
Considering the magnitude of our software platform business, we're investing in our CTV an array businesses, because we believe they have the potential to become meaningful contributors to our annual revenue.
Our dedication to creating long term value for our shareholders is steadfast we're confident in the capabilities of our team the potential for the innovation of our technology the quality of our products.
And the strength of our financial position.
We are grateful for your trust and support as we embark on the next chapter of our journey, which promises growth and relentless innovation.
Before concluding I would like to express my gratitude to Harold for his many contributions during his tenure as CFO over the past four years barrels ambition to build a strong foundation in our support and operational functions has been realized setting us on a course for operational excellence.
As we transition to provide more opportunities for his team Harold will continue to offer and valuable strategic guidance and as new advisory role to me.
I will now turn it to Herald, who will share the financial highlights of the quarter. Thank you again for your continued support.
Thanks, Adam and thanks for the kind words.
Adam discussed strong execution across the board led to fantastic financial performance this past quarter.
In Q3, we achieved incredible year over year and quarter over quarter revenue growth with software platform up 65% year over year, reaching a $2 billion run rate.
<unk> posted in the first quarter of quarter over quarter revenue growth since we started our portfolio optimization program.
In total generated revenue of $864 million up 21% year over year with adjusted EBITDA of $419 million up 63% year over year.
Both exceeding the high end of our guidance.
Even higher margins and higher contribution from our software platform business total adjusted EBITDA reached the highest EBITDA margin in five years at 48, 5% margin an improvement quarter over quarter of over 400 basis points on top of a 600 basis points improvement from Q2 over Q1 2023.
Of note this past quarter did benefit from approximately 100 basis points of improvement coming from one time nonrecurring cost benefit.
Turning to our segment reporting we're excited to see our software platform and AI driven technologies help our advertising partners expand the reach achieve better returns on their investments and to increase their spending with us.
Software platform reached record revenue of $504 million, a 65% increase over the prior year and a 24% increase quarter over quarter, which is the third consecutive quarter with double digit quarter over quarter revenue growth.
Sulfur platform adjusted EBITDA grew 91% year over year, and 33% quarter over quarter to $364 million with a record 72% adjusted EBITDA margin.
Our software platform continues to demonstrate high flow through from revenue to adjusted EBITDA as we scale.
Given its extraordinary growth and cash flow generation software platform adjusted EBITDA now represents nearly 90% of our company's total adjusted EBITDA.
As Adam mentioned, we're very proud of our software platform team's hard work and accomplishments to date.
Even more excited about where this business can go in the future both within our core markets and within the new initiatives, we have been pursuing with boral in array.
Moving onto the Apt segment.
<unk> revenue grew 5% sequentially to $360 million the first quarter of growth since we started our portfolio optimization project.
Apps, adjusted EBITDA was $55 million a margin of 15%.
With the major parts of our portfolio review complete we're continuing to focus on balancing growth and cash flow to optimize our financial performance and enterprise value of our apps portfolio.
With regard to free cash flow, we generated $194 million in Q3, the flow through from adjusted EBITDA to free cash flow in Q3 is slightly lower than normal primarily due to a temporary delay in certain cash collections.
We expect will reverse itself in Q4.
As previously mentioned our calls adjusted EBITDA to free cash flow flow through is typically 50% to 60% on a normalized run rate basis, noting that we typically have some deviations in any particular quarter driven by the timing of tax payments and working capital movements.
This flow through percentage should increase over time as our high cash flow converting software platform business continues to grow faster than the apps.
With regard to guidance for Q4 2023, we are targeting another quarter of growth with revenue between 910 and $930 million adjusted EBITDA between 420 and $440 million in margin between 46% 47%.
Margin outlook is slightly down from Q3's 48, 5% given the approximately 100 basis point benefit from one time items in Q3 and the potential for further investments in the business in Q4.
From a cash perspective, we ended Q3 with 332 million of cash on our balance sheet in the quarter, we used $582 million of cash to buy back stock and $249 million to pay down our term loan.
It was offset by a $185 million drawn on our revolver.
Stock buybacks year to date through the end of the third quarter, we repurchased $1 $2 billion of our class a common stock at a weighted average price of under $25 per share.
This is consistent with our asset allocation plan and focus on driving long term shareholder value.
On the debt side in Q3, we amended a portion of our term loans extending the maturity to 2030, reducing principal amount by $250 million to $249 million and improving our credit spread.
With regard to our board, we're pleased to add Todd Morgan fell in the quarter, a seasoned executive who most recently was a CFO at Pinterest and part of that was VP finance at Twitter.
Concurrently Asa Sharma feel of instant card stepped down from the board.
Overall, our strong Q3 performance showcases the strength and powerful business model underlying our software platform business.
Lastly on a personal note as Adam mentioned earlier, our decided to ensure and transitioned from a full time role to an advisory one at the end of this year. So.
So I can take some time off and investigate new opportunities.
In my new role as adviser to the CEO I very much look forward to working with Adam and the team on key strategic and financial matters.
Whether I will be continuing my service on the Avalon and board.
It has been my privilege to serve as <unk>, President and CFO for the past four years in particular getting to help build and work with is truly extraordinary management team.
Come January I'm excited to have Matt and Dmitry step into their new and well deserved leadership roles based on their track records and past contributions I am confident in their success.
Since joining the board in 2018 on her Adam's leadership. The company has achieved tremendous growth increasing revenues by over <unk> and adjusted EBITDA is multiplied from a couple of hundred million dollars of run rate to over $1 $6 billion run rate today.
While the path has not always been linear nor easy the team has remained steadfast and executed with expertise to drive this outstanding performance.
Thank you to all the Apple of stakeholders, including our team customers partners shareholders lenders and board, who support us along our journey thus far.
I do say, thus far because the opportunity ahead of Apple oven is awesome and I very much look forward to being a part of it in my new role.
Now the moderator, who will take us through Q&A.
Thank you so much heralded like Harold said, we will now take your questions. So when I call. Your name. Please turn on your video and on mute.
In an effort to allow everyone an opportunity to ask their question. We do ask our analysts to please limit yourself to one question. We thank you in advance for your consideration.
And our first question is going to come from Ralph <unk> with William Blair. Ralph. Please go ahead.
Great. Thanks for taking my question first question just on the over performance in the quarter, maybe you can kind of speak to maybe whats going better with the sort of ramp of exon two than you originally anticipated and perhaps may you could kind of touch on I think historically, you've talked about an extended beyond gaming maybe some perspective on how it's doing in some of the other verticals that have a caller. Please.
Sure. Thanks for all for joining in the questions. So we talked about last quarter axon two was rolled out partial way in the prior quarter.
This brand new technology, and it's a self learning type of technology. These AI models as they get scaled continuously improve themselves and then our team also is able to continuously improve them. So we're talking about a new technology that.
We've seen as one been game changing for our business and as to in the first inning and that's what gets US really excited the output of the technology delivers better results for advertisers and we've seen it to your question on gaming or non gaming we've seen it agnostic of the category advertisers on our platform are spending more dollars in a material way at <unk>.
Returns and.
That is a model that just compounds on itself and so that's what led to the vast majority of the over performance this past quarter.
Great.
Sorry, I'll jump on that.
So you wanted to know about the non U.
It's much better for both non gaming and gaming right.
Great.
During the prepared remarks, Amy talked about.
Extending exon two to the expected television business and array and then setting will at some point contributes a result, just kind of curious some perspective on your opinion when it could start adding to the overall sort of enterprise results. Yes, I mean, we did the world deal I think it was last April rates, that's been about a year and a half.
All teams integrated they built out really good product offerings on connected TV part of that is an SSP. So theres a lot of inventory available on worlds platform now for us to step into it and buy it with our performance marketing model.
In our last earnings call, we talked about we're just going to start migrating axon to over to the connected TV offering we've got in the testing phase on that as we start scaling that we're very excited about the potential of that platform. Obviously, it's TV and we also know that performance marketing on television Hasnt really been.
Being anywhere near as much as it has been on desktop or or on mobile devices and so our technology is truly cutting edge and being able to extend that to that platform presents a very big opportunity and then our array has the same deal array gets us on an Android devices today in a much more intimate way in <unk>.
<unk> multiple new AD offerings to the consumer and being able to use the oxon <unk> solution. There. We think is also going to be game changing for that business and the prospects of us.
Great. Thanks, Abba and best of luck in the transition here.
Yes.
Our next question will come from Clark Lehman with BTG.
Thanks for taking the question Adam I was hoping maybe we could unpack a little bit of the sort of sequential uplift that we saw in software revenue you talked about it being a testament to axon to at the top of your prepared remarks was that the key driver.
Sort of lift we saw up to 500 million or were there other businesses like moral or maybe Max also contributing.
The vast vast majority axon tier that powers, the App discovery platform, our advertising business and that's already the vast majority of the software platform that axon T was a key catalyst got it.
As we look at I guess sort of the forward guidance. If you would assume I guess just for discussion sake that the.
The apps business is running flat, we're sort of seeing like a 9% to 13% uptick.
In software revenue into the fourth quarter is that still expected to be mostly driven by app discovery axon sort of the compounding effect of the.
The improvements that you've talked about historically.
Yeah, we see both sides of the business growing as we mentioned that we've had the first quarter of growth quarter over quarter growth in absence, we started our portfolio optimization program, but clearly the vast majority of growth will remain in the software side as well as translation that we were able to grow that business translation to EBITDA.
EBITDA as we mentioned there were some onetime items in the third quarter that will come out in the fourth quarter and then the fourth quarter.
We are considering some additional investments on the growth side, both on the software and App side.
And I'll step away really quick and just a second but any any uplift that you guys were seeing from sort of non gaming customers. This quarter also or was this mostly.
Your sort of core game developers face that was driving most of the improvement we're seeing now what we're seeing success across both gaming and non gaming obviously gaming is a much bigger part of our business non gaming is growing faster because the number that is starting out is materially smaller.
It will take a sales effort to substantially grow non gaming so that it can become a much more material part of the business, but the technology works very effectively regardless of the type of App on the other side thanks very much.
And our Syn <unk> with Wolf has the next question.
Hi, how are you congrats on the results just very briefly a high level question, how far ahead as axon Tuesday advantage versus competitors, how long does this persist before competitors, maybe catch up and following up on that how should we think about the pace of new releases, what that kind of becomes for you guys and when should we expect like an exon three.
How much did new requirements and changes in privacy and the AD market drive that new release desire versus say competitors improving.
Competitive positioning against you.
As a as a bunch of questions in there.
Look these technologies are super complicated, we think ours is cutting edge.
And one of the leading AI solutions in the market across any of the AI implementations. We've seen we have very large deployment of software and hardware to power it and we've got a material amount of data.
Systems themselves money center self learning and we're continuing to evolve what we have on our on an ongoing basis on a regular basis. So this isn't something where we look at competition catching up we look at we've set a new standard and we're going to go build on that and that hopefully will lead to many quarters of growth coming up.
The privacy question that leading to axon three year changes in the platform.
Look we've dealt with privacy changes it probably since 2014 every time, there's a change on platform or with regulators you change something in your stack, but we're a nimble company we have rewritten our core technology multiple times over the years and we are always able to adopt and perform in the face of any of those kinds of changes.
And as far as axon three goes we signaled axon two to you all.
A year ago, we've obviously executed really well on putting it together.
Im talking about axon three we're talking about a lot.
A excitement about multiple quarters of growth coming up from what we put together here.
And we will now hear from Franco Granda with da Davidson.
Hi, good afternoon, thanks for taking our questions here.
I wish you luck Harold on your next move and obviously, it's good to know that you'll be in that picture still moving forward.
I had a question around the investments on CTV and OEM, obviously last year, you put those investments in Boston on the Essentials and these were some areas that suffered but now that you're planning on implementing axon into those categories can you comment on perhaps the magnitude of these investments.
How we should think about those mosshart, yes.
Yes, I mean, I don't think we've ever put them on positive and talking about CTV since we acquired.
World and an array we launched I think a couple of years ago and we've signaled to you. All that these are a couple of the growth vectors that we're really excited about our software business, obviously is really big.
$2 billion, a year run rate so to have a.
To have the type of numbers and scale from a new initiative.
<unk> put a real big that on those numbers. It takes a while but we're very excited about CTV an array. The foundation is there on both those businesses and we're taking this market leading technology applying it to it we think we're going to be able to really accelerate the path of book.
Okay. Thanks for that clarification, there and then just very quickly here on the apps business growth based on the quarter.
Much of that growth came from perhaps your integration with axon and leveraging that technology for that UA capabilities back.
Yes, we're obviously a big customer of our own systems and we when we saw Exxon students' performance like a lot of our customers. We invested more in UA and we expect to continue to do that and enrolling into the fourth quarter. So that was a big driver of growth.
Okay. Thanks.
And moving on to Tim Martin Yang with Opco.
Hi, Thank you for taking my question a question on the share between non gaming and gaming for suffer platform can.
Can you first talk about the general trend all the revenue contribution from non gaming apps and then.
Did axon to help.
Either direction op and non gaming share of revenues to suffer preference. Thanks.
Yeah, well, we don't break down the percentages, but we've talked about majority of our business is gaming.
And then I referenced that this technology is working really well for advertisers of any time across every category of mobile application. So we're seeing quite a bit of growth across all the non gaming starts from a smaller place. So we're actually seeing accelerated growth on non gaming advertisers.
Yes.
Thank you.
Now moving on to Ross content with Macquarie.
Hi, guys. Thanks for taking the question I was looking at the gross margin last year and a 40 22, that's a 47% and quite frequently in PKU I could point to 69%.
If you could expand on the protest has been kind of let us in on how we should think about this in default going beyond the debt ceiling scale of course helps melamine crude putting technology with axon, but any kind of understanding and the operating leverage in the model would be would be great.
Yeah. Some of the question was breaking up but I think you were asking about the gross margin on software interest the improvement year over year.
Is that correct, yes, yes, yes.
Yeah.
Our business model on the salvage side with first of all as you know we report on a net revenue basis as we start about at that level in the P&L and then in terms of the cost structure itself that's directly.
Related to software a lot of it is the data center infrastructure.
That we had talked about it almost a year ago that we had a big new contract that we needed to get through the initial.
Initial amount initial scale and so we had to grow into that I'd say now we're very much.
On page of not growing through us through some of that contract and so fully utilizing the capacity that we've had on board and that's why we've been able to really expand gross margin and all the way through.
EBITDA, given a relatively fixed cost structure on the R&D front.
Great. Thank you.
Morgan Stanley's, Matt Coss has the next question, Matt If you are able to start your video. Please go right ahead, otherwise that ask a question. Please.
Everyone. Thanks for taking the questions I guess the first one would just be there were some media reports in September and October of some advertisers boycotting one of your largest competitors are pulling back then did you see any material impact on your business in the third quarter or do you expect any business any impact longer term.
Lines in the fourth quarter.
It was a little overblown in the media pretty negligible impact those late September into maybe a week or two of of noise in the market, but the negligible to us.
Great. Thank you and then just on the software platform margin, 72%, a very very strong result.
I guess <unk>.
Give us your latest thoughts on what the loss through at scale potential is for that business good value.
We're higher than we've been certainly in a while.
Yes, good question, Matt and again theirs.
In every quarter theres going be some vagaries of say if theres some fixed costs incremental costs.
That function cost in particular on the datacenter side, but we expect as I said R&D to be relatively stable and that software margin can grow and expand as we continue to grow.
App discovery in particular, because that is a net revenue business over time looking at more of a longer longer run as we scale world's rescale CTV.
Sorry, as we scale the OEM side an array.
We need to make some fixed investments in those businesses and hire some teams, but those are also strong margin businesses as they scale up as well, but unlikely to start.
As high as the contribution that we do get from App discovery.
Great. Thank you.
Thank you so much and our final question will come from Omar <unk> with Bofa Omar. Please go ahead and on mute.
Hi can you guys hear me.
Yep Yep.
Okay.
So you guys talked about header bidding.
And how Google is going to shift to header bidding demand.
Shift demand, 100% of header bidding they put out a.
I notice on their website recently that.
They won't be shifting entirely after October 31, but will do so partially and I expect that transition to happen into the first quarter of next year.
So.
I think you mentioned that.
Your mediation platform contacts.
Yes, Google demand.
And.
I was wondering was actually given that Google has been waterfall bidder for so long and App discovery has been a real time bidder for so long that google's shift to real time bidding.
Actually post competition to your core business.
We've tended to focus on the idea that you could tax demand from Google doing real time bidding, but what about the competitive spec their approval.
Yeah, So you're talking about cannibalization effect of a mediation network one of the biggest Google in particular going to bidding.
We've taken that most of the market the bidding at this point, we're already above I think 60% once Google is the bidding is going to be very close to the full market tipping that way on every network. That's mediated go into bidding share moves around only slightly.
And possibly the bidder gets more efficient so it can gain share, but the overall pie grows and so that's the whole point of the Max platform is our objective with that platform was building an efficient marketplace, where you bring these these networks and put them into the most efficient way possible to serve pit sharp price and serve an AD a header bidding ste.
Right and then the publisher yields more the publisher yields more so they can spend more on user acquisition. We're obviously one of their main user acquisition channels dollars go back into the ecosystem. The pie grows and usually all parties end up benefiting and that's the trend we've seen now for five six years since we launched the Max level.
Okay. So if I understood correctly, then it sounds like Youre, saying he is a benefit of Google moving to real time bidding is to make the entire industry bigger and that will outweigh.
Any potential competition, because you have a new technology in the market from.
Someone other than yourself, which could potentially.
<unk> increases in AD spend yeah, we'll agree we never look at shared.
It's not a zero sum game you need all the marketing companies to do well that helps the ecosystem grow user acquisition dollars come into the space more eyeballs swallow consumption goes up that's always been our formula to growth.
So we look at dollars and the dollars become bigger benefits all parties and Thats, what we see every time and not where it goes to bidding.
Thank you very much.
Alright, and with that that does conclude today's earnings. We thank you all for attending and we look forward to seeing you next quarter take care until next time you may now disconnect.
Thank you.
Goodbye.