Applovin Corporation

Okay, good afternoon, everyone. Let's get started. Welcome to App11's earnings call for the quarter-ended March 31st, 2021. I'm Ryan Gee, Head of Investor Relations and Strategic Finance at App11, and joining me to discuss the results are our co-founder, CEO, and chairperson, Adam Farobi, and our President and Chief Financial Officer, Harold Chen. Please note our SEC filings, earnings release, and shareholder letter discussing our first quarter performance are available at investors.appleven.com. We also posted a short slide presentation that Harold will reference later in this call if you'd like to follow along. During today's call, we may be making forward-looking statements regarding future events and the future financial performance of our company. These statements are based on our current assumptions and beliefs. We assume no obligation to update them except as required by law. Actual results may differ materially from the results predicted. Please review the risk factors in our most recently filed Form 10-K and in our form 10Q to be filed shortly after this call for additional information. 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 IR website. Please be sure to review the GAAP measures and the reconciliations as the non-GAAP measures are not intended to be a substitute for or superior to our GAAP results. This conference call is being recorded and a replay will be available shortly. We will be hosting a Q&A session after our prepared remarks. But first, I would like to turn it over to Adam and Harold. Adam, please go ahead.

This past quarter, we achieved many key milestones for AppLoad. We celebrated our 10-year anniversary as a business, our one-year anniversary as a public company, and we cleared over 10 billion app installs discovered through our marketing platform. We can celebrate these milestones because of the hard work and value-driven culture that we have at AppLoad. First, We hire and work with great people from diverse backgrounds. We give them an environment to thrive in, always trying to ensure each person has room to develop their professional and personal skills here more than anywhere else. Second, we are entrepreneurial and we never settle. We know that in a competitive and challenging market, complacency leads to failure. And third, we maintain focus. We aim to do big things. But all of our decisions are tied to our core goals, continuing to expand our footprint as a marketing and monetization platform for developers. It was key to the team that we maintain these core principles as we entered a new public chapter for our company. I'm very proud to say we've done just that. This can be demonstrated in our first quarter. First, our software platform business has continued to expand by adding new clients and increasing the amount that existing clients are spending. This strong performance has led to a record EBITDA in Q1 of $276 million. Most software businesses lose money while growing. We're growing quickly and just cleared a billion-dollar EBITDA run rate. Next, we successfully completed migrating Welcome into our Max platform, unifying the two largest mediation solutions in the mobile app market. We not only had to execute quickly on our side to accomplish this, we also asked publishers to integrate our platform into their apps in just 90 days or risk losing their ad revenues. A couple things to call out specifically here. Historically, we grew Max to become the leading solution in the market by offering the best technology, not by paying bonuses. This is exactly how we'll run our business going forward, focusing on continuing to deliver the best solution in the market. Given the short window of time to move to our unified platform, we made the decision to pay out $210 million in one-time publisher bonuses. We accounted for these bonuses as contra revenue, and Harold will give you the accounting details shortly. We see the opportunity to own the largest marketplace in the in-app advertising ecosystem as strategically valuable long-term. And therefore, this was a decision that was an easy one to make because it helps ensure continuity with the publishers coming over from MOBA. Switching modernization platforms is a big undertaking and we are proud that over 90% of the MoQuad publishers moved over to Max. As a result, we now have significant share in the market using our solutions so much so that the success of our platform will directly influence growth in the total addressable market and success of all major parties in the ecosystem. That's a strong position to be in and a responsibility we will be proud to own. And finally, we acquired Whirl. a leader in powering streaming TV. Together, we will partner to bring performance marketing to CTV. It is clear just how quickly we push forward on items that make the biggest impact to our business when we look back just one year to the IPO and see that software was only 14% of our revenue versus 40% now. At that time, we discussed just how important the first-party data that those games provided was to our software platform success. Today, our software platform business is growing at a significant rate much faster than we expected, while their apps business has leveled off. In fact, our software business in Q1 22 is four times larger than it was in Q1 21. And in Q1, software contributed over 80% of our EBITDA. For the last several quarters, we've talked about how the apps business is not as strategic as it once was. With the continued scaling of our software platform, we've proven that the two businesses can operate independently from one another. More directly, given the success of our software platform, we will no longer run our games as a cost center. This means we will be exploring how to structure our app's business so that it is run more efficiently as its own standalone business unit. This exploration may result in operational changes and possibly plans to sell or spin off some of the studios. Among them are nearly 20 very capable game studios, their founders, and their teams. We will operate the studios with a more profitable spend on user acquisition, which we already started to do in late Q1. Traditionally, we were willing to spend more on new users, valuing the scale, audience, and data as the justification. This led to operating it around break-even, while typically gaming companies operate at 20% or higher EBITDA margins, which we will now aim to reach over time. Mobile app discovery and modernization are critical for app developers now more than ever. With Max, we have the market's leading modernization solution. App discovery is the fastest growing user acquisition channel for developers today. With customers paying us for performance, we're shielded against macroeconomic volatility. We have a powerful machine learning engine that is only 18 months old and will continue to improve. Max allows us to serve ads to the 700 million daily active users we help monetize. We have a team seasoned in navigating a complex ecosystem and a dynamic privacy landscape. With the growth opportunities across our software business and future initiatives and the high cash flow our business generates even today, we're very excited about our future. Now I'll turn it over to Harold to outline the details of Q1 Financials and our outlook.

Thanks very much. As Adam mentioned, with the growth in margins for our software platform, plus a new operating approach for our apps portfolio, we're excited about our near and long-term growth prospects and cash flow outlook. To help you better understand that thesis, going forward, we'll be providing greater insights into the economic drivers of our two businesses and regarding the overall cash generation of our company. For a quick preview of what I'm going to describe in more detail shortly, Our guidance for a software platform business is to generate over $1 billion of revenue in the second through fourth quarter of this year. Based on an estimated margin for that business of 70% and a flow through the cash of another estimated 70%, that business alone will generate over half a billion dollars of unlevered free cash flow in the next three quarters alone. But let's get back to the quarter, and since in Q1 we made some key decisions and good progress to our goals, I'll highlight a few in details a few in detail before we take your questions. The first topic is our overall strong trending and margins. We have strong quarter over quarter and year over year growth on both the top and bottom lines when adjusting for the 210 million of contra revenue we booked in Q1, which were the bonuses paid to publishers related to the MoPub transaction. Our growth in Q1 was driven by the growth in our software platform revenue more than making up for a modest decline in our apps revenue. But let me spend a few minutes on the Contra revenue so you can appreciate the growth and margin expansion that we saw in the quarter. First of all, just the accounting of Contra revenue. We paid these publisher bonuses to our vendors that are currently or may become future customer owners. And since GAAP requires offsetting revenue for fees you pay to customers or potential customers, these publisher migration bonuses of $210 million are accounted for as Contra revenue. Second, these fees are non-recurring and result from the mobile product transaction. Historically, we did not incur these fees in any significant size. But when you shut down one of the largest players in mediation and ask their publishers to move over in 90 days, those publishers incur real revenue loss and cost to migrate. Going forward, we do not see publisher bonuses as a significant cost to our normal business, and we do not have them before Mopum, nor do we project anything significant going forward. Because the Mopum-related fees are not recurring, we add it back to adjusted EBITDA. And any non-public-related publisher bonuses we would see after Q1, we will not be adding back to adjusted EBITDA. So therefore, it is just a one-time occurrence in this quarter, in this past quarter. For reporting purposes, on the revenue side, we cannot add back the contra revenue. But for internal purposes, of course, we combine the two numbers, which adds up to an amount 38% greater than our Q4 number. Overall, if you consider the $210 million of contra revenue as part of our $1.05 billion purchase price for MoFa, the total price for that acquisition was $1.26 billion. And that's a very attractive price for such a strategic and financially accretive asset. On the cash flow side, Adam mentioned we had record $276 million in EBITDA with a reported margin of 44%. When normalizing revenue for the publisher bonuses, our adjusted EBITDA margin was 33%, which you can see in purple here. That, we think, is the normal run rate of the business, and that is a 500 basis point increase over 28% in the fourth quarter of 2021. This margin expansion was entirely driven by the strong growth of our high margin software business, And in fact, the margin was slightly reduced by our app business, where the reduction in app revenue was in large part offset by user acquisition spend, but was still diluted to our overall margin. As we mentioned in our shareable letter, we currently estimate that our software platform business currently runs at a normalized EBITDA margin of 65% to 70%, and our apps business at an estimated EBITDA margin of 5% to 10%. Therefore, faster growth of software-related apps drives margin expansions. We will be providing more details on this in our Q2 earnings report, where we will be providing segmented financials for the first time. Our strong outlook for software platform routing and margin plus operating cost management allows us to raise our EBITDA guidance for this year, and we'll talk about that further in a minute. Of note, at our current operating scale, we were able to translate a significant percentage of our EBITDA to unlimited free cashflow, given our low capex, working capital requirements, and moderate tax rate. We estimate that normalized run rate percentage of adjusted EBITDA translating to unlevered pre-cash flow to be around 65 to 75%. The next slide, we want to show you, talk about our software expansion for the quarter. So we heard now a few times from Adam and me, we believe that the software platform growth is key to our long-term growth and cash flow. So let's take a deeper look at our Q1 software performance. First of all, as noted in purple, you can see all of the one-time contract revenue is taken against our software revenue. When added to GAAP revenue of 119 million, the total is 329 million for Q1. That represents a 33% quarter growth rate on top of strong quarter-over-quarter growth over our prior three quarters. We saw strong customer adoption across all of our solutions, including App Discovery, App Loan Exchange, Adjust and Max, as we started to pick up revenue from the integrated Mopub customers. Our customers continue to find success with our solutions, are growing their business, and in turn, spending more on us. Of note, in Q1, we received approximately $40 million of revenue from Mopub Twitter and expect the revenue from the app position to grow over the course of the year. However, going forward, it will be difficult to discern what revenue comes explicitly from Mopub now that it has been fully integrated Across the board on software KPIs, we had very solid performance when normalized for the contra revenue impact. We had 258% net dollar-based revenue retention in the quarter over a prior year, showing the resiliency of our customers and continued increase in the use of our software solutions. We also had a solid increase in the number of new customers. Our normalized spec count reached 519, an increase over 58 customers, where we still believe that's a small percentage of the customers available to us in the marketplace. The additions were across the business, including from new additions from customers migrating from Mopa, as well as for new customers from App Discovery and Adjust. On top of more customers, we saw the average revenue increase on average from all of our specs to reaching normalized $603,000. a steady increase over the past three quarters. Of note, when taking the $210 million of contradicting out of these metrics, we still were able to grow net dollar-based retention and the total number of specs. For the third topic, we wanted to provide you an update on our guidance, where we're increasing our 22 adjusted EBITDA targets. For 22, our operating outlook for the software platform remains the same as previously given. However, we are adjusting our formal guidance by the 210 million in contra revenue to gap revenue guidance of 1.14 billion to 1.29 billion. We are continuing to expect $2 billion in software platform revenue in 2023, which will be a 10 times increase from 2020 and a 65% increase over the midpoint of a revised software platform guidance in 22. We believe we have the market, solutions, technology, and team to reach that goal. Further, given our scalable cost structure, which we articulated earlier, we believe the cash flow from a $2 billion revenue software platform business would be substantial. Switching to the app side, as Adam mentioned, the scale of our software platform in the men's future for max solution means we are much less reliant on the data from our apps to drive financial performance for our clients. Therefore, we're planning to manage that business to optimize for operating and financial efficiency with the perspective on how to best try to catch flow from that business over the long term. In the near and medium term, that may include lowering our investment in user acquisition, which will drive up margins but lower overall growth. We will also do a review of our app portfolio, which could lead to a wide variety of transactions or no change at all. Based on this new approach, we are lowering our revenue guidance by $200 million and now targeting a range of $2 billion to $2.15 billion in revenue from apps in 2022. The combination of our changes in software and apps guidance leads to a revised total guidance of $3.14 billion to $3.44 billion on a GAAP basis. With regard to adjusted EBITDA, given our record performance and strong margins, we're raising adjusted EBITDA guidance to a midpoint target of $1.2 billion. This target, again, represents a 65% increase over prior year. This is also an increase from our previous guidance of high 20% margins against a total revenue forecast at midpoint of $3.7 billion, which equated to just over $1 billion. Key drivers of this increase in EBITDA guidance are the much higher growth of our software platform business, which, as I said, has a much higher margin profile. We have lower investment requirements than originally earmarked for new initiatives, and we now have a higher margin expected from our house business as we optimize it. From an overall margin perspective, this equates to a 36% 22 adjusted EBITDA margin at midpoint of GAAP revenue guidance. and a 34% adjusted EBITDA margin when excluding the contra revenue. Therefore, the 34% target is our run rate margin to focus on, which would be an 800 basis point increase over the prior year. Since we do generate a significant amount of cash flow, I wanted to touch briefly on our go-forward capital allocation perspectives. As previously stated, we're not focused on M&A for the app side of the business. We will opportunistically look on the software side, although there too, we've assembled many of the key assets we wanted over the past 18 months. Then with regard to the stock buyback side, we do have our $750 million authorized program, and it will be used just over $45 million thus far. We are planning to use that authorization when appropriate and are open to doing so given the right opportunity. We appreciate the public markets are highly volatile and difficult to predict. In these markets, we believe cash is king and cash flow growth is king and queen. That's exactly where our team is focused. We believe in our strategic position, growth, and cash generation potential, and we will work hard quarter after quarter to post the numbers that will earn your trust. Thank you for taking the time to get an update on our business. And with that, we'll open the call for questions. Brian.