Applovin Corporation

Okay, welcome everyone to Applovin's earnings call for the second quarter ended June 30th, 2022. Joining me today to discuss our results are our co-founder, CEO, and chairperson, Adam Foroughi, and our president and chief financial officer, Harold Chen. Please note our SEC filings, earnings release, and shareholder letter discussing our second quarter performance are available at investors.applovin.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, our strategic review of our app's portfolio, and our proposal to combine with Unity. These statements are based on our current market 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-K for the fiscal year ended December 31, 2022, our press release regarding our proposed combination with Unity, and in our Form 10-Q for the second quarter, which we expect to file later this week. This call does not constitute an offer to sell or the solicitation of any offer to buy any securities or solicitation of any vote or approval. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of U.S. Securities Act of 1933, as amended. This call includes information related to a proposal that we have made for a business combination transaction with Unity Software. In furtherance of this proposal and subject to future developments, we, and if a negotiated transaction is agreed to, Unity, may file one or more registration statements, proxy statements, tender offer statements or other documents with the SEC. We urge investors and security holders to read such registration statements, proxy statements, tender offer statements or other documents we or Unity file with the SEC because they will contain important information about the proposed combination. We will also be discussing our non-GAAP financial measures. Reconciliations of our GAAP and non-GAAP financial measures are included in our shareholder letter available on our investor relations site. 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 on our IR website shortly. I'm going to turn it over to Adam to discuss some highlights for the second quarter, and Harold will provide more context on our financial performance and our 2022 outlook. Then we'll open up for Q&A. With that, Adam, please go ahead.

Thanks, Ryan. Thank you all for joining us today. With our proposal this week, we were really hoping to spice things up with this earnings call. We'll come back to that in a bit. But now, I want to start by saying that we are pleased with our performance during the second quarter. We delivered strong year-over-year growth led by our software platform business, which grew over 100% over the same period last year. Notably, we surpassed 500 software platform enterprise clients, and our revenue from those clients and net dollar-based revenue retention also improved year-over-year. We're successfully driving adoption by onboarding new clients and deepening our relationships with the existing ones. I also want to acknowledge the challenging period for the mobile app ecosystem, which was facing a few headwinds going into the quarter and which were compounded by the weaker macro economy. We appreciate the near term may be challenging, so we are hyper-focused on the one thing we can control best, continuing to improve our strong software platform technologies. I'm very proud of our team and all of our accomplishments. Let me highlight three of them. First, we successfully completed the shutdown of Mopub. Now that Mopub is fully integrated into Max and their developers have moved over, we have been focused on strengthening our relationship with all the new partners in the quarter. Max is on track to hit our goal of a $10 billion a year run rate of media transacted through our platform by the end of the year. Max is the strongest platform for mobile in-app bidding. Next, we ramped our app Lovin Exchange, continuing the migration of MoPub demand partners to our platform. Just as with the publisher integration of MoPub into Max, we are rebuilding 10 years of MoPub efforts in a very short amount of time. We want to facilitate success for these DSPs as they migrate and to give back to the publishers that use Macs in a tough economic time. So we reduced our take rate on Applovin Exchange by nearly half. While we maintain flexibility on the economics of ALX long term, in the short term, we felt this was the right thing to do for our marketplace. Additionally, we successfully integrated World and are already using AppLev and AdTech to start testing mobile gaming advertising campaigns on CTV. While this is still in the early stages of testing, the results are promising, and we're excited for World to bring a true performance-driven approach to advertising for the television market. This past quarter, we updated our strategic and financial approach to our apps business to focus on segment profitability and long-term cashflow growth. We have better aligned our level of investment across the portfolio to both current market conditions and future opportunities. For some studios, our plan may be to sell, close, or restructure to maximize value. To increase margins, the most notable change in our approach was a reduction in user acquisition spend for our portfolio of apps, as we increased our own desired return goals. The effect of this is that it reduces revenue, which is reflected in our guidance, but will lead to higher margins, much more in line with industry peers. We believe we're mostly through this period of readjustment of revenues and margins, and the business will now be in a stable place, able to produce consistent cash flow. With that, let me turn it over to Harold to provide color on our numbers and outlook.

Thanks Adam, and thanks everyone for taking the time to join us today. We know you may not have had time to review our shareholder letter just yet, so I'll quickly hit some of the key points. As you already know, we are operating in a more challenging environment. Notwithstanding though, given the focus and execution of our Applovin teams around the globe, We're able to continue to grow our top line year over year to $776 million, which is a 16% increase led by our software platform business. That growth plus improvements in cashflow from our apps business resulted in year over year adjusted EBITDA growth of 47% to 270 million. That equates to a 35% margin, which is the highest normalized EBITDA margin we've posted since being public. We also introduced segment reporting this quarter, which allows us to provide you more information regarding the progress of our businesses. Starting with the software platform segment, we had $318 million of revenue, which was up 118% year over year. We continued to deliver highly performance solutions to our most important customers, as evidenced by our record 503 enterprise customers, with an increase in net dollar-based revenue retention of 204% on an LTM basis. On a quarter-for-quarter basis, all of our software solutions had some growth except for ALX, which in the aggregate led to a quarterly decline of minus 3%. The ALX decline was due to a migration of DSP demand from Twitter's platform in Q1 to our ALX platform in Q2, which takes some time to ramp. And as Adam mentioned, we proactively reduced the take rate from DSPs so we could pass more dollars along to our publishers. Importantly, from a cash flow standpoint, our software platform adjusted EBITDA grew 114% year over year to $197 million, representing a margin of 62%. While certainly a strong margin overall, in particular relative to our peers, during the quarter, we incurred step function increases in several costs. First, we had technology infrastructure costs that we discussed before, including additional data center capacity to support new publishers and demand partners onboarded from MoPub acquisition. and Headcount Cost. We're now including the team from Whirl, our recently acquired connected TDB platform. For the second half of 2002, importantly, we do not foresee meaningful increases in the software platform costs. Therefore, we expect our software platform adjusted EBITDA margin to be between 65 and 70% for the year, consistent with our previous range. Regarding software revenue performance for the year, we have confidence we will deliver against our guidance. The second and third quarter summer months are a slower part of the year for mobile gaming. But importantly for our business, the primary driver of our software platform business growth is app discovery, which is of course powered by Axon. The ability for us to more than double revenue over the past year and more than quintuple revenue over the past two years is largely driven by the continuous improvements in Axon. As we find improvements to our technology, we will realize meaningful increases in software revenue, which will flow through at very high margins. We do expect more of these improvements to occur over time, which supports our outlook for this year and beyond. Turning to the app side, as Adam described, our new approach to managing the portfolio is to focus on optimizing the business for financial return. Our efforts and progress are already evident in our second quarter numbers. Our apps adjusted EBITDA increased from $41 million in Q1 to $73 million. Margins expanded from 8% to 16%. Our bigger-than-expected reduction in spend, in particular in user acquisition, impacts the top line in the near term, and therefore, we meaningfully reduced our apps revenue guidance by $300 million for the year. By 2023, our goal is to position the apps portfolio to have a healthy business model where we can grow the top line and earn a solid margin. Closing out on guidance, we did not make any other changes to guidance, including holding the midpoint of 22 EBITDA at $1.2 billion. We can do so given our high margin software platform business and our ability to drive higher margins now in our apps portfolio. Overall, we remain highly confident in the standalone long-term value creation potential for our business, given our top line prospects and cash generation potential. To that end, we were able to buy back approximately 340 million of our stock under our $750 million buyback program at an average price of $38 per share. Before we open it up for Q&A, I want to turn it back to Adam to address the unique partnership proposal we made this week to the Unity Board.