Applovin Corporation

Welcome to the Applovin earnings call for the second quarter into June 30th, 2024. I'm David Hsiao, Head of Investor Relations. Joining me today to discuss our results are Adam Ferughi, our Co-Founder, CEO, and Shareperson, and Matt Stump, our CFO. Please note, our SEC filings to date, as well as our shareholder letter and press release discussing our second quarter are available at investors.applovin.com. During today's call, we will be making forward-looking statements regarding our products and services, market expectations, the expected 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 first quarter and in March 31, 2024. Additional information may also be found on our quarterly report in Form 10-Q for the fiscal quarter into June 30, 2024, which will be filed later today. We will also be discussing non-GAAP financial measures. These non-GAAP measures are not intended to be superior to or a substitute for our GAAP results. Please be sure to review the reconciliations of our GAAP and non-GAAP financial measures in our earnings release and shareable letter, available on our Investor Relations site. This conference call is being recorded and a replay will be available for a period of time on our IR website. Now I'll turn it over to Adam and Matt for some opening remarks, then we'll have the moderator take us through Q&A.

Welcome everyone, and thank you for joining us. We had another strong quarter in Q2. Our software business had 5% revenue growth quarter over quarter because our models continue to improve. As you'll recall in Q1, we had a big step up in growth, so continuing that trend to continue to grow quarter over quarter is a really promising sign. As we've stated in previous earnings calls, if we keep growing the software business, the flow through to EBITDA and cash is very high and our business margins and cash conversion will continue to improve. We've also consistently said that the slower growth market we're in, mobile gaming doesn't constrain our opportunity to grow our software business. We've noticed that at times this concept is needed a little bit more explaining for our shareholders and prospective investors. So I wanted to take the time to do that here. Our platform is entirely performance-based. In other words, gaming advertisers who market on our platform generate a measurable revenue and profit from the dollars they spend on our platform. Our customers run marketing campaigns with target return goals, but tend to have a much higher appetite for spend on our platform than we can deliver today. And why can't we deliver more today? Because our current system can only find a limited number of users who will meet their revenue goals. As our technology improves, we will continue to find more users who achieve these goals, increasing advertiser spend resulting in materially higher growth than the growth rate of the mobile gaming market. Last quarter I talked about a goal of growing our software business 20 to 30% for the long term. I typically don't communicate externally about our goals if I don't have confidence in it. I'm communicating it now because I do have strong confidence in it and I see many years of growth ahead of us. Here are the primary drivers of that growth goal. Continued improvement from our models as they learn from more data. As our models gather more data, they'll become more accurate and find more good users for our advertisers. Gains that our team delivers to the efficacy of our models through enhancements. Our research science and core engineering team members are exceptionally talented and consistently deliver lifts to the performance of our models. Demand expansion into new verticals. We just launched the first web advertising campaigns for shops this quarter. And while in pilot right now, we think it will unlock a lot of demand expansion opportunities for us. And then supply expansion. As we broaden out our demand base outside of gaming, we expect the new categories will really help grow our CPV footprint. We continue to be very excited about our prospects and the performance our team is able to deliver. We will work tirelessly to achieve the goals we set and hope that over the next many quarters and years together, you will have a better sense of how an AI driven marketing platform creates growth opportunities that just weren't possible in advertising before because technologies were not this sophisticated. With that, I'll hand it off to Matt to run you through the financial highlights.

Thanks Adam and good afternoon. I'm pleased to report we had another strong quarter with total revenue reaching $1.08 billion and adjusted EBITDA of $601 million, achieving a 56% adjusted EBITDA margin. This marks a 44% increase in revenue and an 80% increase in adjusted EBITDA from the same period last year, translating to an impressive 81% flow through from revenue to adjusted EBITDA. In the first quarter, we generated $446 million in free cash flow, which is a 74% flow through from adjusted EBITDA. Quarter over quarter, our free cash flow grew 15% compared to 10% growth in adjusted EBITDA over the same period as we benefited from a relatively stable base of cash tax and interest. During the quarter, improvement in our Axon technology, driven by ongoing self-learning, contributed to further growth of our software platform, which generated $711 million in revenue and $520 million in adjusted EBITDA, retaining our 73% margin and growing 91% from the same period last year. This represents an 87% flow-through of revenue from the prior quarter, illustrating our ability to remain disciplined with our costs, growing revenue while remaining lean and efficient. Our app's revenue for the quarter was $369 million. an increase of 7% from last year, with $81 million in adjusted EBITDA, representing a 22% margin. During the quarter, we readjusted our user acquisition return goals, resulting in an 11% quarter-over-quarter decrease in total app segment costs, while revenue decreased by 3%. We expect our future margin profile to normalize to approximately 15% over the long term, consistent with industry standards. Looking ahead to capital allocation, we plan to focus on three key areas. First, investment in organic growth initiatives, specifically our engineering and business development headcount to support the development of our excellent technology and expansion into e-commerce. We do not expect significant capital investment here since we plan to expand our teams in a very lean and targeted manner. Second, continued share management activities with a combination of withhold to cover on future share vesting and strategic repurchases. And third, strengthening of our balance sheet to enhance operational flexibility and liquidity while reducing net debt. In Q2, we used $356 million to withhold 4.2 million shares, allocating about 80% of our free cash flow in the quarter to share management. Since 2022, we've invested nearly $3 billion to repurchase and withhold a combined 83.6 million shares. Finally, in the third quarter of 2024, we anticipate to deliver between $1.115 and $1.135 billion in revenue, with adjusted EBITDA between $630 and $650 million, targeting an adjusted EBITDA margin of 57%. Now with that, let's move to Q&A.