Applovin Corporation

Welcome to Applovin's earnings call for the third quarter and it's September 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 chairperson, and Matt Stumpf, our CFO. Please note, our SEC filings to date, as well as our shareholder letter and press release discussing our third 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, our share repurchase program including future amounts available for repurchase, 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 second quarter ended June 30th, 2024. Additional information may also be found in our quarterly report on Form 10-Q for the fiscal quarter ended September 30th, 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 GAAP results. Please be sure to review the reconciliations of our GAAP and non-GAAP financial measures in our earnings release and shareholder 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.

Thank you all for joining us. We're excited to welcome a growing group of investors this quarter. Before we dive into our strong Q3 results, I want to emphasize the role that our culture plays as a fundamental strength in our business. Recently in Silicon Valley, much has been said about the importance of founder mode. While I'm a very hands-on founder, I believe that the key to our success lies not only in my hands-on approach, but more importantly, in surrounding myself with a team that shares a similar mindset and drive. Here are some defining traits of that mindset. We act like owners, treating the business with personal accountability. We approach each day with urgency and purpose. We have an insatiable desire to learn. We are driven by a relentless pursuit of excellence. We're constantly optimizing for diversity of thought and unity of ambition. We prioritize automation wherever possible. We don't get bogged down in overthinking. Instead, we make decisions and take action, adjusting quickly when needed. Our managers aren't just managers, they're doers and expected to lead by example. We take pride in our profitability with our business generating over $1.5 million in run rate adjusted EBITDA per employee and efficiency we aim to improve. This quarter, I took on oversight of our HR function to ensure our culture thrives as we continue to grow. Now turning to our quarterly performance. We continue to execute well, expanding our core business and laying the groundwork for sustained growth. Last quarter I shared our confidence in achieving 20-30% year-over-year growth for the foreseeable future. We continue to expect 4-5% quarterly growth through self-learning and market growth, with occasional step changes resulting from enhancements to our Axon algorithm. This quarter, we saw one of those step changes, with meaningful growth driven by advancements to Axon. While we can't predict the timing of these breakthroughs, we're in the early stages of AI software development, both within our company and in the broader industry. We expect ongoing research advancements to continue driving our technology forward. While we remain confident in 20-30% growth for mobile gaming advertisers alone, we're also exploring new areas, as shown by our recent e-commerce pilot. Early data has exceeded our expectations, with advertisers in the pilot seeing substantial returns, often surpassing those from other media channels, and in many cases experiencing nearly 100% incrementality from our traffic. We're increasingly confident this vertical will scale significantly in 2025 and become a strong contributor for us over the next year and beyond. To support this, we've streamlined resources and are reallocating talent from other initiatives to our e-commerce go-to-market team. In the next few quarters, we'll launch a self-service platform, opening global opportunities for advertisers of all sizes. Next, an update on our earnings communication. While we've been issuing quarterly shareholder letters, we believe businesses are built over years, not quarters. And to align with this vision, we will shift to an annual shareholder letter. Financial results and guidance will still be released quarterly, but each year will provide a comprehensive summary of the past year and our plans for the future in the form of an annual shareholder letter. Finally, I'd like to thank our team for their outstanding execution and relentless drive. After 13 years, I'm continually inspired by the passion and excellence that define our company. We're in the early stages of building one of the world's most innovative technology platforms. The future is incredibly bright and we have the right team to seize every opportunity in front of us. Now I'll hand it off to Matt to run you through the financial details.

Good afternoon. We had another fantastic quarter with total revenue reaching $1.2 billion and adjusted EBITDA of $722 million, achieving a 60% adjusted EBITDA margin. This marks a 39% increase in revenue and a 72% increase in adjusted EBITDA from the same period last year, translating to an impressive 91% flow through from revenue to adjusted EBITDA. In the third quarter, we generated $545 million in free cash flow. That's up 182% year over year. Quarter over quarter, our free cash flow grew 22%, consistent with adjusted EBITDA growth over the same period, and representing 76% flow through from adjusted EBITDA to free cash flow. At the end of the third quarter, we had $568 million in cash and cash equivalents and 335 million shares outstanding. During the quarter, improvements in our Axon technology, driven by ongoing self-learning and enhancements by our engineering team, contributed to further growth of our software platform. This segment generated $835 million in revenue and $653 million in adjusted EBITDA, achieving a 78% margin and growing 66% in revenue and 79% in adjusted EBITDA from the same period last year. Quarter-over-quarter flow-through from revenue to adjusted EBITDA was 107%. Our software platform adjusted EBITDA this quarter was positively impacted by several non-recurring cost benefits associated with the renewal of our Google Cloud contract, PSU vesting in the prior quarter, and foreign exchange. On a normalized basis, we estimate our quarter-over-quarter flow-through would be approximately 100%. Next quarter, we expect software flow-through to reduce slightly as a result of PSU-related vesting costs and an increase in data center capacity to support future growth. As our core advertising business now represents substantially all of our software platform revenue and future focus for the company, starting with our next shareholder letter, an annual 10K, we will rename our software platform and associated revenue to advertising to better align with the nature of this business. Our apps revenue for the quarter was $363 million, a 1% increase from last year, with $68 million in adjusted EBITDA, representing a 19% margin. We continue to expect the apps business to be stable in the future. We believe a strong capital structure and effective capital allocation plan are crucial to the creation of long-term shareholder value. To that end, we're focused on a few areas. First and foremost, to drive organic growth by recruiting top talent and investing in our technology in the most lean and cost-efficient way possible. Second, to manage our outstanding shares through ongoing repurchases funded from free cash flow and prudent equity grants to employees. This quarter, we retired and withheld a total of 5 million shares for a total cost of $437 million. To further our share management efforts, we also received our board's approval to increase our repurchase authorization by $2 billion, bringing our remaining authorization to a total of $2.3 billion. And third, to build a strong capital foundation with sufficient liquidity to support financial flexibility with a net debt leverage ratio below two times. Finally, turning to our financial guidance for next quarter. In the fourth quarter of 2024, We anticipate to deliver between $1.24 and $1.26 billion in revenue, with adjusted EBITDA between $740 and $760 million, targeting an adjusted EBITDA margin of 60%. Now with that, let's move to Q&A.