Applovin Corporation

Welcome to Apploving's earnings call for the fourth quarter and year ended December 31st, 2024. I'm David Hsiao, Head of Investor Relations. Joining me today to discuss our results are Adam Fruge, our co-founder, CEO, and chairperson, and Matt Stump, our CFO. Please note, our SEC filings to date, as well as our shareholder letter, financial update, and press release discussing our fourth quarter annual performance are available at investors.apploving.com. During today's call, we will be making forward-looking statements including, but not limited to, the future development and reach of our platform, our expected growth opportunities, the result and timing of our strategic transactions, the efficiency of our operations, 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 third quarter ended September 30th, 2024. Additional information may also be found in our annual report on Form 10-K for the fiscal year ended December 31st, 2024, which will be filed later this month. 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 GAAP results and the reconciliations of our GAAP and non-GAAP financial measures in our earnings release and financial update, 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 IRO 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. Q4 was a major milestone, arguably our most foundational period since the Axon upgrade in 2023. For the first time, we captured meaningful holiday shopping advertising dollars and witnessed the impact of an advertising category beyond solely gaming contributing to our growth. I'm sure many of you are curious about how much revenue our e-commerce category contributed. While we're not breaking out revenue by vertical, because that's not how we view our business, I'd like to provide some perspective. We operate a platform that reaches over a billion people in mobile games daily, with their engagement times comparable to social networks. Historically, most of our ads focused on advertising for other games, but now we're attracting a broader set of advertisers. Q4 results show that our models can perform in other categories, in addition to continuing to improve performance for gaming customers. This breakthrough is only the beginning. We've now also validated that our platform success isn't only limited to direct-to-consumer brands. Early pilots have shown positive outcomes for a range of advertisers, suggesting that any business in any vertical can harness the power of our platform. This opens up a massive opportunity as there are over 10 million businesses worldwide who advertise online that could eventually use our platform profitably. By delivering incremental value, we position ourselves as an engine for growth. It's a win-win for brands, consumers, and shareholders. These early results solidify our vision of building one of the most influential marketing platforms in the world. Where we once focused on gaming, we're now positioning ourselves to serve the entire global advertising economy. Importantly, the users engaging with our network aren't just shifting existing purchases. They're discovering new products while playing the games they love, generating truly incremental demand. By enabling these discoveries, we're expanding the global economy for consumers and advertisers alike. Demand from advertisers wanting to join our platform is high. Currently, our systems are still being fully developed and lack the full self-service capabilities needed to handle growth at scale. Our priority this year is to develop and roll out more automated tools to allow countless new businesses to tap into our platform. In line with this expanding focus on advertising, we've been assessing how best to invest our resources to serve the needs of a global client base. Seven years ago, we began acquiring gaming studios to help train our earliest machine learning models, an invaluable step in shaping the AI that underpins our Axon platform. However, we've never been a game developer at heart. We have immense respect for the creativity it takes to build games, including from teams in our studios. Today we're announcing we've signed an exclusive term sheet to sell all of our apps business. Matt will share further details, but I want to emphasize to our teams, you'll soon be part of a company that specializes in and champions game development. While it's bittersweet to part ways, we're excited for your future and immensely grateful for your role in getting us to where we are today. Finally, I'd like to highlight our favorite metric going forward, adjusted EBITDA per employee. As we're transitioning to a pure advertising platform, our focus will be on productivity, automation, and building lean high-impact teams. In Q4, we had approximately $3 million in run rate adjusted EBITDA per employee in our advertising business, and we expect that number to rise as we refine processes and scale our business. This metric underscores our commitment to operational excellence. Thank you for your continued support and partnership as we enter this next phase of growth. I'm more confident than ever that we're building a platform with the potential to transform global marketing. With that, I'll turn it over to Matt for a deeper look at our financials.

Thanks, Adam, and good afternoon. I'm happy to announce we had another strong quarter, with total revenue increasing 44% from the same period last year to $1.37 billion and adjusted EBITDA increasing 78% to $848 million, achieving a 62% adjusted EBITDA margin. This represents an 89% flow-through from revenue to adjusted EBITDA. In the fourth quarter, we generated $695 million in free cash flow, up 105% year-over-year. Quarter-over-quarter, our free cash flow grew 28%, representing 82% flow-through from adjusted EBITDA to free cash flow. Free cash flow grew slightly more than our adjusted EBITDA growth over the same period due to the timing of cash tax payments. At the end of the fourth quarter, we had $741 million in cash and cash equivalents and 340 million shares outstanding. During the quarter, our advertising business continued to drive increased performance for our mobile gaming partners, combined with positive early results for e-commerce advertisers during the holiday season. The advertising business generated $999 million in revenue and $777 million in adjusted EBITDA, achieving a 78% margin. Quarter-over-quarter flow-through from revenue to adjusted EBITDA was 75%, which is slightly lower than our normal levels. As I previewed last quarter, this was due to a step function increase in our data center costs. Flow-through will normalize from here as we gain leverage on this increase in GPU costs. Before we get into the financial performance for our apps business, as Adam mentioned, we're excited to announce we've signed a term sheet to divest our apps business. Total estimated consideration is $900 million, including 500 million in cash, with the remainder representing a minority equity stake in the combined private company. Subject to regulatory clearance, we hope to close this transaction in the coming quarter and look forward to seeing the success of this business under new leadership. Our app's revenue for the quarter was $373 million, a 1% decrease from last year, with $71 million in adjusted EBITDA, representing a 19% margin. Turning briefly to our annual results, revenue for the year was $4.7 billion. That's an increase of 43% from last year. Adjusted EBITDA was $2.72 billion. That's an incredible 81% increase from last year, at an adjusted EBITDA margin of 58%. Free cash flow for the year was $2.1 billion, representing an impressive 76% flow through from adjusted EBITDA of $2.72 billion. This quarter, we withheld a total of 1.6 million shares for a total cost of $508 million. For the full year, we repurchased or withheld a total of 25.7 million shares for a total cost of $2.1 billion. I want to pause here to emphasize this point. During the year, we had $2.1 billion in free cash flow and spent $2.1 billion on our shares at a weighted average price of approximately $83 per share, illustrating the commitment we've communicated to drive shareholder value through prudent capital allocation and an investment in our own shares. Finally, turning to our financial guidance for next quarter. In light of the transaction we highlighted here and the continued focus on the advertising business, we will provide guidance for each of our segments separately. In the first quarter of 2025, for the advertising business, we anticipate to deliver between $1 billion and $30 million and $1 billion and $50 million in revenue, with adjusted EBITDA between $805 and $825 million, targeting an adjusted EBITDA margin of 78% to 79%. We expect apps revenue to be between 325 and $335 million at an adjusted EBITDA of between 50 and $60 million. Now with that, let's move to Q and A. Thanks so much, Matt.