Applovin Corporation

Welcome to Apple Loving's earnings call for the first quarter ended March 31, 2025. 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 financial update and press release discussing our first quarter performance are available at investors.appleloving.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 proposed sale of our game's business, 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-K for the year ended December 31, 2024. Additional information may also be found in our quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2025, which will be filed today. We will also be discussing non-GAAP financial measures. These non-GAAP measures are not intended to be superior to or 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 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 today. Q1 2025 was another fantastic quarter, marked by resilience and robust growth. After seeing the stock price rise roughly 50 times in two years, we faced short seller scrutiny, which we've addressed comprehensively and won't revisit here. Our mission remains clear, helping advertisers reach new customers profitably. It's important to remember, in our business, our only financial incentive is to drive measurable revenue and profitability to our advertisers. Without that, we could not scale our business, nor would we get paid. As a leading performance marketing platform, our technological innovations have catalyzed the return to growth in the gaming ecosystem, reviving an industry that would otherwise be struggling without our advancements over the past two years. We've empowered sophisticated media buyers, investing over $10 billion annually with us, driving strong returns and generating significant impact for their businesses. We're now expanding into broader categories, confident in our ability to fuel their growth as we did for gaming. Few platforms operate at our scale, and we're proud of our role in driving economic growth. Our partners' vocal support this quarter was inspiring, and we're doing more business than ever. Let's dive into our outstanding Q1 performance. The first quarter is typically challenging for advertising due to seasonality and fewer days compared to Q4. Yet we achieved remarkable growth. How? We further refined our machine learning models, enabling mobile gaming companies to scale their campaigns on our platform. Less significant but impactful was the full quarter contribution from web advertisers. This diversification is transformative and fuels our excitement for what's ahead. Today, we're thrilled to announce the signing of the definitive agreement to sell our games business in its entirety. This strategic move sharpens our focus on advertising. To our studio teams, you've been instrumental in building the technology that powers our Axon platform. As you transition to a company dedicated to game development, we're grateful for your contributions and excited for your future. Now looking ahead, we're focusing all resources on three key priorities for 2025. First, we're relentlessly improving our machine learning models. Our research science team is leveraging rapid AI advancements to deliver even greater value to our partners, ensuring our platform remains a performance leader. Second, We're advancing our e-commerce and web advertising solutions with three areas of focus. We're continuously refining our models. While our product already works well for many advertisers, it's still early days, and we believe it can be significantly better. Each iteration brings us closer to that goal. We're enhancing integrations with third-party platforms and attribution vendors to provide advertisers with a seamless measurement experience. The web advertising space is more fragmented than apps, so this will take time, but it's a straightforward task. We're also developing a self-service dashboard, and we'll be launching it this quarter for select customers. Once fully rolled out, this tool will enable seamless automation, allowing new advertisers to set objectives, budgets, upload ads, and let our system deliver results. While we've seen great performance so far in our web advertising pilot, we're currently less than 0.1% of the potential market of total advertisers. Each new partner adds to our growth. It will take a few quarters to refine these tools for a broader release, but when we launch self-service globally, we expect it to unlock a massive opportunity. Third, we're enhancing ad testing and automated ad creation Improving the creative experience is a priority this year, enabling advertisers to better optimize campaigns effortlessly. These initiatives are both immediate and long-term, positioning us for sustained success. Now let me address the potential impact of tariffs. 90% plus of our revenue in advertising comes from mobile games, which aren't directly impacted by tariffs. In web-based advertising, some assume we rely heavily on large Chinese e-commerce businesses, which are impacted by the de minimis tariff exemption changes. In reality, we focus on mid-market web advertisers and aren't yet working with the largest players, as we're refining our tools first. It is absolutely possible some of the merchants we do work with will have their businesses impacted by tariffs. However, with such low market penetration, We're well positioned to grow through macroeconomic changes like tariffs without any visible impact on our business trajectory. I also want to address a few topics in the news. On competition, we embrace it. It drives innovation and pushes us all to improve. With our growing data moat and AI expertise, we're confident in our leadership and ability to grow rapidly, regardless of others' advancements. Regarding potential alternative payment systems in the app store, we see this as a positive. Lower fees for content developers, our customers, means they can invest more in user acquisition which benefits our platform. For context on our TikTok bid, please see my blog post we published a few minutes ago. Our lean team continues to impress, showcasing a model for how AI-based businesses can operate efficiently. Our run rate adjusted EBITDA per employee in our advertising business has risen to approximately $4 million annually, reflecting our commitment to operational excellence and robust economics. Thank you for your continued support as we execute our vision to build one of the world's most influential marketing platforms. With each quarter, I grow more confident in our ability to deliver incremental value to our partners. With that, I'll turn it over to Matt for a deeper dive on our financials.

Thanks, Adam. And thanks to everyone for joining us today. We're thrilled to share that Q1 was another outstanding quarter for us, showcasing the strength and efficiency of our business model. Total revenue soared 40% from the same period last year to $1.5 billion, and adjusted EBITDA increased a remarkable 83% to an impressive $1 billion, achieving a fantastic 68% adjusted EBITDA margins. We've driven a 600 basis point increase in our EBITDA margin over the previous quarter, a testament to our ability to leverage our primarily fixed cost base while fueling revenue growth through cutting edge technology. In the first quarter, we generated $826 million in free cash flow, up a staggering 113% year over year. Quarter over quarter, our free cash flow grew 19%, representing an impressive 82% flow through from adjusted EBITDA to free cash flow. At the end of the first quarter, we had $551 million in cash and cash equivalents. This quarter, we repurchased and withheld a total of 3.4 million shares for a total cost of $1.2 billion, primarily funded through our free cash flow, as well as a temporary draw on our revolving credit facility, which we've now repaid. As a result of our strategic share management activities, we were able to reduce the total outstanding shares net of share issuances to employees, demonstrating our commitment to delivering value to shareholders and ended the quarter with 338 million shares outstanding. Shifting to the advertising business, we generated $1.16 billion in revenue and $943 million in adjusted EBITDA, achieving an incredible 81% margin. Our revenue growth in the quarter was driven by a combination of factors, including continued enhancements in our AI-driven technology, which has delivered even better performance for the advertisers using App Discovery, and the full quarter impact of our web-based advertising solution, which continues to perform strongly while coming off a seasonally high spend period for e-commerce. Quarter-for-quarter flow-through from revenue to adjusted EBITDA was an exceptional 104%. which is slightly higher than our normal levels, due to certain non-recurring costs last quarter. However, after adjusting for these costs, our flow-through was still a robust 100%, despite the step-up in data center costs I mentioned last quarter, highlighting our dedication to operating lean while scaling smartly. As Adam mentioned, we're excited to share that we've signed a definitive agreement with TripleDot Studios to divest our apps business. Consideration includes $400 million in cash and a 20% ownership stake in the combined business. Subject to regulatory clearance, we anticipate closing this transaction in the second quarter, and we're confident in the success this business will achieve under new leadership while we sharpen our focus on advertising. Finally, turning to our financial guidance for next quarter. In light of the app sale and our strategic focus on the advertising business, we will only provide guidance for our advertising segment. In the second quarter of 2025, for the advertising business, we anticipate delivering between $1 billion and $195 million and $1 billion and $215 million in revenue. with adjusted EBITDA between $970 and $990 million, targeting an adjusted EBITDA margin of 81%. We're confident these targets position us to continue driving strong growth and value for our partners and shareholders. Now with that, let's move to Q&A.