APP Crushes Q3 Earnings

Looks like a great quarter from APP, shares up 30% AH. Massive margin expansion! wow.

  • Q3 GAAP EPS of $1.25 beats by $0.32.
  • Revenue of $1.2B (+38.8% Y/Y) beats by $70M.

In the third quarter, we generated revenue of $1.20 billion (+39% year-over-year), net income of
$434 million (+300% year-over-year) at a net margin of 36%, and Adjusted EBITDA of $722 million
(+72% year-over-year) at an Adjusted EBITDA margin of 60%. We generated net cash from
operating activities of $551 million (+177% year-over-year) and Free Cash Flow of $545 million
(+182% year-over-year).

Our Software Platform revenue grew in the third quarter to $835 million (+66% year-over-year) and
Software Platform Adjusted EBITDA expanded to $653 million (+79% year-over-year) at an Adjusted
EBITDA margin of 78%

-APP Q4 guidance of $1.24-1.26B vs $1.18B est

-APP Q4 EBITDA guidance of $740-760M vs $667M est

**-**Long APP, 17% position

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Looking back , the 1st introduction of APP was from mekong in Oct. 2021(price in the 90"s),
reintroduced by intjudo in April 2024( again in the 90"s) and then followed up by others - now over 200 -thanks to all!

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Wow. Great quarter. They will be renaming “Software Platform” as “Advertising” starting next quarter to better reflect that portion of the business. From that perspective, they are growing twice as fast as TTD at a slightly larger scale.

I’m expecting a good print from TTD tomorrow, but might need to take a closer look at comparing the two going forward. Any thoughts from anyone who’s already compared them head-to-head? @mekong22?

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Adding my notes from the conference call,

CEO - Adam Foroughi

  • we act like owners, personal accountability, pursuit of excellence, take pride in profitability (long intro to new investors on values)
  • over 1.5M adj EBITDA per employee per year
  • committed to long term goal of 20-30% yoy revenue growth in gaming space, and 4-5% sequentially
  • this quarter saw meaningful growth driven by enhancements in Axon
  • recent e-commerce pilot has exceeded expectations
  • advertisers in pilot seeing substantial returns, often surpassing other media channels
  • “in many cases experiencing nearly 100% incrementally from our traffic”
  • confident pilot will scale significantly in 2025 and become a strong contributor
  • reallocating employees to work on pilot, will launch self service platform, opening global opportunities for advertisers of all sizes

CFO - Matt Stumpf

  • adj EBITDA +72% yoy
  • 91% flow through from revenue to adj EBITDA
  • 545M in FCF, +182% yoy
  • FCF grew 22% qoq
  • 76% flow through from adj EBITDA to FCF
  • cash 568M (up from 460M last q, debt down -7M)
  • improvements in Axon driven by self learning
  • software platform “qoq flow through from revenue to adj EBITDA was 107%” (seems like they got some boost to get over 100% from revenue? mentioned on next point)
  • adj EBITDA impacted by several non-recurring contracts with Google Cloud, foreign exchange, and vesting schedules
  • “on a normalized basis we estimate qoq flow through be would be approximately 100%” (I believe what they are saying here is every transaction costs nothing for them and goes to earnings!)
  • manage outstanding share repurchases funded through FCF
  • increasing share repurchase program by 2B, total 2.3B in share repurchases planned

Q&A

  • e-commerce is “super compelling product”
  • best product ever seen released by us
  • pilot is too early to have significant financial impact, quarter driven entirely by gaming side
  • long runway for gaming
  • gaming has a need for more UA dollars spent, constrained by return on ad spend goals and tech platforms such as AppLovin
  • long roadmap of enhancements to this platform
  • “we’ve got one of the largest GPUs deployed in the world at this point” through GCP (I did not realize they are using this much compute and AI)
  • Twitter users saying pilot seeing as much scale and ROAS as anything in the world
  • automated return on ad spend model
  • e-commerce large fragmented category, so many promises in the past from others, AppLovin solution will be attractive to other side very quickly
  • 10 years from now, every advertiser that has a transactional model can buy on our platform and do it at scale, no limitation
  • want to grow organically over M&A
  • stock price has no impact to keep purchasing back shares, feel it’s a great investment for share holders
  • timing wise pilot exactly on track
  • GA for pilot next year and will be self service for users
  • The Trade Desk targets big agencies, two different approaches to the market, AppLovin targets brand and direct to consumers, gaming, devs
  • customers care about optimization and automated advertising
  • AppLovin takes all the risk on the media side
  • 1.4B DAUS, largest mediation solution
  • long runway to “expand the platform and become one of the strongest companies the world has seen”
  • e-commerce the fastest growing product they’ve ever seen
  • partnership with Flip app for licensing, will be secondary in priority to the e-commerce platform though
  • Gen AI ads have a lot of potential to customize ads
  • supply is not a constraint, lot of ways to improve monetizing 1.4B DAUs
  • WURL with CTV provides an immense amount of supply
  • created a bigger market in games, category is accelerating its growth
  • growth in gaming driven by user acquisition, advertisers need more user acquisition
  • platform unlocks more dollars
  • advertisers are often doubling spend on AppLovin while keeping spending on other platforms, they want more overall
  • shops are getting exposed to a new audience, not otherwise able to reach without AppLovin
  • immense amount of incremental value for shops from the ads
  • every advertiser has more budget interest in spending on our platform that we can deliver on a daily basis
  • e-commerce has never seen this kind of data coming from a new product, compelling ever seen
  • “line out the door at companies that want to jump on this platform”

This was an incredible quarter from AppLovin as gaming drove the top and bottom line results, while the pilot for e-commerce is ramping up extremely well. The management seems to have a new found confidence on the call, talking about the longer term vision. There were so many metrics that were unusually large percentages such as EBITDA flow through being “approximately 100%”. The future looks very strong for AppLovin as they have a “line out the door” for the new e-commerce solution.

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Yes, really really pleased with APPs earnings and call last night. Very positive. Lots of analyst upgrades this morning. BTIG upgraded to $291. Its become a much larger holding for me following the AH raise yesterday, but I have no plans to sell. This is a company firing on all cylinders.

Jonathan

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Well congratulations to all of the APP longs (does not include me unfortunately!) Wow!

I’m a lot more familiar with TTD than APP, but I just poked around a bit and can share my two cents.

My Applovin History

Although I did write up one of the first APP intro posts here a few years ago (after Bert had recommended them at the time and I was intrigued by the prospects), I took a small position back then which quickly shot up about (+20%?) within a few weeks and I sold out and took the quick profits.

I believe the stock proceeded to drop -80% (maybe -90%) over the next year or so and I chalked it up to a lucky swing trade that I was fortunate to get out of when I did.

I also had dabbled in other advertising tech stocks (Magnite and Pubmatic) which were very volatile and ultimately not profitable for me, which helped to re-set my thinking that, if I have a big position in one company (TTD) in that industry, that has a long history of success, with a management team that I greatly trust, and lots of indications that they will continue to have a long runway and be a/the leader in their field (and I have a very low cost basis at about $11/share, one-tenth of where it trades today), why am I messing around with other alternatives until those things start to change or deteriorate.

That’s not to say that, today, APP couldn’t be the better investment going forward. It could. I just don’t follow it or have as good a familiarity with the company, or why their prospects for the next year, or multiple years should continue to be strong. Obviously they are doing amazing recently.

Initial Overviews

Revenue Recognition

As a reminder, both TTD and APP are largely “net revenue” companies (considered an “agent” from GAAP accounting standpoint). This means that what they show in revenue on their income statement is only the percentage/commission (“take-rate”) that they collect and keep.

For Trade Desk, the amounts they charge their customers and collect in cash is more than five times larger than what they show as revenue (e.g. revenue is less than 20% of the cash they charge and collect)

So instead of showing:

$100 gross revenue
$81 cost of sales
=$19 gross margin

(Note that the $81 cost of sales is essential the money owed to the platform (e.g. streaming service like Hulu) which TTD collects and immediately passes on to the platoform)

they essentially show

$19 revenue
$0 cost of sales
$19 margin

In the past, some users on the TMF boards have argued that you should consider the “platform operations” expense on their statement of operations/income stmt as cost of sales and look at the net of those two as their gross margin.

I’ve generally disagreed with that as I believe that most of what is included in platform operations are expenses that most companies (even ones that show their revenue “gross” on the P&L before subtracting cost of sales) would include in G&A expense further below gross margin.

So when I compare TTD to a tech company that is considered an accountig “principal” (not “agent”) and records their revenue gross, I compare TTD’s total revenue number to the gross margin of the other company.

Here is how TTD defines platform operations expense:

“Platform operations expense consists of expenses related to hosting our platform, which includes “internet traffic” associated with the viewing of available impressions or queries per second (“QPS”), purchasing data used to inform and improve the platform and providing support to our clients. Platform operations expense includes hosting costs, personnel costs, data-related costs and amortization of acquired technology and capitalized software costs for the development of our platform. Personnel costs include salaries, bonuses, stock-based compensation and employee benefit costs for personnel who support our platform and provide our clients with platform support. We capitalize certain costs associated with the development of our platform, which are amortized in platform operations over their estimated useful lives. We expect platform operations expenses to increase in absolute dollars in future periods as we continue to experience increased volumes of QPS through our platform and hire additional personnel to support our clients.”

I see that, although APP does specify they also record revenue “net”, they do also have a line called “Cost of Revenue”, which they define as:

“Cost of revenue consists primarily of third-party payment processing fees for distribution partners, amortization of acquired technology-related intangible assets, amortization of finance lease right-of-use assets related to certain servers and networking equipment and costs for third-party cloud service providers. Third-party payment processing fees relate to IAP Revenue. The fees for IAPs are processed and collected by third-party distribution partners. We expect our cost of revenue to increase in absolute dollars over the long term as our business and revenue continue to grow. We also expect our cost of revenue as a percentage of revenue to fluctuate period-over-period.”

So some of the same things are included in TTD’s “platform operations” exp that are in APP’s “cost of revenue”, such as amortization of some technology etc. In my opinion, I would probably argue that what is in APP’s cost of revenue could more easily be categorized as G&A expense, rather than arguing that TTD’s platform exp shoudl be COS.

Sometimes accounting isn’t so cut and dry and is open to interpretations, even by experts that deal with it every day for their career.

Also, it’s possible that the “cost of revenue” for APP relates to their “Apps” segment and not the “Software” (Advertising) segement, or some allocation between the two, so it may be a moot point if you are focusing on the advertising comparison between TTD and APP. It’s probaby explained somewhere in APP’s filings, but I haven’t dug in deep enough to know for sure.

For the below, I’ll compare what APP shows as their software revenue (without netting any of the cost of revenue out) to what TTD shows as their total revenue, as that is my best guess as to what would be considered an apples to apples comparison of the advertising businesses of the two. Go ahead and adjust however you might feel appropriate.

Also note that “Accounts Receivable” for companies that show their revenue “net” is usually going to look (misleadingly) high because AR has to include the full gross amount of cash that customers owe to the company (e.g. the $100 in the TTD example above, not just the $19).

So some people will look at a “net” revenue company’s balance sheet and mistakenly believe that they have big collections problems getting money from customer and risk of writeoffs of bad debt in the future becasue the AR compared to revenue looks wildly higher than other companies they typically analyze.

In fact, I believe TTD typically gets paid in advance for their ad placements (before the ad has run), so they actually have more of a “float” (in insurance terms) where they receive the money from customers before they need to pay out the platform’s share. This is a very good thing.

In APP’s filing, I see it says that customers generally have to pay them within 30 days of the end of the month. If I’m reading this correctly, then APP has more of a credit risk than TTD, if APP’s customers don’t pay them until after the ad is run/shown/displayed, and could potentially never get collected.

Revenue (advertising)

Just looking at the last year or so, I see revenue growth rates of:

APP (software/advertising)
Sequential

Q4’23 +14%
Q1’24 +18%
Q2’24 +5%
Q3’24 +17%

TTD
Sequential

Q4’23 +23%
Q1’24 -19%
Q2’24 +19%
Q3’24 +6% (guidance, likely to beat)

The one thing that stands out here to me is it does not appear that APP’s platform revenue has the seasonality that TTD (and most every other advertising company in the world) has, where Q4 is much higher due to the holiday shopping season advertising spike.

I’d be curious as to why it doesn’t seem to have impacted APP, at least last year (the only year I was looking at). It’s possible that the gaming customers that they are targeting are not so keen on picking up a holiday gift while playing a mobile game, and they are more likely to buy other types of products, so maybe it’s very different in that way? I really don’t know.

Here’s the same four quarters showing the year-over-year comparison:

APP (software/advertising)
YOY

Q4’23 +88%
Q1’24 +90%
Q2’24 +75%
Q3’24 +66%

TTD
YOY

Q4’23 +23%
Q1’24 +26%
Q2’24 +28%
Q3’24 +25% (guidance, likely to beat)

Clearly much higher growth rates for APP. If it’s mostly organic, then my questions would be how sustainable is the higher rate of growth going to be, especially over the next 1-3 years. Will it be like many other companies we’ve followed over the years where a very high rate of growth suddenly dips. I dont’ think anyone expects 70% is sustainable for long, but the question will be whether it drops to 50% next year, or 30%, or what? I don’t have any insight

I also don’t know if APP has had acquisitions that are boosting these numbers at all with inorganic revenue growth. I can see from their goodwill and intangibles on the balance sheet, that APP looks to have done some signfiicant acquisitions in the past (more on that in the balance sheet section below) but I don’t know if those were recent or could potentially be from a few years ago, such that the current revenue growth is apples to apples and not impacted.

But I do know for TTD, that their new deals with Disney+, Netflix, HBO Max, etc are only suppossed to start to add new revenue in 2025 and probably 2026, as well as what should bea continued overall shift from linear to programatic digital advertising. Whether that leads to future growth above, below, or in line with the mid twenty percents that we’ve seen recently is hard to say, but at least I have some reason to expect positive momentum in the coming year(s), all else being equal.

Market Cap

With today’s big pop in APP stock price, based on what Yahoo! Finance is currently showing, they have a market cap of about $80 Billion. TTD’s market cap is about $63 Billion, or about 78% of APP’s value

If I add +5% beat to TTD’s Q3 revenue guidance (purely a placeholder guess), TTD will do about $650 million of revenue in Q3, compared to $835 million of APP platform/advertising revenue. Almost exactly 78% as much, interestingly

Obviously APP is growing at a much higher clip right now, so if everything else was equal, you would expect these to be more disconnected than they currently seem to be.

Income Tax expense

TTD has been consistently profitable for years, so they typically incur a pretty “normal” amount of income tax expense. In Q2 it was about 24% of their pretax income

Looking at APP’s Q2 (from three months ago for more of an apples to apples comp), they had almost no income tax expense. Only 4% effective tax rate on their pretax income

I assumed initially that APP may have had more unprofitable loss years recently have some “net operating losses” ("NOL"s, essentially tax loss carryforwards in corproate tax speak) which they can use to reduce their new tax liabilities.

That may be partially true. In APP’s last 10-K annual filing, it says they had a $47 million dollar NOL at Dec 2022 and only $8 million at Dec 2023. So they’ve probably had the benefit from their NOL’s in recent quarters, but they’ve just about used them all up, and shouldn’t have much of these past loss credits to apply against new income taxes going forward, assuming they continue to be profitable.

They could be other things affecting APP’s income taxes. I’m no tax expert, but if I were modeling APP next few quarters/years, I would probably estimate a more normal level of income taxes going forward, than they’ve had recently.

Balance Sheet

Here we have some areas that seem to favor Trade Desk over Applovin

(using mostly Q2 vs Q2 comparisons since TTD’s Q3 is not released yet as of this writing 11/7/24 am)

Cash/ST Investments

Trade Desk has about three times as much cash and short term investments on their balance sheet (as of Q2 for both companies), $1.5 billion for TTD compared to less than $500m for APP.

Debt & Interest

APP has $3.5 billion of Debt compared to none for TTD

This debt is probably responsible for the $75 million of interest expense that APP incurred in Q2. On the other hand, TTD actually had interest income of +$17 million in Q2, so that’s nearly a $100 million per quarter difference in favor of TTD if those numbers are representative of where they might continue to trend going forward.

Goodwill & Intangible Assets

And I can see that $2.9 Billion of the assets on APP’s balance sheet are Goodwill and Intangible assets, I assume from past aquisitions. Trade Desk has grown almost entirely organically for a long time and don’t have these types of intangible assets/goodwill.

The risk here is if APP has a downturn where the carrying value of those assets cannot be supported, they might have impairment expense writeoffs in the future. It probably won’t affect their cash and operations, but ignoring any impact on their debt agreements, requirements to repay debt, or interest rates, a goodwill impairment writeoff shouldn’t impact their operations directly.

This does kind of go hand in hand with APP’s lower cash/investments on hand and (slightly?) higher customer credit risks), where any negative economic macro difficulties that impact advertisers, could more harshly affect APP than TTD.

Wrap Up

So that’s it. I’ll also note that I think extremely highly of TTD CEO Jeff Green (who is VERY incentivized with his employment incentive agreements to help get TTD’s stock price to $200 or $300 or more). I don’t know much about APP’s CEO. He could be great too, but I don’t know.

So there is nothing I see that makes me think I should be moving money into APP immediately. I have sold off more than 25% of my TTD shares over the past couple of months as the stock price ran up from $100 to $130 and is already more than 30% of my portfolio, as it was becoming too heavily weighted for me. But I still own a lot of Trade Desk shares and will consider whether I should make any further changes once we get their Q3 results and Q4 guidance later today, along with the earnings call.

I do expect a very good results from the Q3 TTD quarter and hopefully strong guidance for Q4. If they do, it will be interesting to see how much of that is already priced into the shares, given the strong run in recent months.

-mekong

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Thanks, @mekong22.

That might be the most thorough “I’m not sure but let me take a crack at it” response in the history of Saul’s. I appreciate you taking the time.

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Wow. Thank you @mekong22 !

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After my initial post above, I got to thinking more about APP’s debt and how the principal repayments are going to impact cash flows in coming years

Committments

Before I got there, another thing jumped out at me. In the “committments and contingencies” footnote from APP’s new Q3’24 10-Q specifies that they have an agreement with a “cloud services provider” committing APP to spend $1.26 billion over a three year period.

Including a take-rate/commission for APP, I assume that means that they need to steer their customers toward spending about $1.5 Billion on that cloud provider’s platform over three years.

It’s totally possible that this is a good deal for APP and maybe they get access to this provider’s inventory that they wouldn’t otherwise have, if not for the committment. Or maybe they get a favorable rate (e.g. they only have to pay the provder 60% or 70% of what they collect instead of 80%+ in exchange for guaranteeing a certain level of spend over three years?

I have no idea. But the flip side is that this presents a risk where, if APP is unable to sell the full $1.5 B of inventory over three years, they probably have to pay out the difference (or some/most of it) to the provider, which has exposure to be a big expense with no corresponding revenue.

I double checked TTD’s footnote and it doesn’t appear that they have anything like this, so no such risk/exposure for them.

Also, TTD has for a long time emphasized that they will only be a DSP (demand side platform) that works with the advertisers (purchasers of ads) and they will not become a SSP (supply side provider) where they own inventory (like the streaming services). TTD believes this is important to the customers that buy ad campaigns with them because it gives them comfort that TTD is not trying to “steer” them toward a particular place to run their ads, which could potentially be more profitable for TTD but less effective ad placements for the advertiser customers.

Seeing this minimum guarantee in APP, makes me wonder if it causes them to push certain advertisers toward this cloud provider to make sure they dont’ fall short of the guaranteed committments in their deal.

Again, who knows? we can only assume so much based on the information that is publicly available here. But overall, this looks to me like a few positive points in favor of Trade Desk over Applovin. Could be totally insignficant (e.g. if APP is going to easily hit the threshold and has no reason to push advertisers to that cloud provider). And maybe APP’s advertisers have no idea that this committement is even in place regardless.

But sometimes perception is everything and that’s why TTD has always emphasized their setup to keep their advertising customers comfortable that no matter where they choose to put their advertising dollars, TTD will essentially earn the same amount, so they will always be a partner that helps the advertiser do what is best for that customer’s own business.

Back to Debt…

Note that I only looked at what is described in APP’s footnote disclosures in their latest quarterly Form 10-Q 9/30/24 and Annual 10K from 12/31/23. I’m sure the original debt agreements are filed publicly too, I didn’t review them directly to look for any additional details that might not be explicitly disclosued within the APP SEC filing.

So a few things jump out at me here as I dig into their debt some more.

Stock Repurchases

The first is that APP has done $1 billion or so of stock repurchases/buybacks in both 2023 and 2024 YTD. Interesting that a company with relatively low cash balances and already with pretty high debt would be buying back so much stock.

However, at least based on the stock’s appreciation lately (today!), it would seems to have worked out (so far) and they likely bought back those shares well below where the stock is trading now. Regardless, it’s a bit risky to be taking on debt to do such large buybacks with the balance sheet looking the way it does.

Debt Repayments and Interest

Interest rates on APP’s debt are between 7.45% to 8.45%, or about $300 million per year on $3.5 billion of debt. This lines up pretty consistently with the $75 million of interest I noted in Q2 above (75m x 4 quarters = $300m/year).

It appears that the banks that loaned APP these funds trust them to service the repayments in the future, as APP only has to pay back $30 million per year (of the $3.5 billion) for the next four years (2024 to 2027).

This is different from the setup of e.g. a personal home mortgage where someone pays the same amount back each month and early on, it’s mostly interest and little principal repayment, and then later on there is little interest and mostly principal being paid.

The $3.5 B is actually two loans, one of about $1.5 B due in 2028 and one of $2 Billion due in 2030.

So the only have to pay $30 million per year for another four years and then they have to pay back the full $1.5 B in 2028 and the full $2 Billion in 2030, assuming the don’t modify or renegotiate the loans before then.

What this means is that their interest expense will stay just as high as they are now, for the next several years, $300 million per year.

So 2028 and 2030 might sound like a long way away, but for a company with only $0.5 B in cash right now, that seems to be ongoing repurchasing a lot of stock (maybe will slow after today’s big stock price spike?), they are going to have to save up about $700 million per year in order to pay back $3.5 B in debt by the end of 2030.

And that’s while incuring $300 million per year in interest. So all told, if my understanding of how this works is correct, that’s about a billion dollars per year they need to save for the next half decade in order to not default on their debt, leaving them with $0.5 B in cash like they have now to fund the day to day business operations (may not need this much but let’s assume that amount to keep things simple).

This is a company that is currently in a very strong growth spurt, but how long will that last? They’ll need to manage their expenses really effectively to make sure they spend enough to drive future growth, but don’t overspend and offset the growing revenue that they’re driving.

If there is a big macro economic event/environment that negatively impacts them for a few quarters or longer, that could be scary for a company with this much debt.

If competition impacts their business signfificantly over the next few years, that could also be a challenge to the future payback of the debt they currently owe.

So this is a very different situation needing to accumulate $700m per year for future debt repayments and incur $300m per year in interest, vs TTD which is currenlty earning about $70m per year in interest income from their excess cash and investments. And as TTD grows over the next 5 years, I would bet that amount increases along with the growth of their business as they have demonstrated that they are a disciplined company over the long term.

But I’ll say again “who knows?”, maybe APP will continue to grow at a nice clip for years and manage their expenses well and it will be a piece of cake for them to pay back the debt when due, or extend the loan out further.

Either way, their debt and overall balance sheet would certainly impact how one values APP compared TTD today…and is a much stronger position for The Trade Desk. So don’t just focus on the revenue/income/growth rates.

-mekong

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That is awesome, thank you!
I went back to TTD a few months back, anticipating the effects of the election on their revenue. Historically, big events influence advertisement spend a lot, with the elections being the most notable.
I’ve had APP in the past and exited before the big crash, luckily. I went back on 9/20/2024 (didn’t catch the 500% run in the past year, unfortunately, but I’m up 90% since that first buy 45 days ago with today’s pop), and I added a little bit yesterday before earnings.
With their mobile gaming advertisement, I feel there is less dependency on big events, but maybe I don’t have the complete picture (I don’t “get” the advertisement business very well. META, Magnite, TTD, I’ve owned all those, but I always exit due to lack of confidence and understanding).
I added a little to TTD today as well. Let’s wait and see. I may exit TTD altogether tomorrow, but posts like this really help me. Thanks again, @mekong22 !

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One thing I’ll note from this thread that I find interesting is the earnings call comment that “The Trade Desk targets big agencies, two different approaches to the market, AppLovin targets brand and direct to consumers, gaming, devs”

This is key at least for me to understand how they are achieving the growth that they are. It essentially means that they aren’t really competing with TTD (or other media companies) directly, they are side-stepping them altogether. Not all, but many companies actually operate separate media budgets, one for traditional marketing campaigns and one for performance/customer acquisition/customer re-engagement. It behooves companies to run acquisition campaigns internally as they cut out the commissions that the agency makes, and every dollar counts in performance marketing. In the modern day, you don’t REALLY need a media agency to run performance marketing, you just need a couple people and the algorithms do the rest. DTC companies sometimes also run their own media (oftentimes 100% performance allocation).

There are a lot of reasons why selling an agency person would be harder than going client direct, so this is really smart, and could result in a longer runway than I initially thought.

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APP had $545M of free cash flow in the quarter reported yesterday. APP is forcasting an uptick in adjusted EBITDA so let’s say that they have another $545M of free cash flow to be conservative in Q4. That gives them a run rate of ~$2.2B of free cash flow per year if they don’t grow (they are forecasting about 30% growth/year). This is a cash flow monster of a company.

Interest expense of $300M on $2.2B FCF (more likely to be higher) is something a bank will lend against eight days a week and twice on Halloween. There have been a couple of M&A deals, purchases, the past year so the debt isn’t just going to stock repurchases. But, at a cost of capital between 7.45% to 8.45% and buybacks at stock prices that have gone up +400% in most cases is a masterstroke of capital allocation.

It isn’t impossible, but proabably dang near close, that APP is going to pay off the principal amount of the debt when due. This will get refinanced and possibly it will increase along the way for more buybacks and M&A deals.

One note from the conference call, the CFO was asked about future M&A deals and he said nothing on the buy side is on the radar at this time. He volunteered that they would consider selling off their app business which is a steady state, low/no growth, business. Clearly he was signaling the market or other companies but I expect they will sell this part of the business for a nice chunk of cash.

EDIT ADD:

Companies in the position of having fantastic FCF have a few choices on how to use that cash.

  • Grow the business via expansion of employees, sales, marketing, CAPEX…which the CEO clearly said they don’t/won’t do as they do not have to. They are currently at $1.5M of EBITDA per employee and are forecasting organic growth at 30%/year.

  • M&A or buy companies. The leadership team said they buy information from time-to-time, not other verticles, in order to enhance their advertising models.

  • Capital allocation: pay down debt, buy back shares, or pay dividends. With the massive FCF and low cost of capital (borrowing) and the amazing value of buybacks it seems to make complete sense to continue the buybacks. Dividends are nice, but once you start you need to keep going. A combination of buybacks and dividends are nice as well.

The CEO/co-founder pounded the table on the conference call that the company manifests a owner mentality in everything they do. They claim to be focused on what is best for the owners of the company. At this point in time is seems hard to argue with him.

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I agree that TTD and APP are in pretty different segments of the advertising industry, so I don’t really look at them as overlapping or competing for the same business, which is why I haven’t really followed APP recently as any proxy for The Trade Desk.

I also didn’t mean to imply that APP should have any trouble servicing their debt, assuming no major macro economic situation or surprise new competition surfaces. I was really just trying to think through the differences between TTD and APP and some of the possible reasons why APP isn’t necessarily the better investment simply based on their growth rates, such as the debt on the balance sheet and related amounts they’ll need to generate to cover future interest and principal repayments.

Trade Desk Q3 just out. +27% revenue growth vs +25% guidance for the third quarter and about +25% new guide for the big seasonally high Q4 holiday quarter…not as big a beat as I was hoping for. Aftermarket prices are down about -8-9% at the moment. Ultimately a fairly “normal” quarter for them that keeps the long term story on track, although would have loved to see more of a bump from political advertising. At least I’m not regretting trimming a decent chunk of my shares recently, including a few more percent earlier today near the highs.

Will be listening to the earnings call and will post my thoughts if anything significant to add

-mekong

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Wow - when I posted this just 2 days ago I did wonder if that analyst price target of $291 was a little too optimistic! Well, just 2 days later we are already above it with the AH price of $293! This has been an 82% rise in just the past 5 days!I can’t remember a stock shooting up so quickly in such a short amount of time. Talk about let your winners run…!

Jonathan

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@mekong22 Are you familiar with $ZETA? If so, I’d be interested in any/all thoughts you have about their scope of operations vs. $TTD and $APP.

(…$ZETA’s stock performance so far this year looks quite similar to $APP’s.)

I’m new to this space, but from what I’m reading so far, it seems like

  • $ZETA operates at more of a multi–channel, or maybe omnichannel scope (…and customer acquisition and long-term customer relationships?)
  • vs. $TTD and $APP are more focused on short-term customer behavior (purchases of specific items).

If $APP really can break into adjacent markets (Web, CTV), does that mean $APP has the potential to become more of a multichannel provider? Perhaps they could help put together campaigns that span/coordinate-between mobile gaming, Web and CTV?

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@mekong22 WOW! That’s one of the most in-depth posts I think I’ve ever read. First let me commend you on the thoroughness and depth of your analysis. I know you’ve invested a lot of time and brainsweat to put this together.

That being said, I think you have a few misunderstandings about AppLovin’s business and what their customers pay for. I don’t pretend to know this company inside and out. I’ve never been involved in the advertising business and especially the newish industry of digital advertising. It’s a far cry from that which was depicted in the TV series Mad Men. But it seems to me that you very much wish to demonstrate that The Trade Desk is better investment. I think TTD is a pretty good, pretty safe investment. But, I don’t expect extraordinary returns from an investment in TTD. Regardless, it’s probably worth noting that TTD and APP are not direct competitors, at least not at this time.

Moving on . . . Let’s start with your comment,

You wrote:

This a faulty assumption. Later you wrote:

I won’t bother quoting every reference you make with respect to AppLovin potentially steering or pushing their advertising clients to any specific content provider. But you imply very strongly that this is what AppLovin does.

AppLovin’s cloud service provider is Google. This is public information. Adam Foroughi, CEO asserted that Google has been a great partner and has satisfied their demands for compute by providing one of the largest GPU arrays in the world used by just one customer.

This is simply a misunderstanding of what the $1.5B payment to Google is for. It’s payment for compute provided by GCP, it is not directly related to the placement of advertising on YouTube or any other Alphabet product. There is no risk due to failure to meet some threshold related to placement of advertising. They make this payment even if AppLovin places zero advertising with Google.

AppLovin does not “steer” or “push” their customers to Google or any other supply side partner. I haven’t any idea what your reference to “minimum guarantee” means. Maybe you’ve confused it with the fact that AppLovin provides guaranteed return on advertising spend (ROAS) for the clients who place ads. They do not guarantee any monetary performance level with any content provider. Per the 10-Q the amount that goes to the partner content provider, is typically determined on a cost per impression basis (an impression occurs when a consumer views an ad). Obviously, an impression does not always result in an ad placement. Additionally, I think they split the revenue they receive for payment of installs resulting from an ad placed with the content provider. They have lots of partners (Partners | AppLovin, under the resources tab, use the dropdown to select MAX).

Frankly, I think providing a guaranteed ROAS +/- 1% provides even greater comfort to AppLovin customers. AppLovin refuses to accept more from a customer than they can guarantee. In fact, their placement decisions are automated. Given such a guarantee, why would a customer care that AppLovin functions as both a DSP and an SSP? So far as I know, TTD does not guarantee in dollars the performance of an advertising campaign.

As previously noted, the information regarding the payment to Google is public. It’s for GCP and it is fully unrelated to ad placements.

I’m not sure, but I think the Cost of Revenue that AppLovin reports on their income statement reflects the payment to content providers. This cost represents roughly a third of AppLovin’s advertising revenue, but it is shown as a cost of total revenue and not specifically advertising revenue. If the take rate is included in Cost of Revenue it’s certainly not explicit, but I could find no other financial entry that might account for it. The definition of Cost of Revenue provided in the 10-Q does not make it very clear either.

At present the vast majority of AppLovin’s customers are publishers of mobile games. And the majority of the games are free-to-play. Their ad placement recommendations are placed with companies that are partners which comprise the membership of their supply side platform (SSP). Unlike The Trade Desk, AppLovin integrates its supply side platform (SSP) with its demand side platform (DSP). As I understand it, TTD generates SaaS revenue from advertisers who subscribe to its DSP service. I am not very familiar with TTD but I think they rely on Magnite and other SSPs for access to content where advertising can be placed.

Briefly, there is no human intervention with respect to which ads get placed with which content providers for AppLovin. There is no possibility for anyone to “steer,” “push” or in any other manner direct the matching of demand with supply. The heart of AppLovin’s advertising business is AXON, the AI engine they have created. I think of AXON as a black box. I think it safe to say it ingests massive amounts of data from both advertisers and content providers. This constitutes the training data for AXON which is exploited in order to make decisions about ad placements. I don’t really understand AI very well, but I believe the decisions about ad placement would be considered the inference function of an AI system. It is the precision of AXON that allows AppLovin to provide performance guarantees to their customers. I have not studied the advertising business in depth, but I’m pretty certain that there is no other DSP that offers performance guarantees, at least not exact ROAS +/- 1%.

Given the precision of AXON, why would anyone at AppLovin supersede the decisions in order to “steer” an advertiser to a specific content provider? Such action would only serve to defeat the functionality of the AI capability in which they’ve invested millions of dollars to create. And they continue to invest heavily enhancing AXON such that they can guarantee higher levels of advertising spend from their customers, thereby increasing their revenue - more on that later.

That brings me to “take-rate/commission.” Hmm, I think you need to better understand how AppLovin produces revenue. I’m not exactly sure how much of it is in the form of commissions as they don’t break it out as a separate constituent of revenue, but for starters, excluding their own inventory of about 250 mobile games (which I won’t discuss) AppLovin has seven products within their advertising services that produce revenue. So far as I know, they don’t break down their revenue by product. But, as I said earlier, the majority is generated by AppDiscovery.

Before I begin, I think it’s important to understand how a mobile game developer generates revenue and what they hope to achieve by advertising. Mobile games produce revenue primarily from in-app sales. The bulk of those sales are tokens that enhance the players level of achievement within the game. Free-to-play games (and maybe even pay-to-install games) experience a lot of churn. They rely on new players to replace those who stop generating revenue.

With that out of the way, as noted above, AppLovin asserts in the 10-Q that the majority of their income is produced by the AppDiscovery product. MAX and Adjust also contribute to their advertising revenue. They have other products, but the contribution from them is not material. Also, there are quite a few things about the details of AppLovin’s business of which I am uncertain, hence the frequent use of terms like “so far as I know,” “I believe,” etc.

  • AppDiscovery - This the heart of their offerings and main source of revenue. Its primary function is acquisition of profitable users for the customer’s mobile apps. AppLovin gets paid for each install that the advertiser gains via AppDiscovery. AppLovin shares a portion of the revenue with the publisher hosting the ad. I assume this revenue split is what you referred to as the “commission” that AppLovin receives. To use your term, it is AppDiscovery which “steers” advertisers to content providers based on algorithms within AXON, AppLovin’s AI engine.

  • MAX - this is AppLovin’s instantaneous mobile auction system that matches content providers with advertisers. MAX is virtually without competition in the mobile app market (it is not limited only to auctions for gaming apps). Google, Meta, Tencent, Roblox etc. are MAX customers. AppLovin does take a small commission for each transaction executed via MAX. The entity placing the ad pays the commission, but note that this is true whether or not AppLovin had any involvement beyond matching buyer and seller.

  • Adjust - This is an SaaS product which provides the customer with reports related to their apps and the related financial performance of those apps. The customer uses the reports for analytical purposes. Separately, during the 2Q24 CC Adam mentioned that MAX processes tens of billions in dollar volume, so even if APP’s commission is quite small, that still represents significant revenue.

Moving on, there’s this:

AppLovin management has been very clear about stock buybacks. First, they strive to offset SBC, in addition they make strategic buybacks in order to reduce dilution. During the most recent CC they revealed that the BoD has authorized another $2B for stock purchases.

Separately, you have made an issue of their debt. I won’t try to argue that $3.5B is not a lot of long term debt. What I will say is that the payments on short term debt are no strain on their finances. While you argue that they would be in quite a pickle should have to pay back the full amount of debt when it comes due, that would be true if for some reason they were unable to refinance it. There are any number of scenarios that might be entertained that would serve to inhibit their ability to refinance the debt, they all rely on rather extraordinary circumstances. If I were very good at predicting the future, I most likely wouldn’t even be writing this. Nevertheless, I think the most likely situation will be that they will have no trouble refinancing the debt when that is the appropriate action to take.

We’ve been given reason to believe that it will last indefinitely. During the 2Q24 conference call analyst James Heaney of Jefferies asked (the Q & A are from my notes, so I paraphrase rather than direct quote), “Would you please provide more details on 20% - 30% s/w platform growth? Is it dependent on new verticals?”

Adam Foroughi replied: “We have high confidence in meeting the goals without any additional contributions.” He went on to explain, “Mobile gaming category is intrinsically worth low single digit growth, model enhancement drives 3+% new business, improved targeting brings enough for 4% or so. All together that’s 7+% QoQ, we’re at the high end of the range with no new verticals.” Later in the call he explained that the math was simple, 20% - 30% annual growth required 5% - 7% QoQ growth.

This description applies to their business continuing in steady state. The references to model enhancement and improved targeting come from improved learning derived from increases in training data. Step increases in revenue will come from the release of an enhanced AI engine (new code) and new verticals. They do not include these boosts to revenue because they are unable to predict with any certainty when they will come to fruition. Nevertheless, during the 3Q24 CC Adam announced that they anticipated material contributions from ecommerce advertising in 2025 which has been in pilot mode and performing better than expected.

How about this concern?

All I can really say about that is where do you think the competitive impacts will com from? Applovin has a several years headstart on AI development. Time is golden with AI. I could be wrong, but I’m pretty certain that AppLovin is pulling out further and further ahead of any would be competitors. I don’t really worry about this, but maybe I should - - -

I will note that TTD and APP have very different approaches to the advertising market. Omar Dessouky from BofA asked a veiled question about TTD during the 3Q24 CC. Adam recognized the question for what it was. He replied, “So I guess you are asking what’s the difference between TTD’s model and ours. They’ve targeted big ad agencies and wisely taken an SaaS approach. We’ve targeted brands and direct-to-consumer and e-commerce, gaming, game developers on the gaming side. What these companies care about is not the media dollars or percentage markup. They care about optimization and automated advertising to a revenue goal. That’s what our system is predicated on. we take all the risk on the media side.”

You’ve also expressed concern about how a major macro event might impact their business, especially in consideration of the debt they carry. I think I more or less addressed this earlier. War or climate change devastation or worldwide depression or add your own speculations would no doubt put a big dent in their business. What are the odds of a cataclysmic event? I don’t know, but I would guess pretty low. And should that occur, what equity investment would survive without serious damage?

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Hi Brittlerock

Thanks for the clarification on the minimum purchase commitment with Google. Makes sense.

I really only spent a few minutes looking over Applovin’s filings when I was asked above if I had compared APP head to head with TTD. I’m not particularly familiar with APP’s business as I don’t consider them in direct competition so I don’t follow their earnings as a proxy for what Trade Desk might do.

I really wasn’t trying to demonstrate that TTD is a better investment. I have no idea. I was just trying to point out for anyone that primarily focuses on revenue/income growth rates, which certainly favor APP today, what other factors I might consider that would be more positive for TTD.

I’m already up over +1,000% on my TTD investments, so it’s been a big winner for me over the past five years and I feel like I understand their business pretty well. And I think they have some clear positive near term catalysts over the next year or so as they get more integrated with the big streaming services, and the potential that they get added to the S&P 500 index either in December (when the next quarterly changes are announced), or maybe sometime next year, which would likely give the shares a boost as forced buying adds them to all of the index funds, as I personally think it’s hard to argue that there are many other companies currently in contention ahead of TTD.

So for me, I’m more comfortable owning Trade Desk today, but it’s very possible that APP could be the better investment going forward, I wish I knew.

Hopefully both companies continue to do astoundingly well and we all see our accounts rise accordingly!

-mekong

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As predicted, APP is already refinancing their debt. Getting away from banks and onto public unsecured senior notes should bring down the interest rate and most importantly they are unsecured by any of APP’s assets.

I’d expect to see a press release from APP as soon as tomorrow to announce the successful placement of these notes along with a descriptoin of the terms.

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APP released the terms of the debt placement and they are very favorable to APP. Here is a story from Bloomberg that describes the deal and why it is so good for APP.

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