AppLovin Q1 2024 Earnings

AppLovin (APP) reported Q1 earnings on May 8 with the following results,

Guides vs Actuals

  • Guided revenue 955 - 975M → actual 1060M (+48%)
  • Guided adj EBITDA 475 - 495 → actual 549M (+101%)
  • Guided adj EBITDA margin 50 - 51% → actual 52%
  • Robinhood analyst consensus adj EPS $0.57 → actual $0.67
  • Q2 guide of revenue 1060 - 1080M
  • Q2 guide of adj EBITDA 550 - 570M
  • Q2 guide of adj EBITDA margin 52-53%

Notable items from the report,

  • Net income 236M, net income margin 22%
  • FCF 388M
  • Net cash from operating activities 393M
  • Shares outstanding is 329M down from 371M last year (they have bought back a lot of shares!)
  • Software business revenue of 678M, +18% qoq, +91% yoy
  • Cost of revenue 294M, +12.2% yoy (cost of revenue barely going up)
  • Sales and marketing 227M (+11.8% yoy), R&D 155M (+6.9% yoy), G&A 42M (-6.6%)

Graphs from the investor slide deck. Note that the “Apps” business is their legacy business of building games, and their software platform business is their new AXON-2 platform.

Notes from the conference call,

CEO - Adam Foroughi

  • Axon-2 is now one year old
  • Full recovery after a difficult 2022
  • Stayed lean retaining key employees and have exceptionally high performing team with subject matter experts
  • Advertisers have increased spend on platform as a result of AXON
  • Seeing the industry return to growth
  • Software business grew from 355M to 678M
  • Of 323M incremental revenue to the software business, 84% or 273M flowed through to adj EBITDA
  • Ongoing improvements to AXON, models still early stage and learning
  • Team finding meaningful ways to improve AXON algorithms
  • Never been more excited by company prospects

CFO - Matt Stumpf

  • Revenue 1.06B, adj EBITDA 549M, 52% EBITDA margin
  • Revenue grew near 50% while adj EBITDA has doubled
  • 338M in FCF, 71% flow through to adj EBITDA
  • Diligent about cost discipline
  • Slight step up in cloud data center costs at end of Q4 to reserve GPU capacity, supporting future growth
  • Continued adoption of real time bidding
  • Platform seeing ongoing self learning, additional data enhancements
  • Apps portfolio remained stable, maintaining 15% adj EBITDA margin (legacy games business)
  • Amended term loans for more favorable interest expense
  • “Amending our loans to include outstanding revolver borrowings previously used for share repurchases” (not sure why they don’t pay down the debt over share repurchases)
  • Repurchased 14.9M shares, or 3% of outstanding shares
  • Since early 2022 have spent 2.6B to repurchase shares, remarkable 20% reduction in total shares outstanding
  • Guiding Q2, rev 1.06-1.08B, 550-570M EBITDA, 52-53% adj EBITDA

Q&A

  • Analyst says, “this quarter exceeded your internal expectations”
  • Adding more advertisers in gaming, but also other verticals and will look to break out soon
  • Anytime we see improvements in our core models, we see gains in business
  • Models are self learning, feedback loop that gets data back into system for improving, system continues to get better
  • Model is all math and as it gets more accurate will see further gains
  • Very high margin gains because no cost associated with gains
  • No sales process to get gains, just a gain in the business
  • Software business growing 90-100%, 73% margin business
  • Every incremental dollar is “very, very high margin”
  • Vertical expansion is key part of focus
  • “Never been more excited about the prospects we have in front of us than we are today”
  • Rolling out AXON-2 across a variety of non-gaming companies
  • Non-gaming app space is growing faster than gaming app space
  • Launching the first form of web advertising on our platform
  • Product first company, not a very good seller at marketing
  • Relies on word of mouth, platform can sell itself
  • “A lot of mobile gaming customers who either hadn’t heard of us or had chosen not to work with us have adopted our platform over the last year. So we haven’t ramped up sales to go get those relationships”
  • We have no interest in getting into brand advertising”, everything is performance based
  • Not going to invest in sales
  • In some of these newer transaction categories, you need some presence, some marketing, but not a heavy investment
  • Collecting a 5% fee on header bidding (real time auction) from MAX
  • Trend of people shifting over to header bidding with an acceleration in Q1
  • Unity will be bidding into the AppLovin MAX supply (competitor is buying from them)
  • Vast majority of market bids or auction today, now 80%+
  • Transition to real time bidding was multi-year effort and nearly complete
  • Wouldn’t call any one company a primary competitor
  • The whole market is buying efficiently and the publishers are making more
  • The publishers in turn reinvest more in the user acquisition and the pie grows
  • Very secure about data, partners can audit us when comes to data transactions
  • Data available to AppLovin is same data customers see
  • Completely fair, transparent and clean auction which provides a huge benefit to the publisher
  • Wurl acquisition is brining more demand into CTV, added eyeballs and added supply
  • Have over 1B daily actives in the mobile app ecosystem
  • Idea with Wurl was to bring supply online, now need to monetize it
  • “I don’t want to build out a sales force”
  • Attribution for sales in industry used to be murky
  • Now model is everything spent is tracked, and all closed loop, real time reported
  • If you have someone spend $1 and earn $2, they will spend that $1 as many times a day as you will spend it on their behalf
  • Incredible flow through of business
  • We don’t have to convince advertisers to spend more, they will automatically spend more
  • Wurl too small to break out currently, they’ve done a great job brining supply (users) online
  • Algorithms can work on any transaction vertical
  • R&D effort needed to build web marketing for first time
  • “Every company will talk about the AI strategy, but very, very few have been able to actually execute on a large scale implementation of complex systems like these”
  • Analyst notes, the bigger the app developer the more they are spending in AppDiscovery
  • We really don’t have a limit to what an advertiser can spend, no budgetary limitations
  • Notes that any breakthrough on algorithm can make model more effective, and if their models got twice as effective, business would double overnight
  • AXON 2 is expanding the TAM of the market itself
  • Don’t pay attention much to competition
  • People view AppLovin in “an oversimplified manner”, think easy to copy but their systems are “really, really complicated”
  • We build cutting edge AI technologies that are multiyear efforts, competitors would be years behind trying to catch up
  • Could open source our code tomorrow, still won’t matter because competitors don’t have the data to drive the model
  • “Insane amount of data into the system every single day”, system is continuing to improve
  • Have opportunity to go out and expand business to deliver value to all sorts of companies outside of gaming and unlock value to their business through the use of AI
  • We see a very large increase in the volume of installations and correlated to an increase in advertiser spend

Wow, this report blew away all my expectations which were already high for this company. They are unlocking new TAM, massively growing revenue, EBITDA, and net income. This is a company which is actually a huge winner from AI and monetizing effectively. They do no brand advertising - the product sells itself and costs are staying practically flat while revenue grows at 50% and EBITDA over 100%.

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Unity (U) reported earnings recently and they were asked about AppLovin. They have a competing product that isn’t doing as well.

Analyst asks,

Jim, you mentioned interventions on the modernization side and not in the numbers yet, but can you give us more clarity, maybe some quantification on what you’re seeing initial testing and expectations for return on ad spend relative to the industry standard today? AppLovin commented last night, they believe they have a insurmountable advantage on the modernization side. And so, I would love to hear your thoughts of what you’re seeing with the initial testing and where you are or believe you are return the ad spend and where you believe that you can go and close that gap.

The CEO replied,

Well, I’ll give you two observations and then Luis, if you want to kind of add in here. So first off, some of these tests, as we’ve then kind of talked to partners, they have been extremely positive and we’ve actually had some people moving some more to level play with the results of some of the things we’re doing. And these are large max customers. And so that leads us to believe that the interventions actually close much of the gap versus AppLovin.

These things are kind of relative share. So a lot of share moving back our way, are we equal to them or not in ROAS? It’s hard to exactly say on these, but the customer feedback has been actually extremely positive. And we are seeing share shift and we think when we roll these out, we will continue to see that. The other thing I would say just broadly is, look, nothing against AppLovin. I think they’re doing an amazing job.

They’re executing on all cylinders. I think one of the benefits as we look at ourselves right now, and we hear this over and over and over again, no one wants to have one partner, right? That scares people. You don’t want to be reliant on one partner, especially given the ability, if you have a lot of share, to just increase your margin, i.e. what you pay a publisher versus what you charge. And so people want competition there.

And so we’ve had a number of customers just say, we’re being patient. We’re expecting you to catch up. We’re here for you. You got to deliver, but we’re here for you. So it’s not a situation where, a company can run away with this and everybody’s excited, but people are wanting us to close gaps and win. So there’s a lot of patience there. And as we’re working through these, again, where we’ve worked with a couple of partners specifically on these things, we’ve seen really good results against those things.

So, whether we close the gap to 100% or to 70% or 80%, it’s really hard to say just as we’re kind of running through, because you don’t actually see the ROAS numbers across, but what we’re seeing is very positive trajectory, which will impact spend with these various advertisers. So that much I can say, it’s hard to compare benchmark to benchmark.

The CEO is saying that having one partner for monetization “scares people” and that people want competition. He says that customers are saying “we’re here for you” and “wanting us to close gaps and win” and customers have a lot of patience.

Seems like Unity is trying to cope with having an inferior product. I’m trying to understand what app developer would want to use two competing products - one with much inferior results which cannot or doesn’t know how to show the ROI of the product to the customer. As AppLovin says their customers can see if they spent $1 they get $2 back in a transparent auction - they same cannot be said for Unity’s product.


AppLovin is entering the CTV market as well and will be competing with The Trade Desk soon. I think they are going to eat TTD’s lunch, but will be interesting to see how that plays out.

Side by side comparison of TTD and APP’s last Q’s

Revenue
TTD: 491M (+28%)
APP: 1058M (+48%)

EBITDA
TTD: 50M
APP: 453M

Net income
TTD: 32M
APP: 236M

Market Cap
TTD: 43B
APP: 28B

P/E
TTD: 218
APP: 52

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What is your thesis based on for AppLovin eating TTD lunch in CTV?
What is the point of your side-by-side comparison of last Q’s numbers if they are in completely different markets in said quarter?
Perhaps you are suggesting that APP dwarfs TTD in terms of FCF to invest?

Their balance sheets are a different matter.

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They are in the same industry which is the digital adverting industry or Ad-tech. AppLovin is in mobile and The Trade Desk is in CTV. The difference between mobile and CTV is enough for you to say they are “completely different markets”?

Perhaps you are suggesting that APP dwarfs TTD in terms of FCF to invest?

No, I am showing APP has massively greater net income for a comparable business.

Comparing FCF, APP is significantly better,

What is your thesis based on for AppLovin eating TTD lunch in CTV?

They have a recent track record of taking huge market share by implementing advanced AI solutions. As AppLovin says, a lot of companies are talking about AI and how it will benefit them, AppLovin is one of few who is proving the effectiveness of their solution growing revenue at 50% and net income at 100%, while keeping cost of revenue growing around 10%.

They already purchased WURL which provides demand for CTV ads and are entering that market. I believe AppLovin has a more transparent auction solution than any other product in the Ad-tech market and this is why they are able to take so much market share without doing any advertising - the product sells itself.

As I wrote above, time will tell, so I don’t think it’s a foregone conclusion. But I think it’s certain that AppLovin will be taking at least some market share from Trade Desk, and I don’t see that Trade Desk has plans to enter the mobile game space for ads.

Their balance sheets are a different matter.

Total Assets
TTD: 4.7B
APP: 5.2B

Total Liabilities
TTD: 2.5B
APP: 4.5B

Total Debt
TTD: 237M
APP: 3.5B

Updating to the add the debt comparison which is significant. APP bought back 20% of their shares in the past year instead of paying back debt. Management has made the choice to purchase back shares rather than pay back the debt, I’d rather see them pay back the debt but they may view their shares are undervalued.

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Its not the Liabilities that kill you it’s the Debt. TTD has no debt and App has almost 4 billion in debt.

Andy

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Yes, but they are different markets with completely different competitors.

And yes, it’s in the debt area that the balance sheet question is relevant.

I’ve been an owner of APP in the past several times and I’m a long time owner of TTD. I do think APP has an opportunity to enter into the CTV space and take some piece of an expanding market. They might even turn the market on it’s ear. But I think there’s little evidence at this point to treat that as anything but frosting on the cake if they are able to manage.

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Are you able to share any reference material that makes you think AppLovin has a more transparent solution than TTD?

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It’s a little worse than that. Their debt, and even net debt (debt minus cash and cash equivalents), has actually risen by over $1b in the last 12 months.

They had ~$1b of FCF in the same time period. They didn’t need to take on more debt. I guess they used it to pay for acquisitions and stuff, and used the FCF they had to buy back shares?

It’s one thing to not pay debt back, but to take on more debt when you have the cash – and to instead use the cash for financial engineering (which does often help the share price but doesn’t create any value)…it’s a red flag IMO. And even if you don’t agree, you have to admit it’s beyond weird.

Bear

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The other one? The Trade Desk who has long been utilizing AI. So it will be interesting to see what APP’s disruptive approach will be. I’m currently in the “show me” camp.

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Another company in a similar space is $RBLX. Haven’t looked into them very much, but $APP seems to have better numbers just from a cursory glance. And like $U they just had a disappointing quarter

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This is a great callout because I had not noticed debt from Q4 → Q1 went from 2.9B to 3.5B and I am not sure why. From this last call here is the CFO,

Turning to our capital structure. During the quarter, we amended our term loans, capitalizing on favorable market conditions to further reduce interest expense, while at the same time amending our loans to include outstanding revolver borrowings previously used for share repurchases. Continuing our commitment to share management, in Q1, we repurchased and withheld a total of 14.9 million shares of our stock. Net of issuances during the quarter, we reduced our total shares outstanding by approximately 3%.

Since we began our share management activities in early 2022, we have spent nearly $2.6 billion to repurchase and withhold a combined 79 million shares, that’s a remarkable 20% pro forma reduction in our total shares outstanding.

I actually don’t really understand what this phrase bolded means. I would have thought debt restructuring would be to reduce the total amount of debt, so I’m not sure where the additional ~500M of debt comes from and that definitely lowers my confidence some on how they are managing the debt.


Admittedly, AppLovin CEO and CFO are a bit eccentric in their product, financial and even naming strategy of the company AppLovin and AXON-2 (when there’s already an AXON company the investment community is familiar with).

This is a CEO who says against all advice he refuses to do brand advertising for his company. I cannot even imagine how many times by advertisers and board members he was probably told to start advertising.

On share repurchases I believe management realizes their company is underestimated in the market place and their share price represents a remarkable value. On the last earnings call three months ago which was very impressive, the analysts were asking, why is it you think the market doesn’t give you the credibility you deserve with the numbers you are putting up.

I think it would be quite reasonable for APP to be 50-60B company and be reasonably valued, if that’s management’s viewpoint as well they are getting a good deal on share repurchases.

While debt is concerning, I like the share repurchases here, and with the stock being at an all time high, they were good buys - at least in the short term. If they know the competitive advantage they have, and how they are going to be getting into all these adjacent markets like web advertising, and CTV, they can see a much larger TAM. They’ve already seen the superiority of their solution, and are thus investing behind it.

Many other software companies I am following have high stock based comp and dilution of shares. I’m seeing this company has a completely different approach and it’s winning in the marketplace.

There’s a fine line between an eccentric and a visionary, I am betting this leadership is more of the visionary type. When I follow the growth story here and narrative I like this company a lot. The red or debatably yellow flags on the debt are a concern to me, but it’s not enough to outweigh liking the rest of the story here.

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I am seeing there are only a few companies in the marketplace which have demonstrated significant financial gains and accelerations from AI that are driving growth at scale. Some examples are Nvidia, Meta, Super Micro and I’d include AppLovin in that group.

Their AXON-2 MAX platform has been live for one year. In that same time frame, revenue growth has gone from,

-3% → 21% → 36% → 48%

There is a clear acceleration in this business. We also know their legacy Apps business is still a huge portion of revenue that the AXON-2 platform is growing 90%+ per year. To me that demonstrates they are winning in the marketplace.

By contrast when I look at The Trade Desk last Q quarters the revenue growth is,

23% → 25% → 23% → 28%

It does not appear there is an acceleration of the underlying business here. I briefly looked at what TTD is saying about AI from their last call,

Let me also spend a moment on AI, not because we’re trying to get on the bandwagon. We’ve been deploying AI in our platform since we launched Koa in 2016. Given the frenzy around AI, I think it’s important to talk about how it is actually helping advance the work of programmatic advertising. Too much discussion on AI today is about AI in the abstract instead of practical details about implementation.

We are starting to get better at explaining how our AI investments will actually help people do their jobs better. To that end, we’ve known, since before our company existed, that the complexity of assessing millions of ad opportunities every second, along with hundreds of variables for each impression, is beyond the scope of any individual human. We have always thought about AI as a co-pilot for our hands-on keyboard traders. And with Kokai, we are bringing the power of AI to a broader range of key decision points than ever, whether it’s in relevance scoring, forecasting, budget optimization, frequency management, or upgraded measurement.

AI is also incorporated into a series of new indices that score relevance, which advertisers can use to better understand the relevance of different ad impressions in reaching their target audience. For example, UScellular worked with their agency, Harmelin Media, to leverage our TV Quality Index to better reach new customers. Their conversion rates improved 71%. They reached 66% more households by optimizing frequency management and their cost per acquisition decreased 24%.

I think it’s important to understand how we’re putting AI to work in Kokai because this kind of tech dislocation will bring new innovators. We see that now where major tech players are inviting scrutiny because they’re behind the innovation curve on AI, and more agile players, and I would include the Trade Desk in that bucket, are figuring out how to apply it to help humans make better, more data-driven decisions. We are also developing AI branded with Koa to make data-driven refinements on its own, within the confines of human-defined guardrails. Let me close by trying to bring all of this together and help you understand why I believe this positions The Trade Desk so well going forward.

I am seeing a very bullish sentiment from leadership about AI with TTD’s Koa, but left wondering why is revenue not ramping up significantly on a year over year basis?

It leaves me wondering how much AI is actually benefitting TTD’s business. I’ve seen other names like Cloudflare and Snowflake talk about the incredible gains they are going to get from AI, but not have it translate to any noticeable revenue increase. I’d rather have my money in companies which are demonstrating the benefits of their AI system through their financial results - both top and bottom line growth.

I don’t understand what solution AppLovin is building for CTV, although I do know that AppLovin is entering the CTV market. I’m not sure if the solution they are building is going to compete head to head with The Trade Desk system and directly in the same market. My impression is these markets do overlap, and at some point in the coming years these two companies will be competing with each other on some aspects of the Ad-Tech market.

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I am not personally interested enough in APP at this time to dive in, I lost faith in the APP CEO some time ago, so I will not be doing more research.

But I would suggest that some (if not most) of the massive growth experienced by APP is because Unity P.O.'d the Game Creator community and they left Unity en masse. So zero switching costs and a massive bungle by Unity.

How much of that can you attribute to Axon-2 and AI? I am not interested enough personally to dive in. But I would be cautious attributing 100% of the growth to APP awesomeness or AI leverage or whatever.

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I actually don’t really understand what this phrase bolded means. I would have thought debt restructuring would be to reduce the total amount of debt, so I’m not sure where the additional ~500M of debt comes from and that definitely lowers my confidence some on how they are managing the debt.

This is a great discussion on the debt. I have examined and discarded APP in the past due to their debt and their choice to buy back shares instead of paying down the debt. As Bear said, it seemed plain weird.

I have been told, though, “why not?” - If they raise their stock price enough, they can do an issue of shares at a much lower cost (ie get up to 50B or beyond and then do an 8% dilution raise) and pay it off in one fell swoop. Obviously the stock price would drop but I imagine with the better debt picture it would rapidly recover as the bottom line jumps. Yet…seems weird…I have never heard of an issuance for that reason.

Their debt to equity IS really high, but their servicing costs appear to have gone down (unless not reflected yet in this quarter.). Last three quarters, most recent on the left.

Interest Expense (74.2) (106.3) (74.3)

Also, their debt to Free Cash Flow is squarely in the middle of the pack of the stocks I own, which many of you share.

I appreciate this conversation - including the doubt about the engine bringing on more people vs. just the Unity fallout - and it has given me pause on the big add I was about to do on this stock. I think I’ll keep my 4% position or possibly even lower it and wait another quarter.

For me it’s worth staying in to see how things play out…the revenue and bottom line for the valuation is really stellar.

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