AppLovin Q2 2024 earnings review

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AppLovin (APP) reported earnings on August 7, 2024. They had guided for the following, and got these results,

Guides vs Actuals

  • Guided revenue 1.06-1.08B → actual 1.08 (+44% yoy)
  • adj EBITDA 550-570M → actual 601M (+80% yoy)
  • adj EBITDA 52-53% → actual 56%
  • guided next quarter revenue 1.12-1.14
  • guided next quarter adj EBITDA 630-650M with 57% margin
  • analyst consensus adj EPS 0.75 → actual 0.89

Notes from the conference call,

CEO - Adam Foroughi

  • models continue to improve, CEO noting revenue is up 5% qoq
  • customers have higher appetite for spend than can deliver today, as platform improves it will result in materially higher growth
  • models gathering data and they will become more accurate
  • launched first web advertising for shops this quarter, in pilot
  • broadening outside of gaming, and expect new categories will help grow CTV footprint, excited about prospects

CFO - Matt Stumpf

  • 446M in free cash flow (388M last quarter, +15% qoq)
  • software platform was 711M revenue (+75% yoy), adj EBITDA +91% yoy (last quarter software grew 91% yoy and adj EBITDA was +125%)
  • Apps part of business was +7% yoy, adj EBITDA of 81M and 22% margin
  • 22% EBITDA margin on Apps is up from 15% last quarter as they turned off marketing for existing apps
  • expanding team in very lean and targeted manner
  • goal of enhancing operational flexibility and liquidity while reducing net debt
  • used 356M to “withhold 4.2M shares”, allocating 80% of free cash flow in quarter to “share management”

Q&A

  • CEO mentions that “we’re seeing really good trends in Q3”
  • a lot of optimism on the web advertising category
  • long term goal of growing software platform from 20-30% per year, and does not depend on categories outside of gaming
  • gaming category is growing low single digits year over year
  • majority of mobile gaming in app advertising is running through the MAX platform auctions
  • vast majority of auctions are in a bidding state and it has continuously gotten more efficient
  • “billions of dollars of more investment happening from mobile gaming companies in user acquisition and user discovery”
  • very hard for a game publisher to look anywhere else besides AppLovin given their presence in the market
  • no customer in mobile gaming that is not able to find scalable success on the platform
  • asked about CTV, CEO says “Trade Desk products are nothing like ours”, differentiating factors are AppLovin is looking to drive measurable growth, and has attribution network
  • models in the CTV category can predict revenue and match the user up with the advertiser, product is in pilot, going to build product out “very aggressively”
  • audience for mobile gamers skews female and middle age, completely different than many assume a gaming audience is at a very large scale
  • AXON-2 platform is much more sophisticated than had in the past
  • new pilot program outside of gaming is more of a go to market problem and less a technology problem
  • on Apps they are looking to decrease costs and boost margin profile, open to selling the Apps portion of business in future
  • every month of AXON-2 in marketplace has been bigger than prior month, and data is growing which improves system

This seemed like a mixed report in that revenue only came within range of the estimate, however profitability in EBITDA and net income came in ahead of expectations. That does give me some concern revenue growth could be flattening out a bit.

Non-gaming in the pilot program sounds like a promising development as they start to get into the CTV markets. I’m likely holding my position for now or slightly trimming as my confidence in AppLovin is a little lower than before the report.

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Agreed that overall revenue was a bit disappointing. Of course we wanted to see that AI booster rocket send revenues to the moon (more on this later).

However, if you unpack the revenue into Apps and Software, it is much less disappointing. And if you factor in the pass-through in earnings and profits, they knocked it out of the park. Finally, the earnings call, to me, made all the difference.

Revenues: 1.06B → 1.08B 1.9% QOQ
Software revenues 678 → 711 4.8% QOQ

Adjusted EBITDA. 549-> 601 9.5% QOQ
Software EBITDA 492-> 520 5.7% QOQ

Cash Flow. 393M-> 446M. 13.5%. QOQ (!!!). FCF margin is 41%.

Here are the comments in the call that gave me confidence in APP moving forward.

  1. Their pilot to move into web advertising is going well.

Yeah. Good to see, Jason. In the quarter, Q2, we launched pilot of our web advertising program and this allows – let’s talk about e-commerce first. This allows an e-commerce shop that has a website to buy on our in-app inventory, the billion-plus daily active users we see in mobile gaming, a video advertisement routes that user to their shop and purchase that user in the same way that mobile game companies like purchasing users on our platform.

So, doing it on a performance basis and then we’re delivering them measurable revenue and results. This is brand-new. I’d say it’s been in pilot for a few months now. Results are looking really promising, materially better than what we would have expected this early in our progression in trying to get into web advertising. So this product, we think is something that we’re going to invest heavily behind, start scaling out and hopefully will show a material impact in '25 and beyond. And it is not limited to just e-commerce. It opens the door to advertising for any website of any type that wants to drive transactions that are measurable on a performance basis on our platform.

  1. They are not factoring in the results of this pilot in their estimates (which is prudent). That means if successful, you’ll have material upside.

James Heaney
*Could you just talk more about the 20% to 30% long-term software platform growth that you referenced? And I’m curious just how dependent that goal is on verticals beyond gaming? *
Adam Foroughi
Yeah. We don’t think it’s very dependent outside of gaming at all. You’ve got a mobile gaming category. It’s got a few percentage points of growth a year now. So let’s call that low-single digits. You’ve got a business that as these models continue to improve from gathering more data, we think that’s an extra 3%, 4% a quarter as well. So, that sort of gets you to the low end.
And then we’ve got a team that’s constantly working on improving the models and any improvement that’s actually develop or driven enhancement to the models that makes them more accurate, then steps you up into the higher-end of that range. And so we’ve got a lot of confidence in the growth goal we put out there just on a baseline basis the current business. Now, we do the with current business now we do sit on 1 billion plus daily active users.
We’ve got one of the most sophisticated advertising platforms in the world and we’re driving billions of dollars of performance value in gaming. There’s nothing about the technology we have that would disallow it from going outside of just mobile gaming, and we’re already seeing positive trends in that pilot. So as we start putting these pieces together and broaden out our platform over time, we’re really excited about how big the numbers could become.

  1. Willingness of advertisers to spend is not the gating factor in revenue growth. It is the ability of their model to actually find enough of the targeted users that will give the advertisers the return they seek. That’s why their revenue has not exploded. They remain confident that their model will find more matching users but for me that’s a tbd and not a sure thing.

When an advertiser says, I want to break even in 30 days on our platform, we achieve that goal for them. When I say increasing the match rate, it means let’s say that advertiser says, I want to spend $1,000 today and I want to get the $1,000 back in 30 days and we get that within a percent of inaccuracy. So they get whether it’s $990 or $1,010 back in 30 days that we have a limit of $1,000 that they can spend today, though the system can only deliver that much with a very low error rate for them.
Now let’s say tomorrow the system processes more data or our team makes an enhancement and now the system can deliver $2,000 at that same 30-day breakeven. The advertiser is going to say, I got the $2,000 ready to go. You’re breakeven in 30 days, I’ll put it on my credit card. Well, they have unlimited tolerance to spend, if all else remains equal and as our technology continues to improve, that business will continue to grow.

My conclusions:

  1. This is a longer-term growth story and the explosive quarter we were looking to see we might not see for one or even two more quarters. However, if you look at revenue growth in just the part of the business that matters – software – it’s a respectable 20% YOY.

  2. If you believe that their technology can move to other areas, you have two levers: a) bringing more advertisers to their existing mobile gaming user base and b) later, expanding the model to find users that are outside of their mobile gaming base. It looks like a) is happening and b) is tbd. I’d really like to see b) happen one day because then this company will truly shoot to the moon but if they can just do a) at $1,000 per advertiser per month, it will greatly expand their business.

  3. While we wait, this company is a cash-generating machine. To take in revenues of 1.08 B and turn that into cash flow of 446M is nothing short of phenomenal. It is the highest FCF margin of any stock I own. Even if this company does not grow revenues 1 cent for the rest of its life, reliably turning 1.08B into 446M of cash is enough to make this stock a winner.

  4. This is a highly optimistic strong hold for me. Software appears to be a solid 20% a year grower as it is now. It has not yet proved its explosive growth story and I will likely wait until I see that tipping point before putting a massive amount in, but I plan to add a bit opportunistically to my already 4.5% holding.

Finally, I really like that they do the conference call on zoom and show their faces. You really get a feel that these guys are not schmoozers or showmen, just two nerdy guys really interested in growing their business.

I encourage all APP shareholders to take a look at the call.

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Cash Flow. 393M-> 446M. 13.5%. QOQ (!!!). FCF margin is 41%.

The profitability on AppLovin is amazing for a software company. I am seeing the forward P/E for AppLovin listed at 13.3, meaning just hitting analyst estimates on profitability would make this company cheap.

Putting the net income and gross margin numbers on a longer timeline that goes back to 2022 looks impressive too,

Net income
-80M → -5 → 80 → 109 → 172 → 236 → 310 (current quarter)

Gross margin
47% → 63 → 66 → 69 → 71 → 72 → 74 (current quarter)

Adding one more detail that cash went up 24M this quarter, debt down -8M, while these are small changes, it helps in a trend that has been going the wrong way. I believe the remainder of the income sounds like it was used for share repurchases as the company sees themselves still undervalued.

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I think they are very focused on making sure they counteract dilution via stock-based compensation with share repurchases. They talked about this in the call.

Something a lot of companies don’t care about but that matters.

And, also it is true that the company sees themselves as still undervalued.

I would like to see their debt go down but I think that will happen in due time.

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Spot on - There’s almost nothing not to like about Applovin save two things, 1) The company name, how did they ever come up with that and decide it was a good name? It just defies common sense. 2) Debt - they carry a lot of debt. Yes, it’s manageable, insolvency is not a realistic scenario, but the debt load is really large. I like the stock purchases offsetting EBC. And the belief that the stock is cheap so buying their own stock is a good investment, but ~$3.5B just a lot of debt for a company with an enterprise value of $25.5B IMO.

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I have been sitting on the sidelines for AppLovin. Fundamentals all look great in the rear view mirror. But accelerating growth for their mobile service is slowing. The catalyst for reacceleration seems to be the new analogous web service. Of course they can cross sell their existing mobile development customers but these guys are not likely developing web software, are they? Why will the existing mobile e-commerce advertisers use the new APPS web service? We know the model is working for mobile. What is the basis for the confidence in the new web service? Why are folks so confident it will succeed? Help me as I am a little out of my knowledge zone here.

-zane

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They bought Wurl to gain access to a large dataset re/ CTV, and the management feels confident that their advertising products will work just as well there as they do for mobile. I don’t really know exactly how they intend to break into servicing web advertisers and content providers.

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The wildcard question is whether AppLovin can get into this web or CTV space without doing any brand advertising. Currently AppLovin does no brand advertising or marketing and the product has grown through word of mouth. For developers and businesses in the free to play mobile game space AppLovin is the main game in town.

The CEO has been adamant against advertising on previous calls. If they are able to pull off entering new markets without doing marketing, that would be a huge win because it’s going to be profitable right away. I’m guessing they will need to do some initial marketing. The CEO makes it sound as if it’s inevitable their product will succeed in these other marketplaces, but we will see if it plays out that way. On this latest call the CEO seemed dismissive of Trade Desk’s solutions saying they are nothing like theirs.

Adding these new marketplaces where nobody thinks they can succeed seems to give this company a lot of upside in my view. The advertising software platform grew 75% yoy this quarter, so it’s not like their business is seeing some slowdown, although sequential revenue did not look great.

AppLovin got rid of Unity’s competing business in one fell swoop. Leadership sounds confident they can do well here and gain traction fast, and with this quarter off to a promising start on the new markets, I’m wanting to stay invested for at least a couple quarters more to learn how this plays out.

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AppLovin is a middle man. They help mobile developers get in-product advertisers and advertisers find mobile app users to advertise their products or services. They make a cut for doing this.

It’s my understanding that this next leg is what I call lever a) in my comment above - let’s get web products and services to advertise to the mobile app users of our mobile app developer world and then route them to the advertiser’s e-commerce shop (or whatever website - they expressly stated it was not just ecommerce but that’s where they were starting) to actually make the purchase.

So they are moving from mobile app products and services advertising to mobile app users to a broader audience advertising to the same mobile app users.

Why would web sites use it? Because AppLovin’ is strictly pay for performance. You don’t get results, you don’t pay. And if what AppLovin’ claims is true - and I have no reason to believe otherwise - they have 1-1 ROI ie if an advertiser spends $1000 they will get $1000 worth of business (and of course, a customer for possible future sales.)

(as an aside, I don’t know how they calculate this or what they promise…so there is a bit of faith in taking what they are saying is true. I’ll look into this and post if I get more detail.)

Why wouldn’t I do that? It’s users that I haven’t been able to advertise to before, and you are promising me equal or better ROI than I am getting anywhere else.

I agree it might be hard to ramp up without advertising…we’ll have to wait and see.

And I also feel that the BIG lever is when they complete that leg and then move to everyone to everyone, which is still a big IF - and why I am not yet ready to bet the store - but there is no reason why they technically can’t accomplish this.

So first thing we need to see is revenues that grow from lever a. - then there is no reason to believe they can’t do lever b.

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I’ve stayed out of this stock for a few reasons but mostly because it’s in my industry and I can have clouded judgment.

If their pricing model truly is conversion-driven as you describe it, they may find it somewhat tougher to scale into web & CTV and website purchases. Mobile games are notoriously addictive and have very high usage amongst those that play them. They have a hundred little triggers and ways to make tiny amounts of money which add up quite a bit.

It’s a different story when you’re trying to get someone to buy, say, insurance. Or a grill. The path to purchase is also a lot more complicated and direct attribution is a lot more difficult to measure. They’re also going to be dealing with more sophisticated brands who may be harder to sell.

If I were invested in this company, I wouldnt assume that it’s going to be so easy to move out of their mobile gaming and advertising specialty.

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So I agree there’s a big question mark about their ability to forge new business with web and CTV. FWIW, the CEO said they have a very promising web pilot and they bought Wurl to gain access to a large body of CTV data to feed their AXON model. From that point forward it’s wait and see. I have a position, but I admit there’s a fair amount of taking it on faith. Just because they’ve had a lot of success in mobile doesn’t guarantee anything.

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Focusing in on the what the CEO said about the new markets they are entering, this sounds more promising than I understood from my first read through,

In the quarter, Q2, we launched a pilot of our web advertising program. This allows – let’s talk about e-commerce first. This allows an e-commerce shop that has a website to buy on our in-app inventory, the 1 billion-plus daily active users we see in mobile gaming, a video advertisement and route that user to their shop and purchase that user in the same way that mobile gaming companies like purchasing users on our platform.

So doing it on a performance basis, and then we’re delivering that measurable revenue and result. This is brand-new. I’d say it’s been in pilot for a few months now.

Results are looking really promising, materially better than what we would have expected this early in our progression in trying to get into web advertising. So this product, we think, is something that we’re going to invest heavily behind, start scaling out and hopefully will show a material impact in '25 and beyond. And it is not limited to just e-commerce. It opens the door to advertising for any website of any type that wants to drive transactions that are measurable on a performance basis on our platform.

Now we do, do sit on 1 billion-plus daily active users. We’ve got one of the most sophisticated advertising platforms in the world, and we’re driving billions of dollars of performance value in gaming. There’s nothing about the technology we have that would disallow it from going outside of just mobile gaming, and we’re already seeing positive trends in that pilot. So as we start putting these pieces together and broaden out our platform over time, we’re really excited about how big the numbers could become.

Directly applicable to e-commerce is something that we’ve always hypothesized as possible. The models in Axon 2.0 are so much more sophisticated than technologies we’ve had in the past that they should enable success there. Now we’re in pilot and we’re seeing success there. So we’re at the point now where we know we put the pieces in place, and now it’s more of a go-to-market problem and less of a technology problem.

This does sound like a greenfield opportunity for AppLovin and they make it sound surprisingly simple to move the technology to adjacent markets because nothing restricts the ads to mobile gaming. Additionally, they mentioned none of this pilot, or any improvements in the model are baked into the future guides.

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Foroughi (CEO) had the option to say nothing about their toe in web waters. Instead, he decided to enthusiastically paint a very pretty picture based on a pilot e-commerce program involving one shop, months long pilot.

I’m sure he wouldn’t say anything unless he was quite confident that this extrapolation of their existing technology into new domains will prove profitable as they scale out.

I am also encouraged based on his remarks, but maybe a little less sanguine than he. A pilot is just that, a pilot. There can be a lot of hiccups as they try to push this capability into the market.

It’s curious that they don’t advertise even though advertising is essentially the service they provide. If contagious marketing continues to work well for them as gaming has, then I guess things are destined to do well, and we as owners should also do well. All the same, I still think a fair degree of the investment thesis is based on hope as opposed to demonstrated performance. I usually shy away from investments of this nature. I’ll keep my eyes wide open on this one. I’m a bit uncomfortable. But really, every investment involves risk and faith. My confidence is based on the success they’ve had with mobile gaming and trust in management’s assertions that see no significant constraints to penetrating these new markets.

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