AppLovin Corp Q3 FY2024 earnings call

• Culture: Emphasized company culture traits such as acting as owners, urgency, insatiable desire to learn, pursuit of excellence, automation, quick decision-making, and profitability. The company's culture is a fundamental strength, with the CEO taking oversight of HR to ensure culture thrives as the company grows. • Quarterly Performance: Continued to execute well, expecting 4-5% quarterly growth through self-learning and market growth, with a step change in growth driven by AXON algorithm enhancements. The e-commerce pilot showed strong early data with advertisers seeing substantial returns. Shifted to an annual shareholder letter while still releasing quarterly financial results and guidance. • Financials: Total revenue reached $1.2 billion, adjusted EBITDA was $722 million (60% margin), up 39% in revenue and 72% in adjusted EBITDA year-over-year. Free cash flow was $545 million, up 182% year-over-year. • Renaming: Starting with the next shareholder letter and annual 10-K, the Software Platform and associated revenue will be renamed to Advertising to align with the business nature. • Capital Allocation: Focus on organic growth by recruiting top talent and investing in technology efficiently, share repurchases funded by free cash flow, and maintaining a strong capital structure with net debt leverage below 2 times.

The company's segments included the Software Platform (renamed to Advertising in future filings) and Apps. The Software Platform (Advertising) generated $835 million in revenue and $653 million in adjusted EBITDA in the third quarter, achieving a 78% margin. Revenue for this segment grew 66% year-over-year, and adjusted EBITDA grew 79% year-over-year. The Apps segment had revenue of $363 million, a 1% increase from the same period last year, with $68 million in adjusted EBITDA, representing a 19% margin.

• Q4 2024: Anticipates revenue between $1.24 billion and $1.26 billion, with adjusted EBITDA between $740 million and $760 million, targeting a 60% adjusted EBITDA margin. • Long-term: Continues to expect 20% to 30% year-over-year growth for mobile gaming advertisers, with e-commerce pilot showing strong potential and expected to scale significantly in 2025, becoming a strong contributor. • Software Platform: Next quarter, software flow-through expected to reduce slightly due to PSU-related vesting costs and increase in data center capacity for future growth.

• No specific detailed risks discussed, but general risks include market competition, timing of e-commerce ramp, and execution of new initiatives such as scaling e-commerce and implementing GenAI features.

Q: Regarding e-commerce pilot, is there little revenue contribution currently and which segment was bigger contributor this quarter? Also, contextualize capacity increase.

A: E-commerce is still in pilot with little financial impact. The step-up this quarter was entirely on the gaming side. The renewal of Google Cloud contract was slightly earlier than planned to get capacity for future growth, with one of the largest GPU deployments in the world and investing ahead of needs.

Q: Any reason e-commerce could ramp more slowly despite strong product?

A: E-commerce is a new category needing brand awareness, but the product is compelling. The company took a long-term approach like in gaming, and strong performance in pilot suggests potential for quick attraction despite being new.

Q: Ability to expand model to other verticals beyond e-commerce?

A: The technology has no limitation to cover other verticals. The only limitation is go-to-market, but the company aims to penetrate all transactional categories over time.

Q: Impact of stock price increase on buyback and M&A?

A: Stock price increase has no impact on buyback decision. The company has no plans for M&A on the advertising side, focusing on organic growth.

Q: Timing of e-commerce general availability and go-to-market partners?

A: Still on track for general availability next year. Customers' successes on the platform are creating noise on social media, indicating performance but no disclosed partners.

Q: Growth in 2025 and licensing of AXON?

A: E-commerce is expected to be material in 2025 but timing hard to predict. AXON licensing is a longer-term focus, secondary to current e-commerce and scaling efforts.

Q: GenAI features timeline and benefits?

A: GenAI features are on the roadmap, expected to personalize ads and lift response rates, but not immediate.

Q: Expanding supply outside mobile games?

A: Supply expansion is a growth factor. The company bought Wurl to tap into CTV, aiming for more supply reach beyond mobile gaming.

Q: E-commerce opportunity and competition?

A: Entering greenfield in e-commerce, with no current competitors in mobile games for outside categories. The platform offers incremental value to advertisers with new audiences.

Q: E-commerce investment and bottlenecks?

A: E-commerce is the most exciting product launched, with no bottlenecks other than human capital capacity as companies line up to use the platform.

Q: Technical step function change and GenAI unlock?

A: The engineering team's talent and research advancements drive technical step functions. GenAI features are on the roadmap for personalized ads but not immediate.

Q: Probabilistic billing impact?

A: The switch to probabilistic billing had nominal impact, mainly to align with advertiser tracking.