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AppLovin Corporation (APP) Q1 2023 Earnings Call Transcript

AppLovin Corporation (APP)

Q1 2023 Earnings Conference Call

Company Participants

David Hsiao - Head of IR

Adam Foroughi - CEO & Co-Founder

Herald Chen - President & CFO

Conference Call Participants

Martin Yang - Oppenheimer

Ralph Schackart - William Blair

David Pang - Stifel

Franco Granda - D.A. Davidson

Presentation

David Hsiao

Welcome, everyone, to the AppLovin earnings call for the first quarter ended March 31, 2023. I'm David Hsiao, Head of Investor Relations. Joining me today to discuss our results are Adam Foroughi, our Co-Founder, CEO and Chairperson; and Herald Chen, our President and CFO. Please note our SEC filings as well as our shareholder letter discussing our first quarter performance are available at investors.applovin.com.

During today's call, we may be making forward-looking statements regarding future events, market expectations, the future financial performance of the company and the strategic review of our apps portfolio. These statements are based on our current assumptions and beliefs, and we assume no obligation to update them except as required by law. Actual results may differ materially from the results predicted. We encourage you to review the risk factors in our most recently filed Form 10-K for the fiscal year ended December 31, 2022. Additional information will also be set forth in our quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2023.

We will also be discussing non-GAAP financial measures. These non-GAAP measures are not intended to be a substitute for or superior to our GAAP results. Please be sure to review the reconciliations of our GAAP and non-GAAP financial measures in our shareholder letter available on our Investor Relations site. This conference call is being recorded and a replay will be available on our IR website.

I'll turn it over to Adam for some opening remarks, then we'll open it up for Q&A.

Adam Foroughi

Good afternoon, everyone, and thank you for joining us today. We had a strong Q1 on our software platform business with significant growth quarter-over-quarter. This was directly attributable to our advertisers seeing improved performance on our platform and returning to more of a growth mindset, leading them to more confidently spend with us. Further, we've always talked about mobile gaming being a resilient category and we always believed it would be stable even in weaker economic times. We're seeing just that.

At AppLovin, our teams have been working tirelessly over the past few quarters, focusing on several key growth initiatives. Firstly, we have been working on significant upgrades to our advertising technology. This has been a major focus for us and we are starting to see early benefits from these efforts. Secondly, we have been working hard to unlock the synergies from our Wurl acquisition by bringing our advertising platform into CTV. While we don't expect this to have a material financial impact in the near term, we are excited about the early data we are seeing in this area.

And finally, we're extending our marketing solutions to carriers and OEMs through our Array business. Although this is still in the early stages, we are pleased with our progress. At the same time, we have been optimizing our gaming business and are now running at a more efficient level. We are confident that this business will be a stable source of cash flow going forward.

Now let's talk a little bit more in detail about AXON improvements. We have been discussing the development of AXON 2 for a year now and have always communicated that our strongest growth would come from advancements in our own technology. It's been challenging to explain what this means, but with the exploding popularity of consumer-facing AI tools, we can draw a simple analogy.

Upgrading from AXON 1 to 2 is no different than OpenAI moving from ChatGPT 3 to 4. Our models can always be improved, and our entire business is powered by the evolution of our technology. The enhancements to our machine learning and AI are not a onetime thing, but a series of upgrades over time. As we make these, there is the potential for significant lifts to both revenue and cash flow.

We are currently in the midst of a staged rollout of AXON 2 and we are very excited about the long-term potential of this new technology for our partners and our business. We are extremely pleased with our execution so far this year. We believe that our technology and innovation will continue to be the driving force behind our success and we are committed to continuously improving our business.

Thank you again for joining us today and we look forward to sharing more updates with you in the future.

With that, I'll hand it off to Herald.

Herald Chen

Thanks, Adam, and good afternoon, everyone. I'd like to begin by expressing my gratitude to Ryan Gee for his leadership of our IR activities over the past few years. Additionally, I want to extend a warm welcome to David Hsiao, who joined AppLovin in early '21 and has taken on the Head of IR role for the company.

As Adam mentioned, we had a solid first quarter, exceeding expectations across revenue, EBITDA and cash flow. Importantly, in addition to financial performance, we're just as pleased with the focused execution and progress achieved by our teams during the quarter, in particular, as it pertains to our software platform growth initiatives.

To touch on a few key financial highlights, in Q1, our revenue reached $715 million and our adjusted EBITDA hit $274 million surpassing the high end of our guidance. Our adjusted EBITDA margin was 38%, which was the highest run rate margin we've had since 2018. Our software platform segment was a standout performer recording -- record quarterly revenue of $355 million, which is a 16% increase over the prior quarter.

What's more, our software platform adjusted EBITDA grew 18% quarter-over-quarter to $219 million translating to a 62% adjusted EBITDA margin. Our software platform growth over the past two years has been robust with Q1 '23 revenue exceeding Q1 '21 revenue by over 4 times. This represents a 100% compounded annual growth rate.

Additionally, software platform adjusted EBITDA increased from $59 million in Q1 '21 to $219 million in Q1 '23, a strong 90% plus CAGR. As Adam noted, while it's challenging to predict the precise timing and impact of our software platform growth initiatives, we are optimistic that they will drive meaningful revenue growth and high-margin cash flow....

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