Applovin Corp (APP) 2021 Q2 法說會逐字稿

Greetings, and welcome to the AppLovin earnings call for the quarter ended June 30, 2021. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ryan Gee, Head of Investor Relations and Strategic Finance. Thank you, Mr. Gee, you may begin.

Yes. Thank you, Alex, and welcome, everyone, to AppLovin's earnings call for the quarter ended June 30, 2021. Joining me today to discuss our results and key business initiatives are our Co-Founder, CEO and Chairperson, Adam Foroughi; and our President and Chief Financial Officer, Herald Chen.

Please note that our SEC filings and earnings release are available at investors.applovin.com, where we have also posted a shareholder letter discussing our 2Q performance.

Before I turn it over to Adam, I'd like to remind you that during the call, we may be making forward-looking statements regarding future events and the future financial performance of the company. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected or implied today. For more on these potential risks, please refer to our most recent Form 10-Q filed May 14, 2021, and our Form 10-Q for the second quarter 2021 to be filed in the next few days. That said, you should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of the date hereof and AppLovin disclaims any obligation to update these forward-looking statements, except as required by law.

Our discussion today will include non-GAAP financial measures. These measures should be considered in addition to not as a substitute for or in isolation of our GAAP results. Information regarding our non-GAAP financial results, including a reconciliation, our historical GAAP to non-GAAP results may be found in our shareholder letter furnished with our Form 8-K filed today with the SEC as well as at our Investor Relations website.

Finally, a recording of this conference will be available on our IR website shortly after this call has ended.

And with that, I'll now turn it over to our CEO, Adam Foroughi. Adam?

Thank you, Ryan. We are excited to have you on the AppLovin team.

Thank you all for joining us today. I hope each one of you has an opportunity to read the shareholder letter we posted this afternoon, highlighting our second quarter business and financial performance. This is the second earnings period we've had as a public company, and once again, I am extremely proud of the strong execution by our teams this quarter, which resulted in our record financial performance.

In the Q1 earnings call, we spoke a lot about how software powered by our first-party data advantage was excelling in the marketplace. Today, we're very proud to give you data that will show you the significant gains we've had in the software business since then.

Consumers are downloading roughly 150 billion apps a year, and probably half of those through organic discovery on the app stores themselves. Through AppLovin software platforms in the first half of the year, consumers downloaded almost 2 billion installs. Our market share is growing, and we have become one of the largest platforms for developers to market to consumers.

I'll touch on 2 topics that demonstrate our strengths. First is the tremendous performance and prospects for our software business. Since the launch of our machine learning engine, AXON, our software platform revenue growth has accelerated for 3 consecutive quarters. And during the second quarter, our software platform revenue more than tripled year-over-year.

Improvement in the efficacy of our software has also accelerated customer adoption. In the second quarter, we tripled the number of Software Platform Enterprise Customers, or SPECs, to 366. We also saw significant growth in spend with net dollar-based retention of 279% from our existing specs. Even when we exclude Adjust, growth was just as impressive with specs more than doubling to 237 and software revenue more than tripling. Our average quarterly revenue per SPEC, excluding Adjust, was also up 51% year-over-year to an all-time high.

We're focused on growing our client base, which, in turn, drives up pricing in our marketplace. As with most software businesses, ours included, there is a high flow-through of incremental revenue to EBITDA. This material growth led to us achieving record EBITDA performance. Looking forward, we're excited to be integrating the Adjust team into our business. Here's a simple way to think about this opportunity. If every one of the 250 sales and marketing people on the Adjust team convert just 1 client out of their 3,000 clients in the next year into an AL SPEC, our software business will double. Given the favorable growth and margin profile of our software business, we believe it will be a key driver of our long-term value creation.

The second point I'd like to highlight is our differentiated approach to mobile content. We are unlike traditional mobile gaming publishers. Our top priority is to generate scaled first-party data across a wide audience. Larger-scale and first-party data enhances our targeting capabilities, ultimately leading to the exceptional growth in our higher-margin software business as we saw this quarter.

We've invested heavily in apps over the past 3 years and now have an annualized revenue of more than $2 billion, growing this business organically 80% year-over-year. Even more importantly, we have one of the largest pools in mobile development talent in the world, with close to 3,000 content creators across 16 global studios with expertise in nearly all popular mobile gaming categories, building content exclusively for us. We were the #1 publisher globally by downloads in the second quarter according to Sensor Tower.

While many of the gaming teams we have invested in are relatively new to AppLovin, the majority of those teams have been working tirelessly on new content. We have a handful of new evergreen titles planned for launch in the second half of the year. We use the term evergreen for titles that we believe can have a meaningful impact on our P&L at over $100 million of annual revenue for many years. This pipeline of content and ability to scale more hits like Project Makeover, Wordscapes and many others, is what makes us very confident in the prospects of this business for years to come.

To summarize, we had a great second quarter. Our record performance was a result of our unique and integrated business model, powered by our strong technology and a great team. The fact that a business at our software run rate grew organically year-over-year faster than any other scaled advertising solution, despite what many in our industry anticipated would be a significant growth headwind with regards to data privacy, speaks to the unique insights afforded to our software engine from our proprietary first-party data, our market share gains and to the tremendous opportunity for growth ahead of us.

Now before I hand it off to Herald to highlight financial performance, I'd also like to announce that Asha Sharma has recently joined our Board of Directors. Asha is the COO of Instacart and has held successful senior roles at Facebook, Porch and Microsoft. She's a proven tech operator and leader, and we're very excited to be working with her.

With that, I'll pass it to Herald.

Thanks, Adam, and thanks to everyone for taking time to join us.

Our business performed exceptionally well in the second quarter, a result driven by the hard work and focus of the global AppLovin team. This momentum and awesome team bolsters our confidence in AppLovin's integrated strategic approach to the market, namely software, fueled by scaled content and data and, in turn, our confidence for future growth and expansion.

In addition to all the excellent growth metrics already mentioned by Adam, I'd like to highlight a few additional points from the quarter. First, on the software side. Our total software transaction value, or TSTV, grew over 4x year-over-year in the second quarter to an annual run rate of approximately $900 million. That makes us one of the largest and fastest-growing players in the category. As a reminder, TSTV, which we launched in the first quarter, adds back our eliminated intercompany revenue from owned and operated marketing spend. We do that in order to give you a comparison of the total scale of our software business on an absolute basis and compared to our peers.

An additional point on software. Although early, we are pleased with the progress we're making on our software platform with nongaming customers, where revenue more than doubled in the second quarter compared to the first. One relevant customer case study is posted on our website, highlighting our success for an app called Fastic, a leading fasting app, where we drove 125% increase in installs. Of note, Adjust, those large customer base is well over half nongaming, will also accelerate our growth in this category.

Next, as Adam mentioned, we doubled the apps business year-over-year and have a strong pipeline of new evergreen games coming in the short term. I want to emphasize and highlight the scale and depth of both our apps portfolio and our development capabilities, which gives us strong diversification, business model durability and paths for organic growth in this business.

With regard to cash flow, as Adam mentioned, we delivered record adjusted EBITDA. We grew more than 200% year-over-year and over 40% quarter-over-quarter to $184 million. Margins improved to 27%. A big reason for this expansion is the growth of our software platform, which operates at a much higher margin than our apps-related businesses. Therefore, as our software business grows, it can drive meaningful adjusted EBITDA growth and margin.

One last quick highlight, our combined Q2 revenue growth and EBITDA margin led us to a rule of measure of 150%.

Moving to 2021 outlook. We have strong momentum in the -- for the second half of 2021, and we are confident that we can deliver against our organic financial outlook provided previously, which was revenue between $2.65 billion to $2.70 billion and adjusted EBITDA between $680 million to $700 million.

Importantly, we see several opportunities for added growth over the next several quarters, in particular, given the strong momentum in software and from all the investments we made over the past few quarters and years to grow our apps business.

Again, thanks for taking time today. Operator, please open the line for questions.

(Operator Instructions) Our first question comes from Alexia Quadrani with JPMorgan.

This is David Karnovsky on for Alexia. Adam, your software business is clearly accelerating here mid-IDFA changes. Can you just talk through some of the drivers? What do you think software clients are seeing in your platform versus competing networks or some of the (inaudible) channels?

And then can you just discuss a little bit more the integration of Adjust, what's been the experience so far, utilizing their sales force cross-promoting your core services? And have you found that Adjust can serve as an entry point to new developers that are sort of just starting out or launching their games?

Great. So the software side, obviously, is seeing a lot of acceleration, and we touched on it last quarter when we highlighted what we thought IDFA impact would be. The changes really govern how third parties share data with first parties and how that data is used for advertising. And in our case, we have a lot of first-party data, both scaled 200 million users a month playing our game, scaled across engagement data, and then also scaled transactional data, which is very unique. We've got millions of customers paying and having paid in our games.

And then that data, we're able to put in our machine learning engine, AXON, to come up with really ad recommendations that drive much better performance for the advertiser. We rolled this out in Q4 of last year. And you've seen immense amounts of growth on the software side, both in terms of the dollars that people are spending on our platform, which is reflective of the performance, and in terms of new clients coming on, which doubled year-over-year. We're very confident in this trend going forward.

And then in terms of the integration of Adjust, we closed that late April. So through Q2, it was more of work of just integrating them into the team, getting them up to speed on how our software solutions operate. The average ticket size on an Adjust client is tens of thousands a year. Our average ticket size at AppLovin on a software client is roughly $2 million a year of net reported revenue. And as you all know, typical ad network margins, you can grow that up by a factor of 3 or possibly even more to figure out how much a typical advertiser is spending on our platform for a year.

And we look at Adjust, and I touched on this a second ago, as an opportunity to go convert 3,000 clients to become AppLovin SPECs. If we even convert 7% of those clients to become AppLovin SPECs, in the next year, we'll double our software business.

Okay. Great. And maybe if I could just squeeze in one more. Just on the decision not to adjust your outlook after the strong quarter, maybe you could just talk through your philosophy that you laid out in the shareholder letter to set guidance just onetime at the start of the year.

Yes. That's, I would say, is a me thing. I've been operating this business since I started it, really looking forward with our team to opportunities to execute on the technology and product side years ahead of where we're at in the present. And what we didn't want to get into is a pattern of trying to update numbers every single quarter and shifting our mindset from a long-term focus that we know creates the most long-term shareholder value to one that's more short-term focused.

Obviously, our business is performing exceptionally well. We've got a lot of assets in place that we believe will give us a path to growth for many quarters and years to come, and so we're very confident that we'll continue to put up very strong numbers. But we decided financial guidance should match the way we operate, and we'll update those annually for you all, unless we're going to diverge materially from that guidance.

Our next question comes from Stephen Ju with Credit Suisse.

So Adam, and as a follow-up, question for Adjust, I guess, you're calling out 2,000 gaming and nongaming marketers spending $11 billion in mobile ad dollars. So can you talk about what incremental work do you think you need to do in order to gain more wallet share there?

Thanks, Stephen. And it's interesting because the reason we got really excited to do this transaction, and it was frankly really difficult to do during the IPO process, but we felt like we had to do it is we went and crossed our clients with Adjust clients and there was almost no overlap. Adjust has a team that's based in Berlin, and then really, they invested going east from there. So a lot of their clients are international. And we realized, without a sales force, we just didn't have any sort of penetration into this international client base. We didn't even know who these customers were, and obviously, they're huge mobile marketers. So that's what got us really excited.

We saw just greenfield to go operate, where you've got 3,000 almost clients that they've got, and probably 500-plus of those are big enough to become AppLovin SPECs. So it's just not going to take a lot of work for us to go convince them if they're already spending substantial dollars on mobile marketing to test out our platform. It's low cost and then creates massive amounts of upside.

And Herald touched on the case of Fastic, which was one of the earliest Adjust cross-sells, but it's something we're going to be investing heavily into going forward because it's such an easy path for us to go tackle to create immense amounts of growth in that software business.

Our next question comes from Jason Bazinet with Citi.

Okay. I'm going to apologize in advance if this is a dumb question because I confess I'm still trying to wrap my head around the new KPIs that you gave last quarter.

But the software platform revenue year-over-year grew from $41 million to $146 million to up $105 million. The business apps revenue went from $96 million to $162 million, up only $66 million. Is there something in the middle there that is worth highlighting that may have shrank?

So business apps, just to be clear, is advertising from third-party, typically, ad networks within our own mobile game applications. And then business software is obviously our app discovery solution and the MAX solution, and now, Adjust, so the software net revenue that we report. That business grew exceptionally quickly with the advantages that we thought we had going into the changing landscape.

One of the things we touched on in the first quarter earnings call is our other prediction on IDFA changes were the prices in the ecosystem would drop on iOS, and that flows through to business publishing. Now despite that, business publishing had quite sizable growth. The mobile gaming ecosystem doesn't tend to grow that quickly on a year-over-year basis. So despite the lower pricing in the ecosystem, we still were able to generate outsized growth in that business as well.

Maybe I can add on to that. Yes, so we -- within the business category, originally, we had the apps and the software. We broke it out for you before, but now, we're explicitly showing you the number of customers on the software side. We still, in the disclosure, have the enterprise customers, which would total up to the aggregate business revenue, which includes both the business apps revenue and the software revenue.

Business apps revenues, you'll see in the letter, grew 70% in the quarter, and then, of course, the software side grew at a much faster rate at 256%.

Okay. Can I ask maybe one other dumb question? If I take the clients that generate over $125,000 on spend per quarter, if I multiply those 2 numbers together and I compare it to the software platform revenue, it used to be sort of like a rounding error. And this quarter, it jumped up where it's like, I don't know, $13 million or something like that.

Is that from the Adjust acquisition? Or are you beginning to get more traction from business accounts that generate less than $125,000 where it's becoming sort of a larger number?

Yes, I could take that one as well. So in the letter, we do show you what the business did without Adjust and with Adjust. And so without Adjust, the average SPEC client spent $519,000 in revenue for the quarter. So that's a much bigger increase over the prior quarter. Then the Adjust SPECs, which is the incremental 129 customers, they do have a lower average. So the total overall average, when you combine them, was the $364 million.

Our next question comes from Youssef Squali with Truist Securities.

And guys, congrats on a solid quarter.

So 2 questions. One, a follow-up on the Adjust acquisition. I was just wondering if maybe you can speak to the rollout of the -- or the cross-selling potential of that 250 salespeople and just kind of -- how quickly do you think you can ramp that up and kind of what's baked into your published guidance so far?

And second, and obviously, the numbers speak for themselves. But just going back to IDFA, I was wondering if you can comment on the percentage of iOS users that have upgraded to 14.5 or later, and what kind of impact have you seen either on opt-in rates or basically on that sliver of the business?

Thanks, Youssef. I'll answer the second first just because it's quicker. We've seen about 80% of iOS devices are now updated to 14.5 or later. And consent rates are coming in quite a bit higher than I think a lot of the folks in the industry had projected. It's different by app by app, but anywhere between 20% to 25% on the low end and 60% to 65% on the high end, and it lands on an average to around 35% to 40% are opting into sharing information. So that's on IDFA changes.

On the Adjust piece, again, Q2 was just integration, get the team trained up. It takes a little bit of time for clients to come on our platform and actually ramp up because there's learning costs and a learning time frame. So really, we'll start seeing the effects of Adjust starting in Q3 really taking shape in Q4 and impacting next year quite materially. As such, we didn't project too much into our numbers at all from Adjust cross-sell this year. We're already starting to see, though, quite a lot of cross-selling activity happening because, frankly, it really isn't a hard sell. These are mobile marketers. They know how to spend dollars on mobile. They're performance buyers.

And as I touched on in my summary, too, we've grown to become such a big source of mobile traffic acquisition that it's really easy for their salespeople to commence one of their clients who hadn't heard of us before to go test out our platform.

And then Herald, I don't know if you want to give anything explicit on the guidance there that we included in terms of Adjust.

In terms of the guidance, we had known we were going to acquire Adjust at the time, so our guidance for the year, when we gave it in the first quarter, it was inclusive of that and the 2 acquisitions we announced in the first quarter.

Yes, so we included their numbers and not much upside from cross-sell. So that creates quite a lot of upside for us in the future.

Our final question comes from Brian Nowak with Morgan Stanley.

It's Matt on for Brian. So I guess for the software platform, I think you guys said in the letter, you had about 40% organic growth sequentially versus 1Q. How did AXON contribute to that growth versus contextual products? And did that change at all in terms of like the strength in the contextual products as you moved through quarter and maybe more people were upgrading to iOS 14.5 or higher?

And then you mentioned software gaining share -- continuing to gain share this quarter. Who in the ecosystem do you think are the share donors at this stage?

Matt, so let me answer again, second first, because it's just top of mind. We think the ecosystem itself is still growing quite quickly. In our space in the last 24 hours, you've seen Unity report great numbers; ironSource, great numbers. We obviously reported industry-leading growth numbers with that triple-digit software growth and the 40% sequentially.

What we think is happening is that the marketing platforms are just improving, and they're improving at a really quick pace, which increases the pie. And it's not that we're taking from another company, it's that the market is growing. We're just outpacing the growth of the market, which is leading to all of the key players in the ecosystem, though, growing as well as the publishers themselves who lean on advertising to grow their business.

And then on the first one, the 40% growth sequentially, can you just rephrase the question for me so I can remember exactly what to answer?

Yes. Of course. It was just about the contribution to that growth from AXON versus contextual advertising and see that shift maybe towards -- yes.

Yes. So if you recall, we touched on in first quarter earnings, our advantage we felt like going into the IDFA change was -- compared to our peers, is that we weren't going to fall back from a completely personalized solution to a completely contextual solution that lacked the personalization you get with data. Our advantage truly comes from very scaled first-party data.

We've got 200 million users playing games every single month that we've got good engagement data on. We've got millions of customers having paid us over the history of our gaming business. All of that data remains intact and is in our models with or without IDFA.

And so going into the quarter, we felt like we had advantages. We articulated it for you all in Q1. And then obviously, you've seen in the step-up in performance that 3x growth in the software business and up 40% quarter-over-quarter and the huge ramp-up in clients that we're able to outperform in the marketplace because of those investments we've made over the last couple of years.

Our next question comes from Angie Song with Oppenheimer.

I'm actually speaking on behalf of Martin Yang at Oppenheimer.

Can you talk to us a little bit about your first-party game pipeline for 2021 and entering into 2022? And are you planning on expanding into more genres or expanding market opportunities? And also, what is your long-term revenue mix goal for first-party games versus software?

So thanks for the question. The game pipeline itself, while we don't talk about games because we operate it as a portfolio, what we can tell you is this, we started the games business 3 years ago, roughly, but most of our investments in creators coming into our ecosystem to build content for us has really happened in the last 18 months. We've now got 3,000, roughly, game creators around the world that are expertised across nearly every category of mobile gaming, building content for us.

Now we pulled out this notion of an evergreen title. These are titles that take substantial amount of investment to go build, usually in the millions of dollars of R&D cost, but also, more importantly, 1 to 2 years of development time. Since our gaming business is so new, you haven't yet seen a pipeline of content roll out from us. Yet we're working on it, and you've seen it reflected in our expenses. The first game that came organically launched last year in November, Project Makeover, and within 2 months was top 20 grossing globally mobile game, one of the fastest-growing of all time.

So what gets us really excited is that in the second half of the year, we're now going to have a constant pipeline of big games rolling out. We'll have a handful coming over the next few months that we'll launch, and we believe and have confidence in will be able to clear this threshold that we defined as an evergreen title, at least $100 million of revenue per title per year, with an outlook to many years to come of being able to generate that.

And then do you mind repeating the second question as well?

Mix of software and apps.

Do you want to answer that one, Herald?

Yes. Sure. Sure, sure. Look, we're -- our strategy is to grow both sides of the business and be opportunistic where we can be. Of course, as you can see in this quarter, our software business has tremendous growth and a big market potential. And so that business, we see quite robust growth rates for quite a long time.

On the IP side, look, we've gone from 0 to several billion dollars in less than 3 years, and as Adam just mentioned, a lot of that has come in the very recent few quarters. And so that should be accelerating as well as we get more studios launching new games, we improve our live ops behind those games. And over time, we don't target necessarily a mix. We're looking to grow both businesses as efficiently and as quickly as possible.

Again, we see the software business, though, now that it -- given the margin structure, as we mentioned, will drive significant EBITDA. And if it grows faster than apps, will increase margins. And as a percentage of overall revenue, again, not that we're targeting it, I think we were 14% in 2020 for the year. In this quarter, we're at -- software is now 22% of the business because of the accelerated growth.

Yes. One thing to add, too, is as we -- as you think about the 2 revenue streams, the software revenue stream is just much higher value in terms of conversion to EBITDA. When you build games, at least upfront with our strategy, we're generating scale. We're investing heavily in the user acquisition.

Now we have cost synergies. And for that, you can just take that TSTV number minus the third-party software reported revenue number, and that was annualized $300 million a year of UA savings that we have because of our integrated solution. But still, we're investing a lot in growing that gaming business because we want the audience.

That software business, every incremental dollar is exceptionally high margin. So the way we look at our business is, if we can grow the software business really quickly, our EBITDA will continue to improve. And that's why when you look at the numbers this quarter, you can take the revenue beat and the EBITDA beat, and you'd notice the dollar-for-dollar revenue beat almost entirely flowed through to EBITDA, and that's because software is performing so well.

Thank you. This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.