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    Applovin Corp (APP)

    Q4 2023 Summary

    Published Jan 15, 2025, 8:21 PM UTC
    Initial Price$40.15October 1, 2023
    Final Price$39.85December 31, 2023
    Price Change$-0.30
    % Change-0.75%

    What went well

    • Rapid Growth Driven by AXON 2 AI Technology: AppLovin's Software Platform business experienced significant growth due to the implementation of their AXON 2 AI platform. From Q2 to Q4, the software business grew by almost 50%, with an approximately 80% flow-through to adjusted EBITDA and 70%+ EBITDA margins. This technology is still in its early stages, suggesting substantial potential for continued expansion and revenue growth.
    • Expansion into Non-Gaming Verticals and New Markets: The company is actively expanding beyond gaming into non-gaming verticals, including Connected TV (CTV) and the carrier/OEM market. These initiatives are starting to contribute to performance, with non-gaming growing faster than gaming. This strategic move is expected to significantly broaden AppLovin's total addressable market and drive further growth. ,
    • Strong Financial Performance and Shareholder Value: AppLovin demonstrated strong financial results with adjusted EBITDA margins of 50% to 51% as guided for Q1 2024. The company also boasts a high free cash flow conversion, exceeding expectations. Committed to returning value to shareholders, AppLovin has authorized a $1.25 billion share repurchase program and plans to continue facilitating buybacks, reflecting confidence in future prospects. ,

    What went wrong

    • AppLovin's expansion into non-gaming verticals is still in early stages and contributes a relatively small portion of revenue, which may cast uncertainty on future growth prospects outside of mobile gaming.
    • Upcoming changes in the mobile advertising landscape, such as the Digital Markets Act, Google's deprecation of Android ID, and iOS 17.4, introduce uncertainty, and the company acknowledges they don't know the exact impact these changes may have on their business.
    • The company does not provide long-term guidance due to difficulties in forecasting the impact of new technologies like AXON 2.0, potentially signaling uncertainty in future performance and making it challenging for investors to gauge sustainable growth.

    Q&A Summary

    1. AXON 2 Outperformance
      Q: Why is AXON 2 outperforming expectations?
      A: AXON 2 is surpassing expectations because it operates at massive scale, reaching over 1 billion daily active users. Historically, monetization in our space has been low compared to social networks and search engines. Our improved technology has become more efficient at monetizing this audience. With AXON 2 making better predictions than its predecessor, it creates efficiency gains for both our business and our partners. This efficiency not only boosts current performance but also expands our reach to other verticals, creating growth opportunities.

    2. Sustainability of Software Margins
      Q: Are the strong Q4 Software segment EBITDA margins sustainable?
      A: Yes, we expect the roughly 80% flow-through to EBITDA in our Software segment to continue as the business grows. As we expand into new verticals, we haven't seen any significant difference in margin profiles between our existing mobile gaming business and non-gaming. Our guidance reflects this, as we're guiding to overall EBITDA margins in the 50% to 51% range.

    3. Guidance and Software Expansion
      Q: Can you explain not providing CY24 guidance while expanding software reach?
      A: We launched AXON 2, our upgraded AI platform, in Q2 last year, and from that point to Q4, our software business grew almost 50%. Given this rapid growth and the early-stage nature of the technology, it's hard to forecast exactly where we'll land. The applications of this technology are much broader than what we do today, and we're continuously improving it. Due to the difficulty in understanding the financial impact of launching such new technology, we don't provide longer-term guidance.

    4. Mobile Market Improvement
      Q: What's driving the improvement in the mobile market?
      A: In Q4, we saw CPM growth comparing '23 to '22 holiday periods. During '22, the economy was fearful, affecting our sector significantly. In Q4, brands and performance advertisers were more willing to invest in marketing dollars. We believe this improvement is a function of both the economy recovering and AI-driven advancements in marketing technologies, including the efficiency implied by our numbers and performance.

    5. Shift to Real-Time Bidding
      Q: How is the shift to real-time bidding impacting you financially?
      A: The vast majority of the market traded in a programmatic real-time manner throughout Q4. When advertising companies bid in real time, we charge a take rate of 5% on our MAX platform. With the majority of the market moving to real-time bidding, this is a positive economic development for our Software segment. Additionally, real-time bidding clears auctions faster, allowing publishers to show more ads and yielding more ad revenue per user.

    6. Stock Buyback Strategy
      Q: Why didn't you repurchase stock in Q4 despite the buyback authorization?
      A: Our approach is to do directed larger repurchases rather than buy back in the open market. The opportunity didn't present itself in Q4 to do a large buyback from an existing shareholder. We remain committed to buybacks and believe that, given the cash flow we generate, we can continue to return value to shareholders.

    7. Non-Gaming Business Growth
      Q: How is the growth of AXON 2 in non-gaming verticals progressing?
      A: Non-gaming is growing fast, although from a smaller base, so there's more room to grow. We're committed to broadening our platform to non-gaming, including Connected TV and delivering marketing solutions to carriers and OEMs powered by AXON 2. While non-gaming enterprises move slower than gaming due to fixed budgets and longer planning cycles, we're seeing success across various categories and are investing in expanding these verticals.

    8. Connected TV (CTV) Testing
      Q: What's the progress with CTV testing and advertiser adoption?
      A: CTV testing and rollout are in the early stages. Advertisers are intrigued because traditionally they can't buy on a performance basis in Connected TV the way we can enable today. While there's excitement about recruiting on a new device, it will take multiple years for this initiative to make a significant impact given the scale of our existing business.

    9. Competitive Landscape
      Q: Are you seeing any shifts in the competitive landscape?
      A: We've been a strong independent leader in the sector since going public, and nothing has changed there. As our technology has become more efficient, we're driving more value to advertisers. The industry isn't zero-sum; when we provide more value, advertisers expand their budgets rather than shifting them from others.

    10. Regulatory Changes Impact
      Q: How will upcoming regulatory changes affect your business?
      A: It's hard to predict the exact impact of changes like DMA, Google Android ID deprecation, or iOS 17.4 because we don't know the dates or specifics. However, we're confident we'll navigate any changes due to our entrepreneurial and nimble approach. We run a more contextual behavioral model and don't interface as much with sensitive user data, putting us in a better starting position compared to others.

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