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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2023
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-40325
AppLovin Corporation
(Exact name of registrant as specified in its charter)
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Delaware |
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45-3264542 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
1100 Page Mill Road
Palo Alto, California 94304
(Address of registrant’s principal executive offices, including zip code)
(800) 839-9646
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
Class A common stock, par value $0.00003 per share |
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APP |
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The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 2, 2023, the number of shares of the registrant’s Class A common stock outstanding was 264,638,950 and the number of shares of the registrant’s Class B common stock outstanding was 71,162,622.
Table of Contents
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include statements about:
•our future financial performance, including our expectations regarding our revenue, cost of revenue, and operating expenses, and our ability to achieve or maintain future profitability;
•the sufficiency of our cash and cash equivalents to meet our liquidity needs;
•the demand for our AppLovin Software Platform and AppLovin Apps;
•our ability to attract and retain clients and users;
•our ability to develop new products, features, and enhancements for our AppLovin Core Technologies and AppLovin Software Platform and to launch or acquire new AppLovin Apps and successfully monetize them;
•our ability to compete with existing and new competitors in existing and new markets and offerings;
•our ability to successfully acquire and integrate companies and assets and to expand and diversify our operations through strategic acquisitions and partnerships;
•our ability to maintain the security and availability of our AppLovin Core Technologies, AppLovin Software Platform, and AppLovin Apps;
•our expectations regarding the effects of existing and developing laws and regulations, including with respect to taxation and privacy and data protection;
•our ability to manage risk associated with our business;
•our expectations regarding new and evolving markets;
•our ability to develop and protect our brand;
•our expectations and management of future growth;
•our expectations concerning relationships with third parties;
•our ability to attract and retain employees and key personnel;
•our expectations regarding our share repurchase program;
•our expectations regarding the macroeconomic environment, including rising inflation and interest rates, uncertainty in the global banking and financial services markets, the war in Ukraine and the crisis in the Middle East; and
•our ability to maintain, protect and enhance our intellectual property.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors, including those described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
Neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. Moreover, the forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, partnerships, mergers, dispositions, joint ventures, or investments we may make.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
PART I – FINANCIAL INFORMATION (UNAUDITED)
Item 1. Condensed Consolidated Financial Statements
AppLovin Corporation
Condensed Consolidated Balance Sheets
(in thousands, except for share and per share data)
(unaudited)
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September 30, 2023 |
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December 31, 2022 |
Assets |
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Current assets: |
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Cash and cash equivalents |
$ |
332,491 |
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$ |
1,080,484 |
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Accounts receivable, net |
849,140 |
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702,814 |
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Prepaid expenses and other current assets |
119,161 |
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155,785 |
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Total current assets |
1,300,792 |
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1,939,083 |
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Property and equipment, net |
102,156 |
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78,543 |
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Operating lease right-of-use assets |
52,998 |
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60,379 |
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Goodwill |
1,813,567 |
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1,823,755 |
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Intangible assets, net |
1,386,591 |
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1,677,660 |
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Other assets |
349,124 |
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268,426 |
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Total assets |
$ |
5,005,228 |
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$ |
5,847,846 |
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Liabilities and stockholders’ equity |
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Current liabilities: |
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Accounts payable |
$ |
281,103 |
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$ |
273,196 |
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Accrued and other current liabilities |
181,679 |
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147,801 |
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Licensed asset obligation |
13,389 |
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15,254 |
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Short-term debt |
215,000 |
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33,310 |
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Deferred revenue |
77,899 |
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64,018 |
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Operating lease liabilities |
13,800 |
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14,334 |
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Deferred acquisition costs, current |
22,604 |
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31,045 |
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Total current liabilities |
805,474 |
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578,958 |
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Long-term debt |
2,912,302 |
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3,178,412 |
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Operating lease liabilities, non-current |
46,887 |
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54,153 |
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Licensed asset obligation, non-current |
11,794 |
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26,970 |
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Other non-current liabilities |
132,981 |
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106,676 |
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Total liabilities |
3,909,438 |
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3,945,169 |
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Commitments and contingencies (Note 4) |
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Stockholders’ equity: |
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Preferred stock, $0.00003 par value—100,000,000 shares authorized, no shares issued and outstanding as of September 30, 2023 and December 31, 2022 |
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— |
|
Class A and Class B Common Stock, $0.00003 par value—1,700,000,000 (Class A 1,500,000,000 and Class B 200,000,000) shares authorized, 335,783,928 (Class A 264,621,306 and Class B 71,162,622) and 373,873,683 (Class A 302,711,061 and Class B 71,162,622) shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively |
11 |
|
|
11 |
|
Additional paid-in capital |
2,174,658 |
|
|
3,155,748 |
|
Accumulated other comprehensive loss |
(93,657) |
|
|
(83,382) |
|
Accumulated deficit |
(985,222) |
|
|
(1,169,700) |
|
Total stockholders’ equity |
1,095,790 |
|
|
1,902,677 |
|
Total liabilities and stockholders’ equity |
$ |
5,005,228 |
|
|
$ |
5,847,846 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AppLovin Corporation
Condensed Consolidated Statements of Operations
(in thousands, except for per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
2023 |
|
2022 |
|
2023 |
|
2022 |
Revenue |
$ |
864,256 |
|
|
$ |
713,099 |
|
|
$ |
2,329,826 |
|
|
$ |
2,114,751 |
|
Costs and expenses: |
|
|
|
|
|
|
|
Cost of revenue |
265,049 |
|
|
300,988 |
|
|
785,584 |
|
|
886,697 |
|
Sales and marketing |
212,352 |
|
|
196,785 |
|
|
607,755 |
|
|
719,014 |
|
Research and development |
159,288 |
|
|
122,059 |
|
|
441,563 |
|
|
389,417 |
|
General and administrative |
41,249 |
|
|
44,000 |
|
|
116,231 |
|
|
144,988 |
|
Total costs and expenses |
677,938 |
|
|
663,832 |
|
|
1,951,133 |
|
|
2,140,116 |
|
Income (loss) from operations |
186,318 |
|
|
49,267 |
|
|
378,693 |
|
|
(25,365) |
|
Other income (expense): |
|
|
|
|
|
|
|
Interest expense and loss on settlement of debt |
(78,583) |
|
|
(48,627) |
|
|
(204,081) |
|
|
(117,141) |
|
Interest income and other, net |
1,490 |
|
|
969 |
|
|
27,062 |
|
|
3,501 |
|
Total other expense, net |
(77,093) |
|
|
(47,658) |
|
|
(177,019) |
|
|
(113,640) |
|
Income (loss) before income taxes |
109,225 |
|
|
1,609 |
|
|
201,674 |
|
|
(139,005) |
|
Provision for (benefit from) income taxes |
586 |
|
|
(22,053) |
|
|
17,196 |
|
|
(25,570) |
|
Net income (loss) |
108,639 |
|
|
23,662 |
|
|
184,478 |
|
|
(113,435) |
|
Less: Net loss attributable to noncontrolling interest |
— |
|
|
(109) |
|
|
— |
|
|
(201) |
|
Net income (loss) attributable to AppLovin |
$ |
108,639 |
|
|
$ |
23,771 |
|
|
$ |
184,478 |
|
|
$ |
(113,234) |
|
Less: Net income attributable to participating securities |
$ |
804 |
|
|
$ |
122 |
|
|
$ |
963 |
|
|
$ |
— |
|
Net income (loss) attributable to AppLovin common stockholders: |
|
|
|
|
|
|
|
Basic |
$ |
107,835 |
|
|
$ |
23,649 |
|
|
$ |
183,515 |
|
|
$ |
(113,234) |
|
Diluted |
$ |
107,869 |
|
|
$ |
23,653 |
|
|
$ |
183,545 |
|
|
$ |
(113,234) |
|
Net income (loss) per share attributable to AppLovin common stockholders: |
|
|
|
|
|
|
|
Basic |
$ |
0.32 |
|
|
$ |
0.06 |
|
|
$ |
0.51 |
|
|
$ |
(0.30) |
|
Diluted |
$ |
0.30 |
|
|
$ |
0.06 |
|
|
$ |
0.50 |
|
|
$ |
(0.30) |
|
Weighted average common shares used to compute net income (loss) per share attributable to AppLovin common stockholders: |
|
|
|
|
|
|
|
Basic |
341,435,759 |
|
|
369,389,170 |
|
|
357,009,609 |
|
|
371,736,763 |
|
Diluted |
356,906,222 |
|
|
378,462,207 |
|
|
368,259,513 |
|
|
371,736,763 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AppLovin Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
2023 |
|
2022 |
|
2023 |
|
2022 |
Net income (loss) |
$ |
108,639 |
|
|
$ |
23,662 |
|
|
$ |
184,478 |
|
|
$ |
(113,435) |
|
Other comprehensive loss: |
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of tax |
(17,127) |
|
|
(11,794) |
|
|
(10,275) |
|
|
(94,691) |
|
Total other comprehensive loss, net of tax |
(17,127) |
|
|
(11,794) |
|
|
(10,275) |
|
|
(94,691) |
|
Comprehensive income (loss) including noncontrolling interest |
91,512 |
|
|
11,868 |
|
|
174,203 |
|
|
(208,126) |
|
Less: Comprehensive loss attributable to noncontrolling interest |
— |
|
|
(109) |
|
|
— |
|
|
(201) |
|
Comprehensive income (loss) attributable to AppLovin |
$ |
91,512 |
|
|
$ |
11,977 |
|
|
$ |
174,203 |
|
|
$ |
(207,925) |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AppLovin Corporation
Condensed Consolidated Statements of Redeemable Noncontrolling Interest and Stockholders’ Equity
(in thousands, except share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable Noncontrolling Interest |
|
Class A and Class B Common Stock |
|
Additional Paid-In Capital |
|
Accumulated Other Comprehensive Income (Loss) |
|
Accumulated Deficit |
|
Total Stockholders’ Equity |
|
Shares |
|
Par Value |
|
Balance as of December 31, 2022 |
$ |
— |
|
|
373,873,683 |
|
|
$ |
11 |
|
|
$ |
3,155,748 |
|
|
$ |
(83,382) |
|
|
$ |
(1,169,700) |
|
|
$ |
1,902,677 |
|
Stock issued in connection with equity awards |
— |
|
|
4,061,015 |
|
|
— |
|
|
2,974 |
|
|
— |
|
|
— |
|
|
2,974 |
|
Shares withheld related to net share settlement |
— |
|
|
(1,281,849) |
|
|
— |
|
|
(19,167) |
|
|
— |
|
|
— |
|
|
(19,167) |
|
Repurchase of Class A common stock |
— |
|
|
(5,396,617) |
|
|
— |
|
|
(76,358) |
|
|
— |
|
|
— |
|
|
(76,358) |
|
Stock-based compensation |
— |
|
|
— |
|
|
— |
|
|
82,966 |
|
|
— |
|
|
— |
|
|
82,966 |
|
Total other comprehensive income, net of tax |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
10,006 |
|
|
— |
|
|
10,006 |
|
Net loss |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(4,518) |
|
|
(4,518) |
|
Balance as of March 31, 2023 |
$ |
— |
|
|
371,256,232 |
|
|
$ |
11 |
|
|
$ |
3,146,163 |
|
|
$ |
(73,376) |
|
|
$ |
(1,174,218) |
|
|
$ |
1,898,580 |
|
Stock issued in connection with equity awards |
— |
|
|
4,053,303 |
|
|
— |
|
|
3,677 |
|
|
— |
|
|
— |
|
|
3,677 |
|
Shares withheld related to net share settlement |
— |
|
|
(1,503,757) |
|
|
— |
|
|
(37,436) |
|
|
— |
|
|
— |
|
|
(37,436) |
|
Repurchase of Class A common stock |
— |
|
|
(25,483,835) |
|
|
— |
|
|
(503,448) |
|
|
— |
|
|
— |
|
|
(503,448) |
|
Issuance of Class A common stock under employee stock purchase plan |
— |
|
|
174,670 |
|
|
— |
|
|
2,071 |
|
|
— |
|
|
— |
|
|
2,071 |
|
Stock-based compensation |
— |
|
|
— |
|
|
— |
|
|
76,753 |
|
|
— |
|
|
— |
|
|
76,753 |
|
Total other comprehensive loss, net of tax |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(3,154) |
|
|
— |
|
|
(3,154) |
|
Net income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
80,357 |
|
|
80,357 |
|
Balance as of June 30, 2023 |
$ |
— |
|
|
348,496,613 |
|
|
$ |
11 |
|
|
$ |
2,687,780 |
|
|
$ |
(76,530) |
|
|
$ |
(1,093,861) |
|
|
$ |
1,517,400 |
|
Stock issued in connection with equity awards |
— |
|
|
4,621,926 |
|
|
— |
|
|
11,319 |
|
|
— |
|
|
— |
|
|
11,319 |
|
Shares withheld related to net share settlement |
— |
|
|
(1,549,778) |
|
|
— |
|
|
(59,243) |
|
|
— |
|
|
— |
|
|
(59,243) |
|
Repurchase of Class A common stock |
— |
|
|
(15,784,833) |
|
|
— |
|
|
(573,787) |
|
|
— |
|
|
— |
|
|
(573,787) |
|
Stock-based compensation |
— |
|
|
— |
|
|
— |
|
|
108,589 |
|
|
— |
|
|
— |
|
|
108,589 |
|
Total other comprehensive loss, net of tax |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(17,127) |
|
|
— |
|
|
(17,127) |
|
Net income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
108,639 |
|
|
108,639 |
|
Balance as of September 30, 2023 |
$ |
— |
|
|
335,783,928 |
|
|
$ |
11 |
|
|
$ |
2,174,658 |
|
|
$ |
(93,657) |
|
|
$ |
(985,222) |
|
|
$ |
1,095,790 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AppLovin Corporation
Condensed Consolidated Statements of Redeemable Noncontrolling Interest and Stockholders’ Equity
(in thousands, except share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable Noncontrolling Interest |
|
Class A and Class B Common Stock |
|
Additional Paid-In Capital |
|
Accumulated Other Comprehensive Loss |
|
Accumulated Deficit |
|
Total Stockholders’ Equity |
|
|
Shares |
|
Par Value |
|
|
|
|
Balance as of December 31, 2021 |
$ |
201 |
|
|
375,089,360 |
|
|
$ |
11 |
|
|
$ |
3,160,487 |
|
|
$ |
(45,454) |
|
|
$ |
(976,954) |
|
|
$ |
2,138,090 |
|
Stock issued in connection with equity awards |
— |
|
|
1,179,554 |
|
|
— |
|
|
6,541 |
|
|
— |
|
|
— |
|
|
6,541 |
|
Shares withheld related to net share settlement |
— |
|
|
(89,319) |
|
|
— |
|
|
(4,227) |
|
|
— |
|
|
— |
|
|
(4,227) |
|
Repurchase of Class A common stock |
— |
|
|
(893,556) |
|
|
— |
|
|
(43,697) |
|
|
— |
|
|
— |
|
|
(43,697) |
|
Stock-based compensation |
— |
|
|
— |
|
|
— |
|
|
44,377 |
|
|
— |
|
|
— |
|
|
44,377 |
|
Total other comprehensive loss, net of tax |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(13,532) |
|
|
— |
|
|
(13,532) |
|
Net loss |
(41) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(115,257) |
|
|
(115,257) |
|
Balance as of March 31, 2022 |
$ |
160 |
|
|
375,286,039 |
|
|
$ |
11 |
|
|
$ |
3,163,481 |
|
|
$ |
(58,986) |
|
|
$ |
(1,092,211) |
|
|
$ |
2,012,295 |
|
Stock issued in connection with equity awards |
— |
|
|
1,194,805 |
|
|
— |
|
|
8,267 |
|
|
— |
|
|
— |
|
|
8,267 |
|
Shares withheld related to net share settlement |
— |
|
|
(234,412) |
|
|
— |
|
|
(9,384) |
|
|
— |
|
|
— |
|
|
(9,384) |
|
Repurchase of Class A common stock |
— |
|
|
(5,749,856) |
|
|
— |
|
|
(210,830) |
|
|
— |
|
|
— |
|
|
(210,830) |
|
Issuance of Class A common stock in connection with acquisitions |
— |
|
|
2,579,692 |
|
|
— |
|
|
137,422 |
|
|
— |
|
|
— |
|
|
137,422 |
|
Issuance of Class A common stock under employee stock purchase plan |
— |
|
|
107,781 |
|
|
— |
|
|
3,663 |
|
|
— |
|
|
— |
|
|
3,663 |
|
Stock-based compensation |
— |
|
|
— |
|
|
— |
|
|
56,855 |
|
|
— |
|
|
— |
|
|
56,855 |
|
Total other comprehensive loss, net of tax |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(69,365) |
|
|
— |
|
|
(69,365) |
|
Net loss |
(51) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(21,748) |
|
|
(21,748) |
|
Balance as of June 30, 2022 |
$ |
109 |
|
|
373,184,049 |
|
|
$ |
11 |
|
|
$ |
3,149,474 |
|
|
$ |
(128,351) |
|
|
$ |
(1,113,959) |
|
|
$ |
1,907,175 |
|
Stock issued in connection with equity awards |
— |
|
|
1,360,814 |
|
|
— |
|
|
6,293 |
|
|
— |
|
|
— |
|
|
6,293 |
|
Shares withheld related to net share settlement |
— |
|
|
(149,015) |
|
|
— |
|
|
(3,996) |
|
|
— |
|
|
— |
|
|
(3,996) |
|
Repurchase of Class A common stock |
— |
|
|
(2,746,270) |
|
|
— |
|
|
(84,353) |
|
|
— |
|
|
— |
|
|
(84,353) |
|
Stock-based compensation |
— |
|
|
— |
|
|
— |
|
|
44,806 |
|
|
— |
|
|
— |
|
|
44,806 |
|
Total other comprehensive loss, net of tax |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(11,794) |
|
|
— |
|
|
(11,794) |
|
Net income |
(109) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
23,771 |
|
|
23,771 |
|
Balance of September 30, 2022 |
$ |
— |
|
|
371,649,578 |
|
|
$ |
11 |
|
|
$ |
3,112,224 |
|
|
$ |
(140,145) |
|
|
$ |
(1,090,188) |
|
|
$ |
1,881,902 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AppLovin Corporation
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
2023 |
|
2022 |
Operating Activities |
|
|
|
Net income (loss) |
$ |
184,478 |
|
|
$ |
(113,435) |
|
Adjustments to reconcile net income (loss) to operating activities: |
|
|
|
Amortization, depreciation and write-offs |
369,897 |
|
|
445,507 |
|
Stock-based compensation |
275,058 |
|
|
143,943 |
|
Change in operating right-of-use asset |
11,732 |
|
|
13,725 |
|
Amortization of debt issuance costs and discount |
9,663 |
|
|
9,685 |
|
Loss on settlement of debt |
4,337 |
|
|
— |
|
Other |
(3,906) |
|
|
2,133 |
|
Changes in operating assets and liabilities, net of effect of acquisitions: |
|
|
|
Accounts receivable |
(146,796) |
|
|
(139,350) |
|
Prepaid expenses and other current assets |
28,695 |
|
|
(70,242) |
|
Other assets |
(58,179) |
|
|
(4,616) |
|
Accounts payable |
7,955 |
|
|
(7,881) |
|
Operating lease liabilities |
(12,253) |
|
|
(15,345) |
|
Accrued and other liabilities |
32,416 |
|
|
(2,645) |
|
Deferred revenue |
14,425 |
|
|
(11,905) |
|
Net cash provided by operating activities |
717,522 |
|
|
249,574 |
|
Investing Activities |
|
|
|
Acquisitions, net of cash acquired |
(51,816) |
|
|
(1,335,698) |
|
Purchase of non-marketable equity securities |
(16,934) |
|
|
(56,546) |
|
Capitalized software development costs |
(6,523) |
|
|
(4,546) |
|
Purchase of property and equipment |
(4,002) |
|
|
(621) |
|
Proceeds from sale of assets |
8,250 |
|
|
3,657 |
|
Net cash used in investing activities |
(71,025) |
|
|
(1,393,754) |
|
Financing Activities |
|
|
|
Repurchases of stock |
(1,153,593) |
|
|
(338,880) |
|
Principal repayments of debt |
(490,494) |
|
|
(17,482) |
|
Payment of withholding taxes related to net share settlement |
(115,846) |
|
|
— |
|
Payments of licensed asset obligation |
(15,254) |
|
|
(17,374) |
|
Principal payments on finance leases |
(16,191) |
|
|
(18,099) |
|
Payments of deferred acquisition costs |
(11,503) |
|
|
(104,998) |
|
Payment of debt issuance cost |
(4,545) |
|
|
— |
|
Proceeds from issuance of debt |
210,281 |
|
|
— |
|
Proceeds from revolving credit facility |
185,000 |
|
|
— |
|
Proceeds from exercise of stock options |
17,807 |
|
|
21,733 |
|
Proceeds from the issuance of common stock under the Employee Stock Purchase Plan |
2,071 |
|
|
3,663 |
|
Net cash used in financing activities |
(1,392,267) |
|
|
(471,437) |
|
Effect of foreign exchange rate on cash and cash equivalents |
(2,223) |
|
|
(11,379) |
|
Net decrease in cash and cash equivalents |
(747,993) |
|
|
(1,626,996) |
|
Cash, cash equivalents and restricted cash equivalents at beginning of the period |
1,080,484 |
|
|
2,570,504 |
|
Cash and cash equivalents at end of the period |
$ |
332,491 |
|
|
$ |
943,508 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AppLovin Corporation
Condensed Consolidated Statements of Cash Flows (continued)
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
2023 |
|
2022 |
Supplemental non-cash investing and financing activities disclosures: |
|
|
|
Right-of-use assets acquired under finance leases |
$ |
40,666 |
|
|
$ |
37,433 |
|
Right-of-use assets acquired under operating leases |
$ |
4,576 |
|
|
$ |
3,400 |
|
Acquisitions not yet paid |
$ |
— |
|
|
$ |
40,791 |
|
Issuance of common stock in connection with acquisitions |
$ |
— |
|
|
$ |
137,422 |
|
Supplemental disclosure of cash flow information: |
|
|
|
Cash paid for interest, net |
$ |
184,600 |
|
|
$ |
107,650 |
|
Cash paid for income taxes, net of refunds |
$ |
12,749 |
|
|
$ |
58,770 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AppLovin Corporation
Notes to the Condensed Consolidated Financial Statements
(unaudited)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
AppLovin Corporation (the “Company” or “AppLovin”) was incorporated in the state of Delaware on July 18, 2011. The Company is a leader in the mobile app industry with a focus on building a software-based platform for mobile app developers to improve the marketing and monetization of their apps. The Company also has a globally diversified portfolio of apps—free-to-play mobile games that it operates through its own or partner studios.
The Company is headquartered in Palo Alto, California, and has several operating locations in the U.S. as well as various international office locations in North America, Asia, and Europe.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, the unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2023. The condensed consolidated balance sheet data as of December 31, 2022 was derived from the audited consolidated financial statements at that date but does not include all disclosures required by GAAP. The accompanying unaudited condensed consolidated financial statements reflect all normal and recurring adjustments, that are, in the opinion of management, necessary for the fair presentation of the Company’s financial position, results of operations, cash flows and stockholders’ equity for the interim periods presented. The results of operations for the three and nine months ended September 30, 2023 shown in this report are not necessarily indicative of the results to be expected for the full year ending December 31, 2023 or any other period.
Basis of Consolidation
The Company's condensed consolidated financial statements include accounts and operations of the Company and the entities in which the Company has a controlling financial interest. The typical condition for a controlling financial interest ownership is holding a majority of the voting interests of an entity; however, a controlling financial interest may also exist in variable interest entities ("VIE"), through arrangements that do not involve controlling voting interests. ASC 810 requires a variable interest holder to consolidate a VIE if it has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and has the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company does not consolidate a VIE when the Company is not deemed the primary beneficiary. The Company evaluates its relationships with all VIEs on an ongoing basis. All intercompany transactions and balances have been eliminated upon consolidation.
Use of Estimates
The preparation of the Company's condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes. The Company bases its estimates on assumptions, both historical and forward-looking, that are believed to be reasonable. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to fair values of intangible assets and goodwill, useful lives of intangible assets and property and equipment, expected period of consumption of virtual goods, expected life of paying users, income and indirect taxes, contingent liabilities, evaluation of recoverability of intangible assets and long-lived assets, goodwill impairment, and fair value of derivatives and other financial instruments. These estimates are inherently subject to judgment and actual results could differ materially from those estimates.
Recent Accounting Pronouncements (Issued and Adopted)
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The ASU clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.
The ASU also clarifies that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction and requires specific disclosures for equity securities subject to contractual sale restrictions. The Company adopted this ASU on January 1, 2023 with no material impact on its condensed consolidated financial statements.
2. Revenue
Revenue from Contracts with Customers
The Company generates Software Platform and Apps revenue. Software Platform revenue is generated primarily from fees collected from advertisers and advertising networks who use the Software Platform. Apps revenue consists of in-app purchase ("IAP") revenue generated from in-app purchases made by users within the Company’s apps (“Apps”), and in-app advertising ("IAA") revenue generated from advertisers that purchase ad inventory from Apps.
Software Platform Revenue
The vast majority of the Software Platform Revenue is generated through AppDiscovery and MAX, which provide the technology to match advertisers and owners of digital advertising inventory (“Publishers”) via auctions at large scale and microsecond-level speeds. The terms for all mobile advertising arrangements are governed by the Company’s terms and conditions and generally stipulate payment terms of 30 days subsequent to the end of the month. Substantially all of the Company's contracts with customers are fully cancellable at any time or upon short notice.
Software Platform Revenue is generated by placing ads on mobile applications owned by Publishers. The Company’s performance obligation is to provide customers with access to the Software Platform, which facilitates the advertiser’s purchase of ad inventory from Publishers. The Company does not control the ad inventory prior to its transfer to the advertiser, because the Company does not have the substantive ability to direct the use of nor obtain substantially all of the remaining benefits from the ad inventory. The Company is not primarily responsible for fulfillment and does not have any inventory risk. The Company is an agent as it relates to the sale of third-party advertising inventory and presents revenue on a net basis. The transaction price is the product of either the number of completions of agreed upon actions or advertisements displayed and the contractually agreed upon price per advertising unit with the advertiser less consideration paid or payable to Publishers. The Company recognizes Software Platform Revenue when the agreed upon action is completed or when the ad is displayed to users. The number of advertisements delivered and completions of agreed upon actions is determined at the end of each month, which resolves any uncertainty in the transaction price during the reporting period.
Software Platform Revenue also includes revenue generated by the Company's mobile application tracking and attribution solutions that is recognized ratably over the subscription period, generally up to twelve months.
Apps Revenue
In-App Purchase Revenue
IAP Revenue includes fees collected from users to purchase virtual goods to enhance their gameplay experience. The identified performance obligation is to provide users with the ability to acquire, use, and hold virtual items over the estimated period of time the virtual items are available to the user or until the virtual item is consumed. Payment is required at the time of purchase, and the purchase price is a fixed amount.
Users make IAPs through the Company’s distribution partners. The transaction price is equal to the gross amount charged to users because the Company is the principal in the transaction. IAP fees are non-refundable. Such payments are initially recorded as deferred revenue. The Company categorizes its virtual goods as either consumable or durable. Consumable virtual goods represent goods that can be consumed by a specific player action in gameplay; accordingly, the Company recognizes revenue from the sale of consumable virtual goods as the goods are consumed. Durable virtual goods represent goods that are accessible to the user over an extended period of time; accordingly, the Company recognizes revenue from the sale of durable virtual goods ratably over the period of time the goods are available to the user, which is generally the estimated average user life (“EAUL”).
The EAUL represents the Company’s best estimate of the expected life of paying users for the applicable game. The EAUL begins when a user makes the first purchase of durable virtual goods and ends when a user is determined to be inactive. The Company determines the EAUL on a game-by-game basis. For a newly launched game with limited playing data, the Company determines its EAUL based on the EAUL of a game with sufficiently similar characteristics.
The Company determines the EAUL on a quarterly basis and applies such calculated EAUL to all bookings in the respective quarter. Determining the EAUL is subjective and requires management’s judgment. Future playing patterns may differ from historical playing patterns, and therefore the EAUL may change in the future. The EAULs are generally between five and ten months.
In-App Advertising Revenue
IAA Revenue is generated by selling ad inventory on the Company's Apps to third-party advertisers. Advertisers purchase ad inventory either through the Software Platform or through third-party advertising networks (“Ad Networks”). Revenue from the sale of ad inventory through Ad Networks is recognized net of the amounts retained by Ad Networks as the Company is unable to determine the gross amount paid by the advertisers to Ad Networks. The Company recognizes revenue when the ad is displayed to users.
The Company presents taxes collected from customers and remitted to governmental authorities on a net basis.
Disaggregation of Revenue
The following table presents revenue disaggregated by segment and type (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
2023 |
|
2022 |
|
2023 |
|
2022 |
Software Platform Revenue |
$ |
504,452 |
|
|
$ |
306,592 |
|
|
$ |
1,265,273 |
|
|
$ |
742,972 |
|
In-App Purchase Revenue |
247,309 |
|
|
272,437 |
|
|
732,262 |
|
|
915,177 |
|
In-App Advertising Revenue |
112,495 |
|
|
134,070 |
|
|
332,291 |
|
|
456,602 |
|
Total Apps Revenue |
359,804 |
|
|
406,507 |
|
|
1,064,553 |
|
|
1,371,779 |
|
Total Revenue |
$ |
864,256 |
|
|
$ |
713,099 |
|
|
$ |
2,329,826 |
|
|
$ |
2,114,751 |
|
Revenue disaggregated by geography, based on user location, consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
2023 |
|
2022 |
|
2023 |
|
2022 |
United States |
$ |
500,586 |
|
|
$ |
437,679 |
|
|
$ |
1,393,625 |
|
|
$ |
1,299,624 |
|
Rest of the World |
363,670 |
|
|
275,420 |
|
|
936,201 |
|
|
815,127 |
|
Total Revenue |
$ |
864,256 |
|
|
$ |
713,099 |
|
|
$ |
2,329,826 |
|
|
$ |
2,114,751 |
|
Contract Balances
Contract liabilities consist of deferred revenue related to payments received in advance of the satisfaction of performance obligations. During the three months ended September 30, 2023 and 2022, the Company recognized $48.4 million and $48.4 million of revenue that was included in deferred revenue as of June 30, 2023 and 2022, respectively. During the nine months ended September 30, 2023 and 2022, the Company recognized $62.5 million and $78.1 million of revenue that was included in deferred revenue as of December 31, 2022 and 2021, respectively.
Unsatisfied Performance Obligations
Substantially all of the Company’s unsatisfied performance obligations relate to contracts with an original expected length of one year or less.
Publisher Bonuses
In the first quarter of 2022, the Company paid or promised to pay a total of $209.6 million in bonuses to publishers consisting primarily of non-recurring bonuses to migrate publishers to MAX, the Company's in-app mediation platform. The Company accounted for such publisher bonuses as a reduction to revenue since the publishers receiving such bonuses are also customers of the Company.
3. Financial Instruments and Fair Value Measurements
The following table sets forth the Company’s financial instruments that are measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2023 |
|
|
Balance Sheet Location |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
Money market deposit accounts |
|
Cash and cash equivalents |
|
$ |
1,332 |
|
|
$ |
1,332 |
|
|
$ |
— |
|
|
$ |
— |
|
Interest rate swap |
|
Prepaid expenses and other current assets |
|
$ |
1,606 |
|
|
$ |
— |
|
|
$ |
1,606 |
|
|
$ |
— |
|
Total financial assets |
|
|
|
$ |
2,938 |
|
|
$ |
1,332 |
|
|
$ |
1,606 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2022 |
|
|
Balance Sheet Location |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
Money market funds(1) |
|
Cash and cash equivalents |
|
$ |
604,399 |
|
|
$ |
604,399 |
|
|
$ |
— |
|
|
$ |
— |
|
Interest rate swaps |
|
Prepaid expenses and other current assets |
|
$ |
7,319 |
|
|
$ |
— |
|
|
$ |
7,319 |
|
|
$ |
— |
|
Total financial assets |
|
|
|
$ |
611,718 |
|
|
$ |
604,399 |
|
|
$ |
7,319 |
|
|
$ |
— |
|
(1) Includes balances in money market deposit accounts of $524.2 million as of December 31, 2022.
Derivatives Not Designated as Hedging Instruments
In October 2022 and March 2023, the Company entered into multiple pay-fixed receive-variable interest rate swaps as part of its interest rate risk management strategy in connection with the term loans under a certain credit agreement, which was originally entered in August 2018 and has been subsequently amended multiple times. The Company elected to not designate the interest rate swaps as hedging instruments for accounting purposes and recorded both realized and unrealized gains and losses associated with the interest rate swaps immediately through earnings in interest expense in the Company's condensed consolidated statement of operations. The fair value of the interest rate swaps are determined using widely accepted valuation techniques including discounted cash flow analysis based on the expected cash flows of the interest rate swaps. The Company has determined that the significant inputs, such as interest yield curve and discount rate, used to value its interest rate swaps fall within Level 2 of the fair value hierarchy. In June 2023, the Company settled the March 2023 interest rate swaps with the counterparties and received $12.2 million in cash. The net cash proceeds received from the settlement of the interest rate swaps and net interest paid or received are presented in net cash provided by operating activities and the supplemental disclosure of cash paid for interest, net in the Company's condensed consolidated statement of cash flows.
As of September 30, 2023, the remaining interest rate swap had a notional amount of $1.7 billion and matures on October 31, 2023. In relation to these interest rate swaps, the Company recorded a net gain of $15.8 million during the nine months ended September 30, 2023. The net gain was not material for the three months ended September 30, 2023.
Non-Marketable Equity Securities Measured at Net Asset Value
The Company held equity interests in certain private equity funds of $54.2 million and $32.3 million as of September 30, 2023 and December 31, 2022, respectively, which are measured using the net asset value practical expedient. Under the net asset value practical expedient, the Company records investments based on the proportionate share of the underlying funds’ net asset value as of the Company's reporting date. These investments are included in other assets in the Company’s condensed consolidated balance sheets.
These funds vary in investment strategies and generally have an initial term of 7 to 10 years, which may be extended for 2 to 3 additional years with the applicable approval. These investments are subject to certain restrictions regarding transfers and withdrawals and generally cannot be redeemed with the funds. Distributions from the funds will be received as the underlying investments are liquidated. The Company’s maximum exposure to loss is limited to the carrying value of these investments of $54.2 million and the unfunded commitments of $41.1 million as of September 30, 2023.
During the three and nine months ended September 30, 2023, the Company made total capital contributions of $0.1 million and $16.9 million related to these investments. The unrealized gains related to these investments were $2.3 million and $7.3 million, for the three and nine months ended September 30, 2023, respectively. The unrealized gains and losses were not material for the three and nine months ended September 30, 2022.
Non-Marketable Equity Securities Measured at Fair Value on a Non-Recurring Basis
In the second quarter of 2022, the Company purchased certain non-marketable equity securities for total proceeds of $38.0 million. Non-marketable equity securities are investments in privately held companies without readily determinable fair values. The Company elected the measurement alternative to account for these investments. Under the measurement alternative, the carrying value of the non-marketable equity securities are adjusted based on price changes from observable transactions of identical or similar securities of the same issuer or for impairment. Any changes in carrying value are recorded within interest income and other, net in the Company's condensed consolidated statement of operations. During the first quarter of 2023, the Company recorded an impairment charge of $5.0 million related to one of these investments. As of September 30, 2023, the carrying amount of these investments was $33.0 million, which was included in other assets in the Company’s condensed consolidated balance sheets.
4. Commitments and Contingencies
Commitments
As of September 30, 2023, the Company's non-cancelable minimum purchase commitments consisted primarily of a certain arrangement related to cloud platform services. In May 2022, the Company entered into a new order form under an existing master agreement that required the Company to purchase at least $550.0 million of cloud services through May 2025. During the nine months ended September 30, 2023, the Company made payments of $167.2 million under this arrangement, with $285.7 million of this commitment unpaid as of September 30, 2023. In addition, the Company had total unfunded commitments of $41.1 million related to investments in certain private equity funds. For additional information see Note 3 – Financial Instruments and Fair Value Measurements.
Contingencies
From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated.
Letters of Credit
As of September 30, 2023, the Company had outstanding letters of credit in the aggregate amount of $6.3 million, which were issued as security for certain leased office facilities under the Credit Agreement. These letters of credit have never been drawn upon.
Legal Proceedings
The Company is involved from time to time in litigation, claims, and proceedings. The outcomes of the Company’s legal proceedings are inherently unpredictable and subject to significant uncertainty.
The Company records a liability when it is probable that a loss has been incurred and the amount can be reasonably estimated. If it is determined that a loss is reasonably possible and the loss or range of loss can be estimated, the reasonably possible loss is disclosed. The Company evaluates developments in legal matters that could affect the amount of liability that has been previously accrued, and related reasonably possible losses disclosed, and makes adjustments as appropriate. Significant judgment is required to determine the likelihood of matters and the estimated amount of a loss related to such matters. To date, losses in connection with legal proceedings have not been material.
The Company expenses legal fees in the period in which they are incurred.
Indemnifications
The Company enters into indemnification provisions under agreements with other parties in the ordinary course of business, including certain customers, business partners, investors, contractors and the Company’s officers, directors and certain employees. It is not possible to determine the maximum potential loss under these indemnification provisions due to the Company’s limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision. To date, losses recorded in the Company’s condensed consolidated statements of operations in connection with the indemnification provisions have not been material. As of September 30, 2023, the Company did not have any material indemnification claims that were probable or reasonably possible.
Non-income Taxes
The Company may be subject to audit by various tax authorities with regard to non-income tax matters. The subject matter of non-income tax audits primarily arises from different interpretations on tax treatment and tax rates applied. The Company accrues liabilities for non-income taxes that may result from examinations by, or any negotiated agreements with, these tax authorities when a loss is probable and reasonably estimable. If a loss is reasonably possible and the loss or range of loss can be estimated, the Company discloses the reasonably possible loss.
5. Acquisitions and Dispositions
2023 Acquisitions
During the three and nine months ended September 30, 2023, the Company recognized total earn-out costs of $9.2 million and $52.2 million, respectively, related to asset acquisitions closed in 2021 and prior. No other acquisitions were completed during the three and nine months ended September 30, 2023.
2022 Acquisitions
Business Combinations
MoPub—On January 1, 2022, the Company completed its acquisition from Twitter, Inc. of certain assets that comprised its MoPub business for a total purchase price of $1.03 billion in cash. The acquisition allowed the Company to integrate certain product features of the MoPub platform into MAX, the Company's in-app mediation platform, and migrate publishers and demand partners from the MoPub platform to MAX. The Company accounted for the acquisition as a business combination. Transaction costs incurred by the Company in connection with the acquisition, including professional fees, were $14.4 million.
The following table summarizes the allocation of the purchase consideration to the fair value of the assets acquired (in thousands):
|
|
|
|
|
|
Intangible assets |
|
Advertiser Relationships—estimated useful life of 9 years |
$ |
212,700 |
|
Publisher Relationships—estimated useful life of 9 years |
123,300 |
|
Developed Technology—estimated useful life of 5 years |
61,800 |
|
Tradename—estimated useful life of 3 months |
60 |
|
Goodwill |
632,472 |
|
Total purchase consideration |
$ |
1,030,332 |
|
The income approach was used to determine the fair value of the advertiser relationships, publisher relationships, developed technology and tradename. Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired at the acquisition date and is primarily attributable to the assembled workforce and expected synergies at the time of the acquisition. For tax purposes, a tax deductible goodwill of $645.1 million was generated as a result of this acquisition. No liabilities were assumed in the transaction.
Contemporaneously with the signing of the asset purchase agreement, the Company entered into an agreement for Twitter, Inc. to provide certain transitional services to facilitate the migration of publishers and demand partners to MAX during a three-month transitional period following the closing of the transaction (the "TSA"). The Company accounted for the TSA as a transaction separate from the business combination since it was negotiated primarily for the benefit of the Company. During the first quarter of 2022, the Company recognized total expense of $7.0 million related to the transitional services, which was included primarily in cost of revenue in the Company's condensed consolidated statement of operations.
Due to the significant integration of the MoPub business with MAX, it was impractical to determine the impact of the acquired business on revenue or earnings.
Wurl—On April 1, 2022, the Company completed its acquisition of all of the equity interests of Wurl, Inc. ("Wurl"), a connected TV (CTV) software platform company, for a total purchase price of $378.2 million, consisting of $219.3 million in cash, 2,579,692 shares of the Company's Class A common stock valued at $137.4 million and a deferred payment of $22.7 million, with a present value of $21.5 million at the closing of the acquisition, relating to an indemnity holdback amount to be paid in 18 months following the transaction close date, less any eligible claims against Wurl paid by AppLovin.
The transaction allowed the Company to expand into the connected TV market. The Company accounted for the acquisition as a business combination. Transaction costs incurred by the Company in connection with the acquisition, including professional fees, were $1.9 million.
The following table summarizes the allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
|
Cash and cash equivalents |
$ |
400 |
|
Accounts receivable and other current assets |
15,194 |
|
Intangible assets |
— |
|
Customer Relationships—estimated useful life of 15 years |
41,000 |
|
Developed Technology—estimated useful life of 6 years |
60,500 |
|
Tradename—estimated useful life of 10 years |
14,700 |
|
Goodwill |
264,149 |
|
Property and equipment, net |
363 |
|
Other assets |
159 |
|
Accounts payable, accrued liabilities and other current liabilities |
(12,854) |
|
Deferred revenue |
(209) |
|
Deferred income tax liability |
(5,235) |
|
Total purchase consideration |
$ |
378,167 |
|
The income approach was used to determine the fair value of the customer relationships, developed technology, and tradename. Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed at the acquisition date and is primarily attributable to the assembled workforce and expected synergies at the time of the acquisition. For tax purposes, no tax deductible goodwill was generated as a result of this acquisition.
Contemporaneously with entering into the definitive agreement, the Company also adopted a multi-year performance-based incentive plan for certain key employees of Wurl, under which the key employees may earn up to a total of $600.0 million in additional shares of the Company's Class A common stock through 2025, contingent upon the achievement of certain revenue and other performance targets by the acquired business and the continued employment of such key employees between 2023 and 2025. In April 2023, the Company amended the multi-year performance-based incentive plan into a one-year plan for 2023, under which the Company may be obligated to issue up to a total of $90.0 million in additional shares of the Company's Class A common stock, contingent upon Wurl’s achievement of certain revenue and other performance targets and the continued employment of the key employees.
The Company’s condensed consolidated statement of operations for nine months ended September 30, 2022 includes Wurl's revenue of $22.7 million and pre-tax loss of $8.7 million for the period from the acquisition date of April 1, 2022 to September 30, 2022.
The unaudited supplemental pro forma information below presents the combined historical results of operations of the Company, the MoPub business and Wurl, as if they had been acquired as of January 1, 2021 (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2022 |
Nine Months Ended September 30, 2022 |
|
Revenue |
$ |
713,099 |
|
$ |
2,123,783 |
|
Net income (loss) |
$ |
23,662 |
|
$ |
(104,775) |
|
The unaudited supplemental pro forma information above includes the following adjustments to net loss in the appropriate pro forma periods (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2022 |
Nine Months Ended September 30, 2022 |
|
An (increase) in amortization expense related to the fair value of acquired identifiable intangible assets, net of the amortization expense already reflected in actual historical results |
$ |
— |
|
$ |
(3,512) |
|
A decrease in expenses related to the TSA |
$ |
— |
|
$ |
7,000 |
|
An (increase) due to replacement stock awards |
$ |
— |
|
$ |
(1,221) |
|
A decrease in expenses related to transaction costs |
$ |
— |
|
$ |
16,899 |
|
A decrease in expenses related to transaction bonuses |
$ |
— |
|
$ |
1,101 |
|
An (increase) in income tax provision |
$ |
— |
|
$ |
(4,625) |
|
Asset Acquisitions
During the three and nine months ended September 30, 2022, the Company recognized total earn-out costs of $23.2 million and $98.7 million, respectively, related to asset acquisitions closed in 2021 and prior. No other asset acquisitions were completed during the three and nine months ended September 30, 2022.
Assets Held for Sale
As of September 30, 2022, the Company classified certain assets within the Apps segment as assets held for sale and recorded an impairment charge of $27.7 million in cost of revenue in the condensed consolidated statements of operations for the three and nine months ended September 30, 2022 to measure such assets at fair value less costs to sell. As of September 30, 2022, the carrying value of such assets was immaterial. The sale was subsequently closed in the fourth quarter of 2022. There were no assets classified as held for sale during the nine months ended September 30, 2023.
6. Goodwill and Intangible Assets
The following table presents the changes in the carrying amount of goodwill by reporting unit (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Software Platform |
Apps |
Total |
December 31, 2022 |
$ |
1,478,014 |
|
$ |
345,741 |
|
$ |
1,823,755 |
|
|
|
|
|
Foreign currency translation |
(10,188) |
|
— |
|
(10,188) |
|
September 30, 2023 |
$ |
1,467,826 |
|
$ |
345,741 |
|
$ |
1,813,567 |
|
Intangible assets, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- Average Remaining Useful Life (Years) |
|
As of September 30, 2023 |
|
As of December 31, 2022 |
|
Gross Carrying Value |
Accumulated Amortization |
Net Book Value |
|
Gross Carrying Value |
Accumulated Amortization |
Net Book Value |
|
|
|
Long-lived intangible assets: |
|
|
|
|
|
|
|
|
|
Apps |
3.9 |
|
$ |
1,830,329 |
|
$ |
(1,083,524) |
|
$ |
746,805 |
|
|
$ |
1,790,820 |
|
$ |
(836,375) |
|
$ |
954,445 |
|
Customer relationships |
8.5 |
|
513,182 |
|
(97,174) |
|
416,008 |
|
|
515,084 |
|
(58,881) |
|
456,203 |
|
User base |
2.5 |
|
68,817 |
|
(44,436) |
|
24,381 |
|
|
68,817 |
|
(37,122) |
|
31,695 |
|
License asset |
2.3 |
|
59,207 |
|
(27,478) |
|
31,729 |
|
|
59,207 |
|
(16,901) |
|
42,306 |
|
Developed technology |
3.9 |
|
205,205 |
|
(79,038) |
|
126,167 |
|
|
206,060 |
|
(53,879) |
|
152,181 |
|
Other |
4.5 |
|
60,100 |
|
(18,599) |
|
41,501 |
|
|
53,933 |
|
(13,103) |
|
40,830 |
|
Total long-lived intangible assets |
|
|
2,736,840 |
|
(1,350,249) |
|
1,386,591 |
|
|
2,693,921 |
|
(1,016,261) |
|
1,677,660 |
|
Short-lived intangible assets: |
|
|
|
|
|
|
|
|
|
Apps |
0.3 |
|
47,640 |
|
(47,480) |
|
160 |
|
|
45,791 |
|
(44,838) |
|
953 |
|
Total intangible assets |
|
|
$ |
2,784,480 |
|
$ |
(1,397,729) |
|
$ |
1,386,751 |
|
|
$ |
2,739,712 |
|
$ |
(1,061,099) |
|
$ |
1,678,613 |
|
As of September 30, 2023 and December 31, 2022, short-lived mobile Apps were included in prepaid expenses and other current assets.
The Company recorded amortization expenses related to acquired intangible assets as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
2023 |
|
2022 |
|
2023 |
|
2022 |
Cost of revenue |
$ |
93,398 |
|
|
$ |
111,259 |
|
|
$ |
288,180 |
|
|
$ |
342,115 |
|
Sales and marketing |
16,829 |
|
|
16,619 |
|
|
50,397 |
|
|
49,543 |
|
Total |
$ |
110,227 |
|
|
$ |
127,878 |
|
|
$ |
338,577 |
|
|
$ |
391,658 |
|
7. Equity
In February 2022, the Company's Board authorized the repurchase of up to $750.0 million of the Company’s Class A common stock. Repurchases may be made from time to time through open market purchases or through privately negotiated transactions, subject to market conditions, applicable legal requirements and other relevant factors. Open market repurchases may be structured to occur in accordance with the requirements of Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company may also, from time to time, enter into Rule 10b-5 trading plans, to facilitate repurchases of shares. In May and August 2023, the Company's Board authorized increases to the repurchase program of $296.0 million and $447.6 million, respectively.
The repurchase program does not obligate the Company to acquire any particular amount of Class A common stock, has no expiration date and may be modified, suspended, or terminated at any time at the Company's discretion. The Company retires its Class A common stock upon repurchase, and records any excess of the cost of the repurchased shares over their par value as a reduction to additional paid-in capital, or in the absence of additional paid-in capital, to accumulated deficit. During the nine months ended September 30, 2023 and 2022, the Company repurchased 46,665,285 and 9,042,407 shares of Class A common stock for an aggregate amount, including commissions and fees, of $1,153.6 million and $338.8 million, respectively.
8. Stock-based Compensation
The Company maintains three equity compensation plans that provide for the issuance of shares of its common stock to the Company’s employees, directors, consultants and other service providers: the 2021 Equity Incentive Plan (the "2021 Plan"), the 2021 Partner Studio Incentive Plan, and the 2021 Employee Stock Purchase Plan (the "ESPP").
In March 2023, the Company’s Board of Directors (the "Board"), upon recommendation of the Compensation Committee of the Board (the "Compensation Committee"), granted to each of Adam Foroughi, the Company’s CEO and Chairperson, and Vasily Shikin, the Company’s CTO, 6,902,000 performance-based RSUs (“PSUs”), and delegated authority to Mr. Foroughi to grant up to additional 3,451,000 PSUs to non-executive employees (the "Additional Participants") in consultation with the chair of the Compensation Committee under the 2021 Plan. The PSUs are divided into five equal tranches that are eligible to vest based on the achievement of certain stock price targets (see below), measured based on the minimum closing price of the Company’s Class A common stock over a consecutive 30 trading day period during the five-year performance period beginning on the date of grant, subject to the recipient’s continued employment through the applicable vesting date. In the event of a change in control of the Company during the performance period, any unvested PSUs are eligible to vest a pro-rated amount if the per share transaction price in the change in control is between two stock price targets that have not previously been achieved, subject to the recipient’s continued employment through the date immediately prior to the change in control. PSUs for Mr. Foroughi and Mr. Shikin may continue to vest for up to one year after termination of employment if certain conditions are met. In April 2023, the remaining 3,451,000 PSUs were granted to the Additional Participants.
The following table presents the number of PSUs that are eligible to vest based on the achievement of the respective stock price targets for each of Mr. Foroughi, Mr. Shikin and the Additional Participants (in aggregate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PSUs Eligible to Vest |
Company Stock Price Target |
|
Adam Foroughi |
|
Vasily Shikin |
|
Additional Participants (in aggregate) |
$ |
36.00 |
|
|
1,380,400 |
|
|
1,380,400 |
|
|
690,200 |
|
$ |
46.75 |
|
|
1,380,400 |
|
|
1,380,400 |
|
|
690,200 |
|
$ |
57.50 |
|
|
1,380,400 |
|
|
1,380,400 |
|
|
690,200 |
|
$ |
68.25 |
|
|
1,380,400 |
|
|
1,380,400 |
|
|
690,200 |
|
$ |
79.00 |
|
|
1,380,400 |
|
|
1,380,400 |
|
|
690,200 |
|
|
|
6,902,000 |
|
|
6,902,000 |
|
|
3,451,000 |
|
The weighted-average grant date fair value of the PSUs for Mr. Foroughi, Mr. Shikin and the Additional Participants was $7.60, $6.03, and $8.76 per share, respectively. The Company used a Monte Carlo simulation model to calculate the grant date fair value of the PSUs and the derived service period for each of the five vesting tranches, which is the measure of the expected time to achieve the respective stock price target, as described above. The Monte Carlo simulation model incorporates the likelihood of achieving the stock price targets and requires the input of assumptions including the underlying stock price, expected volatility, expected term, risk-free rate and dividend yield. The Company also applied a discount for lack of marketability to the value of PSUs for employees other than the CEO as the shares issued for these awards are subject to a holding period of approximately one year.
The Company will recognize stock-based compensation expense over the derived service period of each of the five vesting tranches, ranging from 1.7 to 3.1 years, using the accelerated attribution method. If the stock price targets are met sooner than the derived service period, the Company will adjust its stock-based compensation expense to reflect the cumulative expense associated with the vested awards. Subject to continued employment of the recipients, the Company will recognize stock-based compensation expense over the derived service period, regardless of whether the stock price targets are achieved.
In September 2023, 3,451,000 PSUs vested upon the achievement of the stock price target of $36.00 per share, resulting in a stock-based compensation expense of $25.7 million recorded for such PSUs during the three months ended September 30, 2023.
During the nine months ended September 30, 2023, the Company granted 4,631,285 restricted stock units ("RSUs") to certain employees under the 2021 Plan at the weighted average grant date fair value of $14.14 per RSU. These awards vest based on a service condition that becomes satisfied over generally one year.
In February 2023, the Board approved an increase to the maximum number of shares that can be purchased in each purchase period from 590 to 3,500 shares of Class A common stock. During the nine months ended September 30, 2023, 174,670 shares of Class A common stock were purchased under the ESPP.
Stock-based compensation expense is attributed to the cost center to which the award holder belongs.
The following table summarizes total stock-based compensation expense by function (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
2023 |
|
2022 |
|
2023 |
|
2022 |
Cost of revenue |
$ |
1,309 |
|
|
$ |
1,230 |
|
|
$ |
3,942 |
|
|
$ |
4,988 |
|
Sales and marketing |
26,025 |
|
|
10,035 |
|
|
62,121 |
|
|
30,386 |
|
Research and development |
70,462 |
|
|
21,569 |
|
|
176,337 |
|
|
68,088 |
|
General and administrative |
13,043 |
|
|
9,313 |
|
|
32,658 |
|
|
40,481 |
|
Total |
$ |
110,839 |
|
|
$ |
42,147 |
|
|
$ |
275,058 |
|
|
$ |
143,943 |
|
9. Earnings Per Share
The following table sets forth the computation of basic and diluted net income (loss) per share attributable to common stockholders (in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
2023 |
|
2022 |
|
2023 |
|
2022 |
Basic EPS |
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
Net income (loss) attributable to AppLovin |
$ |
108,639 |
|
|
$ |
23,771 |
|
|
$ |
184,478 |
|
|
$ |
(113,234) |
|
Less: |
|
|
|
|
|
|
|
Income attributable to options exercises by promissory notes |
(442) |
|
|
(102) |
|
|
(720) |
|
|
— |
|
Income attributable to common stock subject to share repurchase agreements |
(360) |
|
|
— |
|
|
(228) |
|
|
— |
|
Income attributable to unvested early exercised options |
(2) |
|
|
(18) |
|
|
(15) |
|
|
— |
|
Income attributable to unvested RSAs |
— |
|
|
(2) |
|
|
— |
|
|
— |
|
Net income (loss) attributable to AppLovin common stockholders—Basic |
$ |
107,835 |
|
|
$ |
23,649 |
|
|
$ |
183,515 |
|
|
$ |
(113,234) |
|
Denominator: |
|
|
|
|
|
|
|
Weighted-average shares used in computing net income (loss) per share—Basic |
341,435,759 |
|
|
369,389,170 |
|
|
357,009,609 |
|
|
371,736,763 |
|
Net income (loss) per share attributable to common stock—Basic |
$ |
0.32 |
|
|
$ |
0.06 |
|
|
$ |
0.51 |
|
|
$ |
(0.30) |
|
Diluted EPS |
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
Net income (loss) attributable to AppLovin |
108,639 |
|
|
23,771 |
|
|
184,478 |
|
|
(113,234) |
|
Less: |
|
|
|
|
|
|
|
Income attributable to options exercises by promissory notes |
(423) |
|
|
(99) |
|
|
(698) |
|
|
— |
|
Income attributable to common stock subject to share repurchase agreements |
(345) |
|
|
— |
|
|
(220) |
|
|
— |
|
Income attributable to unvested early exercised options |
(2) |
|
|
(17) |
|
|
(15) |
|
|
— |
|
Income attributable to unvested RSAs |
— |
|
|
(2) |
|
|
— |
|
|
— |
|
Net income (loss) attributable to AppLovin common stockholders—Diluted |
$ |
107,869 |
|
|
$ |
23,653 |
|
|
$ |
183,545 |
|
|
$ |
(113,234) |
|
Denominator: |
|
|
|
|
|
|
|
Weighted-average shares used in computing net income (loss) per share—Basic |
341,435,759 |
|
|
369,389,170 |
|
|
357,009,609 |
|
|
371,736,763 |
|
Weighted-average dilutive stock awards |
15,470,463 |
|
|
9,073,037 |
|
|
11,249,904 |
|
|
— |
|
Weighted-average shares used in computing net income (loss) per share—Diluted |
356,906,222 |
|
|
378,462,207 |
|
|
368,259,513 |
|
|
371,736,763 |
|
Net income (loss) per share attributable to AppLovin common stockholders—Diluted |
$ |
0.30 |
|
|
$ |
0.06 |
|
|
$ |
0.50 |
|
|
$ |
(0.30) |
|
The following table presents the forms of antidilutive potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, |
|
2023 |
|
2022 |
Stock options exercised for promissory notes |
1,399,999 |
|
|
1,399,999 |
|
Early exercised stock options |
5,736 |
|
|
191,748 |
|
Stock options |
613,968 |
|
|
12,168,796 |
|
Unvested RSUs |
4,747,127 |
|
|
9,318,132 |
|
ESPP |
— |
|
|
413,829 |
|
Total antidilutive potential common shares |
6,766,830 |
|
|
23,492,504 |
|
The table above excludes any unvested PSUs or potentially issuable shares under the incentive plan for certain key employees of Wurl since the related market and/or performance conditions had not been met as of September 30, 2023.
10. Income Taxes
The Company is subject to income taxes in the U.S. and in foreign jurisdictions. The Company bases the interim tax accruals on an estimated annual effective tax rate applied to year-to-date income and records the discrete tax items in the period to which they relate. In each quarter, the Company updates the estimated annual effective tax rate and makes a year-to-date adjustment to the tax provision as necessary. The Company’s calendar year 2023 annual effective tax rate differs from the U.S. statutory rate primarily due to jurisdictional mix of earnings, stock-based compensation expense, foreign derived intangible income deduction, and global intangible low-taxed income.
During the nine months ended September 30, 2023, there were no material changes to the Company's unrecognized tax benefits, and the Company does not expect material changes in unrecognized tax benefits within the next twelve months.
11. Segments
The Company determines its operating segments based on how its chief operating decision maker (“CODM”) manages the business, allocates resources, makes operating decisions and evaluates operating performance. The Company's two operating and reportable segments are as follows:
•Software Platform: Software Platform generates revenue primarily from fees paid by advertisers for the placement of ads on mobile applications owned by Publishers.
•Apps: Apps generates revenue when a user of one of the Apps makes an in-app purchase and when an advertiser purchases the digital advertising inventory of the Company's portfolio of Apps.
The CODM evaluates the performance of each operating segment using revenue and segment adjusted EBITDA. The Company defines segment adjusted EBITDA as revenue less expenses, excluding depreciation and amortization and certain items that the Company does not believe are reflective of the operating segments’ core operations. Expenses include indirect costs that are allocated to operating segments based on a reasonable allocation methodology, which are generally related to sales and marketing activities and general and administrative overhead. Revenue and expenses exclude transactions between the Company's operating segments. The CODM does not evaluate operating segments using asset information, and, accordingly, the Company does not report asset information by segment.
The following table provides information about the Company's reportable segments and a reconciliation of the total segment adjusted EBITDA to income (loss) before income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
2023 |
|
2022 |
|
2023 |
|
2022 |
Revenue: |
|
|
|
|
|
|
|
Software Platform |
$ |
504,452 |
|
|
$ |
306,592 |
|
|
$ |
1,265,273 |
|
|
$ |
742,972 |
|
Apps |
359,804 |
|
|
406,507 |
|
|
1,064,553 |
|
|
1,371,779 |
|
Total Revenue |
$ |
864,256 |
|
|
$ |
713,099 |
|
|
$ |
2,329,826 |
|
|
$ |
2,114,751 |
|
|
|
|
|
|
|
|
|
Segment Adjusted EBITDA: |
|
|
|
|
|
|
|
Software Platform |
$ |
364,117 |
|
|
$ |
190,256 |
|
|
$ |
855,697 |
|
|
$ |
622,555 |
|
Apps |
55,174 |
|
|
67,381 |
|
|
170,806 |
|
|
181,055 |
|
Total Segment Adjusted EBITDA |
$ |
419,291 |
|
|
$ |
257,637 |
|
|
$ |
1,026,503 |
|
|
$ |
803,610 |
|
|
|
|
|
|
|
|
|
Interest expense and loss on settlement of debt |
$ |
(78,583) |
|
|
$ |
(48,627) |
|
|
$ |
(204,081) |
|
|
$ |
(117,141) |
|
Interest income and other, net |
771 |
|
|
3,604 |
|
|
26,359 |
|
|
8,473 |
|
Amortization, depreciation and write-offs |
(121,797) |
|
|
(163,830) |
|
|
(369,897) |
|
|
(445,507) |
|
Non-operating foreign exchange gain |
613 |
|
|
406 |
|
|
1,159 |
|
|
1,683 |
|
Stock-based compensation |
(110,839) |
|
|
(42,147) |
|
|
(275,058) |
|
|
(143,943) |
|
Acquisition-related expense |
(231) |
|
|
(4,317) |
|
|
(995) |
|
|
(21,052) |
|
Publisher bonuses |
— |
|
|
— |
|
|
— |
|
|
(209,635) |
|
MoPub acquisition transition services |
— |
|
|
— |
|
|
— |
|
|
(6,999) |
|
Restructuring costs |
— |
|
|
(1,117) |
|
|
(2,316) |
|
|
(8,494) |
|
Income (loss) before income taxes |
$ |
109,225 |
|
|
$ |
1,609 |
|
|
$ |
201,674 |
|
|
$ |
(139,005) |
|
12. Credit Agreement
The Company is a party to a certain credit agreement (the “Credit Agreement”), which provides for senior secured term loans and a revolving credit facility.
In January 2023, the Company entered into Amendment No. 7 to the Credit Agreement to transition the benchmark interest rate from the London Interbank Offered Rate (“LIBOR”) to the Term Secured Overnight Financing Rate (“SOFR”), which included a 10 basis-point credit spread adjustment. In June 2023, the Company entered into Amendment No. 8 to the Credit Agreement to extend the maturity date with respect to the revolving credit facility to the earlier of 91 days prior to the final maturity of any term loan under the Credit Agreement (unless all term loans with a maturity date earlier than October 25, 2028 have been repaid in full prior to such date) and June 12, 2028, and increase the maximum commitment of the revolving credit facility by $10.0 million to an aggregate of $610.0 million. The other material terms of the Credit Agreement were unchanged. The Company incurred $4.0 million in debt issuance costs in connection with Amendment No. 8 which were deferred and are being recognized as interest expense over the term of revolving credit facility. These costs were included in "Other assets" in the Company's condensed consolidated balance sheet.
In August 2023, the Company entered into Amendment No. 9 to the Credit Agreement to refinance certain term loans in the aggregate principal amount of $1.7 billion with a maturity date of August 15, 2025. The refinanced term loans have (a) a principal amount of $1.5 billion, to be repaid in equal quarterly installments of $3.8 million with the remaining balance due on August 16, 2030, (b) an interest rate “floor” of 50 basis points if such loans bear interest based on SOFR (such loans, “Term SOFR Loans”), and (c) an applicable margin for Term SOFR Loans equal to 3.10% (or 2.00% for base rate loans). The other material terms of the refinanced term loans remain unchanged.
The Company evaluated the refinancing transaction described above on a creditor-by-creditor basis to determine the appropriate application of modification or extinguishment accounting under the provisions of ASC 470-50. As a result, the Company recorded a loss on extinguishment of debt of $4.3 million and an expense for third-party costs related to modification of debt of $11.1 million, in interest expense and loss on debt settlement and interest income and other, net, respectively, in the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2023. The Company recorded the refinanced term loans at face value less unamortized debt discount and issuance cost of $20.1 million, which is subject to amortization over the term of the refinanced term loans using the effective interest method.
In August 2023, the Company drew down $185.0 million from the revolving credit facility. As of September 30, 2023, an aggregate of $418.7 million was available to be drawn from the revolving credit facility.
13. Related Party Transactions
In May 2023, the Company repurchased 15,952,381 shares of its Class A common stock from KKR Denali Holdings L.P. ("KKR Denali") in a private transaction at a price per share equal to $21.00, for an aggregate purchase price of $335.0 million under the Company's share repurchase program. In August 2023, the Company repurchased 15,000,000 shares of its Class A common stock from KKR Denali in a private transaction at a price per share equal to $36.85, for an aggregate purchase price of $552.8 million under the Company's share repurchase program.
See Note 7 – Equity for additional information on the share repurchase program.
The Company had no other material related party transactions for the three and nine months ended September 30, 2023 and 2022.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Factors that could cause or contribute to such differences include those identified below and those discussed in the section titled “Risk Factors” and other parts of this Quarterly Report on Form 10-Q. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
Overview
Our mission is to help companies grow their apps and accelerate their business. Our full stack software solutions provide advanced tools for mobile app developers to grow their businesses by automating and optimizing the marketing and monetization of their apps. We also operate a portfolio of owned mobile apps and accelerated our market penetration through an active acquisition and partnership strategy. Our scaled business model sits at the nexus of the mobile app ecosystem, which creates a durable competitive advantage that has fueled our clients’ success and our strong growth.
Since our founding in 2011, we have been focused on building a software-based platform for mobile app developers to improve the marketing and monetization of their apps. Our founders, who are mobile app developers themselves, quickly realized the real impediment to success and growth in the mobile app ecosystem was a discovery and monetization problem—breaking through the congested app stores to efficiently find users and successfully grow their business. Their first-hand experience with these developer challenges led to the development of our infrastructure and software—AppLovin Core Technologies and AppLovin Software Platform. We capitalized on our success and understanding of the mobile app ecosystem by launching AppLovin Apps in 2018. Our Apps now consist of a globally diversified portfolio of over 200 free-to-play mobile games across five genres, run by eleven studios.
For the three months ended September 30, 2023, our revenue increased 21% year-over-year to $864.3 million, from $713.1 million in the three months ended September 30, 2022. We generated net income of $108.6 million and $23.7 million for the three months ended September 30, 2023 and 2022, respectively. We generated Adjusted EBITDA of $419.3 million and $257.6 million for the three months ended September 30, 2023 and 2022, respectively. Additionally, our net cash provided by operating activities was $717.5 million and $249.6 million in the nine months ended September 30, 2023 and 2022, respectively. We generated Free Cash Flow of $697.3 million and $230.9 million for the nine months ended September 30, 2023 and 2022, respectively. Given our strong financial position, we have been able to reinvest in our expansion and growth, and repurchase shares of our Class A common stock. See the section titled “Non-GAAP Financial Measures” below for definitions of our non-GAAP financial measures and reconciliations of the most directly comparable financial measures calculated in accordance with GAAP to these measures.
Our Business Model
We generate revenue from our Software Platform and our Apps. During the three months ended September 30, 2023, Software Platform Revenue represented 58% of total revenue and Apps Revenue represented 42% of total revenue.
We report our operating results through two reportable segments: Software Platform and Apps. Prior to the second quarter of 2022, we had a single operating and reportable segment.
Our chief operating decision maker ("CODM"), the Chief Executive Officer, evaluates performance of each segment based on several factors, of which the financial measures are segment revenue and segment adjusted EBITDA, as defined in Note 11 to our condensed consolidated financial statements.
The Software Platform and Apps segments provide a view into the organization of our business and generate revenue as follows:
Software Platform Revenue
We primarily generate Software Platform Revenue from fees paid by mobile app advertisers who use our Software Platform to grow and monetize their apps. We are able to grow our Software Platform Revenue by improving our various software technologies.
Software Platform clients include a wide variety of advertisers, from indie developer studios to some of the largest global internet platforms, such as Facebook and Google. We see multiple opportunities to gain new Software Platform clients, and to increase spend from existing clients, as we help them grow their businesses and make them more successful.
Our Software Platform includes AppDiscovery, MAX, Adjust, and Wurl. Clients use AppDiscovery to automate, optimize, and manage their user acquisition investments. They set marketing and user growth goals, and AppDiscovery optimizes their ad spend in an effort to achieve their return on advertising spend targets and other marketing objectives. AppDiscovery comprises the vast majority of revenue from our Software Platform. Revenue is generated from our advertisers, typically on a performance basis, and shared with our advertising publishers, typically on a cost per impression model.
Software Platform clients use MAX to optimize purchases of app advertising inventory. The Compass Analytics tool within MAX provides insights to manage against key performance indicators, understand the long-term value of users, and help manage profitability. Revenue from MAX is generated based on a percentage of client spend. As more developers move to in-app bidding monetization, we expect growth in the adoption of, and revenue from, MAX.
Software Platform clients use Adjust's SaaS mobile marketing platform to better understand their users' journey while allowing marketers to make smarter decisions through measurement, attribution and fraud prevention. Revenue from Adjust is primarily generated from an annual software subscription fee.
Software Platform clients use Wurl's CTV platform to distribute streaming video, maximize advertising revenue, and acquire and retain viewers or subscribers. Revenue from Wurl is primarily generated from content companies, typically on a usage-based model.
Apps Revenue
Apps Revenue is generated when a user of one of our Apps makes an in-app purchase ("IAP") and when clients purchase the digital advertising inventory of our portfolio of Apps ("IAA"). We are able to grow our Apps Revenue by adding more apps to our Apps portfolio and increasing engagement on our existing Apps.
Our Apps are generally free-to-play mobile games and generate IAP Revenue through IAPs. IAPs consist of virtual goods used to enhance gameplay, accelerate access to certain features or levels, and augment other mobile game progression opportunities for the user. IAPs drive more engagement and better economics from our Apps. The vast majority of our IAP revenue flows through two app stores, Apple App Store and Google Play, which charge us a standard commission on IAPs. IAP Revenue represented 69% of total Apps Revenue in the three months ended September 30, 2023.
During the three months ended September 30, 2023, we had an average of 1.8 million Monthly Active Payers ("MAPs") across our portfolio of Apps. Over that period, we had an Average Revenue Per Monthly Active Payer ("ARPMAP") of $46. See “Key Metrics” below for additional information on how we calculate MAPs and ARPMAP.
IAA clients that purchase advertising inventory from our Apps are able to target highly relevant users from our diverse and global portfolio of over 200 mobile games. Our clients leverage a broad set of high-performing mobile ad formats, including playable and rewarded video, and are able to match these ads with relevant users resulting in a better return on their advertising spend. By increasing the number of users and their engagement, as well as better matching ads with the appropriate target audience, we are able to increase our revenue from IAA clients that purchase advertising inventory from our Apps. IAA Revenue represented 31% of total Apps Revenue in the three months ended September 30, 2023.
Key Metrics
We review the following key metrics on a regular basis in order to evaluate the health of our business, identify trends affecting our performance, prepare financial projections, and make strategic decisions.
Monthly Active Payers ("MAPs"). We define a MAP as a unique mobile device active on one of our Apps in a month that completed at least one IAP during that time period. A consumer who makes IAPs within two separate Apps on the same mobile device in a monthly period will be counted as two MAPs. MAPs for a particular time period longer than one month are the average MAPs for each month during that period. We estimate the number of MAPs by aggregating certain data from third-party attribution partners. Some of our Apps do not utilize such third-party attribution partners, and therefore our MAPs figure for any period does not capture every user that completed an IAP on our Apps. We estimate that our counted MAPs generated approximately 98% of our IAP Revenue during the three months ended September 30, 2023, and as such, management believes that MAPs are still a useful metric to measure the engagement and monetization potential of our games.
Average Revenue Per Monthly Active Payer ("ARPMAP"). We define ARPMAP as (i) the total IAP Revenue derived from our Apps in a monthly period, divided by (ii) MAPs in that same period. ARPMAP for a particular time period longer than one month is the average ARPMAP for each month during that period. ARPMAP shows how efficiently we are monetizing each MAP.
The following table shows our Monthly Active Payers and Average Revenue Per Monthly Active Payer for the three months ended September 30, 2023 and 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
2023 |
|
2022 |
Monthly Active Payers (millions) |
1.8 |
|
|
2.2 |
|
Average Revenue Per Monthly Active Payer |
$ |
46 |
|
|
$ |
41 |
|
Our key metrics are not based on any standardized industry methodology and are not necessarily calculated in the same manner or comparable to similarly titled measures presented by other companies. Similarly, our key metrics may differ from estimates published by third parties or from similarly titled metrics of our competitors due to differences in methodology. The numbers that we use to calculate MAPs and ARPMAP are based on internal data. While these numbers are based on what we believe to be reasonable judgments and estimates for the applicable period of measurement, there are inherent challenges in measuring usage and engagement. We regularly review and may adjust our processes for calculating our internal metrics to improve their accuracy.
Non-GAAP Financial Measures
Adjusted EBITDA and Adjusted EBITDA Margin
We define Adjusted EBITDA for a particular period as net income (loss) before interest expense and loss on settlement of debt, interest income and other, net (excluding certain recurring items), provision for (benefit from) income taxes, amortization, depreciation and write-offs and as further adjusted for stock-based compensation expense, acquisition-related expense and transaction bonus, publisher bonuses, MoPub acquisition transition services, restructuring costs, impairment and loss in connection with the sale of long-lived assets, loss (gain) on extinguishments of acquisition related contingent consideration, non-operating foreign exchange (gain) losses, lease modification and abandonment of leasehold improvements, and change in the fair value of contingent consideration. We define Adjusted EBITDA margin as Adjusted EBITDA divided by revenue for the same period.
Adjusted EBITDA and Adjusted EBITDA margin are key measures we use to assess our financial performance and are also used for internal planning and forecasting purposes. We believe Adjusted EBITDA and Adjusted EBITDA margin are helpful to investors, analysts, and other interested parties because they can assist in providing a more consistent and comparable overview of our operations across our historical financial periods. In addition, these measures are frequently used by analysts, investors, and other interested parties to evaluate and assess performance. We use Adjusted EBITDA and Adjusted EBITDA margin in conjunction with GAAP measures as part of our overall assessment of our performance, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies, and to communicate with our board of directors concerning our financial performance.
Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures and are presented for supplemental informational purposes only and should not be considered as alternatives or substitutes to financial information presented in accordance with GAAP. These measures have certain limitations in that they do not include the impact of certain expenses that are reflected in our consolidated statement of operations that are necessary to run our business. Our definitions may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our Adjusted EBITDA and Adjusted EBITDA margin should be considered in addition to, not as substitutes for, or in isolation from, measures prepared in accordance with GAAP.
The following table provides our Adjusted EBITDA and Adjusted EBITDA margin for the three and nine months ended September 30, 2023 and 2022, and a reconciliation of net income (loss) to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
2023 |
|
2022 |
|
2023 |
|
2022 |
|
(in thousands. except percentages) |
Revenue |
$ |
864,256 |
|
$ |
713,099 |
|
$ |
2,329,826 |
|
$ |
2,114,751 |
Net income (loss) |
$ |
108,639 |
|
$ |
23,662 |
|
$ |
184,478 |
|
$ |
(113,435) |
Net Margin |
12.6% |
|
3.3% |
|
7.9% |
|
(5.4)% |
Adjusted as follows: |
|
|
|
|
|
|
|
Interest expense and loss on settlement of debt |
78,583 |
|
48,627 |
|
204,081 |
|
117,141 |
Interest income and other, net |
(771) |
|
(3,604) |
|
(26,359) |
|
(8,473) |
Provision for (benefit from) income taxes |
586 |
|
(22,053) |
|
17,196 |
|
(25,570) |
Amortization, depreciation and write-offs |
121,797 |
|
163,830 |
|
369,897 |
|
445,507 |
Non-operating foreign exchange gain |
(613) |
|
(406) |
|
(1,159) |
|
(1,683) |
Stock-based compensation |
110,839 |
|
42,147 |
|
275,058 |
|
143,943 |
Acquisition-related expense |
231 |
|
4,317 |
|
995 |
|
21,052 |
Publisher bonuses1 |
— |
|
— |
|
— |
|
209,635 |
MoPub acquisition transition services2 |
— |
|
— |
|
— |
|
6,999 |
Restructuring costs |
— |
|
1,117 |
|
2,316 |
|
8,494 |
Adjusted EBITDA |
$ |
419,291 |
|
$ |
257,637 |
|
$ |
1,026,503 |
|
$ |
803,610 |
Adjusted EBITDA Margin |
48.5 |
% |
|
36.1 |
% |
|
44.1 |
% |
|
38.0 |
% |
__________________
1 In association with the MoPub acquisition, we incurred certain costs to incentivize publishers to migrate to our MAX mediation solution including existing publishers of MoPub as well as publishers on other competitor offerings. We have not historically incurred significant publisher migration costs, nor do we currently intend to incur significant publisher migration costs in the future. As such, we have removed the impact of these costs from Adjusted EBITDA.
2 Reflects one-time transition services provided by Twitter, Inc. to AppLovin.
Free Cash Flow
We define Free Cash Flow as net cash provided by operating activities less purchases of property and equipment and principal payments on finance leases. We use Free Cash Flow to help manage the health of our business, prepare budgets and for capital allocation purposes. We believe Free Cash Flow provides useful supplemental information to help investors understand underlying trends in our business and our liquidity. Free cash flow has certain limitations, including that it does not reflect our future contractual commitments. Our definition may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish Free Cash Flow or similar metrics. Thus, our Free Cash Flow should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP.
The following table provides our Free Cash Flow for the nine months ended September 30, 2023 and 2022, and a reconciliation of net cash provided by operating activities to Free Cash Flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
2023 |
|
2022 |
|
(in thousands) |
Net cash provided by operating activities |
$ |
717,522 |
|
|
$ |
249,574 |
|
Less: |
|
|
|
Purchase of property and equipment |
(4,002) |
|
|
(621) |
|
Principal payments on finance leases |
(16,191) |
|
|
(18,099) |
|
Free Cash Flow |
$ |
697,329 |
|
|
$ |
230,854 |
|
Net cash used in investing activities |
$ |
(71,025) |
|
|
$ |
(1,393,754) |
|
Net cash used in financing activities |
$ |
(1,392,267) |
|
|
$ |
(471,437) |
|
Factors Affecting Our Performance
We believe that the future success of our business depends on many factors, including the factors described below. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in order to continue to grow profitably while maintaining strong cash flow.
Continue to invest in innovation
We have made, and intend to continue to make, significant investments in our Core Technologies and Software Platform to enhance their effectiveness and value proposition for our clients. We expect that these investments will require spending on research and development, and acquisitions and partnerships related to technology components and products. We believe investments in our software, including our AI-based advertising engine AXON, AppDiscovery, Adjust, MAX and Wurl will further improve effectiveness for developers. For example, in the second quarter of 2023, we rolled-out our latest AI-based advertising engine, AXON 2.0, which has driven improvements to AppDiscovery performance and returns for advertisers. Our investments will also allow us to enter new mobile app sectors outside of gaming. While our investments in research and development and acquisitions and partnerships may not result in revenue in the near term, we believe these investments position us to increase our revenue over time.
Retain and grow existing clients
We rely on existing clients for a significant portion of our revenue. As we improve our Software Platform and Apps, we can attract additional spend from these clients. Our clients include indie studio developers and some of the largest mobile advertising platforms in the world. We believe there is significant room for us to further expand our relationships with these clients and increase their usage of our Software Platform. We have invested in targeted sales and account-based marketing efforts to identify and showcase opportunities to clients and plan to continue to do so in the future.
In the past, our clients have generally increased their usage of our Software Platform, and as a result, growth from existing clients has been a primary driver of our revenue growth. We must continue to retain our existing clients and expand their spend with us over time to continue to grow our revenue, increase profitability and drive greater cash flow.
Add new clients globally
Our future success depends in part on our ability to acquire new clients. We continue to focus on markets outside the United States to serve the needs of clients globally. During the three months ended September 30, 2023, 45% of our revenue from Software Platform and IAA Revenue clients was generated from outside of the United States. We believe that the global opportunity is significant and will continue to expand as developers and advertisers outside the United States adopt our Software Platform and advertise on our Apps. We also see opportunities to continue to acquire new clients outside of mobile gaming, as the capabilities of our Core Technologies and Software Platform are relevant to the broader mobile app ecosystem. We are investing in direct sales, product development, education, and other capabilities to drive increased awareness and adoption of our Software Platform and Apps, which investments may impact our profitability in the near term as we seek further scale. We must continue to acquire new clients to grow our revenue, increase profitability, and drive greater cash flow.
Optimization of our AppLovin Apps portfolio
Over the past several years, our Apps have been critical in providing first-party data and audiences for our Software Platform to enable us to test, design, and scale our technologies. Given the recent development of our technology, the current scale of our Software Platform, and the reach of our MAX solution, we believe we can reduce our reliance on the data from our Apps. Beginning in the second quarter of 2022, we performed a strategic review of our Apps portfolio and its cost structure, which we have substantially completed and which has resulted in the divestiture or closure of certain studios, a reduction of headcount, restructuring of earn out arrangements, and other changes to our Apps portfolio, such as restructuring of certain assets or choosing to make changes to optimize the cost structure of certain Apps rather than investing in revenue growth. For example, we have reduced our user acquisition spend for our portfolio of Apps as we increased our desired return goals, which has led to improved Apps Adjusted EBITDA margin, but also contributed to a decline in revenue and MAPs. We continue to optimize the portfolio, focusing on how best to optimize each asset’s contribution to our overall financial performance, and we may periodically take similar actions in the future. We will continue to manage our Apps portfolio for financial return, including investing for growth through new game launches, while remaining open to evaluating opportunities for the retention, restructure, or sale of assets in the future.
We believe that our ability to optimize the contribution of our Apps portfolio will continue to affect our revenue growth, profitability, and cash flow.
Continued execution of strategic acquisitions and partnerships
We intend to continue to make strategic acquisitions and enter into strategic partnerships to grow our business. From the beginning of 2018 through September 30, 2023, we have invested nearly $4.0 billion in 29 strategic acquisitions and partnerships with mobile app developers and for technologies to enhance our Software Platform including the acquisition of MAX in 2018, Adjust in April 2021, MoPub in January 2022, and Wurl in April 2022.
While we have a strong pipeline of strategic acquisition and partnership opportunities, we believe our future results of operations will be affected by our ability to continue to identify and execute such transactions that are accretive to our growth and profitability.
Growth and structure of the mobile app ecosystem
Our business and results of operations will be impacted by industry factors that drive overall performance of the mobile app ecosystem. The mobile app ecosystem has been affected by the recent economic uncertainty, including by advertisers more closely managing budgets and reducing overall spend, which has resulted in slowed growth for our Software Platform in recent quarters. We expect that any further slowing, or accelerations, of the mobile app ecosystem would affect our business and results of operations. In addition, even if the mobile app ecosystem continues to grow at its current rate, our ability to position ourselves within the market will impact our business and results of operations.
Mobile app developers, including AppLovin, rely on third-party platforms, such as the Apple App Store and Google Play Store, among others, to distribute games, collect payments made for IAPs, and target users with relevant advertising. We expect this to continue for the foreseeable future. These third-party platforms have significant market power and discretion to set platform fees, select which apps to promote, and decide how much consumer information to provide to advertising networks that enable our Core Technologies and Software Platform to target users with personalized and relevant advertising and allocate marketing campaigns in an efficient and cost-effective manner. Any changes made in the policies of third-party platforms could drive rapid change across the mobile app ecosystem. For example, in April 2021, Apple started implementing its application tracking transparency framework that, among other things, requires users' opt-in consent for certain types of tracking. While this transparency framework has not had a significant impact on our overall business, it may do so in the future, including with respect to the effectiveness of our advertising practices and/or our ability to efficiently generate revenue for our Apps. We rely in part on Identifier for Advertisers ("IDFA") to provide us with data that helps our Software Platform better market and monetize Apps. In light of the IDFA and transparency changes, we made changes to our data collection practices. To the extent we are unable to utilize IDFA or a similar offering, or if the transparency changes and any related opt-in or other requirements result in decreases in the availability or utility of data relating to Apps, our Software Platform may not be as effective, we may not be able to continue to efficiently generate revenue for our Apps, and our revenue and results of operations may be harmed. Additionally, Apple implemented new requirements for consumer disclosures regarding privacy and data processing practices in December 2020, which has resulted in increased compliance requirements and could result in decreased usage of our Apps. Apple incorporated new SDK privacy controls into iOS 17, which was released in September 2023, including privacy manifests and signatures designed to allow app developers to outline the data practices for SDKs embedded in their apps, manage tracking domains within SDKs, and curb device fingerprinting by requiring app developers to select allowed reasons for using data received through certain APIs. In February 2022, Google announced its Privacy Sandbox initiative for Android, a multi-year effort expected to restrict tracking activity and limit advertisers' ability to collect app and user data across Android devices. In May 2023, Google announced new consent management platform ("CMP") requirements for ads served in the European Economic Area (EEA) and UK, which will require, starting in January 2024, publishers using Google AdSense, Ad Manager, or AdMob to use a CMP that has been certified by Google and has integrated with the Interactive Advertising Bureau’s (“IAB”) Transparency and Consent Framework when serving ads to users in the EEA or the UK. If publishers do not adopt a Google-certified CMP by this timeframe, only limited ads will be eligible to serve in the EEA and UK. While to date these third-party platform privacy changes have had some impact on the discoverability of apps across these platforms and have had a relatively muted aggregate impact on our results of operations, the ultimate impact of these or any similar or future changes to the policies of Apple or Google could adversely affect our business, financial condition, and results of operations.
New tools for developers, industry standards, and platforms may emerge in the future. We believe our focus on the mobile app ecosystem has allowed us to understand the needs of our clients and our relentless innovation has enabled us to quickly adapt to changes in the industry and pioneer new solutions.
We must continue to innovate and stay ahead of developments in the mobile app ecosystem in order for our business to succeed and our results of operations to continue to improve.
Current Economic Conditions
We are subject to risks and uncertainties caused by global economic conditions and events with significant macroeconomic impacts, including but not limited to, uncertainty in the global banking and financial services markets, the war in Ukraine, crisis in the Middle East and increasing friction between the United States and China, including related sanctions. Inflation, rising interest rates and reduced consumer confidence have caused and may continue to cause our clients to be cautious in their spending. The mobile gaming and app market continue to be affected by cautious advertiser demand, but we believe that demand has generally stabilized when compared against the second half of 2022. The full impact of these macroeconomic events and the extent to which these macro factors may impact our business, financial condition, and results of operations in the future remains uncertain. The risks related to our business are further described in the section titled “Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Ukraine/Russia Conflict
As the Russian invasion of Ukraine continues to evolve, we are closely monitoring the current and potential impact on our business, our people, and our clients. We have taken steps to comply with applicable domestic and international regulatory restrictions on international trade and financial transactions including terminating or suspending contracts with certain clients and vendors in Russia and Belarus. Revenues associated with clients and vendors in Russia and Belarus are not material to our consolidated financial results, and we anticipate that the termination of Russian and Belarus clients and vendors will not have a material impact on our business or other client relationships. Management and our Board of Directors are monitoring the regional and global ramifications of the continuing events. Our cybersecurity teams are continually monitoring for any attacks originating from this region that could cause disruption to our platform, systems, and networks, which could result in security breaches or data loss, damage to our brand, or reduce demand for our products and services.
Components of Results of Operations
Revenue
We generate Software Platform Revenue primarily from fees collected from advertisers spending on AppDiscovery, typically on a performance basis, then shared with our advertising publishers, typically on a cost per impression basis. Software Platform Revenue also includes fees generated based on a percentage of client spend through MAX and subscription fees for Adjust's SaaS mobile marketing platform.
We generate Apps Revenue from In-App Purchases made by the users within our Apps and from In-App Advertising generated from advertisers that purchase advertising inventory from our diverse portfolio of Apps.
Cost of Revenue and Operating Expenses
Cost of revenue. Cost of revenue consists primarily of third-party payment processing fees for distribution partners, amortization of acquired technology-related intangible assets, and expenses associated with operating our network infrastructure. Third-party payment processing fees relate to IAP Revenue. The fees for IAPs are processed and collected by third-party distribution partners. Network operating costs include bandwidth, energy, other equipment costs related to our co-located data centers and costs for third-party cloud service providers. We expect our cost of revenue to increase in absolute dollars over the long term as our business and revenue continue to grow. We also expect our cost of revenue as a percentage of revenue to fluctuate period-over-period.
Sales and marketing. Sales and marketing expenses consist primarily of user acquisition costs, marketing programs and other advertising expenses, professional services costs related to the marketing of apps by third parties, personnel-related expenses including salaries, employee benefits, and stock-based compensation for employees engaged in sales and marketing activities, amortization of acquired user-related intangible assets, travel and allocated facilities and information technology costs.
We plan to continue to invest in sales and marketing to grow our Software Platform customer base and increase brand awareness. We also plan to continue to invest in new App launches to the extent we see opportunities for cost-effective growth. As a result, we expect sales and marketing expenses to increase in absolute dollars over the long-term, though they may fluctuate period-over-period in the near term as we reduce our user acquisition spend for our portfolio of Apps. We also expect our sales and marketing expenses as a percentage of revenue to fluctuate period-over-period in the near term as we invest to grow our customer base and increase brand awareness, and to decrease over the long term as we benefit from greater scale.
Research and development. Research and development expenses consist primarily of product development costs, including personnel-related expenses including salaries, employee benefits, and stock-based compensation for employees engaged in research and development activities, professional services costs related to development of new apps by third parties, consulting costs, regulatory compliance costs, and allocated facilities and information technology costs.
We plan to continue to invest in research and development to continue to enhance our Core Technologies and Software Platform, and to improve existing games and develop new games. As a result, we expect research and development expenses to increase in absolute dollars over the long term, though they may fluctuate period-over-period in the near term as we reassess in which areas to focus our investment. We also expect our research and development expenses as a percentage of revenue to fluctuate period-over-period in the near term as we invest to enhance our Core Technologies and Software Platform, and to decrease over the long term as we benefit from greater scale.
General and administrative. General and administrative expenses consist primarily of costs incurred to support our business, including personnel-related expenses including salaries, employee benefits, and stock-based compensation for employees engaged in finance, accounting, legal, human resources and administration, professional services fees for legal, accounting, recruiting, and administrative services (including acquisition-related expenses), insurance, travel, and allocated facilities and information technology costs.
We plan to continue to invest in our general and administrative function to support the growth of our business. We expect general and administrative expenses to generally increase in absolute dollars, subject to fluctuations due to the timing and extent of acquisition-related expenses. We also expect our general and administrative expenses as a percentage of revenue to fluctuate period-over-period in the near term as we invest to support the growth of our business, and to decrease over the long term as we benefit from greater scale.
Other Income and Expenses
Interest expense and loss on settlement of debt. Interest expense and loss on settlement of debt consists primarily of interest expense associated with our outstanding debt, including accretion of debt discount, and gains and losses of interest rate swaps related to the variable interest payments associated with our outstanding debt.
Interest income and other, net. Interest income and other, net, primarily includes interest earned on our cash and cash equivalents, fair value adjustments relating to our non-marketable equity securities, and foreign currency gains and losses.
Provision for (benefit from) income taxes. We are subject to income taxes in the United States and foreign jurisdictions in which we do business. These foreign jurisdictions have different statutory tax rates than those in the United States. Additionally, certain of our foreign earnings may also be taxable in the United States. Accordingly, our effective tax rate will vary depending on the relative proportion of foreign to domestic income, impacts from acquisition restructuring, deduction benefits related to foreign-derived intangible income, future changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws. Additionally, our effective tax rate can vary based on the amount of pre-tax income or loss.
Results of Operations
The following table summarizes our historical condensed consolidated statements of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
2023 |
|
2022 |
|
2023 |
|
2022 |
|
(in thousands) |
Revenue |
$ |
864,256 |
|
|
$ |
713,099 |
|
|
$ |
2,329,826 |
|
|
$ |
2,114,751 |
|
Costs and expenses: |
|
|
|
|
|
|
|
Cost of revenue(1)(2) |
265,049 |
|
|
300,988 |
|
|
785,584 |
|
|
886,697 |
|
Sales and marketing(1)(2) |
212,352 |
|
|
196,785 |
|
|
607,755 |
|
|
719,014 |
|
Research and development(1) |
159,288 |
|
|
122,059 |
|
|
441,563 |
|
|
389,417 |
|
General and administrative(1) |
41,249 |
|
|
44,000 |
|
|
116,231 |
|
|
144,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
677,938 |
|
|
663,832 |
|
|
1,951,133 |
|
|
2,140,116 |
|
Income (loss) from operations |
186,318 |
|
|
49,267 |
|
|
378,693 |
|
|
(25,365) |
|
Other income (expense): |
|
|
|
|
|
|
|
Interest expense and loss on settlement of debt |
(78,583) |
|
|
(48,627) |
|
|
(204,081) |
|
|
(117,141) |
|
Interest income and other, net |
1,490 |
|
|
969 |
|
|
27,062 |
|
|
3,501 |
|
Total other expense, net |
(77,093) |
|
|
(47,658) |
|
|
(177,019) |
|
|
(113,640) |
|
Income (loss) before income taxes |
109,225 |
|
|
1,609 |
|
|
201,674 |
|
|
(139,005) |
|
Provision for (benefit from) income taxes |
586 |
|
|
(22,053) |
|
|
17,196 |
|
|
(25,570) |
|
Net income (loss) |
$ |
108,639 |
|
|
$ |
23,662 |
|
|
$ |
184,478 |
|
|
$ |
(113,435) |
|
__________________
(1) Includes stock-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
2023 |
|
2022 |
|
2023 |
|
2022 |
|
(in thousands) |
Cost of revenue |
$ |
1,309 |
|
|
$ |
1,230 |
|
|
$ |
3,942 |
|
|
$ |
4,988 |
|
Sales and marketing |
26,025 |
|
|
10,035 |
|
|
62,121 |
|
|
30,386 |
|
Research and development |
70,462 |
|
|
21,569 |
|
|
176,337 |
|
|
68,088 |
|
General and administrative |
13,043 |
|
|
9,313 |
|
|
32,658 |
|
|
40,481 |
|
Total stock-based compensation |
$ |
110,839 |
|
|
$ |
42,147 |
|
|
$ |
275,058 |
|
|
$ |
143,943 |
|
(2) Includes amortization expense related to acquired intangibles as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
2023 |
|
2022 |
|
2023 |
|
2022 |
|
(in thousands) |
Cost of revenue |
$ |
93,398 |
|
|
$ |
111,259 |
|
|
$ |
288,180 |
|
|
$ |
342,115 |
|
Sales and marketing |
16,829 |
|
|
16,619 |
|
|
50,397 |
|
|
49,543 |
|
Total amortization expense related to acquired intangibles |
$ |
110,227 |
|
|
$ |
127,878 |
|
|
$ |
338,577 |
|
|
$ |
391,658 |
|
The following table sets forth the components of our condensed consolidated statements of operations for each of the periods presented as a percentage of revenue(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
2023 |
|
2022 |
|
2023 |
|
2022 |
Revenue |
100 |
% |
|
100 |
% |
|
100 |
% |
|
100 |
% |
Costs and expenses: |
|
|
|
|
|
|
|
Cost of revenue |
31 |
% |
|
42 |
% |
|
34 |
% |
|
42 |
% |
Sales and marketing |
25 |
% |
|
28 |
% |
|
26 |
% |
|
34 |
% |
Research and development |
18 |
% |
|
17 |
% |
|
19 |
% |
|
18 |
% |
General and administrative |
5 |
% |
|
6 |
% |
|
5 |
% |
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
78 |
% |
|
93 |
% |
|
84 |
% |
|
101 |
% |
Income (loss) from operations |
22 |
% |
|
7 |
% |
|
16 |
% |
|
(1) |
% |
Other income (expense): |
|
|
|
|
|
|
|
Interest expense and settlement of debt |
(9) |
% |
|
(7) |
% |
|
(9) |
% |
|
(6) |
% |
Interest income and other, net |
0 |
% |
|
— |
% |
|
1 |
% |
|
— |
% |
Total other expense, net |
(9) |
% |
|
(7) |
% |
|
(8) |
% |
|
(5) |
% |
Income (loss) before income taxes |
13 |
% |
|
— |
% |
|
9 |
% |
|
(7) |
% |
Provision for (benefit from) income taxes |
0 |
% |
|
(3) |
% |
|
1 |
% |
|
(1) |
% |
Net income (loss) |
13 |
% |
|
3 |
% |
|
8 |
% |
|
(5) |
% |
_________________
(1) Totals of percentages of revenue may not foot due to rounding.
Comparison of Our Results of Operations for the Three and Nine Months Ended September 30, 2023 and 2022
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
2022 to 2023 % change |
|
Nine Months Ended September 30, |
|
2022 to 2023 % change |
|
2023 |
|
2022 |
|
|
2023 |
|
2022 |
|
|
(in thousands, except percentages) |
Software Platform Revenue |
$ |
504,452 |
|
|
$ |
306,592 |
|
|
65 |
% |
|
$ |
1,265,273 |
|
|
$ |
742,972 |
|
|
70 |
% |
In-App Purchases Revenue |
247,309 |
|
|
272,437 |
|
|
(9) |
% |
|
732,262 |
|
|
915,177 |
|
|
(20) |
% |
In-App Advertising Revenue |
112,495 |
|
|
134,070 |
|
|
(16) |
% |
|
332,291 |
|
|
456,602 |
|
|
(27) |
% |
Total Apps Revenue |
359,804 |
|
|
406,507 |
|
|
(11) |
% |
|
1,064,553 |
|
|
1,371,779 |
|
|
(22) |
% |
Total Revenue |
$ |
864,256 |
|
|
$ |
713,099 |
|
|
21 |
% |
|
$ |
2,329,826 |
|
|
$ |
2,114,751 |
|
|
10 |
% |
Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022
For the three months ended September 30, 2023, our Software Platform Revenue increased by $197.9 million, or 65%, compared to the same period in the prior year primarily due to improved AppDiscovery performance, where net revenue per installation increased 40% and the volume of installations increased 29%. We do not recognize Software Platform Revenue from transactions with our Owned Studios and Partner Studios.
For the three months ended September 30, 2023, our Apps Revenue decreased by $46.7 million, or 11%, from the prior year period. For the three months ended September 30, 2023, our IAP Revenue from Apps decreased by $25.1 million, or 9%, from the prior year period, due primarily to a 4% decrease in the volume of in-app purchases and a 7% decrease in price per in-app purchase, driven by a reduction in user acquisition spend and the sale of certain assets as part of the strategic review and optimization of our Apps portfolio. Our IAA Revenue from Apps decreased by $21.6 million, or 16%, from the prior year period, due primarily to a 41% decrease in price per advertising impression, partially offset by a 43% increase in the volume of advertising impressions.
Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022
For the nine months ended September 30, 2023, our Software Platform Revenue increased by $522.3 million, or 70%, compared to the same period in the prior year, due primarily to publisher bonuses of $209.6 million accounted for as a reduction to revenue in the prior year period. The increase in Software Platform revenue was also due to improved AppDiscovery performance, where net revenue per installation increased 42%, partially offset by a 2% decrease in the volume of installations. We do not recognize Software Platform Revenue from transactions with our Owned Studios and Partner Studios.
For the nine months ended September 30, 2023, our Apps Revenue decreased by $307.2 million, or 22%, from the prior year period. For the nine months ended September 30, 2022, our IAP Revenue from Apps decreased by $182.9 million, or 20%, from the prior year period, primarily due to a 16% decrease in the volume of in-app purchases and a 4% decrease in price per in-app purchase, driven by a reduction in user acquisition spend and the sale of certain assets as part of the strategic review and optimization of our Apps portfolio. Our IAA Revenue declined $124.3 million, or 27%, due primarily to a 45% decrease in price per advertising impression compared to the prior year period, partially offset by a 32% increase in the volume of advertising impressions.
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
2022 to 2023 % Change |
|
Nine Months Ended September 30, |
|
2022 to 2023 % Change |
|
2023 |
|
2022 |
|
|
2023 |
|
2022 |
|
|
(in thousands, except percentages) |
Cost of revenue |
$ |
265,049 |
|
|
$ |
300,988 |
|
|
(12) |
% |
|
$ |
785,584 |
|
|
$ |
886,697 |
|
|
(11) |
% |
Percentage of revenue |
31 |
% |
|
42 |
% |
|
|
|
34 |
% |
|
42 |
% |
|
|
Cost of revenue in the three months ended September 30, 2023 decreased by $35.9 million, or 12%, compared to the same period in the prior year, due primarily to a decrease of $42.3 million in amortization and impairment of intangible assets resulting from the sale of certain assets within our Apps segment during the second half of 2022 and a decrease of $5.9 million in third-party payment processing fees driven by a decrease in IAP revenue, partially offset by an increase of $8.3 million in expenses associated with operating our network infrastructure driven by the growth in our operations.
Cost of revenue in the nine months ended September 30, 2023 decreased by $101.1 million, or 11%, compared to the same period in the prior year. The decrease in the nine months ended September 30, 2023 was due primarily to a decrease of $80.5 million in amortization and impairment of intangible assets resulting from the sale of certain assets within our Apps segment during the second half of 2022 and a decrease of $49.3 million in third-party payment processing fees driven by a decrease in IAP revenue, partially offset by an increase of $22.2 million in expenses associated with operating our network infrastructure driven by the growth in our operations.
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
2022 to 2023 % Change |
|
Nine Months Ended September 30, |
|
2022 to 2023 % Change |
|
2023 |
|
2022 |
|
|
2023 |
|
2022 |
|
|
(in thousands, except percentages) |
Sales and marketing |
$ |
212,352 |
|
|
$ |
196,785 |
|
|
8 |
% |
|
$ |
607,755 |
|
|
$ |
719,014 |
|
|
(15) |
% |
Percentage of revenue |
25 |
% |
|
28 |
% |
|
|
|
26 |
% |
|
34 |
% |
|
|
Sales and marketing expenses in the three months ended September 30, 2023 increased by $15.6 million, or 8%, compared to the same period in the prior year, due primarily to an increase of $17.1 million in personnel-related expenses related to an increase in stock-based compensation expense, partially offset by a decrease of $3.1 million in professional services costs due to the optimization and sale of certain assets within our Apps segment during the second half of 2022.
Sales and marketing expenses in the nine months ended September 30, 2023 decreased by $111.3 million, or 15%, compared to the same period in the prior year primarily due to a $136.5 million decrease in user acquisition costs and a $15.3 million decrease in professional services costs associated with the strategic review and optimization of our Apps segment during the second half of 2022, partially offset by an increase of $35.8 million in personnel-related expenses related to an increase in stock-based compensation expense.
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
2022 to 2023 % Change |
|
Nine Months Ended September 30, |
|
2022 to 2023 % Change |
|
2023 |
|
2022 |
|
|
2023 |
|
2022 |
|
|
(in thousands, except percentages) |
Research and development |
$ |
159,288 |
|
|
$ |
122,059 |
|
|
31 |
% |
|
$ |
441,563 |
|
|
$ |
389,417 |
|
|
13 |
% |
Percentage of revenue |
18 |
% |
|
17 |
% |
|
|
|
19 |
% |
|
18 |
% |
|
|
Research and development expenses in the three months ended September 30, 2023 increased by $37.2 million, or 31%, compared to the same period in the prior year, primarily due to an increase of $48.9 million in stock-based compensation expense, partially offset by a decrease of $15.4 million in professional services costs due to the optimization and sale of certain assets within our Apps segment during the second half of 2022.
Research and development expenses in the nine months ended September 30, 2023 increased by $52.1 million, or 13%, compared to the same period in the prior year, primarily due to an increase of $108.2 million in stock-based compensation expense, partially offset by a decrease of $60.8 million in professional services costs due to the optimization and sale of certain assets within our Apps segment during the second half of 2022.
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
2022 to 2023 % Change |
|
Nine Months Ended September 30, |
|
2022 to 2023 % Change |
|
2023 |
|
2022 |
|
|
2023 |
|
2022 |
|
|
(in thousands, except percentages) |
General and administrative |
$ |
41,249 |
|
|
$ |
44,000 |
|
|
(6) |
% |
|
$ |
116,231 |
|
|
$ |
144,988 |
|
|
(20) |
% |
Percentage of revenue |
5 |
% |
|
6 |
% |
|
|
|
5 |
% |
|
7 |
% |
|
|
General and administrative expenses in the three months ended September 30, 2023 decreased by $2.8 million, or 6%, compared to the same period in the prior year, due primarily to a decrease of $5.0 million in acquisition-related expenses, offset by an increase of $3.4 million in personnel-related expenses primarily related to stock-based compensation expense.
General and administrative expenses in the nine months ended September 30, 2023 decreased by $28.8 million, or 20%, compared to the same period in the prior year. This decrease was primarily due to a $19.6 million decrease in acquisition-related expenses and a $9.6 million decrease in personnel-related expenses primarily related to stock-based compensation expense.
Interest expense and loss on settlement of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
2022 to 2023 % Change |
|
Nine Months Ended September 30, |
|
2022 to 2023 % Change |
|
2023 |
|
2022 |
|
|
2023 |
|
2022 |
|
|
(in thousands, except percentages) |
Interest expense and loss on settlement of debt |
$ |
(78,583) |
|
|
$ |
(48,627) |
|
|
62 |
% |
|
$ |
(204,081) |
|
|
$ |
(117,141) |
|
|
74 |
% |
Percentage of revenue |
(9) |
% |
|
(7) |
% |
|
|
|
(9) |
% |
|
(6) |
% |
|
|
In the three months ended September 30, 2023, interest expense and loss on settlement of debt increased by $30.0 million, or 62%, compared to the same period in the prior year, due primarily to an increase in the interest rate for our outstanding debt.
In the nine months ended September 30, 2023, interest expense and loss on settlement of debt increased by $86.9 million, or 74%, compared to the same period in the prior year, due primarily to an increase in the interest rate for our outstanding debt.
Interest income and other, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
2022 to 2023 % Change |
|
Nine Months Ended September 30, |
|
2022 to 2023 % Change |
|
2023 |
|
2022 |
|
|
2023 |
|
2022 |
|
|
(in thousands, except percentages) |
Interest income and other, net |
$ |
1,490 |
|
|
$ |
969 |
|
|
54 |
% |
|
$ |
27,062 |
|
|
$ |
3,501 |
|
|
673 |
% |
Percentage of revenue |
— |
% |
|
— |
% |
|
|
|
1 |
% |
|
— |
% |
|
|
In the three months ended September 30, 2023, interest income and other, net increased by $0.5 million compared to the same period in the prior year, due primarily to a $5.0 million increase in interest income earned on our cash and cash equivalents, a $2.7 million unrealized gain related to the fair value adjustment of non-marketable equity securities, a net foreign currency gain of $3.6 million, offset by certain third party costs incurred in connection with the refinancing of our term loans of $11.0 million.
In the nine months ended September 30, 2023, interest income and other, net increased by $23.6 million, or 673%, compared to the same period in the prior year, due primarily to a $27.6 million increase in interest income earned on our cash and cash equivalents driven by an increase in interest rates.
Provision for (benefit from) Income Taxes
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|
|
Three Months Ended September 30, |
|
2022 to 2023 % Change |
|
Nine Months Ended September 30, |
|
2022 to 2023 % Change |
|
2023 |
|
2022 |
|
|
2023 |
|
2022 |
|
|
(in thousands, except percentages) |
Provision for (benefit from) Income Taxes |
$ |
586 |
|
|
$ |
(22,053) |
|
|
(103) |
% |
|
$ |
17,196 |
|
|
$ |
(25,570) |
|
|
(167) |
% |
Percentage of revenue |
— |
% |
|
(3) |
% |
|
|
|
1 |
% |
|
(1) |
% |
|
|
In the three months ended September 30, 2023, the provision for income taxes increased by $22.6 million, or 103%, compared to the same period in the prior year. The increase was primarily driven by higher pre-tax book income from business operations during the three months ended September 30, 2023, lower stock-based compensation benefit, and higher global intangible low-taxed income, partially offset by foreign-derived intangible income deduction and research and development credits.
In the nine months ended September 30, 2023, provision for income taxes increased by $42.8 million or 167% compared to the same period in the prior year. The increase was primarily driven by higher pre-tax book income from business operations during the nine months ended September 30, 2023, partially offset by foreign income taxed at different rates and higher stock-based compensation benefit.
Comparison of our Segment Results of Operations
The following table presents the results for our Software Platform and Apps segment adjusted EBITDA for the periods indicated:
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|
|
Three Months Ended September 30, |
|
2022 to 2023 % Change |
|
Nine Months Ended September 30, |
|
2022 to 2023 % Change |
|
2023 |
|
2022 |
|
|
2023 |
|
2022 |
|
|
(in thousands, except percentages) |
Software Platform Adjusted EBITDA |
$ |
364,117 |
|
|
$ |
190,256 |
|
|
91 |
% |
|
$ |
855,697 |
|
|
$ |
622,555 |
|
|
37 |
% |
Apps Adjusted EBITDA |
$ |
55,174 |
|
|
$ |
67,381 |
|
|
(18) |
% |
|
$ |
170,806 |
|
|
$ |
181,055 |
|
|
(6) |
% |
Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022
The $173.9 million, or 91%, increase in Software Platform Adjusted EBITDA for the three months ended September 30, 2023 was primarily driven by an increase in Software Platform revenue of $197.9 million, partially offset by an increase of $11.9 million in personnel-related expenses and an increase of $10.5 million in expenses associated with operating our network infrastructure driven by the growth in our operations.
The $12.2 million, or 18%, decrease in Apps Adjusted EBITDA for the three months ended September 30, 2023 was primarily driven by a decrease in Apps Revenue of $46.7 million, partially offset by a decrease of $18.8 million in professional services costs related to marketing, development and maintenance of apps by third parties and a decrease of $5.9 million in third-party payment processing fees related to in-app purchases.
Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022
The $233.1 million, or 37%, increase in Software Platform Adjusted EBITDA for the nine months ended September 30, 2023 was primarily driven by an increase in Software Platform revenue of $522.3 million, partially offset by an increase of $36.2 million in personnel-related expenses related to an increase in headcount primarily due to the acquisition of Wurl in April 2022 and an increase of $27.8 million in expenses associated with operating our network infrastructure. In addition, Software Platform Adjusted EBITDA for the nine months ended September 30, 2022 has been adjusted to exclude publisher bonuses of $209.6 million in the period.
The $10.2 million, or 6%, decrease in Apps Adjusted EBITDA for the nine months ended September 30, 2023 was primarily driven by a decrease in Apps Revenue of $307.2 million, partially offset by a $136.6 million decrease in user acquisition costs, a $76.3 million decrease in professional services costs related to marketing, development and maintenance of apps by third parties, a $49.3 million decrease in third-party payment processing fees related to in-app purchases, and a $16.9 million decrease in personnel-related expenses.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through payments received from clients using our Software Platform and advertising on our Apps, and from user IAPs from our Apps, and through net proceeds we received from the sales of our capital stock and borrowings made under our Credit Agreement, as defined below. As of September 30, 2023, we had cash and cash equivalents of $332.5 million.
We believe that our existing cash and cash equivalents would be sufficient to satisfy our anticipated working capital and capital expenditures needs for at least the next 12 months. Our future capital requirements, however, will depend on many factors, including our growth rate; sales and marketing activities; timing and extent of spending to support our research and development efforts; and our continued need to invest in our IT infrastructure to support our growth. In addition, we may enter into additional strategic partnerships as well as agreements to acquire or invest in teams and technologies, including intellectual property rights, which could increase our cash requirements. As a result of these and other factors, we may be required to seek additional equity or debt financing sooner than we currently anticipate. If additional financing from outside sources is required, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when required, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition, and results of operations could be adversely affected.
The following table summarizes our cash flows for the periods indicated:
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|
|
|
|
|
Nine Months Ended September 30, |
|
2023 |
|
2022 |
|
(in thousands) |
Net cash provided by operating activities |
$ |
717,522 |
|
|
$ |
249,574 |
|
Net cash used in investing activities |
$ |
(71,025) |
|
|
$ |
(1,393,754) |
|
Net cash used in financing activities |
$ |
(1,392,267) |
|
|
$ |
(471,437) |
|
Operating Activities
Net cash provided by operating activities was $717.5 million for the nine months ended September 30, 2023, primarily consisting of $184.5 million of net income, adjusted for certain non-cash items, which included $369.9 million of amortization, depreciation, and write-offs, $275.1 million of stock-based compensation expense, $11.7 million of change in operating right of use assets, and $9.7 million of amortization of debt issuance costs and discount, partially offset by a net increase in operating assets and liabilities of $133.7 million. The net increase in the operating assets and liabilities was primarily driven by an increase in accounts receivable, other assets, and accrued liabilities and a decrease in prepaid expenses.
Net cash provided by operating activities was $249.6 million for the nine months ended September 30, 2022, primarily consisting of $113.4 million of net loss, adjusted for certain non-cash items, which included $445.5 million of amortization, depreciation, and write-offs, $143.9 million of stock-based compensation expense, $13.7 million of change in operating right of use asset, $9.7 million of amortization of debt issuance costs and discount, and $2.3 million of net unrealized losses on fair value remeasurements, partially offset by a net increase in operating assets and liabilities of $252.0 million. The net increase in the operating assets and liabilities was primarily driven by an increase in accounts receivable, prepaid expenses, and other current assets and decreases in accounts payable, operating lease liabilities, deferred revenue, and accrued and other liabilities.
Investing Activities
Net cash used in investing activities was $71.0 million for the nine months ended September 30, 2023, primarily consisting of $51.8 million related to earn-out payments associated with asset acquisitions and $16.9 million in purchases of non-marketable equity securities, partially offset by $8.3 million in proceeds from the sale of assets.
Net cash used in investing activities was $1.4 billion for the nine months ended September 30, 2022, primarily consisting of $1.3 billion related to acquisitions and $56.5 million in purchases of non-marketable investments and other, partially offset by $3.7 million in proceeds from other investing activity.
Financing Activities
Net cash used in financing activities was $1,392.3 million for the nine months ended September 30, 2023, primarily consisting of repurchases of stock under our share repurchase program of $1,153.6 million, payments for withholding taxes related to the net share settlement of restricted stock units of $115.8 million, principal repayments of debt of $490.5 million net of $210.3 million proceeds from issuance of debt, payments for license asset obligations of $15.3 million, and principal payments on finance leases of $16.2 million, partially offset by $185.0 million in proceeds from drawing down the revolving credit facility and $17.8 million in proceeds from the exercise of stock options.
Net cash used in financing activities was $471.4 million for the nine months ended September 30, 2022, primarily consisting of repurchases of stock under our share repurchase program of $338.9 million, payments for deferred acquisition costs of $105.0 million, payments for finance leases of $18.1 million, repayments of debt principal of $17.5 million, and payments for license asset obligations of $17.4 million, partially offset by $21.7 million proceeds from exercise of stock options.
Share Repurchase Program
During the nine months ended September 30, 2023, we repurchased 46,665,285 shares of Class A common stock for an aggregate amount, including commissions and fees, of $1,153.6 million. For additional information, see Note 7 – Equity of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Credit Agreement
We are party to a credit agreement (the “Credit Agreement”), which provides for senior secured term loans and a revolving credit facility. In January 2023, we entered into Amendment No. 7 to the Credit Agreement to transition the benchmark interest rate from the London Interbank Offered Rate (“LIBOR”) to the Term Secured Overnight Financing Rate (“SOFR”), which included a 10 basis-point credit spread adjustment. In June 2023, we entered into Amendment No. 8 to the Credit Agreement to extend the maturity date with respect to the revolving credit facility to the earlier of 91 days prior to the final maturity of any term loan under the Credit Agreement (unless all term loans with a maturity date earlier than October 25, 2028 have been repaid in full prior to such date) and June 12, 2028, and increase the maximum commitment of the revolving credit facility by $10.0 million to an aggregate of $610.0 million.
In August 2023, we entered into Amendment No. 9 to the Credit Agreement (the "Amendment") to refinance certain term loans in the aggregate principal amount of $1.7 billion with an maturity date of August 15, 2025. The refinanced term loans have (a) a principal amount of $1.5 billion, to be repaid in equal quarterly installments of $3.8 million with the remaining balance due on August 16, 2030, (b) an interest rate “floor” of 50 basis points if such loans bear interest based on SOFR (such loans, “Term SOFR Loans”), and (c) an applicable margin for Term SOFR Loans equal to 3.10% (or 2.00% for base rate loans). The other material terms of the refinanced term loans remain unchanged.
In August 2023, we drew down $185.0 million from the revolving credit facility. As of September 30, 2023, an aggregate of $418.7 million was available to be drawn from the revolving credit facility.
There were no other material changes to our debt and the related Credit Agreement since December 31, 2022.
Contractual Obligations
Except for scheduled payments from the ongoing business, there were no material changes to our commitments under contractual obligations since December 31, 2022.
Critical Accounting Estimates
Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities and the amount of revenue and expenses that are not readily apparent from other sources. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
There have been no material changes to our critical accounting policies and estimates during the nine months ended September 30, 2023, as compared to those disclosed in our Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in our 2022 Annual Report on Form 10-K filed with the SEC.
Recent Accounting Pronouncements
See Note 1, “Description of Business and Summary of Significant Accounting Policies” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks in the ordinary course of our business, which primarily relate to fluctuations in interest rates and foreign exchange risks.
From time to time, we enter into pay-fixed receive-variable interest rate swap agreements as part of our interest rate risk management strategy in connection with our outstanding indebtedness, which is subject to variable interest rates. Such agreements effectively fix the borrowing rates on the notional amount to provide an economic hedge against the risk of rising interest rates during the terms of these agreements. We do not designate the interest rate swaps as hedging instruments for accounting purposes and record unrealized gains and losses related to the change in fair value of such interest rate swaps through interest expense in our condensed consolidated statement of operations. However, such gains and losses would only be realized upon the cash settlement of the interest rate swaps. A hypothetical 100 basis point change in interest rates would not have a material impact on our cash interest expense for the three months ended September 30, 2023.
There have been no other material changes to our market risk since December 31, 2022.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2023.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their desired objectives. Management does not expect, however, that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions, and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company have been detected.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be subject to legal proceedings and claims that arise in the ordinary course of business, as well as governmental and other regulatory investigations and proceedings. In addition, third parties may from time to time assert claims against us in the form of letters and other communications. We are not currently a party to any legal proceedings that, if determined adversely to us, would, in our opinion, have a material adverse effect on our business, financial condition, results of operations, or cash flows. Future litigation may be necessary to defend ourselves and our business partners and to determine the scope, enforceability, and validity of third-party proprietary rights, or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
ITEM 1A. RISK FACTORS
You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, including our unaudited condensed consolidated financial statements and the related notes and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our business, financial condition, results of operations, or prospects could also be adversely affected by risks and uncertainties that are not presently known to us or that we currently believe are not material. If any of the risks actually occur, our business, financial condition, results of operations, and prospects could be adversely affected. In that event, the market price of our Class A common stock could decline, and you could lose all or part of your investment.
Risk Factor Summary
Investing in our Class A common stock involves a high degree of risk because our business is subject to numerous risks and uncertainties, as further described below. The principal factors and uncertainties that make investing in our Class A common stock subject to risk include, among other things:
Business, Operational, and Industry Factors
•our limited operating history and the unpredictability of our results of operations;
•our ability to attract new clients, the loss of clients, or reduction in spend by clients;
•security breaches, improper access to or disclosure of data, or other cyber incidents;
•competition in our industry and our ability to adapt to technological change;
•our ability to address or mitigate technical limitations in our systems and to maintain and scale our technical infrastructure;
•the impact of macroeconomic conditions and the geopolitical climate;
•our reliance on certain key employees and our ability to attract, retain, and motivate key personnel;
•risks related to our strategic acquisitions and partnerships, including integration, managing growth and tax risks;
•risks related to the expansion and diversification of our operations, in the United States and globally, and possibly through future strategic acquisitions and partnerships;
•our expansion into new business opportunities and our ability to effectively manage our growing international operations;
•our ability to realize the value of our Apps portfolio;
•our ability to maintain relationships with our Partner Studios;
•our reliance on third-party platforms to distribute our AppLovin Apps and collect revenue;
•our ability to launch or acquire new AppLovin Apps and successfully monetize or improve them and existing Apps;
•our ability to retain existing users or add new users cost-effectively, or if users decrease their level of engagement;
•concentration of our revenue sources;
•our recent rapid growth, and ability to manage growth;
•our ability to increase in-app purchases, respond to changes with respect to in-app purchases, and manage the economies in our AppLovin Apps;
•our ability to achieve or maintain profitability with increasing operating expenses;
•our ability to maintain company culture and to establish and maintain awareness of the AppLovin brand;
•our ability to maintain a customer support ecosystem amongst the proliferation of “cheating” programs and scam offers seeking to exploit our mobile games and users;
•the use of machine learning ("ML") and artificial intelligence ("AI") in our offerings and business;
Legal and Regulatory Matters
•changes in laws and regulations concerning privacy, information security, data protection, consumer protection, AI, advertising, tracking, targeting, and protection of minors;
•changes in U.S. and foreign laws, many of which are unsettled and still developing;
•compliance with governmental anti-bribery, export controls and economic sanctions laws;
•changes in tax laws or tax rulings or exposure to greater than anticipated tax liabilities;
•assertions by taxing authorities that we should have collected or in the future should collect sales and use, value added, or similar taxes;
•our ability to realize tax savings from our international structure;
•liability for content that is distributed through or advertising that is served through our Software Platform or Apps;
•expenses related to legal or regulatory proceedings and settlements or laws and regulations affecting public companies;
Intellectual Property Factors
•our ability to protect or enforce our proprietary and intellectual property rights or the costs involved in such enforcement;
•our involvement in intellectual property disputes;
•our use of and compliance with open source software;
•our ability to acquire and maintain licenses to intellectual property;
Financial and Accounting Matters
•our ability to maintain an effective system of disclosure controls and internal control over financial reporting;
•our reliance on assumptions and estimates to calculate certain of our key metrics;
•changes to segment reporting as a result of our evolving business;
•the possibility that we may be required to record a significant charge to earnings if our goodwill becomes impaired;
•substantial indebtedness under our senior secured credit facilities;
•our ability to generate sufficient cash flow to satisfy our significant debt service obligations;
•the availability of additional capital on acceptable terms;
Ownership of our Class A common stock and Governance
•the multi-class structure of our common stock and the Voting Agreement among the Voting Agreement Parties;
•our status as a “controlled company” within the meaning of the Nasdaq corporate governance requirements;
•volatility of the market price of our Class A common stock;
•the possibility that we may not realize the anticipated long-term stockholder value of our share repurchase programs;
•the issuance of additional stock in connection with financings, acquisitions, investments, our equity incentive plans, or otherwise;
•provisions of Delaware law, the Voting Agreement, our amended and restated certificate of incorporation, and our amended and restated bylaws could make a merger, tender offer, or proxy contest difficult; and
•exclusive forum provisions in our amended and restated bylaws.
Risks Related to Our Business and Industry
We have a limited operating history, especially with respect to our AppLovin Apps, which makes it difficult to evaluate our current business and future performance and the risks we may encounter.
Our limited operating history, especially with respect to our AppLovin Apps, which we launched in 2018, may make it difficult to evaluate our current business and our future performance. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries, such as the mobile app ecosystem, including our ability to:
•accurately forecast our revenue and plan our operating expenses;
•attract new and retain existing clients using AppLovin Software Platform and users of our Apps;
•successfully compete with current and future competitors, some of whom are also our clients;
•successfully expand our business in existing markets and enter new markets and geographies;
•successfully execute strategic acquisitions and partnerships;
•develop a scalable, high-performance technology infrastructure that can efficiently and reliably handle increased usage, as well as the deployment of new features and services;
•comply with existing and new laws and regulations applicable to our business;
•anticipate and respond to macroeconomic changes and changes in the markets in which we operate;
•establish and maintain our brand and reputation;
•adapt to rapidly evolving trends in the ways businesses and consumers interact with technology;
•effectively manage our rapid growth;
•avoid interruptions or disruptions in our AppLovin Core Technologies, Software Platform, or Apps; and
•hire, integrate, and retain key personnel.
Further, because we have limited historical financial data, including limited data regarding the integration of our strategic acquisitions and partnerships, and operate in a rapidly evolving market, any financial planning and forecasting, including predictions about our future revenue and expenses, may not be as accurate as they would be if we had a longer operating history or operated in a more predictable market. If our assumptions regarding these risks and uncertainties, which we use to plan and operate our business, are incorrect or change, or if we do not address these risks successfully, our results of operations could differ materially from our expectations. If we fail to address the risks and uncertainties that we face, including those described elsewhere in this “Risk Factors” section, our business, financial condition, and results of operations could be adversely affected.
Our results of operations are likely to fluctuate from period-to-period, which could cause the market price of our Class A common stock to decline.
Our results of operations have fluctuated in the past and are likely to fluctuate significantly from quarter-to-quarter and year-to-year in the future for a variety of reasons, many of which are outside of our control and difficult to predict. As a result, you should not rely upon our historical results of operations as indicators of future performance. Numerous factors can influence our results of operations, including:
•our ability to maintain and grow our client and user bases;
•changes to our Core Technologies, Software Platform, Apps, or other offerings, or the development and introduction of new software or development of new mobile apps by our studios or our competitors;
•changes to the policies or practices of companies or governmental agencies that determine access to third-party platforms, such as the Apple App Store and the Google Play Store, or to our Software Platform, Apps, website, or the internet generally;
•changes to the policies or practices of third-party platforms, such as the Apple App Store and the Google Play Store, including with respect to Apple’s Identifier for Advertisers ("IDFA"), which helps advertisers assess the effectiveness of their advertising efforts, and with respect to transparency regarding data processing;
•the diversification and growth of revenue sources beyond our current Software Platform and Apps;
•our ability to achieve the anticipated synergies from our strategic acquisitions and effectively integrate new assets and businesses acquired by us;
•the success of our strategic review of our Apps portfolio;
•the actions of our competitors, both with respect to their own offerings and, to the extent such competitors are also our clients, with respect to their use of our Software Platform;
•costs and expenses related to the strategic acquisitions and partnerships, including costs related to integrating mobile gaming studios or other companies that we acquire, as well as costs and expenses related to the development of our Core Technologies, Software Platform, or Apps;
•our ability to achieve or maintain profitability;
•increases in and timing of operating expenses that we may incur to grow and expand our operations and to remain competitive;
•system failures or outages, or actual or perceived breaches of security or privacy, and the costs associated with preventing, responding to, or remediating any such outages or breaches;
•changes in the legislative or regulatory environment, including with respect to privacy, data protection, and AI or actions by governments or regulators, including fines, orders, or consent decrees;
•charges associated with impairment of any assets on our balance sheet or changes in our expected estimated useful life of property and equipment and intangible assets;
•adverse litigation judgments, settlements, or other litigation-related costs and the fees associated with investigating and defending claims;
•the overall tax rate for our business, which may be affected by the mix of income we earn in the United States and in jurisdictions with comparatively lower tax rates;
•the impact of changes in tax laws or judicial or regulatory interpretations of tax laws, which are recorded in the period such laws are enacted or interpretations are issued and may significantly affect the effective tax rate of that period;
•the application of new or changing financial accounting standards or practices; and
•changes in regional or global business or macroeconomic conditions, including as a result of uncertainty in the global banking and financial services markets, political tension and escalation in regions such as Russia, China and the Middle East, inflation, and rising interest rates, which may impact the other factors described above.
In particular, it is difficult to predict if, when, or how quickly newly-launched software may begin to generate revenue or decline in popularity. Further, we cannot be certain if a new App will become popular amongst users and generate revenue. The success of our business depends in part on our ability to develop and enhance our Core Technologies and Software Platform, and consistently and timely launch new Apps. It is difficult for us to predict with certainty when we will expand our Software Platform suite or launch a new App as we may require longer development schedules or soft launch periods to meet our quality standards and expectations. If our clients do not adopt our new Software Platform offerings, or develop or further invest in their own competing alternatives, or if we are unable to successfully launch or acquire new Apps or maintain or improve existing Apps, our business and results of operations could be adversely affected. Fluctuations in our results of operations may cause such results to fall below our financial guidance or the expectations of analysts or investors, which could cause the market price of our Class A common stock to decline.
The failure to attract new clients, the loss of clients, or a reduction in spending by these clients could adversely affect our business, financial condition, and results of operations.
A significant portion of our revenue is Software Platform Revenue and In-App Advertising ("IAA") Revenue from our Apps. Software Platform Revenue is mostly from AppDiscovery, is generated from our advertisers, typically on a performance-based, cost-per-install basis, then shared with our advertising publishers, typically on a cost per impression model. IAA Revenue generated from our Apps comes from advertisers that purchase ad inventory from our diverse portfolio of mobile games. As is common in the mobile app ecosystem and in the advertising industry, our clients do not have long-term advertising commitments with us. Our success depends in part on our ability to satisfy our advertising partners.
Revenue could also be impacted by a number of other factors, including:
•our ability to attract and retain clients;
•our ability to improve the effectiveness and predictability of our advertising and maintain and improve our AI-based advertising engine AXON;
•our ability to maintain or increase advertiser demand and third-party publisher supply, the quantity or quality of advertisements shown to users, or our pricing of advertisements;
•our ability to continue to increase user access to and engagement with our Apps;
•mobile app changes or inventory management decisions we may make that change the size, format, frequency, or relative prominence of advertisements displayed on our Apps;
•our ability to recruit, train, and retain personnel to support continued growth of our Core Technologies and Software Platform;
•our ability to establish and maintain our brand and reputation;
•loss of market share to our competitors, including if competitors offer lower priced, more integrated, or otherwise more effective products;
•the development and success of technologies designed to block the display of advertisements or block our ad measurement tools, which have in the past impacted and may in the future impact our business, or technologies that make it easier for users to opt out of behavioral targeting;
•the availability, accuracy, utility, and security of analytics and measurement solutions offered by us or third parties that demonstrate the value of our Software Platform to advertisers, developers and publishers, or our ability to further improve such tools;
•government actions or legislative, regulatory, or other legal developments relating to advertising, including developments that may impact our ability to deliver, target, or measure the effectiveness of advertising;
•changes that limit our ability to deliver, target, or measure the effectiveness of advertising, including changes to policies by mobile operating system and third-party platform providers, and the degree to which users opt in or opt out of certain types of ad targeting as a result of changes and controls implemented in connection with such policy changes and with the E.U. General Data Protection Regulation (the "GDPR"), ePrivacy Directive, the California Consumer Privacy Act (the "CCPA") as amended by the California Privacy Rights Act (the "CPRA") and similar U.S. multi-state privacy laws, and the Children’s Online Privacy Protection Act (the "COPPA");
•decisions by clients to reduce their advertising due to concerns about legal liability or uncertainty regarding their own legal and compliance obligations, or due to negative publicity, regardless of its accuracy, involving us, our user data practices, advertising metrics or tools, our Software Platform or Apps, or other companies in our industry; and
•the impact of macroeconomic conditions, including inflation, rising interest rates, uncertainty in the global banking and financial services markets, the war in Ukraine, the crisis in the Middle East, political tension between the United States and China, and responses thereto, and seasonality, whether in the advertising industry in general, or among specific types of advertisers or within particular geographies.
From time to time, certain of these factors have adversely affected our revenue to varying degrees. The occurrence of any of these or other factors in the future could result in a reduction in demand for our Software Platform and use of our Apps, which may reduce the prices we receive for our advertisements or cause clients to stop advertising with us altogether, either of which would adversely affect our business and results of operations. The failure to attract new clients, loss of clients, or reduction in spending by clients could adversely affect our business, financial condition, and results of operations.
Security breaches, improper access to or disclosure of our data or user data, other hacking and phishing attacks on our systems, or other cyber incidents could harm our reputation and adversely affect our business.
The mobile app ecosystem is prone to cyberattacks by third parties seeking unauthorized access to our data or the data of our clients or users or to disrupt our ability to provide service. Our Core Technologies, Software Platform, Apps, and other offerings involve the collection, storage, processing, and transmission of a large amount of data, including personal information, and we and our third-party service providers otherwise store and process information, including our confidential and proprietary business information, and personal information and other information relating to our employees and clients or other third parties. We also store and implement measures designed to secure the source code for our Core Technologies, Software Platform and Apps as they are created. Any failure to prevent or mitigate security breaches or incidents impacting our systems or other systems used in our business, or improper access to or disclosure of our data, including source code, or user data, including personal information, content, or payment information from users, or information from clients or other third parties, that is stored or otherwise processed in our business could result in the unauthorized loss, modification, disclosure, destruction, or other misuse of such data, or unavailability of data or of our Core Technologies, Software Platform, Apps, or other offerings. Any such event, or the perception it has occurred, could adversely affect our business and reputation, damage our operations, result in claims, litigation, or regulatory investigations or enforcement actions, fines, penalties, or other liability or obligations, and diminish our competitive position. In particular, a breach or incident, whether physical, electronic, or otherwise, impacting systems on which source code or other sensitive data are stored could lead to loss, disruption, unavailability, or piracy of, or damage to, our offerings, lost or reduced ability to protect our intellectual property, and diminished competitive position.
Computer malware (including ransomware), viruses, social engineering (predominantly spear phishing attacks or smishing), and general hacking have become more prevalent in the mobile app ecosystem. Some of these have occurred on our systems and otherwise in our business in the past, and we expect will continue to occur in the future. We regularly encounter attempts to create false or undesirable user accounts or take other actions for purposes such as spamming or other objectionable ends. Any actual or attempted breaches, incidents, or attacks may cause disruptions or interruptions to our Core Technologies, Software Platform, Apps, or other offerings, degrade the user experience, impair, disrupt, or interrupt our internal systems and other systems and networks used in our business, or adversely affect our reputation, business, financial condition, and results of operations. Our efforts to protect our data, user data, and information from clients, partners, and other third parties, and to disable or otherwise respond to undesirable activities on our Core Technologies, Software Platform, Apps, or other offerings, may also be unsuccessful due to software bugs or other technical defects, errors, or malfunctions; employee, contractor, vendor, or partner error or malfeasance, including defects or vulnerabilities in information technology systems or offerings; cyberattacks, attacks designed to disrupt systems or facilities, or breaches of physical security of our facilities or technical infrastructure; or other threats that evolve. Additionally, any such breach, incident, attack, malfunction, defect, or vulnerability, or the perception that any of these has occurred, may cause clients or users to lose confidence and trust in our Core Technologies, Software Platform or Apps and otherwise harm our reputation and market position.
In addition, some developers or other business partners, such as those that help us measure the effectiveness of advertisements, may receive or store information provided by us or by our users through mobile or web apps or other means. These third parties may misappropriate our information and engage in unauthorized use of it. If these third parties fail to adopt or adhere to adequate data security practices, or experience a breach of, or other security incident impacting, their networks or systems, our data or our users’ data may be lost, destroyed, or improperly accessed, modified, disclosed, or otherwise misused. In such an event, or if such an event is perceived to have occurred, we may suffer damage to our reputation, may have increased costs arising from the restoration or implementation of additional security measures, and we may face claims, demands, investigations, and other proceedings by private parties or governmental actors, and fines, penalties, and other liability or obligations, any of which could adversely affect our business, financial condition, and results of operations. Any theft or unauthorized use or publication of our trade secrets and other confidential business information as a result of such an event could also adversely affect our business, competitive position, and results of operations.
Cyberattacks continue to evolve in sophistication and volume, and may be inherently difficult to detect for long periods of time. Although we have developed systems and processes that are designed to protect our data, user data, and information from our partners; to prevent data loss, disable undesirable accounts and activities on our Core Technologies, Software Platform or Apps; and to prevent and detect security breaches; we cannot assure you that such measures will provide comprehensive security, that we have been or will be able to identify breaches or other incidents or to react to them in a timely manner or that our remediation efforts will be successful. We experience cyberattacks and other security incidents of varying degrees from time to time, and we may incur significant costs in investigating, protecting against, litigating, or remediating such incidents. We may face increased risks of cyberattacks and other security incidents as a result of more employees working remotely, our use of third-party systems designed to enable the transition to a remote workforce introducing security risks and increased cyberattacks, such as phishing attacks by threat actors as a method for targeting personnel. Further, in connection with the war in Ukraine and the crisis in the Middle East, there may be a heightened risk of potential cyberattacks by state actors or others.
Additionally, our Core Technologies, Software Platform, and other offerings operate in conjunction with, and we are in some cases dependent upon, third-party products, services, and components. Our ability to monitor our third-party service providers’ data security is limited, and in any event, attackers may be able to circumvent our third-party service providers’ data security measures. There have been and may continue to be significant attacks on certain third-party providers, and we cannot guarantee that our or our third-party providers’ systems and networks have not been breached or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our systems and networks or the systems and networks of third parties that support us and our platform and service. If there is a security vulnerability, error, or other bug in one of these third-party products, services, and components and if there is a security exploit targeting them, we could face increased costs, claims, liability, and additional or new obligations, reduced revenue, and harm to our reputation or competitive position. We and our service providers may be unable to anticipate these techniques, react, remediate or otherwise address any security vulnerability, breach or other security incident in a timely manner, or implement adequate preventative measures. Furthermore, the use of AI technology in our platform, services, and components, or in third-party products and services, may result in new and enhanced security risks, related liability, and harm to our reputation.
Further, we utilize AI technologies in our Core Technologies, Software Platform, and Apps and may expand such use in the future. Our use of AI technologies may create additional cybersecurity risks or increase cybersecurity risks, including risks of security breaches and incidents. Further, AI technologies may be used in connection with certain cybersecurity attacks, resulting in heightened risks of security breaches and incidents.
In addition to our efforts to mitigate cybersecurity risks, we are making significant investments in privacy, safety, security, and content review efforts to combat misuse of our services and user data by third parties. As a result of these efforts, we anticipate that we will discover incidents of misuse of user data or other undesirable activity by third parties. We may not discover all such incidents or activity, in connection with such efforts or otherwise, whether owing to our data limitations, the scale of activity on our Core Technologies and Software Platform, challenges related to our personnel working remotely, the re-allocation of resources to other projects, or other factors, and we may be notified of such incidents or activity by users, the media, or other third parties. Such incidents and activities have in the past, and may in the future, include the use or other processing of user data or our systems in a manner inconsistent with our terms, contracts or policies, the existence of false or undesirable user accounts, improper advertising practices, activities that threaten people’s safety on- or offline or instances of spamming, scraping, data harvesting, or unsecured datasets. We may also be unsuccessful in our efforts to enforce our policies or otherwise remediate or respond to any such incidents effectively or in a timely manner. Any of the foregoing developments, or any reports of them occurring or the perception that any of them has occurred, could adversely affect user trust and engagement, harm our brand and reputation, require us to change our business practices, result in claims, demands, investigations, and other proceedings by private parties or governmental actors, and fines, penalties, and other liability or obligations, and adversely affect our business, financial condition, and results of operations.
We are subject to a variety of laws and regulations in the United States and abroad relating to cybersecurity and data protection, a number of which provide a private right of action. Many jurisdictions have enacted breach notification obligations, and our agreements with certain customers or partners may require us to notify them in the event of a security breach. Affected users or government authorities could initiate legal or regulatory actions against us in connection with any actual or perceived security breaches or improper access to or disclosure of data, which has occurred in the past and which could cause us to incur significant expense and liability, distract management and technical personnel, and result in orders or consent decrees forcing us to modify our business practices. Such actual or perceived incidents or our efforts to remediate such incidents may also result in a decline in our active user base or engagement levels.
We are seeing an increase in inquiries from our partners regarding audit certifications, such as SOC 2, Type II or ISO 27001, which we have not yet achieved. Any of these events could adversely affect our reputation, business, financial condition, or results of operations.
Our insurance coverage may not extend to all types of privacy and data security breaches or other incidents, and it may be insufficient to cover all costs and expenses associated with such incidents. Further, such insurance may not continue to be available to us in the future on economically reasonable terms, or at all, and insurers may deny us coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our reputation, financial condition, or results of operations.
The mobile app ecosystem is intensely competitive. If clients or users prefer our competitors’ products or services over our own, our business, financial condition, and results of operations could be adversely affected.
We face significant competition in the mobile app ecosystem. We offer a suite of solutions for developers to get their mobile apps discovered and downloaded by the right users, optimize return on marketing spend, and maximize the monetization of their engagement. We collect revenue from clients for fees paid by mobile app advertisers, including developers, that use our Software Platform and from the sale of advertising inventory of our Apps. Advertisers often engage with several advertising platforms and networks to purchase advertisements on mobile apps and developers often engage with multiple tools to market and monetize their apps. Accordingly, we face significant competition from traditional, online, and mobile businesses that provide ad networks and platforms, mobile apps and games, media, and other services for advertisers to reach relevant audiences. We also face competition from providers of developer tools that enable developers to reach their audiences or manage or optimize their advertising campaigns. These companies vary in size and include Facebook, Google, and Unity Software as well as various private companies. Several of these companies, including Facebook, Google, and Unity Software, are also our partners and clients. Additionally, our studios build many of our Apps using the development kits offered by Unity Software. Changes in pricing or the terms on which developers engage with companies in the mobile app ecosystem, such as the pricing changes announced by Unity Software in September 2023, could negatively impact our studios and the mobile app ecosystem generally. Clients who are also competitors may decide to invest i