AppLovin Corporation — Q2 2023 Form 10-Q Summary
Business context and reporting period
AppLovin operates two reportable segments: Software Platform, which provides advertising, mediation, attribution, and connected-TV software, and Apps, consisting primarily of free-to-play mobile games. The filing covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods. Financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $750.2 million | $776.2 million | $1.466 billion | $1.402 billion |
| Net income attributable to AppLovin | $80.4 million | $(21.7) million | $75.8 million | $(137.0) million |
| GAAP net margin | 10.7% | (2.8%) | 5.2% | (9.8%) |
| Adjusted EBITDA | $333.5 million | $269.7 million | $607.2 million | $546.0 million |
| Adjusted EBITDA margin | 44.5% | 34.8% | 41.4% | 39.0% |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $518.5 million | $75.1 million |
| Free cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $503.7 million | $62.4 million |
Q2 Software Platform revenue increased 28% to $406.1 million, while Apps revenue declined 25% to $344.1 million. Q2 in-app purchase revenue fell 23% to $233.6 million and in-app advertising revenue fell 29% to $110.5 million. Software Platform represented 54% of total revenue and Apps represented 46%.
Average Monthly Active Payers declined to 1.7 million from 2.3 million, while average revenue per monthly active payer increased to $46 from $43.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $876.2 million at June 30, 2023, compared with $1.080 billion at December 31, 2022.
- Outstanding debt totaled approximately $3.20 billion, including $3.167 billion of long-term debt and $33.3 million of short-term debt.
- The revolving credit facility was undrawn at quarter-end. Amendment No. 8 increased its commitment to $610 million and extended its maturity framework.
- Management stated that existing cash should satisfy anticipated working-capital and capital-expenditure needs for at least the next 12 months, although additional financing could be required for growth, acquisitions, or other investments.
- The company repurchased 30.9 million shares for $579.8 million during the first six months and repurchased an additional $21.0 million through August 8, 2023. At that date, $107.4 million remained available under the authorized program.
Material changes versus the prior comparable period
- Q2 revenue decreased 3%, but six-month revenue increased 5%. The six-month comparison benefited from a $209.6 million publisher-bonus reduction to revenue recorded in the 2022 period.
- Operating income improved to $131.3 million from $53.4 million in Q2 2022 and to $192.4 million from an operating loss of $74.6 million for the first six months.
- Cost of revenue declined 15% in Q2 and 11% year to date, reflecting lower amortization and lower payment-processing costs associated with reduced in-app purchase revenue.
- Sales and marketing expense declined 17% in Q2 and 24% year to date, primarily because of lower Apps user-acquisition spending.
- Interest expense increased 40% in Q2 and 83% year to date because of higher interest rates on variable-rate debt.
- Stock-based compensation increased to $81.3 million in Q2 and $164.2 million year to date, compared with $57.2 million and $101.8 million, respectively, in the prior-year periods.
- Cash flow from operations increased substantially, while investing cash use declined because 2023 included no major acquisitions comparable to the 2022 MoPub and Wurl transactions.
Guidance, outlook, commentary, and risks
The filing does not provide a clear numerical revenue or earnings outlook. Management highlighted the Q2 rollout of the AI-based AXON 2.0 advertising engine, which it said drove sequential improvements in AppDiscovery performance and advertiser returns.
Management is continuing to optimize the Apps portfolio by reducing user-acquisition spending, restructuring or divesting assets, and prioritizing financial returns. This strategy has improved Apps margins but has contributed to lower Apps revenue and Monthly Active Payers.
- Key risks include advertiser budget reductions, macroeconomic uncertainty, rising interest rates, competition, and dependence on third-party platforms such as Apple App Store and Google Play.
- Privacy and tracking changes, including Apple’s app privacy controls and Google’s Privacy Sandbox and consent-management requirements, could reduce advertising effectiveness or increase compliance costs.
- Cybersecurity incidents, outages, data protection claims, evolving AI regulation, and intellectual-property disputes could adversely affect operations and reputation.
- The company has substantial variable-rate debt and relies on continued operating cash flow to service its obligations. Interest-rate swaps covered a $1.8 billion notional amount at June 30, 2023; one remaining swap matured October 31, 2023.
- Outstanding commitments included $342.3 million of unpaid cloud-service commitments under an arrangement requiring at least $550.0 million of purchases through May 2025, plus $33.4 million of unfunded private-equity investment commitments.
- No material legal proceeding was identified as likely to have a material adverse effect, and management concluded that disclosure controls were effective at a reasonable assurance level.
Important facts for investors to verify
- Whether AXON 2.0 and continued Software Platform growth can offset declining Apps revenue and payer volumes.
- The sustainability of the unusually high 2023 operating cash flow and Adjusted EBITDA, including the impact of non-cash amortization and stock-based compensation.
- Debt maturities, variable-rate exposure, covenant compliance, and the effect of higher interest costs on future earnings and cash flow.
- The remaining authorization and future pace of share repurchases relative to liquidity and acquisition needs.
- The effect of Apple and Google privacy, tracking, consent, and platform-policy changes on advertising performance and app monetization.
- The potential dilution and expense associated with performance-based stock awards, including up to $90 million of additional Class A shares potentially issuable under the amended Wurl incentive plan.