AppLovin Corporation — Q3 2022 Form 10-Q Summary
Business context and reporting period
AppLovin operates a software platform serving mobile app developers and a portfolio of more than 350 free-to-play mobile games. Beginning in the second quarter of 2022, management reported two segments: Software Platform and Apps. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $713.1 million | $727.0 million | $2.115 billion | $1.พ000 billion |
| Net income (loss) | $23.7 million | $0.1 million | $(113.4) million | $3.9 million |
| Net margin | 3.3% | Approximately 0% | (5.4)% | 0.2% |
| Operating income (loss) | $49.3 million | $45.0 million | $(25.4) million | $91.5 million |
| Adjusted EBITDA | $257.6 million | $190.7 million | $803.6 million | $505.5 million |
| Adjusted EBITDA margin | 36.1% | 26.2% | 38.0% | 25.3% |
| Cash flow from operations | Not separately provided | Not separately provided | $249.6 million | $276.8 million |
Q3 revenue declined 2% year over year, while nine-month revenue increased 6%. Software Platform revenue increased 59% in Q3 and 74% for the nine-month period, reaching $306.6 million and $743.0 million, respectively. Apps revenue declined 24% in Q3 and 13% year to date, primarily because of lower in-app purchase activity and advertising pricing.
Q3 cost of revenue was $301.0 million, or 42% of revenue, compared with 35% in the prior-year quarter. Sales and marketing declined 31% to $196.8 million, or 28% of revenue, reflecting lower user-acquisition spending. Research and development increased 12% to $122.1 million, and general and administrative expense increased 29% to $44.0 million.
Interest expense and loss on settlement of debt increased to $48.6 million in Q3 from $18.8 million, primarily because of higher LIBOR and increased debt balances. Stock-based compensation was $42.1 million in Q3 and $143.9 million for the first nine months. Amortization, depreciation and write-offs were $163.8 million in Q3 and $445.5 million year to date.
Liquidity, debt and cash flow
- Cash and cash equivalents were $943.5 million at September 30, 2022, down from $1.521 billion at December 31, 2021. The company reported no restricted cash at September 30, 2022.
- Total outstanding indebtedness under the credit agreement was approximately $3.25 billion, consisting of term loans. The balance-sheet presentation included $33.3 million of short-term debt and $3.184 billion of long-term debt.
- Nine-month operating cash flow was $249.6 million, down from $276.8 million in the prior-year period.
- Nine-month investing cash use was $1.394 billion, including $1.336 billion for acquisitions and $56.5 million for non-marketable investments.
- Nine-month financing cash use was $471.4 million, including $338.9 million of share repurchases, $105.0 million of deferred acquisition-cost payments and $17.5 million of debt principal repayments.
- Management stated that existing cash and cash equivalents should satisfy anticipated working-capital and capital-expenditure needs for at least the next 12 months, although additional financing could be required depending on growth, acquisitions and investment needs.
Material changes versus the prior comparable period
- Software Platform revenue and profitability expanded significantly, supported by AppDiscovery, MAX, Adjust and Wurl. Software Platform adjusted EBITDA rose 46% in Q3 and 121% for the nine-month period.
- Apps revenue weakened, driven by a 28% Q3 decline in in-app purchase volume, lower revenue from Project Makeover and Matchington Mansion, and a 14% decline in advertising price per impression. Monthly active payers declined to 2.2 million from 2.9 million, while average revenue per payer declined to $41 from $44.
- Management reduced Apps user-acquisition spending and increased return thresholds. This improved Apps adjusted EBITDA in Q3 but contributed to lower monthly active payers.
- The company completed the $1.03 billion MoPub acquisition on January 1, 2022, and the $378.2 million Wurl acquisition on April 1, 2022. Wurl contributed $22.7 million of revenue and an $8.7 million pretax loss from acquisition through September 30.
- Nine-month results included $209.6 million of publisher bonuses related primarily to migrating publishers to MAX, $7.0 million of MoPub transition-service costs and $8.5 million of restructuring costs. These items were excluded from adjusted EBITDA where applicable.
- In June 2022, the company announced a workforce reduction affecting approximately 12% of employees and recorded a $7.4 million restructuring charge, primarily for termination benefits.
- Goodwill increased to $1.763 billion from $966.4 million at year-end 2021, primarily from acquisitions, partly offset by foreign-currency translation losses. Management concluded that goodwill was not impaired as of the reporting date.
Guidance, outlook, commentary and risks
The filing does not provide a clear quantitative revenue or earnings outlook. Management expects continued investment in the Software Platform, research and development, infrastructure and strategic acquisitions, while stating that expenses may fluctuate and profitability may not be achieved in every period.
The strategic review of the Apps portfolio remains ongoing. Potential outcomes include retaining, restructuring or selling certain assets, separating portions of the Apps business, or making no changes. The filing provides no defined timetable or assurance that a transaction will occur.
- Management cited reduced advertiser budgets, inflation, rising interest rates and broader economic uncertainty as factors slowing Software Platform growth.
- Apple and Google privacy, tracking and platform-policy changes, including Apple’s IDFA framework and Google’s planned Privacy Sandbox, could reduce targeting, measurement and monetization effectiveness.
- The company is exposed to substantial leverage, variable interest rates and the transition away from LIBOR. Debt covenants and secured collateral could restrict operational flexibility.
- Acquisition integration, contingent consideration, goodwill impairment and intangible-asset amortization remain significant financial risks. Wurl employees may earn up to $600 million in additional Class A shares through 2025 if specified performance and employment conditions are met.
- The company amended cloud-service commitments to $550 million through May 2025 and had paid $44.8 million as of September 30, 2022. It also had $36.1 million of unfunded private-equity commitments and $11.1 million of outstanding letters of credit.
- Other principal risks include cybersecurity, privacy and data-protection regulation, competition, dependence on third-party app stores, revenue concentration in a small number of games and clients, foreign-exchange exposure, geopolitical disruption from the Russia-Ukraine conflict and regulatory uncertainty surrounding the recently launched NFT marketplace.
- The company stated that no pending legal proceeding was expected to have a material adverse effect, and that legal-proceeding losses had not been material.
Most important facts for investors to verify
- Whether Software Platform growth can offset continuing declines in Apps revenue, monthly active payers and in-app purchase volume.
- The sustainability of the 36.1% Q3 adjusted EBITDA margin after excluding publisher bonuses, restructuring, acquisition-related costs and other adjustments.
- Debt maturities, variable-rate exposure, covenant compliance and the effect of higher interest rates on cash flow.
- Progress and ultimate outcome of the Apps portfolio strategic review, including any divestitures or separation transactions.
- Integration results and return on investment from MoPub and Wurl, including Wurl’s contingent stock-based incentive plan.
- The company’s ability to maintain liquidity after acquisitions, share repurchases and contractual commitments.
- Future effects of Apple, Google and other privacy, tracking, app-store and advertising-policy changes.