AppLovin Corporation 10-Q Summary
Business Context and Reporting Period
AppLovin operates a software platform that helps mobile-app developers market and monetize their applications and owns a portfolio of more than 350 free-to-play mobile games across 18 studios. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Financial Performance and Position
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $727.0 million | $381.7 million | $2.00 billion | $941.2 million |
| Net income (loss) | $0.1 million | $(89.9) million | $3.9 million | $(107.0) million |
| Income (loss) from operations | $45.0 million | $(75.5) million | $91.5 million | $(57.1) million |
| Adjusted EBITDA | $190.7 million | $84.3 million | $505.5 million | $207.6 million |
| Adjusted EBITDA margin | 26.2% | 22.1% | 25.3% | 22.1% |
| Cash flow from operations | Not separately provided | Not separately provided | $276.8 million | $122.7 million |
Q3 revenue increased 90%, driven by Business Revenue growth of 103% and Consumer Revenue growth of 80%. Software Platform revenue increased 385%, while Business Revenue from Apps increased 18%. For the nine-month period, revenue increased 112%.
Q3 cost of revenue was 35% of revenue versus 43% in the prior-year quarter, producing an implied GAAP gross margin of approximately 65% versus 57%. Operating margin was approximately 6% versus negative 20%, while net margin was approximately zero versus negative 24%. The nine-month operating margin was approximately 5% versus negative 6%.
At September 30, 2021, cash and cash equivalents were $1.05 billion, compared with $317.2 million at December 31, 2020. Total current assets were $1.63 billion and current liabilities were $569.8 million. Total debt was approximately $1.78 billion, consisting primarily of term loans; the revolving credit facility was repaid using IPO proceeds. The company was in compliance with its debt covenants.
Operating cash flow increased to $276.8 million, but investing cash use was $1.21 billion, including $1.20 billion for acquisitions. Financing cash inflow was $1.66 billion, including $1.75 billion of net IPO proceeds and $844.7 million of debt issuance proceeds, partially offset by $711.5 million of debt principal repayments.
Material Changes Versus the Prior Comparable Period
- Revenue, operating income, net income and Adjusted EBITDA improved substantially from the prior-year periods.
- Business Revenue increased to $349.5 million in Q3 from $172.4 million; Consumer Revenue increased to $377.4 million from $209.3 million.
- Sales and marketing expense increased 86% in Q3, primarily from a $108.9 million increase in user-acquisition costs. Research and development increased 112%, and general and administrative expense increased 123%.
- Stock-based compensation increased to $34.7 million in Q3 and $91.8 million for the first nine months, compared with $10.9 million and $19.4 million, respectively, in the prior-year periods.
- The company completed its IPO in April 2021, sold 22.5 million Class A shares at $80 per share, and received approximately $1.75 billion in net proceeds.
- AppLovin acquired Adjust for preliminary consideration of approximately $967.8 million, including cash and convertible securities, and acquired multiple mobile apps in separate asset acquisitions.
- Goodwill increased from $249.8 million at year-end 2020 to $997.7 million at September 30, 2021, largely because of the Adjust acquisition.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a clear quantitative revenue or earnings outlook. Management expects continued investment in the Software Platform, research and development, user acquisition, new apps, international expansion and strategic acquisitions. Management stated that existing cash and cash equivalents were expected to fund anticipated working-capital and capital-expenditure needs for at least the next 12 months, although additional financing could be required for growth or acquisitions.
- On October 6, 2021, AppLovin agreed to acquire Twitter’s MoPub business for approximately $1.05 billion in cash; closing was expected in 2022 and remained subject to customary conditions.
- On October 25, 2021, the company amended its credit agreement to add $1.50 billion of senior secured term loans. The filing states that accounting for these subsequent transactions was still being finalized.
- AppLovin had a $300 million cloud-service-provider spending commitment through May 2026, outstanding letters of credit of $11.1 million, and potential earn-out obligations tied to acquired apps.
- Key risks include dependence on Apple, Google and other distribution platforms; privacy and data-use changes, including Apple’s IDFA framework; intense competition; user-acquisition costs; revenue concentration in a limited number of games; acquisition integration and impairment risk; cybersecurity and service interruptions; substantial leverage; variable interest rates and LIBOR transition; regulatory and tax changes; and concentrated voting control.
- Three games—Project Makeover, Matchington Mansion and Wordscapes—collectively represented approximately 31% of nine-month revenue. Class B stockholders collectively held approximately 93% of voting power as of September 30, 2021.
- Unusual items included $16.9 million of debt-extinguishment loss, fair-value changes in convertible securities and derivatives, significant acquisition-related amortization, and a $10.0 million write-off of a non-marketable investment during Q3.
Investor Verification Checklist
- Verify the sustainability of Software Platform growth, including the contribution from Adjust and changes in installation volumes and pricing.
- Assess whether user-acquisition spending and higher research and development costs are producing durable returns and whether Adjusted EBITDA growth translates into cash generation.
- Reconcile reported debt, including the $1.50 billion post-quarter-end term-loan increase, and review interest-rate exposure, covenants and maturities.
- Evaluate the cash funding requirements and integration risks associated with MoPub, Adjust and the acquired mobile-app portfolio.
- Monitor Apple and Google privacy, tracking, platform-fee and distribution-policy changes and their effect on advertising efficiency and in-app purchases.
- Review revenue concentration, app performance, earn-out obligations, goodwill and intangible-asset balances for impairment or future cash requirements.
- Consider the implications of the dual-class structure, controlled-company status and approximately 93% voting control held by Class B stockholders.