AppLovin Corporation — Q3 2023 Form 10-Q Summary
Business context and reporting period
AppLovin operates a software platform that helps mobile-app developers market and monetize their applications and also owns a portfolio of more than 200 free-to-play mobile games operated through eleven studios. The filing covers the three and nine months ended September 30, 2023; financial statements are unaudited and prepared under U.S. GAAP.
The company reports two segments: Software Platform and Apps. Software Platform revenue primarily comes from AppDiscovery, MAX, Adjust and Wurl. Apps revenue consists of in-app purchases and in-app advertising.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $864.3 million | $713.1 million | $2.330 billion | $2.115 billion |
| Income from operations | $186.3 million | $49.3 million | $378.7 million | $(25.4) million |
| Net income attributable to AppLovin | $108.6 million | $23.8 million | $184.5 million | $(113.2) million |
| Diluted EPS | $0.30 | $0.06 | $0.50 | $(0.30) |
| Adjusted EBITDA | $419.3 million | $257.6 million | $1.027 billion | $803.6 million |
| Adjusted EBITDA margin | 48.5% | 36.1% | 44.1% | 38.0% |
| Net margin | 12.6% | 3.3% | 7.9% | (5.4)% |
For the nine months, operating cash flow was $717.5 million versus $249.6 million in the prior-year period. Company-defined free cash flow was $697.3 million versus $230.9 million. Investing cash use was $71.0 million, while financing cash use was $1.392 billion, primarily reflecting share repurchases and debt repayments.
Cash and cash equivalents were $332.5 million at September 30, 2023, down from $1.080 billion at December 31, 2022. Accounts receivable increased to $849.1 million from $702.8 million. Total debt was approximately $3.127 billion, consisting of $215.0 million of short-term debt and $2.912 billion of long-term debt. The company stated that cash and cash equivalents should meet anticipated working-capital and capital-expenditure needs for at least the next 12 months, although future acquisitions, growth investments and financing needs could require additional capital.
Revenue mix and material changes
- Q3 Software Platform revenue increased 65% to $504.5 million, driven primarily by improved AppDiscovery performance. Net revenue per installation increased 40% and installation volume increased 29%.
- Q3 Apps revenue declined 11% to $359.8 million. In-app purchase revenue fell 9% to $247.3 million, while in-app advertising revenue fell 16% to $112.5 million.
- For the first nine months, Software Platform revenue increased 70% to $1.265 billion. The comparison benefited from $209.6 million of publisher bonuses that reduced prior-year Software Platform revenue.
- Nine-month Apps revenue declined 22% to $1.065 billion, reflecting lower in-app purchase volume and pricing, reduced user-acquisition spending, and asset sales or other portfolio actions.
- Monthly active payers declined to 1.8 million from 2.2 million, while average revenue per monthly active payer increased to $46 from $41.
- Software Platform segment adjusted EBITDA increased 91% in Q3 to $364.1 million; Apps segment adjusted EBITDA declined 18% to $55.2 million.
- Operating margin improved to 21.6% in Q3 from 6.9%, and to 16.3% for the nine months from negative 1.2%. Cost of revenue declined to 31% of revenue from 42% in Q3, while research and development increased to 18% from 17%.
Debt, capital allocation and unusual items
- In August 2023, AppLovin refinanced approximately $1.7 billion of term loans, including $1.5 billion of refinanced principal with remaining balance due August 16, 2030. The company recorded a $4.3 million debt extinguishment loss and $11.1 million of third-party refinancing costs.
- The company drew $185.0 million under its revolving credit facility. The facility had $418.7 million available at September 30, 2023, within an aggregate commitment of $610.0 million.
- Interest expense and loss on debt settlement increased 62% in Q3 and 74% for the nine months, primarily because of higher interest rates.
- AppLovin repurchased 46.7 million Class A shares for $1.154 billion during the first nine months, including 15.0 million shares repurchased from KKR Denali in August for $552.8 million. Approximately $2 million remained available under the repurchase authorization at September 30.
- Stock-based compensation was $110.8 million in Q3 and $275.1 million for the nine months, compared with $42.1 million and $143.9 million, respectively, in the prior-year periods. Performance-based awards vested in September after the $36.00 stock-price target was achieved, resulting in $25.7 million of Q3 stock-based compensation expense.
- The company had $285.7 million of unpaid commitments under a cloud-services arrangement requiring at least $550.0 million of purchases through May 2025, plus $41.1 million of unfunded private-equity commitments.
Guidance, outlook, commentary and risks
The filing text does not provide a clear quantitative revenue, earnings or cash-flow guidance outlook. Management expects to continue investing in AI-based advertising technology, including AXON 2.0, research and development, infrastructure, international expansion and selected acquisitions or partnerships. Management stated that advertiser demand had generally stabilized compared with the second half of 2022, but remains cautious.
AppLovin has substantially completed a strategic review of its Apps portfolio and continues to prioritize financial returns. Reduced user-acquisition spending has improved Apps profitability but contributed to lower Apps revenue and monthly active payers. Management also expects operating expenses and investment needs to fluctuate and may increase over the long term.
- Key business risks include advertiser budget reductions, competition, client concentration, dependence on Apple and Google distribution platforms, and declining performance of major games.
- Privacy, tracking and consent changes, including Apple’s IDFA and iOS requirements and Google’s Android Privacy Sandbox and EEA/UK consent requirements, could reduce targeting effectiveness or monetization.
- Cybersecurity, data-protection, AI-related, intellectual-property and regulatory risks could create operational disruption, litigation, penalties or higher compliance costs.
- Variable-rate debt, rising interest expense, substantial leverage and refinancing or covenant risk could constrain liquidity and financial flexibility.
- Goodwill and intangible assets totaled approximately $3.2 billion at September 30, 2023 and could require impairment charges if operating performance or market conditions deteriorate.
- Three games—Project Makeover, Matchington Mansion and Wordscapes—represented approximately 16% of nine-month revenue, creating concentration risk.
- The company reported no legal proceeding expected to have a material adverse effect, and stated that legal losses to date have not been material.
Most important facts for investors to verify
- Whether Software Platform growth and AXON 2.0 performance can offset continued declines in Apps revenue, monthly active payers and major-game contribution.
- The sustainability of the 48.5% Q3 adjusted EBITDA margin after excluding amortization, stock-based compensation and other adjustments.
- Cash generation after $1.154 billion of repurchases, scheduled debt service, cloud commitments and potential acquisitions.
- Interest-rate exposure, debt maturities, covenant compliance and the company’s ability to refinance or repay approximately $3.127 billion of debt.
- The remaining authorization and future pace of share repurchases, including effects on liquidity and per-share value.
- Potential dilution and expense from performance-based equity awards, including the Wurl incentive plan and executive PSUs.
- Changes in Apple, Google and privacy regulations that could affect advertising measurement, user acquisition and in-app monetization.
- Whether the reported non-GAAP measures are comparable with peers and how stock-based compensation, amortization and other excluded items affect GAAP profitability.