AppLovin Corporation: Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
AppLovin operates two reportable segments: Software Platform, which provides mobile app marketing, monetization, attribution and connected-TV solutions, and Apps, which comprises a portfolio of more than 300 free-to-play mobile games. The filing covers the unaudited three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $715.4 million | $625.4 million | 14% increase |
| Operating income (loss) | $61.0 million | $(128.0) million | Improved |
| Net loss | $4.5 million | $115.3 million | Improved |
| Net margin | (0.6)% | (18.4)% | Improved |
| Adjusted EBITDA | $273.7 million | $276.2 million | 1% decrease |
| Adjusted EBITDA margin | 38.3% | 44.2% | Down 5.9 percentage points |
| Cash flow from operations | $288.7 million | $(31.7) million | Improved |
| Free cash flow | $283.1 million | $(38.2) million | Improved |
Software Platform revenue was $354.8 million, up 199%, while Apps revenue was $360.6 million, down 29%. Software Platform revenue represented approximately 50% of total revenue, with Apps contributing the remaining 50%.
Apps revenue consisted of $251.3 million of in-app purchase revenue, down 26%, and $109.3 million of in-app advertising revenue, down 35%. Monthly Active Payers declined to 1.8 million from 2.7 million, while average revenue per monthly active payer increased to $46 from $41.
Cash and cash equivalents were $1.246 billion at March 31, 2023, compared with $1.080 billion at December 31, 2022. Total debt was approximately $3.206 billion, consisting of $33.3 million of short-term debt and $3.173 billion of long-term debt. The filing separately states that aggregate principal indebtedness under the credit facilities was $3.24 billion.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily because the prior-year period included $209.6 million of publisher bonuses recorded as a reduction of Software Platform revenue. Excluding that effect, Software Platform revenue increased by $26.3 million, driven primarily by higher net revenue per installation, partially offset by lower installation volume.
- Apps revenue declined because in-app purchases decreased following lower user-acquisition spending and the sale of certain assets. In-app advertising revenue also declined, primarily because price per advertising impression fell 42%, partly offset by a 13% increase in impression volume.
- Total costs and expenses decreased 13% to $654.4 million. Cost of revenue declined 7%, sales and marketing declined 30%, and general and administrative expense declined 19%; research and development increased 15%.
- Sales and marketing benefited from a $96.8 million reduction in user-acquisition costs. Research and development increased primarily because of higher personnel-related costs and stock-based compensation.
- Interest expense increased 133% to $74.5 million, primarily because of higher interest rates on outstanding debt. Interest income and other, net increased to $10.1 million from $2.0 million, mainly because of higher interest income on cash.
- Stock-based compensation increased to $83.0 million from $44.6 million. The company granted substantial performance-based restricted stock units to its CEO and CTO tied to stock-price targets.
- Cash flow improved substantially, while investing outflows declined to $13.0 million from $1.06 billion because the prior-year period included the $1.03 billion MoPub acquisition.
Guidance, Outlook, Commentary and Risks
The filing does not provide clear quantitative revenue or earnings guidance. Management stated that advertiser demand remained cautious but appeared to be stabilizing relative to the second half of 2022. The company expects to continue investing in its Software Platform, research and development, infrastructure, international expansion, and strategic opportunities.
Management has substantially completed a strategic review of the Apps portfolio. Actions included reducing user-acquisition spending, closing or divesting certain studios or assets, reducing headcount, restructuring earn-out arrangements, and emphasizing financial returns. These actions improved Apps segment Adjusted EBITDA margin but contributed to lower Apps revenue and Monthly Active Payers.
The company believes existing cash and cash equivalents are sufficient to meet anticipated working-capital and capital-expenditure needs for at least the next 12 months. However, future requirements may increase because of growth investments, acquisitions, partnerships, infrastructure spending and debt service.
- Interest-rate exposure remains material because of variable-rate debt, although interest-rate swaps effectively fix borrowing rates on outstanding debt for the applicable periods.
- The company has a $550.0 million minimum cloud-services purchase commitment through May 2025; $398.4 million remained unpaid at March 31, 2023. It also had $33.4 million of unfunded private-equity commitments.
- Third-party platforms, particularly Apple and Google, control app distribution, payment processing, privacy rules, tracking access and platform economics. Changes to IDFA, Android Privacy Sandbox or platform policies could affect advertising effectiveness and monetization.
- Macroeconomic conditions, inflation, rising interest rates, reduced advertising budgets, consumer spending, foreign exchange, cybersecurity incidents and the Russia-Ukraine conflict may adversely affect results.
- Revenue concentration remains a risk: Project Makeover, Matchington Mansion and Wordscapes together represented approximately 18% of Q1 2023 revenue.
- As of March 31, 2023, no legal proceedings were identified that management believed would have a material adverse effect, and reported legal-proceeding losses had not been material.
- In April 2023, the company amended the Wurl performance plan and could be required to issue up to $90 million of additional Class A shares if specified performance and employment conditions are met.
Other Capital Allocation and Governance Items
The company repurchased 5.4 million Class A shares for $76.4 million during the quarter. From April 1 through May 8, 2023, it repurchased an additional 7.7 million shares for $125.8 million. As of May 8, $209.6 million remained available under the $750 million authorization.
AppLovin is a controlled company. The Voting Agreement Parties collectively held approximately 86.5% of voting power as of March 31, 2023, concentrating control over director elections and other matters requiring stockholder approval.
Important Facts for Investors to Verify
- Reconcile the reported 14% revenue growth with the unusually favorable comparison caused by the $209.6 million publisher-bonus reduction in Q1 2022.
- Assess whether Software Platform growth can continue while installation volume and advertiser demand remain pressured.
- Monitor the Apps portfolio trade-off between lower user acquisition and MAPs versus improved segment profitability.
- Review total debt, variable-rate exposure, interest expense, swap terms, maturities, covenants and required debt service.
- Evaluate the sustainability of operating cash flow and Free Cash Flow, including the effects of working-capital movements, stock-based compensation and contractual commitments.
- Track the remaining share-repurchase authorization, cash used for repurchases and potential dilution from equity awards, Wurl earn-outs and performance-based restricted stock units.
- Review privacy, data protection, cybersecurity and app-store policy developments that could affect targeting, measurement, distribution or monetization.
- Consider the concentration of revenue in a limited number of games, customers, advertising platforms and app stores.