Earnings call transcript: Applovin beats EPS expectations in Q2 2025

AppLovin Corp (APP) reported its earnings for the second quarter of 2025, showcasing a significant earnings per share (EPS) beat and a slight revenue miss. The company’s EPS stood at $2.39, surpassing the forecasted $1.95, marking a surprise of 22.56%. However, revenue came in at $1.26 billion, slightly below the expected $1.28 billion, representing a -1.56% surprise. With a P/E ratio of 68.76, AppLovin trades at a premium valuation multiple, reflecting market expectations for continued growth. Following the announcement, AppLovin’s stock initially rose by 3.34% during regular trading hours but fell by 4.02% in premarket trading the next day.

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Key Takeaways

• AppLovin’s EPS exceeded expectations by 22.56%.
• Revenue slightly missed forecasts with a -1.56% surprise.
• Stock experienced a 3.34% rise post-announcement but fell 4.02% in premarket trading.
• Free cash flow increased by 72% year-over-year to $768 million.
• The company is preparing for international expansion in October 2025.

Company Performance

AppLovin demonstrated robust financial performance in Q2 2025, with a 77% year-over-year increase in revenue to $1.26 billion. The company’s adjusted EBITDA nearly doubled to $1.02 billion, reflecting an 81% margin. The company maintains impressive gross profit margins of 77.72% and has achieved a 41.63% revenue growth over the last twelve months. Additionally, AppLovin generated $768 million in free cash flow, a 72% increase from the previous year. The company ended the quarter with $1.2 billion in cash and cash equivalents, operating with a moderate level of debt and maintaining a healthy current ratio of 1.68.

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Financial Highlights

• Revenue: $1.26 billion, up 77% YoY
• Earnings per share: $2.39, exceeding forecast by 22.56%
• Adjusted EBITDA: $1.02 billion, 81% margin
• Free cash flow: $768 million, up 72% YoY
• Cash and cash equivalents: $1.2 billion

Earnings vs. Forecast

AppLovin’s EPS of $2.39 significantly outperformed the forecast of $1.95, marking a 22.56% surprise. However, revenue slightly missed expectations, coming in at $1.26 billion compared to the forecasted $1.28 billion, a -1.56% surprise. This mixed performance reflects the company’s ability to control costs and drive profitability despite revenue challenges.

Market Reaction

Following the earnings announcement, AppLovin’s stock rose by 3.34% during regular trading hours, closing at $390.57. However, in premarket trading, the stock saw a decline of 4.02%, trading at $374.87. This volatility reflects investor reactions to the mixed earnings results and future growth prospects.

Outlook & Guidance

Looking ahead, AppLovin provided Q3 2025 revenue guidance between $1.3 billion and $1.34 billion, with adjusted EBITDA expected to range from $1.07 billion to $1.09 billion. The company plans to launch a referral-based self-serve platform on October 1, 2025, and aims for a global public launch of the Axon platform in 2026. AppLovin targets 20-30% year-over-year growth, driven by its gaming segment. The company’s strong financial health is reflected in its InvestingPro Overall Score of 3.41 (GREAT), supported by robust profit and growth metrics.

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Executive Commentary

CEO Adam Farooghi emphasized the company’s commitment to enabling businesses of all sizes to acquire customers profitably. He stated, "Our aspirations are to help any business of any size be able to acquire customers profitably." Farooghi also highlighted the potential of the self-serve platform, noting, "As we open up the platform, the goal that we have is to see that any small business of any type can market on our platform."

Risks and Challenges

• Potential revenue volatility due to market dynamics in mobile gaming advertising.
• Challenges in scaling international expansion efforts effectively.
• Competition in the e-commerce advertising sector.
• Dependence on continued innovation to maintain competitive edge.
• Macroeconomic factors that could impact advertising budgets.

Q&A

During the earnings call, analysts inquired about AppLovin’s plans for paid marketing to acquire advertisers, the strategy for international expansion, and the potential for AI-driven advertising tools. Management addressed these concerns by highlighting the incremental margin potential in new markets and the strategic focus on expanding the platform’s reach.

Full transcript - Applovin Corp (APP) Q2 2025:

David Shao, Head of Investor Relations, AppLovin: Welcome to AppEleven’s earnings call for the second quarter ended 06/30/2025. I’m David Shao, head of investor relations. Joining me today to discuss our results are Adam Farooghi, our cofounder, CEO, and chairperson, and Matt Stump, our CFO. Please note our SEC filings to date as well as our financial update and press release discussing our second quarter performance are available at investors.applovin.com. During today’s call, we will be making forward looking statements, including, but not limited to, the future development and reach of our platform, including the expected timing of product launches, our expected growth opportunities, the efficiency of our operations, the expected future financial performance of the company, and other future events.

These statements are based on our current assumptions and beliefs, and we assume no obligation to update them except as required by law. Our actual results may differ materially from the results predicted. We encourage you to review the risk factors in our most recently filed Form 10 Q for the first quarter ended 03/31/2025. Additional information may also be found on our quarterly report on Form 10 q for the fiscal quarter ended 06/30/2025, which will be filed today. We will also be discussing non GAAP financial measures.

These non GAAP measures are not intended to be superior to or a substitute for our GAAP results. Please be sure to review the GAAP results and the reconciliation of our GAAP and non GAAP financial measures in our earnings release and financial update available on our Investor Relations site. This conference call is being recorded, and a replay will be available for a period of time on our IR website. Now I’ll turn it over to Adam and Matt for some opening remarks, then we’ll have the moderator take us through q and a.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin: Thanks everyone for joining us today. We appreciate your time and interest. Q2 twenty twenty five was another great quarter, driven by continued strength in gaming advertising. Our growth comes from improved technology, increased demand, as well as from supply side expansion. The Max Marketplace creates the supply that drives our growth as well as the growth in the market.

As marketing technologies in the industry continue improving, we expect the supply will keep growing quickly. While we don’t disclose exact Max Marketplace growth rates, it has consistently been double digits, far outpacing growth in the in app purchasing gaming market. The ongoing improvement in our models drives sustainable growth rates beyond the market growth rates while we continue to expand our dominant leadership position. Based on all the opportunity in front of us in our core market, we are confident we can sustain 20 to 30% year over year growth driven by just gaming. However, what gets us more excited now than ever in our history before is the opportunity to really expand outside our core market.

Recently, we took the first step towards opening up our platform broadly, quietly launching our new Axon Ads Manager. Our self-service portal, which will serve as the foundation for our next decade of growth. Our Ads Manager has many benefits. It puts day to day controls directly in advertisers’ hands, reducing friction. It enables credit card billing, eliminating the hassle of monthly invoicing.

It provides the architecture for agents that can eventually automate every workflow. It establishes the framework for automatically generated ads. It simplifies onboarding through our recently launched Shopify app. It deepens integrations with attribution providers, giving customers more accurate reporting. With the rollout going smoothly, we’re ready to widen access.

On 10/01/2025, we plan to open the Axon Ads Manager on a referral basis, perfectly timed for the holiday season. Feedback from these partners will guide our global public launch in the 2026. To date, web advertising campaigns have been limited to The United States. On October 1, we plan to open our platform to most major international markets. Now stepping back, we have spent the last decade assembling the pieces, reach of more than 1,000,000,000 users, best in class optimization, and now a self-service interface.

Together, they position us to help any business of any size anywhere in the world grow profitably. That is good for our partners, it’s good for economies around the world, and it’s great for job creation. The opportunity is so big that we will be launching the platform under its own brand, Axon. Once Axon is fully open next year, we plan to begin paid marketing to recruit new advertisers, which will drive predictable compounding growth. We have been building performance driven advertising products longer and better than most anyone.

Operating at our current scale with an incredibly small amount of advertiser relationships highlights the magnitude of the opportunity ahead. Our strategy is simple. Build world class products, launch them when they meet our high bar, and compound from there. Patient disciplined execution produces durable success, and we hope our track record gives you the same confidence we have in our future. We’re incredibly excited about what’s ahead.

With that, I’ll turn it over to Matt for a closer look at the numbers.

Matt Stump, CFO, AppLovin: Thanks, Adam, and thanks to everyone for joining us today. Q two was another exceptional quarter for AppLovin. At the end of the quarter, we closed the sale of our apps business to Triple Dot Studios. This quarter, the financial results for the apps business were included within discontinued operations, and we will keep our commentary limited to the advertising business only. During the quarter, revenue increased by a very healthy 77% from last year to approximately $1,260,000,000, while adjusted EBITDA nearly doubled to an impressive $1,020,000,000, achieving an 81 adjusted EBITDA margin.

The majority of our revenue growth in the quarter was driven by our core gaming business. While ecommerce continues to perform well, we limited onboarding of new customers to focus on the preparation for the self serve launch in q four. Quarter over quarter flow through from revenue to adjusted EBITDA was a very strong 81%, illustrating our continued dedication to operating lean. At the end of the second quarter, we had $1,200,000,000 in cash and cash equivalents, which includes 425,000,000 in net cash received from the sale of the apps business. In the second quarter, we generated $768,000,000 in free cash flow, up a staggering 72% year over year.

Our free cash flow was slightly lower than last quarter due to the timing of payments for interest on our bonds, which are semiannual, and certain taxes associated with the prior year. This quarter, we repurchased and withheld approximately 900,000 shares for a total cost of $341,000,000 funded through free cash flow. As a result of our ongoing strategic share management activities, we were able to reduce our weighted average diluted common shares outstanding this year from 346,000,000 in the fourth quarter to 342,000,000 this quarter. Finally, turning to our financial guidance for next quarter. In the 2025, for the advertising business, we anticipate delivering between 1,000,000,003 and $20,000,000 and $1,340,000,000 in revenue, with adjusted EBITDA between 1,000,000,070 and $1,090,000,000, targeting an adjusted EBITDA margin of 81%.

We’re confident these targets position us to continue driving strong growth and value for our partners and shareholders. Now with that, let’s move to Q and A.

Moderator: We’ll now begin the question and answer session. Please be sure to unmute and turn on your video before asking your question. We will take as many questions as time permits. And since we have many questions today, please be patient as we move through the list. Our first question will come from Matthew Cost from Morgan Stanley.

Matthew Cost, Analyst, Morgan Stanley: Hi, everybody. Thanks for taking the question. I guess on your plans to start doing paid marketing next year, talk to us a little bit about how you arrived at this decision to market to acquire advertisers. Because I think historically, it’s mostly been growth by word-of-mouth and sort of virality within the gaming industry that people become aware of your products. So I guess why is now the right time to start marketing?

What channels are you going to market through? And how are you going to evaluate the return there?

: And then I have one follow-up.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin: Hey, Matt. Good to see you. So so, look, like, we’re we’ve got big aspirations with our platform. The advertising solution right now to web commerce advertisers and more broadly other categories we’ve talked about is looking really strong. Obviously, we have very small penetration in terms of advertiser base against what our global advertisers, count.

And the way we look at our businesses, if the model works this well at this small amount of penetration, what happens when we can really open it up and go service all the small businesses in the world? Our aspirations are to help any business of any size be able to acquire customers profitably. And if we can do that, we’ll achieve the goals that we’ve set for ourselves. So the the value of us being able to go out and performance market the platform is that we’ve got one of the most lucrative financial models the world has ever seen. I mean, obviously, you can see the amount of cash that we print.

And we’re very good performance marketers. So if we’re very good performance marketers, it’s plausible that we will be using our own models to recruit advertisers off of our own inventory. There’s plenty of moms with small businesses and dads with small businesses sitting in games, playing games all day. They could use our platform to market themselves. You can imagine us running ads on Facebook, on LinkedIn, on TikTok.

But it really does come down to the fact that we’ve got such a lucrative financial model, and we try to run lean and automate every step of that process. And we believe that if we can automate the onboarding of advertiser flow from when an advertiser can find out about us from an ad all the way through to going live and then scaling on our platform, the model will be very lucrative on an LTV to CAC basis, and we won’t have to staff up a large Salesforce.

Matthew Cost, Analyst, Morgan Stanley: Great. Thank you. And then on the supply side, you made some comments in the prepared remarks about, you know, some strong supply growth that you’re seeing. Given that Max was kind of already starting from such a strong position already, is the further growth, is it a function of just taking even more share in mediation? Is it about ad load increasing to the customers you already have?

I guess where is the supply growth coming from?

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin: Yeah. Look, we we talk a lot about the market in mobile gaming, and people fixate on the in app purchasing market. And what we’re trying to do is just highlight the fact that our business grows from improvements in technology and demand, which drives CPM and expansion of supply. The Max mediation platform is really high penetration into the market, so we’re not gonna be able to grow it particularly quickly by taking more mediation, from other platforms at this point. What we were highlighting was that the base platform, just the audience inside Max, is growing swiftly, double digit growth.

So multiples greater than what you would expect when people try to size up the gaming market growth rates of 3% to 5%. The other thing that is is super valuable to understand in that is that inside that marketplace, we historically have always talked about how there’s not a share gain concept. As the marketing platforms improve, that platform grows. The eyeballs playing games play more games every single day. Inventory goes up.

That drives growth on our platform. It drives growth on the platforms that are the other bidders inside that ecosystem. And then we benefit the most because we’re taxing every transaction for the most part that happens outside of us at the max fee. And then, obviously, our own DSP is a super lucrative business model when we win the inventory.

Matthew Cost, Analyst, Morgan Stanley: Great. Thanks so much.

Moderator: Next, we’ll hear from Ralph Schackart with William Blair.

Ralph Schackart, Analyst, William Blair: Afternoon, Adam and Matt. Thanks for taking the question. Hey, Ralph.

: Just two,

Ralph Schackart, Analyst, William Blair: if I could. Just on the self serve platform, Adam, maybe you could sort of frame this for us. The launch is coming up, public launch is coming up, which is exciting, but know, could this be a, you know, pretty material impact to the overall business? Obviously, it’s of good scale today and growing pretty fast, but maybe you kinda frame that opportunity. Then I have a follow-up, please.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin: Yeah. Sure. I mean, let let’s look back over the last year at our numbers, and then I I’m gonna give you qualitatively sort of what was going on with growth in the business. In q four, we saw a huge ramp up in the ecommerce category when we went into this pilot state, recruited hundreds of advertisers that we disclosed. That And was a big ramp up in q four where in q one, we got the full benefit of that run rate.

And if you look back at the quarter over quarter growth, q four and q one were really high growth rates. Now the reason for that is is that the new type of customer that comes into our platform is extremely incremental to our business, like we’ve talked about in the past. Then since then, we knew that we had highlighted a whole bunch of things that we had to go build into the platform to be able to service advertisers at the level that we like to do. And we like to set a really high bar for the products we deliver. We wanted to build the ads manager, which we released, and we will continue to innovate and iterate through.

We wanted to build dynamic product ads. That came out in the last couple quarters. We wanted to do better integrations with attribution companies, which happened inside the quarter. And we wanted to launch a Shopify app and other apps that allow for seamless integration amongst the advertiser base. So we ended up constraining the advertiser onboarding process for a couple quarters while we made sure that the product was at the level that we wanted to get it to.

Now we’re looking at, in q four, talking about a referral based opening. That in itself, I’m gonna define that for you so you understand what we’re talking about. But accounts on the platform, they obviously like our solutions because they’re spending substantial amounts of money on our platform. Will get the chance to refer their colleagues into our platform and have them go live in a self-service way. We expect that will increase the advertiser count quite quickly and also allow us to go through live examples of advertisers coming in self-service all the way to scale on our product.

Assuming all that goes well, then we talked about opening up the platform entirely to the world in first half of next year. We think as advertiser count grows on our business, especially in categories outside of gaming, you’re gonna see a lot of upside in in the numbers that we’re able to report.

Ralph Schackart, Analyst, William Blair: Great. Maybe one more if I could. I think historically, you’ve talked about e comm being around 10% or so of the business for this year. Maybe just sort of an update if that’s current thinking. And then I think in your, prepared remarks, you talked about limited onboarding to ecom customers.

You know, did that sort of, limit the growth rate in the quarter had you, you know, not limited those, customers being onboarded?

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin: Yeah. For sure. I mean, I’ll take it in reverse. By constraining the advertiser count, we’re limiting growth. Now we’re focused on growing the cohort that’s live, which we saw growth from the cohort that’s live.

But Matt in his prepared remarks said majority of our growth came from gaming. So if you assume a large, large amount of the the growth in the quarter came from gaming and you’re roughly 9% quarter over quarter, gaming is still a 30% to 40% grower for us, so well above our 20 to 30% long term goals that we’ve stated. Now ecommerce, we we went from a state where we ramped it in q one and then controlled, as I said, on the advertiser onboarding while we got these tools ready to go. And so where we were at was that sort of 10% range that we were targeting for the year. There’s no reason to expect it to have grown above that because gaming is growing so quickly.

And for two quarters now, we’ve mentioned that gaming was a big contributor to growth. As we go into q four, that’s a huge holiday shopping season. So not only are you gonna see the cohort that we have live spend a lot more, you’re also going to have new onboarding happening for the first time in our history at a rate that’s much higher than we will have ever seen before. So we fully expect that ecommerce will see a pretty substantial ramp up through that, what what you can call a soft launch period, and then, obviously, as we go into a broader global release, the impact from that. And then the last point to remember is another one of my prepared remarks highlighted the fact that we have constrained the advertisers we even have live today by not allowing them to buy our audience that’s international.

The vast majority of our user audience is outside The US. We will be releasing almost all markets once we go into this October first release.

Ralph Schackart, Analyst, William Blair: Okay. Great. Thanks, Alan. Yep.

Moderator: Our next question will come from Omar Dasuki with Bank of America.

Omar Dasuki, Analyst, Bank of America: Thanks so much. Can you hear me? Yep.

Matthew Cost, Analyst, Morgan Stanley: We’re happy to hear you fine,

Omar Dasuki, Analyst, Bank of America: Great. Thanks for letting me ask the question here. I just wanted to take the conversation in a slightly different direction, if I could, and ask about game engine data. And, you know, one of your competitors, specifically Unity, which owns a game engine, which 70% or so of of mobile games are built on, you know, plans to use game engine data for, ad targeting purposes sometime in 2026. Do do other companies, besides them have access to game engine data?

Do you know if if your customers own their own game engine data and you’re able to access it and use it at some point in the future? And do you think it matters?

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin: Yeah. Omar, we can’t speak to other people’s data. I mean, we don’t know what game engine data even means. But when you’re integrated inside an application, both as a publisher and as an advertiser, you have a lot of data points that you’re able to extract that are behavioral data points of how the consumer is playing into a game. We’re obviously very good.

Our models are cutting edge. Axon two has shown phenomenal growth for, I don’t know, eight, nine quarters now since release. You have to assume we’re pretty good at using the data we have available to us. So what we don’t know, as you didn’t define game engine data, is is there some magical data out there? But our market penetration inside gaming is really large at this point.

It’s materially higher than 70%. We’ve got very good visibility into what matters in the gaming category given how large we’ve become. What’s really gonna matter for our business as we go forward is whether we can go expand out this offering the way we expect to across all businesses of all sizes in any category. If we’re able to do that, we will have a much better sense of the consumer on the other side. And I I do want to remind everyone, we have billion plus users, and they’re not gamers.

These are human beings doing a whole bunch of things, but the share of wallet from gaming is gonna be a minority of the dollars that these people are spending outside of gaming. And that’s what’s really compelling to us as we go to this next chapter in the company. If our models that are already as good as they are with such a small amount of advertiser penetration now go get visibility into consumer behavior across every category, we’re gonna be way more predictive about the advertisement that we could show the consumer.

Omar Dasuki, Analyst, Bank of America: Thank you very much. Yep.

Moderator: Our next question will come from Chris Kantarich with UBS.

Chris Kantarich, Analyst, UBS: Thanks for taking the question here. Maybe just on the referral program and how this is gonna work functionally. Are advertisers that are currently on this plan platform, are they going to be given referral bonuses? Is there going to be any restriction in advertisers that they could refer? You’ve talked about opening up international inventory.

Will international advertisers be available to participate in the referral program? And, just as we think about kind of this line out the door of advertisers you’ve been talking about for a while, are they gonna get any, any special look here potentially to, to come in here maybe if they don’t get a referral? Thanks.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin: Yeah. Hey, Chris. I I can’t say we have all the answers to all those questions you asked. We’re gonna definitely go through an iterative period too on the release of the referral program. But, fundamentally, we don’t think a ticket into our system is really worth paying for.

If someone’s a client of ours, they have a lot of benefit from being on the platform. People love using social media. You’ve already seen a whole bunch of organic posts about us from influencers. We think as we give them the capacity to invite their peers, they’re gonna do it on their own because the platform has been restrictive and exclusive for so long. If we see that happen, it’s much better organically.

And beyond that, line out the door, we’ll still need to most likely get an invite into the platform from one of our customers to be able to get automatically cleared.

Chris Kantarich, Analyst, UBS: Okay. Thank you very much. Just as we’re kind of thinking about the 3Q guidance here, maybe a little bit faster than what we’ve seen in the past couple of quarters, is there anything kind of reflected here in the faster sequential growth associated with the App Portfolio divestiture? And any sort of quantification around that would be helpful. Thank you.

Matt Stump, CFO, AppLovin: Yeah. Sure. So the one the one change we did make, Chris, this quarter, which is slightly different than kind of our our typical cadence that we’ve been going every quarter, was to include the the benefit as well that we’re going to see from the divestiture of the apps business where we have a slight pickup in revenue. So we also incorporated that within the q three guide.

Chris Kantarich, Analyst, UBS: Got it. Thank you.

: Welcome. Your

Moderator: next question will come from Jason Bazinet with Citi.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin0: So I think on the last call, you all said that, you’re definitely working towards building two Axon models. Right? One that’s specific to games and one that’s, more focused on the other ecommerce. You use a new term now. I can’t remember what it is, but I’ll call it ecommerce, but I know it’s more holistic.

When when you think about all the data that you had to ingest, and the models that you had to build to make the the gaming model as good as it is, what sort of the right runway that you have in your mind before those two could be at at parity in terms of efficacy?

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin: I mean, look, Jason, it’s a great question. There there’s one, there’s no way to know that. Right? Because that’s that’s future looking, and and we’re gonna go acquire a lot of data as we open up the platform. But in terms of architecture of the models, the two models are distinctly different because on the one hand, a user’s going to a website, and on the other hand, a user’s going to an app store, and that that app store isn’t even something that we can measure.

And so you’ve got two frameworks. And then the as you touched on in gaming, when we launched Axon two, we already had pretty good market penetration. Now we didn’t work with the largest customers, so we continue to get better as we broke into the largest customers in the category. But I wanna say we had 60% penetration, and now market penetration gaming, as you all know, we’re we’re we’re almost a requirement at this point given how good we are. In ecommerce, when we launched in the pilot, why we were so excited about the result is that the first beauty shop that went live, the model knew nothing about the shopper behavior inside the beauty category.

And we talked about this. That was the big concern. Could AppLovin’s tech actually go out and figure out predictably how to convert a user to go buy from a beauty store with no knowledge. Now what we have we’ve talked about the the one disclosure we gave hundreds of of ecommerce businesses live on the platform. That that’s a pathetic amount versus the grand scope of how big these categories are.

I mean, Shopify alone has millions of shops. Right? So you you have so much potential for data accumulation. And then just remember, the data in our platform is not unique to one or the other part of the business. So we’ve always felt that games will benefit a lot from our ability to break into these other categories.

You can imagine if someone buys a $4,000 handbag from a store, that person’s probably a whale for a match three game. Now I can tell you that, but I can tell you the the technology is gonna come up with a lot of cross correlations and conclusions that are a lot more powerful than that. So the in terms of opportunity for us, not only does opening up the platform get us more demand, which is gonna be massively accretive and incremental to our business, it it gets us more data. And so every single quarter, you’re gonna have that flywheel effect that that then paired with our engineers’ ability to take added data and improve the technology and its interpretation of that data creates a real strong foundation for growth for a long time to come.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin0: Thank you very much.

Ralph Schackart, Analyst, William Blair: Yep.

Moderator: Next, we’ll go to Rob Sanderson with Loop Capital.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin1: Yeah. Good afternoon, gentlemen. Thanks for taking my question. My question is on just improving performance for your web based advertisers. As we speak to pilot customers, you know, obviously, we hear you’re highly effective at driving conversions, but, you know, really lacks a lot of basic, you know, targeting functions, like small things, like just excluding existing customers, etcetera.

The you know, they see this seems pretty simple to solve for, but maybe not when you’re multi app inventory. I I don’t know. I mean, the question’s really, you know, you’re targeting and other improvements that that web based customers are asking for. Are these largely things that you’ve already seen and solved for for gaming customers and just takes time to collect feedback and work optimizations into the product, etcetera, Or are you really solving for, like, a whole new set of challenges, maybe some of both?

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin: Yeah. It’s great question. So, look, when we got into the space, it surprised us how much of the market meta advertising was in the d to c space, and it it was the majority. And when you have one platform that’s that big, everyone wants every other platform to give them the same exact tools. Now we don’t have an email address or that persistent identifier that matches up with their audience data.

So, technically, doing an exclude is not gonna be as accurate as what Meta can deliver to these advertisers. There are other nuances and differences. We serve a full screen advertisement, and then we can pair the video with a dynamic product ad. That creates more intent for the shopper. So the vast majority of all the transactions we drive happen within an hour or two, and the vast majority of the transactions MetaDrive, they they take attribution for a much longer time frame.

So there are these differences between platforms, but advertisers like comfort. They like what they know. They wanna stick in the same processes. What we believe, because we can see it, our ads drive a lot of intent and drive to conversion very, very quickly, And we’ve been able to extract a lot of value out of the space. I mean, if you take the disclosure that I gave you, in q I think it was q one, hundreds of advertisers, I believe it was in the six hundreds, and a billion dollar run rate.

The market penetration in terms of market of scale of advertisers to total market is probably 1% or less in that number. And to get to a billion dollar run rate, clearly, even if they’re complaining about feature missing, the money is showing up at a level that you wouldn’t expect for that little market penetration. So then as you go extrapolate to getting new customers on, we think the products that we deliver work. We think their mindsets will change over time because they’ll realize platforms are different, and that’s good for their business. It’s not bad for their business.

Now the last thing I’ll leave you with is we do believe in automation entirely throughout the funnel. We don’t allow gaming companies to use any sort of manual targeting in our platform. The platform allows them to input a goal, put it in a budget, and get that result. And that’s what they pay us for, the technology being extremely precise and removing that human mind out of the equation. We bring the same view to this category.

All these technologies in advertising are gonna move to AI, automating most of this funnel in the future. We’ve already done that in our largest part of our business, and we are committed to doing that in this category and not allowing people to override what is a smarter system than the human being.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin1: If I could ask a follow-up. I’ve you know, you’ve said in previous calls that you’re gonna be patient, and and, and, you know, we want great experience for all customers before you open up. And, you know, you said, I think, you know, 80% are having good outcomes, but maybe 20% aren’t, and maybe the product performing around a b, things like this in the past. But so October 1, obviously, you know, you’re still referral based, so you’re not completely open, but it’s definitely a big step forward. So, you know, can we infer that it’s largely improving performance that’s informing that decision to go bigger?

You know? And and if so, you know, kinda how would you grade that, or how would know, are you doing better than any any commentary on on performance?

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin: Look. Last call, I laid out a list that I thought would take quarters, and our team knocked out most of that list in a single quarter. We got the Shopify app integration live. We don’t announce these things, but you can find the app in the Shopify app store. It creates one click integration.

We got dynamic product ads live that made a material uplift to the ability for the advertiser to run a video plus inventory ad to then transact the user in a very short amount of time. We did more in in-depth integrations with the attribution companies, which we talked about last time. It was really important so that we can report the same way that the advertiser looks at data and then let the model interpret data that way. We’re continuously improving the core underlying model. So as we looked at the advertisers that we have, the the growth rate that they’re seeing is substantial enough, and the feedback that we’re getting is strong enough that we have no reason not to open up our platform as soon as we can now.

Moderator: Our next question will come from Clark Lampin with BTIG.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin2: I have obviously, I guess, some follow ups on the self serve launch. But I wanted to see, I guess, as you guys are thinking about taking on more of the customers that are in backlog, onboarding new sort of cohorts and verticals next year. In the near term, is there any significant difference, I guess, if we think about the customers that are coming on from a size or product vertical standpoint? And then from as we think about, I guess, the referral dynamic, does that have any impact on expenses or sort of margins? Will those customers be given credits or any sort of compensation for bringing on, I guess, peers?

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin: Yes. Second one first, Clark. I mean, obviously, the incremental value of $1 in our business is worth a ton. So if we decide to pay a referral, you know that we like to make money. So I wouldn’t expect you’ll even see it in the margin number.

It’s just the business is way too big. But it’s very likely that what we look at is what I mentioned earlier. The chance for our clients to tell their peers to come on our platform while we’ve been exclusive for this long is a perk in itself. So we’re not gonna see much of a need to go pay for that client acquisition. And then on the the first question, if you don’t mind, quick recap.

Customer Yes. Just any job. Profile. Yeah. It it’ll it’ll vary because we’re gonna open up to much more account.

So so far, we’ve gone through a period where, at first, I think we were constrained to $2,530,000,000 of GMV. We dropped it down for a little bit. We raised it up this quarter to a 100,000,000 plus to really constrain what’s coming on the platform. As we open up, the goal that we have is to see that any small business of any type can market on our platform. If we clear that goal, we know we’re gonna be a product that can be very important to economies and job creation around the world.

That’s our goal. Now if we don’t see that, we’re gonna work on that. But we think the product is ready for that. We’ve seen cases of regardless of size, customers just plug in and it works. They can find their customers.

They can measure the way they need, and they get the result that they would expect to grow their business. And so if we see that in this referral state, then we’re gonna be quickly on our way to opening up the business and really pushing it hard.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin2: Okay. And then, not that this is something that’s, I guess, a huge priority right now, but in terms of, I guess, sort of long run supply expansion, I think you guys, as you have more model improvements, will unlock supply across the existing gaming footprint. But when you think, I guess, maybe years down the road, where would it make sense? Guess, is there a way to sort of expand Max, you know, sort of logically outside of the gaming ecosystem?

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin: Yeah. I I I don’t think it’s gonna be years down the road if we’re able to go get the demand that is broad reaching and drive up the client count substantially over the coming quarters. Pretty quickly, we’re gonna look at new supply sources as well. There’s absolutely no reason why we wouldn’t wanna plug into other properties even if they’re large social networks, music apps, news apps, sports apps, websites. The the audience itself again, this gamer audience is a human being that’s doing a whole bunch of other things, and games are probably somewhere in the neighborhood of 10 to 15% of their time spent on mobile.

And if we can access them outside of the the largest walled gardens that won’t let us in everywhere else, if we know them and we have data on them, we wanna show that ad to them every chance we get. And we think that’ll be a very lucrative transaction moment for us and and the advertiser. We’re gonna go after that. And so I wouldn’t expect that that’s a year’s out the the out into the future initiative. Thank you.

Yep.

Moderator: Next, Shluhini with Jefferies.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin3: Great. Thank you, guys. Adam, have you seen any changes in overall user acquisition spend from gaming companies post the Apple versus Epic lawsuit? I mean conceptually, it should be a great tailwind for your business, but interested if you’re seeing any benefits playing out currently. Not

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin: yet. I think I mentioned this on the last call, but we sort of expect this one to be take longer than people expect. Certainly, some apps are are bypassing the app store now to cut their rate down, but the biggest gaming companies tend to move really slowly and tend to operate in fear of the big platforms. And so in order to really do it, I think it’s gonna take a few quarters for them to optimize the user experiences and go bank it. And then from there, you’ll start seeing it compound pretty quickly in terms of benefit to us as an ad platform.

Because once the very large leaders start doing it, you’ll start seeing the smaller to midsize ones really pick it up quickly. So no impact yet. And I I would guess it’ll probably take two to four quarters from some impact. And by four to eight quarters, you’re gonna get get pretty material impact in pricing on our platform.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin3: Great. And then maybe just another one on, capital allocation. I mean, looks like without the apps business, you’re generating a 60% plus free cash flow margin. So just interested to hear how you’re thinking about use of the cash.

Matt Stump, CFO, AppLovin: Yeah. I mean, the the approach that we’re gonna take, James, going forward is very consistent with what we’ve done in the past. I mean, obviously, first, you know, continuing to to allocate capital towards organic initiatives, continuing to hire on, you know, very high quality engineering and business development talent, right, to to help con continue to grow the organic business. And then after that, then to continue to return capital to shareholders via share buybacks. So that that’s the approach going forward as well.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin3: Thank you.

Moderator: Our next question will come from Martin Yang with OpCo.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin4: Hi. Thank you for taking my question. One question on international expansion. Can you give us a sense of how do you view the size of The US market versus international when it comes to your ideal target customer in the near term? And I have a follow-up.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin: Yeah. I mean, one, let’s let’s divide it into two things. One, there’s international businesses that like, local shop in Japan, versus domestic US businesses. Second, there’s the traffic. And for us, historically, because we’ve grown word-of-mouth, getting customers that were local to markets was always tricky.

So it was much easier for us to get companies that were international buyers, and the revenue was driven by where’s the audience and how monetizable is the audience. And so today, I wanna say this off the top of my head, and Mac can correct if I’m wrong, but it’s roughly half half on domestic US versus rest of the world. And remember, we don’t tend to operate inside China. And so you start with that. You go, okay.

Well, we have a in the the only disclosure we’ve given you on the ecommerce vertical, that billion dollar run rate, I look at that and go, well, if we open up all these other countries, for the most part, is one gonna become two overnight? Probably not because most of these western companies can’t go out and buy Japan and Korea and things that are really localized in language. But there’s a lot of markets that look and feel similar to The US. So once we open it up, one’s gonna become much more than one. We just don’t know where it’s gonna land.

And then as we open up the platform, that local Japanese company should be able to come into our platform. And like we said, if we don’t see them organically coming in, we’re gonna market to them and ensure they’re coming in. The one in Korea is gonna come on the platform, and we’ll start getting penetration in every one of the market that our users are in. And that incremental advertiser in these categories, as I touched on, the the revenue from that is worth so much to us that we have a the the type of financial model that will allow us to go get coverage all over the world.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin4: Got it. Thank you. My follow-up question on that is on the pace of onboarding international customers. Do you see a pent up demand among those? So when it comes to pacing, should we see a sudden uptick similar to four q last year in The US, or international onboarding will be a more gradual in line with your overall rollout?

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin: Yeah. I I I can’t say I know. I mean, I haven’t looked at the queue of domains. You’d have to infer where where the company is based, and we don’t even ask, like like, country of origin. But the reality is as we open up the platform, the the customers that we have inside gaming are global.

So as they invite their peers, their peers are gonna be wherever their headquarters are. Right? So there’s there’s coverage all over the world. The companies that are live inside of ecommerce are predominantly US. So probably their peers are gonna be in western markets.

And so you’ll have a mix of referrals going out. And I I don’t think it’s gonna be, like, everyone’s focused on the user only in The US to invite. It’s gonna be broad reaching, and there’s no constraints that we’re gonna be setting as we start opening the platform up.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin4: Got it. Thanks.

Moderator: Our next question will come from Jim Callahan with Piper Sandler.

: Hi. Thanks, guys, for taking the question. On ecommerce, you’re working with a lot of different types of advertisers with different bidding goals and purchase windows. What have you learned through that process so far that’s informing the self serve kinda toolset?

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin: I I mean, it is much more fragmented when it comes to attribution and and integration than the mobile app ecosystem. The mobile app ecosystem has two major MMPs, mobile measurement partners. We own one of them. So integration is pretty easy across the advertiser base, and everyone has the same attribution model. Everyone looks at things on a last click basis, and so everything is standardized.

When we got into web, not only did we have to contend with the fact that most of the media buying was happening on Meta, so everyone wanted things the way they looked at things on Meta. Secondarily, we had to contend with the fact that the space was completely fragmented. So this was one of the bigger lifts that we had to go accomplish over the last quarter or two was do all those integrations that I laid out on the last call to get us ready so that we can go out and and really open up the platform. We wouldn’t be able to if every Shopify shop came onto our platform and couldn’t integrate one click. That’s how they integrate everywhere else.

So we needed to have that deal struck and have that app integrated in their store and already approved and functional. We needed to ensure that we were integrated with the major attribution companies so numbers line up and the advertisers can see things the way they need. And, also, the model gets the data that it needs to be able to go optimize on their behalf. So those things were the harder points, and we’ve gotten through it. We’ve seen, obviously, positive reception, which gives us the confidence to get going in on our journey to open up the platform.

: Great. That’s helpful. And just on core gaming in the quarter, anything to call out in terms of, like, model enhancements, tweaks, performance improvements?

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin: Yeah. I mean, nothing that’s, like, double digit step function. But, look, the numbers are getting bigger now. So we’re we’re now in a place where we continue to put up big numbers every single quarter. Q two isn’t particularly strong seasonally in the category, but we still grew at a really healthy rate.

We continue to have iterative lifts, and we continue to deliver the advertisers a lot of value. So every quarter, they come back to reinvest more as they continue to see strong return on ad spend on our platform. So what what gives us confidence is as our numbers are getting bigger and without some something that’s what we would call the next big model enhancement, we’re still growing at really healthy rates. So everything else that we’re talking about just creates this upside opportunity on the business, not only the incremental data flywheel from the new category, the new demand from the new category, but also the fact that inside gaming, there’s more improvement to our technology to come. And some of that improvement at times will be those model enhancement, substantial lifts that no one expects.

Ralph Schackart, Analyst, William Blair: Great. Thank you. Yep.

Moderator: Our next question comes from Bernie McTernan with Needham and Company.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin5: Great. Hey, Adam. Thanks for taking questions. The incremental margin of the business are are obviously pretty incredible. Should there be any changes that we expect as, you know, as ecommerce expand, whether from marketing to acquire advertisers or, you know, the economics if you look at to plug into other supply sources, like this eighty, ninety, 100 incremental margins, is that still the right way to think about the business?

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin: Well well, the latter one we plug in will be net revenue reported. Right? Because still, we’re gonna report revenue rec the same way. The former will be a cost line item, but as you’ve seen, we’re really responsible with the dollars that we spend. One, you’ll see the sales and marketing line.

So we’ll talk about it as we go and test it. Two, we’ll test it. And three, we’re only gonna spend the dollars on performance marketing if we’re printing cash on the other side, and it’s creating this growth upside that we expect. So it’s gonna be a a cost line item that wouldn’t have existed before that will, and one that I think everyone who’s a shareholder is gonna love to see growing because it’ll imply we’re gonna make a huge spread on the LTV to cost the user acquisition on the other side.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin5: Makes sense. Thank you.

Omar Dasuki, Analyst, Bank of America: Thanks, Brian.

Moderator: Our next question comes from Arsenesh Madhavik with Wolfe.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin6: Hey. Thanks for taking my question. Adam, with Meta reintroducing the advanced mobile measurement and adjust supporting it, do you see that maybe as an opportunity to showcase, like, apps, you know, engines and incremental performance for ecommerce campaigns versus Meta? And could your advertisers that are opting in drive strong retraction with ecommerce advertisers, especially with, like, the referral based rollout in October. Is that timing of that rollout also still keeping that 10% of that revenue being ecommerce intact for the year?

And then, Matt, just a quick follow-up after.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin: You blitzed those questions. So it’s a and it sort of ran together for me. So let let’s start with, advanced mobile measurement, then let’s jump into the next one. So, advanced mobile measurement, met Meta I mean, we don’t comment on other companies’ measurement integrations, but they’ve always been integrated as a self attributing network with Adjust. Adjust is no different than AppsFire.

We run that business completely separately. So they do support attribution models across all these companies. I don’t think there’s any overlap with our business on these integrations, at least not that we’ve ever seen in the past. And, therefore, that’s something that happens on a team that we don’t closely manage and and really runs their business to maximize the SaaS, business that they have. On I I think your second question was percentage of e comm revenue in the future.

Correct? Like, we’re starting Now at we’ve said I think on the last earnings call, I think I said 0.5% market penetration. It’s probably I mean, we’re we’re certainly sub 1% of MetaReports over 10,000,000 advertisers, and we’re going after all businesses of all sizes. We don’t have a lot of advertisers. So the opportunity in that category, both in terms of advertiser count and in terms of scale of TAM, is much greater than gaming.

So as we go forward, if we’re doing our job right and performance is as we would expect based on the data that we have so far, it’s going to quickly become more and more of our business. And will one day our business become 90% web based advertising, 10% mobile gaming? I don’t know. But what I think, because of the data flywheel and the system that benefits both sides and the improvements that we continue to have on gaming, is that gaming is gonna get bigger and that other other category is gonna get really big.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin6: Got it. And then, Matt, just on the actual guide, so I think 5% sequential growth conservatism last quarter was four. Do we just say, hey. The incremental point, that’s kind of the UA spend tied from the studios being off and getting some of that revenue. Is that fair

Matt Stump, CFO, AppLovin: way to Historically, what we were doing was trying to guide towards the component of growth, right, that we feel very confident in, that’s very predictable, which is when you look at kind of the components of of overall growth in our technology. Right? It’s the the directed, model enhancements that Adam mentioned, changes that the engineers are making, and then the ongoing reinforcement learning within the model. And that ongoing reinforcement learning has kinda generally trended towards the three to 5% per quarter. So the difference between that and then the guide this quarter is the incremental uplift from the additional revenue that we’re gonna get from the apps divestiture.

Ralph Schackart, Analyst, William Blair: Got it. Thanks. Welcome.

Moderator: Our final question comes from Alex Brandola with Wells Fargo.

: Perfect. Thanks so thanks so much for the question. I think what everybody is trying to figure out is, you know, when when self-service goes live on October 1 in a referral basis or perhaps broader general availability next year, there’s some noble amount of waiting demand that’s waiting to get into the program. Right? Advertisers that have asked you to join but maybe didn’t meet the GMV thresholds or perhaps you didn’t have the capacity to onboard in the past.

Can you maybe help us understand how big that list of advertisers is? You mentioned a queue in response to the previous question. So it seems like there’s some there’s some amount of demand that you’ve already identified and waiting to come into the program.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin: Yeah. Look. The referral program is to make sure that our advertisers who find success on our platform thus far are effectively curating the next set of advertisers. And prior to that, it was our team doing that, and we were very, very restrictive. So we think our advertisers are gonna cause an onboarding moment that’ll be multiples bigger than what we were manually curating.

Now what it’s not necessarily true that we’re gonna take our queue that’s built over the last year and just say, everyone, you’re in. They’re still gonna have to get invited to get into the platform. So it will be still curated onboarding. The the reality is, like, q four is gonna end up being a fun quarter. You’ve got the the advertiser cohort that we didn’t have last q four that was growing in the quarter to the point where, you know, we reported huge numbers and then had huge numbers in q one.

But we’re gonna have those advertisers primed and ready to go for the full q four. We’re gonna have those advertisers inviting their friends onto our platform in q four, and we’re gonna be opening up international all at the same time. So there’s gonna be a lot of fun moment moments for us and our customers in this ecommerce or web based category that’ll set sort of a new baseline for that business. And then, obviously, then we will go through hopefully, another inflection when we really truly open up the platform and and try to get into a state where we’re more stable long term.

: Yep. And then maybe just one more if I could. You know, you’ve kind of articulated a vision for the self-service ads manager where there’s a lot of agent capabilities built in in in the campaign workflow. Is that live on October 1, or is October 1 a version of the product that has credit card that has measurement, but then we add kind of the AI stuff later maybe?

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin: Yeah. Parts. I mean, look. There’s there’s different levels of of agents. There’s an agent that can respond and answer questions and give you responses to those questions and help you along.

That that’s sort of a onboarding widget that whether we wanna call this AI or not, now AI has made it a lot more capable. It’s something that’s that’s probably gonna be in present early in the the release of this product. The the more complex level is an agent that does everything for you. You’re an advertiser and you wonder how your campaign is doing, analyze the performance, talk to me about the ads I’m running. That’s a complex agent task.

That analysis tax task at the advertiser level is not trivial. That’ll be on the way too. And then you’ve got a third form, and I wouldn’t call this an agent. I call it tools, but I keep referencing this generative AI based ad creative tools. We’re going to give our customers the ability to automatically create advertisements, whether video or end card.

What that’ll do is create way more diversity of advertisement on our platform for the model to go use to personalize ad to the other side and hopefully much higher response rate from the consumer. In in particular, businesses don’t have the resources to go build ads that adapt for our platform. Given the ads that adapt for our platform tend to engage the user for thirty to sixty seconds instead of three to six seconds like they do on social. And so we wanna give them those tools so that they can have the same capacity the larger brands do so they can buy at the maximum capability that their business justifies on our platform. All of these things will come.

I mean, and then we’ll talk about the next tools behind it because no product in our world stops being iterative. We launch, we then add tools, we try to make the advertisers’ life seamless and fully automated, and we will keep giving them tools that we think will benefit them, which in turn benefits consumers and us.

: Thank you so much. Yep.

Moderator: And that concludes the question and answer session for this quarter. We thank you all for joining us today. Have a good afternoon.

Adam Farooghi, Cofounder, CEO, and Chairperson, AppLovin: Thanks, everyone.

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