AppLovin 10-Q 2022-03-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2022

For the transition period from to

Commission File Number: 001-40325

AppLovin Corporation

(Exact name of registrant as specified in its charter)

1100 Page Mill Road

Palo Alto, California 94304

(Address of registrant’s principal executive offices, including zip code)

(800) 839-9646

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 3, 2022, the number of shares of the registrant’s Class A common stock outstanding was 299,383,309 and the number of shares of the registrant’s Class B common stock outstanding was 78,662,622.

Table of Contents

NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include statements about:

• our future financial performance, including our expectations regarding our revenue, cost of revenue, and operating expenses, and our ability to achieve or maintain future profitability;

• the sufficiency of our cash and cash equivalents to meet our liquidity needs;

• the demand for our AppLovin Software Platform and AppLovin Apps;

• our ability to attract and retain business clients and users;

• our ability to develop new products, features, and enhancements for our AppLovin Core Technologies and AppLovin Software Platform and to launch or acquire new AppLovin Apps and successfully monetize them;

• our ability to compete with existing and new competitors in existing and new markets and offerings;

• our ability to successfully acquire and integrate companies and assets and to expand and diversify our operations through strategic acquisitions and partnerships;

• our strategic review of our AppLovin Apps portfolio;

• our ability to maintain the security and availability of our AppLovin Core Technologies, AppLovin Software Platform, and AppLovin Apps;

• our expectations regarding the effects of existing and developing laws and regulations, including with respect to taxation and privacy and data protection;

• our ability to manage risk associated with our business;

• our expectations regarding new and evolving markets;

• our ability to develop and protect our brand;

• our expectations and management of future growth;

• our expectations concerning relationships with third parties;

• our ability to attract and retain employees and key personnel;

• our expectations regarding our share repurchase program;

• our ability to maintain, protect and enhance our intellectual property; and

• the increased expenses associated with being a public company.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors, including those described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking

statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

Neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. Moreover, the forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, partnerships, mergers, dispositions, joint ventures, or investments we may make.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

PART I – FINANCIAL INFORMATION

AppLovin Corporation

Condensed Consolidated Balance Sheets

(in thousands, except for share and per share data)

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

AppLovin Corporation

Condensed Consolidated Statements of Operations

(in thousands, except for per share data)

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

AppLovin Corporation

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

AppLovin Corporation

Condensed Consolidated Statements of Redeemable Noncontrolling Interest and Stockholders’ Equity (Deficit)

(in thousands, except share data)

(unaudited)

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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Factors that could cause or contribute to such differences include those identified below and those discussed in the section titled “Risk Factors” and other parts of this Quarterly Report on Form 10-Q. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.

Overview

Our mission is to grow the mobile app ecosystem by enabling the success of mobile app developers. Our software solutions provide advanced tools for mobile app developers to grow their businesses by automating and optimizing the marketing and monetization of their apps. Our software, coupled with our deep industry knowledge and expertise, has allowed us to rapidly scale a successful and diversified portfolio of owned mobile apps. We have also accelerated our market penetration through an active acquisition and partnership strategy. Our scaled and integrated business model sits at the nexus of the mobile app ecosystem, which creates a durable competitive advantage that has fueled our clients’ success and our strong growth.

Since our founding in 2011, we have been focused on building a software-based platform for mobile app developers to improve the marketing and monetization of their apps. Our founders, who are mobile app developers themselves, quickly realized the real impediment to success and growth in the mobile app ecosystem was a discovery and monetization problem—breaking through the congested app stores to efficiently find users and successfully grow their business. Their first-hand experience with these developer challenges led to the development of our infrastructure and software—AppLovin Core Technologies and AppLovin Software Platform. We capitalized on our success and understanding of the mobile app ecosystem by launching AppLovin Apps in 2018. Our Apps now consist of a globally diversified portfolio of over 350 free-to-play mobile games across five genres, run by nineteen studios.

For the three months ended March 31, 2022, our revenue grew 4% year-over-year, from $603.9 million for the three months ended March 31, 2021 to $625.4 million in the comparative period in 2022. We generated a net loss of $115.3 million for the three months ended March 31, 2022, and a net loss of $10.6 million in the comparative period in 2021. We generated Adjusted EBITDA of $276.2 million, and $131.1 million for the three months ended March 31, 2022 and 2021, respectively. Additionally, our net cash provided by (used in) operating activities was $31.7 million and $61.8 million in the three months ended March 31, 2022 and 2021, respectively. See the section titled “Non-GAAP Financial Metrics” for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated in accordance with GAAP.

Our Business Model

We collect revenue from our Software Platform and our Apps. During the three months ended March 31, 2022, Software Platform Revenue represented 19% of total revenue and Apps Revenue represented 81% of total revenue.

As a result of the strategic review of our Apps portfolio, which we announced in our shareholder letter on May 11th, 2022 and which we discuss below, we have updated the presentation of our revenue and associated discussion within this filing to align with how our management reviews our revenue and financial performance.

Software Platform Revenue

We generate Software Platform Revenue from fees paid by mobile app advertisers who use our Software Platform to grow and monetize their apps. We are able to grow our Software Platform Revenue by improving our various software technologies.

Software Platform clients include a wide variety of advertisers, from indie developer studios to some of the largest global internet platforms, such as Facebook and Google. While we have thousands of clients as of March 31, 2022, the vast majority of our revenue is derived from our Software Platform Enterprise Clients. See “Key Metrics” below for additional information on how we calculate Software Platform Enterprise Clients. We see multiple opportunities to gain new Software Platform clients, and to increase spend from existing clients, as we help them grow their businesses and make them more successful.

Our Software Platform includes AppDiscovery, Adjust and MAX. Clients use AppDiscovery to automate, optimize, and manage their user acquisition investments. They set marketing and user growth goals, and AppDiscovery optimizes their ad spend in an effort to achieve their return on advertising spend targets and other marketing objectives. AppDiscovery comprises the vast majority of revenue from our Software Platform. Revenue is generated from our advertisers, typically on a performance-based, cost-per-install basis, and shared with our advertising publishers, typically on a cost per impression model. Our Software Platform Enterprise Clients had a Net Dollar-Based Retention Rate of approximately 137% for the three months ended March 31, 2022.1

Software Platform clients use Adjust's SaaS mobile marketing platform to better understand their users' journey while allowing marketers to make smarter decisions through measurement, attribution and fraud prevention. Revenue from Adjust is primarily generated from an annual software subscription fee.

Software Platform clients use MAX to optimize purchases of app advertising inventory. The Compass Analytics tool within MAX provides insights to manage against key performance indicators, understand the long-term value of users, and help manage profitability. Revenue from MAX is generated based on a percentage of client spend. As more developers move to in-app bidding monetization, we expect growth in the adoption of, and revenue from, MAX.

Apps Revenue

Apps Revenue is generated when a user of one of our Apps makes an in-app purchase ("IAP") ("Consumer Revenue") and when clients purchase the digital advertising inventory of our portfolio of Apps ("Business Revenue"). We are able to grow our Apps Revenue by adding more apps to our Apps portfolio and increasing engagement on our existing Apps.

Our Apps are generally free-to-play mobile games and generate Consumer Revenue through IAPs. IAPs consist of virtual goods used to enhance gameplay, accelerate access to certain features or levels, and augment other mobile game progression opportunities for the user. IAPs drive more engagement and better economics from our Apps. The vast majority of our IAP revenue flows through two app stores, Apple App Store and Google Play, which charge us a standard commission on IAPs. Consumer Revenue represented 67% of total Apps Revenue in the three months ended March 31, 2022.

During the three months ended March 31, 2022, we had an average of 2.7 million Monthly Active Payers ("MAPs") across our portfolio of Apps. Over that period, we had an Average Revenue Per Monthly Active Payer ("ARPMAP") of $41. Leveraging the benefit of our integrated Platform and Apps, we see opportunities to grow our App-related revenue streams by increasing MAPs and expanding ARPMAP within existing games and through new game development, acquisitions and partnerships. See “Key Metrics” below for additional information on how we calculate MAPs and ARPMAP.

Business clients that purchase advertising inventory from our Apps are able to target highly relevant users from our diverse and global portfolio of over 350 mobile games. Our clients leverage a broad set of high-performing mobile ad formats, including playable and rewarded video, and are able to match these ads with relev

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We are exposed to market risks in the ordinary course of our business, which primarily relate to fluctuations in interest rates.

As of March 31, 2022, we had unrestricted cash and cash equivalents of $1.41 billion. A hypothetical 10% change in interest rates would not have a material impact on our financial condition or results of operations due to the short-term nature of our cash equivalents.

As of March 31, 2022, we had a debt balance of $3.27 billion. A hypothetical 50 basis point change in interest rates as of March 31, 2022 would not have a material impact on our net income for the three months ended March 31, 2022.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

Our management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Due to inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may be subject to legal proceedings and claims that arise in the ordinary course of business, as well as governmental and other regulatory investigations and proceedings. In addition, third parties may from time to time assert claims against us in the form of letters and other communications. We are not currently a party to any legal proceedings that, if determined adversely to us, would, in our opinion, have a material adverse effect on our business, financial condition, results of operations, or cash flows. Future litigation may be necessary to defend ourselves and our business partners and to determine the scope, enforceability, and validity of third-party proprietary rights, or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, including our unaudited condensed consolidated financial statements and the related notes and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our business, financial condition, results of operations, or prospects could also be adversely affected by risks and uncertainties that are not presently known to us or that we currently believe are not material. If any of the risks actually occur, our business, financial condition, results of operations, and prospects could be adversely affected. In that event, the market price of our Class A common stock could decline, and you could lose all or part of your investment.

Risk Factor Summary

Investing in our Class A common stock involves a high degree of risk because our business is subject to numerous risks and uncertainties, as fully described below. The principal factors and uncertainties that make investing in our Class A common stock risky include, among other things:

Business, Operational and Industry Factors

• our limited operating history;

• the unpredictability of our results of operations;

• our ability to attract new clients, the loss of clients or reduction in spend by clients;

• security breaches, improper access to or disclosure of data or other cyber incidents;

• competition in our industry;

• our ability to adapt to technological change;

• our ability to address or mitigate technical limitations in our systems;

• our ability to maintain and scale our technical infrastructure;

• our reliance on certain key employees and our ability to attract, retain, and motivate key personnel;

• risks related to our strategic acquisitions and partnerships, including integration and managing growth;

• risks related to our plan to continue to expand and diversify operations through strategic acquisitions and partnerships;

• our ability to realize the value of our strategic review of our Apps portfolio;

• our strategic acquisitions and partnerships may expose us to tax risks;

• our ability to maintain relationships with our Partner Studios;

• our reliance on third-party platforms to distribute our AppLovin Apps and collect revenue;

• our ability to launch or acquire new AppLovin Apps and successfully monetize or improve them and existing Apps;

• our ability to retain existing users or add new users cost-effectively, or if users decrease their level of engagement;

• concentration of our revenue sources;

• our recent rapid growth, and ability to manage growth;

• expansion into new business opportunities;

• our ability to effectively manage our growing international operations;

• the impact of the geopolitical climate on our operations, including, for example, the impact to our business and certain of our strategic partners impacted by the current warfare in Ukraine and resulting sanctions in Russia;

• our ability to increase in-app purchases, respond to changes with respect to in-app purchases, and manage the economies in our AppLovin Apps;

• our ability to achieve or maintain profitability with increasing operating expenses;

• the impact of the COVID-19 pandemic and responsive measures;

• our ability to maintain company culture;

• our ability to establish and maintain awareness of the AppLovin brand;

• our general lack of long-term agreements with our business clients;

• the ability of our AppLovin Apps to meet user expectations;

• our ability to maintain a customer support ecosystem amongst the proliferation of “cheating” programs and scam offers seeking to exploit our mobile games and users;

Legal and Regulatory Matters

• changes in laws and regulations concerning privacy, information security, data protection, consumer protection, advertising, tracking, targeting, and protection of minors;

• changes in U.S. and foreign laws, many of which are unsettled and still developing;

• compliance with the Foreign Corrupt Practices Act, and similar anti-corruption and anti- bribery laws;

• governmental export controls and economic sanctions laws;

• changes in tax laws or tax rulings;

• our exposure to greater than anticipated tax liabilities;

• assertions by taxing authorities that we should have collected or in the future should collect sales and use, value added, or similar taxes;

• liability for content that is distributed through or advertising that is served through our AppLovin Software Platform or Apps;

• increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies;

• expenses related to legal or regulatory proceedings and settlements;

Intellectual Property Factors

• our ability to protect or enforce our proprietary and intellectual property rights or the costs involved in such enforcement;

• our involvement in intellectual property disputes;

• our use of and compliance with open source software;

• our ability to acquire and maintain licenses to intellectual property

Financial and Accounting Matters

• our ability to maintain an effective system of disclosure controls and internal control over financial reporting;

• changes in financial accounting standards;

• our reliance on assumptions and estimates to calculate certain of our key metrics;

• conversion of key internal systems and processes and problems with the design, implementation, or operation of these systems and processes;

• the possibility that we may be required to record a significant charge to earnings if our goodwill becomes impaired;

• substantial indebtedness under our senior secured credit facilities;

• our ability to generate sufficient cash flow to satisfy our significant debt service obligations;

• the availability of additional capital on acceptable terms;

• changes with the London Interbank Offered Rate;

Ownership of our Class A common stock and Governance

• the multi-class structure of our common stock and the Voting Agreement among the Voting Agreement Parties;

• our status as a “controlled company” within the meaning of the Nasdaq corporate governance requirements;

• the effect our multi-class structure may have on the market price of our Class A common stock;

• volatility of the market price of our Class A common stock;

• the possibility that we may not realize the anticipated long-term stockholder value of our share repurchase programs;

• future sales of our Class A common stock;

• the issuance of additional stock in connection with financings, acquisitions, investments, our equity incentive plans, or otherwise;

• provisions of Delaware law, the Voting Agreement, our amended and restated certificate of incorporation, and our amended and restated bylaws could make a merger, tender offer, or proxy contest difficult; and

• exclusive forum provisions in our amended and restated bylaws.

Risks Related to Our Business and Industry

We have a limited operating history, especially with respect to our AppLovin Apps, which makes it difficult to evaluate our current business and future performance and the risks we may encounter.

Our limited operating history, especially with respect to our AppLovin Apps, which we launched in 2018, may make it difficult to evaluate our current business and our future performance. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries, such as the mobile app ecosystem, including our ability to:

• accurately forecast our revenue and plan our operating expenses;

• attract new and retain existing clients using AppLovin Software Platform and users of our Apps;

• successfully compete with current and future competitors, some of whom are also our clients;

• successfully expand our business in existing markets and enter new markets and geographies;

• successful

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We have filed the exhibits listed on the accompanying Exhibit Index, which is incorporated herein by reference.

EXHIBIT INDEX

†The certifications attached as Exhibit 32.1 that accompany this Quarterly Report on Form 10-Q are deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of AppLovin Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.