filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 included 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 help companies grow their apps and accelerate their business. Our full stack software solutions provide advanced tools for mobile app developers to grow their businesses by automating and optimizing the marketing and monetization of their apps. We also operate a portfolio of owned mobile apps and accelerated our market penetration through an active acquisition and partnership strategy. Our scaled 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 300 free-to-play mobile games across five genres, run by eleven studios.
For the three months ended March 31, 2023, our revenue grew 14% year-over-year, from $625.4 million in the three months ended March 31, 2022 to $715.4 million in the comparative period in 2023. We generated a net loss of $4.5 million for the three months ended March 31, 2023, and a net loss of $115.3 million in the comparative period in 2022. We generated Adjusted EBITDA of $273.7 million and $276.2 million for the three months ended March 31, 2023 and 2022, respectively. Additionally, our net cash provided by (used in) operating activities was $288.7 million and $(31.7) million in the three months ended March 31, 2023 and 2022, respectively. We generated Free Cash Flow of $283.1 million and $(38.2) million for the three months ended March 31, 2023 and 2022, respectively. Given our strong financial position, we have been able to reinvest in our expansion and growth, and repurchase our Class A common stock. See the section titled “—Non-GAAP Financial Measures” for definitions of our non-GAAP financial measures and reconciliations of the most directly comparable financial measures calculated in accordance with GAAP to these measures.
Our Business Model
We collect revenue from our Software Platform and our Apps. During the three months ended March 31, 2023, Software Platform Revenue represented 50% of total revenue and Apps Revenue represented 50% of total revenue.
In the second quarter of 2022, we revised the presentation of segment information to align with changes to how our chief operating decision maker (“CODM”), the Chief Executive Officer, allocates resources and assesses performance. Effective in May 2022, we report our operating results through two reportable segments: Software Platform and Apps. Previously we had a single operating and reportable segment.
The CODM evaluates performance of each segment based on several factors, of which the financial measures are segment revenue and segment adjusted EBITDA, as defined in Note 11 to the Company's condensed consolidated financial statements.
The Software Platform and Apps segments provide a view into the organization of our business and generate revenue as follows:
Software Platform Revenue
We primarily 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. 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, MAX, Adjust, and Wurl. 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 basis, and shared with our advertising publishers, typically on a cost per impression model.
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.
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 Wurl's CTV platform to distribute streaming video, maximize advertising revenue, and acquire and retain viewers or subscribers. Revenue from Wurl is primarily generated from content companies, typically on a usage-based model.
Apps Revenue
Apps Revenue is generated when a user of one of our Apps makes an in-app purchase and when clients purchase the digital advertising inventory of our portfolio of Apps (IAA). 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 IAP 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. IAP Revenue represented 70% of total Apps Revenue in the three months ended March 31, 2023.
During the three months ended March 31, 2023, we had an average of 1.8 million Monthly Active Payers ("MAPs") across our portfolio of Apps. Over that period, we had an Average Revenue Per Monthly Active Payer ("ARPMAP") of $46. See “Key Metrics” below for additional information on how we calculate MAPs and ARPMAP.
IAA clients that purchase advertising inventory from our Apps are able to target highly relevant users from our diverse and global portfolio of over 300 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 relevant users resulting in a better return on their advertising spend. By increasing the number of users and their engagement, as well as better matching ads with the appropriate target audience, we are able to increase our revenue from IAA clients that purchase advertising inventory from our Apps. IAA Revenue represented 30% of total Apps Revenue in the three months ended March 31, 2023.
Key Metrics
We review the following key metrics on a regular basis in order to evaluate the health of our business, identify trends affecting our performance, prepare financial projections, and make strategic decisions.
Monthly Active Payers ("MAPs"). We define a MAP as a unique mobile device active on one of our Apps in a month that completed at least one IAP during that time period. A consumer who makes IAPs within two separate Apps on the same mobile device in a monthly period will be counted as two MAPs. MAPs for a particular time period longer than one month are the average MAPs for each month during that period. We estimate the number of MAPs by aggregating certain data from third-party attribution partners. Some of our Apps do not utilize such third-party attribution partners, and therefore our MAPs figure for any period does not capture every user that completed an IAP on our Apps. We estimate that our counted MAPs generated approximately 99% of our IAP Revenue during the three months ended March 31, 2023, and as such, management believes that MAPs are still a useful metric to measure the engagement and monetization potential of our games.
Average Revenue Per Monthly Active Payer ("ARPMAP"). We define ARPMAP as (i) the total IAP Revenue derived from our Apps in a monthly period, divided by (ii) MAPs in that same period. ARPMAP for a particular time period longer than one month is the average ARPMAP for each month during that period. ARPMAP shows how efficiently we are monetizing each MAP.
The following table shows our Monthly Active Payers and Average Revenue Per Monthly Active Payer for the three months ended March 31, 2023 and 2022.
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Monthly Active Payers (millions) | 1.8 | 2.7 | |||||||||
| Average Revenue Per Monthly Active Payer | $ | 46 | $ | 41 |
Our key metrics are not based on any standardized industry methodology and are not necessarily calculated in the same manner or comparable to similarly titled measures presented by other companies. Similarly, our key metrics may differ from estimates published by third parties or from similarly titled metrics of our competitors due to differences in methodology. The numbers that we use to calculate MAPs and ARPMAP are based on internal data. While these numbers are based on what we believe to be reasonable judgments and estimates for the applicable period of measurement, there are inherent challenges in measuring usage and engagement. We regularly review and may adjust our processes for calculating our internal metrics to improve their accuracy.
Non-GAAP Financial Measures
Adjusted EBITDA and Adjusted EBITDA Margin
We define Adjusted EBITDA for a particular period as net income (loss) before interest expense and loss on settlement of debt, other (income) expense, net (excluding certain recurring items), provision for (benefit from) income taxes, amortization, depreciation and write-offs and as further adjusted for stock-based compensation expense, acquisition-related expense and transaction bonus, publisher bonuses, MoPub acquisition transition services, restructuring costs, impairment and loss in connection with the sale of long-lived assets, loss (gain) on extinguishments of acquisition related contingent consideration, non-operating foreign exchange (gain) losses, lease modification and abandonment of leasehold improvements, and change in the fair value of contingent consideration. We define Adjusted EBITDA margin as Adjusted EBITDA divided by revenue for the same period.
Adjusted EBITDA and Adjusted EBITDA margin are key measures we use to assess our financial performance and are also used for internal planning and forecasting purposes. We believe Adjusted EBITDA and Adjusted EBITDA margin are helpful to investors, analysts, and other interested parties because they can assist in providing a more consistent and comparable overview of our operations across our historical financial periods. In addition, these measures are frequently used by analysts, investors, and other interested parties to evaluate and assess performance. We use Adjusted EBITDA and Adjusted EBITDA margin in conjunction with GAAP measures as part of our overall assessment of our performance, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies, and to communicate with our board of directors concerning our financial performance.
Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures and are presented for supplemental informational purposes only and should not be considered as alternatives or substitutes to financial information presented in accordance with GAAP. These measures have certain limitations in that they do not include the impact of certain expenses that are reflected in our consolidated statement of operations that are necessary to run our business. Our definitions may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our Adjusted EBITDA and Adjusted EBITDA margin should be considered in addition to, not as substitutes for, or in isolation from, measures prepared in accordance with GAAP.
The following table provides our Adjusted EBITDA and Adjusted EBITDA margin for the three months ended March 31, 2023 and 2022, and a reconciliation of net loss to Adjusted EBITDA:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| (in thousands. except percentages) | |||||||||||||||||||||||
| Revenue | $ | 715,405 | $ | 625,421 | |||||||||||||||||||
| Net loss | $ | (4,518) | $ | (115,298) | |||||||||||||||||||
| Net Margin | (0.6)% | (18.4)% | |||||||||||||||||||||
| Adjusted as follows: | |||||||||||||||||||||||
| Interest expense | 74,511 | 32,009 | |||||||||||||||||||||
| Interest income and other, net | (9,771) | (2,417) | |||||||||||||||||||||
| Provision for (benefit from) income taxes | 1,165 | (42,684) | |||||||||||||||||||||
| Amortization, depreciation and write-offs | 128,208 | 128,989 | |||||||||||||||||||||
| Non-operating foreign exchange gain | (672) | (458) | |||||||||||||||||||||
| Stock-based compensation | 82,966 | 44,640 | |||||||||||||||||||||
| Acquisition-related expense | 517 | 14,814 | |||||||||||||||||||||
| Publisher bonuses1 | — | 209,635 | |||||||||||||||||||||
| MoPub acquisition transition services2 | — | 6,999 | |||||||||||||||||||||
| Restructuring costs | 1,292 | — | |||||||||||||||||||||
| Adjusted EBITDA | $ | 273,698 | $ | 276,229 | |||||||||||||||||||
| Adjusted EBITDA Margin | 38.3 | % | 44.2 | % |
1 In association with the MoPub acquisition, we incurred certain costs to incentivize publishers to migrate to our MAX mediation solution including existing publishers of MoPub as well as publishers on other competitor offerings. We have not historically incurred significant publisher migration costs, nor do we currently intend to incur significant publisher migration costs in the future. As such, we have removed the impact of these costs from Adjusted EBITDA.
2 Reflects one-time transition services provided by Twitter to AppLovin.
Free Cash Flow
We define Free Cash Flow as net cash provided by operating activities less purchases of property and equipment and principal payments on finance leases. We use Free Cash Flow to help manage the health of our business, prepare budgets and for capital allocation purposes. We believe Free Cash Flow provides useful supplemental information to help investors understand underlying trends in our business and our liquidity. Free cash flow has certain limitations, including that it does not reflect our future contractual commitments. Our definition may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish Free Cash Flow or similar metrics. Thus, our Free Cash Flow should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP.
The following table provides our Free Cash Flow for the three months ended March 31, 2023 and March 31, 2022 and a reconciliation of net cash provided by operating activities to Free Cash Flow:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (in thousands) | |||||||||||
| Net cash provided by (used in) operating activities | $ | 288,662 | $ | (31,719) | |||||||
| Less: | |||||||||||
| Purchase of property and equipment | (70) | (285) | |||||||||
| Principal payments on finance leases | (5,447) | (6,176) | |||||||||
| Free Cash Flow | $ | 283,145 | $ | (38,180) | |||||||
| Net cash used in investing activities | $ | (12,975) | $ | (1,059,743) | |||||||
| Net cash used in financing activities | $ | (111,415) | $ | (65,424) |
Factors Affecting Our Performance
We believe that the future success of our business depends on many factors, including the factors described below. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in order to continue to grow profitably while maintaining strong cash flow.
Continue to invest in innovation
We have made, and intend to continue to make, significant investments in our Core Technologies and Software Platform to enhance their effectiveness and value proposition for our clients. We expect that these investments will require spending on research and development, and acquisitions and partnerships related to technology components and products. We believe investments in our software, including our machine learning engine AXON, AppDiscovery, Adjust, MAX and Wurl will further improve effectiveness for developers. Our investments will also allow us to enter new mobile app sectors outside of gaming. While our investments in research and development and acquisitions and partnerships may not result in revenue in the near term, we believe these investments position us to increase our revenue over time.
Retain and grow existing clients
We rely on existing clients for a significant portion of our revenue. As we improve our Software Platform and Apps, we can attract additional spend from these clients. Our clients include indie studio developers and some of the largest mobile advertising platforms in the world. We believe there is significant room for us to further expand our relationships with these clients and increase their usage of our Software Platform. We have invested in targeted sales and account-based marketing efforts, including through Adjust’s sales and marketing teams, to identify and showcase opportunities to clients and plan to continue to do so in the future.
In the past, our clients have generally increased their usage of our Software Platform and Apps, and as a result, growth from existing clients has been a primary driver of our revenue growth. We must continue to retain our existing clients and expand their spend with us over time to continue to grow our revenue, increase profitability and drive greater cash flow.
Add new clients globally
Our future success depends in part on our ability to acquire new clients. We recently increased our focus on markets outside the United States to serve the needs of clients globally. During the three months ended March 31, 2023, only 41% of our revenue from Software Platform and IAA Revenue clients was generated from outside of the United States. We believe that the global opportunity is significant and will continue to expand as developers and advertisers outside the United States adopt our Software Platform and advertise on our Apps. We also see opportunities to acquire new clients outside of mobile gaming, as the capabilities of our Core Technologies and Software Platform are relevant to the broader mobile app ecosystem. We are investing in direct sales, product development, education, and other capabilities to drive increased awareness and adoption of our Software Platform and Apps, which investments may impact our profitability in the near term as we seek further scale. We must continue to acquire new clients to grow our revenue, increase profitability, and drive greater cash flow.
Review of our AppLovin Apps portfolio
Over the past several years, our Apps have been critical in providing first-party data and audiences for our Software Platform to enable us to test, design, and scale our technologies. Given the recent development of our technology, the current scale of our Software Platform, and the reach of our MAX solution, we believe we can reduce our reliance on the data from our Apps. Since the second quarter of 2022, we have been performing a strategic review and optimization of our Apps portfolio and its cost structure, focusing on how best to optimize each asset’s contribution to our overall financial performance. This review is substantially complete and has resulted in the divestiture or closure of certain studios, a reduction of headcount, restructuring of earn out arrangements, and other changes to our Apps portfolio, such as restructuring of certain assets or choosing to make changes to optimize the cost structure of certain Apps rather than investing in revenue growth. For example, we have reduced our user acquisition spend for our portfolio of Apps as we increased our desired return goals, which has led to improved App segment Adjusted EBITDA margin, but also contributed to a decline in revenue and MAPs. We may take similar actions in the future. We will continue to manage our Apps portfolio for financial return, including investing for growth through new game launches, while remaining open to evaluating opportunities for the retention, restructure, or sale of assets in the future. We believe that our ability to optimize the contribution of our Apps portfolio will continue to affect our revenue growth, profitability, and cash flow.
Continued execution of strategic acquisitions and partnerships
We intend to continue to make strategic acquisitions and enter into strategic partnerships to grow our business. From the beginning of 2018 through March 31, 2023, we have invested nearly $4.0 billion in 29 strategic acquisitions and partnerships with mobile app developers and for technologies to enhance our Software Platform including the acquisition of MAX in 2018, Adjust in April 2021, MoPub in January 2022, and Wurl in April 2022.
While we have a strong pipeline of strategic acquisition and partnership opportunities, we believe our future results of operations will be affected by our ability to continue to identify and execute such transactions that are accretive to our growth and profitability.
Growth and structure of the mobile app ecosystem
Our business and results of operations will be impacted by industry factors that drive overall performance of the mobile app ecosystem. The mobile app ecosystem has been affected by the recent economic uncertainty, including by advertisers more closely managing budgets and reducing overall spend, which has resulted in slowed growth for our Software Platform in recent quarters. We expect that any further slowing, or accelerations, of the mobile app ecosystem would affect our business and results of operations. In addition, even if the mobile app ecosystem continues to grow at its current rate, our ability to position ourselves within the market will impact our business and results of operations.
Mobile app developers, including AppLovin, rely on third-party platforms, such as the Apple App Store and Google Play Store, among others, to distribute games, collect payments made for IAPs, and target users with relevant advertising. We expect this to continue for the foreseeable future. These third-party platforms have significant market power and discretion to set platform fees, select which apps to promote, and decide how much consumer information to provide to advertising networks that enable our Core Technologies and Software Platform to target users with personalized and relevant advertising and allocate marketing campaigns in an efficient and cost-effective manner. Any changes made in the policies of third-party platforms could drive rapid change across the mobile app ecosystem. For example, in April 2021, Apple started implementing its application tracking transparency framework that, among other things, requires users' opt-in consent for certain types of tracking. While this transparency framework has not had a significant impact on our overall business, it may in the future, including with respect to the effectiveness of our advertising practices and/or our ability to efficiently generate revenue for our Apps. We rely in part on Identifier for Advertisers ("IDFA") to provide us with data that helps our Software Platform better market and monetize Apps. In light of the IDFA and transparency changes, we made changes to our data collection practices. To the extent we are unable to utilize IDFA or a similar offering, or if the transparency changes and any related opt-in or other requirements result in decreases in the availability or utility of data relating to Apps, our Software Platform may not be as effective, we may not be able to continue to efficiently generate revenue for our Apps, and our revenue and results of operations may be harmed. Additionally, Apple implemented new requirements for consumer disclosures regarding privacy and data processing practices in December 2020, which has resulted in increased compliance requirements and could result in decreased usage of our Apps. In February 2022, Google announced its Privacy Sandbox initiative for Android, a multi-year effort expected to restrict tracking activity and limit advertisers' ability to collect app and user data across Android devices. These or any similar changes to the policies of Apple or Google may materially and adversely affect our business, financial condition, and results of operations. To date, these data privacy changes have had some impact on the discoverability of apps across these platforms, though they have had a relatively muted aggregate impact on our overall results of operations.
New tools for developers, industry standards, and platforms may emerge in the future. We believe our focus on the mobile app ecosystem has allowed us to understand the needs of our clients and our relentless innovation has enabled us to quickly adapt to changes in the industry and pioneer new solutions. We must continue to innovate and stay ahead of developments in the mobile app ecosystem in order for our business to succeed and our results of operations to continue to improve.
Current Economic Conditions
We are subject to risks and uncertainties caused by global economic conditions and events with significant macroeconomic impacts, including but not limited to, uncertainty in the global banking and financial services markets and the Russian invasion of Ukraine. Inflation, rising interest rates and reduced consumer confidence have caused and may continue to cause our clients to be cautious in their spending. The mobile gaming and app market continue to be affected by cautious advertiser demand, but we believe that demand is stabilizing when compared against the second half of 2022. The full impact of these macroeconomic events and the extent to which these macro factors may impact our business, financial condition, and results of operations in the future remains uncertain. The risks related to our business are further described in the section titled “Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Ukraine/Russia Conflict
As the Russian invasion of Ukraine continues to evolve, we are closely monitoring the current and potential impact on our business, our people, and our clients. We have taken steps to comply with applicable domestic and international regulatory restrictions on international trade and financial transactions. In connection with our compliance efforts, we have identified active clients and vendors inside Russia and Belarus that are subject to evolving sanctions imposed by the United States and/or the European Union and have terminated or suspended our contracts with them. Revenues associated with clients and vendors in Russia and Belarus are not material to our consolidated financial results, and we anticipate that the termination of Russian and Belarus clients and vendors that are subject to duly authorized sanctions will not have a material impact on our business or other client relationships. Management and our Board of Directors are monitoring the regional and global ramifications of the continuing events. Our cybersecurity teams are continually monitoring for any attacks that could cause disruption to our platform, systems, and networks, which could result in security breaches or data loss, damage to our brand, or reduce demand for our products and services.
Components of Results of Operations
Revenue
We generate Software Platform Revenue primarily from fees collected from advertisers spending on AppDiscovery, typically on a performance basis, then shared with our advertising publishers, typically on a cost per impression basis. Software Platform Revenue also includes fees generated based on a percentage of client spend through MAX and subscription fees for Adjust's SaaS mobile marketing platform.
We generate Apps Revenue from In-App Purchases made by the users within our Apps and from In-App Advertising generated from advertisers that purchase advertising inventory from our diverse portfolio of Apps.
Cost of Revenue and Operating Expenses
Cost of revenue. Cost of revenue consists primarily of third-party payment processing fees for distribution partners, amortization of acquired technology-related intangible assets, and expenses associated with operating our network infrastructure. Third-party payment processing fees relate to IAP Revenue. The fees for IAPs are processed and collected by third-party distribution partners. Network operating costs include bandwidth, energy, other equipment costs related to our co-located data centers and costs for third-party cloud service providers. We expect our cost of revenue to increase in absolute dollars over the long term as our business and revenue continue to grow. We also expect our cost of revenue as a percentage of revenue to fluctuate period-over-period.
Sales and marketing. Sales and marketing expenses consist primarily of user acquisition costs, marketing programs and other advertising expenses, personnel-related expenses including salaries, employee benefits, and stock-based compensation for employees engaged in sales and marketing activities, and amortization of acquired user-related intangible assets, customer service costs, travel and allocated facilities and information technology costs.
We plan to continue to invest in sales and marketing to grow our Software Platform customer base and increase brand awareness. We also plan to continue to invest in new App launches to the extent we see opportunities for cost-effective growth. As a result, we expect sales and marketing expenses to increase in absolute dollars over the long-term, though they may fluctuate period-over-period in the near term as we reduce our user acquisition spend for our portfolio of Apps. We also expect our sales and marketing expenses as a percentage of revenue to fluctuate period-over-period in the near term as we invest to grow our customer base and increase brand awareness, and to decrease over the long term as we benefit from greater scale.
Research and development. Research and development expenses consist primarily of product development costs, including personnel-related expenses including salaries, employee benefits, and stock-based compensation for employees engaged in research and development activities, professional services costs related to development of new apps by third parties, consulting costs, regulatory compliance costs, and allocated facilities and information technology costs.
We plan to continue to invest in research and development to continue to enhance our Core Technologies and Software Platform, and to improve existing games and develop new games. As a result, we expect research and development expenses to increase in absolute dollars over the long term, though they may fluctuate period-over-period in the near term as we reassess in which areas to focus our investment. We also expect our research and development expenses as a percentage of revenue to fluctuate period-over-period in the near term as we invest to enhance our Core Technologies and Software Platform and improve our existing Apps and develop new Apps, and to decrease over the long term as we benefit from greater scale.
General and administrative. General and administrative expenses consist primarily of costs incurred to support our business, including personnel-related expenses including salaries, employee benefits, and stock-based compensation for employees engaged in finance, accounting, legal, human resources and administration, professional services fees for legal, accounting, recruiting, and administrative services (including acquisition-related expenses), insurance, travel, and allocated facilities and information technology costs.
We plan to continue to invest in our general and administrative function to support the growth of our business. We expect general and administrative expenses to generally increase in absolute dollars, subject to fluctuations due to the timing and extent of acquisition-related expenses. We also expect our general and administrative expenses as a percentage of revenue to fluctuate period-over-period in the near term as we invest to support the growth of our business, and to decrease over the long term as we benefit from greater scale.
Other Income and Expenses
Interest expense. Interest expense consists primarily of interest expense associated with our outstanding debt, including accretion of debt discount, and gains and losses of interest rate swaps related to the variable interest payments associated with our outstanding debt.
Interest income and other, net. Interest income and other, net, primarily includes interest earned on our cash and cash equivalents, fair value adjustments relating to our non-marketable equity securities, foreign currency remeasurement gains and losses, and foreign currency transaction gains and losses.
Provision for (benefit from) income taxes. We are subject to income taxes in the United States and foreign jurisdictions in which we do business. These foreign jurisdictions have different statutory tax rates than those in the United States. Additionally, certain of our foreign earnings may also be taxable in the United States. Accordingly, our effective tax rate will vary depending on the relative proportion of foreign to domestic income, impacts from acquisition restructuring, deduction benefits related to foreign-derived intangible income, future changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws. Additionally, our effective tax rate can vary based on the amount of pre-tax income or loss.
Results of Operations
The following table summarizes our historical condensed consolidated statements of operations data:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Revenue | $ | 715,405 | $ | 625,421 | |||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of revenue(1)(2) | 261,960 | 281,780 | |||||||||||||||||||||
| Sales and marketing(1)(2) | 202,976 | 290,133 | |||||||||||||||||||||
| Research and development(1) | 144,851 | 126,250 | |||||||||||||||||||||
| General and administrative(1) | 44,571 | 55,245 | |||||||||||||||||||||
| Total costs and expenses | 654,358 | 753,408 | |||||||||||||||||||||
| Income (loss) from operations | 61,047 | (127,987) | |||||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense | (74,511) | (32,009) | |||||||||||||||||||||
| Interest income and other, net | 10,111 | 2,014 | |||||||||||||||||||||
| Total other expense, net | (64,400) | (29,995) | |||||||||||||||||||||
| Loss before income taxes | (3,353) | (157,982) | |||||||||||||||||||||
| Provision for (benefit from) income taxes | 1,165 | (42,684) | |||||||||||||||||||||
| Net loss | $ | (4,518) | $ | (115,298) |
(1) Includes stock-based compensation expense as follows:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Cost of revenue | $ | 1,316 | $ | 1,052 | |||||||||||||||||||
| Sales and marketing | 16,683 | 6,919 | |||||||||||||||||||||
| Research and development | 49,929 | 20,629 | |||||||||||||||||||||
| General and administrative | 15,038 | 16,040 | |||||||||||||||||||||
| Total stock-based compensation | $ | 82,966 | $ | 44,640 |
(2) Includes amortization expense related to acquired intangibles as follows:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Cost of revenue | $ | 98,644 | $ | 104,619 | |||||||||||||||||||
| Sales and marketing | 16,788 | 16,392 | |||||||||||||||||||||
| Total amortization expense related to acquired intangibles | $ | 115,432 | $ | 121,011 |
The following table sets forth the components of our condensed consolidated statements of operations for each of the periods presented as a percentage of revenue(1):
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Revenue | 100 | % | 100 | % | |||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of revenue | 37 | % | 45 | % | |||||||||||||||||||
| Sales and marketing | 28 | % | 46 | % | |||||||||||||||||||
| Research and development | 20 | % | 20 | % | |||||||||||||||||||
| General and administrative | 6 | % | 9 | % | |||||||||||||||||||
| Total costs and expenses | 91 | % | 120 | % | |||||||||||||||||||
| Income (loss) from operations | 9 | % | (20) | % | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense | (10) | % | (5) | % | |||||||||||||||||||
| Interest income and other, net | 1 | % | 0 | % | |||||||||||||||||||
| Total other expense, net | (9) | % | (5) | % | |||||||||||||||||||
| Loss before income taxes | — | % | (25) | % | |||||||||||||||||||
| Provision for (benefit from) income taxes | 0 | % | (7) | % | |||||||||||||||||||
| Net loss | (1) | % | (18) | % |
(1) Totals of percentages of revenue may not foot due to rounding.
Comparison of Our Results of Operations for the Three Months Ended March 31, 2023 and 2022
Revenue
| Three Months Ended March 31, | 2022 to 2023 % change | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
| Software Platform Revenue | $ | 354,758 | $ | 118,840 | 199 | % | |||||||||||||||||||||||||||||
| In-App Purchases Revenue | 251,328 | 339,472 | (26) | % | |||||||||||||||||||||||||||||||
| In-App Advertising Revenue | 109,319 | 167,109 | (35) | % | |||||||||||||||||||||||||||||||
| Total Apps Revenue | 360,647 | 506,581 | (29) | % | |||||||||||||||||||||||||||||||
| Total Revenue | $ | 715,405 | $ | 625,421 | 14 | % |
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
For the three months ended March 31, 2023, our Software Platform Revenue increased by $235.9 million, or 199%, compared to the same period in the prior year, due primarily to publisher bonuses of $209.6 million accounted for as a reduction to revenue in the prior year period. The increase in Software Platform revenue was also due to AppDiscovery, driven by a 48% increase of net revenue per installation, which is partially offset by a 14% decrease in the volume of installations. We do not recognize Software Platform Revenue from transactions with our Owned Studios and Partner Studios.
For the three months ended March 31, 2023, our Apps Revenue decreased by $145.9 million, or 29%, from the prior year period. For the three months ended March 31, 2023, our IAP Revenue from Apps decreased by $88.1 million, or 26%, from the prior year period, due primarily to a 25% decrease in the volume of in-app purchases as a result of a reduction in user acquisition spend and the sale of certain assets as part of the strategic review and optimization of our Apps portfolio. Our IAA Revenue from Apps decreased by $57.8 million, or 35%, from the prior year period, due primarily to a 42% decrease in price per advertising impression, partially offset by a 13% increase in the volume of advertising impressions.
Cost of revenue
| Three Months Ended March 31, | 2022 to 2023 % Change | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
| Cost of revenue | $ | 261,960 | $ | 281,780 | (7) | % | |||||||||||||||||||||||||||||
| Percentage of revenue | 37 | % | 45 | % |
Cost of revenue in the three months ended March 31, 2023 decreased by $19.8 million, or 7%, compared to the same period in the prior year, due primarily to a decrease of $25.9 million in third-party payment processing fees driven by a decrease in IAP revenue and a decrease of $7.0 million in amortization of intangible assets resulting from the sale of certain assets within our Apps segment during the second half of 2022, partially offset by an increase of $15.4 million in expenses associated with operating our network infrastructure driven by the growth in our operations.
Sales and marketing
| Three Months Ended March 31, | 2022 to 2023 % Change | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
| Sales and marketing | $ | 202,976 | $ | 290,133 | (30) | % | |||||||||||||||||||||||||||||
| Percentage of revenue | 28 | % | 46 | % |
Sales and marketing expenses in the three months ended March 31, 2023 decreased by $87.2 million, or 30%, compared to the same period in the prior year, due primarily to a decrease of $96.8 million in user acquisition costs as a result of the strategic review and optimization of our Apps portfolio, partially offset by an increase of $16.1 million in personnel-related expenses driven primarily by an increase in stock-based compensation expense.
Research and development
| Three Months Ended March 31, | 2022 to 2023 % Change | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
| Research and development | $ | 144,851 | $ | 126,250 | 15 | % | |||||||||||||||||||||||||||||
| Percentage of revenue | 20 | % | 20 | % |
Research and development expenses in the three months ended March 31, 2023 increased by $18.6 million, or 15%, compared to the same period in the prior year. This increase was primarily due to an increase of $31.6 million in personnel-related expenses mainly driven by an increase in stock-based compensation expense, partially offset by a decrease of $18.8 million in professional services costs related to development of new apps by third parties.
General and administrative
| Three Months Ended March 31, | 2022 to 2023 % Change | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
| General and administrative | $ | 44,571 | $ | 55,245 | (19) | % | |||||||||||||||||||||||||||||
| Percentage of revenue | 6 | % | 9 | % |
General and administrative expenses in the three months ended March 31, 2023 decreased by $10.7 million, or 19%, compared to the same period in the prior year, due primarily to a decrease in acquisition-related expenses.
Interest expense
| Three Months Ended March 31, | 2022 to 2023 % Change | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
| Interest expense | $ | (74,511) | $ | (32,009) | 133 | % | |||||||||||||||||||||||||||||
| Percentage of revenue | (10) | % | (5) | % |
In the three months ended March 31, 2023, interest expense increased by $42.5 million, or 133%, compared to the same period in the prior year, due primarily to an increase in the interest rate for our outstanding debt.
Interest income and other, net
| Three Months Ended March 31, | 2022 to 2023 % Change | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
| Interest income and other, net | $ | 10,111 | $ | 2,014 | (402) | % | |||||||||||||||||||||||||||||
| Percentage of revenue | 1 | % | — | % |
In the three months ended March 31, 2023, interest income and other, net increased by $8.1 million, or 402%, compared to the same period in the prior year, due primarily to an increase in interest income earned on our cash and cash equivalents driven by an increase in interest rates.
Provision for (benefit from) Income Taxes
| Three Months Ended March 31, | 2022 to 2023 % Change | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
| Provision for (benefit from) Income Taxes | $ | 1,165 | $ | (42,684) | (103) | % | |||||||||||||||||||||||||||||
| Percentage of revenue | — | % | (7) | % |
In the three months ended March 31, 2023, the provision for income taxes increased by $43.8 million, or 103%, compared to the same period in the prior year. The increase in the tax provision was primarily driven by higher pre-tax book income during the three months ended March 31, 2023.
Comparison of our Segment Results of Operations
The following table presents the results for our Software Platform and Apps segment adjusted EBITDA for the periods indicated:
| Three Months Ended March 31, | 2022 to 2023 % change | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
| Software Platform Adjusted EBITDA | $ | 218,694 | $ | 235,555 | (7) | % | |||||||||||||||||||||||||||||
| Apps Adjusted EBITDA | $ | 55,004 | $ | 40,674 | 35 | % |
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
The $16.9 million, or 7%, decrease in Software Platform Adjusted EBITDA for the three months ended March 31, 2023 was primarily driven by an increase of $17.0 million in expenses associated with our network infrastructure and an increase of $19.9 million in personnel-related expenses driven primarily by the acquisition of Wurl completed in the second quarter of 2022, partially offset by an increase in Software Platform revenue of $26.3 million excluding the impact of certain publisher bonuses of $209.6 million relating to the prior year period.
The $14.3 million, or 35%, increase in Apps Adjusted EBITDA for the three months ended March 31, 2023 was primarily driven by a decrease of $96.8 million in user acquisition costs, a decrease of $25.9 million in third-party payment processing fees related to in-app purchases, a decrease of $25.9 million in professional services costs related to the marketing and development of new apps by third parties, and a decrease of $7.4 million in personnel-related expenses, partially offset by a decrease in Apps Revenue of $145.9 million.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through payments received from clients using our Software Platform and advertising on our Apps, and from user IAPs from our Apps, and through net proceeds we received from the sales of our capital stock and borrowings made under our Credit Agreement, as defined below. As of March 31, 2023, we had cash and cash equivalents of $1.2 billion.
We believe that our existing cash and cash equivalents would be sufficient to satisfy our anticipated working capital and capital expenditures needs for at least the next 12 months. Our future capital requirements, however, will depend on many factors, including our growth rate; sales and marketing activities; timing and extent of spending to support our research and development efforts; and our continued need to invest in our IT infrastructure to support our growth. In addition, we may enter into additional strategic partnerships as well as agreements to acquire or invest in teams and technologies, including intellectual property rights, which could increase our cash requirements. As a result of these and other factors, we may be required to seek additional equity or debt financing sooner than we currently anticipate. If additional financing from outside sources is required, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when required, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition, and results of operations could be adversely affected.
The following table summarizes our cash flows for the periods indicated:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (in thousands) | |||||||||||
| Net cash provided by (used in) operating activities | $ | 288,662 | $ | (31,719) | |||||||
| Net cash used in investing activities | $ | (12,975) | $ | (1,059,743) | |||||||
| Net cash used in financing activities | $ | (111,415) | $ | (65,424) |
Operating Activities
Net cash provided by operating activities was $288.7 million for the three months ended March 31, 2023, primarily consisting of a $4.5 million net loss, adjusted for certain non-cash items, which included $128.2 million of amortization, depreciation, and write-offs, $83.0 million of stock-based compensation expense, $3.5 million of change in operating right of use assets, $3.3 million of amortization of debt issuance costs and discount, and $2.3 million of net unrealized losses from fair value remeasurements, partially offset by a net increase in operating assets and liabilities of $72.9 million. The net increase in the operating assets and liabilities was primarily driven by a decrease in accounts receivable and increases in accounts payable accrued and other liabilities and deferred revenue.
Net cash used in operating activities was $31.7 million for the three months ended March 31, 2022, primarily consisting of a $115.3 million net loss, adjusted for certain non-cash items, which included $129.0 million of amortization, depreciation and write-offs, $44.6 million of stock-based compensation expense, $5.8 million of change in operating right of use asset, $3.2 million of amortization of debt issuance costs and discount and $1.0 million of net unrealized losses from fair value remeasurements, partially offset by a net increase in the operating assets and liabilities of $99.5 million. The net increase in the operating assets and liabilities was primarily driven by an increase in accounts receivable, prepaid expenses and other current assets and decrease in operating lease liabilities partially offset by higher accounts payable and accrued and other liabilities.
Investing Activities
Net cash used in investing activities was $13.0 million for the three months ended March 31, 2023, primarily consisting of $16.8 million in purchases of non-marketable equity securities, and $2.2 million related to asset acquisitions, partially offset by $8.3 million in proceeds from the sale of assets.
Net cash used in investing activities was $1.06 billion for the three months ended March 31, 2022, primarily consisting of $1.05 billion related to acquisitions and $14.1 million in purchases of non-marketable equity securities, partially offset by $2.2 million in proceeds from the sale of assets.
Financing Activities
Net cash used in financing activities was $111.4 million for the three months ended March 31, 2023, primarily consisting of repurchases of stock under the repurchase program of $64.9 million, payments for withholding taxes related to the net share settlement of restricted stock units of $19.2 million, payments for license asset obligations of $15.3 million, repayments of debt principal of $8.3 million, principal payments on finance leases of $5.4 million, and payments for deferred acquisition costs of $1.2 million, partially offset by $2.9 million proceeds from the exercise of stock options.
Net cash used in financing activities was $65.4 million for the three months ended March 31, 2022, primarily consisting of repurchases of stock under the repurchase program of $43.7 million, payments for license asset obligations of $17.4 million, principal payments on finance leases of $6.2 million, repayments of debt principal of $4.6 million, and payments for deferred acquisition costs of $1.7 million, partially offset by $8.1 million proceeds from the exercise of stock options.
Share Repurchase Program
During the three months ended March 31, 2023, we repurchased 5,396,617 shares of Class A common stock for an aggregate amount, including commissions and fees, of $76.4 million. Subsequent to March 31, 2023, the Company repurchased 7,684,860 shares of its Class A common stock for an aggregate amount, including commissions and fees, of $125.8 million pursuant to the $750 million Share Repurchase Program through May 8, 2023. For additional information see Note 7 – Equity and Note 13 – Subsequent Events.
Credit Agreement
We are party to a credit agreement (the “Credit Agreement”), which provides for senior secured term loans and a revolving credit facility. In January 2023, we entered into Amendment No. 7 to the Credit Agreement, which replaced the interest rate benchmark of our outstanding debt under the Credit Agreement from the London Interbank Offered Rate (“LIBOR”) to the Term Secured Overnight Financing Rate (“SOFR”). There were no other material changes to our debt and the related Credit Agreement since December 31, 2022.
Contractual Obligations
Except for scheduled payments from the ongoing business, there were no material changes to our commitments under contractual obligations since December 31, 2022.
Critical Accounting Estimates
Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities and the amount of revenue and expenses that are not readily apparent from other sources. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
There have been no material changes to our critical accounting policies and estimates during the three months ended March 31, 2023, as compared to those disclosed in our Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in our 2022 Annual Report on Form 10-K filed with the SEC.
Recent Accounting Pronouncements
See Note 1, “Description of Business and Summary of Significant Accounting Policies” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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