filings.toolsItem 1. Condensed Consolidated Financial Statements
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Item 1. Condensed Consolidated Financial Statements
AppLovin Corporation
Condensed Consolidated Balance Sheets
(in thousands, except for share and per share data)
(unaudited)
| June 30, 2023 | December 31, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 876,227 | $ | 1,080,484 | |||||||
| Accounts receivable, net | 669,785 | 702,814 | |||||||||
| Prepaid expenses and other current assets | 150,256 | 155,785 | |||||||||
| Total current assets | 1,696,268 | 1,939,083 | |||||||||
| Property and equipment, net | 115,391 | 78,543 | |||||||||
| Operating lease right-of-use assets | 57,390 | 60,379 | |||||||||
| Goodwill | 1,830,710 | 1,823,755 | |||||||||
| Intangible assets, net | 1,493,996 | 1,677,660 | |||||||||
| Other assets | 288,365 | 268,426 | |||||||||
| Total assets | $ | 5,482,120 | $ | 5,847,846 | |||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 260,847 | $ | 273,196 | |||||||
| Accrued liabilities | 159,157 | 147,801 | |||||||||
| Licensed asset obligation | 13,819 | 15,254 | |||||||||
| Short-term debt | 33,310 | 33,310 | |||||||||
| Deferred revenue | 74,307 | 64,018 | |||||||||
| Operating lease liabilities | 14,104 | 14,334 | |||||||||
| Deferred acquisition costs, current | 36,396 | 31,045 | |||||||||
| Total current liabilities | 591,940 | 578,958 | |||||||||
| Long-term debt | 3,166,759 | 3,178,412 | |||||||||
| Operating lease liabilities, non-current | 51,292 | 54,153 | |||||||||
| Licensed asset obligation, non-current | 11,637 | 26,970 | |||||||||
| Other non-current liabilities | 143,092 | 106,676 | |||||||||
| Total liabilities | 3,964,720 | 3,945,169 | |||||||||
| Commitments and contingencies (Note 4) | |||||||||||
| Stockholders’ equity: | |||||||||||
| Preferred stock, $0.00003 par value—100,000,000 shares authorized, no shares issued and outstanding as of June 30, 2023 and December 31, 2022 | — | — | |||||||||
| Class A and Class B Common Stock, $0.00003 par value—1,700,000,000 (Class A 1,500,000,000 and Class B 200,000,000) shares authorized, 348,496,613 (Class A 277,333,991 and Class B 71,162,622) and 373,873,683 (Class A 302,711,061 and Class B 71,162,622) shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively | 11 | 11 | |||||||||
| Additional paid-in capital | 2,687,780 | 3,155,748 | |||||||||
| Accumulated other comprehensive loss | (76,530) | (83,382) | |||||||||
| Accumulated deficit | (1,093,861) | (1,169,700) | |||||||||
| Total stockholders’ equity | 1,517,400 | 1,902,677 | |||||||||
| Total liabilities and stockholders’ equity | $ | 5,482,120 | $ | 5,847,846 |
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)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenue | $ | 750,165 | $ | 776,231 | $ | 1,465,570 | $ | 1,401,652 | |||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of revenue | 258,575 | 303,929 | 520,535 | 585,709 | |||||||||||||||||||
| Sales and marketing | 192,427 | 232,096 | 395,403 | 522,229 | |||||||||||||||||||
| Research and development | 137,424 | 141,108 | 282,275 | 267,358 | |||||||||||||||||||
| General and administrative | 30,411 | 45,743 | 74,982 | 100,988 | |||||||||||||||||||
| Total costs and expenses | 618,837 | 722,876 | 1,273,195 | 1,476,284 | |||||||||||||||||||
| Income (loss) from operations | 131,328 | 53,355 | 192,375 | (74,632) | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense | (50,987) | (36,505) | (125,498) | (68,514) | |||||||||||||||||||
| Interest income and other, net | 15,461 | 518 | 25,572 | 2,532 | |||||||||||||||||||
| Total other expense, net | (35,526) | (35,987) | (99,926) | (65,982) | |||||||||||||||||||
| Income (loss) before income taxes | 95,802 | 17,368 | 92,449 | (140,614) | |||||||||||||||||||
| Provision for (benefit from) income taxes | 15,445 | 39,167 | 16,610 | (3,517) | |||||||||||||||||||
| Net income (loss) | 80,357 | (21,799) | 75,839 | (137,097) | |||||||||||||||||||
| Less: Net loss attributable to noncontrolling interest | — | (51) | — | (92) | |||||||||||||||||||
| Net income (loss) attributable to AppLovin | $ | 80,357 | $ | (21,748) | $ | 75,839 | $ | (137,005) | |||||||||||||||
| Less: Net income attributable to participating securities | $ | (318) | $ | — | $ | (299) | $ | — | |||||||||||||||
| Net income (loss) attributable to AppLovin common stockholders: | |||||||||||||||||||||||
| Basic | $ | 80,039 | $ | (21,748) | $ | 75,540 | $ | (137,005) | |||||||||||||||
| Diluted | $ | 80,047 | $ | (21,748) | $ | 75,547 | $ | (137,005) | |||||||||||||||
| Net income (loss) per share attributable to AppLovin common stockholders: | |||||||||||||||||||||||
| Basic | $ | 0.22 | $ | (0.06) | $ | 0.21 | $ | (0.37) | |||||||||||||||
| Diluted | $ | 0.22 | $ | (0.06) | $ | 0.20 | $ | (0.37) | |||||||||||||||
| Weighted average common shares used to compute net income (loss) per share attributable to AppLovin common stockholders: | |||||||||||||||||||||||
| Basic | 356,957,059 | 373,912,724 | 365,013,736 | 372,932,509 | |||||||||||||||||||
| Diluted | 366,340,275 | 373,912,724 | 373,022,200 | 372,932,509 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
AppLovin Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net income (loss) | $ | 80,357 | $ | (21,799) | $ | 75,839 | $ | (137,097) | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation adjustment, net of tax | (3,154) | (69,365) | 6,852 | (82,897) | |||||||||||||||||||
| Total other comprehensive income (loss), net of tax | (3,154) | (69,365) | 6,852 | (82,897) | |||||||||||||||||||
| Comprehensive income (loss) including noncontrolling interest | 77,203 | (91,164) | 82,691 | (219,994) | |||||||||||||||||||
| Less: Comprehensive loss attributable to noncontrolling interest | — | (51) | — | (92) | |||||||||||||||||||
| Comprehensive income (loss) attributable to AppLovin | $ | 77,203 | $ | (91,113) | $ | 82,691 | $ | (219,902) |
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
(in thousands, except share data)
(unaudited)
| Redeemable Noncontrolling Interest | Class A and Class B Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Par Value | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | — | 373,873,683 | $ | 11 | $ | 3,155,748 | $ | (83,382) | $ | (1,169,700) | $ | 1,902,677 | ||||||||||||||||||||||||||||
| Stock issued in connection with equity awards | — | 4,061,015 | — | 2,974 | — | — | 2,974 | ||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement | — | (1,281,849) | — | (19,167) | — | — | (19,167) | ||||||||||||||||||||||||||||||||||
| Repurchase of Class A common stock | — | (5,396,617) | — | (76,358) | — | — | (76,358) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | 82,966 | — | — | 82,966 | ||||||||||||||||||||||||||||||||||
| Total other comprehensive income, net of tax | — | — | — | — | 10,006 | — | 10,006 | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (4,518) | (4,518) | ||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2023 | $ | — | 371,256,232 | $ | 11 | $ | 3,146,163 | $ | (73,376) | $ | (1,174,218) | $ | 1,898,580 | ||||||||||||||||||||||||||||
| Stock issued in connection with equity awards | — | 4,053,303 | — | 3,677 | — | — | 3,677 | ||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement | — | (1,503,757) | — | (37,436) | — | — | (37,436) | ||||||||||||||||||||||||||||||||||
| Repurchase of Class A common stock | — | (25,483,835) | — | (503,448) | — | — | (503,448) | ||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock under employee stock purchase plan | — | 174,670 | — | 2,071 | — | — | 2,071 | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | 76,753 | — | — | 76,753 | ||||||||||||||||||||||||||||||||||
| Total other comprehensive loss, net of tax | — | — | — | — | (3,154) | — | (3,154) | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 80,357 | 80,357 | ||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ | — | 348,496,613 | $ | 11 | $ | 2,687,780 | $ | (76,530) | $ | (1,093,861) | $ | 1,517,400 |
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
(in thousands, except share data)
(unaudited)
| Redeemable Noncontrolling Interest | Class A and Class B Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Par Value | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | 201 | 375,089,360 | $ | 11 | $ | 3,160,487 | $ | (45,454) | $ | (976,954) | $ | 2,138,090 | ||||||||||||||||||||||||||||
| Stock issued in connection with equity awards | — | 1,179,554 | — | 6,541 | — | — | 6,541 | ||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement | — | (89,319) | — | (4,227) | — | — | (4,227) | ||||||||||||||||||||||||||||||||||
| Repurchase of Class A common stock | — | (893,556) | — | (43,697) | — | — | (43,697) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | 44,377 | — | — | 44,377 | ||||||||||||||||||||||||||||||||||
| Total other comprehensive loss, net of tax | — | — | — | — | (13,532) | — | (13,532) | ||||||||||||||||||||||||||||||||||
| Net loss | (41) | — | — | — | — | (115,257) | (115,257) | ||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | 160 | 375,286,039 | $ | 11 | $ | 3,163,481 | $ | (58,986) | $ | (1,092,211) | $ | 2,012,295 | ||||||||||||||||||||||||||||
| Stock issued in connection with equity awards | — | 1,194,805 | — | 8,267 | — | — | 8,267 | ||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement | — | (234,412) | — | (9,384) | — | — | (9,384) | ||||||||||||||||||||||||||||||||||
| Repurchase of Class A common stock | — | (5,749,856) | — | (210,830) | — | — | (210,830) | ||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock in connection with acquisitions | — | 2,579,692 | — | 137,422 | — | — | 137,422 | ||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock under employee stock purchase plan | — | 107,781 | — | 3,663 | — | — | 3,663 | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | 56,855 | — | — | 56,855 | ||||||||||||||||||||||||||||||||||
| Total other comprehensive loss, net of tax | — | — | — | — | (69,365) | — | (69,365) | ||||||||||||||||||||||||||||||||||
| Net loss | (51) | — | — | — | — | (21,748) | (21,748) | ||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | 109 | 373,184,049 | $ | 11 | $ | 3,149,474 | $ | (128,351) | $ | (1,113,959) | $ | 1,907,175 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
AppLovin Corporation
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Six Months Ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Operating Activities | |||||||||||
| Net income (loss) | $ | 75,839 | $ | (137,097) | |||||||
| Adjustments to reconcile net income (loss) to operating activities: | |||||||||||
| Amortization, depreciation and write-offs | 248,100 | 281,677 | |||||||||
| Stock-based compensation | 164,219 | 101,796 | |||||||||
| Amortization of debt issuance costs and discount | 6,583 | 6,820 | |||||||||
| Change in operating right-of-use asset | 6,893 | 10,558 | |||||||||
| Other | (1,017) | 478 | |||||||||
| Changes in operating assets and liabilities, net of effect of acquisitions: | |||||||||||
| Accounts receivable | 33,271 | (163,416) | |||||||||
| Prepaid expenses and other current assets | (2,111) | (28,993) | |||||||||
| Other assets | (3,017) | 3,033 | |||||||||
| Accounts payable | (12,265) | 13,773 | |||||||||
| Operating lease liabilities | (7,104) | (12,046) | |||||||||
| Accrued and other liabilities | (1,033) | 7,795 | |||||||||
| Deferred revenue | 10,098 | (9,286) | |||||||||
| Net cash provided by operating activities | 518,456 | 75,092 | |||||||||
| Investing Activities | |||||||||||
| Acquisitions, net of cash acquired | (38,356) | (1,294,352) | |||||||||
| Purchase of non-marketable equity securities | (16,834) | (56,546) | |||||||||
| Capitalized software development costs | (4,433) | (2,608) | |||||||||
| Purchase of property and equipment | (3,819) | (400) | |||||||||
| Proceeds from sale of assets | 8,250 | 2,162 | |||||||||
| Net cash used in investing activities | (55,192) | (1,351,744) | |||||||||
| Financing Activities | |||||||||||
| Repurchases of stock | (572,101) | (244,015) | |||||||||
| Payment of withholding taxes related to net share settlement | (56,603) | — | |||||||||
| Principal repayments of debt | (16,656) | (9,155) | |||||||||
| Payments of licensed asset obligation | (15,254) | (17,374) | |||||||||
| Principal payments on finance leases | (10,915) | (12,326) | |||||||||
| Payment of debt issuance cost | (3,961) | — | |||||||||
| Payments of deferred acquisition costs | (1,229) | (71,712) | |||||||||
| Proceeds from exercise of stock options | 6,535 | 15,873 | |||||||||
| Proceeds from the issuance of common stock under the Employee Stock Purchase Plan | 2,071 | 3,663 | |||||||||
| Net cash used in financing activities | (668,113) | (335,046) | |||||||||
| Effect of foreign exchange rate on cash and cash equivalents | 592 | (7,246) | |||||||||
| Net (decrease) in cash and cash equivalents | (204,257) | (1,618,944) | |||||||||
| Cash, cash equivalents and restricted cash equivalents at beginning of the period | 1,080,484 | 2,570,504 | |||||||||
| Cash and cash equivalents at end of the period | $ | 876,227 | $ | 951,560 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
AppLovin Corporation
Condensed Consolidated Statements of Cash Flows (continued)
(in thousands)
(unaudited)
| Six Months Ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Supplemental non-cash investing and financing activities disclosures: | |||||||||||
| Right-of-use assets acquired under finance leases | $ | 45,564 | $ | 17,869 | |||||||
| Right-of-use assets acquired under operating leases | $ | 4,001 | $ | 1,385 | |||||||
| Repurchases of common stock included in accrued liabilities | $ | 7,705 | $ | 10,512 | |||||||
| Acquisitions not yet paid | $ | 7,463 | $ | 70,792 | |||||||
| Issuance of common stock in connection with acquisitions | $ | — | $ | 137,422 | |||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid for interest, net | $ | 118,948 | $ | 61,867 | |||||||
| Cash paid for income taxes, net of refunds | $ | 6,808 | $ | 19,529 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
AppLovin Corporation
Notes to the Condensed Consolidated Financial Statements
(unaudited)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
AppLovin Corporation (the “Company” or “AppLovin”) was incorporated in the state of Delaware on July 18, 2011. The Company is a leader in the mobile app industry with a focus on building a software-based platform for mobile app developers to improve the marketing and monetization of their apps. The Company also has a globally diversified portfolio of apps—free-to-play mobile games that it operates through its own or partner studios.
The Company is headquartered in Palo Alto, California, and has several operating locations in the U.S. as well as various international office locations in North America, Asia, and Europe.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, the unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2023. The condensed consolidated balance sheet data as of December 31, 2022 was derived from the audited consolidated financial statements at that date but does not include all disclosures required by GAAP. The accompanying unaudited condensed consolidated financial statements reflect all normal and recurring adjustments, that are, in the opinion of management, necessary for the fair presentation of the Company’s financial position, results of operations, cash flows and stockholders’ equity for the interim periods presented. The results of operations for the three and six months ended June 30, 2023 shown in this report are not necessarily indicative of the results to be expected for the full year ending December 31, 2023 or any other period.
Basis of Consolidation
The Company's condensed consolidated financial statements include accounts and operations of the Company and the entities in which the Company has a controlling financial interest. The typical condition for a controlling financial interest ownership is holding a majority of the voting interests of an entity; however, a controlling financial interest may also exist in variable interest entities ("VIE"), through arrangements that do not involve controlling voting interests. ASC 810 requires a variable interest holder to consolidate a VIE if it has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and has the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company does not consolidate a VIE when the Company is not deemed the primary beneficiary. The Company evaluates its relationships with all VIEs on an ongoing basis. All intercompany transactions and balances have been eliminated upon consolidation.
Use of Estimates
The preparation of the Company's condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes. The Company bases its estimates on assumptions, both historical and forward-looking, that are believed to be reasonable. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to fair values of intangible assets and goodwill, useful lives of intangible assets and property and equipment, expected period of consumption of virtual goods, expected life of paying users, income and indirect taxes, contingent liabilities, evaluation of recoverability of intangible assets and long-lived assets, goodwill impairment, and fair value of derivatives and other financial instruments. These estimates are inherently subject to judgment and actual results could differ materially from those estimates.
Recent Accounting Pronouncements (Issued and Adopted)
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The ASU clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU also clarifies that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction and requires specific disclosures for equity securities subject to contractual sale restrictions. The Company adopted this ASU on January 1, 2023 with no material impact on its condensed consolidated financial statements.
2. Revenue
Revenue from Contracts with Customers
The Company generates Software Platform and Apps revenue. Software Platform revenue is generated primarily from fees collected from advertisers and advertising networks who use the Software Platform. Apps revenue consists of in-app purchase ("IAP") revenue generated from in-app purchases made by users within the Company’s apps (“Apps”), and in-app advertising ("IAA") revenue generated from advertisers that purchase ad inventory from Apps.
Software Platform Revenue
The vast majority of the Software Platform Revenue is generated through AppDiscovery and MAX, which provide the technology to match advertisers and owners of digital advertising inventory (“Publishers”) via auctions at large scale and microsecond-level speeds. The terms for all mobile advertising arrangements are governed by the Company’s terms and conditions and generally stipulate payment terms of 30 days subsequent to the end of the month. Substantially all of the Company's contracts with customers are fully cancellable at any time or upon short notice.
Software Platform Revenue is generated by placing ads on mobile applications owned by Publishers. The Company’s performance obligation is to provide customers with access to the Software Platform, which facilitates the advertiser’s purchase of ad inventory from Publishers. The Company does not control the ad inventory prior to its transfer to the advertiser, because the Company does not have the substantive ability to direct the use of nor obtain substantially all of the remaining benefits from the ad inventory. The Company is not primarily responsible for fulfillment and does not have any inventory risk. The Company is an agent as it relates to the sale of third-party advertising inventory and presents revenue on a net basis. The transaction price is the product of either the number of completions of agreed upon actions or advertisements displayed and the contractually agreed upon price per advertising unit with the advertiser less consideration paid or payable to Publishers. The Company recognizes Software Platform Revenue when the agreed upon action is completed or when the ad is displayed to users. The number of advertisements delivered and completions of agreed upon actions is determined at the end of each month, which resolves any uncertainty in the transaction price during the reporting period.
Software Platform Revenue also includes revenue generated by the Company's mobile application tracking and attribution solutions that is recognized ratably over the subscription period, generally up to twelve months.
Apps Revenue
In-app Purchase Revenue
IAP Revenue includes fees collected from users to purchase virtual goods to enhance their gameplay experience. The identified performance obligation is to provide users with the ability to acquire, use, and hold virtual items over the estimated period of time the virtual items are available to the user or until the virtual item is consumed. Payment is required at the time of purchase, and the purchase price is a fixed amount.
Users make IAPs through the Company’s distribution partners. The transaction price is equal to the gross amount charged to users because the Company is the principal in the transaction. IAP fees are non-refundable. Such payments are initially recorded as deferred revenue. The Company categorizes its virtual goods as either consumable or durable. Consumable virtual goods represent goods that can be consumed by a specific player action in gameplay; accordingly, the Company recognizes revenue from the sale of consumable virtual goods as the goods are consumed. Durable virtual goods represent goods that are accessible to the user over an extended period of time; accordingly, the Company recognizes revenue from the sale of durable virtual goods ratably over the period of time the goods are available to the user, which is generally the estimated average user life (“EAUL”).
The EAUL represents the Company’s best estimate of the expected life of paying users for the applicable game. The EAUL begins when a user makes the first purchase of durable virtual goods and ends when a user is determined to be inactive. The Company determines the EAUL on a game-by-game basis. For a newly launched game with limited playing data, the Company determines its EAUL based on the EAUL of a game with sufficiently similar characteristics.
The Company determines the EAUL on a quarterly basis and applies such calculated EAUL to all bookings in the respective quarter. Determining the EAUL is subjective and requires management’s judgment. Future playing patterns may differ from historical playing patterns, and therefore the EAUL may change in the future. The EAULs are generally between five and ten months.
In-App Advertising Revenue
IAA Revenue is generated by selling ad inventory on the Company's Apps to third-party advertisers. Advertisers purchase ad inventory either through the Software Platform or through third-party advertising networks (“Ad Networks”). Revenue from the sale of ad inventory through Ad Networks is recognized net of the amounts retained by Ad Networks as the Company is unable to determine the gross amount paid by the advertisers to Ad Networks. The Company recognizes revenue when the ad is displayed to users.
The Company presents taxes collected from customers and remitted to governmental authorities on a net basis.
Disaggregation of Revenue
The following table presents revenue disaggregated by segment and type (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Software Platform Revenue | $ | 406,063 | $ | 317,540 | $ | 760,821 | $ | 436,380 | |||||||||||||||
| In-App Purchase Revenue | 233,625 | 303,268 | 484,953 | 642,740 | |||||||||||||||||||
| In-App Advertising Revenue | 110,477 | 155,423 | 219,796 | 322,532 | |||||||||||||||||||
| Total Apps Revenue | 344,102 | 458,691 | 704,749 | 965,272 | |||||||||||||||||||
| Total Revenue | $ | 750,165 | $ | 776,231 | $ | 1,465,570 | $ | 1,401,652 |
Revenue disaggregated by geography, based on user location, consists of the following (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| United States | $ | 453,720 | $ | 481,378 | $ | 893,039 | $ | 861,945 | |||||||||||||||
| Rest of the World | 296,445 | 294,853 | 572,531 | 539,707 | |||||||||||||||||||
| Total Revenue | $ | 750,165 | $ | 776,231 | $ | 1,465,570 | $ | 1,401,652 |
Contract Balances
Contract liabilities consist of deferred revenue related to payments received in advance of the satisfaction of performance obligations. During the three months ended June 30, 2023 and 2022, the Company recognized $44.8 million and $54.7 million of revenue that was included in deferred revenue as of March 31, 2023 and 2022, respectively. During the six months ended June 30, 2023 and 2022, the Company recognized $58.8 million and $73.4 million of revenue that was included in deferred revenue as of December 31, 2022 and 2021, respectively.
Unsatisfied Performance Obligations
Substantially all of the Company’s unsatisfied performance obligations relate to contracts with an original expected length of one year or less.
Publisher Bonuses
In the first quarter of 2022, the Company paid or promised to pay a total of $209.6 million in bonuses to publishers consisting primarily of non-recurring bonuses to migrate publishers to MAX, the Company's in-app mediation platform. The Company accounted for such publisher bonuses as a reduction to revenue since the publishers receiving such bonuses are also customers of the Company.
3. Financial Instruments and Fair Value Measurements
The following table sets forth the Company’s financial instruments that are measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in thousands):
| As of June 30, 2023 | ||||||||||||||||||||||||||||||||
| Balance Sheet Location | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||
| Financial Assets: | ||||||||||||||||||||||||||||||||
| Money market funds(1) | Cash and cash equivalents | $ | 533,219 | $ | 533,219 | $ | — | $ | — | |||||||||||||||||||||||
| Interest rate swap | Prepaid expenses and other current assets | $ | 5,725 | $ | — | $ | 5,725 | $ | — | |||||||||||||||||||||||
| Total financial assets | $ | 538,944 | $ | 533,219 | $ | 5,725 | $ | — |
| As of December 31, 2022 | ||||||||||||||||||||||||||||||||
| Balance Sheet Location | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||
| Financial Assets: | ||||||||||||||||||||||||||||||||
| Money market funds(1) | Cash and cash equivalents | $ | 604,399 | $ | 604,399 | $ | — | $ | — | |||||||||||||||||||||||
| Interest rate swaps | Prepaid expenses and other current assets | $ | 7,319 | $ | — | $ | 7,319 | $ | — | |||||||||||||||||||||||
| Total financial assets | $ | 611,718 | $ | 604,399 | $ | 7,319 | $ | — |
(1) Includes balances in money market deposit accounts of $453.3 million and $524.2 million as of June 30, 2023 and December 31, 2022, respectively.
Derivatives Not Designated as Hedging Instruments
In October 2022 and March 2023, the Company entered into multiple pay-fixed receive-variable interest rate swaps as part of its interest rate risk management strategy in connection with the term loans under a certain credit agreement, which was originally entered in August 2018 and has been subsequently amended multiple times. The Company elected to not designate the interest rate swaps as hedging instruments for accounting purposes and recorded both realized and unrealized gains and losses associated with the interest rate swaps immediately through earnings in interest expense in the Company's condensed consolidated statement of operations. The fair value of the interest rate swaps are determined using widely accepted valuation techniques including discounted cash flow analysis based on the expected cash flows of the interest rate swaps. The Company has determined that the significant inputs, such as interest yield curve and discount rate, used to value its interest rate swaps fall within Level 2 of the fair value hierarchy. In June 2023, the Company settled the March 2023 interest rate swaps with the counterparties and received $12.2 million in cash. The net cash proceeds received from the settlement of the interest rate swaps and net interest paid or received are presented in net cash provided by operating activities and the supplemental disclosure of cash paid for interest, net in the Company's condensed consolidated statement of cash flows.
As of June 30, 2023, the remaining interest rate swap had a notional amount of $1.8 billion and matures on October 31, 2023. In relation to these interest rate swaps, the Company recorded a net gain of $21.4 million and $15.7 million during the three and six months ended June 30, 2023, respectively.
Non-Marketable Equity Securities Measured at Net Asset Value
The Company held equity interests in certain private equity funds of $52.1 million and $32.3 million as of June 30, 2023 and December 31, 2022, respectively, which are measured using the net asset value practical expedient. Under the net asset value practical expedient, the Company records investments based on the proportionate share of the underlying funds’ net asset value as of the Company's reporting date. These investments are included in other assets in the Company’s condensed consolidated balance sheets.
These funds vary in investment strategies and generally have an initial term of 7 to 10 years, which may be extended for 2 to 3 additional years with the applicable approval. These investments are subject to certain restrictions regarding transfers and withdrawals and generally cannot be redeemed with the funds. Distributions from the funds will be received as the underlying investments are liquidated. The Company’s maximum exposure to loss is limited to the carrying value of these investments of $52.1 million and the unfunded commitments of $33.4 million as of June 30, 2023.
During the three months ended March 31, 2023, the Company made total capital contributions of $16.8 million related to these investments. No additional capital contribution was made during the three months ended June 30, 2023. The unrealized gains related to these investments were $3.6 million and $5.0 million, for the three and six months ended June 30, 2023, respectively. The unrealized gains and losses were not material for the three and six months ended June 30, 2022.
Non-Marketable Equity Securities Measured at Fair Value on a Non-Recurring Basis
In the second quarter of 2022, the Company purchased certain non-marketable equity securities for total proceeds of $38.0 million. Non-marketable equity securities are investments in privately held companies without readily determinable fair values. The Company elected the measurement alternative to account for these investments. Under the measurement alternative, the carrying value of the non-marketable equity securities are adjusted based on price changes from observable transactions of identical or similar securities of the same issuer or for impairment. Any changes in carrying value are recorded within interest income and other, net in the Company's condensed consolidated statement of operations. During the first quarter of 2023, the Company recorded an impairment charge of $5.0 million related to one of these investments. As of June 30, 2023, the carrying amount of these investments was $33.0 million, which was included in other assets in the Company’s condensed consolidated balance sheets.
4. Commitments and Contingencies
Commitments
As of June 30, 2023, the Company's non-cancelable minimum purchase commitments consisted primarily of a certain arrangement related to cloud platform services. In May 2022, the Company entered into a new order form under an existing master agreement that required the Company to purchase at least $550.0 million of cloud services through May 2025. During the six months ended June 30, 2023, the Company made payments of $110.6 million under this arrangement, with $342.3 million of this commitment unpaid as of June 30, 2023. In addition, the Company had total unfunded commitments of $33.4 million related to investments in certain private equity funds. For additional information see Note 3 – Financial Instruments and Fair Value Measurements.
Contingencies
From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated.
Letters of Credit
As of June 30, 2023 and December 31, 2022, the Company had outstanding letters of credit in the aggregate amount of $11.1 million, which were issued as security for certain leased office facilities under the Credit Agreement. These letters of credit have never been drawn upon.
Legal Proceedings
The Company is involved from time to time in litigation, claims, and proceedings. The outcomes of the Company’s legal proceedings are inherently unpredictable and subject to significant uncertainty.
The Company records a liability when it is probable that a loss has been incurred and the amount can be reasonably estimated. If it is determined that a loss is reasonably possible and the loss or range of loss can be estimated, the reasonably possible loss is disclosed. The Company evaluates developments in legal matters that could affect the amount of liability that has been previously accrued, and related reasonably possible losses disclosed, and makes adjustments as appropriate. Significant judgment is required to determine the likelihood of matters and the estimated amount of a loss related to such matters. To date, losses in connection with legal proceedings have not been material.
The Company expenses legal fees in the period in which they are incurred.
Indemnifications
The Company enters into indemnification provisions under agreements with other parties in the ordinary course of business, including certain customers, business partners, investors, contractors and the Company’s officers, directors and certain employees. It is not possible to determine the maximum potential loss under these indemnification provisions due to the Company’s limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision. To date, losses recorded in the Company’s condensed consolidated statements of operations in connection with the indemnification provisions have not been material. As
of June 30, 2023, the Company did not have any material indemnification claims that were probable or reasonably possible.
Non-income Taxes
The Company may be subject to audit by various tax authorities with regard to non-income tax matters. The subject matter of non-income tax audits primarily arises from different interpretations on tax treatment and tax rates applied. The Company accrues liabilities for non-income taxes that may result from examinations by, or any negotiated agreements with, these tax authorities when a loss is probable and reasonably estimable. If a loss is reasonably possible and the loss or range of loss can be estimated, the Company discloses the reasonably possible loss.
5. Acquisitions and Dispositions
2023 Acquisitions
During the three and six months ended June 30, 2023, the Company recognized total earn-out costs of $29.8 million and $43.0 million, respectively, related to asset acquisitions closed in 2021 and prior. No other acquisitions were completed during the three and six months ended June 30, 2023.
2022 Acquisitions
Business Combinations
MoPub—On January 1, 2022, the Company completed its acquisition from Twitter, Inc. of certain assets that comprised its MoPub business for a total purchase price of $1.03 billion in cash. The acquisition allowed the Company to integrate certain product features of the MoPub platform into MAX, the Company's in-app mediation platform, and migrate publishers and demand partners from the MoPub platform to MAX. The Company accounted for the acquisition as a business combination. Transaction costs incurred by the Company in connection with the acquisition, including professional fees, were $14.4 million.
The following table summarizes the allocation of the purchase consideration to the fair value of the assets acquired (in thousands):
| Intangible assets | |||||
| Advertiser Relationships—estimated useful life of 9 years | $ | 212,700 | |||
| Publisher Relationships—estimated useful life of 9 years | 123,300 | ||||
| Developed Technology—estimated useful life of 5 years | 61,800 | ||||
| Tradename—estimated useful life of 3 months | 60 | ||||
| Goodwill | 632,472 | ||||
| Total purchase consideration | $ | 1,030,332 |
The income approach was used to determine the fair value of the advertiser relationships, publisher relationships, developed technology and tradename. Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired at the acquisition date and is primarily attributable to the assembled workforce and expected synergies at the time of the acquisition. For tax purposes, an estimated tax deductible goodwill of $694.5 million was generated as a result of this acquisition. No liabilities were assumed in the transaction.
Contemporaneously with the signing of the asset purchase agreement, the Company entered into an agreement for Twitter, Inc. to provide certain transitional services to facilitate the migration of publishers and demand partners to MAX during a three-month transitional period following the closing of the transaction (the "TSA"). The Company accounted for the TSA as a transaction separate from the business combination since it was negotiated primarily for the benefit of the Company. During the first quarter of 2022, the Company recognized total expense of $7.0 million related to the transitional services, which was included primarily in cost of revenue in the Company's condensed consolidated statement of operations.
Due to the significant integration of the MoPub business with MAX, it was impractical to determine the impact of the acquired business on revenue or earnings during the periods presented.
Wurl—On April 1, 2022, the Company completed its acquisition of all of the equity interests of Wurl, Inc. ("Wurl"), a connected TV (CTV) software platform company, for a total purchase price of $378.2 million, consisting of $219.3 million in cash, 2,579,692 shares of the Company's Class A common stock valued at $137.4 million and a deferred payment of $22.7 million, with a present value of $21.5 million at the closing of the acquisition, relating to an indemnity holdback amount to be paid in 18 months following the transaction close date, less any eligible claims against Wurl paid by AppLovin. The transaction allowed the Company to expand into the connected TV market. The Company accounted for the acquisition as a business combination. Transaction costs incurred by the Company in connection with the acquisition, including professional fees, were $1.9 million.
The following table summarizes the allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed (in thousands):
| Cash and cash equivalents | $ | 400 | |||
| Accounts receivable and other current assets | 15,194 | ||||
| Intangible assets | — | ||||
| Customer Relationships—estimated useful life of 15 years | 41,000 | ||||
| Developed Technology—estimated useful life of 6 years | 60,500 | ||||
| Tradename—estimated useful life of 10 years | 14,700 | ||||
| Goodwill | 264,149 | ||||
| Property and equipment, net | 363 | ||||
| Other assets | 159 | ||||
| Accounts payable, accrued liabilities and other current liabilities | (12,854) | ||||
| Deferred revenue | (209) | ||||
| Deferred income tax liability | (5,235) | ||||
| Total purchase consideration | $ | 378,167 |
The income approach was used to determine the fair value of the customer relationships, developed technology, and tradename. Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed at the acquisition date and is primarily attributable to the assembled workforce and expected synergies at the time of the acquisition. For tax purposes, no tax deductible goodwill was generated as a result of this acquisition.
Contemporaneously with entering into the definitive agreement, the Company also adopted a multi-year performance-based incentive plan for certain key employees of Wurl, under which the key employees may earn up to a total of $600.0 million in additional shares of the Company's Class A common stock through 2025, contingent upon the achievement of certain revenue and other performance targets by the acquired business and the continued employment of such key employees between 2023 and 2025. In April 2023, the Company amended the multi-year performance-based incentive plan into a one-year plan for 2023, under which the Company may be obligated to issue up to a total of $90.0 million in additional shares of the Company's Class A common stock, contingent upon Wurl’s achievement of certain revenue and other performance targets and the continued employment of the key employees.
The Company’s condensed consolidated statement of operations for the three and six months ended June 30, 2022 includes Wurl's revenue of $11.4 million and pre-tax loss of $4.6 million for the period from the acquisition date of April 1, 2022 to June 30, 2022.
The unaudited supplemental pro forma information below presents the combined historical results of operations of the Company, the MoPub business and Wurl, as if they had been acquired as of January 1, 2021 (in thousands):
| Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |||||||
| Revenue | $ | 776,231 | $ | 1,410,684 | ||||
| Net loss | $ | (20,810) | $ | (128,437) |
The unaudited supplemental pro forma information above includes the following adjustments to net loss in the appropriate pro forma periods (in thousands):
| Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |||||||
| An (increase) in amortization expense related to the fair value of acquired identifiable intangible assets, net of the amortization expense already reflected in actual historical results | $ | — | $ | (3,512) | ||||
| A decrease in expenses related to the TSA | $ | — | $ | 7,000 | ||||
| An (increase) due to replacement stock awards | $ | — | $ | (1,221) | ||||
| A decrease in expenses related to transaction costs | $ | 179 | $ | 16,899 | ||||
| A decrease in expenses related to transaction bonuses | $ | 1,101 | $ | 1,101 | ||||
| An (increase) in income tax provision | $ | (292) | $ | (4,625) |
Asset Acquisitions
During the three and six months ended June 30, 2022, the Company recognized total earn-out costs of $43.8 million and $75.5 million, respectively, related to asset acquisitions closed in 2021 and prior. No other asset acquisitions were completed during the three and six months ended June 30, 2022.
6. Goodwill and Intangible Assets
The following table presents the changes in the carrying amount of goodwill by reporting unit (in thousands):
| Software Platform | Apps | Total | |||||||||
| December 31, 2022 | $ | 1,478,014 | $ | 345,741 | $ | 1,823,755 | |||||
| Foreign currency translation | 6,955 | — | 6,955 | ||||||||
| June 30, 2023 | $ | 1,484,969 | $ | 345,741 | $ | 1,830,710 |
Intangible assets, net consisted of the following (in thousands):
| Weighted- Average Remaining Useful Life (Years) | As of June 30, 2023 | As of December 31, 2022 | |||||||||||||||||||||||||||
| Gross Carrying Value | Accumulated Amortization | Net Book Value | Gross Carrying Value | Accumulated Amortization | Net Book Value | ||||||||||||||||||||||||
| Long-lived intangible assets: | |||||||||||||||||||||||||||||
| Apps | 4.0 | $ | 1,827,128 | $ | (1,004,234) | $ | 822,894 | $ | 1,790,820 | $ | (836,375) | $ | 954,445 | ||||||||||||||||
| Customer relationships | 8.7 | 516,700 | (84,964) | 431,736 | 515,084 | (58,881) | 456,203 | ||||||||||||||||||||||
| User base | 2.8 | 68,817 | (41,998) | 26,819 | 68,817 | (37,122) | 31,695 | ||||||||||||||||||||||
| License asset | 2.5 | 59,207 | (23,952) | 35,255 | 59,207 | (16,901) | 42,306 | ||||||||||||||||||||||
| Developed technology | 4.1 | 206,769 | (71,144) | 135,625 | 206,060 | (53,879) | 152,181 | ||||||||||||||||||||||
| Other | 4.9 | 58,564 | (16,897) | 41,667 | 53,933 | (13,103) | 40,830 | ||||||||||||||||||||||
| Total long-lived intangible assets | 2,737,185 | (1,243,189) | 1,493,996 | 2,693,921 | (1,016,261) | 1,677,660 | |||||||||||||||||||||||
| Short-lived intangible assets: | |||||||||||||||||||||||||||||
| Apps | 0.2 | 47,136 | (46,863) | 273 | 45,791 | (44,838) | 953 | ||||||||||||||||||||||
| Total intangible assets | $ | 2,784,321 | $ | (1,290,052) | $ | 1,494,269 | $ | 2,739,712 | $ | (1,061,099) | $ | 1,678,613 |
As of June 30, 2023 and December 31, 2022, short-lived mobile Apps were included in prepaid expenses and other current assets.
The Company recorded amortization expenses related to acquired intangible assets as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Cost of revenue | $ | 96,138 | $ | 126,237 | $ | 194,782 | $ | 230,856 | |||||||||||||||
| Sales and marketing | 16,780 | 16,532 | 33,568 | 32,924 | |||||||||||||||||||
| Total | $ | 112,918 | $ | 142,769 | $ | 228,350 | $ | 263,780 |
7. Equity
In February 2022, the Company's Board authorized the repurchase of up to $750.0 million of the Company’s Class A common stock. Repurchases may be made from time to time through open market purchases or through privately negotiated transactions, subject to market conditions, applicable legal requirements and other relevant factors. Open market repurchases may be structured to occur in accordance with the requirements of Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company may also, from time to time, enter into Rule 10b-5 trading plans, to facilitate repurchases of shares. In May 2023, the Company's Board authorized an increase to the repurchase program of $296.0 million.
The repurchase program does not obligate the Company to acquire any particular amount of Class A common stock, has no expiration date and may be modified, suspended, or terminated at any time at the Company's discretion. The Company retires its Class A common stock upon repurchase, and records any excess of the cost of the repurchased shares over their par value as a reduction to additional paid-in capital, or in the absence of additional paid-in capital, to accumulated deficit. During the six months ended June 30, 2023 and 2022, the Company repurchased 30,880,452 and 6,643,412 shares of Class A common stock for an aggregate amount, including commissions and fees, of $579.8 million and $254.5 million, respectively.
8. Stock-based Compensation
The Company maintains three equity compensation plans that provide for the issuance of shares of its common stock to the Company’s employees, directors, consultants and other service providers: the 2021 Equity Incentive Plan (the "2021 Plan"), the 2021 Partner Studio Incentive Plan, and the 2021 Employee Stock Purchase Plan (the "ESPP").
In March 2023, the Company’s Board of Directors (the "Board"), upon recommendation of the Compensation Committee of the Board (the "Compensation Committee"), granted to each of Adam Foroughi, the Company’s CEO and Chairperson, and Vasily Shikin, the Company’s CTO, 6,902,000 performance-based RSUs (“PSUs”), and delegated authority to Mr. Foroughi to grant up to additional 3,451,000 PSUs to non-executive employees (the "Additional Participants") in consultation with the chair of the Compensation Committee under the 2021 Plan. The PSUs are divided into five equal tranches that are eligible to vest based on the achievement of certain stock price targets (see below), measured based on the minimum closing price of the Company’s Class A common stock over a consecutive 30 trading day period during the five-year performance period beginning on the date of grant, subject to the recipient’s continued employment through the applicable vesting date. In the event of a change in control of the Company during the performance period, any unvested PSUs are eligible to vest a pro-rated amount if the per share transaction price in the change in control is between two stock price targets that have not previously been achieved, subject to the recipient’s continued employment through the date immediately prior to the change in control. PSUs for Mr. Foroughi and Mr. Shikin may continue to vest for up to one year after termination of employment if certain conditions are met. In April 2023, the remaining 3,451,000 PSUs were granted to the Additional Participants.
The following table presents the number of PSUs that are eligible to vest based on the achievement of the respective stock price targets for each of Mr. Foroughi, Mr. Shikin and the Additional Participants (in aggregate):
| PSUs Eligible to Vest | ||||||||||||||||||||
| Company Stock Price Target | Adam Foroughi | Vasily Shikin | Additional Participants (in aggregate) | |||||||||||||||||
| $ | 36.00 | 1,380,400 | 1,380,400 | 690,200 | ||||||||||||||||
| $ | 46.75 | 1,380,400 | 1,380,400 | 690,200 | ||||||||||||||||
| $ | 57.50 | 1,380,400 | 1,380,400 | 690,200 | ||||||||||||||||
| $ | 68.25 | 1,380,400 | 1,380,400 | 690,200 | ||||||||||||||||
| $ | 79.00 | 1,380,400 | 1,380,400 | 690,200 | ||||||||||||||||
| 6,902,000 | 6,902,000 | 3,451,000 |
The weighted-average grant date fair value of the PSUs for Mr. Foroughi, Mr. Shikin and the Additional Participants was $7.60, $6.03, and $8.76 per share, respectively. The Company used a Monte Carlo simulation model to calculate the grant date fair value of the PSUs and the derived service period for each of the five vesting tranches, which is the measure of the expected time to achieve the respective stock price target, as described above. The Monte Carlo simulation model incorporates the likelihood of achieving the stock price targets and requires the input of assumptions including the underlying stock price, expected volatility, expected term, risk-free rate and dividend yield. The Company also applied a discount for lack of marketability to the value of PSUs for employees other than the CEO as the shares issued for these awards are subject to a holding period of approximately one year.
The Company will recognize stock-based compensation expense over the derived service period of each of the five vesting tranches, ranging from 1.7 to 3.1 years, using the accelerated attribution method. If the stock price targets are met sooner than the derived service period, the Company will adjust its stock-based compensation expense to reflect the cumulative expense associated with the vested awards. Subject to continued employment of the recipients, the Company will recognize stock-based compensation expense over the derived service period, regardless of whether the stock price targets are achieved.
During the six months ended June 30, 2023, the Company granted 4,464,260 restricted stock units ("RSUs") to certain employees under the 2021 Plan at the weighted average grant date fair value of $13.43 per RSU. These awards vest based on a service condition that becomes satisfied over generally one year.
In February 2023, the Board approved an increase to the maximum number of shares that can be purchased in each purchase period from 590 to 3,500 shares of Class A common stock. During the three months ended June 30, 2023, 174,670 shares of Class A common stock were purchased under the ESPP.
Stock-based compensation expense is allocated based on the cost center to which the award holder belongs. The following table summarizes total stock-based compensation expense by function (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Cost of revenue | $ | 1,317 | $ | 2,706 | $ | 2,633 | $ | 3,758 | |||||||||||||||
| Sales and marketing | 19,413 | 13,432 | 36,096 | 20,351 | |||||||||||||||||||
| Research and development | 55,946 | 25,890 | 105,875 | 46,519 | |||||||||||||||||||
| General and administrative | 4,577 | 15,128 | 19,615 | 31,168 | |||||||||||||||||||
| Total | $ | 81,253 | $ | 57,156 | $ | 164,219 | $ | 101,796 |
9. Earnings Per Share
The following table sets forth the computation of basic and diluted net income (loss) per share attributable to common stockholders (in thousands, except share and per share data):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Basic EPS | |||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income (loss) attributable to AppLovin | $ | 80,357 | $ | (21,748) | $ | 75,839 | $ | (137,005) | |||||||||||||||
| Less: | |||||||||||||||||||||||
| Income attributable to options exercises by promissory notes | (314) | — | (290) | — | |||||||||||||||||||
| Income attributable to unvested early exercised options | (4) | — | (9) | — | |||||||||||||||||||
| Net income (loss) attributable to AppLovin common stockholders—Basic | $ | 80,039 | $ | (21,748) | $ | 75,540 | $ | (137,005) | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average shares used in computing net income (loss) per share—Basic | 356,957,059 | 373,912,724 | 365,013,736 | 372,932,509 | |||||||||||||||||||
| Net income (loss) per share attributable to common stock—Basic | $ | 0.22 | $ | (0.06) | $ | 0.21 | $ | (0.37) | |||||||||||||||
| Diluted EPS | |||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income (loss) attributable to AppLovin | 80,357 | (21,748) | 75,839 | (137,005) | |||||||||||||||||||
| Less: | |||||||||||||||||||||||
| Income attributable to options exercises by promissory notes | (306) | — | (284) | — | |||||||||||||||||||
| Income attributable to unvested early exercised options | (4) | — | (8) | — | |||||||||||||||||||
| Net income (loss) attributable to AppLovin common stockholders—Diluted | $ | 80,047 | $ | (21,748) | $ | 75,547 | $ | (137,005) | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average shares used in computing net income (loss) per share—Basic | 356,957,059 | 373,912,724 | 365,013,736 | 372,932,509 | |||||||||||||||||||
| Weighted-average dilutive stock options and RSUs | 9,383,216 | — | 8,008,464 | — | |||||||||||||||||||
| Weighted-average shares used in computing net income (loss) per share—Diluted | 366,340,275 | 373,912,724 | 373,022,200 | 372,932,509 | |||||||||||||||||||
| Net income (loss) per share attributable to AppLovin common stockholders—Diluted | $ | 0.22 | $ | (0.06) | $ | 0.20 | $ | (0.37) |
The following table presents the forms of antidilutive potential common shares:
| As of June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Stock options exercised for promissory notes | 1,399,999 | 1,774,999 | |||||||||
| Early exercised stock options | 8,324 | 512,249 | |||||||||
| Unvested RSAs | — | 60,579 | |||||||||
| Stock options | 955,658 | 13,196,979 | |||||||||
| Unvested RSUs and other | 5,547,615 | 9,316,138 | |||||||||
| ESPP | 750,149 | 432,845 | |||||||||
| Total antidilutive potential common shares | 8,661,745 | 25,293,789 |
The PSUs granted in the three and six months ended June 30, 2023 were excluded from the above table because the respective stock price targets had not been met as of June 30, 2023.
10. Income Taxes
The Company is subject to income taxes in the U.S. and in foreign jurisdictions. The Company bases the interim tax accruals on an estimated annual effective tax rate applied to year-to-date income and records the discrete tax items in the period to which they relate. In each quarter, the Company updates the estimated annual effective tax rate and makes a year-to-date adjustment to the tax provision as necessary. The Company’s calendar year 2023 annual effective tax rate differs from the U.S. statutory rate primarily due to stock-based compensation expense, foreign derived intangible income deduction, global intangible low-taxed income, and valuation allowance against losses which are not more likely than not to be realized.
During the six months ended June 30, 2023, there were no material changes to the Company's unrecognized tax benefits, and the Company does not expect material changes in unrecognized tax benefits within the next twelve months.
11. Segments
The Company determines its operating segments based on how its chief operating decision maker (“CODM”) manages the business, allocates resources, makes operating decisions and evaluates operating performance. The Company's two operating and reportable segments are as follows:
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Software Platform*:* Software Platform generates revenue primarily from fees paid by advertisers for the placement of ads on mobile applications owned by Publishers.
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Apps*:* Apps generates revenue when a user of one of the Apps makes an in-app purchase and when an advertiser purchases the digital advertising inventory of the Company's portfolio of Apps.
The CODM evaluates the performance of each operating segment using revenue and segment adjusted EBITDA. The Company defines segment adjusted EBITDA as revenue less expenses, excluding depreciation and amortization and certain items that the Company does not believe are reflective of the operating segments’ core operations. Expenses include indirect costs that are allocated to operating segments based on a reasonable allocation methodology, which are generally related to sales and marketing activities and general and administrative overhead. Revenue and expenses exclude transactions between the Company's operating segments. The CODM does not evaluate operating segments using asset information, and, accordingly, the Company does not report asset information by segment.
The following table provides information about the Company's reportable segments and a reconciliation of the total segment adjusted EBITDA to income (loss) before income taxes (in thousands).
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Software Platform | $ | 406,063 | $ | 317,540 | $ | 760,821 | $ | 436,380 | |||||||||||||||
| Apps | 344,102 | 458,691 | 704,749 | 965,272 | |||||||||||||||||||
| Total Revenue | $ | 750,165 | $ | 776,231 | $ | 1,465,570 | $ | 1,401,652 | |||||||||||||||
| Segment Adjusted EBITDA: | |||||||||||||||||||||||
| Software Platform | $ | 272,886 | $ | 196,744 | $ | 491,580 | $ | 432,299 | |||||||||||||||
| Apps | 60,628 | 73,000 | 115,632 | 113,674 | |||||||||||||||||||
| Total Segment Adjusted EBITDA | $ | 333,514 | $ | 269,744 | $ | 607,212 | $ | 545,973 | |||||||||||||||
| Interest expense | $ | (50,987) | $ | (36,505) | $ | (125,498) | $ | (68,514) | |||||||||||||||
| Interest income and other, net | 15,817 | 2,452 | 25,588 | 4,869 | |||||||||||||||||||
| Amortization, depreciation and write-offs | (119,892) | (152,688) | (248,100) | (281,677) | |||||||||||||||||||
| Non-operating foreign exchange gain (loss) | (126) | 819 | 546 | 1,277 | |||||||||||||||||||
| Stock-based compensation | (81,253) | (57,156) | (164,219) | (101,796) | |||||||||||||||||||
| Acquisition-related expense | (247) | (1,921) | (764) | (16,735) | |||||||||||||||||||
| Publisher bonuses | — | — | — | (209,635) | |||||||||||||||||||
| MoPub acquisition transition services | — | — | — | (6,999) | |||||||||||||||||||
| Restructuring costs | (1,024) | (7,377) | (2,316) | (7,377) | |||||||||||||||||||
| Income (loss) before income taxes | $ | 95,802 | $ | 17,368 | $ | 92,449 | $ | (140,614) |
12. Credit Agreement
The Company is a party to a certain credit agreement (the “Credit Agreement”), which provides for senior secured term loans and a revolving credit facility.
In January 2023, the Company entered into Amendment No. 7 to the Credit Agreement to transition the benchmark interest rate from the London Interbank Offered Rate (“LIBOR”) to the Term Secured Overnight Financing Rate (“SOFR”), which included a 10 basis-point credit spread adjustment. In June 2023, the Company entered into Amendment No. 8 to the Credit Agreement to extend the maturity date with respect to the revolving credit facility to the earlier of 91 days prior to the final maturity of any term loan under the Credit Agreement (unless all term loans with a maturity date earlier than October 25, 2028 have been repaid in full prior to such date) and June 12, 2028, and increase the maximum commitment of the revolving credit facility by $10.0 million to an aggregate of $610.0 million. The other material terms of the Credit Agreement were unchanged. The Company incurred $4.0 million in debt issuance costs in connection with Amendment No. 8 which were deferred and are being recognized as interest expense over the term of revolving credit facility. These costs were included in "Other assets" in the Company's condensed consolidated balance sheet. As of June 30, 2023, no amount was drawn from the revolving credit facility.
13. Related Party Transactions
In May 2023, the Company repurchased 15,952,381 shares of its Class A common stock from KKR Denali Holdings L.P. ("KKR Denali") in a private transaction at a price per share equal to $21.00 per share, for an aggregate purchase price of $335.0 million, under the Company's share repurchase program. See Note 7 – Equity for additional information on the share repurchase program.
The Company had no other material related party transactions for the three and six months ended June 30, 2023 and 2022.
14. Subsequent Events
From July 1, 2023 through August 8, 2023, the Company repurchased 784,833 shares of its Class A common stock for an aggregate amount, including commissions and fees, of $21.0 million pursuant to the Share Repurchase Program. Year-to-date through August 8, 2023, the Company repurchased $600.8 million of its Class A common stock, including commissions and fees. As of August 8, 2023, $107.4 million of the $1,046.0 million authorized amount under the share repurchase program remains available.
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