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 200 free-to-play mobile games across five genres, run by eleven studios.

For the three months ended June 30, 2023, our revenue declined 3% year-over-year to $750.2 million, from $776.2 million in the three months ended June 30, 2022. We generated net income of $80.4 million for the three months ended June 30, 2023, and a net loss of $21.8 million in the comparative period in 2022. We generated Adjusted EBITDA of $333.5 million and $269.7 million for the three months ended June 30, 2023 and 2022, respectively. Additionally, our net cash provided by operating activities was $518.5 million and $75.1 million in the six months ended June 30, 2023 and 2022, respectively. We generated Free Cash Flow of $503.7 million and $62.4 million for the six months ended June 30, 2023 and 2022, respectively. Given our strong financial position, we have been able to reinvest in our expansion and growth, and repurchase shares of our Class A common stock. See the section titled “Non-GAAP Financial Measures” below 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 generate revenue from our Software Platform and our Apps. During the three months ended June 30, 2023, Software Platform Revenue represented 54% of total revenue and Apps Revenue represented 46% of total revenue.

We report our operating results through two reportable segments: Software Platform and Apps. Previously we had a single operating and reportable segment.

Our chief operating decision maker ("CODM"), the Chief Executive Officer, 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 ("IAP") 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 68% of total Apps Revenue in the three months ended June 30, 2023.

During the three months ended June 30, 2023, we had an average of 1.7 million Monthly Active Payers ("MAPs") across our portfolio of Apps. Over that period, we had an Average Revenue Per Monthly Active Payer ("ARPMAP") of $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 200 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 32% of total Apps Revenue in the three months ended June 30, 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 June 30, 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 June 30, 2023 and 2022.

			Three Months Ended June 30,
			2023						2022
Monthly Active Payers (millions)			1.7						2.3
Average Revenue Per Monthly Active Payer			$	46					$	43

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, interest income and other, 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 and six months ended June 30, 2023 and 2022, and a reconciliation of net income (loss) to Adjusted EBITDA:

			Three Months Ended June 30,												Six Months Ended June 30,
			2023						2022						2023						2022
			(in thousands. except percentages)
Revenue			$	750,165					$	776,231					$	1,465,570					$	1,401,652
Net income (loss)			$	80,357					$	(21,799)					$	75,839					$	(137,097)
Net Margin			10.7%						(2.8)%						5.2%						(9.8)%
Adjusted as follows:
Interest expense			50,987						36,505						125,498						68,514
Interest income and other, net			(15,817)						(2,452)						(25,588)						(4,869)
Provision for (benefit from) income taxes			15,445						39,167						16,610						(3,517)
Amortization, depreciation and write-offs			119,892						152,688						248,100						281,677
Non-operating foreign exchange loss (gain)			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 bonuses1			—						—						—						209,635
MoPub acquisition transition services2			—						—						—						6,999
Restructuring costs			1,024						7,377						2,316						7,377
Adjusted EBITDA			$	333,514					$	269,744					$	607,212					$	545,973
Adjusted EBITDA Margin			44.5		%				34.8		%				41.4		%				39.0		%

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 six months ended June 30, 2023 and 2022, and a reconciliation of net cash provided by operating activities to Free Cash Flow:

			Six Months Ended June 30,
			2023						2022
			(in thousands)
Net cash provided by operating activities			$	518,456					$	75,092
Less:
Purchase of property and equipment			(3,819)						(400)
Principal payments on finance leases			(10,915)						(12,326)
Free Cash Flow			$	503,722					$	62,366
Net cash used in investing activities			$	(55,192)					$	(1,351,744)
Net cash used in financing activities			$	(668,113)					$	(335,046)

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.

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 AI-based advertising engine AXON, AppDiscovery, Adjust, MAX and Wurl will further improve effectiveness for developers. For example, in the second quarter of 2023, we rolled-out our latest AI-based advertising engine, AXON 2.0, which drove sequential improvements to AppDiscovery performance and returns for advertisers. 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 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 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 continue to focus on markets outside the United States to serve the needs of clients globally. During the three months ended June 30, 2023, 42% 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 continue 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.

Optimization 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. Beginning in the second quarter of 2022, we performed a strategic review of our Apps portfolio and its cost structure, which we have substantially completed and which 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 Apps Adjusted EBITDA margin, but also contributed to a decline in revenue and MAPs. We continue to optimize the portfolio, focusing on how best to optimize each asset’s contribution to our overall financial performance, and we may periodically 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 June 30, 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 do so 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 June 2023, Apple announced new SDK privacy controls that will be part of iOS 17, including new protections designed to limit tracking or identification of user devices. 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. In May 2023, Google announced new consent management platform ("CMP") requirements for ads served in the European Economic Area (EEA) and UK, which will require, starting in January 2024, publishers using Google AdSense, Ad Manager, or AdMob to use a CMP that has been certified by Google and has integrated with the Interactive Advertising Bureau’s (“IAB”) Transparency and Consent Framework when serving ads to users in the EEA or the UK. If publishers do not adopt a Google-certified CMP by this timeframe, only limited ads will be eligible to serve in the EEA and UK. While to date these third-party platform privacy changes have had some impact on the discoverability of apps across these platforms and have had a relatively muted aggregate impact on our results of operations, the ultimate impact of these or any similar or future changes to the policies of Apple or Google could adversely affect our business, financial condition, and 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, the Russian invasion of Ukraine and increasing friction between the United States and China, including related sanctions. 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 has generally stabilized 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 including terminating or suspending contracts with [certain] clients and vendors in Russia and Belarus. 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 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 originating from this region 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 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 June 30,												Six Months Ended June 30,
			2023						2022						2023						2022
			(in thousands)
Revenue			$	750,165					$	776,231					$	1,465,570					$	1,401,652
Costs and expenses:
Cost of revenue(1)(2)			258,575						303,929						520,535						585,709
Sales and marketing(1)(2)			192,427						232,096						395,403						522,229
Research and development(1)			137,424						141,108						282,275						267,358
General and administrative(1)			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)

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(1) Includes stock-based compensation expense as follows:

			Three Months Ended June 30,												Six Months Ended June 30,
			2023						2022						2023						2022
			(in thousands)
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 stock-based compensation			$	81,253					$	57,156					$	164,219					$	101,796

(2) Includes amortization expense related to acquired intangibles as follows:

			Three Months Ended June 30,												Six Months Ended June 30,
			2023						2022						2023						2022
			(in thousands)
Cost of revenue			$	96,138					$	126,237					$	194,782					$	230,856
Sales and marketing			16,780						16,532						33,568						32,924
Total amortization expense related to acquired intangibles			$	112,918					$	142,769					$	228,350					$	263,780

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 June 30,												Six Months Ended June 30,
			2023						2022						2023						2022
Revenue			100		%				100		%				100		%				100		%
Costs and expenses:
Cost of revenue			34		%				39		%				36		%				42		%
Sales and marketing			26		%				30		%				27		%				37		%
Research and development			18		%				18		%				19		%				19		%
General and administrative			4		%				6		%				5		%				7		%
Total costs and expenses			82		%				93		%				87		%				105		%
Income (loss) from operations			18		%				7		%				13		%				(5)		%
Other income (expense):
Interest expense			(7)		%				(5)		%				(9)		%				(5)		%
Interest income and other, net			2		%				—		%				2		%				—		%
Total other expense, net			(5)		%				(5)		%				(7)		%				(5)		%
Income (loss) before income taxes			13		%				2		%				6		%				(10)		%
Provision for (benefit from) income taxes			2		%				5		%				1		%				—		%
Net income (loss)			11		%				(3)		%				5		%				(10)		%

---

(1) Totals of percentages of revenue may not foot due to rounding.

Comparison of Our Results of Operations for the Three and Six Months Ended June 30, 2023 and 2022

Revenue

			Three Months Ended June 30,												2022 to 2023 % change						Six Months Ended June 30,												2022 to 2023 % change
			2023						2022									2023						2022
			(in thousands, except percentages)
Software Platform Revenue			$	406,063					$	317,540					28		%				$	760,821					$	436,380					74		%
In-App Purchases Revenue			233,625						303,268						(23)		%				484,953						642,740						(25)		%
In-App Advertising Revenue			110,477						155,423						(29)		%				219,796						322,532						(32)		%
Total Apps Revenue			344,102						458,691						(25)		%				704,749						965,272						(27)		%
Total Revenue			$	750,165					$	776,231					(3)		%				$	1,465,570					$	1,401,652					5		%

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

For the three months ended June 30, 2023, our Software Platform Revenue increased by $88.5 million, or 28%, compared to the same period in the prior year primarily due to AppDiscovery where net revenue per installation increased 38%, partially offset by a 8% 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 June 30, 2023, our Apps Revenue decreased by $114.6 million, or 25%, from the prior year period. For the three months ended June 30, 2023, our IAP Revenue from Apps decreased by $69.6 million, or 23%, from the prior year period, due primarily to a 17% decrease in the volume of in-app purchases and a 7% decrease in price per in-app purchase, driven by 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 $44.9 million, or 29%, from the prior year period, due primarily to a 48% decrease in price per advertising impression, partially offset by a 37% increase in the volume of advertising impressions.

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

For the six months ended June 30, 2023, our Software Platform Revenue increased by $324.4 million, or 74%, 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, where net revenue per installation increased 42%, partially offset by a 11% decrease in the volume of installations.

For the six months ended June 30, 2023, our Apps Revenue decreased by $260.5 million, or 27%, from the prior year period. For the six months ended June 30, 2022, our IAP Revenue from Apps decreased by $157.8 million, or 25%, from the prior year period, primarily due to a 22% decrease in the volume of in-app purchases and a 4% decrease in price per in-app purchase, driven by 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 declined $102.7 million, or 32%, due primarily to a 46% decrease in price per advertising impression compared to the prior year period, partially offset by a 25% increase in the volume of advertising impressions.

Cost of revenue

			Three Months Ended June 30,												2022 to 2023 % Change						Six Months Ended June 30,												2022 to 2023 % Change
			2023						2022									2023						2022
			(in thousands, except percentages)
Cost of revenue			$	258,575					$	303,929					(15)		%				$	520,535					$	585,709					(11)		%
Percentage of revenue			34		%				39		%										36		%				42		%

Cost of revenue in the three months ended June 30, 2023 decreased by $45.4 million, or 15%, compared to the same period in the prior year, due primarily to a decrease of $31.1 million in amortization of intangible assets resulting from the sale of certain assets within our Apps segment during the second half of 2022 and a decrease of $17.4 million in third-party payment processing fees driven by a decrease in IAP revenue.

Cost of revenue in the six months ended June 30, 2023 decreased by $65.2 million, or 11%, compared to the same period in the prior year. The decrease in the six months ended June 30, 2023 was due primarily to a decrease of $43.4 million in third-party payment processing fees driven by a decrease in IAP revenue and a decrease of $38.2 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 $13.9 million in expenses associated with operating our network infrastructure driven by the growth in our operations.

Sales and marketing

			Three Months Ended June 30,												2022 to 2023 % Change						Six Months Ended June 30,												2022 to 2023 % Change
			2023						2022									2023						2022
			(in thousands, except percentages)
Sales and marketing			$	192,427					$	232,096					(17)		%				$	395,403					$	522,229					(24)		%
Percentage of revenue			26		%				30		%										27		%				37		%

Sales and marketing expenses in the three months ended June 30, 2023 decreased by $39.7 million, or 17%, compared to the same period in the prior year, due primarily to a decrease of $38.7 million in user acquisition costs as a result of the strategic review and optimization of our Apps portfolio.

Sales and marketing expenses in the six months ended June 30, 2023 decreased by $126.8 million, or 24%, compared to the same period in the prior year primarily due to a $135.5 million decrease in user acquisition costs as a result of the strategic review and optimization of our Apps portfolio, partially offset by an increase of $18.7 million in personnel-related expenses related to an increase in stock-based compensation expense.

Research and development

			Three Months Ended June 30,												2022 to 2023 % Change						Six Months Ended June 30,												2022 to 2023 % Change
			2023						2022									2023						2022
			(in thousands, except percentages)
Research and development			$	137,424					$	141,108					(3)		%				$	282,275					$	267,358					6		%
Percentage of revenue			18		%				18		%										19		%				19		%

Research and development expenses in the three months ended June 30, 2023 decreased by $3.7 million, or 3%, compared to the same period in the prior year. This decrease was primarily due to a decrease of $26.6 million in professional services costs related to development of new apps by third parties, partially offset by an increase of $23.7 million in personnel-related expenses primarily related to an increase in stock-based compensation expense.

Research and development expenses in the six months ended June 30, 2023 increased by $14.9 million, or 6%, compared to the same period in the prior year. This increase was primarily due to an increase of $55.3 million in personnel-related expenses primarily related to an increase in stock-based compensation expense, partially offset by a decrease of $45.4 million in professional services costs related to development and maintenance of apps by third parties.

General and administrative

			Three Months Ended June 30,												2022 to 2023 % Change						Six Months Ended June 30,												2022 to 2023 % Change
			2023						2022									2023						2022
			(in thousands, except percentages)
General and administrative			$	30,411					$	45,743					(34)		%				$	74,982					$	100,988					(26)		%
Percentage of revenue			4		%				6		%										5		%				7		%

General and administrative expenses in the three months ended June 30, 2023 decreased by $15.3 million, or 34%, compared to the same period in the prior year, due primarily to a decrease of $13.7 million in personnel-related expenses primarily related to a decrease in stock-based compensation expense, as well as a decrease of $1.9 million in professional services costs associated with a reduction in acquisition-related expenses.

General and administrative expenses in the six months ended June 30, 2023 decreased by $26.0 million, or 26%, compared to the same period in the prior year. This decrease was primarily due to a $13.1 million decrease in stock-based compensation expense as well as $12.7 million in acquisition-related stamp duty taxes recognized in the prior year period.

Interest expense

			Three Months Ended June 30,												2022 to 2023 % Change						Six Months Ended June 30,												2022 to 2023 % Change
			2023						2022									2023						2022
			(in thousands, except percentages)
Interest expense			$	(50,987)					$	(36,505)					40		%				$	(125,498)					$	(68,514)					83		%
Percentage of revenue			(7)		%				(5)		%										(9)		%				(5)		%

In the three months ended June 30, 2023, interest expense increased by $14.5 million, or 40%, compared to the same period in the prior year, due primarily to an increase in the interest rate for our outstanding debt.

In the six months ended June 30, 2023, interest expense increased by $57.0 million, or 83%, 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 June 30,												2022 to 2023 % Change						Six Months Ended June 30,												2022 to 2023 % Change
			2023						2022									2023						2022
			(in thousands, except percentages)
Interest income and other, net			$	15,461					$	518					*						$	25,572					$	2,532					910		%
Percentage of revenue			2		%				—		%										2		%				—		%

*Percentage not meaningful

In the three months ended June 30, 2023, interest income and other, net increased by $14.9 million compared to the same period in the prior year, due primarily to a $10.4 million increase in interest income earned on our cash and cash equivalents driven by an increase in interest rates and a $4.4 million unrealized gain related to the change in the carrying value of non-marketable equity securities.

In the six months ended June 30, 2023, interest income and other, net increased by $23.0 million, or 910%, compared to the same period in the prior year, due primarily to a $22.5 million 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 June 30,												2022 to 2023 % Change						Six Months Ended June 30,												2022 to 2023 % Change
			2023						2022									2023						2022
			(in thousands, except percentages)
Provision for (benefit from) Income Taxes			$	15,445					$	39,167					(61)		%				$	16,610					$	(3,517)					(572)		%
Percentage of revenue			2		%				5		%										1		%				—		%

In the three months ended June 30, 2023, the provision for income taxes decreased by $23.7 million, or 61%, compared to the same period in the prior year. The decrease was primarily driven by lower non-deductible stock-based compensation expense, lower global intangible low-taxed income, and lower valuation allowance, partially offset by lower benefits from foreign-derived intangible income deduction and research and development credits.

In the six months ended June 30, 2023, provision for income taxes increased by $20.1 million or 572% compared to the same period in the prior year. This increase was primarily driven by higher income from operations in the six months ended June 30, 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 June 30,												2022 to 2023 % Change						Six Months Ended June 30,												2022 to 2023 % Change
			2023						2022									2023						2022
			(in thousands, except percentages)
Software Platform Adjusted EBITDA			$	272,886					$	196,744					39		%				$	491,580					$	432,299					14		%
Apps Adjusted EBITDA			60,628						73,000						(17)		%				115,632						113,674						2		%

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

The $76.1 million, or 39%, increase in Software Platform Adjusted EBITDA for the three months ended June 30, 2023 was primarily driven by an increase in Software Platform revenue of $88.5 million, partially offset by an increase of $4.5 million in personnel-related expenses.

The $12.4 million, or 17%, decrease in Apps Adjusted EBITDA for the three months ended June 30, 2023 was primarily driven by a decrease in Apps Revenue of $114.6 million, partially offset by a decrease of $38.7 million in user acquisition costs, a decrease of $31.7 million in professional services costs related to the marketing, development and maintenance of apps by third parties, a decrease of $17.4 million in third-party payment processing fees related to in-app purchases, and a decrease of $7.1 million in personnel-related expenses.

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

The $59.3 million, or 14%, increase in Software Platform Adjusted EBITDA for the six months ended June 30, 2023 was primarily driven by an increase in Software Platform revenue of $324.4 million, partially offset by an increase of $24.4 million in personnel-related expenses related to an increase in headcount primarily due to the acquisition of Wurl in April 2022 and an increase of $17.3 million in expenses associated with operating our network infrastructure. In addition, Software Platform Adjusted EBITDA for the six months ended June 30, 2022 has been adjusted to exclude publisher bonuses of $209.6 million in the period.

The $2.0 million, or 2%, increase in Apps Adjusted EBITDA for the six months ended June 30, 2023 was primarily driven by a decrease in Apps Revenue of $260.5 million, partially offset by a $135.5 million decrease in user acquisition costs, a $57.5 million decrease in professional services costs related to development of new apps by third parties, a $43.4 million decrease in third-party payment processing fees related to in-app purchases, and a $14.5 million decrease in personnel-related expenses.

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 June 30, 2023, we had cash and cash equivalents of $0.9 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:

			Six Months Ended June 30,
			2023						2022
			(in thousands)
Net cash provided by operating activities			$	518,456					$	75,092
Net cash used in investing activities			$	(55,192)					$	(1,351,744)
Net cash used in financing activities			$	(668,113)					$	(335,046)

Operating Activities

Net cash provided by operating activities was $518.5 million for the six months ended June 30, 2023, primarily consisting of $75.8 million of net income, adjusted for certain non-cash items, which included $248.1 million of amortization, depreciation, and write-offs, $164.2 million of stock-based compensation expense, $6.9 million of change in operating right of use assets, and $6.6 million of amortization of debt issuance costs and discount, partially offset by a net decrease in operating assets and liabilities of $17.8 million. The net decrease in the operating assets and liabilities was primarily driven by a decrease in accounts receivable and deferred revenue, offset by lower accounts payable and operating lease liabilities.

Net cash provided by operating activities was $75.1 million for the six months ended June 30, 2022, primarily consisting of a $137.1 million net loss, adjusted for certain non-cash items, which included $281.7 million of amortization, depreciation, and write-offs, $101.8 million of stock-based compensation expense, $10.6 million of change in operating right of use asset, $6.8 million of amortization of debt issuance costs and discount, and $1.8 million of net unrealized losses on fair value remeasurements, partially offset by a net increase in operating assets and liabilities of $189.1 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 decreases in operating lease liabilities and deferred revenue, partially offset by higher accounts payable and accrued and other liabilities.

Investing Activities

Net cash used in investing activities was $55.2 million for the six months ended June 30, 2023, primarily consisting of $38.4 million related to earn-out payments associated with asset acquisitions and $16.8 million in purchases of non-marketable equity securities, partially offset by $8.3 million in proceeds from the sale of assets.

Net cash used in investing activities was $1.4 billion for the six months ended June 30, 2022, primarily consisting of $1.3 billion related to acquisitions and $56.5 million in purchases of non-marketable investments and other, partially offset by $2.2 million in proceeds from other investing activity.

Financing Activities

Net cash used in financing activities was $668.1 million for the six months ended June 30, 2023, primarily consisting of repurchases of stock under the repurchase program of $572.1 million, payments for withholding taxes related to the net share settlement of restricted stock units of $56.6 million, repayments of debt principal of $16.7 million, payments for license asset obligations of $15.3 million, and principal payments on finance leases of $10.9 million, partially offset by $6.5 million in proceeds from the exercise of stock options.

Net cash used in financing activities was $335.0 million for the six months ended June 30, 2022, primarily consisting of repurchases of stock under the repurchase program of $244.0 million, payments for deferred acquisition costs of $71.7 million, payments for license asset obligations of $17.4 million, payments for finance leases of $12.3 million, and repayments of debt principal of $9.2 million, partially offset by $15.9 million in proceeds from the exercise of stock options.

Share Repurchase Program

During the six months ended June 30, 2023, we repurchased 30,880,452 shares of Class A common stock for an aggregate amount, including commissions and fees, of $579.8 million. Subsequent to June 30, 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 through August 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 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, we 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. 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 six months ended June 30, 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.