AppLovin 10-Q 2023-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2023

For the transition period from to

Commission File Number: 001-40325

AppLovin Corporation

(Exact name of registrant as specified in its charter)

1100 Page Mill Road

Palo Alto, California 94304

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

(800) 839-9646

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

As of November 2, 2023, the number of shares of the registrant’s Class A common stock outstanding was 264,638,950 and the number of shares of the registrant’s Class B common stock outstanding was 71,162,622.

Table of Contents

NOTE ABOUT FORWARD-LOOKING STATEMENTS

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

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

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

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

• our ability to attract and retain clients and users;

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

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

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

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

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

• our ability to manage risk associated with our business;

• our expectations regarding new and evolving markets;

• our ability to develop and protect our brand;

• our expectations and management of future growth;

• our expectations concerning relationships with third parties;

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

• our expectations regarding our share repurchase program;

• our expectations regarding the macroeconomic environment, including rising inflation and interest rates, uncertainty in the global banking and financial services markets, the war in Ukraine and the crisis in the Middle East; and

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

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

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

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

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

PART I – FINANCIAL INFORMATION (UNAUDITED)

AppLovin Corporation

Condensed Consolidated Balance Sheets

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

(unaudited)

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

AppLovin Corporation

Condensed Consolidated Statements of Operations

(in thousands, except for per share data)

(unaudited)

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

AppLovin Corporation

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes 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 September 30, 2023, our revenue increased 21% year-over-year to $864.3 million, from $713.1 million in the three months ended September 30, 2022. We generated net income of $108.6 million and $23.7 million for the three months ended September 30, 2023 and 2022, respectively. We generated Adjusted EBITDA of $419.3 million and $257.6 million for the three months ended September 30, 2023 and 2022, respectively. Additionally, our net cash provided by operating activities was $717.5 million and $249.6 million in the nine months ended September 30, 2023 and 2022, respectively. We generated Free Cash Flow of $697.3 million and $230.9 million for the nine months ended September 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 September 30, 2023, Software Platform Revenue represented 58% of total revenue and Apps Revenue represented 42% of total revenue.

We report our operating results through two reportable segments: Software Platform and Apps. Prior to the second quarter of 2022, 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 our 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 69% of total Apps Revenue in the three months ended September 30, 2023.

During the three months ended September 30, 2023, we had an average of 1.8 million Monthly Active Payers ("MAPs") across our portfolio of Apps. Over that period, we had an Average Revenue Per Monthly Active Payer ("ARPMAP") of $46. See “Key Metrics” below for additional information on how we calculate MAPs and ARPMAP.

IAA clients that purchase advertising inventory from our Apps are able to target highly relevant users from our diverse and global portfolio of over 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 advertisin

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

From time to time, we enter into pay-fixed receive-variable interest rate swap agreements as part of our interest rate risk management strategy in connection with our outstanding indebtedness, which is subject to variable interest rates. Such agreements effectively fix the borrowing rates on the notional amount to provide an economic hedge against the risk of rising interest rates during the terms of these agreements. We do not designate the interest rate swaps as hedging instruments for accounting purposes and record unrealized gains and losses related to the change in fair value of such interest rate swaps through interest expense in our condensed consolidated statement of operations. However, such gains and losses would only be realized upon the cash settlement of the interest rate swaps. A hypothetical 100 basis point change in interest rates would not have a material impact on our cash interest expense for the three months ended September 30, 2023.

There have been no other material changes to our market risk since December 31, 2022.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2023.

Changes in Internal Control

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their desired objectives. Management does not expect, however, that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions, and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company have been detected.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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

Risk Factor Summary

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

Business, Operational, and Industry Factors

• our limited operating history and the unpredictability of our results of operations;

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

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

• competition in our industry and our ability to adapt to technological change;

• our ability to address or mitigate technical limitations in our systems and to maintain and scale our technical infrastructure;

• the impact of macroeconomic conditions and the geopolitical climate;

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

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

• risks related to the expansion and diversification of our operations, in the United States and globally, and possibly through future strategic acquisitions and partnerships;

• our expansion into new business opportunities and our ability to effectively manage our growing international operations;

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

• our ability to maintain relationships with our Partner Studios;

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

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

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

• concentration of our revenue sources;

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

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

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

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

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

• the use of machine learning ("ML") and artificial intelligence ("AI") in our offerings and business;

Legal and Regulatory Matters

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

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

• compliance with governmental anti-bribery, export controls and economic sanctions laws;

• changes in tax laws or tax rulings or exposure to greater than anticipated tax liabilities;

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

• our ability to realize tax savings from our international structure;

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

• expenses related to legal or regulatory proceedings and settlements or laws and regulations affecting public companies;

Intellectual Property Factors

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

• our involvement in intellectual property disputes;

• our use of and compliance with open source software;

• our ability to acquire and maintain licenses to intellectual property;

Financial and Accounting Matters

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

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

• changes to segment reporting as a result of our evolving business;

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

• substantial indebtedness under our senior secured credit facilities;

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

• the availability of additional capital on acceptable terms;

Ownership of our Class A common stock and Governance

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

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

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

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

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

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

• exclusive forum provisions in our amended and restated bylaws.

Risks Related to Our Business and Industry

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

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

• accurately forecast our revenue and plan our operating expenses;

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

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

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

• successfully execute strategic acquisitions and partnerships;

• develop a scalable, high-performance technology infrastructure that can efficiently and reliably handle increased usage, as well as the deployment of new features and services;

• comply with existing and new laws and regulations applicable to our business;

• anticipate and respond to macroeconomic changes and changes in the markets in which we operate;

• establish and maintain our brand and reputation;

• adapt to rapidly evolving trends in the ways businesses and consumers interact with technology;

• effectively manage our rapid growth;

• avoid interruptions or disruptions in our AppLovin Core Technologies, Software Platform, o

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Securities Trading Plans of Directors and Executive Officers

During our last fiscal quarter, the following directors and officers, as defined in Rule 16a-1(f), adopted or terminated a “Rule 10b5-1 trading arrangement,” as defined in Regulation S-K Item 408, as follows:

On August 7, 2023, Herald Chen, our President, Chief Financial Officer and a member of our board of directors terminated a Rule 10b5-1 trading plan, which was previously adopted on June 14, 2023 and intended to satisfy the affirmative defense in Rule 10b5-1(c). The terminated trading plan provided for the potential sale of up to an aggregate of 1,200,000 shares of our Class A common stock held by Mr. Chen and was scheduled to be effective from January 1, 2024 until December 31, 2025, or earlier if all transactions under the trading plan were completed. Prior to its termination, Mr. Chen had not sold any shares of our Class A common stock under the trading plan.

On August 31, 2023, Victoria Valenzuela, our Chief Legal Officer, terminated a Rule 10b5-1 trading plan, which was previously adopted on December 19, 2022 and intended to satisfy the affirmative defense in Rule 10b5-1(c). The terminated trading plan provided for the potential sale of up to an aggregate of 150,000 shares of

our Class A common stock held by Ms. Valenzuela and additional shares of our Class A common stock issuable upon vesting and settlement of RSUs granted to Ms. Valenzuela subsequent to the adoption of the trading plan and prior to February 21, 2023. The terminated trading plan was scheduled to be effective from February 13, 2023 until December 31, 2023, or earlier if all transactions under the trading plan were completed. On September 11, 2023, Ms. Valenzuela entered into a Rule 10b5-1 trading plan providing for the potential sale of up to an aggregate of 90,000 shares of our Class A common stock held by Ms. Valenzuela and additional shares of our Class A common stock issuable upon vesting and settlement of RSUs granted to Ms. Valenzuela subsequent to the adoption of the trading plan and prior to December 31, 2023. The trading plan is scheduled to be effective until May 31, 2025, or earlier if all transactions under the trading plan are completed. The trading plan is intended to satisfy the affirmative defense in Rule 10b5-1(c).

No other officers or directors, as defined in Rule 16a-1(f), adopted and/or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as defined in Regulation S-K Item 408, during the last fiscal quarter.

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

EXHIBIT INDEX

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

SIGNATURES

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