Greetings. And welcome to the AppLovin Earnings Call for the Quarter ended June 30, 2021. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ryan Gee, Head of Investor Relations and Strategic Finance. Thank you, Mr. Gee. You may begin.

Yes. Thank you, Alex. And welcome, everyone, to AppLovin’s earnings call for the quarter ended June 30, 2021. Joining me today to discuss our results and key business initiatives are Co-Founder, CEO and Chairperson, Adam Foroughi; and our President and Chief Financial Officer, Herald Chen. Please note that our SEC filings and earnings release are available at investors.applovin.com, where we have also posted a Shareholder Letter discussing our Q2 performance. Before I turn it over to Adam, I’d like to remind you that during the call, we may be making forward-looking statements regarding future events and the future financial performance of the company. These statements are subject to risk and uncertainties that could cause our actual results to different materially from those projected or implied today. For more on these potential risks, please refer to our most recent Form 10-Q filed May 14, 2021, and our Form 10-Q for the second quarter 2021 will be filed in the next few days. That said, you should not rely on our forward-looking statements and predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of the date hereof, and AppLovin disclaims any obligation to update these forward-looking statements except as required by law. Our discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and a substitute for an isolation of our GAAP results. Information regarding our non-GAAP financial results, including a reconciliation our historical GAAP to non-GAAP results, may be found in our Shareholder Letter furnished with our Form 8-K filed today with SEC, as well as at our Investor Relations website. Finally, a recording of this conference call will also be available on our IR website shortly after this call has ended. And with that, I will now turn it over to our CEO, Adam Foroughi. Adam?

Thank you, Ryan. We are excited to have you on the AppLovin team. Thank you all for joining us today. I hope each one of you has an opportunity to read the Shareholder Letter we posted this afternoon, highlighting our second quarter business and financial performance. This is the second earnings period we have had as a public company, and once again, I am extremely proud of the strong execution by our teams this quarter, which resulted in our record financial performance. In the Q1 earnings call, we spoke a lot about how software powered by our first-party data advantage was excelling in the marketplace. Today, we are very proud to give you data that will show you the significant gains we have had in the software business since then. Consumers are downloading roughly 150 billion apps a year and probably half of those through organic discovery on the app stores themselves. Through AppLovin software platforms in the first half of the year, consumers downloaded almost 2 billion installs. Our market share is growing and we have become one of the largest platforms for developers to market to consumers. I will touch on two topics that demonstrate our strength. First is a tremendous performance and prospects for our software business. Since the launch of our machine learning engine AXON, our software platform revenue growth has accelerated for three consecutive quarters. And during the second quarter our software platform revenue more than tripled year-over-year. Improvement in the efficacy of our software has also accelerated customer adoption. In the second quarter, we tripled the number of software platform enterprise customers or SPECs to 366. We also saw significant growth in spend with net dollar based retention of 279% from our existing SPECs. Even when we exclude Adjust growth was just as impressive…

Thanks, Adam, and thanks to everyone for taking time to join us. Our business performed exceptionally well in the second quarter, result driven by the hard work and focus of the global AppLovin team. This momentum and awesome team bolsters our confidence in AppLovin’s integrated strategic approach to the market, namely software fueled by scaled content and data, and in turn, our confidence for future growth and expansion. In addition to all the excellent growth metrics already mentioned by Adam, I’d like to highlight a few additional points from the quarter. First on the software side, our total software transaction value or TSTV grew over 4x year-over-year in the second quarter to an annual run rate of approximately $900 million. That makes us one of the largest and fastest growing players in the category. As a reminder, TSTV which we launched in the first quarter adds back our eliminated intercompany revenue from owned and operated marketing spend. If we do that in order to give you a comparison of the total scale of our software business on an absolute basis and compared to our peers. An additional point on software, although early we are pleased with the progress we are making on our software platform with non-gaming customers, where revenue more than doubled in the second quarter compared to the first. One relevant customer case study is posted on our website, highlighting our success for an app called Fastic. A leading fasting app where we drove 125% increase in installs. Of note, Adjust whose large customer base is well over half non-gaming will also accelerate our growth in this category. Next, as Adam mentioned, we doubled the apps business year-over-year and have a strong pipeline of new evergreen games coming in the short-term. I want to emphasize and highlight the…

Thank you. [Operator Instructions] Our first question comes from Alexia Quadrani with JPMorgan. Please proceed with your question.

Oh! Hi. Thank you. This is David Karnovsky on for Alexia. Adam, your software business clearly accelerating here amid IDFA changes, can you just talk through some of the drivers, what do you think software clients sort of see in your platform versus competing networks or some of the walled garden channels? And then can you just discuss a little bit more the integration of the Adjust, what’s been the experience so far utilizing their sales force customer at your core services and have you found that Adjust can serve as an entry point to new developers that are sort of starting out at launching their games? Thanks.

Great. So the software side obviously is seeing a lot of acceleration and we touched on it last quarter when we highlighted what we thought IDFA impact would be. The changes really govern how third-party share data with first-party and how that data is used for advertising. And in our case we have a lot of first-party data, both scaled 200 million users a month playing our games, scaled across engagement data and then also scaled transactional data, which is very unique. We have got millions of customers paying and having paid in our games. And then that data we are able to put in our machine learning engine AXON to come up with really add recommendations that drive much better performance for the advertiser. We rolled this out in Q4 of last year and you have seen immense amounts of growth on the software side, both in terms of the dollars that people are spending on our platform, which is reflective of the performance and in terms of new clients coming on which doubled year-over-year. We are very confident in this trend going forward. And then in terms of the integration of Adjust, we closed that late April. So through Q2 it was more a work of just integrating them into the team, getting them up to speed on how our software solutions operate. The average ticket size on an Adjust client is tens of thousands a year. Our average ticket size is AppLovin on a software client is roughly $2 million a year of net reported revenue. And as you all know typical ad network margins you can grow set up by a factor of three or possibly even more to figure out how much a typical advertiser is spending on our platform per year. And we look at Adjust and I touch on this a second ago, as an opportunity to go convert 3,000 clients to become AppLovin SPECs and we even convert 7% of those clients to become AppLovin SPECs in the next year we will double our software business.

Okay. Great. And maybe if I just squeeze in one more, just on the decision not to adjust your outlook after the strong quarter, maybe you could just talk through your philosophy that you laid out on the Shareholder Letter to set guidance just one time at the start of the year? Thanks.

Yeah. That’s, I would say is a me thing. I have been operating this business since I started it. Really looking forward with our team to opportunities to execute on the technology and product side years ahead of where we are at and the present, and what we didn’t want to get into is a pattern of trying to update numbers every single quarter and shifting our mindset from a long-term focus that we know creates the most long-term shareholder value to one that’s more short-term focused. Obviously, our business is performing exceptionally well. We have got a lot of assets in place that we believe will give us a path to growth for many quarters and years to come, and so we are very confident that we will continue to put up very strong numbers. But we decided financial guidance should match the way we operate and we will update those annually for you, unless we are going to diverge materially from that guidance.

Great. Thank you.

Thank you. Our next question comes from Stephen Ju with Crédit Suisse. Please proceed with your question.

Hey. Thank you so much. So, Adam, as a follow up question for Adjust, I guess, you are calling out 2,000 gaming and non-gaming marketers spending $11 billion in mobile ad dollars. So you know can you talk about what incremental work do you think you need to do in order to gain more wallet share there? Thank you.

Thanks Stephen. It’s interesting, because the reason we got really excited to do this transaction and it was frankly really difficult to do during the IPO process, but we felt like we had to do it is. We went and crossed our clients with Adjust clients and there was almost no overlap. Adjust has a team that’s based in Berlin and then really they invested going east from there. So a lot of their clients are international and we realized without a sales force, we just didn’t have any sort of penetration into this international client base. We didn’t even know who these customers were and obviously they are huge mobile marketers. So that’s what got us really excited. We saw just greenfield to go operate. We have got 3,000 almost clients that they have got and probably 500 plus of those are big enough to become AppLovin SPECs. So it’s just not going to take a lot of work for us to go convince them if they are already spending substantial dollars on mobile marketing to test out our platform. It’s low cost and then creates massive amounts of upside, and Herald, touched on the case of Fastic, which was one of the earliest Adjust cross sells. But it’s something we are going to be investing heavily into going forward, because it’s such an easy path for us to go tackle to create immense amounts of growth in that software business.

Thank you. Our next question comes from Jason Bazinet with Citi. Please proceed with your question.

Okay. I am going to apologize in advance, if this is a dumb question because I confess I am still trying to wrap my head around the new KPI that you gave last quarter. But the software platform revenue year-over-year grew from $41 million to $146 million, up $105 million, but business apps revenue went from $96 million to $162 million, up only $66 million. Is there something in the middle there that is worth highlighting that may have shrunk?

So business apps, just to be clear is, advertising from third-party typically ad networks within our own mobile game applications and then business software is obviously are our app discovery solution and the max solution, and now Adjust, so the software and net revenue that we report. That business grew exceptionally quickly with the advantages that we thought we had going into the changing landscape. One of the things we touched on in the first quarter earnings call is, our other prediction on IDFA changes where the prices in the ecosystem would drop on iOS and that flows through to business publishing. Now despite that, business publishing had a quite sizable growth. The mobile gaming ecosystem doesn’t tend to grow that quickly on a year-over-year basis, so despite the lower pricing in the ecosystem, we still were able to generate outsized growth in that business as well.

And maybe I can add on to that.

Okay. Yeah. Yeah.

Yeah. So we -- within the business category, originally we had the apps and the software. We broke it out pretty for you before, but now we are explicitly showing the number of customers on the software side. We still in the disclosure have the enterprise customers, which would total up to the aggregate business revenue, which includes both the business apps revenue and the software revenue. Business apps revenues you will see in the letter grew 70% in the quarter, and then, of course, the software side grew to a much faster rate of 256%

Okay. Can I ask maybe one other dumb question. If I take the clients to generate over $125,000 spend per quarter, if I multiply those two numbers together and I compare it to the software platform revenue, it used to be sort of like a rounding error. In this quarter, it jumped up whereas like $113 million or something like that. Is that from the Adjust acquisition or are you beginning to get more traction from business accounts to generate less than $125,000, what’s becoming sort of a larger number? Thanks.

Yeah. I can take that one as well. So, in the letter we do show you what the business did without Adjust and with Adjust. And so, without Adjust, the average SPEC client spent $150, $100, sorry, $519,000 in revenue for the quarter. So it was a much -- that’s a much bigger increase over the prior quarter. Then, the Adjust SPECs, which is the incremental 129 customers, they do have a lower average. So the total overall average when you combine them was the 364.

Okay. Got it. Thank you very much.

Thank you. Our next question comes from Youssef Squali with Truist Securities. Please proceed with your question.

Hi. Great. Thank you and guys congrats on a solid quarter. So, two questions, one, a follow up on the Adjust acquisition. I was just wondering if maybe you can speak to the rollout of the or the cross selling potential of the -- of that 250 salespeople? And just kind of how quickly do you think you can ramp that up and kind of what’s baked into your published guidance so far? And second, and obviously, the numbers speak for themselves, but just going back to IDFA, I was wondering if you can comment on the percentage of iOS users that have upgraded to 14.5 or later and what kind of impact have you seen either on opting rates or basically on that on that sliver of the business? Thank you.

Thanks, Youssef. I will answer the second first, just because it is quicker. We have seen about 80% of iOS devices are now updated to 14.5 or later and consent rates are coming in quite a bit higher than, I think, a lot of the folks in the industry had projected. It’s different by app-by-app, but anywhere between 20% to 25% on the low end and 60% to 65% on the high end and it lands on an average to around 35% to 40% or opting into sharing information. So that’s on IDFA changes. On the Adjust piece, again, Q2 was just integration, get the team trained up. It takes a little bit of time for clients to come on our platform and actually ramp up, because there’s learning costs and a learning timeframe. So, really we will start seeing the effects of Adjust. Starting in Q3 really taking shape in Q4 and impacting next year quite materially. As such, we didn’t project too much into our numbers at all from Adjust cross-sell this year. We are already starting to see though quite a lot of cross-selling activity happening, because frankly, it really isn’t a hard sell. These are mobile marketers. They know how to spend dollars on mobile. They are performance buyers. And as I touched on in my summary too, we have grown to become such a big source of mobile traffic acquisition that it’s really easy for their salespeople to convince one of their clients who hadn’t heard of us before to go test on our platform.

Okay.

And Herald, I don’t know if you want, yeah, if you want to give anything explicit on the guidance there that we included in terms of Adjust?

In terms of the guidance we have done we are going to acquire Adjust at the time, so our guidance for the year we gave in the first quarter it was inclusive of that and the two acquisitions we announced in the first quarter.

Got it. Okay.

Yeah. So we included their numbers and not much outside from cross sell, so that creates quite a lot of upside for us in the future.

Okay. Okay. Thanks for that clarification. That was actually important. Thank you.

Thank you. Our final question comes from Brian Nowak with Morgan Stanley. Please proceed with your question.

Hi, guys. It’s Matt on for Brian. Thanks for taking the question. So I guess for the software platform I think you guys said in the letter you had about 40% organic growth sequentially versus 1Q. How did AXON contribute to that growth versus contextual products? And did that change at all in terms of like the strength and the contextual product as you move through the quarter and maybe more people were upgrading to iOS 14.5 or higher? And then, you mentioned, software gaining share -- continuing to gain share this quarter, who in the ecosystem do you think are the share donors at this stage? Thanks.

Hi, Matt. So let me answer again second first, if it was top of mind. We think the ecosystem itself is still growing quite quickly, in our space in the last 24 hours you have seen Unity report great numbers, Iron Source see great numbers. We obviously reported industry-leading growth numbers with that triple-digit software growth and 40% sequentially. What we think is happening is that the marketing platforms are just improving and they are improving at a really quick pace, which increases the pie and it’s not that we are taking from another company, it’s that the market’s growing, we are just outpacing the growth of the market, which is leading to all of the key players in the ecosystem though growing, as well as the publishers themselves who lean on advertising to grow their business. And then on the first one, the 40% growth sequentially, can you just rephrase the question for me, so I can remember exactly what to answer?

Oh! Yeah. Of course. It was just about the contribution to that growth from AXON versus contextual advertising it and you did…

Yeah. I got. I got it. Yeah.

… shift may be towards the end?

Yeah. So if you recall we touched on in first quarter earnings, our advantage we felt like going into the IDFA change was compared to our peers is that we weren’t going to fall back from a completely personalized solution to a completely contextual solution that lacked the personalization you get with data. Our advantage truly comes from very scaled first-party data. We have got $200 million users playing games every single month that we have got good engagement data on. We have got millions of customers having paid us over the history of our gaming business. All of that data remains intact and -- in our models with or without IDFA, and so going into the quarter, we felt like we had advantages. We articulated it for you all in Q1. And then, obviously, you have seen in the step-up in performance that 3x growth in the software business and that 40% quarter-over-quarter and a huge ramp-up in clients that we are able to outperform in the marketplace because of those investments we have made over the last couple of years.

Great. Thank you.

Thank you. Our next question comes from Angie Song with Oppenheimer. Please proceed with your question.

Hi. Thank you for taking my call. I am actually speaking on behalf of Martin Yang at Oppenheimer. Could you talk to us a little bit about your first party games pipeline for 2021 and entering into 2022? And are you planning on expanding into more genres or expanding market opportunities? And also what is your long-term revenue mix goal for first-party games versus software?

So, thanks for the question. The game pipeline itself, while we don’t talk about games, because we operated as a portfolio, what we can tell you is this. We started the game this business three years ago roughly. But most of our investments and creators coming into our ecosystem to build content for us has really happened in the last 18 months. We have now got 3,000 roughly game creators around the world that are expertise across nearly every category of mobile gaming building content for us. Now we pulled out this notion of an evergreen title. These are titles that take a substantial amount of investment to go built usually in the millions of dollars of R&D cost, but also more importantly one year to two years of development time. Since our gaming business is so new, you haven’t yet seen a pipeline of content rollout from us. Yet, we are working on it and you have seen it reflected in our expenses. The first game that came organically launched last year in November a Project Makeover and within two months was top 20 grossing globally mobile game, one of the fastest growing of all time. So what gets us really excited is that in the second half of the year we are now going to have a constant pipeline of big games rolling out, we will have a handful coming over the next few months that will launch. And we believe and have confidence in we will be able to clear this threshold that we define as an evergreen title at least $100 million of revenue per title per year with an outlook to many years to come of being able to generate that. And then, do you mind repeating the second question as well?

Mix of software and apps.

So, do you want to answer that one, Herald?

Yeah. Sure. Sure. Sure. Look we are -- our strategy is to grow both sides of the business and be opportunistic where we can be. Of course, as you can see in this quarter, our software business has tremendous growth in a big market potential and so that business we see quite robust growth rates for quite a long time. On the IP side, look we have gone from zero to several billion dollars in less than three years. And as Adam just mentioned, a lot of that has come in the very recent few quarters and so that should be accelerating as well as we get more studios, launching new games. We improve our live ops behind those games. And over time, we don’t target necessarily a mix. We are looking to grow both businesses as efficiently and as quickly as possible. Again, we see the software business though, now that it, given the margin structure as we mentioned will drive significant EBITDA and if it grows faster than apps, we will increase margins. And as a percentage of overall revenue, again not that we are targeting it, I think, we are 14% in 2020 for the year, in this quarter where software is now 22% of the business, because of the accelerated growth.

Yeah. And as that -- one thing to add to is as we -- as you think about the two revenue streams, the software revenue stream is just much higher value in terms of conversion to EBITDA. When you build games at least upfront with our strategy, we are generating scale. We are investing heavily in the user acquisition. Now, we have cost synergies and for that you can just take that TSTV number minus the third-party software reported revenue number. And that was annualized $300 million a year of UA savings that we have because of our integrated solutions. But still we are investing a lot and growing that gaming business because we want the audience. That software business, every incremental dollar is exceptionally high margin. So the way we look at our business is, if we can grow the software business really quickly, our EBITDA will continue to improve and that’s why when you look at the numbers this quarter, yeah, you can take the revenue beat and the EBITDA beat, and you notice the dollar-for-dollar revenue beat almost entirely flows through to EBITDA and that’s because software is performing so well.

Great. Thanks for the color. Congrats on a great quarter.

Thank you. This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.