Welcome everyone to the AppLovin earnings call for the first quarter ending March thirty-first, twenty twenty-three. I'm David Hsiao, Head of Investor Relations. Joining me today to discuss our results are Adam Foroughi, our Co-founder, CEO, and Chairperson, and Herald Chen, our President and CFO. Please note our SEC filings as well as our shareholder letter discussing our first quarter performance are available at investors.applovin.com.
During today's call, we may be making forward-looking statements regarding future events, market expectations, the future financial performance of the company, and the strategic review of our apps portfolio. These statements are based on our current assumptions and beliefs, and we assume no obligation to update them except as required by law. Actual results may differ materially from the results predicted. We encourage you to review the risk factors in our most recently filed Form 10-K for the fiscal year ended December thirty-first, twenty twenty-two.
Additional information will also be set forth in our quarterly report on Form 10-Q for the fiscal quarter ended March thirty-first, 2023. We will also be discussing Non-GAAP financial measures. These Non-GAAP measures are not intended to be a substitute for or superior to our GAAP results. Please be sure to review the reconciliations of our GAAP and Non-GAAP financial measures in our shareholder letter available on our investor relations site. This conference call is being recorded and a replay will be available on our IR website. I'll turn it over to Adam for some opening remarks, then we'll open up for Q&A.
Good afternoon, everyone, and thank you for joining us today. We had a strong Q1 on our software platform business with significant growth quarter-over-quarter. This was directly attributable to our advertisers seeing improved performance on our platform and returning to more of a growth mindset, leading them to more confidently spend with us.
Further, we've always talked about mobile gaming being a resilient category, and we always believed it would be stable even in weaker economic times. We're seeing just that. At AppLovin, our teams have been working tirelessly over the past few quarters, focusing on several key growth initiatives. Firstly, we have been working on significant upgrades to our advertising technology. This has been a major focus for us, and we are starting to see early benefits from these efforts.
Secondly, we have been working hard to unlock the synergies from our Wurl acquisition by bringing our advertising platform into CTV. While we don't expect this to have a material financial impact in the near term, we are excited about the early data we are seeing in this area. Finally, we're extending our marketing solutions to carriers and OEMs through our Array business.
Although this is still in the early stages, we are pleased with our progress. At the same time, we have been optimizing our gaming business and are now running at a more efficient level. We are confident that this business will be a stable source of cash flow going forward. Now, let's talk a little bit more in detail about AXON improvements.
We have been discussing the development of AXON 2 for a year now, and have always communicated that our strongest growth would come from advancements in our own technology. It's been challenging to explain what this means, but with the exploding popularity of consumer-facing AI tools, we can draw a simple analogy.
Upgrading from AXON 1.0 to 2 is no different than OpenAI moving from ChatGPT 3 to 4. Our models can always be improved, and our entire business is powered by the evolution of our technology. The enhancements to our machine learning and AI are not a one-time thing, but a series of upgrades over time. As we make these, there is the potential for significant lifts to both revenue and cash flow.
We are currently in the midst of a staged rollout of AXON 2, and we are very excited about the long-term potential of this new technology for our partners and our business. We are extremely pleased with so far this year. We believe that our technology and innovation will continue to be the driving force behind our success, and we are committed to continuously improving our business. Thank you again for joining us today, and we look forward to sharing more updates with you in the future. With that, I'll hand it off to Herald.
Thanks, Adam, and good afternoon, everyone. I'd like to begin by expressing my gratitude to Ryan G. for his leadership of our IR activities over the past few years. Additionally, I want to extend a warm welcome to David Hsiao, who joined AppLovin in early 2021 and has taken on the head of IR role for the company.
As Adam mentioned, we had a solid first quarter exceeding expectations across revenue, EBITDA, and cash flow. Importantly, in addition to financial performance, we're just as pleased with the focused execution and progress achieved by our teams during the quarter. In particular, as it pertains to our software platform growth initiatives. To touch on a few key financial highlights, in Q1, our revenue reached $715 million, and our adjusted EBITDA hit $274 million, surpassing the high end of our guidance.
Our adjusted EBITDA margin was 38%, which was the highest run rate margin we've had since 2018. Our software platform segment was a standout performer, recording record quarterly revenue of $355 million, which was a 16% increase over the prior quarter. Our software platform adjusted EBITDA grew 18% quarter-over-quarter to $219 million, translating to a 62% adjusted EBITDA margin. Our software platform growth over the past 2 years has been robust, with Q1 '23 revenue exceeding Q1 '21 revenue by over 4x . This represents a 100% compounded annual growth rate. Additionally, software platform adjusted EBITDA increased from $59 million in Q1 '21 to $219 million in Q1 '23, a strong 90%+ CAGR.
As Adam noted, while it's challenging to predict the precise timing and impact of our software platform growth initiatives, we are optimistic that they will drive meaningful revenue growth and high margin cash flow. Turning to the app segment. We had $361 million of revenue in Q1, a 9% decline from prior quarter, which includes the impact of optimizing certain studio assets.
Q1 apps adjusted EBITDA was $55 million, and adjusted EBITDA margin was 15%. The margin was slightly lower than recent quarters due to the launch of several new games, leading to an increase in user acquisition spend as a percentage of revenue. At a consolidated level, we are pleased to report that we have robust free cash flow of $283 million in Q1, due in part to the growth of our high margin software platform business.
We also benefited from several significant customer payments delayed from prior periods as well as lower cash taxes in the period. With regard to guidance for Q2 2023, we are targeting $710 million - $730 million in revenue, with $280 million-$300 million in adjusted EBITDA, which equates to a 39%-41% adjusted EBITDA margin. We anticipate continuing growth from our software platform business offset to some degree by the apps business.
The impact of the AXON 2.0 rollout will be a key factor in the quarter. As previously mentioned on our calls, we expect free cash flow to be approximately 50%-60% of adjusted EBITDA on a normal run rate basis, noting that we may have some deviations from that in any particular quarter.
From a cash perspective, at the end of Q1, we had $1.2 billion of cash on the balance sheet, a clear testament to our strong financial position and cash generation. During the quarter, we repurchased approximately $76 million of stock. Year to date through May 8th, we repurchased $202 million of stock, leaving $210 million on our $250 million authorized buyback program.
As we look toward the future, we're determined to maintain our position as a market leader by investing in our team, solutions and key growth initiatives. Our strong financial position and cash generation allows us to take calculated risks and make strategic decisions to keep AppLovin at the forefront of the industry. It's an exciting time for AppLovin, and we're excited by our future prospects.
Now I invite the moderator to lead us through Q&A.
Thank you so much. Like you said, we will now begin the question-and-answer portion of our call. Be sure to unmute your equipment before asking your question and we'll get through as many questions as we can in the time allotted. Our first question is going to come from Martin Yang with Oppenheimer.
Hi. Good afternoon, Adam and Harold. My first question is on the strength for software platform and how much did AXON 2 or was AXON 2 a meaningful driver for that performance sequentially?
Hey, Martin, thanks for the question. That really AXON 2 we talked about, we're now in the midst of a stage rollout, so that came after the quarter. In Q1, we did see improvements in our technology is fundamentally core to our business on an ongoing basis. We also saw more confidence from advertiser spending on our platform as they were seeing good results, and the mindset in the ecosystem is starting to return back to growth. We're seeing good industry and momentum as well.
Got it. Would you say the sequential improvement was more in line with market as opposed to your taking share from someone else?
I would talk about it not in line with market, because I don't think the market grew 20% quarter-over-quarter. much more so, efficiency gains in technology, our advertisers investing more with theirselves. We don't really think about this market as zero-sum. It's not a we take an extra $0.20 and someone else loses $0.20. We think about it as additive to the market. Our improved efficiency creates gains in the market for all of our partners, and peers by default, would benefit from that as well.
Thank you. My second question is more on Google's, including AppLovin as well as some of, three other players in their open bidding or Real-Time Bidding. Can you maybe comment on the long-term implication of that and how that help or impact your business? Thank you.
Yeah, we're super bullish on this. We've been. We really brought MAX to the market originally with Facebook, both us and them being early stage, adopting bidding, believing that it's a much more efficient way to go. Google now leaning in for the first time in the industry to external solutions is a huge win for the ecosystem. We think them bringing their demand more efficiently to the market will create upside for the whole market.
We've been a partner of theirs in this movement for a while. It's now open to all publishers in the ecosystem. MAX obviously is the majority share of mediation in gaming, we can extend their demand in a very efficient manner to the bulk of mobile gaming publishers, and we're excited about that.
More broadly speaking, we've got a great relationship with Google, and we continue to build on that.
Thank you.
Moving on to Ralph Schackart with William Blair.
Hey, Adam. Hey, Herald. two questions if I could, please. Adam, in the letter you talked about partial stabilization in the mobile ad market. Can you maybe talk about the linearity that you saw throughout the quarter and stabilization? You know, how did you exit the quarter versus how you entered it? I have a follow-up, please.
Yeah, I mean, we're seeing just generally, and this is true in a lot of my conversations with mobile game developers as well, a lot more confidence in the ecosystem now that we've gotten through last year. The economy seems a little bit more stable. We feel like we're reaching that trough point. Mobile gaming developers are starting to be more growth mindset oriented, which is great for our business.
As those dollars come in, it will lead to growth. That confidence builds over time, so obviously reflected in our guidance. You saw, and in Herald's commentary, a reference to the software platform continuing to perform really well. This isn't a one-time event or a zap function. We're very confident where this business is going.
Great. Maybe kind of leading to the software business. You talked about the strong growth, and, you know, it seems like the market's sort of stabilizing. I know you're not giving full year guidance, but anything that you're seeing currently that, you know, would preclude this growth rate sort of persisting through 2023? Just sort of broadly speaking, how should we think about growth this year on the software business? Thank you.
We're really looking at it, the sort of building blocks. Last year, obviously, was difficult for the whole ad ecosystem and the economy in general. Now we've got one good quarter in place. The biggest change for us in our business today is we're rolling out AXON 2. This is a material upgrade of our core platform, and we're really excited about it.
The team working on this is phenomenal. Getting this out to market could become a catalyst for our own growth. We've always talked about our position in this market is quite large, in the mobile gaming ecosystem. If we're able to become more efficient, we'll create growth across the whole sector. That's what we're really excited about.
We think this, if it continues to go well as we roll this out throughout the rest of the year, we'll be able to create growth in this ecosystem irregardless of what's going on around us.
Okay. Thank you.
We'll move on to David Pang with Stifel.
Great. Thanks. I was just hoping to see what your expectations are for the ad spend flowing through MAX in 23. If you could remind us what your near-term and intermediate targets are.
Those are not numbers we've really disclosed. We do see good momentum on MAX as the market becomes more efficient and you get more header bidders live. That usually creates increases to pub spend on the platform, that creates gains. Those ARPDAU gains that these publishers get allows them to then go market more.
As systems like ours become more efficient, it gives them a better place to go market themselves, creates growth. We're seeing good momentum on that platform, very high stickiness across our publisher base. The MAX product is in a really good spot. We're just not disclosing the exact numbers on that product though.
Just as one follow-up, like could you provide a ballpark of what portion of the spend is currently on RTB?
No. We've talked about real-time bidding as being the majority of the platform already, and Google taking it to the vast majority as that product scales.
Got it. Thanks.
D.A. Davidson's Franco Granda has the next question.
Hi. Thanks for taking my questions here. I like to reference AXON One as the same way as AMD references its architectures by saying that they age like fine wine. Are you approaching AXON Two in a similar way, where the efficiency continues to build on top of itself as you continue to iterate on it?
Yeah. I mean, the world we live in today with these AI technologies is the fastest evolution in change in technology we've ever seen in our lifetimes. The rate of innovation is just incredible. As we go to AXON Two, there's, on an ongoing basis, incremental improvements that we can make to the platform. That'll fuel our business for some time.
Then there's the incremental uptick to ChatGPT 3 and then ChatGPT 4 and ChatGPT 5. This core expertise is gonna drive our business for a very, very long time. These technologies are only gonna get more powerful. Because of our market leading position, we've got so much volume flowing through our systems that efficiency gains from these technologies as they evolve will generate lifts to revenue.
We've always talked about how our software business technology-derived lift lifts to revenue end up very high flow through, and that's what we're excited about.
Awesome. Thanks for that color. Then going to the apps business, it seems like, you know, the in-app purchases did well in the quarter on a relative basis, then the advertising was where it kind of fell off or dipped a little bit. Any trends to note there? Was it just the ad spend softness?
I think in general, there was some ad trend softness and some seasonality coming off the fourth quarter. We about half the delta on the revenue from quarter-over-quarter on the app side actually came from us closing down some studios or divesting studios as well. There's some, I guess, call it one-time impacts in terms of the mix there.
Okay. Thanks.
We'll now hear from Bernie McTernan with Needham & Company.
Hi, this is Stefanos Crist calling in for Bernie. Thanks for taking our questions. Can you just remind us on point number 3 of your growth drivers about extending, the marketing platform to carriers and OEMs? You know, what gives you the confidence you have the technology and relationships to do that organically?
Yeah. I mean, what gives us the confidence there is we're so good on the marketing technologies in our core business, and that industry is quite nascent. There's only a couple of players in there. We all end up having to play a similar game in the mobile gaming category. In that category, we've got the market-leading technologies, and we've proven that for a very, very long time. Extending that core efficiency out to the carriers and OEM space seems like a very smart thing to do. Incremental to that, we're bringing some new products to the carriers and OEMs too, that we think will make a material impact to their businesses and in turn, ours. We're excited about where that can go.
I will caveat it with new businesses that we're going after that are related to our core business aren't gonna move the needle on a billion-dollar-plus software business in the short term. These are businesses that we expect when we're talking to you all in three years, we're talking about big parts of our business. This is not a short-term bet. This is one that we're investing into and expect to pay off materially in the long term.
Great. Thank you. Just speaking of the competitive environment, have you seen any changes there with the combination of Unity and ironSource, I think is how it's run? Thank you.
We can't really talk to peers and what they're up to, and we just know that bringing two big companies together in integration takes time. It's difficult. We also know that in this ecosystem, we need them to do well. They need us to do well. At all marketing companies drive the growth of our partners. So long as every company is operating efficiently, we'll see growth. We did grow a lot in the quarter, and so our products have been very, very sticky, and we expect that to continue.
Thank you.
Eric Sheridan with Goldman Sachs has the next question.
Thank you, so much. Maybe two, if I could. Coming back to the apps business, is there anything you're calling out in terms of new game launches we should be keeping in mind between now and the remainder of 2023, just so we better understand some of the potential mismatches between revenue growth and investing behind those game launches and how it might impact on the margin landscape?
That would be number one. Number two, coming back to the broader advertising landscape. It sounded like you talked a little bit about it already, but I wanted to go a little bit deeper into the connected TV opportunity and how you're thinking about that helping widen out potential further advertiser diversity and density in terms of your platform over the medium to long term. Thanks so much.
Thanks, Eric. I'll take the apps question first. Overall, we're very pleased on getting the other side of our major optimization of that portfolio of apps. We're down to about 11 studios, which we're investing against. We do have a number of new game launches coming. I think out of every studio, they've got a game plan to launch new games.
This quarter's impact, I think we've always said it'd be in the mid-teens margin and on a run rate basis. I think we remain there, Eric. If there was a whole bolus of games that we thought were really awesome, you know, that margin could come down. I think it would still be a double-digit number. Right now we see it, you know, really building into the business model of regularly launching games. We think the margin should remain in that mid-teens range. On the CTV question, Eric, we obviously invested in Wurl a little over a year ago.
They've got pre-existing relationships with a lot of the media companies, and you think of them as like a CDN for these companies, but they help them bring their content online and schedule the content, build effectively channels on the connected TV devices across all the various devices in that fragmented space. Those pre-existing relationships were what we were excited about. They also have an SSP business, and so we're already in market. We're plugging in our app discovery solution through their SSP to connected TV inventory.
This is early stage, so we talked about no significant impact to our financial performance in the near term. The data is strong. The offering is really cool for mobile app developers. There hasn't been a scaled performance-based solution in this category really ever in that manner on a performance basis. We charge for performance. The advertisers that are leaning into it are leaning into it and very excited by the potential of us scaling that offering.
We have time for one additional question, which will come from Matthew Cost with Morgan Stanley. Matt, if you'll go ahead and press star six for us. Great. Thank you.
Hi, this is Dave on for Matt. Apologies if I missed this earlier. Are you able to give a sense of timeline on the full release of AXON 2? I know earlier you said that you were rolling it out. How should we think about the financial impact, if you can share any color there?
I'll talk about the timeline. Herald can cover financial impact, but we're in market rolling it out in stages. This is a complex technological upgrade that we are excited by the early results, and we've reflected confidence in our guidance going forward. Yeah, just on impact, I think earlier we did say that there was no impact because it had not been rolled out at all in the first quarter for AXON 2.0. Going forward, it is still difficult to predict the timing of the rollout and then ultimately the impact financially of the technology.
What we do know is the technology is superior to AXON 1.0. Just like as Adam said in his script, that we see what ChatGPT does from 3 to 4 or 4 to 5. You know, we know it's better technology, it's more effective, it's more efficient. We do believe that there will be significant impact on the software line. When it hits is difficult to predict. The other thing we also know, though, given the software margins, we do think a significant amount of that revenue does flow through to the bottom line. Sort of be a very high percentage increase in the margin as well.
Great. Thank you.
This does conclude the question and answer session for this quarter. We thank you all so much for joining us today. Enjoy the rest of your day, and we will see you next time.
Thank you. Thank you.