Greetings, and welcome to the AppWizard 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. 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 our Co Founder, CEO and Chairperson, Adam Farogi and our President and Chief Financial Officer, Harold Chen. Please note that our SEC filings and earnings release are available at investors. Applevin.com, where we have also posted a shareholder letter discussing our 2Q 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 risks and uncertainties that could cause our actual results to differ 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 2nd That said, you should not rely on our forward looking statements as 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 Our discussion today will include non GAAP financial measures. These measures should be considered in addition to, Asserts for today are not 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 ks filed today with the SEC as well as at our Investor Relations website. Finally, a recording of this conference will be available on our IR website shortly after this call has ended. And with that, I'll now turn it over to our CEO, Adam Froge. 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 Q2 business and financial performance. This is the 2nd earnings period we've had as a public company.
And once again, I'm 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 1st party data advantage was excelling in the marketplace. Today, we're very proud to give you data that will show you the significant gains we've had in the software business since then. Consumers are downloading roughly 150,000,000,000 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 2,000,000,000 installs.
Our market share is growing and we have become one of the largest platforms for developers to market to consumers. I'll touch on 2 topics to demonstrate our strength. First is the 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 3 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 Q2, 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 2.79% from our existing specs. Even when we exclude Adjust, growth was just as impressive with specs more than doubling to 237 and software revenue more than tripling. Our average quarterly revenue per spec, excluding adjust, was also up 51% year over year to an all time high.
We're focused on growing our client base, which in turn drives up pricing in our marketplace. As with most software businesses, ours included, There is a high flow through of incremental revenue to EBITDA. This material growth led to us achieving record EBITDA performance. Looking forward, we're excited to be integrating the Adjust team into our business. Here's a simple way to think about this opportunity.
If every one of the 250 sales and marketing people on the Adjust team convert just one client Out of their 3,000 clients in the next year into an AL spec, our software business will double. Given the favorable growth and margin profile of our software business, we believe it will be a key driver of our long term value creation. The second point I'd like to highlight is our differentiated approach to mobile content. We are unlike traditional mobile gaming publishers. Our top priority is to generate scaled first party data across a wide audience.
Larger scale and first party data Our targeting capabilities, ultimately leading to the exceptional growth in our higher margin software business as we saw this quarter. We've invested heavily in apps over the past 3 years and now have an annualized revenue of more than $2,000,000,000 Growing this business organically 80% year over year. Even more importantly, we have one of the largest pools of mobile development talent in the world With close to 3,000 content creators across 16 global studios with expertise in nearly all popular mobile gaming categories, Building content exclusively for us. We were the number one publisher globally by downloads in the Q2 according to Sensor Tower. While many of the gaming teams we have invested in are relatively new to Avleben, the majority of those teams have been working tirelessly on new content.
We have a handful of new evergreen titles planned for launch in the second half of the year. We use the term evergreen For titles that we believe can have a meaningful impact on our P and L at over $100,000,000 of annual revenue for many years. This pipeline of content and ability to scale more hits like Project Makeover, Workscapes and many others is what makes us very confident in the prospects of this business for years to come. To summarize, we had a great Q2. Our record performance was a result of our unique and integrated business model powered by our strong technology and a great team.
The fact that a business at our software run rate grew organically year over year faster than any other scaled advertising solution, Despite what many in our industry anticipated would be a significant growth headwind with regards to data privacy, Speaks to the unique insights afforded to our software engine from our proprietary first party data, our market share gains And to the tremendous opportunity for growth ahead of us. Now before I hand it off to Harold to highlight financial performance, I'd also like to announce that Asha Sharma has recently joined our Board of Directors. Asha is the COO of Instacart And has held successful senior roles at Facebook, Porch and Microsoft. She is a proven tech operator and leader And we're very excited to be working with her. With that, I'll pass it to Harold.
Thanks, Adam, and thanks to everyone for taking time to join us. Our business performed exceptionally well in the Q2, results 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 $900,000,000 that makes us one of the largest and fastest growing players in the category.
As a reminder, TSTV, which we launched in the Q1, adds back our eliminated intercompany revenue from owned and operated marketing spend. 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're making on our software platform with non gaming customers, Where revenue more than doubled in the 2nd 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 scale and depth of both our apps portfolio and our development capabilities, which gives us strong diversification, Business model durability and paths for organic growth in this business. With regard to cash flow, as Adam mentioned, we delivered record adjusted EBITDA. We grew more than 200% year over year and over 40% quarter over quarter to $184,000,000 Margins improved to 27%.
A big reason for this expansion is the growth of our software platform, which operates at a much higher margin than our apps related businesses. Therefore, as our software business grows, it can drive meaningful adjusted EBITDA growth and margin. One last quick highlight, Our combined Q2 revenue growth and EBITDA margin led us to a rule of measure of 150%. Moving to 2021 outlook. We have strong momentum for the second half of twenty twenty one and we are confident that we can deliver against our organic financial outlook Provided previously, which was revenue between $2,650,000,000 to $2,700,000,000 and adjusted EBITDA between $680,000,000 to 700 Importantly, we see several opportunities for added growth over the next several quarters, in particular, given the Again, thanks for taking time today.
Operator, please open the line for questions.
Thank you. Our first question comes from Alexia Quadrani with JPMorgan.
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 are seeing in your platform versus Competing networks or some of the lost garden channels? And then can you just discuss a little bit more the integration of Adjust?
What's experience so far utilizing their sales force across promote your core services? And have you found that Adjust can serve As an entry point to new developers that are sort of just starting out or 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 3rd parties share data with 1st parties and how that data is used for advertising. And in our case, we have a lot of first party data, both scaled 200,000,000 users a month playing our game, scaled across engagement data and then also scaled transactional data, which is very unique.
We've got millions of customers paying and having paid in our games. And then that data, We're able to put in our machine learning engine Axon to come up with really ad recommendations that drive much better performance for the advertiser. We rolled this out in Q4 of last year and you've seen immense amounts of growth on the software side, both in We're 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 of 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 1,000 a year. Our average ticket size at App 11 on a software client It's roughly $2,000,000 a year of net reported revenue. And as you all know typical ad network margins, you can grow that up by a factor of 3 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 touched on this a second ago, As an opportunity to go convert 3,000 clients to become AppLovin specs, if we even convert 7% of those clients to become AppLovin specs, In the next year, we'll double our software business.
Okay, great. And maybe if I could 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 You know that you laid on the shareholder letter to set guidance just one time at the start of the year? Thanks.
Yes. That's I would say is a me thing. I've 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're at in 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 So one that's more short term focused. Obviously, our business is performing exceptionally well. We've got a lot of assets in place that we believe Will give us a path to growth for many quarters years to come.
And so we're very confident that we'll continue to put up very strong numbers. So we decided financial guidance should match the way we operate and we'll update those annually for you all, Unless we're going to diverge materially from that guidance.
Great. Thank you.
Thank you. Our next question comes from Stephen Ju with Credit Suisse. Please proceed with your question.
Okay. Thank you so much. So Adam, as a follow-up question for Just, I guess, you're calling out 2,000 gaming and non gaming marketers spending $11,000,000,000 in mobile ad dollars. So 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. And it's interesting because the reason we got really excited to do this transaction 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're huge mobile marketers.
So that's what got us really excited. We saw just greenfield to go operate We've got 3,000 almost clients that they've 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're already spending substantial dollars on mobile marketing to test out our platform. It's low cost and then creates massive amounts of upside. And Harold touched on the case of Bastic, which was one of the earliest Adjust cross sells, but it's something we're going to be investing heavily into going forward because it's such an easy path for us to go tackle
Our next question comes from Jason Bazinet with Citi. Please proceed with your question.
Okay. I'm going to apologize in advance if this is a dumb question because I confess I'm still trying to wrap my head around the new KPIs that you gave last quarter. But The software platform revenue year over year grew from $41,000,000 to $146,000,000 to up $105,000,000 The business apps revenue went from 96 to 162, up only 66. Is there something in the middle there It's worth highlighting that may have shrank.
So business apps, Just to be clear, is advertising from 3rd party, typically ad networks within our own mobile game applications. And then business software is obviously our App Discovery solution and the Mac solution and now it does. So the software 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 Q1 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 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.
Can I ask? Yes, yes.
Yes, sure. Yes, so we within the business category, originally we had the apps and the software. We broke it out for you before, but now we're 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'll see in the letter, grew 70% In the quarter, and then of course the software side grew to much faster rate at 2.56.
Okay. Can I ask maybe one other dumb question? If I take the clients that generate over 125,000 in the spend per 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 upwards like, I don't know, dollars 13,000,000 or something like that. Is that from the Adjust acquisition?
Or are you beginning to get more traction from Business accounts will generate less than 125,000 words becoming sort of a larger number. Thanks.
Yes, 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 $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.
Great. Thank you. And guys, congrats on a solid quarter. So two questions. 1, a follow-up on the Adjust Acquisition, I was just wondering if maybe you could speak to the rollout of the For the cross selling potential 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 could 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 opt in rates or On that sliver of the business?
Thank you.
Thanks, Youssef. I'll answer the second first just because it's quicker. We've 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'll 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're 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, their performance buyers. And as I touched on in my summary too, we've 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 out our platform. And then Harold, I don't know if you want to give anything explicit on the guidance there that we included in terms of adjust?
In terms of the guidance, we had known we were going to acquire Adjust at the time. So our guidance for the year, when we gave it in the Q1, it was inclusive of that and the 2 acquisitions we announced in the Q1.
Got it. Okay.
Yes. So we included their numbers and not much upside 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, Glenn.
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 in the contextual products 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.
Hey, Matt. So let me answer again second first, just to top of mind. We think the ecosystem itself is still growing quite quickly. In our space in the last 24 hours, you've seen Unity report great numbers, IronSource a great numbers. Obviously reported industry leading growth numbers, with that triple digit software growth and the 40% sequentially.
What we think is happening is that the marketing platforms are just improving and they're improving at a really quick pace, which Increase is the pie. And it's not that we're taking from another company. It's that the market's growing. We're just outpacing the growth of the market, which is leading to All of the key players in the ecosystem, they're 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's the answer?
Yes, of course. It was just about the contribution to that growth from Axon Versus contextual advertising and feedback.
Yes. I got it. Yes. So If you recall, we touched on in Q1 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've got 200,000,000 users playing games every single month that we've got good engagement data on. We've got millions of customers having paid us over the history of our gaming business. All of that data remains intact and is 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've seen in the step up in performance that 3x growth in the software business and that 40 Quarter over quarter and the huge ramp up in clients that we're able to outperform in the marketplace because of those investments we've 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'm actually speaking on behalf of Martin Yang at Oppenheimer. Can you talk to us a little bit about your first party game 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
So thanks for the question. The game pipeline itself, While we don't talk about games because we operate it as a portfolio, what we can tell you is this. We started the games business 3 years ago roughly, But most of our investments in creators coming into our ecosystem to build content for us has really happened in the last 18 months. We've 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 substantial amount of investment to go build, usually in the 1,000,000 of dollars of R and D cost, But also more importantly, 1 to 2 years of development time. Since our gaming business is so new, you haven't yet seen a pipeline of content Roll out from us, yet we're working on it and you've seen it reflected in our expenses. The first game that came organically launched last year in November, Project Makeover, Within 2 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're now going to have a constant pipeline of big games rolling out. We'll have a handful coming over the next few months that we'll launch and we believe and have confidence in we'll be able to clear this threshold that we define as an evergreen title, at least $100,000,000 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.
Okay. So do you want to answer that one, Harold?
Yes, sure, sure, sure. Look, 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 and a big market potential. And so that business, we see quite robust growth rates Quite a long time. On the IP side, look, we've gone from 0 to several $1,000,000,000 in less than 3 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're 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'll increase margins. As a percentage of overall revenue, again, not that we're targeting it, I think we are 14% in 2020 for the year. In this quarter, software is now 22% of the business because of the accelerated growth.
Yes. And one thing to add to is, as we as you think about the 2 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're generating scale. We're investing heavily in the user acquisition. Now we have cost synergies.
And for that, you can just take that TSTV number minus the 3rd party software reported revenue number, and That was annualized $300,000,000 a year of UA savings that we have because of our integrated solution. But still, we're investing a lot in growing 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, Yes, you can take the revenue beat and the EBITDA beat and you notice the dollar for dollar revenue beat almost entirely Through the EBITDA and that's because software is performing so well.
Great. Thank you 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.