AppLovin reported Q4 2022 earnings yesterday: the company delivered revenue of $702MM in the quarter, which represents an 11% decline on a year-over-year basis but which beat analyst consensus estimates of $690.38M. AppLovin offered revenue guidance of $685MM to $705MM for Q1.
AppLovin’s Software Platform revenue grew by 24% on a year-over-year basis (“primarily due to AppDiscovery and ALX”) and delivered 44% of the company’s total revenue. Notably, the company introduced two new metrics to its earnings reporting: revenue per installation (RPI) and installations, which increased by 46% and 24% on a year-over-year basis, respectively. This stands in contrast to the performance of Meta, Alphabet, and Snap in Q4, all of which saw increases in engagement but declines in ad pricing.
In assessing AppLovin’s performance, it’s important to consider the strategic difference between and distinct trajectories of its two business units:
- The Software Platform business is a high-margin (61% EBITDA margin in Q4) SaaS business comprised of an end-to-end advertising stack in AppDiscovery (DSP), MAX (SSP), and the AppLovin Exchange, as well as an MMP, Adjust, a Connected TV SSP, Wurl, and Array, an app discovery product;
- The Apps business is a portfolio of owned content (mobile games) that exhibits a much lower margin (19% EBITDA margin in Q4). In its Q1 2021 earnings call, AppLovin indicated that it would streamline its Apps business and potentially divest studios.
Revenue for AppLovin’s Apps business has been in steady sequential decline since at least Q4 of 2021:
Whereas revenue growth for AppLovin’s Software Platform business has been mixed, and was roughly sequentially flat from Q3 to Q4 of last year:
Note that the share of total revenue represented by the Software Platform has increased consistently since Q4 2021:
AppLovin’s stock jumped by more than 30% in after-hours trading after its earnings were released, likely in reaction to the sharp increase in Software Platform revenues as well as the strong guidance the company provided for this quarter. But additionally, AppLovin seems to have stabilized the sharp contraction in revenues in its Apps business. Herald Chen, AppLovin’s President and CFO, stated on the earnings call that AppLovin’s process of streamlining its Apps business — through “headcount reductions, reformatting, earn-outs, focused on the sale and spin, and closure of underperforming assets” — was “nearing completion.”
What’s interesting about the juxtaposition of AppLovin’s Software Platform and Apps businesses is that its Software Platform is dramatically outpacing its Apps business in terms of growth, which could suggest that its Software Platform is outperforming the broader mobile gaming market. Mobile gaming saw growth decline precipitously in 2022, suppressed by the dual specter of a reversion to pre-COVID consumer behavioral norms and Apple’s App Tracking Transparency (ATT) policy, as I describe in The App Tracking Transparency Recession and Mapping the post-ATT future of mobile free-to-play gaming.
The biggest themes from AppLovin’s earnings call were around the development and implementation of AXION 2, its upgraded ad targeting engine; the industry adoption rate of MAX, its SSP product; the company’s initiatives in Connected TV; and the company’s general understanding of the performance marketing operating mindset in the post-ATT mobile gaming landscape. I have curated some excerpts below (all emphasis mine).
On MAX adoption:
We actually recently asked our team to pull top apps in both app stores to see how much usage of our platform there was for the rest of the market…And about two-thirds of those apps, top downloaded apps, are monetizing using your MAX solution.
On AXION 2:
The reality is performance marketing advertisers have an approach. They have an LTV to CAC, and they have their own products. So, if their products improve, they can spend more…And that’s what I’m talking about with AXON 2. As we all know that these core technologies, these AI-based implementations of technology are continuing to evolve…As they get more efficient, what ends up happening is advertisers have the same goal, but you can drive them more scale. They start growing their business. They’re reinvesting more and more into it. It’s all arbitrage marketing on the front end.
On Connected TV:
The Connected TV device is really exciting for us because it’s a television device, full screen, living room, tons of consumption per day. It’s Connected to the Internet. But today, we’re not seeing that much performance advertising happening at large scale on that platform, especially when it comes to mobile app developers. In the last couple of years, we invested in an attribution company that’s one of the leaders in trying to bring attribution to Connected TV device…I’d think about it as full stack. So, the same way in mobile, we’re an SSP and a DSP. Wurl, today, has a very well-performing SSP business. We, AppLovin, our biggest business is our DSP. We’ll couple those pieces and have a full stack offering for Connected TV partners.
And on the new dynamics of the post-ATT mobile gaming market:
The IDFA change impaired that growth prospect. So, all of us marketing companies are really in the business of improving our algorithms. And when together, the category gets to a point where it was before, the category itself will get back to growth. We sit at a leadership point in the category with a market-leading monetization solution and a market-leading growth platform with AppDiscovery…Consumers need to discover content that they love to be able to go spend in it. And the IDFA change really handicapped the category, and it happened abruptly. Now, it’s been a year and a half…Whale hunting, which is an industry term, but marketing to go buy whales for games they can monetize consumers at immense levels is just not something that’s possible anymore in today’s identity-free universe…And traditionally, the IP category, 95% of the users were unmonetized, 5% were whales. They funded this $100 billion in growing space…Now you can’t go find those users as successfully as before. So, you’ve got to monetize the 95% to subsidize the cost of acquiring the 5%.