Applovin(APP.US) 2024 Q4 phone conference: The main task this year is to develop automation tools to transition towards a pure advertising platform.

Recently, Applovin (APP.US) held its 2024 fourth quarter earnings call. Financial data shows that the company's total revenue in the fourth quarter was $1.37 billion, a year-on-year increase of 44%; adjusted EBITDA was $848 million, an increase of 78%, profit margin of 62%, and a revenue to adjusted EBITDA conversion rate of 89%; free cash flow was $695 million, a year-on-year increase of 105% and a quarter-on-quarter increase of 28%. The adjusted EBITDA to free cash flow conversion rate was 82%, with cash and cash equivalents of $741 million at the end of the quarter and 3.4 billion shares outstanding. Company executives stated that the fourth quarter was significant as it was the first time since the upgrade in 2023 that they had received holiday shopping advertising revenue in non-gaming categories, which helped drive growth. The platform reaches over 1 billion mobile game users daily, with user engagement rivaling social networks. In the fourth quarter, advertising business revenue was $999 million, adjusted EBITDA was $777 million, profit margin of 78%, and a quarter-on-quarter revenue to adjusted EBITDA conversion rate of 75%. Due to the incremental increase in data center costs, subsequent leverage effects will return to normal with GPU costs. Application business revenue was $373 million, a year-on-year decrease of 1%, adjusted EBITDA was $71 million, and profit margin was 19%. A term sheet has already been signed for the divestiture of the application business, with an estimated total transaction amount of $900 million, including $500 million in cash and the remaining representing minority equity in the post-merger private company. Pending regulatory approval, the company hopes to complete this transaction in the next quarter and looks forward to seeing success in this business under new leadership. Company executives stated that while they had previously focused mainly on advertising for games, they are now attracting a wider range of advertisers. The fourth quarter demonstrated that the business model applies to multiple categories, and platform success is not limited to direct-to-consumer brands. Early trials showed that businesses in various vertical sectors can benefit from the platform, with over 10 million online advertising companies worldwide monetizing through their platform. The platform is positioned as a growth engine, transitioning from a focus on gaming to serving the global advertising economy, where users discover new products and generate additional demand in games. There is significant demand for advertisers to join the platform, but the advertising system is still under development and lacks complete automation capabilities. The primary task this year is to develop automation tools. Seven years after acquiring a game studio to train machine learning models, signing an exclusive term sheet to sell the App business, with the original App team joining a company focused on game development. Applovin is transitioning to a pure advertising platform, focusing on productivity, automation, and building high-impact teams. Q4 advertising business generated approximately $3 million in run rate adjusted EBITDA per employee, and this is expected to increase in the future. Q&A Q: You mentioned that different verticals and brands have seen benefits beyond just direct-to-consumer (DTC) marketing. Does this mean that the goal for expanding non-gaming business scale this year, entering the self-service stage and targeting a broader global audience, is not just limited to DTC marketing? Or is it an opportunity that is feasible in the future but not fully utilized at the moment? A: When building the platform, we strategically chose the DTC business area because we believed that if the technology was effective in this area, it would be effective in others as well. We have already privately onboarded clients from other categories and found that the advertising model works well in these areas too. Seeing success in various categories on the platform gives us confidence for this year. As we release more tools and move towards more automation and openness, we hope to attract a large group of global advertisers with an annual revenue of over $10 million. We will steadily progress, focusing on utilizing tools, artificial intelligence, and automation technology to provide solutions and success experiences for new advertisers while maintaining our cultural values. Q: Regarding CTV advertising, can you talk about the changes with Wurl, especially compared to the last discussion? What changes have occurred now that prompt more attention to this supply opportunity? A: We haven't really focused on CTV advertising yet. Acquiring Wurl was to leverage their connections with media companies and access some online resources, such as MAX bidding. Our core business and most of our revenue come from the demand-side platform (DSP) where advertisers find us to help them place ads. But we need supply, and Wurl brings in a lot of supply. Last year, the platform could only show game ads, but showing game ads on full-screen TV and asking users to download games on their phones did not yield good results. As consumer ads, DTC business ads, and various categories such as financial technology and automotive advertisers join the platform, expanding creativity to large screens may be very appealing. However, challenges include attribution issues and lack of clear calls to action, but if successful, it will open up a completely new large-scale effective advertising channel, so we will be working towards achieving this this year. Q: What changes have you seen in model improvement this quarter, and how much impact have these improvements had on growth? A: Growth factors can be broken down into several aspects. One is continuous learning of the models, which is expected to benefit each quarter, and has not shown signs of slowing down, contributing to growth this quarter; second is the gradual and incremental improvements to existing models, which, while unpredictable and not a huge improvement, have also had some incremental effects this quarter; third is the significant improvement brought by new models such as ChatGPT 4. In addition, seasonal factors in the fourth quarter related to shopping and purchasing behavior have also played a role in growth.Additionally, people are spending more time on mobile devices this quarter, leading to a greater likelihood of increased consumption and transactions in mobile gaming. These factors together are driving growth. take rate Customer, no matter the price. What's important is paying the highest price the market can obtain, the better the business is done, the stronger it is, because the commission rate can be expanded.Q: E-commerce now accounts for a larger proportion of business, how do you see seasonal issues affecting future income growth and cost structures? A: In terms of costs, the main factors are data center costs and salaries, which are driven by utilization rates. With revenue growth, we expect about a 10% increase in data center costs each year. So the cost fluctuations are not significant. In the e-commerce sector, as e-commerce becomes a larger part of the business, it will be affected by seasonal factors, such as increased revenue during Black Friday and holiday periods. Q: What are the driving factors for the quarter-over-quarter growth in e-commerce in the first quarter? Should we consider it as existing advertisers increasing spending or new incremental advertisers driving growth? A: The situation in e-commerce has not been subdivided yet. In traditional advertising businesses, the first quarter usually sees a decrease due to the two fewer days and seasonal factors in the fourth quarter, and e-commerce categories follow suit. Even without adding new advertisers, this category may still expand relative to the fourth quarter. Overall, business is expected to grow by 4% quarter-over-quarter in the first quarter, despite being 2 days shorter, because we are confident that even after considering seasonal or fourth-quarter growth, the first quarter will continue to grow. Q: How willing are e-commerce advertisers who have long-term partnerships compared to new advertisers to increase daily spending limits? A: The situation is unstable, as e-commerce category just entered in the fourth quarter. Many e-commerce companies heavily invest during Black Friday and holiday periods, as inventory is depleted and needs to be replenished, resulting in a surge in spending, followed by a decline, and then a rebound. The platform is an effect-based marketing business, and as they restock entering the first quarter, they will start anew. The fluctuations seen are due to the nature of the business, and seeing good results on the platform means that, with time and adjustment for seasonal factors, there will be a continuous upward trend in income. This is not only because successful businesses on the platform lead to more marketing funds being invested, but also because the e-commerce model is a few years behind the game model, and there is still a long way to go in this field, making the platform better over time. Q: I am quite interested in the point you made about technology being applicable to different types of advertisers. Within e-commerce, there are different categories, and you introduced Axon Pixel, which e-commerce merchants are using on their websites to help with attribution. Is this enough to reach all different types of e-commerce advertisers? Is there at least a well-deployed technology in terms of attribution to reach out to 10 million global advertisers? Considering the high efficiency of artificial intelligence, will it be used for in-app installations in non-gaming categories? Will this become a growth area by 2025? A: We currently have related technology to help advertisers achieve effective attribution, but it cannot be said that in all aspects of the business, the technology is mature enough. We are constantly adding tools to gain more accurate attribution and work with advertisers. Nevertheless, it is effective in the website and e-commerce category, as well as in the broader non-gaming network category. Any customer with a website can achieve automated advertising delivery on the platform. However, for game advertisers, non-game app advertisers, and businesses with both websites and applications, more work needs to be done to get them online. This is what we are doing this year, and it is expected that as we enter the second half of this year, next year, and the longer-term future, new advertising categories will be touched upon, but it is not expected to be a turning point by 2025. Q: What changes have occurred in recruitment and streamlining operations since taking over the human resources function last quarter, or what areas are worth paying attention to? A: The focus is on streamlining teams and processes, truly focusing. We have announced the sale of the App business, and the company is currently facing tremendous opportunities and a long-term development blueprint. When such opportunities arise, everyone needs to focus on them. Although the company has been announcing layoffs while remaining profitable, we do not want to continue like this. After restructuring human resources, areas that are not fully aligned with the strategy will be reduced to focus on current opportunities, and once this is done, more exciting moments will follow. Q: Non-gaming helps with supply, do you expect to gain market share in the intermediary area, and how will additional supply help the gaming business over time? A: Our market share is already high, not to mention market share, but inventory. We have been gaining new game publishers to run game ads, and currently we are a leader in monetization, with growth in the game supply business, but there is no significant short-term space. Many consumers purchasing in-app purchasing apps spend a lot of time on games but do not run ads because they can monetize effectively through in-app purchases. Companies like King, before being acquired, went public with non-gaming ads creating significant additional revenue. In the traditional mobile game intermediary market, most ads are targeted at games competing with the publisher's games. With the introduction of more non-gaming advertisers, selling MAX products and DSP platforms to primarily or exclusively game publishers monetizing through in-app purchases will create another incremental source. Q: How do you view the amount of spending growth that the current mobile gaming environment or ecosystem can absorb? Can inventory value double or even triple? Do you consider this a limiting factor for future growth? A: I do not consider this a limiting factor. In the past year, the supply volume has remained basically unchanged, while the company has grown by 80% - 90%, with both supply and demand still in their early stages. On the demand side, we are just entering some areas that can monetize inventory better, with current monetization levels lower than some of the largest social platforms. Although ad units are high-impact full-screen videos, we have not yet introduced all types of global advertisers to the platform. In the future, with the introduction of more advertisers, increased demand density, stronger algorithms, and data footprints, even if the supply remains unchanged, the same daily active users will be better monetized, and the road to growth driven by expanding demand is still long. The supply side is just the icing on the cake and will not have a significant impact on growth like demand expansion. Q: What are your thoughts on moving Audience+ from the pilot phase to self-service? What have you learned from the pilot that will help improve or change the solution before transitioning to self-service? When do you expect it to achieve self-service by 2025? A: Self-service will be introduced in due course. The key is to have tools that automate every step of the process.Including AI agents that help advertisers go online and start using them, making them feel like dealing with humans, actually interacting with Siasun Robot&Automation smoothly. Another key point is that when opening up a large platform, a large number of tools and content audit controls must be built to prevent fraud, because like Facebook, Alphabet Inc. Class C, if a large platform does not build tools to prevent fraud, a large amount of fraudulent behavior will pour in after the platform is opened. It will be treated seriously and cautiously. Currently, the growth rate is fast, controlling the pace, developing all tools in the background, and they will be ready to launch. After the launch, it will have a significant impact, and the impact will continue to accumulate in quarters, years, and over a decade.Q: The application sales situation is carried out in stages, gradually eliminating some studios. After all 10 studios stop operating, the application revenue no longer exists. When will the transaction be completed, and how to understand the timing dynamics of this year's application revenue modeling? A: Selling the entire application business will be removed from the profit and loss statement and balance sheet at once. The transaction is expected to be completed in the second quarter, but may be affected by regulatory approval, so the timing may vary slightly, with the goal of completion in the second quarter. Q: How many parts of the personalized advertising experience can be achieved through existing solutions, rather than requiring additional investment to achieve personalized goals? What should be focused on externally to understand how this plan could be implemented and more widely promoted in the business in the coming years? A: Currently, it is all research and development. For example, in the case of Candy Crush, currently, humans upload 20 ads, and artificial intelligence decides to display one of them, which is not very personalized. With generative AI and large language models, top creative can be run through the model to create many variations, and Facebook and Alphabet Inc. Class C are also discussing generative AI-driven ads. The platform is researching and believes it will have a significant impact on driving consumer response to ad units as there are full-screen video experiences, often with HTML or even mini-games. There is still a lot of work to be done to personalize this experience, and to build models that can automatically complete these tasks within GPU constraints, which is one of the main focuses this year. Q: Major electronic brands mainly use social advertising in mobile games, does this provide an opportunity to help e-commerce and other verticals create ads that are more like mobile game ads? A: Possibly. We hope that decisions are not made by humans, but by AI and machines. After entering the machine creativity field, more variations can be created than humans, whether it is ads that gamify e-commerce products or things that are currently unimaginable, theoretically machines can do it. Advertisers and consumers will benefit from all the new ad variations output by the system. Q: What feedback was received from game companies when entering the e-commerce and other vertical sectors? A: Game companies see better performance on the platform every quarter and are pleased that this is a catalyst and a necessary condition for their growth. Publishers are delighted with the shift to e-commerce displays, as the worst thing for a game publisher is to monetize their own game using a competitor's ads, and the platform allows MAX publishers to see these ads running. Some publishers have transitioned to non-gaming categories, and we are excited about this changing trend.