APPLOVIN CORPORATION 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Factors that could cause or contribute to such differences include those identified below and those discussed in the section titled "Risk Factors" and other parts of this Quarterly Report on Form 10-Q. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Overview Our mission is to grow the mobile app ecosystem by enabling the success of mobile app developers. Our software solutions provide advanced tools for mobile app developers to grow their businesses by automating and optimizing the marketing and monetization of their apps. Our software, coupled with our deep industry knowledge and expertise, has allowed us to rapidly scale a successful and diversified portfolio of owned mobile apps. We have also accelerated our market penetration through an active acquisition and partnership strategy. Our scaled and integrated business model sits at the nexus of the mobile app ecosystem, which creates a durable competitive advantage that has fueled our clients' success and our strong growth. Since our founding in 2011, we have been focused on building a software-based platform for mobile app developers to improve the marketing and monetization of their apps. Our founders, who are mobile app developers themselves, quickly realized the real impediment to success and growth in the mobile app ecosystem was a discovery and monetization problem-breaking through the congested app stores to efficiently find users and successfully grow their business. Their first-hand experience with these developer challenges led to the development of our infrastructure and software-AppLovin Core Technologies andAppLovin Software Platform. We capitalized on our success and understanding of the mobile app ecosystem by launching AppLovin Apps in 2018. Our Apps now consist of a globally diversified portfolio of over 350 free-to-play mobile games across five genres, run by nineteen studios. For the three months endedMarch 31, 2022 , our revenue grew 4% year-over-year, from$603.9 million for the three months endedMarch 31, 2021 to$625.4 million in the comparative period in 2022. We generated a net loss of$115.3 million for the three months endedMarch 31, 2022 , and a net loss of$10.6 million in the comparative period in 2021. We generated Adjusted EBITDA of$276.2 million , and$131.1 million for the three months endedMarch 31, 2022 and 2021, respectively. Additionally, our net cash provided by (used in) operating activities was$31.7 million and$61.8 million in the three months endedMarch 31, 2022 and 2021, respectively. See the section titled "Non-GAAP Financial Metrics" for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated in accordance with GAAP. Our Business Model We collect revenue from our Software Platform and our Apps. During the three months endedMarch 31, 2022 , Software Platform Revenue represented 19% of total revenue and Apps Revenue represented 81% of total revenue. As a result of the strategic review of our Apps portfolio, which we announced in our shareholder letter onMay 11th, 2022 and which we discuss below, we have updated the presentation of our revenue and associated discussion within this filing to align with how our management reviews our revenue and financial performance.
Software Platform Revenue
We generate Software Platform Revenue from fees paid by mobile app advertisers who use our Software Platform to grow and monetize their apps. We are able to grow our Software Platform Revenue by improving our various software technologies. Software Platform clients include a wide variety of advertisers, from indie developer studios to some of the largest global internet platforms, such as Facebook and Google. While we have thousands of clients as ofMarch 31, 2022 , the vast majority of our revenue is derived from our Software Platform Enterprise Clients. See "Key Metrics" below for additional information on how we calculate Software Platform Enterprise Clients. We see multiple opportunities to gain new Software Platform clients, and to increase spend from existing clients, as we help them grow their businesses and make them more successful. 21
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Our Software Platform includes AppDiscovery, Adjust and MAX. Clients use AppDiscovery to automate, optimize, and manage their user acquisition investments. They set marketing and user growth goals, and AppDiscovery optimizes their ad spend in an effort to achieve their return on advertising spend targets and other marketing objectives. AppDiscovery comprises the vast majority of revenue from our Software Platform. Revenue is generated from our advertisers, typically on a performance-based, cost-per-install basis, and shared with our advertising publishers, typically on a cost per impression model. Our Software Platform Enterprise Clients had a Net Dollar-Based Retention Rate of approximately 137% for the three months endedMarch 31 , 2022.1 Software Platform clients use Adjust's SaaS mobile marketing platform to better understand their users' journey while allowing marketers to make smarter decisions through measurement, attribution and fraud prevention. Revenue from Adjust is primarily generated from an annual software subscription fee. Software Platform clients use MAX to optimize purchases of app advertising inventory. The Compass Analytics tool within MAX provides insights to manage against key performance indicators, understand the long-term value of users, and help manage profitability. Revenue from MAX is generated based on a percentage of client spend. As more developers move to in-app bidding monetization, we expect growth in the adoption of, and revenue from, MAX.
Apps Revenue
Apps Revenue is generated when a user of one of our Apps makes
an in-app purchase ("IAP") ("Consumer Revenue") and when clients purchase the
digital advertising inventory of our portfolio of Apps ("Business Revenue"). We
are able to grow our Apps Revenue by adding more apps to our Apps portfolio and
increasing engagement on our existing Apps.
Our Apps are generally free-to-play mobile games and generate Consumer Revenue
through IAPs. IAPs consist of virtual goods used to enhance gameplay, accelerate
access to certain features or levels, and augment other mobile game progression
opportunities for the user. IAPs drive more engagement and better economics from
our Apps. The vast majority of our IAP revenue flows through two app stores,
Apple App Store and Google Play, which charge us a standard commission on IAPs.
Consumer Revenue represented 67% of total Apps Revenue in the three months ended
March 31, 2022 .
During the three months ended March 31, 2022 , we had an average of 2.7 million
Monthly Active Payers ("MAPs") across our portfolio of Apps. Over that period,
we had an Average Revenue Per Monthly Active Payer ("ARPMAP") of $41 . Leveraging
the benefit of our integrated Platform and Apps, we see opportunities to grow
our App-related revenue streams by increasing MAPs and expanding ARPMAP within
existing games and through new game development, acquisitions and partnerships.
See "Key Metrics" below for additional information on how we calculate MAPs and
ARPMAP.
Business clients that purchase advertising inventory from our Apps are able to
target highly relevant users from our diverse and global portfolio of over 350
mobile games. Our clients leverage a broad set of high-performing mobile ad
formats, including playable and rewarded video, and are able to match these ads
with relevant users resulting in a better return on their advertising spend. By
increasing the number of users and their engagement, as well as better matching
ads with the appropriate target audience, we are able to increase our revenue
from business clients that purchase advertising inventory from our Apps. Revenue
from business clients related to our Apps is generated from ads purchased by
advertisers, as well as from revenue-sharing agreements between some of our
studios and a selection of third-party studios for which they publish and
monetize games. Business Revenue represented 33% of total Apps Revenue in the
three months ended March 31, 2022 .
1 We measure Net Dollar-Based Retention Rate for the three months ended
March 31, 2022 for our Software Platform Enterprise Clients as current period
revenue divided by prior period revenue. Prior period revenue is measured as
revenue for the three months ended March 31, 2021 from our Software Platform
Enterprise Clients as of March 31, 2021 . Current period revenue is revenue for
the three months ended March 31, 2022 from Software Platform Enterprise Clients
as of March 31, 2021 . See the section titled "Key Metrics--Update to our Key
Metrics" below.
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Key Metrics
We review the following key metrics on a regular basis in order to evaluate the health of our business, identify trends affecting our performance, prepare financial projections, and make strategic decisions.
Software Platform Enterprise Clients ("SPECs"). We focus on the number of
Software Platform Enterprise Clients, which are third-party clients from whom we
have collected greater than $31,250 of Software Platform revenue in the three
months to a given date, equating to an annual run-rate of $125,000 in revenue.
Software Platform Enterprise Clients generate the vast majority of our Business
Revenue - Software Platform and Business Revenue - Software Platform growth.
Revenue Per Software Platform Enterprise Client ("Revenue per SPEC"). We define
Revenue per SPEC as (i) the total revenue derived from our Software Platform
Enterprise Clients in a three-month period, divided by (ii) Software Platform
Enterprise Clients as of the end of that same period. Revenue per SPEC shows how
efficiently we are monetizing each SPEC. We expect to increase Revenue per SPEC
over time as we enhance our Software Platform and Apps.
The following table shows our Software Platform Enterprise Clients and Revenue
per SPEC for the three months
Three Months Ended
March 31,
2022 2021
Software Platform Enterprise Clients 481 193
Revenue per SPEC (thousands) $ 553 $ 453
Update to our Key Metrics
Beginning with the three months ended June 30, 2022 , the revenue measurement
period used to determine the number of SPECs in a period will be updated to
include clients from whom we have collected greater than $125,000 in Software
Platform revenue over the trailing 12 months. The current definition of SPEC
includes third-party clients who had more than $31,250 in Software Platform
revenue for the prior three months. We believe this change in revenue
measurement period will provide additional information regarding the scale and
growth of our more-mature clients. Going forward, when Net Dollar-Based Revenue
Retention ("NDBRR") measures are provided, we will also calculate such measures
using the updated definition of SPECs.
The table below shows our SPEC and Revenue per SPEC as of
Twelve Months Ended
March 31,
2022 2021
SPEC (trailing 12 months) 447 156
Revenue per SPEC (trailing 12 months) (in thousands)
Total Software Transaction Value ("TSTV"). Software Platform revenue is from
third-party clients using our Software Platform to find new customers. We do not
recognize revenue from our own spend on our Software Platform. Therefore, we use
TSTV to measure the scale and growth rates of our Software Platform, as it
reflects the total value on our Software Platform including our first-party
studios as though they were stand-alone businesses.
The following table shows our Total Software Transaction Value for the three
months ended
Three Months Ended
March 31,
2022 2021
Total Software Transaction Value
Monthly Active Payers ("MAPs"). We define a MAP as a unique mobile device active
on one of our Apps in a month that completed at least one IAP during that time
period. A consumer who makes IAPs within two separate Apps on the same mobile
device in a monthly period will be counted as two MAPs. MAPs for a particular
time period longer than one month are the average MAPs for each month during
that period. We estimate the number of MAPs by aggregating certain data from
third-party attribution partners. Some of our Apps do not utilize such
third-party attribution partners, and therefore our MAPs figure for any period
does not capture every user that completed an
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IAP on our Apps. We estimate that our counted MAPs generated approximately 97% of our Consumer Revenue during the three months endedMarch 31, 2022 , and as such, management believes that MAPs are still a useful metric to measure the engagement and monetization potential of our games. We expect to increase our MAPs over time as we increase the number of our Apps and enhance the engagement and monetization of our Apps. Average Revenue Per Monthly Active Payer ("ARPMAP"). We define ARPMAP as (i) the total Consumer Revenue derived from our Apps in a monthly period, divided by (ii) MAPs in that same period. ARPMAP for a particular time period longer than one month is the average ARPMAP for each month during that period. ARPMAP shows how efficiently we are monetizing each MAP. We expect to increase ARPMAP over time as we enhance the monetization of our Apps.
The following table shows our Monthly Active Payers and Average Revenue Per
Monthly Active Payer for the three months ended
Three Months Ended
March 31,
2022 2021
Monthly Active Payers (millions) 2.7 3.1 Average Revenue Per Monthly Active Payer$ 41 $ 38 Our key metrics are not based on any standardized industry methodology and are not necessarily calculated in the same manner or comparable to similarly titled measures presented by other companies. Similarly, our key metrics may differ from estimates published by third parties or from similarly titled metrics of our competitors due to differences in methodology. The numbers that we use to calculate TSTV, MAP, and ARPMAP are based on internal data. While these numbers are based on what we believe to be reasonable judgments and estimates for the applicable period of measurement, there are inherent challenges in measuring usage and engagement. We regularly review and may adjust our processes for calculating our internal metrics to improve their accuracy.
Non-GAAP Financial Metrics
Adjusted EBITDA and Adjusted EBITDA Margin
We define Adjusted EBITDA for a particular period as net income (loss) before
interest expense and loss on settlement of debt, other (income) expense, net
(excluding certain recurring items), provision for (benefit from) income taxes,
amortization, depreciation and write-offs and as further adjusted for
stock-based compensation expense, acquisition-related expense and transaction
bonus, publisher bonuses, MoPub acquisition transition services, loss (gain) on
extinguishments of acquisition related continent consideration, non-operating
foreign exchange losses, lease modification and abandonment of leasehold
improvements, and change in the fair value of contingent consideration. We
define Adjusted EBITDA margin as Adjusted EBITDA divided by revenue for the same
period.
Adjusted EBITDA and Adjusted EBITDA margin are key measures we use to assess our
financial performance and are also used for internal planning and forecasting
purposes. We believe Adjusted EBITDA and Adjusted EBITDA margin are helpful to
investors, analysts, and other interested parties because they can assist in
providing a more consistent and comparable overview of our operations across our
historical financial periods. In addition, these measures are frequently used by
analysts, investors, and other interested parties to evaluate and assess
performance. We use Adjusted EBITDA and Adjusted EBITDA margin in conjunction
with GAAP measures as part of our overall assessment of our performance,
including the preparation of our annual operating budget and quarterly
forecasts, to evaluate the effectiveness of our business strategies, and to
communicate with our board of directors concerning our financial performance.
Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures and
are presented for supplemental informational purposes only and should not be
considered as alternatives or substitutes to financial information presented in
accordance with GAAP. These measures have certain limitations in that they do
not include the impact of certain expenses that are reflected in our
consolidated statement of operations that are necessary to run our business. Our
definitions may differ from the definitions used by other companies and
therefore comparability may be limited. In addition, other companies may not
publish these or similar metrics. Furthermore, these metrics have certain
limitations in that they do not include the impact of certain expenses that are
reflected in our consolidated statement of operations that are necessary to run
our business. Thus, our Adjusted EBITDA and Adjusted EBITDA margin should be
considered in addition to, not as substitutes for, or in isolation from,
measures prepared in accordance with GAAP.
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The following table provides our Adjusted EBITDA and Adjusted EBITDA margin for the three months endedMarch 31, 2022 and 2021, and a reconciliation of net loss to Adjusted EBITDA: Three Months Ended March 31, 2022 2021 (in thousands. except percentages) Net loss $ (115,298)$ (10,575) Adjusted as follows: Interest expense and loss on settlement of debt 32,009 35,010 Other income, net2 (2,417) (8,626) Benefit from income taxes (42,684) (3,180) Amortization, depreciation and write-offs 128,989 88,817 Non-operating foreign exchange gain (458) (1,281) Stock-based compensation 44,640 29,959 Acquisition-related expense 14,814 938 Publisher bonuses3 209,635 - MoPub acquisition transition services4 6,999 - Adjusted EBITDA $ 276,229$ 131,062 Adjusted EBITDA Margin 44.2 % 21.7 %
Factors Affecting Our Performance
We believe that the future success of our business depends on many factors, including the factors described below. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in order to continue to grow profitably while maintaining strong cash flow.
Continue to invest in innovation
We have made, and intend to continue to make, significant investments in our Core Technologies and Software Platform to enhance their effectiveness and value proposition for our clients. We expect that these investments will require spending on research and development, and acquisitions and partnerships related to technology components and products. We believe investments in our software, including AXON, AppDiscovery, Adjust and MAX, will further improve their effectiveness for developers. Our investments will also allow us to enter new mobile app sectors outside of gaming. While our investments in research and development and acquisitions and partnerships may not result in revenue in the near term, we believe these investments position us to increase our revenue over time.
Retain and grow existing clients
We rely on existing clients for a significant portion of our revenue. As we improve our Software Platform and Apps, we can attract additional spend from these clients. Our clients include indie studio developers and some of the largest mobile advertising platforms in the world. We believe there is significant room for us to further expand our relationships with these clients and increase their usage of our Software Platform. We have invested in targeted sales and account-based marketing efforts, including through Adjust's sales and marketing teams, to identify and showcase opportunities to clients and plan to continue to do so in the future. In the past, our clients have generally increased their usage of our Software Platform and Apps, and as a result, growth from existing clients has been a primary driver of our revenue growth. We must continue to retain our existing clients and expand their spend with us over time to continue to grow our revenue, increase profitability and drive greater cash flow.
2 Excludes recurring operational foreign exchange gains and losses.
3 In association with the MoPub acquisition, we incurred certain costs to
incentivize publishers to migrate to our MAX mediation solution including
existing publishers of MoPub as well as publishers on other competitor
offerings, and to retain certain existing MAX publishers. These costs were
reflected as a reduction to revenue in the period. We have not historically
incurred significant publisher migration costs, nor do we currently intend to
incur significant publisher migration costs in the future. As such, we have
removed the impact of these costs from Adjusted EBITDA.
4 Reflects one-time transition services provided by Twitter to
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Add new clients globally
Our future success depends in part on our ability to acquire new clients. We recently increased our focus on markets outsidethe United States to serve the needs of clients globally. During the three months endedMarch 31, 2022 , only 43% of our revenue from Software Platform and Apps Business Revenue clients was generated from outside ofthe United States . We believe that the global opportunity is significant and will continue to expand as developers and advertisers outsidethe United States adopt our Software Platform and advertise on our Apps. We also see opportunities to acquire new clients outside of mobile gaming, as the capabilities of our Core Technologies and Software Platform are relevant to the broader mobile app ecosystem. We are investing in direct sales, product development, education, and other capabilities to drive increased awareness and adoption of our Software Platform and Apps, which investments may impact our profitability in the near term as we seek further scale. We must continue to acquire new clients to grow our revenue, increase profitability, and drive greater cash flow.
Review of our AppLovin Apps portfolio
Over the past several years, our Apps have been critical in providing first-party data and audiences for our Software Platform to enable us to test, design, and scale our technologies, Given the recent development of our technology, the current scale of our Software Platform, and the reach of our MAX solution, we believe we can reduce our reliance on the data from our Apps. Therefore, we are reviewing our Apps portfolio and its cost structure, focusing on how best to optimize each asset's contribution to our overall financial performance. This review may result in the retention, restructure, or sale of certain assets, or no change to our Apps portfolio. We may also choose to make certain changes to optimize the cost structure of certain Apps rather than continuing to invest in revenue growth. We believe that our execution of this review, and our ability to optimize the contribution of our Apps portfolio, will affect our revenue growth, profitability, and cash flow.
Continued execution of strategic acquisitions and partnerships
We intend to continue to make strategic acquisitions and enter into strategic partnerships to grow our business. From the beginning of 2018 throughMarch 31, 2022 , we have invested over$2.5 billion in 28 strategic acquisitions and partnerships with mobile app developers and for technologies to enhance our Software Platform including the acquisition of MAX in 2018, Adjust inApril 2021 and MoPub inJanuary 2022 .
While we have a strong pipeline of strategic acquisition and partnership opportunities, we believe our future results of operations will be affected by our ability to continue to identify and execute such transactions that are accretive to our growth and profitability.
Growth and structure of the mobile app ecosystem
Our business and results of operations will be impacted by industry factors that drive overall performance of the mobile app ecosystem. The mobile app ecosystem has grown rapidly in recent years. We expect that any acceleration, or slowing, of this growth would affect our business and results of operations. In addition, even if the mobile app ecosystem continues to grow at its current rate, our ability to position ourselves within the market will impact our business and results of operations. Mobile app developers, includingAppLovin , rely on third-party platforms, such as theApple App Store andGoogle Play Store , among others, to distribute games, collect payments made for IAPs, and target users with relevant advertising. We expect this to continue for the foreseeable future. These third-party platforms have significant market power and discretion to set platform fees, select which apps to promote, and decide how much consumer information to provide to advertising networks that enable our Core Technologies and Software Platform to target users with personalized and relevant advertising and allocate marketing campaigns in an efficient and cost-effective manner. Any changes made in the policies of third-party platforms could drive rapid change across the mobile app ecosystem. For example, inApril 2021 , Apple started implementing its application tracking transparency framework that, among other things, requires users' opt-in consent for certain types of tracking. While this transparency framework has not had a significant impact on our overall business, it may in the future continue to have an impact on it, including the effectiveness of our advertising practices and/or our ability to efficiently generate revenue for our Apps. We rely in part on Identifier for Advertisers ("IDFA") to provide us with data that helps our Software Platform better market and monetize Apps. The IDFA and transparency changes may require us to engage in significant changes to our data collection practices, which may require our expenditure of substantial costs and resources, and to the extent we are unable to utilize IDFA or a similar offering, or if the transparency changes and any related opt-in or other requirements result in decreases in the availability or utility of data relating to Apps, our Software Platform may not be as effective, we may not be able to continue to efficiently generate revenue for our Apps, and our revenue and results of operations may be harmed. Additionally, Apple implemented new requirements for consumer disclosures regarding privacy and data processing practices inDecember 2020 , which 26
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has resulted in increased compliance requirements and could result in decreased usage of our Apps. InFebruary 2022 , Google announced it planned to adopt restrictions to restrict tracking activity across Android devices. These or any similar changes to the policies of Apple or
Components of Results of Operations
Revenue
We collect Software Platform Revenue from advertisers spending on our Software Platform. Software Platform Revenue is generated from our advertisers, typically on a performance-based, cost-per-install basis, then shared with our advertising publishers, typically on a cost per impression model. We generate Apps revenue from both consumers and business clients. Consumer Revenue is from consumer IAPs made by users within our Apps. Business Revenue is generated from advertisers that purchase advertising inventory from our diverse portfolio of Apps. Business Revenue from our Apps was 33% of total Apps Revenue for the three months endedMarch 31, 2022 .
Cost of Revenue and Operating Expenses
Cost of revenue. Cost of revenue consists primarily of third-party payment
processing fees for distribution partners, amortization of acquired
technology-related intangible assets, and expenses associated with operating our
network infrastructure. Third-party payment processing fees relate to Consumer
Revenue. The fees for IAPs are processed and collected by third-party
distribution partners. Network operating costs include bandwidth, energy, other
equipment costs related to our co-located data centers and costs for third-party
cloud service providers. We expect our cost of revenue to increase in absolute
dollars over the long term as our business and revenue continue to grow. We also
expect our cost of revenue as a percentage of revenue to fluctuate
period-over-period.
Sales and marketing. Sales and marketing expenses consist primarily of user
acquisition costs, other advertising expenses, personnel-related expenses for
salaries, employee benefits, and stock-based compensation for employees engaged
in sales and marketing, and amortization of acquired user-related intangible
assets, marketing programs, travel, customer service costs, and allocated
facilities and information technology costs.
We plan to continue to invest in sales and marketing to grow our customer base
and increase brand awareness. As a result, we expect sales and marketing
expenses to increase in absolute dollars. We also expect our sales and marketing
expenses as a percentage of revenue to fluctuate period-over-period in the near
term as we invest to grow our customer base and increase brand awareness, and to
decrease over the long term as we benefit from greater scale.
Research and development. Research and development expenses consist primarily of
product development costs, including personnel-related expenses for salaries,
employee benefits, and stock-based compensation for employees engaged in
research and development, professional services costs related to development of
new apps by third parties, consulting costs, regulatory compliance costs, and
allocated facilities and information technology costs.
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We plan to continue to invest in research and development to continue to enhance our Core Technologies and Software Platform, and to improve existing games and develop new games. As a result, we expect research and development expenses to increase in absolute dollars. We also expect our research and development expenses as a percentage of revenue to fluctuate period-over-period in the near term as we invest to enhance our Core Technologies and Software Platform and improve our existing Apps and develop new Apps, and to decrease over the long term as we benefit from greater scale. General and administrative. General and administrative expenses consist primarily of costs incurred to support our business, including personnel-related expenses for salaries, employee benefits, and stock-based compensation for employees engaged in finance, accounting, legal, human resources and administration, professional services fees for legal, accounting, recruiting, and administrative services (including acquisition-related expenses), insurance, travel, and allocated facilities and information technology costs. We plan to continue to invest in our general and administrative function to support the growth of our business. In addition, we expect to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance and reporting obligations of a public company, increased insurance and investor relations expenses, and increased professional services fees (including acquisition-related expenses). As a result, we expect general and administrative expenses to increase in absolute dollars. We also expect our general and administrative expenses as a percentage of revenue to fluctuate period-over-period in the near term as we invest to support the growth of our business, and to decrease over the long term as we benefit from greater scale.
Other Income and Expenses
Interest expense and loss on settlement of debt. Interest expense and loss on settlement of debt consists primarily of loss related to debt extinguishment, interest expense associated with our outstanding debt, including accretion of debt discount, and changes in fair value of interest rate swap accounted for as a cash flow hedge related to the stream of variable interest payments associated with a portion of our outstanding debt. Other income, net. Other income, net, includes interest earned on our cash and cash equivalents, gains and losses related to embedded derivatives and other financial instruments accounted for at fair value, and foreign currency exchange gains (losses), which consist primarily of remeasurement of transactions and monetary assets and liabilities denominated in currencies other than the functional currency at the end of the period. Benefit from income taxes. We are subject to income taxes inthe United States and foreign jurisdictions in which we do business. These foreign jurisdictions have different statutory tax rates than those inthe United States . Additionally, certain of our foreign earnings may also be taxable inthe United States . Accordingly, our effective tax rate will vary depending on the relative proportion of foreign to domestic income, impacts from acquisition restructuring, deduction benefits related to foreign-derived intangible income, future changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws. Additionally, our effective tax rate can vary based on the amount of pre-tax income or loss. 28
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Results of Operations
The following table summarizes our historical condensed consolidated statements
of operations data:
Three Months Ended
March 31,
2022 2021
(in thousands)
Revenue $ 625,421 $ 603,877
Costs and expenses:
Cost of revenue(1)(2) 281,780 223,061
Sales and marketing(1)(2) 290,133 265,513
Research and development(1) 126,250 60,876
General and administrative(1) 55,245 42,962
Total costs and expenses 753,408
592,412
Income (loss) from operations (127,987)
11,465
Other income (expense): Interest expense and loss on settlement of debt (32,009) (35,010) Other income, net 2,014 9,790 Total other expense (29,995) (25,220) Loss before income taxes (157,982) (13,755) Benefit from income taxes (42,684) (3,180) Net loss$ (115,298) $ (10,575) __________________
(1) Includes stock-based compensation expense as follows:
Three Months Ended
March 31,
2022 2021
(in thousands)
Cost of revenue $ 1,052 $ 109
Sales and marketing 6,919 1,819
Research and development 20,629 6,465
General and administrative 16,040 21,566
Total stock-based compensation
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(2) Includes amortization expense related to acquired intangibles as follows:
Three Months Ended
March 31,
2022 2021
(in thousands)
Cost of revenue $ 104,619 $ 82,185
Sales and marketing 16,392 3,209
Total amortization expense related to acquired intangibles $ 121,011 $ 85,394
The following table sets forth the components of our condensed consolidated
statements of operations for each of the periods presented as a percentage of
revenue(1):
Three Months Ended
March 31,
2022 2021
Revenue 100 % 100 %
Costs and expenses:
Cost of revenue 45 % 37 %
Sales and marketing 46 % 44 %
Research and development 20 % 10 %
General and administrative 9 % 7 %
Total costs and expenses 120 % 98 %
Income (loss) from operations (20) % 2 %
Other income (expense):
Interest expense and loss on settlement of debt (5) % (6) %
Other income, net 0 % 2 %
Total other expense (5) % (4) %
Loss before income taxes (25) % (2) %
Benefit from income taxes (7) % (1) %
Net loss (18) % (2) %
_________________
(1) Totals of percentages of revenue may not foot due to rounding.
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Comparison of Our Results of Operations for the Three Months EndedMarch 31, 2022 and 2021 Revenue Three Months Ended March 31, 2021 to 2022 2022 2021 % change (in thousands, except percentages) Software Platform Revenue$ 118,840 $ 88,419 34 % Consumer Revenue 339,472 358,495 (5) % Business Revenue 167,109 156,963 6 % Apps Revenue 506,581 515,458 (2) % Total Revenue$ 625,421 $ 603,877 4 %
Three Months Ended
Total revenue increased by
For the three months endedMarch 31, 2022 , our Software Platform Revenue increased by$30.4 million from the prior year period primarily due to AppDiscovery where installations increased 45% and price per installation increased 113% compared to the prior year period, as well as the contribution from MoPub and Adjust, partially offset by publisher bonuses of$209.6 million , which are accounted for as a reduction to revenue since the publishers receiving such bonuses are also our customers. Usage of advertising inventory by ourOwned Studios andPartner Studios represented 15% of installations during the three months endedMarch 31, 2022 . We do not recognize Software Platform Revenue from transactions with ourOwned Studios andPartner Studios . For the three months endedMarch 31, 2022 , our Apps Revenue decreased by$8.9 million from the prior year period. For the three months endedMarch 31, 2022 , our Consumer Revenue decreased by$19.0 million from the prior year period, primarily due to a 12% decrease in the volume of in-app purchases, partially offset by a 8% increase in price per in-app purchase. Existing and newly developed Apps by our Owned andPartner Studios contributed$116.4 million of the decrease, while Apps acquired sinceMarch 31, 2021 generated a partially offsetting increase of$97.4 million . The increase in our Business Revenue from Apps of$10.1 million was primarily a result of increased advertising revenue from acquired Apps which contributed an increase of$25.5 million partially offset by a net decrease of$15.4 million from existing and newly developed Apps by our Owned andPartner Studios . Our Business Revenue from Apps grew due to a 11% increase in the volume of advertising impressions partially offset by a 4% decrease in price per advertising impression compared to the prior year period. We do not recognize Business Revenue from transactions with ourOwned Studios andPartner Studios . Cost of revenue Three Months Ended March 31, 2021 to 2022 2022 2021 % Change (in thousands, except percentages) Cost of revenue$ 281,780 $ 223,061 26 % Percentage of revenue 45 % 37 % Cost of revenue in the three months endedMarch 31, 2022 increased by$58.7 million , or 26%, compared to the same period in the prior year. The increase in the three months endedMarch 31, 2022 was primarily due to an increase of$27.3 million in depreciation and amortization of acquired-technology driven by an increase in acquisition activity subsequent to the prior year period, an increase of$26.9 million in expenses associated with operating our network infrastructure driven by the growth in our operations and an increase of$5.6 million in professional services to support our network infrastructure, partially offset by a decrease of$9.0 million in third-party payment processing fees paid associated with in-app purchases. 31
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Sales and marketing
Three Months Ended
March 31, 2021 to 2022
2022 2021 % Change
(in thousands, except percentages)
Sales and marketing $ 290,133 $ 265,513 9 %
Percentage of revenue 46 % 44 %
Sales and marketing expenses in the three months ended March 31, 2022 increased
by $24.6 million , or 9%, compared to the same period in the prior year primarily
due to an increase of $15.1 million in personnel-related expenses related to an
increase in stock-based compensation as a result of higher grant date fair value
of our common stock and an increase in headcount, an increase of $13.2
million in depreciation and amortization of intangible assets driven by an
increase in acquisition activity, and an increase of $9.3 million in
professional services costs, offset by a $15.8 million decrease in user
acquisition costs.
Research and development
Three Months Ended
March 31, 2021 to 2022
2022 2021 % Change
(in thousands, except percentages)
Research and development $ 126,250 $ 60,876 107 %
Percentage of revenue 20 % 10 %
Research and development expenses in the three months ended March 31, 2022
increased by $65.4 million , or 107%, compared to the same period in the prior
year. The increase in the three months was primarily due to an increase of
$39.0 million in professional services costs related to development of new apps
by third parties and an increase of $24.7 million in personnel-related expenses
related to an increase in stock-based compensation as a result of higher grant
date fair value of our common stock and an increase in headcount.
General and administrative
Three Months Ended
March 31, 2021 to 2022
2022 2021 % Change
(in thousands, except percentages)
General and administrative $ 55,245 $ 42,962 29 %
Percentage of revenue 9 % 7 %
General and administrative expenses in the three months ended March 31, 2022
increased by $12.3 million , or 29%, compared to the same period in the prior
year. The increase in the three months was primarily due to an increase of $12.7
million in acquisition-related stamp duty and an increase of $3.9 million in
professional services costs primarily associated with audit, tax and legal
support, offset by a decrease of $7.4 million in personnel-related expenses
primarily related to executive bonus and stock-based compensation expense in the
prior year period.
Interest expense and loss on settlement of debt
Three Months Ended
March 31, 2021 to 2022
2022 2021 % Change
(in thousands, except percentages)
Interest expense and loss on settlement of debt $ (32,009) $ (35,010) (9) %
Percentage of revenue (5) % (6) %
In the three months ended March 31, 2022 , interest expense and loss on
settlement of debt decreased by $3.0 million , or 9% compared to the same period
in the prior year. This decrease was primary due to a loss on the settlement of
term loans of $16.9 million during the prior year period, offset by an increase
of $12.3 million in interest expense related to an increase in the term loans
balance.
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Other income, net
Three Months Ended
March 31, 2021 to 2022
2022 2021 % Change
(in thousands, except percentages)
Other income, net $ 2,014 $ 9,790 (79) %
Percentage of revenue - % 2 %
In the three months ended March 31, 2022 , other income, net decreased by $7.8
million , or 79%, compared to the same period in the prior year. The decrease was
primarily due to a fair value remeasurement gain of $6.6 million related to term
loan embedded derivative in the prior year period.
Benefit from Income Taxes
Three Months Ended
March 31, 2021 to 2022
2022 2021 % Change
(in thousands, except percentages)
Benefit from income taxes $ (42,684) $ (3,180) 1,242 %
Percentage of revenue (7) % (1) %
In the three months ended March 31, 2022 , benefit from income taxes increased by
$39.5 million or 1,242% compared to the same period in the prior year. The
increase in tax benefit was driven by an increase of $34.9 million due to higher
pre-tax loss during the three months ended March 31, 2022 , an increase of $21.6
million due to stock-based compensation expense, an increase of $21.3 million
due to global intangible low-taxed income, an increase of $17.9 million due to
valuation allowance, and an increase of $4.2 million due to foreign income taxed
at different rates, partially offset by a decrease of $48.9 million due to
foreign derived intangible income deduction, $9.5 million due to research and
development credit, and $3.9 million due to foreign income inclusion.
Liquidity and Capital Resources
Since inception, we financed our operations primarily through payments received from clients using our Software Platform and advertising on our Apps, and from user IAPs from our Apps, and through net proceeds we received from the sales of our convertible preferred stock and borrowings made under our Credit Agreement. As ofMarch 31, 2022 , we had cash and cash equivalents of$1.41 billion . We believe that our existing cash and cash equivalents would be sufficient to satisfy our anticipated working capital and capital expenditures needs for at least the next 12 months. Our future capital requirements, however, will depend on many factors, including our growth rate; expansion of sales and marketing activities; timing and extent of spending to support our research and development efforts; capital expenditures to purchase hardware and software; and our continued need to invest in our IT infrastructure to support our growth. In addition, we may enter into additional strategic partnerships as well as agreements to acquire or invest in teams and technologies, including intellectual property rights, which could increase our cash requirements. As a result of these and other factors, we may be required to seek additional equity or debt financing sooner than we currently anticipate. If additional financing from outside sources is required, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when required, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition, and results of operations could be adversely affected.
The following table summarizes our cash flows for the periods indicated:
Three Months Ended
March 31,
2022 2021
(in thousands)
Net cash provided by (used in) operating activities
$ (1,059,743) $
(18,273)
Net cash provided by (used in) financing activities
Operating Activities
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Net cash used in operating activities was$31.7 million for the three months endedMarch 31, 2022 , primarily consisting of$115.3 million of net loss, adjusted for certain non-cash items, which included$129.0 million of amortization, depreciation and write-offs,$44.6 million of stock-based compensation expense,$5.8 million of change in operating right of use asset,$3.2 million of amortization of debt issuance costs and discount and$1.0 million of net unrealized losses on fair value remeasurements, partially offset by a net increase in the operating assets and liabilities of$99.5 million . The net increase in the operating assets and liabilities was primarily driven by an increase in accounts receivable, prepaid expenses and other current assets and decrease in operating lease liabilities partially offset by higher accounts payable and accrued and other liabilities. Net cash provided by operating activities was$61.8 million for the three months endedMarch 31, 2021 , primarily consisting of$10.6 million of net loss, adjusted for certain non-cash items, which included$88.8 million of amortization, depreciation and write-offs,$30.0 million of stock-based compensation expense,$16.9 million of loss on settlement of debt,$11.2 million of net unrealized gains on fair value remeasurements,$5.8 million of change in operating right of use asset, and$4.3 million of amortization of debt issuance costs and discount, partially offset by a net increase in the operating assets and liabilities of$60.8 million . The net increase in the operating assets and liabilities was primarily driven by an increase in accounts receivable, prepaid expenses and other current assets, and a decrease in operating lease liabilities partially offset by higher accounts payable.
Investing Activities
Net cash used in investing activities was$1.06 billion for the three months endedMarch 31, 2022 , primarily consisting of$1.05 billion related to acquisitions and$14.1 million in purchases of non-marketable investments and other, partially offset by$2.2 million in proceeds from other investing activity.
Net cash used in investing activities was
Financing Activities
Net cash used in financing activities was$65.4 million for the three months endedMarch 31, 2022 , primarily consisting of repurchases of stock under the repurchase program of$43.7 million , payments for license asset obligations of$17.4 million , payments for finance leases of$6.2 million , repayments of debt principal of$4.6 million , and payments for deferred acquisition costs of$1.7 million , partially offset by$8.1 million proceeds from exercise of stock options. Net cash provided by financing activities was$400.4 million for the three months endedMarch 31, 2021 , primarily consisting of$844.7 million of proceeds from debt issuance and$12.9 million proceeds from exercise of stock options, partially offset by repayments of debt principal of$302.3 million , payments for deferred acquisition costs of$152.2 million and payments of deferred IPO costs of$1.8 million . Credit Agreement We are party to a credit agreement (the "Credit Agreement"), which provides for senior secured term loans and a revolving credit facility. As ofMarch 31, 2022 , our total outstanding indebtedness under the Credit Agreement was$3.27 billion , consisting of outstanding term loans.
Contractual Obligations
OnFebruary 23, 2022 we entered into a definitive agreement to acquireWurl, Inc. , a software platform company in the Connected TV ("CTV") market. We completed the acquisition inApril 2022 for a total purchase price of approximately$379.0 million , consisting of$220.0 million in cash, 2,579,692 shares of our Class A common stock valued at$137.0 million and a liability of$22.0 million representing the present value of an indemnity holdback amount of$23.0 million to be paid in 18 months following the closing of the transaction. Concurrent with entering into the definitive agreement, we also adopted a multi-year performance-based incentive plan for certain key employees of Wurl, under which the key employees may earn up to a total of$600.0 million in additional shares of our Class A common stock through 2025, contingent upon the achievement of certain revenue and other performance targets by the acquired business and the continued employment of such key employees. Such plan became effective at the closing of the transaction.
In the first quarter of 2022, we invested or committed to invest in certain
private equity funds with total unfunded commitments of
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With the exception of the transactions described above and except for scheduled payments from the ongoing business, there were no material changes in our commitments under contractual obligations as ofDecember 31, 2021 as disclosed in our Annual Report on Form 10-K filed with theSEC .
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities and the amount of revenue and expenses that are not readily apparent from other sources. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions. There have been no material changes to our critical accounting policies and estimates during the three months endedMarch 31, 2022 , as compared to those disclosed in our Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in our Annual Report on Form 10-K filed with theSEC .
Recent Accounting Pronouncements
See Note 2, "Summary of Significant Accounting Policies" of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.
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