September 28, 2022

AppLovin plans to restructure its apps business and focus on software

AppLovin sees software as its main cash cow.

Going forward, the company plans to prioritize its software platform and focus less on its applications business.

During its first-quarter earnings call on Wednesday, AppLovin told investors it expects revenue from its software business, which includes AppDiscovery (a marketing platform), MAX (an auction software in -app) and Compass (analytics in MAX) reach $2 billion by 2023.

Software now accounts for 40% of AppLovin’s revenue, up from 14% when the company went public in April last year.

Go hard on software

At the time of its IPO, AppLovin was touting to the rooftops the first-party data advantage it was getting from its app portfolio. AppLovin publishes its own titles under Lion Studios and owns stakes in (or has outright acquired) nearly 20 game studios around the world.

(AppLovin studio roll call: Ace Games, Athena Studio, Belka Games, Clipwire Games, Forever9, Geewa, Kryss, Leyi, Machine Zone, Magic Tavern, MagicAnt, Nuts Power – really, that’s what it’s called – PeopleFun, Redemption Games, ZenLife and Zero Gravity.)

Historically, AppLovin has invested heavily in user acquisition (UA) for apps produced by these studios so that they can serve as a ready source of first-party data and audiences to power its machine learning models and Axon, its internally developed recommendation and prediction engine.

Over time, the wheel began to turn as more developers used its technology, and AppLovin became less dependent on first-party data from the content side of the house.

“We’re seeing customers come online,” CEO Adam Foroughi said. “We run more ads, get a bigger feedback loop…and we see [our] machine learning continues to improve without the need for our own games to feed the data.

Although apps still make up the majority of AppLovin’s business, the software side is growing faster than expected, Foroughi said, noting that first-quarter revenue grew 4x year-over-year and that software contributed more than 80% of the company’s net profit. in Q1.

“Over the past few quarters, we’ve talked about the app industry not being as strategic as it once was,” he said. “Given the success of our software platform, we will no longer operate our games as a cost center.”

In other words, AppLovin will audit and restructure its apps business so that the apps business can operate more efficiently as its own standalone business unit. That could mean “operational changes and possible plans to sell or spin off some of the studios,” Foroughi said.

Going forward, AppLovin plans to operate the studios with “more profitable” spending on UA, a process that already began at the end of the first quarter.

“Traditionally, we’ve been willing to spend more on new users, valuing scale, audience and data as justification,” Foroughi said. “That led to it being operated around break-even.”

But now that its machine learning algorithms aren’t as reliant on its own apps as they are on first-party data fuel, AppLovin will prioritize its margins — and software has far higher margins.

The goal is to eventually operate the applications business with 20% higher EBITDA margins, which is more in line with typical game developers.

Machine problems

But you are what you eat, and that also applies to machine learning models.

Unity Software reported revenue earlier this week. Its market cap has been halved. So, no, it didn’t go well.

Unity, which offers a suite of products and services for app developers and content creators (UA, monetization, player engagement tools, etc.), fell after alerting investors to “issues” with Audience Pinpointer, the machine learning tool at the heart of its strategy. to manage privacy changes from Apple.

Pinpointer relies on algorithms that look at in-app behavior data in real time at the time of an ad request to determine the bid most likely to drive performance. Which is fine, but Unity lost the value of some of its training data “in part because we ingested bad data from a big customer,” John Riccitiello, CEO and president of Unity, told investors Tuesday. ‘Unity.

Performance suffered, so customers spent less. Like a steering wheel, but upside down. The impact on Unity’s business will be around $110 million this year, with no carryover effect until 2023, and Riccitiello said resolving the issue is a top priority.

AppLovin’s investors were understandably curious if its Axon tool was exposed to the same potential issues.

“Machine learning obviously has opportunities and sensitivities and really requires good data flow, and a lot of that comes down to execution,” Foroughi said. “We focus on our own execution, not on what others around us are doing.”

MoPublishers on the platform

Additionally, AppLovin’s acquisition of MoPub was completed in early January and the MoPub exchange is now fully integrated with MAX.

More than 90% of MoPub publishers have made the switch, representing just over 700 million daily active users on a single exchange, Foroughi said.

But AppLovin didn’t give MoPub customers much time to migrate to MAX, just 90 days. To protect publishers from losing revenue as they rapidly move their inventory to MAX — a big deal — AppLovin paid out $210 million in one-time bonuses to publishers, which it sees as an investment to create opportunities cross-selling.

“We hope these publishers will become customers on our AppDiscovery platform,” said AppLovin CFO Herald Chen, who noted that if you add the $210 million bonus to the MoPub sticker price , the total for this acquisition was $1.26 billion.

“It’s a very attractive price for such a strategic and financially lucrative asset,” Chen said.

And a quick warning from Nothingburger: AppLovin’s actions were briefly stopped just after the market closed on Wednesday, but the problem was quickly resolved. Apparently, there was a glitch in issuing the earnings press release, and the SEC temporarily halted the stock to be on the safe side.