Applovin Corporation Class A Common Stock 2026 Q2 Earnings Call

Welcome to AppLovin's earnings call for the second quarter ended June 30th, 2026. I'm David Hsiao, Head of Investor Relations. Joining me today to discuss our results are Adam Foroughi, our Co-founder and CEO, and Matt Stumpf, our CFO. Please note our SEC filings to date, as well as our financial update and press release discussing our second quarter performance are available at investors.applovin.com. During today's call, we will be making forward-looking statements including, but not limited to, the future development and reach of our platform, our expected growth opportunities, the expected future financial performance of the company, and other future events. These statements are based on our current assumptions and beliefs, and we assume no obligation to update them except as required by law. Our actual results may differ materially from the results predicted.

We encourage you to review the risk factors in our most recently filed Form 10-Q for the fiscal quarter ended March 31st, 2026. Additional information may also be found in our quarterly report on Form 10-Q for the fiscal quarter ended June 30th, 2026, which will be filed today. We will also be discussing non-GAAP financial measures. These non-GAAP measures are not intended to be superior to or a substitute for our GAAP results. Please be sure to review the GAAP results and reconciliations of our GAAP and non-GAAP financial measures in our earnings release and financial update, available on our IR website. This conference call is being recorded, and a replay and transcript will be available for a period of time on our IR website. Now I'll turn it over to Adam and Matt for some opening remarks, then we'll have the moderator take us through Q&A.

Thanks, everyone, for joining us today. I'm going to get right to it. This quarter, we delivered almost $2 billion in revenue, which was just below the midpoint of our guidance range, and our adjusted EBITDA was just below the range. We've always managed this business with the goal of outperforming our own expectations, and this quarter, we fell short of that standard. What matters is that we know what happened, and it's already been addressed. Q3 is off to a strong start, and the business is back on the trajectory we expect. Let me explain. Gaming is still the majority of our revenue, and the single biggest driver of its growth is model performance. When our models improve, advertisers can profitably deploy more spend at their target return on ad spend goals and budgets naturally step up. This quarter came down to timing.

Our pace of meaningful model improvement was lighter than normal during the quarter, and the next step up in model performance landed just after quarter end. Importantly, nothing we saw suggested weakening advertiser demand or a change in the competitive environment. In fact, MAX publisher earnings grew double digits quarter-over-quarter, and our share of publisher waterfalls remained consistent. With those improvements now live and heading into what is a seasonally stronger part of the year, the business is re-accelerating. Now let me talk about consumer, which had an outstanding quarter. Advertiser spend set another record, finishing 28% above Q4 2025 levels. Remember, Q4 is the seasonal peak for these advertisers. Growing well past peak season levels in a seasonally slow quarter tells you how steep this curve is.

Consumer isn't yet large enough to fully smooth a quarter like this, that will change as we continue to ramp up our consumer business every quarter. Stepping back, I want to put our long-term growth in context, how we think about the next decade. We built gaming into a far larger business, far faster than we believe possible, and gaming keeps improving. What consumer adds is runway. We run one auction across multiple advertiser categories, and every category we bring in extends the opportunity in front of us. Over the longer term, as we continue improving gaming and expanding consumer, we believe this business can compound at roughly 30% annually. Now on EBITDA. Adjusted EBITDA grew to a bit over $1.6 billion, up more than 50% year-over-year. While this result lands just below our guidance range, the incremental investments were exactly where we believe they should be.

In our technology, we've been investing in architectural changes that let us build more complex models that benefit far more from additional training compute. That investment includes additional compute spend on the model improvements now live in Q3. Every dollar of it is dependent on return. When additional compute produces substantially more revenue through better model performance, that's a trade we'll make every day. These higher training and inference costs are built into our guidance for next quarter. During the quarter, we also opened up our platform to the public under its original name, AppLovin Ads Manager. As we said last quarter, we never expected the public launch to change the business overnight. We're sequencing deliberately mid-market advertisers first, where the platform performs best today, with the long tail unlocking as our data compounds, the same way gaming developed.

We'll execute on this through partnerships, you'll see us continue to invest there. Before I close, here's what we're focused on as a team. First, improving our core models, which is the primary driver of our near-term growth. Second, advancing the architectural work that lets us benefit more from scaling compute, which we believe unlocks meaningfully larger gains over time. Third, improving our creative tools and ad formats so advertisers can optimize their use of our platform to achieve even better outcomes. Fourth, bringing more high-quality advertisers onto the platform through strategic partnerships. Let me close with this. We've spent years building an advertising platform whose economics improve as our models improve. Advertiser demand is healthy. Our models continue to improve. Consumer is scaling rapidly. Nothing we saw this quarter changed our conviction in the long-term opportunity ahead.

With that, I'll turn it over to Matt to walk through the financials.

Thanks, Adam, and thanks to everyone for joining us today. This quarter is a good example of the underlying strength of our business. As Adam mentioned, we didn't get the same level of model uplift we've seen in recent quarters, but we still delivered second quarter revenue of $1.92 billion, growing 53% year-over-year and 4% sequentially, driven by the core gaming business and continued scaling in the consumer vertical. Adjusted EBITDA was $1.61 billion, up 58% year-over-year, with margins expanding approximately 300 basis points from the same period last year. Quarter-over-quarter flow-through to adjusted EBITDA was 70%. The primary driver of the sequential increase in costs was higher compute associated with training our existing models and with new model development. That higher compute run rate is reflected in our outlook.

We manage this business to EBITDA dollars and free cash flow rather than to a margin percentage, and we'll continue to deploy dollars when we see an opportunity to produce more revenue. Free cash flow for the quarter was $863 million. As I previewed on last quarter's call, conversion was below our normal cadence in the second quarter due to the timing of international cash tax and interest payments. This is a timing dynamic, not a change in the earnings power of our business. We expect free cash flow conversion to improve in the third quarter and to normalize to roughly 75% of adjusted EBITDA for the full year.

We ended the quarter with $3.05 billion of cash against $3.7 billion of total debt, which puts net leverage at approximately 0.1x trailing 12-month adjusted EBITDA, well within the approximately one x where we'd expect to operate over the long term. During the second quarter, we repurchased and withheld a total of approximately 1.14 million shares for $551 million and ended the quarter with 335 million shares outstanding and approximately $1.8 billion remaining under our share repurchase authorization. Our choice to moderate the pace of our buybacks this quarter relative to the roughly $1 billion we've deployed in the first quarter reflects consideration of our lower free cash flow during the quarter and does not indicate a change in conviction or in how we intend to use the authorization going forward. One other item before I turn to our outlook.

We continue to get questions on the reported SEC inquiry, so let me close the loop. It was a voluntary request, which we never deemed material. The SEC has recently advised us that it concluded its inquiry with no recommended action. We're pleased to have it resolved. Turning to our outlook for the third quarter of 2026.

No, it didn't really happen in that- We expect revenue between $2.055 billion and $2.085 billion, representing 46%-48% year-over-year growth- You got to spell it out every piece or 7%-8% sequentially.

We expect adjusted EBITDA between $1.71 billion and $1.74 billion, representing 48%-50% year-over-year growth with an adjusted EBITDA margin of approximately 83%. That outlook reflects the model improvements that are already live and performing, continued scaling in our consumer vertical, normal seasonality, and the higher training and compute costs I mentioned. It does not assume additional model releases that have not yet been deployed. To close, this was not the quarter we hold ourselves to, and we've been direct with you about why. What hasn't changed is the shape or strength of this business. Nearly $2 billion of quarterly revenue, growing better than 50% year-over-year, margins above 80%, and extremely strong cash generation. With the next step up in model performance already live, our outlook reflects the business getting back to the trajectory we expect. With that, let's move to Q&A.