Applovin Aktie

Welcome to AppLovin's earnings call for the first quarter ended March 31, 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 first 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-K for the year ended December 31, 2025.

Additional information may also be found in our quarterly report on Form 10-Q for the fiscal quarter ended March 31, 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 the reconciliations of our GAAP and non-GAAP financial measures in our earnings release and financial update available on our Investor Relations site. 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 want to start this call a little bit differently than our last view. No preamble on stock price, no addressing short sellers, no reacting to noise. This quarter, the conversation is about us and our future. And from where we sit, the future has never looked better. We just delivered another quarter where we beat our own guidance. Again, we continue to grow this business very quickly despite the numbers getting much bigger, and we are doing it while margins keep expanding.

The rate of top line growth profitability and free cash flow generation that we are delivering is exceptionally rare in public markets, and our team deserves all the credit for that. What I want to spend my time on today is the opportunity ahead because we are quickly moving through a lot of the goals we set for the businesses here, and we are now well on our way to opening up our platform to the public in June. That is a major milestone. For 14 years, we have been a closed platform. Come June, advertisers across the world will be able to sign up for Axon and start running campaigns that changes the trajectory of this company in a very meaningful way.

Let me start with gaming because it remains the foundation of everything we do, and it is performing really well. A couple of weeks ago, we hosted our annual Gaming CEO Summit. We bring in the top executives from the biggest mobile gaming companies in the world, and the energy this year was unlike anything I've seen. These companies have been our closest partners for over a decade in many cases, and the excitement was strong. There is a real sense that we are entering a new phase of growth for the industry, and our platform is at the center of it.

Here is what is driving that excitement. First, AI technologies are now enabling the studios to do things they cannot do before. Incumbent gaming companies, the ones that already have successful titles can now use AI tools to improve their current games faster and cheaper. More importantly, it is giving them the confidence to launch new games. The cost of experimentation has come down dramatically and that is unleashing a wave of new content that is really healthy for our ecosystem.

Second, we are seeing a meaningful shift in how these companies think about monetization. Games that historically only made money from purchases are now really focused on testing hybrid models where they also unlocked incremental revenue for ads. This is a big deal. For years, a lot of these IP-only games would not run ads because they did not want to promote competing titles. But as we scale advertisers who are not gaming companies, whether apps or websites, e-commerce or other categories, which we now call our consumer vertical, those concerns go away.

A cookware company or a fashion brand is not competition to a puzzle game. So we fully expect to see a lot of IP-only games start monetizing with ads that will not be deemed competitor. That is going to be a strong tailwind for many quarters. Together, we and our gaming partners can acknowledge that our platform is driving the market's leading scale and return on ad spend and continues to help the industry grow faster than expected. The ad-supported part of the ecosystem continues to grow at really healthy rates, multiples faster than the growth of the more mature in our purchasing category.

As we look forward, we expect to see much more high-quality content come to market that taps into both ads and in our purchasing modernization and that plays really well into our strengths. Now that brings me to the consumer vertical, which is growing even faster than gaming. This is still only 1.5 years old product. I want people to really internalize that and it is scaling at a pace that gets us very excited.

A couple of weeks ago, we had another material model of release that improved scale and return on ad spend significantly for our consumer advertisers. These are the types of compounding improvements we have talked about on prior calls. The team improves the model, advertisers see better returns and they put more budget into our system. It is a virtuous cycle, and it is working. The consumer vertical exited the quarter very strong with March growing roughly 25% more than the numbers we did in January, in April, reaching a record month in advertiser spend higher than any peak Q4 month. That kind of acceleration is exactly what you want to see from a product that is still early in its development curve.

Advertisers are seeing real success on our platform, and they are ramping aggressively. We are thrilled that this is happening, and we are really excited about what comes next. When we open up our platform in June, and start pursuing our mission of helping all the businesses in the world add another material marketing channel to their set of opportunities, that is when this thing just continues to compound. We always said we want to help the smaller businesses scale. Last quarter, I highlighted in the Israeli Cookware Company that went from $4 million in revenue to $16 million to now projecting $80 million with the majority of their ad spend on our platform. That is the kind of story we want to replicate thousands of times over.

As we look forward, one of the things that I'm most excited about is how advertisers will interact with our platform. We are already seeing advertisers use AI agents to manage their marketing spend, and we are building Axon to be natively accessible to those agents. Between self-serve access in June, our AI-powered ad creative tools and aging compatible infrastructure, we are building a system where an advertiser can onboard, generate high-performing ads and scale campaigns profitably without ever needing to talk to a human.

We're also showing up more podcast, sponsorships, a larger voice in the market that visibility reflects a deeper conviction, Axon powered growth isn't a niche phenomenon. It's a blueprint for transformation at a scale the world hasn't seen yet. Millions of businesses, that's the opportunity in front of us.

Let me close with this. We are a focused company, more excited about our opportunities than at any point in our history. The gaming business is strong, our partners are energized, and we are helping the industry grow. The consumer vertical is scaling fast, and we are just getting started. Our platform opens to the world next month. We will continue to ignore noise, execute on our path forward, perform well and drive value to our customers.

We know that, in turn, that will set us up for a much bigger future than where we are today. With that, I will turn the call over to Matt to walk through the financials.

Thanks, Adam, and thanks, everyone, for joining us today. Q1 was another exceptional quarter. We exceeded the high end of our guidance on revenue and adjusted EBITDA, expanded margins to a new high and continued our disciplined return of meaningful capital to shareholders. Revenue in the first quarter was $1.84 billion, up 59% year-over-year and 11% sequentially, driven by continued technology advancements across our core gaming business and our expanding consumer vertical.

Adjusted EBITDA was $1.56 billion, up 66% year-over-year, representing an 85% margin. Margins expanded approximately 400 basis points from the same period last year. Quarter-over-quarter flow-through to adjusted EBITDA was 86%, again, reflecting the operating leverage of our model. Free cash flow for the quarter was $1.29 billion, slightly elevated due to interest and tax payment timing. As cash tax payments are weighted toward the second and third quarters, free cash flow conversion is naturally lower in those periods and will normalize over the course of the year to approximately 75% of EBITDA for 2026.

We ended the quarter with $2.76 billion in cash and cash equivalents, providing significant flexibility to continue funding both organic investment and capital returns. During the first quarter, we repurchased and withheld 2.3 million shares for $1 billion, ending the quarter with 336 million shares outstanding and approximately $2.3 billion remaining under our share repurchase authorization, a program that continues to reflect our conviction in the value and durability of our business.

Turning to our outlook for the second quarter of 2026. We expect revenue between $1.915 billion and $1.945 billion, representing 52% to 55% year-over-year growth or 4% to 6% sequentially. Adjusted EBITDA is expected to be between $1.615 billion and $1.645 billion, with an adjusted EBITDA margin of approximately 84% to 85%. To close, Q1 was a beat across every metric, with margins at a new high and significant cash returned to shareholders. Our capital allocation priorities for the balance of the year are unchanged, fund organic investment and return capital through buybacks, reflecting our continued commitment to driving shareholder value through disciplined capital deployment. With that, let's move to Q&A.

[Operator Instructions] Our first question will come from Matthew Cost with Morgan Stanley.

I guess on the product road map. Adam, you talked about a significant product breakthrough just a couple of weeks ago. I guess could you give us a little bit more detail about what that entailed? Was it a new type of model targeting a different use case? Or was it an existing one? And then we think about -- when we think about the road map forward from a product perspective, what should we be watching for signs of you continuing to expand that opportunity and, I guess, what you're calling consumer now? Is it about launching new models? What are the milestones that we should be watching for success?

Yes. Thanks, Matt. So -- if you recall, when we first launched Axon 2, we've had a lot of fast growth quarters since I think it's been 12 straight -- and almost -- most of that has been attributed to 2 things. One is releasing new products. So as we've gone deeper into gaming, you know that we've come out with longer date periods of models. And the second and more important is improving the underlying model. And analogy is when you get to the LLMs, they can continuously uptick their model, they're releasing new models that perform better. .

In e-commerce and now what we're calling consumer, this product is really early. So it's like Axon 2, call it, 10 quarters ago. We're going through the phase of not only rolling out a model and understanding what the consumer needs, but also then on the other side, getting more data into the system. As we add more advertisers, we get more data, then we can build a more sophisticated model that can process it and create better output. So we've been continuously doing that. Last quarter earnings, I mentioned we just had 1 new model that had just created an uplift. The 1 we just had a couple of weeks ago was quite substantial. So that's why I highlighted on the talk track that we saw a big acceleration going exiting the quarter.

And then April Q2, bigger than any quarter that we had in Q4, which, as you know, most advertising businesses I don't know of another advertising business, actually, they can grow Q1 over Q4. But when you're in e-commerce, normally, the first half of the year is a huge drop against Q4. So already being ahead of where we were in Q4 prior to opening up the platform gets us really excited.

Got it. Great. And then just on -- you mentioned the Gen AI creative tool. You've been talking about that for a couple of quarters, but I think you're in the process of rolling it out more broadly. So I guess, how is uptake there? And I guess more importantly, for the advertisers that are using it, what sort of impact are you observing from that?

Yes. So I mean, as you know, we've talked about in past quarters, the creative placement on our platform is much different than anywhere else in the world. I argue is the best ad there is. You get over 30 seconds of viewer time, and they usually can't do anything else. So they're watching our ad and they get to -- the brand can deliver a really thoughtful message there and then go to other steps in the ad that can drive transaction. Because it is so different and unique, advertisers have a problem coming to platform and investing in the creative resources necessary to make our platform scale. .

On the other hand, on gaming, we're the largest there is anywhere in the world when it comes to mobile gaming user acquisition, so creative resources are entirely dedicated to our platform. So the importance of this shouldn't be understated. It was critical for us to get a model on top of the popular image and video generation models out so that we can hand to advertisers the capacity to just create ads out of the box that work for our platform. We rolled out something called our Interactive paid generator earlier in the quarter. That's out to all customers. That's pretty widespread adoption at this point.

But more important is the video side, that's still in testing. We're going to roll it out to all accounts shortly. And then that's important before we go to general release as well. That was the point that I mentioned on the last earnings call, advertisers trip up on is a lot of advertisers don't even have video for a platform like us. We'll hand it to them with these tools.

Your next question will come from Omar Dessouky with BofA.

I wanted to focus on the gaming business for a second. -- right? Because it's -- it kept on getting bigger and bigger. So the past several quarters, your quarterly run rate derived from mobile game advertisers has increased every quarter. And more specifically, the amount by which it steps up has also increased in the last several quarters. Did you see that trend continue in the first quarter? Do you expect it to continue the rest of the year and how does your capacity to fund GPU capacity separate you from some of your competitors who are also adding a lot quarter-on-quarter. Obviously, you're the biggest -- but it seems like there's a number of firms growing here. So sorry. So a couple of questions. Did you see the trend continue? Do you expect it to continue for the step-ups to get bigger? And how does your -- your ability to fund GPUs separate you from competitors, if at all?

Yes, Omar, you asked like you're almost surprised, but obviously, we're pretty good at game advertising. I'd say with 2 less days in the quarter and coming off the holidays, to have that much growth in the quarter. Q-over-Q against Q4 is quite substantial. When you look at 59% year-over-year, a large, large part of that is still because gaming is such a large part of our business, comes from the gaming vertical. We have yet since we launched Axon 2 seen a slowdown.

I also touched on a couple of bullets that were important to understand on the talk track. We've got a lot of these IP game companies that are really, really good at monetizing an existing game now able to create more games at lower cost. Much of those more games will be ad-supported and in-app purchasing supported. This hybrid category is explosive growth on our platform. So as you think about that, we're going into a period post growing really quickly, the one where there's going to be a lot more games from the highest quality developers and more games that are targeted directly at what we're very good at, ads and IAP. So at least thus far, we haven't seen a slowdown in growth. We've talked about 20% to 30% long-term growth in the games category. I think we mentioned that maybe 6 to 8 quarters ago. We've never had a single quarter that's come close to those growth numbers. We've been way over those rates. And we've never stated any different view on our long-term growth rates on the gaming vertical alone. I think you can sort of bank on that at this point, we're doing really well.

On the GPU capacity, as the models get more complex, as we continue adding more customers, we're going to need more GPUs. We work with Google Cloud on it, and we can go to any cloud. But we have the GPUs that we need to process the business today, and it's very likely we're going to need to continue to buy GPUs. In the market we exist in, the amount of GPUs you have is not the direct indicator of who's going to have the most success. If you compare us to the mobile gaming ad platforms, we probably have the largest infrastructure. However, if you compare us to Google and Facebook, we certainly don't have anywhere near the largest infrastructure and the reality is different businesses use infrastructure for different purposes.

What makes our business really compelling is that for this space, we've written the best models and products for the advertisers, that's super critical. That's what allows us to do so well. And we process that data and create a better output than anyone else. And that technology lead plus the data expansion plus all the budgets being on our platform, first and foremost drives the scale growth and success you've seen from us.

Okay. It was really a question about the quarterly run rate and how much is stepped up, but I do appreciate the answer. Maybe we can talk in you after call about it. .

Your next question will come from Jason Bazinet with Citi.

Adam, I listen to you long enough to know when you say something a couple of times, it's probably true. And you've mentioned this migration of in-app purchase games moving to hybrid monetization for a couple of quarters now. And since you're pretty good at doing math on the fly, could you just spend a few seconds and just sort of give us your sense of sort of what the mix is today in terms of in app purchase only versus hybrid. And pick a number if 5% of the games go over to this hybrid model. What would that mean in terms of your top line? Like how should we dimensionalize what it could mean for a [indiscernible]?

Yes. It's really, really hard to do that, especially on the fly. But I will give some qualitative points -- the in-app purchasing market is mature. We know it's around $100 billion market. Most of the largest in our purchasing games are some of our big advertisers. There's been a few that are new, but most are pretty old games. Almost all new games and a lot of these older games are really looking at this hybrid strategy because the growth in that hybrid category has been phenomenal.

There is a company out of Turkey this past quarter that just with a dozen people roughly sold for nearly $1 billion about 6 months after launch. Vast majority of all their user acquisition was on our platform, hybrid game and the growth was phenomenal, got up to a 9-figure a year business literally in half a year. And so why is that? Well, the people who are likely to pay in a mobile game are probably all people on our platform, given we service adults. But at any given time, inside of a mobile game, sub-10% of the population will pay in a short window. And we optimize a 28-day window.

Now when you look at that and go, okay, if I'm a really good developer, and I'm making an in purchasing game and I'm coming to this really strong marketing platform, Axon. And I'm only buying 10% of their audience, what am I doing? Well, let me go in later on hybrid monetization and what happens, 10x the market opportunity for that same customer. So these in-app purchasing developers are really starting to understand that there's massive growth in this mix monetization model.

You've got this ad-supported market that's much smaller. But as you know, from the growth rates of all of our peers in the ecosystem in our own has to be growing way faster than the single-digit growth rate in our purchasing market. it's also starting smaller. Where it is today, I would guess, is going to continue to converge to where the in-app purchasing market is over the next 5 years, and it's going to make it a really strong market opportunity for us and all other players in the ecosystem given how much more available inventory there will be to monetize.

Then what gets us excited is you pair that with all this extra demand that we're bringing in and the model improvements, and that's really what catalyzes all the growth that you've seen from us.

Your next question will come from James Heaney with Jefferies.

Yes. Great. Thanks for the question. Just one for Adam and one for Matt. So just for Adam. I think last quarter, you talked about the breakage that you're seeing in your new customer onboarding flow. Could you just give us a progress update on that and how far below your target breakage rate you currently are? And then I had a follow-up for Matt.

Yes, James. I don't know that we have a target. I mean, look, any sort of platform when you get customers on, whether it's social network or an ad platform, you're going to have some breakage. Our job is to give the best tools possible to the customers and really understand what the breakpoints are. The main thing that we talked about last call resolving, we're still in the midst of resolving. We will over the next couple of weeks before we go to general release, and that's delivering video out of the box. That's not a trivial task, but we initially rolled it out a few weeks ago with customers.

There's a blog on our website, so you can see some of the AI generated ads. Frankly, the AI generated ads are really, really tough to tell that they're built by AI instead of a human being and the cost is exceptionally low relative to what a human-generated video would cost. So -- we think we're pretty close to having that ready to go for anyone to just plug in and get video out of the box. And then we talked about opening of the platform in June. So in a matter of weeks, we'll think we're there, we'll roll it out to the broader base of new customers and [indiscernible].

Great. And then 1 for for Matt, just on marketing expense for the second half of the year? I mean is it fair to say, obviously, you've got Axon launching broadly in June. I mean is it something you're looking at kind of -- I don't want to say pumping up, but bumping the marketing spend higher in the second half? Like how do you think about that investment?

Yes. I mean we've communicated this in the past, James, we're spending performance marketing the same way that our customers do. So we're looking at the return from that spend, and we're only investing where we can do that in an efficient and a profitable way. So we might see some increase in sales and marketing costs associated with the general audience launch and just this ongoing building of our overall brand awareness as well that you've seen out of doing more podcast that you mentioned in the preamble as well. So we'll be spending more costs -- and so you might see some temporary increase in the sales and marketing costs associated with that. But over time, if we're really ramping up spend, it should be a positive signal to investors and to the market that we're seeing really profitable returns coming from that. So it should be received very positively.

Yes. A couple of other cool stats I pulled before the call on that, too, is we're still running under 30-day breakeven on the dollars we're spending. We're doing a mix of paid marketing and sponsorship. So you might have seen us on some podcasts. You might see the ads on social media, you might see the ads on search. We're going to keep doing that, but we're very disciplined about what we do. We're don't a rush to go really Sprint at this opportunity because at the same time, as it's really important for us to bring advertisers on, we need time to keep improving our models and our products. And as you know, every time we do that, everything lifts with it. .

And then secondarily, I was looking at right before the call, what's the actual value in the front year of a new customer? And our business, as you know, as customers retain over time, the growth that will happen to the cohorts will be pretty material after the first few months to the front year to the following years. We almost never churn to customers once they get through the first 30 days of our platform.

Right now, we're projecting well over $70,000 a year. from every new customer. So if you just want to size that, at least open up the platform and sign on 100,000 customers in the next year, first year revenue from them or ad spend, advertising spend would be roughly $7 billion. And then you start stacking the cohorts up. So the market opportunity for us now that we've seen that the ticket size is pretty material, even though we've opened up the platform in part through referral is really, really large. We just have to go execute on it.

Your next question will come from Stephen Ju with UBS.

Okay. Adam, I guess I don't want to split hairs here, but Adam, you've started to talk about the broader consumer segment instead of just the narrower e-commerce definition. The retail opportunity is, of course, pretty large. But as you think about the rest of the ad market, out there that could be spending with AppLovin? And can you talk about how easily transportable your current efforts will be to some of the other verticals?

And secondarily, I don't know if this has ever been a concern, but versus the amount of inventory that's out there, how much incremental inventory do you think can be realized with some of the IAP only publishers as you start to bring them advertisers that do not necessarily compete with them? And should we be thinking about the sales cycles to these publishers. It's not going to be that difficult because you're hopefully going to be showing up at their doorstep with lots of cash.

Yes. So great question, Stephen. So let's cover the second 1 first because I can remember right now, and we'll go back to the first one. So the second one, inventory expansion is pretty important for us over time, but not necessarily right now. We have over 1 billion daily active users and we undermonetize what we show right now. As you know, our conversion rate on 1,000 impressions is pretty low to a revenue-generating event for us. And that's only going to go up as the models improve and advertiser density improves.

But -- there's a couple of logical places to go to get inventory. So as you talk about in out purchasing games, if you just start with the $100 billion market and say, Activision, when they were public, and they used to report King ad revenue, they've gotten it to 15%. Let's just take that as an estimate, $15 billion a year to the publisher and then obviously, revenue on top for ad networks. Most of those apps today don't run ads. So if you say, let's say, even half of them do, now you have a $7.5 billion opportunity to publisher, there's a massive supply side expansion for us. That's sort of sitting there pretty easy out of the box. We're going to go after that in short order.

The other side of this is important to understand is as we go and get more publishers to look at us as an advertising monetization platform, we're not competitive with really anyone in the world. So you can imagine any type of publisher that's sitting out there outside of the really big walled gardens are going to want monetization support. It's not particularly easy to place a game at on a social network or a music streaming side or a show streaming business. However, you can imagine e-commerce would place pretty well. And tied back to your first question, things like lead generation and things like fintech would play really well as well. And so as we start going out to these other categories, build the models for them, bring on the demand in parallel, we're going to go to get more supply, both on mobile and then hopefully execute on the connected TV strategy as well.

So this is all on our road map. It's stuff that we're actually working on and thinking about today, it's not stuff that I would say for 2026 is going to have any material financial impact. But as we think about our business, our job is to execute on things today that will help the coming years. That's one of the key bullets that we care about.

Now, on the first question of advertiser demand expansion, I'll start with we're never going to get into branding. We believe everything should be performance when it comes to advertisers. So if you think about our business today, almost all of it drives to revenue generation for advertisers, but we're missing a huge category, lead. If you think about some of the biggest advertisers on social, you've got e-commerce, you've got gaming, you have apps that drive to subscription. So those businesses are all revenue-generating businesses. We do that well.

The other huge category are things like auto insurance, health insurance, fintech, food delivery. These are things that are structured around Elite. Now we're missing that today. we're in the midst of testing a model around that right now. And as we roll that out, we're going to be sort of in the early stages of what we were when we rolled out the original consumer vertical, what we called e-commerce. 6 quarters ago, we'll be at that same stage, but that's something that we're going to invest in. We're going to go service those kinds of advertisers. The 1 billion plus daily active users are not just gamers as we've proven. They're also not just gamers and shoppers for D2C products, they're going to broadly want to do things. And so being able to service them with financial services offers, health insurance, auto insurance is a big part of our strategy.

Your next question will come from Benjamin Black with Deutsche Bank.

So Adam, on web-based or, I guess, consumer advertisers across your existing customers. Can you talk about the difference you're seeing across those who have success and those who are not yet having success on Axon? And then maybe what you're doing to element some of those points of friction before you open up the Self-Serve platform in June? And then secondarily, we're hearing more and more developers bypass [indiscernible] store fees, which obviously improves our margin. So as the profitability increases, have you seen a noticeable tailwind on the gaming side?

Yes. The second one is easier. So I'm just going to answer that directly. We don't notice it. It will flow into the ecosystem as it does. It's never going to be uniform, the game developer ecosystem so fragmented as is our advertiser base. So as they see benefits, one-off, they might start investing, but game developers tend to be risk-averse as well. So it's very unlikely that there's been a massive change in economics to the -- not to the game developer thus far. .

On the first one, as you think -- actually, my mind slipping up, can you remind me of the question [indiscernible].

Yes. Okay. So when it comes to success versus not, we've talked about this before, ad creative matters a lot. We put out blogs around this. We're trying to instruct the advertisers. But it turns out when we first launched this product, it was pretty easy to tell the advertiser to support your social media ads to our platform that was sort of almost a trap in a way because a 10-second ad, this mental hockey user in 3 seconds is not very well suited to a 30 to second video spot.

And so what we've really been doing over the last 18 months with the customers is trying to get them to understand our placements are different. -- they need to really build creative for our platform. And then not only that, we're starting at a point in time where demand density doesn't exist on our platform. If you go to social, it's very rare that you're going to see the advertiser 5 times in a row. If you come to our platform, we're just getting started. And one, this is sort of a hindrance today but a huge opportunity over time. And we think the users in the market for a mattress they might see the same mattress offer 5 times in a row.

Now that mattress company wouldn't have had that case in social. When it comes to us, if they serve 5x in real, they better have 5x the video creative, right? Now come a year from now, and we have way more home goods advertisers because the density is inevitably going up, we would serve different ads in those slots, which would drive our conversion rate up. So thus far, we've seen success with customers that know to invest in our platform for its unique attributes -- and we've seen less success for those that think just port over what they're doing elsewhere, and that's going to work out of the box.

Longer term, the opportunity on our platform is large. And what we're excited about is that the conversion rate is inevitably going to go up as we get more advertiser density and drive more competition, which is going to lower frequency of each individual advertiser to the end consumer.

Your next question will come from Alec Brondolo with Wells Fargo.

Maybe 2 for me. We track the number of apps and games that are being added to the app stores every month. I think that March was up something like 170% year-over-year. It's a pretty meaningful inflection I think that the -- these apps are probably going to be different than the apps that were on the apps for before. I think a lot of them are [indiscernible], A lot of them are being created by prosumers and I guess the question is, does the way that you distribute the mediation solution need to change in order to kind of reach this new long tail of games and apps that are being created. So that's the first question.

Maybe a second question. I think the kind of AppLovin creating a social media platform has been floating around in the guys for a couple of months. I think it keeps coming up. You did a podcast maybe a week ago where you mentioned it again. And so could we maybe just get a little bit of clarification. Is there interest in building a social media network or maybe acquiring one. What is the thought there?

Yes. So the first question, it's a good question. Look, right now, a lot of the bi-coted stuff in the world is quite a bit of slot more than substance. But as you go forward, what's going to end up happening is these tools are going to let the best developers create more content. Quality is going to go up, the content count is going to go up and the need for Discovery is going to go up. So that plays right into our strong suit.

The better quality ops are going to need mediation integration with her mediation solution is really trivial. Anyone could integrate with their mediation solution using the popular by coding tools today. So there's nothing that we need to change there. Now it's not our job to go monetize day monetizing apps. So there's not a whole lot of value in the long tail. But -- so I would say we don't get excited over the flood of apps in the App Store today. what we get excited about is the ramification of by coding tools for the best developers today, they're only going to get better as we go forward.

On the second point, I mentioned this on the podcast. We also can buy code products. And there's once upon a time we bid on TikTok. So you know that we have an interest in better monetizing social. We believe we're very good at recommendation engine technology. We have one of the world's most sophisticated advertising technology and the possibility to work on an engagement algorithm with a social app is enticing to our team.

What we look at when it comes to the world of Vibe coding and just releasing products is there's very little cost. But what it does for your business to be able to build new products, is attract more engineers. Our CTO, Giovanni's job, is to hire the best talent in the world of recommendation systems. And so the social media app is an example of something that will play that role. Not only will it allow us to attract great talent, that team is pretty excited about the things that they're building, and we're going to be able to test and iterate on our product in a very low cost and swift way because of the popular vibecoting tools out there.

Your next question will come from Clark Lampen with BTIG.

Adam, I wanted to go back to, I guess, the hybrid conversion comments that you were making before. I think you said that net of those changes, developers were seeing 10x improvements in monetization. Is it possible to give us like a relative comparison or some relative framing of how monetization post those changes or the bidding dynamics, I guess, post those changes compares between gaming advertisers and nongaming advertisers. I think there's some concern that as density builds for the latter, that if they're bidding against a higher transaction value that there could be some shift in the bidding dynamics that would be unfavorable for your gaming marketers. Is that happening? Or is that -- are you seeing any signs of that occurring? .

Yes. I mean, look, that's a great question, Clarke. Originally, when we got into e-commerce now what we call consumer, we were a little worried like is this going to cannibalize the gaming customers. And we said we are wasting a lot of impressions selling game game, game game and the model given the opportunity to personalize ads is going to drive incremental transactions without cannibalizing. Now this business continues to grow. So -- we talked about the $1 billion run rate a year ago, it's much bigger now. And we talked about our fastest growth month. And then now in April, getting bigger than any month in Q4. So you see the trends where it's growing. And you just saw us put up a huge growth quarter where most of that growth is driven by gaming.

So we have yet to see any cannibalization there's -- not only is there an offset, which is we have a lot of impressions that we waste that now we can utilize for better targeted product ads. The other offset is, as we get more e-commerce or consumer brands to go live, we get more data into the system. The more data we get into our model benefits both kinds of advertisers. So as we get more targeted with gaming ads, it's not likely we're going to see a loss. And then the third tailwind there, which frankly isn't up to us, is that these game developers as I mentioned, are getting more sophisticated. They're going to have more titles coming out, and they're going to be doing these hybrid monetization strategies. -- which paired with the app store fee cuts are going to drive their monetization up a lot, they reach up a lot and create this opportunity to really expand the ecosystem.

Okay. That's helpful. And maybe for the next question, going back to the top, and I think following up on Matt's question around the time line for directed model improvements that we are seeing -- you guys talked about a conversion rate of around 1.3% intra-quarter. It feels, I guess, at least at a high level like we're seeing a faster pace of directed model improvements of late. Is that -- one, is that right? And I guess, two, if so, is there something that you guys have figured like figured out about your underlying models that is leading to a faster pace of improvement or some unlock there. Could the next 1.3% come faster?

I mean, look, the 1.3% comes from advertiser onboarding and model enhancements. This is really a testament to the team. We're now further evolved at understanding how to improve these models, right? So they understand the techniques they've gotten more sophisticated what they're doing. The AI research space, obviously, is seeing fast improvement too. You've seen an insane amount of product releases in the large language model space in short order because of everything that's happening there. .

A lot of those same trends apply to us, but I think it starts with our team is just getting much smarter about the tests that they're doing. So we have 100% seen faster improvements to the malls, both across the consumer business and the gaming business. And we don't really see a reason why that's going to slow down. As our team of researchers get smarter about the things that they're testing, the success rate goes up, which is going to enable us to continue to push the technology forward, drive better return on ad spend that drives up same-store growth, the same customers we have today should keep growing and then pair that with opening up the platform in new advertisers and new data, it makes us really excited about where we're going.

Your next question will come from Rob Sanderson with Loop Capital.

I wanted to go back to the video creation tool you're in testing now. Obviously, is it mostly technology readiness that you're testing? I mean is it too early for any learnings on how it changes spending patterns? Second question on that. I know you source multiple models, but any hiccup with open AI dropping Sora -- and also like your CDASI,something you're interested in leveraging. Is that something you can leverage? And then as the product becomes more popular and you can see this scaling to thousands of customers, maybe more than that over time. But -- what are the implications for compute costs? And do you expect that's going to be a drag on margin? Do you think the revenue stimulus is much higher and it maybe comes at lower margin? Or -- do you think the business can absorb the costs? Or do you think there might be some consumption fee or something like that?

Yes. You got a ton of questions at the -- your [indiscernible]. -- all right. look, video creation tool is new for us. So we don't have -- right now, like in terms of a Dodson total volume on the platform, it's pretty low. The job is to make sure that a customer can access the screen, request a video ad and get now put that they're satisfied with. And so like once it clear that hurdle, and there's not a whole lot of back and forth on that, we'll roll it out. So as I said earlier, I mean, we're days away from rolling it out. So we're in a pretty good spot with believing that the tool is ready.

Now we know for a fact, more creatives that are catered to our platform, drive up spend. That's pretty much standard. Like it's really not a complex task. So we think it's going to be very beneficial, especially for the smaller customers. There are big customers that make ads for our platform. So if you think about like the gaming companies, not as beneficial for them. They're already investing heavily in creating ads for our platform. I mentioned on the last earnings call, some of the top ones have 50,000 adds plus live at any given time. This tool isn't meant for them. But the tool is met for the long tail that we're about to onboard and a lot of these e-commerce/consumer brands that just aren't ramped up on creative production.

Now when it comes to cost, which was your last question, we're going to roll it out where we're going to give them sort of an unlimited access. But if people start over-delivering creatives, one is beneficial, it means the tool works really well. But two, it's a revenue stream for us. We can start charging, we can cap credits, there's companies out there that are raising tons of money at insanely high valuations, they're simply doing this. So if we see that kind of adoption we could just start charging for it. And frankly, the cost is going to be so low compared to what they can generate in human-generated creatives. So that would be a really good sign for the success of what we're building here. And then -- so I wouldn't factor this into our economic profile at all. I would not expect margin compression. This is also not our own compute. This is utilizing third-party services. So it's really just a tax that we have to pay to third-party services to utilize their compute.

So then to your last question, which third-party services do we utilize or how is the market evolving when it comes to image and video generation. SOR2 is a good product. Obviously, it was 1 of the ones that we use underneath the [indiscernible] it going away doesn't change a whole lot. One of the nice things about being an independent company looking at all the large language models, is we don't have to be favored towards any of them. And so you mentioned seed dance. There's other ones out of China as well. We can deploy any form of model, whether open source or close source in any of the categories, tax image or video and utilize the 1 that's best for the purposes that we have. And you can assume we do that. We don't stick to just one. We want to be optimized for the field. And so that's something that we constantly do, therefore, SOR 2 being deprecated, didn't impact as well.

I know there are 6 questions, but I'm going to do a follow-up anyway. Just any learnings from the audience segment and targeting like you went prospecting campaigns to discovery campaigns like any generalization of what this is doing to unlock budget for existing customers?

Yes. I mean, look, it's simply it helps. As you think about like the 3 different levels of targeting, we talk about it as going to the extreme top of funnel. The discovery tool is to send brand-new site visitors optimize them and try to convert them for an advertiser. So this is site visitors the customer has never seen before. That's the extreme top of funnel. Then you go to a prospecting campaign, it's sort of like you're going a little bit further down a little bit, you're still near the top where you're driving a new customer that's never bought before, so 0 retargeting, but it's something that is a new customer that might have visited the site before.

And then our universal campaigns are make sure retargeting and not. And so -- by going from the -- given this targeting that we allow the advertiser to go complete top of funnel, middle of funnel and bottom of funnel, we're seeing that unlock much greater aggregate budget most customers that care about this or have these recurring high brand loyalty type of business models, usually use a mix of all 3, and it gives them just more tools in the tool set. And so it is nice to do that for your customers. It allows them to break things down better. It allows them to change their budgets to better map to their goals. And we've only seen success since we've rolled out those other incremental targeting types.

Your next question will come from Vasily Karasyov with Cannonball.

So Adam, following up with what you mentioned a couple of questions ago, you mentioned Connected TV, right? And I remember I think for 2025, you listed Connected TV as your 5 top priorities for the year, right? Obviously, not getting a ton of attention. But can you explain your vision there? -- you say we'll never do brand, right? You have bol. And by the way, Roku mentioned [indiscernible] now and then in their shareholder letters that they integrate with them. So can you help us understand how what your vision is and how what you're doing now will sort of evolve into that?

Yes. I mean if you think about what happened, this e-commerce consumer business just started growing really quickly. So we sort of shifted focus and said, we don't need to take a bunch of shots on goal last year. We said, all in, let's go make this product really scale. Let's build the Axon ads manager, let's open up the platform. The opportunity was just too big to ignore. So we went all hands on [indiscernible] in front of us. That doesn't change the fact that I still believe television is massively undermonetized and truly the holy grail of advertising when it comes to my view on advertising, defining performance as being able to drive actual incremental revenue for customers is to be able to take that small, medium-sized business. They can't today access the big screen and let them buy the big screen and prove that they're driving incremental value. If we're able to do that, we can take the customers that we're acquiring now. and be able to give them a click of a button to go to the television screen. That's something that we're still working on.

Take the creative that you generated for them. and choose to place it on big screens somewhere. Is that.

Exactly right, and be able to do -- prove to them that, that big screen ad drove more revenue for them than the cost that they were paying us on it. if we can do that well, that's a massively scalable business line. And it's also one that's really enticing to us because it's such an underused screen for performance marketing. It's overused for brand marketing historically. It's under used for a lot of these small to medium-sized businesses, and those are the ones that we really are building tools for. So if we can help them get there. It will grow their businesses, and it will be really dramatic growth for us. That's something that we're working on.

Now as you've seen in the past, -- we work on a lot of things. We don't talk about things really until we know that things are going to work. It's easy to do extrapolation math. And you've seen us really signal new product is going to scale, and I don't know that we've been wrong once yet, right? Like so this is early in development for Connected TV. We're still working on it. At the point in time when it becomes something that's real, tangible, and we can extrapolate to big numbers, we'll start talking about it more. But I just laid out for you how we think about it, and we do think it's a big opportunity for us as a company in the long term.

Your next question will come from Jim Callahan with Piper Sandler .

Just to scale, how should we think about balancing the user acquisition needs between consumer, I guess, now consumer and gaming verticals.

Maybe we missed the first part of your question, Jim, could you.

Sorry. Just as e-commerce scales, how should we think about balancing needs between the consumer and gaming verticals on sort of the user acquisitions at, making sure they're both sort of happy.

Yes. I mean, look, we don't really think about that because we -- as I mentioned earlier, to Clarke's question, we haven't seen any cannibalization effect and so in the absence of our job is to continue to invest for both verticals. But the reason why we talk about the platform is a single platform is it's a single action. It's our job to deliver as much demand diversity into the model so that the model can decide how to place the ad. Now the 2 models we've talked about historically are different. So we continue to invest on the gaming side, and we continue to invest on the e-commerce consumer side. It's also our job to keep improving the underlying technology on both at rapid rates. So that's something that we haven't stopped on.

Obviously, the gaming vertical for us is much bigger than anything else in our platform today. when we met with the gaming executives in Greece, they taken note of the fact that our models continue to improve. So we're not going and saying, we're going to slow down on one in favor of the other. We're saying we're going to push both forward. And then if we continue to see gaming growing really well, we're almost certainly going to see consumer growing faster. But because we haven't seen any cannibalization, it doesn't make us think about, okay, how do you balance the two?

Okay. That's great. And then just 1 more on e-comm. You talked about the step up in April recently. There have been a lot of sort of new product rollouts. I be curious what you'd kind of call out is like the biggest flag of kind of the improvement there?

I mean the product rollout to help advertisers build campaigns, launch ads. Those are sort of like the basics of ad campaign management. A lot of that is going to be automated in the future too with agents. But the most important driver of our success, especially this early in the product is the engineers improving the model to drive better return on ad spend for advertisers at a higher scale. So when we talk about, we saw a big uplift, something that creates a big uplift across all is almost certainly to be an improvement on a next release version of the [indiscernible].

Your next question will come from Robert Coolbrith with Evercore.

Great. guys, really appreciate the opportunity. Adam, I just wanted to get your response on a couple of topics that maybe come up with conversations with some of the gaming developers. On the direct building or web shops, obviously, there's the cost savings side of the equation, but we also hear some developers talk about that as an interesting new surface area for data capture and remarketing. Do you think that's going to be a meaningful opportunity for the sector? Is that something that's potentially a good fit for AppLovin to develop a solution around.

And then second, we also hear some people talking about some of the new creative or generative creative tools, things like playables, generation and iteration or versioning. Is that something that you think fits in with the platform could fit alongside some of the things that you're doing with creates [indiscernible].

Yes. Thanks for the question. So webshops down in the space we're going to get into directly. But obviously, we benefit. So if the game developers have the capacity to get more user data, build a more intimate relationship with the user, launch things like remarketing or even possibly ads on those checkout pages. Those are things that we can play a role in.

We don't need to be the one responsible for the billing now. When it comes to the generative creative tools, it's not our goal to just stop on video and interactive pages. Eventually, we'll have payables. And hopefully, over time, using these tools, we can create more types of templates as well. There's no desire or expectation that for the rest of our existence, we're only going to serve videos in playables and gaming. It's very possible there will be other types of ad formats. And as we get into high iteration mode using the LLMs, it's possible we'll land on new techniques too, that can create better response from consumers.

Now Today, the game developers already use a lot of these tools to create way more content into our system. I really doubt any customer created 50,000-plus ads by hand. So these tools are already benefiting us as a platform that's closed loop in this large scale and also really for the game developer, the first destination. If they're going to spend money on AI tools to create ads they're going to start with, let's create ads for the Axon platform and then they're going to go beyond that. So we are already seeing a benefit. But I think that benefit will continue to grow as we get better at building out these tools ourselves.

Your next question will come from Martin Yang with OpCo.

My question first is on the consumer side. The strength you saw in April -- if you break it down, is that from a newer cohorts that onboarded since 4Q last year from more mature cohorts?

Yes, Martin, it's from both. I mean, newer cohorts are never going to ramp up all that much. So if you recall, I just mentioned, call it, over $70,000 in the front year. So you're not talking about a lot of advertiser spend per month over the cohorts that we've gotten. So you could say like if we're seeing material growth, it almost certainly is coming from the current existing customer base as they see the product improving.

What we care about is growth from those existing customers. If your current cohorts, are growing much faster than expected. It's with certainly you're going to be able to open up your platform and get new customers. That's something that we just know as a function that's inevitable. We don't want growth from new to distract from the need to create growth from preexisting. So we're always fixated on growth from current as the most important KPI that we want to see, and that's exactly what we're seeing as we improve the models.

And second question on the new features and tools you created for your consumer customers. What about the gaming side? Are those customers getting as many new features and updates as the consumer side?

Yes. I mean, look, on the underlying model, the gaming models are continuing to evolve as quickly as the consumer side. So that's why gaming you keep seeing is growing really, really quickly. There's nothing to suggest we should be growing gaming at the scale that we operate at this quickly, other than we have to be improving the model really quickly.

On the ad creative side, I just mentioned like these gaming companies are already really sophisticated. They don't need the tools to be ready for them as much as the consumer advertisers. It's our job to make the consumer advertisers scale but then get better at these tools for the gaming customers as well. So I just touched on that eventually we'll have a playable generator as well. So we'll get into all these categories. But right now, because the tools are so early, the lowest-hanging fruit for us was the consumer vertical.

Your next question will come from Ralph Schackart with William Blair.

Matt, just 2 quick ones. It doesn't look like the macro impacted you in the quarter, but just kind of curious, Adam, anything you're hearing out there, particularly probably the e-com customers or advertisers with the oil prices where they are -- and then talking to ad buyers intra quarter, we're hearing retention rates were a lot higher than at least the people we've been talking to on the self-serve product. I'm just kind of curious if that's something you're also observing on a broader basis on your platform.

Yes. I mean like the first one, we don't tend to get much macro impact. We're selling revenue and profit to advertisers. So if they're buying profit, they're not going to come cut the dollar that's driving them the best ROI on their advertising. So it's not something that we really see. And then on the consumer side, where you'd say, broader set of customers around the economy.

Most of our customers still are Western as we haven't yet really launched an effort to go get customers around the world. So I'd say short is no impact from us, but I don't know that we have the visibility to even know. And it's very likely that just the structure of our business selling revenue and profit to customers makes us pretty insulated for macro trends long term.

On the self-service retention rates, I guess, is your question, are we seeing strong retention from self-service customers Yes, yes, for sure. I mean, I mentioned a few minutes ago that if they get to 30 days of spend, there's first like get them live, which we're continuing to work to improve. But once they get live, if they get to 30 days of spend, customers almost never churn on our platform. So it's our job to get them there, but we see pretty low churn overall when customers go live relative to what you would expect on products like these because we're selling again, we're selling profit to them. So they launched, they see good return on ad spend out of the box. It costs very little for them to see that, then they continue to invest in the platform. And that's why when we look at a product offering that today has less than a 30-day breakeven on the marketing dollars that we're spending, that's really exciting. Obviously, we have really strong retention long term and those cohorts and net dollar retention is going to be pretty strong as well. And you break even that quickly, you're going to make a lot of money as you go get more customers.

Your next question will come from Tim Nollen with SSR.

We'll move to Jonathan Kees with Daiwa.

Okay. So glad to make it. And yes, guys can excuse me. I guess I wanted to ask a strategy question. You're now talking about this as consumer, which is many verticals. And in -- in the past, you talked about going after a transactional base, and now you'll start on transaction and lead based, talking about the 3 parts of the funnel. And the question that you guys, I'm sure, received when you're first going to go into e-commerce and now it came to mind again as you talk about consumer with the many vehicles, Isn't it too much? I mean, you guys got really good because you focus on just 1 vertical mobile games. I just that you guys dominate that, right? And now you're taking expertise over to e-commerce and the verticals within consumer understood, but you're also talking you have to have 2 separate models and some like that and resources can be scarce. That question pops up again. And in terms of -- are you doing too much? And especially like you're still trying to gain traction with like the video ad market, the TV ad market. So I guess that's the [indiscernible] with that.

Yes. And look, it's a good question. We have a great team. People love working hard. They love the products that they're working on. And we've never reached the point of too much. I mean it's one of those things where like it's easy to look at how lean we are and think, okay, they can't do more. But these incremental products are things that we understand really well. Their goal is to go better monetize the audience that we have. And so as we talked about like launching cost per lead model getting in the lead gen, it's not a materially big lift compared to what we've already done because we know really what we have to do. .

Then we talked about in the talk track, giving our dashboard access to agents or any of the popular LLMs. Eventually, you can imagine advertisers will just be able to use their favorite LLM, take all the actions they need in our dashboard automatically create the video and end cards, get live, get profits, get leads, scale that doesn't require a lot of effort from us. A lot of this stuff in the world that we're going into is going to go automated. And then it's up to our team of really sophisticated engineers to build great product and it's up to our business team to make sure the business and growth marketing teams to make sure that our brand is recognized and the customers come to our platform. Those are things that overlap to everything that we're talking about here, whether it's the lead-gen model or the connected TV model.

So what gets us excited about that is all of these growth vectors, also including just getting more supply are all really related to each other. And a lot of this effort is not meant for this year again. Like we're not saying we're going to race after this opportunity and count on it this year. We don't need to count on anything this year. This business is growing really fast. What we're talking about is a whole bunch of related opportunities that are really large that will hopefully set us up for exceptional growth rates and profitability expansion over the coming years.

And that concludes the question-and-answer session for this quarter. We thank you all for joining us today. Have a good afternoon.

Thank you.

All right. Good morning, everyone. Thank you for being here. My name is Matt Cost, Morgan Stanley U.S. Internet team. Very happy this morning to be joined by Adam Foroughi and Matt Stumpf, the CEO and CFO of AppLovin. Thank you for being here, guys.

On the Morgan Stanley disclosure side, please note that all important disclosures, including personal holdings disclosures and MS disclosures appear on the MS public website at morganstanley.com/researchdisclosures or at the registration desk.

All right. And with that out of the way, Matt, maybe let's start with you. I want to revisit the 20% to 30% growth target that you've talked a lot about over the past couple of years for gaming ads. You reiterated again at the fourth quarter. And obviously, you've exceeded it quite a bit over that whole time period. Has your thinking on that benchmark changed at all in terms of the baseline level of growth of the gaming ads business? And is there a potential upside to that number as we look out?

Yes. I mean there's definitely potential upside. Look, when we initially mentioned to investors in the public markets around the 20% to 30% we just wanted to frame for investors that there's a lot of opportunity there for continued growth with the core technology on the mobile gaming side of the business. We broke it down for investors very simply that between directed model enhancements and recursive learning that's happening on an ongoing basis, we should be able to get at least that 20% to 30%. At the time, I think when we initially said it a couple of years ago, we weren't even getting credit for 20%. I think people didn't think we could grow at all. So it was just a baseline and we wanted to kind of level set with investors. And look, over that period of time, over the past couple of years to your point, we've grown at a pace much greater than that.

What investors need to understand is that this technology is very nascent. So our engineers are continuing to come up with directed model enhancements to make the technology better. And as we grow and scale, what that means for the technology is that we're getting more data to feed into it, which then improves the technology over time and continues to stack and compound and as we expand out on things like e-commerce, that will continue to grow the technology's ability to scale and drive spend at the return goals of our advertisers.

You mentioned e-commerce and web. Maybe I'll go to you, Adam, on that one. So on the last earnings call, you talked about expecting a faster ramp for web advertisers compared to gaming. I guess let's talk about what the drivers of that faster ramp are, the scale of the opportunity and then how that business is progressing as you move closer to the GA launch in the first half of this year?

Yes. I felt like with this question, it would be good to just talk through how do we do so well in building products in the markets that we operate in because there's always a question with our business of how do you outcompete everyone in this niche that you become so excellent. And over 13 years, we really understood with game developers what they needed from a marketing platform.

The game development market is much easier to tackle at least for us, it was, then the e-commerce or these incremental markets because it was more niche, the developer mix was smaller and we were able to tackle it over a long time, really understanding that their biggest issue was how do you spend $1 and ensure you make more. These are not VC-backed companies, they had to know that they were going to get a profit on the marketing. In the absence of that, our business never would have scaled. So over the 13 years, we became excellent at building a recommendation system model to automate that problem for them and we do it today at larger scale than anyone else in the world. We became the #1 destination for game developers that required us to know our market.

Now as we've gone outside of gaming, this is a new market for us. We got into e-commerce, we talk to clients, we try to understand the complexities of the market. It's a much more complex market because you've got two parts to -- maybe three parts to e-commerce businesses. They try to find new customers on discovery platforms. Meta is a fantastic example of this. We are trying to be another very large example of this. But they also mix in search advertising, soon there'll be large language model advertising typically called bottom of funnel. At the end of a conversion funnel, you run an ad, close the gap to conversion. And then they've also got CRM. They get a customer and they can convert their own customer.

So when you've got a more complex mix like that, you've got to know what you're building towards. And when we got into the market, we rolled out one type of targeting in our system. Did this 1.5 years ago. We took our expertise in building a recommendation system and we were able to use the 1 billion-plus daily active users we add in games to convert them to new e-commerce brands that came on to the platform and ramped it really quickly.

Now what we didn't talk about was what that first product was. It was -- we call it a universal campaign. But that product is a mixture of discovery for these companies and retargeting.

Now when you talk to the customers, they all want incremental value, first, retargeting, second. We started with the first type of product offering that over the last 1.5 years, we built out more. A few months ago, and I think it was late October, we rolled out new customer campaigns. What this targeting did, all model-based, is have a model, be able to find them new customers that never bought on their site before, but might have visited their site.

So if you think about what our offering is, it's a full funnel offering, have customers discover the product, but price it all the way to the point of transaction for them. We started with something that was further down funnel. We moved to the middle of the funnel. Now last week, we rolled out new visitor campaigns. This is super important because now we're able to drive a customer to their site that they've never seen before. That's the most powerful form of advertising for anyone. No one can debate how incremental something is if they find a customer they've never seen on their website before. We're able to do it really effectively and then pilot on that product, we got great results. We rolled it out a week ago with the product blog and adoption has been really swift.

Now the reason I cover all this is we think about building product over time, and it's an iterative process. It requires us to really understand the clients that we have on the other side, deliver products for them that give them huge value from the marketing, profitable marketing that's measurable. If we can do that, we're able to scale our product out. We take our time developing the products. We're not rushed. As I think investors have seen, we really operate as a private company in the public markets when it comes to product development and product road maps because we're building for 5, 10 years from now.

Now when I talk long term, it does not mean I'm not excited about the short term. In the short term, we're seeing fantastic metrics in an addressable market that might be 5 to 10x the size of the gaming market. As we go and get to a point where we open up our platform, it's not lost on us that now we're going to be able to make a much bigger impact on the overall economy and on our business and for a much bigger set of advertisers. Something that gets us really excited about.

But I do want to remind investors that my role here is to build the biggest company possible 10 years from now, and I direct my team to think that way. We try to really understand our clients. We try to build great technology for the market that we operate in. We have one of the world's most powerful recommendation models. We've got amazing data inside that model. We're able to, at very large scale, #1 in the market, be able to provide value that's immense for the game developers, we're now starting to really ramp outside, and we think that's only going to accelerate as we get further.

Got it. And maybe building off of that, and you're just talking about the long term. I think when I talk to investors about your web business, I get a lot of questions about the short term. So people are asking about the number of customers being added, about sequential growth, dollar revenue and I think you pushed back a little bit on the earnings call, in particular, in that way of thinking about the business. I want to ask you, what should the market be focusing on? How should they be defining success? And what are the milestones they should be looking out for, for this business?

Yes, it's funny because I push back on short term for the reason I just gave because we think long term. But more importantly, the platform itself, the goal we have is to improve how well we monetize the impressions that we serve. We're serving over 1 billion users a day. It's a big audience. The ads are very much attention grabbing ads. Our ads, on average, are watched over 30 seconds. Roughly half the ads we serve, the user is actually opting in to watch an ad, that's called the rewarded video. Nowhere in the world are you going to find an ad that someone's asking to watch, except on our platform at the scale that we operate.

Now what that means is we've got this opportunity to really expand the business if we execute as we go forward into these new categories. And let me break that down for you. We, today, have a 1.3% conversion rate on our ads that we serve. So said differently, we make money on 1.3% of the ads we serve. We lose money on 98.7% of the ads we serve.

Now when the model knows a user is really primed for gaming, they're likely to churn the current game, they're likely to go to another game. We have well over a 5% conversion rate. This is what I call a high value moment. Most of the impressions that the model serves for gaming are not high-value moments. The reason they're not is that the user is playing a game that they like. And if you serve them 100 gaming ads in a row, at some point, that becomes annoying. Well, a very powerful recommendation system is meant to personalized content. But in the absence of content diversity, it has to stick to what it knows, which, in our case, originally was just gaming. Now it's gaming plus. So we've got the e-commerce brands, and we've got some other lead gen brands, but not a lot of them yet, not a lot of density in every single category.

Now fast forward 5 years. Let's say, we have hundreds of thousands of customers, which I fully believe we'll get to. What's going to happen in our platform? Well, this powerful technology, which inevitably is going to get much better over time, is going to be able to serve a different product in every single ad impression. It's going to be able to take the 1,000 impressions that it serves on a unit. And when it believes that gaming is a good ad, nothing else will be gaming in that moment. And if the conversion rate of that is over 5%, you can think of some of the impressions that will be stuck on gaming, that will drive a lot of value for the gaming customers. They won't face cannibalization. But on the rest of the impressions, the model will get more precise, more personalized and drive a higher conversion rate. Our effective yield will go up materially because of it. And we fully expect that we're able to bring density to the auction, we'll get over a 5% conversion rate.

Now we're starting at 1.3%. So just apply a multiplier on that. That doesn't necessarily mean that in our business, that's a 4x to the business because you also then have to understand the dynamics of how we operate. We live in an auction where we're paying out some portion, majority of the revenue that we generate goes out to publishers and I should say, majority of the spend that we generate goes out to publishers. So we pay for their ad space. And then we have spend on top of that, and the spread is what we report as a public company is revenue.

Now if we 4x that. And as an example, last year, we gave $11 billion run rate in our business in Q1 last year of advertiser spend. We're materially bigger than that. As you all know, we've grown. And to conceptualize just how big, bigger than the sum of everything that's happening on Snap, Pinterest, Twitter, Reddit combined falls into the advertiser spend on our platform. Now if you take that number and remember, we're a 1.3% conversion rate there. What happens when you get over 5%? It becomes one of the largest advertising platforms around. We'd be able to generate tens of billions more of ad spend on our platform than we do today. The expansion opportunity, both to the economy, GDP, job production, everything from that is huge, gets us very, very excited.

But the other thing that happens there is as our conversion rate goes up, we're not a fixed share to publishers. We end up in an auction price dynamic, possibly paying the same amount out to publishers in which case you'd say the business would grow, it would quadruple, possibly being able to take even a larger spread because we're accelerating so much ahead of peers in the marketplace, would you then say the business is going to more than quadruple. That's the growth opportunity in front of us. It requires us to get customers in and it requires us to improve our technology. We're super excited we can do all of that over the coming years.

Let's talk, Matt, about the investments necessary to improve the platform and the technology, obviously critical to the vision that Adam just laid out. What does that mean for the company in terms of investment and particularly head count growth? I mean I think you're notable as a company that's been very prudent and aggressive in managing head count through a tremendous period of growth. So how are you thinking about that going forward?

Yes. I mean when you think about investment, really the kind of core components of our cost structure that are important to understand are data center costs. So we've mentioned previously that what we've seen over the long term is that those costs have grown at about 10% of the overall revenue growth, really, in fact, we're beating that now. And that is just really, the efficient way that we run very disciplined as our team is launching new models, like Adam mentioned before, the prospecting model or making improvements. They're looking at the cost impact of that and making sure that those model changes they're making are profitable. And real time, because we run so lean, they're able to do that and really very closely monitor the cost impact of the changes that they're making. So we don't think that, that should change going forward.

Then the other component you mentioned is head count, right? So I think we have, in total, around 900 employees at the company. But really, when you drill into what that is, about 400 only of the 900 are associated with the core ad tech business and all of our back office. So we already run extremely lean. We've got a business development team for the core mobile gaming side of the business, that's like 100 people. I think we have something around 15 people for e-comm. So very, very small team. So as we think about investment to grow to support some of these initiatives like the web-based advertising e-com, we'll definitely add headcount, but we're talking tens of people. So there really isn't any impact on the overall cost structure.

The last category that we've looked at is -- and we mentioned, I think, on the earnings call as well is performance marketing. So now that we've got the product in a place that's very good. We're adding advertisers. We want to accelerate that. So we've started focusing on performance marketing to bring in new advertisers. And that is just as you would think, I mean, in our business model as well. It's running campaigns to drive users into the platform, but we're doing that similarly in a very disciplined manner. So we don't think that any of that should change the cost profile going forward either.

I do want to add a point too here for having a CFO that watches every penny we spend, Matt loves that our EBITDA margins are where they are. But you could take what I just said and you hear massive revenue opportunity, massive growth opportunities sitting right in front of this company. And he's saying, "Go get customers." Well, you can then follow that up with, "what are they nuts? Why aren't they hiring a bunch of business development people, ramping a sales force and getting out there and doing it?" and I get this question all the time. And there's a couple of reasons why we don't aggressively approach it with head count.

One is there's a whole bunch of platforms that ramped up sales, brought in new customers and hit a wall and never grew their business. And why did they hit that wall? Because the product itself was not good enough to provably drive value for the customer, where they could scale in a way that they knew was profitable. And if they have that in front of them, they don't need to be sold, the advertisers are exceptionally smart in performance marketing. They know what's going on, on the other side of the dollars that they spend.

We didn't scale gaming by begging for dollars, we scaled gaming by showing them that they make more money with their dollars spent on our platform than anywhere else in the world. So by constraining team, we're not front-running an opportunity. We're forcing ourselves to build the world's best product for the customer on the other side inside our space. If we can do that, the scale of the business is going to come. We're not rushed to go get there because we think it's going to organically come through word-of-mouth reality because our product is going to end up so good that these advertisers are just going to come into the platform and ramp on their own. We will pair that growth in product improvement, that growth from customers coming on with headcount, but never with that many.

The other reason we constrain it is because we live in this world where we now have large language models to make people more efficient. A couple of years ago, we went through and with the EBITDA margins we have and the growth that we've had over the last couple of years, we cut roughly 40% of the headcount. It seemed insane to people at the time. Now why did we do that? We did it because we wanted to make sure the people that were at the company were the people that could take these tools and make themselves more effective. We've seen a 10x engineer become 100x in terms of output because of large language models that they pair with.

Now not every engineer is created equal. 1x might become 2x because if they're 1x, they're not as capable of using the tools. They're still more effective. But then you have to ask, do you want 50 1x engineers around or do you want 5 10x engineers around and so what we decided is that we want a team of really high-caliber people who are going to learn how to use the tools, make themselves more productive so that they're not automated away. Across the organization, we made that the focus. We leaned up to those people, and that makes us really effective in the world we live in today.

Okay. I guess thinking about competition, Adam, you've pretty consistently framed competition as something that can expand the overall ad opportunity rather than compress it. As web advertising becomes a bigger part of the business, how should investors think about your differentiation versus platforms like Meta or Google? And what are some misunderstandings perhaps about the way you interact with those companies?

Yes. I think when we started the business, we were 1 of the bigger VC misses because we couldn't raise $1 million over 4 or 13 years ago. And the constant feedback I got is competition is going to eat you alive. 13 years later, we've been competing in some very big platforms, and we obviously have a great business. And people -- it's easy to believe that we have disadvantages to the largest platforms, therefore, we should lose. That's the easy answer. No one ever asks why are you winning? How do you do what you do? Well, let me break that down a little bit.

One is, as I talked about, we really know our customer. If you talk about inside games, it's not like we're now competing with the largest companies in e-commerce. We've been competing inside games with the largest companies out in the world for a very long time and done it well and become the leader. Inside games and inside e-commerce in every category we tackle, we want to understand our customer, and we want to solve their problems in our space.

Our space is a niche. It turns out this niche is pretty big. It's a billion-plus daily active users on our platform. It's still a niche. It's different than the other access points for the consumer. The ad formats are different, the experience is different, the type of user is different. This is not your high-frequency user of social media properties. This -- the person who's playing a Mahjong or a Candy Crush, is a different type of user. Fortunately, they're adults and they're great shoppers. And so you've got this great audience. You have this differentiated ad format. You've got a different reason why they're here. People who play games are doing it to relax and they're doing it to get psychological benefit in that moment. That's our framework. That gives us a very good framework.

Now we went in and we built technology to execute in this space. I think there's -- and maybe in the investor community or people that don't understand the complexities of these models, an oversimplification on the problem set that we're solving. If our job was just to place an ad on behalf of the advertiser, a single prediction, analogy would be in a large language model that just had to predict the first word. Well, that's a pretty simple thing to do. If you just place the ad, you would lose a ton of money for yourself as a platform and the advertisers that exist on your platform.

What are we actually doing? Inside gaming, for instance, we predict revenue all the way out to 28 days. If you back up what that means. These are companies that probably run 20%, 30% margin. Our model has to be precise that far out into the future, predicting revenue from a customer that didn't know they wanted this game to begin with. You have to predict engagement with the ad, you have to predict that the download is going to happen, you have to predict usage patterns, you have to predict propensity to spend, you have to predict amount of spend. You can't get any of the sequence of predictions wrong to deliver the value that you're trying to deliver for the advertiser. Now that's a really deep problem set to go solve. It took a lot of technology.

There's a belief today, I think, in AI, and I don't tend to throw the two letters around too much. That large language models are the model that wins. Recommendation system models are one of the best commercial uses of deep learning models. And a lot of the same architecture and technologies apply, we've just built one of the most sophisticated ones to solve a very long list sequence of problem set.

Now when we do that, and we scale our business, it gives us fantastic data inside that model that no one else has access to, to make our model better. The model itself gets smarter as it looks at that data, and so not only were we able to release something that was cutting edge in our space, we were able to solve very large problems for our advertiser set both in gaming and now moving into e-commerce, again, in this space. But our model is getting smarter every single day. This ad that serves our data that no one else has access to, the conversion funnels it builds and sees our data that no one else has access to. And that differentiation is very large when you think about modeling verticals. Some verticals are predicated on same data sets, different machine learning techniques that can create a ton of value as we've seen. Our verticals predicated on different data set and differentiated machine learning techniques and our models are exceptional at solving the problems that we do.

I know you don't like to throw AI around, but let's stick with that for one second. It's a major topic, obviously, but particularly in the past month or two for the video game industry. And I think we've seen some of those concerns spill over into the narrative about AppLovin. So I wanted to ask a fairly narrow question, frankly, which is what would it mean for AppLovin if there were many more games being created by many more people using AI and what if some of the incumbent game companies were disrupted, what would it mean for you?

Yes. I mean, look, the count of content is not really a KPI that matters because you can build a bunch of slop and it doesn't do anything. As we've seen internally, and I mentioned a second ago, our 10x engineers became 100x, our 1x engineers might become 2x, and we're mostly built around the 10x engineers. The efficiency gains are really much more magnified when you're sophisticated of what you do. So rather than think about a child or an adult who doesn't know how to code or is not a game developer, vibe coding a new game and somehow thinking they have a good experience. The application is much more likely to make the current game developers who are very, very sophisticated in what they do, get better.

What does that mean? Content, development inside their current games is going to get cheaper. That's going to allow them to continue to expand their LTV. As their LTV goes up, their marketing dollars go up. That's very beneficial for a platform like ours and the consumer experience expands from that. Those same game developers are almost certainly going to be the winners when it comes to new game development as well. As the cost of content goes down, that count of high-quality games from those game developers goes up. the category is going to be able to use this technology to get to another inflection point of growth.

Now you may also have someone like my 16-year-old envision a game, go write it in natural language and create something that's cool. And it's not slop. What happens at that point? No one in the world is going to play that game, unless that game gets discovered. And how does content get discovered today? The best form of discovery is natural to believe is search and large language models. That is absolutely one. But the other best form of discovery is through display advertisements that allow a consumer to take a break look at content and see if they want to go engage with that new content. And when we've got 30 seconds plus to show new content to the consumer on our platform, and we've got this powerful recommendation engine behind it, all of that new content is going to have to come to our platform to get discovered.

Got it. Let's talk about generating creative. I think it's something you've been piloting recently in terms of creating ad units or rather creating ad creative for some of your advertiser customers. So what feedback have you been getting from the people who are piloting that technology? And what performance or level of impact are you looking to achieve before rolling that out to a much broader group?

Yes. First of all, stating the problem. The problem we've seen is that game developers are extremely high-frequency traders of marketing platforms. The game developers that spend the most on our platform, spend a lot, but they've got over 50,000 ads in a single campaign. The new category, e-commerce and then onward, at best, we saw 1,000 ads in a campaign. At the high end of spend. Now if you think about that differentiation, our model is built to go test ads programmatically and find expansion of conversion rate and return on ad spend and more spend if there's more diversity of that. That is the most important variable that the marketer has at their disposal, but you've got a 50x differential. The e-commerce companies are not going to be able to spin up creative resources and production costs to go 50x their creative output on our platform.

So how do you solve that? Unfortunately, the large language models have gotten really good at image generation and video generation. It's not so good that out of the box, you can solve it for a brand. If it was that simple, the brands were already up 50,000 ads. So we had to bring to market multi-agent approach on top of the large language models to go in and figure out how to create content, both in static images and video, and it satisfies the brand's needs.

We rolled this out and pilot on the static part of the ad. Our ads go from a video to a follow-up to the video that think of it as like a 1-page animated GIF format. And inside that, we're already in pilot. We're seeing a lot of interesting success there with the customers that are adopting it because it allows them to have a lot more velocity. The video model is on the way as well, and people try to ask, "When is that going to come? When are you going to roll it out?" Well, I talked about when we go to general release of our platform, which we're still in a closed state on the platform we fully expect to be able to give tools to the customers to create ads for our platform. And I lock that data in this first half of this year.

So if you think about first half of this year, we're 4 months away from that at the end. Some point in the next 4 months, we will have both these types of problems solved regenerative AI-based creative. Once that happens, the front end of the experience for the customer will be more personalized. Only going to get better over time. But as a starting point, it's going to be much better than where we are today, which is a 50x handicap to the gaming developers who are super sophisticated.

As we see that, we fully expect that these customers will adopt it, they'll get a much higher conversion rate of their ad to user engaging with their product because of the diversity of content at the front end. That will drive up their spend, that will drive out their return on ad spend and should be a material unlock for us.

Great. Maybe turning to mediation. So there's been some news recently about a new player in the mediation market. I think a lot of investors have interpreted that as a competitive threat to MAX, which is your remediation product. So what attributes does MAX have that you expect to help it maintain its leadership? And how do you think that competitive ecosystem will change going forward, if at all?

Yes. Mediation is not a really well-understood technology or concept. So breaking it down a little bit, the market and mediation we got into in -- I think it was 2018 when we launched MAX. And we were competing at the time with Google's mediation layer and IronSource, which is now Unity's mediation layer and a few other ones. So this space has always been full of competition.

The mediation plays two roles. One is this technology is meant to allow a publisher to serve ads but gain access to all the demand in the marketplace. We're a very large demand source for the publishers. As we all know, we're maybe the largest. However, there's a lot of other ones. There's Facebook, there's Google, there's Unity and if go down the last, 15 to 20 to maybe 100. and they get really small at the end, but at the head, there's a lot of diversity there.

The tool has to give a completely fair unbiased auction approach to the publisher to get the best ad from the highest paying network on every instance to be useful. We built MAX completely unbiased, completely transparent on data to the partners that we have, fully audited solution. And when we brought it to market, we were 10 years later than Admob's solutions for publishers. We were maybe 8 to 9 years later than IronSource's solution from publishers. We were also competing with MoPub at the time. MAX went from 0 to probably 1/3 of the market in 2 to 3 years. This was before we had our demand-side platform strength.

So if you just then go grade the technology that we built, we then bought MoPub, took over more of the supply in the space. Threw MoPub's technology out, replace it with ours. Publishers came over. They had every chance to go to any other platform back then. They all came to ours. The reason was is because the technology gave them the most yield. Now then fast forward to today, what's happened since then? We now not only have the highest monetizing in most dense auction inside the MAX auction, we paired it with the best buying tools. The vast majority of every publisher spend comes on our platform.

Now this isn't the advertiser that is the in-app purchasing game. This is a publisher that's running ads inside their game. In order for that publisher to grow, they better be able to buy ads. We're the best destination for them. We built the best tools. It's a really big number in terms of percentage of their spend. So not only are we the best monetizing and most dense and offset competition every step of the way to get to that point. We give them the best growth tools as well.

Long way of saying, our tools are really sticky. We've not been in a market that didn't have competition. So then if you go, "Okay, well, what's going to happen as we go forward?" There's inevitably going to be more competition. We live in an agentic world where it's really cheap to start products, it's really cheap to build tools. Let's not forget that we're also very good at using the same tools. We don't look at product innovation that comes from competition or within us as something that's static. We're always innovating our own products as well. So if there are breakthroughs in the space, and we have the best platform on both sides, that's already locked in, those breakthroughs will help us make our products even better for our customers. So we look at competition as inspiration, but we know that the strengths of our platform make it completely locked in because these companies that are on the other side of it depend on us for their growth.

Got it. Matt, maybe I'll go back to you and then we'll close Adam with sort of a big picture question. But before we do, Matt, there was an interview last month with your Chief product officer talking about some experiments the company is doing in social media. My understanding is that this is more of a -- less of a key strategic priority and perhaps more of like an other bet. Do I have that right? And how should investors think about some of the other smaller projects you're working on?

Yes. I mean there's a lot of talk about this question because it came out, I think, in an interview. And look, like we're always testing new things like this. We're just running small projects to see where there might be opportunity for us in the future. For us, it's less of like something that's core, so your characterization is correct. It's really an opportunity for us to bring in new talent that's differentiated. So something that's outside of our core kind of talent pool, bringing in new ideas and for us, I mean, obviously, we run very lean. So none of these types of other bets are bets that we're running from an R&D perspective really will materially change the cost profile of the business. We're going to keep them very, very small and tight, but we think about it more as an opportunity to bring in new talent that we can then cross-pollinate ideas to the other components of the business.

Got it. Great. So Adam, maybe to close. So obviously, a lot of AI talk today. I guess what would you highlight as the most underappreciated opportunity available to AppLovin in the conversations you're having with investors? And then maybe a challenge that you think is worth pointing out is something that you're going to execute through?

Yes. Look, we're in -- we're building models in a recommendation system. The structure varies similarly to the path of the large language models. And I think everyone expects the technology to be static for whatever reason. We're not out there boasting marketing terms like AGI, but recommendation systems are going to evolve on the same trajectory as the large language models.

Not only are we developing with similar architecture. We're developing paired with the large language models to accelerate rate of development. If we believe that AI technologies are going to be 2x more efficacious in 5 years, just based off of that, if we do our job right, our system is going to be 2x more predictive for its task, the sequence of problems that it's predicting in 5 years. That would double our business or more. And so I think that's not particularly well understood. People really latch on to large language models, obviously, because they can interact with them and less so latch on to the strength of what these recommendation systems are going to be able to do as they evolve.

The challenge we have is also tied to the opportunity paired with the technology. As we go get more customers as we open up our platform, we're going to really be able to expand this business as we talked about. Every new customer is more data and every new customer is more demand. Our data moat is already growing with the technology and the ads we serve and the more customers we get and the quicker we do that, that data moat will even expand more. And so our job is to do that.

The challenge is we're clearly not very good at marketing ourselves. I named the company AppLovin. That's a handicap. Nobody knows about the business. And we've got to put ourselves out there. We've got one of the best solutions for companies in the world to market themselves. They got to find out about it. It's our job to make sure that happens. We do that right our customers grow to over 100,000, and I think it will be in the many hundreds of thousands over the next 5 to 10 years or more. And we improve our technology at the rate or ahead of the rate of improvement in where these AI technologies are going to go, "This is going to be a much, much bigger business in the future."

All right. Adam, Matt, thank you for being here.

Thanks, Matt.

Thanks for having us.

Welcome to AppLovin's earnings call for the fourth quarter and year ended December 31, 2025. I'm David Hsiao, Head of Investor Relations. Joining me today to discuss our results are Adam Foroughi, our Co-Founder, CEO and Chairperson; and Matt Stumpf, our CFO.

Please note, our SEC filings to date as well as our financial update and press release discussing our fourth quarter and annual 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 third quarter ended September 30, 2025. Additional information may also be found in our annual report on Form 10-K for the fiscal year ended December 31, 2025, which will be filed later this month.

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 the reconciliations of our GAAP and non-GAAP financial measures in our earnings release and financial update available on our Investor Relations site. This conference call is being recorded, and a replay 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 want to start by addressing what's clearly on many people's minds. While I prefer to ignore short-term fluctuations in the stock price and focus on maximizing value over the long term, the recent volatility warrants addressing. For the past few weeks, there's been a lot of discussion about how AI and competition will challenge our business. But when I look at our internal dashboards, we are delivering the strongest operating performance in our history. What's fueling that growth is our own AI models. And as research and AI, both internal and external, continues to improve, our business will grow with it. There is a real disconnect between market sentiment and the reality of our business.

Before I talk about the opportunity ahead, let me explain how we think about competition in AI. First, on competition. Since day one, we've competed against many companies. We've never feared competition because it forces us to innovate to serve our gaming ecosystem even better. We operate a foundational piece of the ecosystem, the MAX auction. It's critical for the ecosystem that the MAX auction improves through more competition, which in turn helps publishers make more money, leading to more user acquisition.

Now in a typical zero-sum auction-based market, if one improves another loses. In our case, as bid density goes up, the pie expands. And while our share of the auction may shrink, our economics actually grow. There are impressions our model understands extremely well and it values highly and others where we have less signal and value them less. When competition wins an impression, it's very likely to be the one that we value less. This leads to the publisher making more. And in many cases, we do as well because instead of winning a low-value impression, we get to charge the winning bidder 5%.

When you hear about a start-up coming for our business, you should be asking how their value proposition can be stronger than ours. If our value proposition wasn't strong with our partners, we would have lost those relationships long ago. We have competed very well in mediation against giant companies. The network effects in this business are very real. We scaled our network by providing the best monetization and even more importantly, the best advertising tools to publishers. The combination is not something peers can overcome.

Second, let's talk about AI and game creation. The bearish view assumes that if AI makes games easier to build, the value of our ecosystem declines. Well, we believe the exact opposite. AI will dramatically lower the cost of creation, which means content will explode. And when content becomes abundant, discovery becomes a scarce resource. Even in the past, as mobile games were built by human teams, the content was plentiful and in many cases, commoditized. That is actually what allowed us to deliver such a strong value proposition through our advertising solutions.

In a world where anyone can create an app or a game, millions of experiences will compete for attention. The winners will be the platforms that can efficiently match the right user to the right content at the right moment. That is exactly what our models are designed to do. We are not tied to any specific genre or format, casual, mid-core or beyond. Our systems follow engagement and AI only increases the potential of that capability.

Furthermore, we don't see any evidence of a declining mobile gaming. Casual gaming serves a different human need than console, PC gaming, AAA games or any other form of deeply immersive game experience. People will always look for entertainment that fits naturally into their day. What's changing is how well that attention can be monetized. Even today, we convert only a small portion of those impressions that we serve. We view that not as a limitation, but as a large long-term opportunity as our models continue to improve.

Now that brings me to what we control, performance and culture. Our performance, our business is executing extremely well. We continue to grow very quickly despite the numbers getting much bigger. We delivered strong growth in Q4. And despite typical seasonality where Q1 should be softer than Q4, we are guiding to meaningful sequential growth. That reflects both continued strength in gaming and the scaling of our e-commerce and our self-service customers.

On culture, we embrace being underestimated. A skeptical market sharpens our focus and pushes our teams to execute. Our revenue per employee remains among the highest in the world because we build the best and most scalable products in our category. If the market chooses to price our stock based on fear, while we continue to compound revenue, cash flow and product capability, we'll stay focused on execution and let our results speak over time. From where we sit, we are still in the early innings of what this platform can be.

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

Thanks, Adam. Q4 marked what was not just a strong quarter, but the most exceptional year we've ever delivered and one of the strongest performances in the public markets. At our scale, the combination of growth, profitability, free cash flow and capital returns we are delivering is extraordinarily rare. Revenue in the fourth quarter was $1.66 billion, up 66% year-over-year, driven by continued technology advancements to our core mobile gaming business, seasonal strength and the expanding impact of our e-commerce initiative. Adjusted EBITDA was $1.4 billion, up 82% year-over-year, representing an 84% margin. Margins expanded over 700 basis points from the same period last year and quarter-over-quarter flow-through to adjusted EBITDA was approximately 95%, again, demonstrating our relentless dedication to execution and how efficiently incremental revenue converts into earnings for our business.

Investors often reference the Rule of 40 in software. On that basis, our 66% revenue growth and 84% adjusted EBITDA margins translate to a score of 150. That level of profitability at this growth rate is almost unheard of and reflects the fundamental operating leverage of our model.

Free cash flow for the quarter was $1.31 billion, an 88% increase year-over-year, growing our cash balance to $2.5 billion and reinforcing the strength of our balance sheet. This was a truly remarkable year for AppLovin. Revenue reached $5.48 billion, growing 70% year-over-year. Adjusted EBITDA was $4.51 billion, up 87% year-over-year at an 82% adjusted EBITDA margin, a margin profile that very few companies ever achieve, let alone sustain at the scale. Free cash flow totaled $3.95 billion, up 91% year-over-year, underscoring not just growth, but the exceptional quality and durability of our earnings.

Simply put, very few public companies are scaling faster, more profitably and with greater cash generation than we are today. That strength directly translates into shareholder returns. During the quarter, we repurchased and withheld approximately 800,000 shares for $482 million. For the full year, we repurchased and withheld approximately 6.4 million shares for a total of $2.58 billion, funded entirely by free cash flow.

As of the end of the year, we had a remaining share repurchase authorization of approximately $3.28 billion. Over the last four quarters, we reduced our weighted average diluted shares outstanding from 346 million to approximately 340 million, while simultaneously investing in organic growth and maintaining substantial liquidity. Our share repurchase program reflects our conviction in the value and durability of the business.

Turning to our outlook for the first quarter of 2026. We expect revenue between $1.745 billion and $1.775 billion, representing 5% to 7% sequential growth. Adjusted EBITDA is expected to be between $1.465 billion and $1.495 billion with an adjusted EBITDA margin of approximately 84%, maintaining best-in-class profitability as we continue to scale.

To close, AppLovin represents a combination that is exceedingly rare, sustained hyper growth, exceptional margins, massive free cash flow generation and disciplined capital returns. We believe this puts us in a category of our own and positions us to continue delivering outsized value for shareholders over the long term.

Now with that, let's move to Q&A.

We will now begin the question-and-answer session. [Operator Instructions] Your first question will come from Benjamin Black with Deutsche Bank.

So my first question is on the e-commerce opportunity. So could you perhaps sort of reflect on the self-service launch? What were some of the key learnings, what worked? What didn't? Where is there room for improvement? And to the extent possible, it would be great if you could sort of share or quantify the e-commerce contribution to revenue or gross ad spend this quarter and in the guide? And then I have a quick follow-up.

Yes. So the e-commerce business obviously has been live with us for 1.5 years. It's doing really well. In Q4, we opened up the self-service platform, referral only. So we're not at the point yet where we're sort of a GA type launch. We'll get there. We said first half of this year, that's still on track. What gets us excited are a couple of things. One is the current customers that had lapped Q4 2024 into Q4 2025 saw material increases in spend as our models just keep getting better.

Now remember, this business and the model around this business that drives the value for the advertisers is really in its infancy. It takes us a while to continuously iterate to improve the model. In fact, just a few weeks ago, we had a pretty sizable uplift. So those same customers from the prior year cohort saw big growth. Then you ended up with new customers coming in from the referral program. I mentioned on the last earnings call, we were seeing substantial growth there. we're not going to see anything that's going to impact our overall numbers for a while, but we're seeing great trends. And I'll talk about advertising, leading advertisers into our platform later on the call, but we're just seeing numbers that get us excited.

On the breaking out e-commerce, we're not going to do that because we think of our platform as a unified platform. Let's say, tomorrow, the engineering team improves the gaming model 50%. Well, e-commerce would go down, but the business would be ripping. That wouldn't mean that there's anything wrong with our platform.

Fundamentally, we're one single auction, but getting more diversity will give the model more ways to serve the end consumer and should drive up our overall conversion rate. But we think if we start talking about verticals in a marketplace like ours, you start getting really misleading information that will throw investors off.

Great. I guess. And then sort of my second question is sort of related to a feature set that you're rolling out. So I think in the past, you mentioned the conversion uplift your partners could see if they have the ability to not only optimize for the best performing creators, but also sort of really scale and automate the creation of these video assets. So, I guess, with that backdrop, how far along the automation curve are we now and where could be in the next, call it, 12 to 18 months?

Yes. Great question. We're still pretty early. I pulled some numbers earlier just to compare where e-commerce companies are when they upload ads and how many they upload to our platform versus the gaming companies that have really had a decade plus to optimize for our platform. Top gaming companies run tens of thousands of ads at any given time. The top e-commerce companies are in the hundreds. So you've got a huge discrepancy here. And if you throw more ads in our system, the model does much better. That's just a fact. It gets the chance to diversify what the end user sees and try to find something that's going to eventually convert that user.

Now how do we bridge the gap? Is twofold. One is the customers have to get more accustomed to our platform to know what types of creatives work so that they can build up production around the things that work and multiply out the count. More importantly, though, generative AI tools to build creatives in a really low-cost way in an automated way is on the way. We already have in a pilot with over 100 customers, generative AI-based tools for one part of the ad unit. Our ads are a video plus then an interactive page and then follow-up of a shop preview dynamic product page. But that middle one, the interactive page is not something that these advertisers are accustomed to building because they don't need them on social or search.

We're now generating those automatically for over 100 customers. We'll roll that out soon as it's showing good performance to the broader set of customers. And shortly, we're going to have the video model go live as well. We're going to run the same pilot process. We're going to make sure the video output looks good. But if we get to a place where the video model can help these customers create new video ads in bulk in cost of dollars versus cost of thousands of dollars, we expect the count of ads for these new customers on our platform is going to go up a lot, and that will make them more competitive against the gaming customers that are on our platform.

Your next question will come from Jason Bazinet with Citi.

How are you guys doing? I think one of the things that investors have always struggled with a bit is just sort of what they would call the black box nature of the model, like they can't get comfortable sort of doing a P times Q and sort of extrapolating the model out there. And I know you're not going to break out, as you said, e-commerce from mobile. But as investors are sort of looking at these e-commerce accounts that have your pixel on it, what counsel would you provide to the buy side in terms of using those numbers and trying to do some math to get some sense of how well you're doing?

Yes. I mean, look, it's really, really hard because we're just getting started. Facebook's probably pixeled over 10 million sites. You've been publishing our pixels in the thousands. So it does correlate to the count of advertisers that we have on the platform, but we're just starting out. We can't build a P times Q model in a period of time that we expect to have really outsized growth. Once we open up the platform, start running marketing to the platform, start doing more sales, you're going to end up having a ton of advertisers coming in. We can't predict it. It's not going to be stable until we get to a much further into the future point.

But what gets us excited, like I mentioned on the last answer is we're already testing in advertising to get customers on the platform. So what you're seeing right now is just referral-based advertiser count. But if we start actually being able to market our platform and get customers to convert through the funnel, that's going to help us really catalyze faster growth to go get advertisers in the absence of a sales team. And one stat that's really cool that I pulled earlier, we're testing in light volume on ads on social and search, and then we're doing referral programs.

But right now, we're seeing somewhere around day 30 LTV to cost of user acquisition. So if you think about lead gen models and if you know lead gen models and also if you understand the life of value that we create for advertisers, which is in the many years, to be able to break even on the media buy in 30 days is exceptional. We've got arguably one of the best business models the world has ever seen, and we're seeing the ability to market our platform and small testing at that level. That gets us excited.

Now we're not ready to go to GA yet, and you can ask why. And the why is because we still need to optimize our conversion funnel. We're no different than any social network that's going out and trying to get users. We want to get users into this advertising platform. Right now, we're seeing of qualified leads, 57% of advertisers go live. That's 43% breakage. We think we can get that number much closer to 100% before we open up. And despite that, we're seeing this 30-day breakeven roughly on LTV to CAC.

So we're really excited about where we are. We think we're going to go through this hyper growth phase as we open up and really start pouring advertisers in. Once we get to a stable place where we could start predicting count of advertisers in quarters to come, then we'll give you the P times.

Your next question will come from Omar Dessouky with Bank of America.

I wanted to ask a more general question because the market seems to be having an AI moment here. So let's just forward three to five years in the future to potentially a world where consumers interface with the Internet through natural language-based agents. LLMs are different than performance advertising neural networks. But how would your business be affected by potentially a change in how consumers interface with the Internet. So that's the first part of it.

And then the second is, how do you expect -- again, over the long term, three to five years, how would you expect mobile game developers to casual mobile game developers to adapt their content to a world where they compete for time with these sophisticated chatbots?

Yes. So great question. The way I see the LLM is that it's going to enable anyone to be able to type out ideas for a game and get a game created. That doesn't mean you're going to get users to play your game, but that means you can create content in a very low-cost way, not being an engineer. That will accelerate content production for studios that are developed, that are sophisticated. It will also create a flood of content that's more personalized across people who could just become game developers with no engineering background. That's a good thing for us. In the talk track I mentioned, as you get more content, that content becomes commoditized, the discovery platforms, of which there are very few become the true value because those customers are going to have to come to MAX to monetize and they're going to have to come to our discovery platform to run advertising to get users to their space.

Now if humans just want to talk to a chatbot, do nothing else. Of course, while there's nothing else that they're going to do, we would lose time spent in games. that seems far-fetched. The games that people play today in our domain are not very immersive games. They're quick-to-play relaxing games and people play things like a Solitaire, people play things like a Mahjong. This audience skews older, it skews female. This is an audience that's very unlikely to stop playing crosswords in 10 years because they're talking to a chatbot.

So not only do we think that the base audience is going to keep playing games, you're going to need relaxing outlets. If LLMs increase productivity, people likely have more time to go to outlets like games. And if LLMs increase production quality and production capability of games, you're going to have more content, which leads right into a business model like ours.

Your next question will come from Bernard McTernan with Needham.

I wanted to follow up on e-commerce. Given the self-service launch, are you seeing any changes in the type size of customers that are entering because of self-service versus the prior managed service?

And then also as a follow-up, we've seen some examples in our own tracking of apps that aren't e-commerce with the pixel. Is this a one-off or a new growth vector that you're pursuing within this?

Yes. I mean, obviously, with opening up self-service, we're not gating to a minimum GMV anymore. So in the prior year, we had pretty high minimum standards for businesses. Now you're getting companies that have a few hundred thousand dollars of GMV, a couple of million dollars of GMV a year buying on our platform.

What's nice about that is not only do we see the ability to track performance very clearly on a brand that's small, but they start spending money, the money translates to revenue. And it's really obvious in their numbers that their pre-existing revenue was a few hundred thousand dollars. I'll give you an example. We had, a year ago, this Israeli cookware company come live that did $4 million of revenue. And these types of stories make us really proud. Last year, they scaled on our platform. 65% of all their user acquisition spend was on our platform. They scaled to $16 million of revenue and are profitable in doing so. And we can see the results directly translated from the spend on our platform to their growth.

This year, they're ramping so quickly, again, putting most of their UA spend on our platform. It's looking like they're projecting that $80 million of revenue. So you start seeing that kind of ramp-up in certain specific customers, and we know the product works and it works exceptionally well. That makes us proud. We think what we really like to do at this company is service the smaller businesses, help those smaller businesses become big businesses. That's how we built into gaming. We help the indices first. Now every gaming company in the world that's in mobile that's substantial is probably working with our platform in a major way. But in e-commerce and these other categories, we feel the same way, help the smaller businesses, help them scale their business, and then we'll get to all the brands over the coming years.

In new categories, again, we're not gating anything. So if you end up in auto insurance and you sign up for our platform today, you can go live. We're still early in these other categories because for each one of these cases, we have to tune the model somewhat, and we're focused right now on anything that's transactional-based business versus a lead-based business. So think if you're a transactional-based business, you're not e-commerce, but you're fintech or something. That could work really well out of the box. That's another category of growth.

But then there's a huge sector of lead gen businesses. You want to collect the user's information and sell them in a call center. That's going to come too for us in the coming months where we really focus on a category like that. It's our job to service every transactional category that buys on a performance basis and do it well so that the 1 billion-plus daily actives we see on our platform can get a diverse set of content that they can enjoy.

Your next question will come from Matthew Cost with Morgan Stanley.

I guess starting just to put a finer point on some of the comments from your prepared remarks. because the data points from the channel were a little unusual and thin, did you see a test from Meta doing more advertising in the in-game ad environment? And whether or not you did, how should the market think about what potential impact a scale player like Meta, for example, getting more aggressive in that market would mean?

And then a second question just around MAX. You've been in the business of convincing people to switch mediation platforms for a long time. I guess in light of that experience, how would you characterize the moat around MAX?

Yes. So, two good questions. So the Meta thing, Meta was a launch partner of MAX. They're a good partner. They've been in the MAX platform for a long time. They are a bidder on anything that has an ID today, and they're not a bidder on anything that does not have an ID. So think IDFA off. That's about 2/3 of the full-screen ad units that they currently bid on. They started bidding more on that, as you saw on LinkedIn. They did not start bidding on no ID traffic, and they might very well bid on no ID traffic in the next couple of quarters.

As you know from our business over the last couple of years that you've been following, there have been numerous times where we've added more competition in the MAX auction. Unity has grown with Vector, Liftoff rolled out Cortex and it's growing really quickly. Moloco has been growing and we turned them into a bidder in the last year. You had Google switch to bidding. Every time this has happened, there's been this confusion around, well, in an auction dynamic-based system, competition should decay AppLovin's edge. You've never seen that happen. And this is what I tried to cover in the talk track.

The reason is that, one, we're really big and really good at what we do. But two, every impression is not worth the same thing. Our model is exceptionally good at valuing the impression for what it is. for our data and our customers. Sometimes it values it really high where we make a lot of money. Sometimes it values it low where we make less money or potentially lose a lot of money. And what happens when you get these bidders getting better is that they take some of those impressions that we value low where we might not have made any money or any material money and now we get a 5% amount that we can tax the bidder in our ecosystem. So growth in the ecosystem allows the MAX market economics to improve, and we've never seen growth in the ecosystem cause harm to our AppLovin bidding environment since we got so good. Now this is post AXON 2, where we became the market's dominant player. So I do think it's an important point that people are getting lost on. So I want to see if you have another question on that before I go on to the mediation discussion.

Okay. So on mediation, look, we got in the market with MAX when we bought it and built that technology. We didn't buy technology. We just bought a way into the market. That was in 2018. The MAX platform before we bought MoPub, had already grown to become #1 in the space. When we bought MoPub, we put the two together. As everyone knows, we're very dominant in the sector. We took the MoPub technology in sub-90 days, threw it out, migrated everyone that we could over to our platform, rebuilt the best features of MoPub, put them on top of the best features of MAX and ended up with a very dominant position.

At this point in mediation, there's been a few players that are sort of out of business, and then there's Google, Level Play and us. And then obviously, you have the start-up that people have been discussing. So in a world where Cloud X becomes a start-up that comes into the space, you have to talk about like what are they walking into? How is the world different today versus what it was? The moat around our mediation is not because of the mediation. We're very good. We've got the most bid density. In any mediation A/B test, if you talk to publishers, you'll hear MAX does better. But we don't blow it out of the water. We're a few percentage points better than other mediations. If someone wanted to pay a bonus to cover that, they could potentially pay a bonus to cover that.

Where it gets really expensive for the publisher and where we're really locked in is that we have the best advertising solutions on the market. In fact, for a lot of these publishers, we're over 50% of all their user acquisition spend. They can't go get that anywhere else. If they go off MAX, that decays. And so they're left in a world where they have the best buying tools. They have the best monetization tools. It becomes a really strong 360 solution and their growth depends on it.

And then the MAX ecosystem is not growing slow, as we've talked about in prior calls, this is a double-digit, very strong growing category where these publishers are seeing their businesses improve because of the improvement in our technology. When you've got that in the foundation and you've got a really strong moat with technologies that no one else can replicate or have, then you end up with a sticky solution, and we're very confident our solution is just that.

Your next question will come from James Heaney with Jefferies.

How are you thinking about the AXON marketing investment in 2026? I know you talked late last year about a goal of maybe $1 million of spend per day. Is that still the right way to think about it? And is ultimately GA kind of the biggest prohibiting factor to you guys doubling down on that investment?

Yes. I mean, look, right now, we're testing. So numbers aren't that big. You didn't see anything reflected in our EBITDA margins. In fact, you saw them go up to 84%. We think the growth in the business is so high and our LTV to CAC is going to look so juicy that you're not going to see much decay in our EBITDA margins from ramping up marketing. If you do, then that would be a great thing. It just means we're ripping on the marketing side, and we see a ton of customers that we can bring in to accelerate growth.

But it's much more likely that we're going to go controlled on this because we do want to take our time to build out tools. When we start buying and go GA and bring customers in, if we don't have good content creation tools for them, create the video with generative AI tools, create the interactive pages with generative AI tools and do it in an exceptionally strong way, they won't have as much success on our platform.

So that's a long way of saying we're in no rush. We're seeing 30-day LTV to CAC roughly. If we see that at scale, we're going to scale, but we're not in a rush because we want the tools to catch up to the opportunity.

Your next question will come from Alec Brondolo with Wells Fargo.

I appreciate it. I want to double click on the Meta thing because I kind of think that's the most -- out of all the noise in the market, I think Meta is by far the most important. Right now, probabilistic targeting is the basis of competition between all the mobile game and app networks. I think there's no doubt that you can definitely compete effectively against Meta on a probabilistic basis. When I talk to investors, I think the concern in the market is that Meta could find a way to bid deterministically and opt out ATC traffic with their audience graph, which would give them an advantage over the vertical ad networks. Do you think that's possible from a tech perspective? And if it was, would you still be confident that market expansion can offset the loss of market share?

Yes. I mean, look, I think it's possible from a technology perspective. I think it's bluntly against Apple's terms. I don't think the space is big enough for Meta to say they want to violate the platform they depend on terms. So I'm skeptical what you said is going to happen. It makes no logical sense. in a world where they're bidding deterministically or probabilistically on no IDFA, they're still competing against the AXON 2 model.

Five years ago, when Meta was really big in the space, and I think this is what's throwing people off. People recall a time Meta was half the space. They think it's going to be half the space again. Meta has been on IDFA-based and Google ad ID-based traffic since that no IDFA change. Nothing has changed for them. What's changed in the marketplace is that the other ad platforms that are built for this category, Unity, Liftoff, Moloco, et cetera, have gotten better.

Now we've gotten the best. AXON 2 was the biggest breakthrough in a model in this category period, and we were able to end up becoming the #1 by a lot. AXON 2 didn't exist five years ago. So there's no world where Meta is going to end up becoming that kind of a dominant player in the face of this competition. In fact, I don't see a world anyone else can because they're going up against that dominance. And these models, as they build more data, it's a closed-loop model that's continuously reinforcing itself and getting smarter.

Our model is so far into getting smart for this niche. The niche isn't that small, and we've got such a strong position. It's highly unlikely that someone else is going to come in and materially disrupt it. So a long way of saying, again, no, we don't see what people are so afraid of. We think psychologically, people just index on numbers from five years ago and think, oh, Meta is going to ramp to that. But just ask the customers you talk to, what's the share of wallet between us to them and to everyone else on IDFA-based traffic, and that will give you an indicator of how good we are.

Perfect. That's super helpful. And maybe just one additional question. On the marketing dollars that you're spending against AXON today, where you're earning the 30-day LTV to CAC breakeven, what are the most effective channels? Like I see the ads on Google Search, I see the ads on Facebook and Instagram. Where are you finding the most success? Which platforms are you finding the most success in leveraging to acquire customers today?

We're -- it's a great question. I mean we're too early in testing to really assess or give anything directional because we don't want to be misleading. But I'll say some of the coolest yields that we've seen and coolest partnerships are these partnerships with the measurement companies. So if you talk to triple, they've got a sponsorship from us, TBPN, the podcast branded their Gong with our brand, and that's driven a bunch of business. So stuff like that, we're at such an early point. Part of the direct response channel here is actually just building the brand. So when we get placements like that, people start hearing about this Axon Ads platform.

Then they go to Google, and we don't have any SEO yet. Once we get history and it put more content out on our blog, which we're committed to do and get more link backs, we'll also have SEO. But today, in the absence of Google search words are also great. We're starting to get brand recognition. People know our platform is critical. They go search Google and we're the first ad word now. We're not the first organic link because we don't have that history. So all this stuff is going to improve over time. And we think our job is to combo brand advertising alongside this direct response to really unlock growth in this thing.

Your next question will come from Clark Lampen with BTIG.

At the risk of, I guess, just sort of overdoing it around this Meta point, I wanted to see if you guys can just -- that's lapping. So I think I am overdoing it right now.

But just remind us, I guess, the sort of scale of bidding that you guys are doing right now. I think the $11 billion or over $11 billion number that you provided in the blog post is the most recent example. Is that something that really needs to be replicated in this segment of the market for probabilistic bidding to really drive signal or capture a signal that would allow somebody to replicate the same sort of degree of efficacy.

I think it would just be helpful for people to understand maybe even if somebody wanted to move in this direction, what are the sort of capital constraints of doing something like that?

Yes. I mean, look, first of all, like at the base, there are different approaches to modeling these businesses. Meta has a model that's fantastic, super sophisticated. They're built for social. Most of their training data is on social. We've got a model that's cutting edge, very sophisticated, built for our ecosystem. Our training data is predicated on that ecosystem. Our customers are perfectly tuned for that ecosystem. We started in gaming, where the biggest there is in game UA dollars. So those dollars aren't just going to shift because someone else comes into the space. The dollars are already locked in on us, and our model is very smart. When there's a high-value user, sometimes our model bids thousands of dollars on a CPM basis. The model knows what works for these customers. So it's just not something that's conceivable in a marketplace where you have budgets that are already given to us. and we're on cutting-edge technologies for someone else to come in.

Now if we stop innovating and we decay on the technology side and we stop providing the service to the customers where they start looking around, yes, those things could change. But that's not going to happen overnight. And the one thing we can say confidently 14 years into being an engineering product-led org is you've seen us move incredibly quick. We are innovators. Engineering team is top-notch, second to none in this field. And so we're very much focused on continuing to push our models forward, and we're doing it from a very strong leadership position.

Okay. And if I may just ask sort of a very quick follow-up. prospecting campaigns. This was a product launch that sort of came about recently. There was a lot of very strong feedback in the channel throughout the quarter around the efficacy for some customers seeing full shift in sort of repeat versus new customer mix. Could you talk about the way that, that product -- I know you give sort of specifics around your non-gaming business versus the gaming one, but would it be possible to sort of contextualize the impact for us or maybe what you're seeing with advertiser behavior heading into 2026?

Yes. I mean you've probably talked to some of the advertisers, so you hear positive commentary on it, but it's really hard for advertisers to understand the incremental value of retargeting. It's really easy to understand the incremental value of a new customer. And so it wasn't lost on us for 1 year, 1.5 years when we got into the market that just a universal campaign that had a split of new customers in retargeting wasn't the final answer.

We needed more targeting for these customers to map to their goals. So we rolled out this product in Q4. We let them upload their historical purchases. Using that data, our model can start tuning away from purchasers from the past and towards users that they've never seen before. Results were fantastic. It takes a while in advertising marketplace. for every new product to get adoption, but we've seen really quick adoption on this one because when they flip the switch, they instantly start seeing many more new customers.

Your next question will come from Robert Coolbrith with Evercore.

Adam, you mentioned a couple of times now the connection between ad ROAS and MAX. Just wondering if we could maybe put a finer point on it. If a publisher were to give another platform first look at inventories something like that, would that significantly degrade that connectivity between A ROAS and MAX from a UA perspective for that publisher. The I'll just have a quick follow-up.

Yes. I mean our terms are that they can't do that. So that's not part of the equation.

Got it. Perfect. And then I think there's also a notion out there that demand partners might bid differently in a different environment or something along those lines. Do you have any thoughts on that just...

I mean, look, MAX is fully fair, transparent. We get audited by the bidding partners. It's the vast majority of the marketplace. Wouldn't it be a foolish business decision to bid differently in a very small platform versus the platform that owns most of the space doesn't make any sense. So if someone is going to be a competitive bidder, they're almost certainly going to want to be a competitive bidder in the marketplace leading market.

Got it. And then just one last quick follow-up on the breakage that you mentioned in terms of the qualified leads to go live or launch. Just wondering if you could talk about maybe some of the inhibiting factors today and how you plan on solving some of those.

Yes. The biggest one is that they just don't have video ads for our platform made to the type of format that we need. So those generative AI tools should be able to raise that to a much higher percentage of customers going live.

Your next question will come from Jim Callahan with Piper Sandler.

Just a follow-up on the market growth. You've kind of talked about this double-digit framework through the back half of '25. Can we expect that through 2026? Is that like a step function change that we think can continue?

Look, MAX is growing really quickly. It's -- a lot of it's driven by the strength of our platform. So when we're growing 70% plus year-over-year, a lot of the dollars spent on our platform are the publishers buying customers. So it fuels growth in the ecosystem. so long as we're doing a good job and the other marketing platforms in gaming are doing a good job, the MAX market is likely to be growing really quickly. And this is now no longer a case where you just don't have other data points. Unity Vector is growing really quickly. You've got a company like Moloco that's private, but talking about going public that's growing quickly. Liftoff did testing the waters in a road show. So those numbers were out there that are growing really quickly.

When you've got all these market players growing quickly, that MAX market is growing in a way that people I don't think understood or would have expected, and we're not seeing any slowdowns there.

Got it. That's helpful. And then just you've talked about this reinforcement learning framework for gaming. Now that we're, I guess, like 1.5 years into e-commerce, how does e-commerce reinforcement learning kind of compare? Is it faster, slower? Does it take longer?

I mean what we've talked about is that the gaming model based on its own results can improve. So it creates its own memories, it gets smarter. The e-commerce model is the same thing, but I do just remind people that we're much earlier in e-commerce. We have very little data in the marketplace. So if you think about transactional volume that we have in gaming, we've got most of the market inside our system. So the model is pretty complete from a data perspective. And then also, we've had now, I think it's roughly three years to continuously improve that model. And as you've seen, we've continuously improved it many times over the last 12 to 14 quarters.

E-commerce is newer. It's starting from an earlier place. We have much less data penetration. So we can't go and track like, okay, in a stable world, how much is the model improving because the model is going to be improving much more so from our team improving the model with changes and then just customers coming on. Every new customer that pixels their site passes data to us, both engagement data and transactional data. So as we get customer ramp up, our data penetration in the market is going to go from very little to much greater. And as that happens, that's going to be a big catalyst for improvement in that category.

Your next question will come from Stephen Ju with UBS.

I think you've previously talked about AppLovin being demand constrained versus supply constrained. But can you help clarify particularly, yes, there's yourself and the private company you just called out as well as Unity all out there getting better as well. And I think investors are so accustomed to thinking about all of this being zero sum. So can you help us think about how much more supply there can be with perhaps new publishers and what existing publishers who already accept that can think about doing?

Yes. I think we're a long way from needing new publishers. I mean we've talked about, one, I think at this point, people should believe it's not a zero-sum market. This isn't rideshare where one person takes a ride and another loses. So if that was the case, with our growth and our market position being this dominant, there'd be no conceivable way these smaller gaming ad networks could be growing the way that they are.

So if we set aside the notion of zero sum, then you have to ask, well, how many transactions can we drive to this 1 billion-plus users. 1 billion users playing mobile games, casual games every single day, shopping users because they're adults, they skew female, are not done at this number of dollars. I mean if you just translate to Meta's users, it's 3x more users, a little bit more time spent. But the revenue that they're driving to advertisers over what we're driving and the whole space is driving to advertisers is probably 8x. So there's a lot of room to go on monetizing this audience.

We've also given you historically that our conversion rates on 1,000 impressions were about 1%. They're obviously higher now. We talked about that a year or two ago. The conversion rate is higher, but we think that could go as high as 5%. That's what we see when we're serving an ad where the model is confident that the user is going to take an action.

Now why isn't our whole business converting at 5%? Why aren't we doing $50 billion of revenue on the system? Well, we don't have enough advertisers yet to know what the user is going to be into at that moment. So we constantly serve them gaming ads, some users are into a new game, they're converting at 5%, 50 over 1,000. Other users aren't and the conversion rate is atrocious. It might be 2 over 1,000, and it dilutes you to 1%. E-commerce has given us a path to diversity, but we only have a few customers. Once we get deeply penetrated into the space and we've got really diverse content to show the customer, we think that conversion rate is going to keep rising, and it's going to keep rising really quickly.

Got you. And secondarily, I think you've articulated a desire to go after advertisers of a certain size. So first, before targeting the advertisers with perhaps larger budgets, but maybe more upper funnel. So is that part of the market in addressable right now? Or is that something that might be in the road map in the future?

I think we're going to be going after anything that's not brand dollars. So, by brand, I mean, companies that aren't optimizing to point of transaction, whether they optimize point of transaction or something performance-based like a lead, we're going to go after them. Now we're not going to build out the sales force to go after the -- even in the performance space, advertisers then need you to go to their agency that need you to take a lot of time to go get a lead to go get an advertiser live.

When I talk about this Israeli cookware company, it was a business that was probably spending a couple of thousand dollars a day ramped up to many tens of thousands, possibly hundreds of thousands of dollars a day on our platform. They ramped up really quickly. They scaled their business from near $0 to $16 million to now hoping for $80 million this year. That's an example of taking a customer that didn't have much of a business, plugging them into our tool set, letting our technology do the job and creating a huge business for them and a great relationship for us. That's the type of stuff that really cascades into much more value creation over time because it happens quickly, they become dependent on our platform. We love those stories because we're helping them build the business. If we help Coca-Cola place more dollars in advertising, we're not moving the needle of anything in the economy. Coca-Cola is sort of blindly putting dollars out there.

But if we can help customers spend the dollars, see the direct correlation of that revenue, hire people, grow their business. It's a fantastic story for us because it shows that we're growing the world's economy, we're creating jobs, and we're really creating this dependency on our platform. So really, that's what we're focused on. And in games, that was indie game developers and brands that's going to be these performance D2C companies, much more of the Shopify merchants, much less of those big brands that people talk about that buy through Madison Avenue agencies.

Your next question will come from Cory Carpenter with JPMorgan.

Matt, I got to give you a question before the call ends. So I'll ask about the 1Q guide, the 5% to 7% sequential growth. It's above what you typically guide to in 1Q. Of course, this year, you have the added headwind, if you will, from the e-commerce business seasonality. Could you just talk about some of the assumptions you're making in that outlook and the trends you're seeing so far in the year in e-commerce and gaming?

Yes. So, consistent with kind of our normal practice, Cory, we're guiding to the level where we have a very high level of confidence. For Q1, obviously, coming from Q4, we had a very strong exit rate. So given the factors that Adam was talking about before, the performance of the mobile gaming business, the e-commerce launch as well as the prospecting model, we had a lot of growth in Q4. So the exit rate was quite good. And then that's partially offset by just seasonality going from Q4 into Q1 normally being a weaker seasonal period. And then we also had a couple of days less in Q1 versus Q4. So it's partially offset against that. So that's how we kind of landed in that 5% to 7% sequential.

And then, Adam, you alluded to, I think, an unlock that you saw a couple of weeks ago in the e-commerce business. Anything you can elaborate on what that was would be helpful.

Yes. Look, the team is constantly improving the model. We do a lot of testing. We saw a material lift in the model. We rolled it out. Advertisers saw a huge improvement in return on ad spend. They started putting more budget into our system quickly. So those are the types of things that really catalyze growth for us. When we talk to advertisers and say, test the product in our system, it's test now, but be patient because understand performance today is not going to be indicative of performance in six months.

Our system is constantly improving because our team is improving these models. They do internal research, they use external research published in the AI field. These techniques can apply to what we do. And when they apply well, these advertisers see gains. In gaming, they've seen gains very consistently since we launched AXON 2.

In e-commerce, again, we're starting from a lower point because you need to get more data and you need to get more time to make the models more complex to use that data and create a better value for the customer. We're now doing our job. We're improving the model. They're seeing the result. They put more money into our platform.

Your next question will come from Ralph Schackart with William Blair.

Adam, maybe just staying on that, the model unlock for a second. Maybe kind of frame it. Was it sort of like consistent with other unlocks that you've seen before? Was it different maybe in order of magnitude?

And then I'm not sure if it's for you or Matt, but can you give us a sense once self-serve rolls out and rolls out to GA, how meaningful of an impact can this have on the business? Will this be a slow build? Could this be something that could potentially be additive to second half growth? Just any way you can kind of frame that for me, that would be great.

Yes. I mean on the second one, look, our growth rates are really fast right now. And our business is really big. So taking a self-service platform and opening it up, I wouldn't imagine day one or month one or month two is really going to move the needle on the overall numbers. it's going to build over time. Now certainly, if you're bringing in dollars that you just didn't have before, it's going to add something. So I guess it depends on what our overall growth rates are, but the scale of the business at the growth rate that we have is getting to very, very large numbers quickly. So I would expect that to build over time. I wouldn't expect it to be immediately impactful as a major growth catalyst. It will be noticeable in our numbers.

When it comes to improving the models, we don't call it out anymore. We're constantly improving the gaming models. It happens every single quarter that we find something. And then the e-commerce side is starting from a worse place. It's just earlier stage, less data like we've talked about. So the model uplifts from the team improving the model can be much more substantial. However, the e-commerce business, as you know, even if you took disclosure from last Q1, last Q1, it was roughly 10% of our business. So if you improve 10% of your business, 40%, you're still only getting a 4% uplift on the whole, right? So it's a much smaller potential today.

Now what we know about scaling a business is that we've got to compound these gains so that our performance is unquestionably the best in the market to these customers. If they see that, they're going to invest more and more into us. Most of these customers have scaled businesses. Most of these customers already buy on social and search. We're a new entrant. Most new entrants in the field over the last few years have had done a bad job improving performance. So we know that our performance has to be top notch. We're working towards that, and these types of lifts can compound to get us to that answer.

Next, we'll go to Martin Yang with OpCo.

In the past, you referenced expanding supply sources. Where do you rank among the growth drivers? Where do you rank that among the growth drivers for your overall performance now?

I mean, look, our supply is growing very quickly because MAX is growing very quickly, right? So like I do like fix A B on the marketplace that we have. It's a really large marketplace. If we go get a big publisher tomorrow, it's not going to move the needle in the business because the percentage growth from that publisher to the whole of our market isn't all that much. I mean you're talking about a marketplace, if you know the scale of our business and the ad dollars that we gave you and then we're not the whole market, the MAX marketplace is well over $10 billion a year. There's not a lot of publishers that could put a dent in those overall numbers.

We will eventually go out to new publishers. We get calls all the time. Every publisher wants a monetization platform like ours to help them monetize their business unless they're Facebook, Google or Amazon. And so there's a lot of opportunity out there for us to expand supply. But right now, we're focused on the demand side because that conversion rate can go up so much more than where it is today. We've got a lot of growth in front of us just by doing the demand generation well and improving our core models.

Got you. A follow-up on the creative side. Do you view AXON for e-commerce, the creative format and the overall flow with the end cars and elements as an area of differentiation?

Yes. I mean, look, our ads force attention. So it's a lot different than ads that people are used to. You'd say the closest to our ads is television because you get a 30-second clip. But as we know, most people are ADD and don't really watch the ad on TV these days. Our ads are over 30 seconds of engagement. The user can't do anything else. They're already on their phone. It's a full screen lockup, and it gives the advertiser somewhere between 30 to 60 seconds plus to engage the consumer with their content. They can't get an experience like that anywhere else. So I'd call like the starting point in our business in terms of ad quality, the best that an advertiser can access anywhere in the world.

We'll take our next question from Vasily Karasyov with Cannonball.

Just to follow up on what you said earlier, Adam, about e-commerce model being at a stage where it can't learn as fast now. And I think in the blog post you made recently, you mentioned that the e-commerce targeting is different because there are many more parameters and they're different, right? There is a different LTV calculation. There is no advertising component.

So I guess it's unfair to ask you to compare where the e-commerce model is at this point in its existence compared to where AXON 2 was, right, because there isn't just enough data. But what gives you confidence that once you get enough data, it will work as well or competitive.

Yes. I mean, look, if you talk to the customer base, a lot of the customers are seeing equal performance on us to any other top-of-funnel discovery channel, including the largest social platforms today. So it's not like we're starting behind trying to catch up. We're starting in a competitive place trying to become the best in the world.

Now we're starting with very little data penetration. This is an important point. If you think about the gaming model, I made this point earlier, all the transactions in the space, say, all the IP in the space, all the ad impressions in the space, our model sees the vast majority of everything in the world of mobile gaming today. That allows our engineers to take that data and translate it into exceptional predictions on the other side. In e-commerce, we're starting with -- I mean, the reports show thousands of sites, right? So we're starting with thousands of sites in a world where we can pixel 10 million plus. We have a long ways to go to get to the same data place in e-commerce as we are in gaming.

Now the good news is these models are exceptionally smart, and our team that's putting them together are exceptionally smart. So we don't need to have 100% market penetration or anything close to gaming to really make an impact. We're already proving it works with very little market data penetration. Once that number starts growing quickly, you're going to start seeing this model just improving itself because it gets more data. And off of that incremental data, the same model is going to make better predictions, both for gaming and non, and that's really going to help catalyze growth in our business as we bring on advertisers. We think about every new advertiser as dollars, but just as importantly, data into the model.

So I guess it's more fair to say that what you have now in terms of the e-commerce model is already competitive. It's not like you're behind and need more.

Yes. I mean like we're not an e-commerce brand, but if you talk to them, if you talk to 10, at least five are going to tell you our performance on our platform is really good.

We'll take our last question from Tim Nollen with SSR.

Tail end of the discussion. So just a few tidying up questions actually. For Adam, first off, we're talking about e-commerce all this conversation, but there are other sectors beyond e-commerce that you're servicing. Can you just clarify, I guess, e-commerce is, by far, the largest nongaming sector, but what other sectors are you servicing? And how meaningful are they?

Yes. It's -- look, the other sectors are still early. We started calling it e-commerce, I call it web advertising now. Anyone with the website with a transactional business model should be able to work on our platform. However, we're much earlier in the model evolution for other businesses outside of e-com.

Yes. And then a couple of bits for Matt actually. You've done a great job bringing costs down quite a lot. A lot of that is SBC, I think. You had a slight step-up, I guess, sequentially in your R&D number in the cost lines in Q4. I guess the question is with such a high adjusted EBITDA margin, you seem very confident in maintaining that. What do we need to know in terms of other cost items that could rise? How much could they rise in the coming several periods, not just Q1?

And then last question is regarding cash. You've got now $2.8 billion of cash with $3.5 billion of debt on your balance sheet. Just wondering what your capital structure thoughts and your use of cash priorities would be from here?

Yes. In terms of the margin, I mean, we feel very confident in the margin level that we're at today. The kind of X factors that could potentially change that in the near term or in the short term would be potentially performance marketing that we were talking about before. So to the extent that we see really great performance with some of the campaigns that we're running and we scale those up pretty significantly, we could see kind of a shorter-term impact in margin.

Obviously, we're going to be doing that in the way that we spend, generally speaking, which is very disciplined and then obviously looking at the returns. So we'll run return-based campaigns. So we'll get the spend back in a relatively short period of time. Adam mentioned 30-day return from those. So, overall, that's why we can feel so confident in the overall margin level that it shouldn't change materially from here.

And then in terms of use of cash, obviously, our first priority is spending on the organic growth initiatives. So that's ensuring that we're continuing to retain our talent, compensating people very well. hiring to continue to support our growth initiatives like e-commerce and our engineering team, et cetera. But that really hasn't moved the needle, obviously, in terms of the cash and the cash balance growing. So then it's really what do we do with the cash after that. And we've been very active with our repurchase program, and we continue to plan to be.

Okay. Thanks. I'm right at 60 minutes exactly. So good timing. Thanks.

Perfect. Thank you.

And that concludes the question-and-answer session for this quarter. We thank you all for joining us today. Have a good afternoon.

Thanks, everyone.

Thanks, everyone.

Okay. All right. We are live. Good morning, everyone. Thank you all for being here. My name is Matt Cost, the Morgan Stanley U.S. Internet team. Thrilled this morning to be joined by Adam Foroughi, Matt Stumpf, CEO and CFO of AppLovin. Thank you so much for being here.

Thanks for doing this with us.

Thanks for having us.

Awesome. Let's start on gaming, and then maybe it'll be the last time we talk about gaming advertising in this whole conversation. But there's a lots to talk about outside of it, but the vast majority of your business is in the gaming vertical. Obviously, you've been incredibly successful there for a number of years now. Talk about the durability of growth there and then how the competitive environment is changing? And then how do you feel about that 20% to 30% growth number that you've talked about historically?

Yes. So when you're looking at the mobile gaming growth, first, I try to break it up into the various components. You have to understand that there's supply that's also growing, which I think a lot of people don't view that as a significant component, but it's very important to the overall dynamics of the mobile gaming growth.

So the supply we've talked about that obviously, the MAX marketplace drives is growing on a double-digit basis year-over-year. So that creates a large opportunity for the overall market, right? All of the demand-side platforms that feed into the mobile gaming ecosystem have that as a base, right? Then when you look at on the demand side, AXON advertising, which is driven by the AXON model, the model continues to improve over time, which we've mentioned is driven by the technology improvements, which are the ongoing reinforcement learning, which is just a continuous driver of ongoing improvement of the AXON model coming from the data, the transactional information that we're getting from serving impressions then feeding back into the prediction model to make it better and better over time.

Then you have directed model enhancements, which we've mentioned to the public in the past that those are coming at least 1 per year, driving at least 10% growth. We've simplified that for investors. But really, what's happening behind the scenes is that, that growth is made up of various model enhancements done by our engineering team, dozens really of experiments that the team is doing, and those add a lift over time as well and those stack.

And so when you look at the 20% to 30%, we think that there's still -- that it's very, very robust in terms of growth because that technology is still relatively nascent. So we have plenty of opportunity for continued ongoing learning as well as those directed model enhancements because the team has this very long list of potential experiments to continue to drive growth.

Got it. Let's shift to AXON and the self-serve launch. That happened on October 1, very excited long anticipated development. So I guess, how are you defining success for self-serve for web? I mean, is it number of advertisers? Is it ROAS? Is it wallet share? And then what are you looking at internally to kind of measure progress?

Yes. So with a new product like this, really, it's not the number of customers to us. That's not how we're viewing success. With this new self-serve platform, how we view success is whether or not the platform is performing well. So that is whether or not advertisers that are coming on to the platform are able to see the same -- return on ad spend that's consistent with those return goals that they're putting on to other platforms as well. Are they able to hit those same goals? And then are they able to hit those goals at a scale that is consistent with what they're doing on other channels? Because that provides them the opportunity for them, right, the incentive for them to move over and open up a new channel of advertising spend.

And so we've seen that both with that pilot group of e-commerce advertisers who we added in Q4 of last year. And then similarly, this new cohort that we've started adding on through the referral program in October.

Got it. Maybe going to Adam. What sort of performance are you seeing from new versus existing advertisers in e-commerce as we kind of move through the holidays? And then you talked a lot recently about prospecting campaigns came up on the earnings call and that some other events. I guess tell us a little bit about that product and what it's allowing advertisers to do if they couldn't do before?

Yes. So I've talked about this in another chat, but what's cool for me is we're probably the world's largest start-up because we're bringing this product to market that we just didn't have before. We've got this 1 billion-plus users, and we've gotten really good at serving them gaming ads. In fact, we're the best in the world at driving value inside gaming.

But these users don't want to see game, game, game, game, game inside this space all the time when they're engaged in the game they're playing. And so the idea around this originally was build the product, bring it to market and be able to drive value for companies outside of the gaming space to this audience that they weren't accessing before.

Now we're the largest accessing this audience. The mobile casual gamer is an older audience. This isn't the audience that's spending all day long, 6, 7 hours a day on social. And so this is an opportunity for a brand to be able to access a consumer that could be very well suited to them at a different moment in time than they're accessing them if they're buying on Meta and other channels.

The other compelling factor for us here was we have ad space that we're using with full-screen video advertisements. And the world has gotten really high on [ ADD ] opportunities. But in our domain inside gaming, the user has to watch the ad. They get a full-screen video. It's followed up by upsell screens. They can't do anything else, but watch the ad.

So when we developed this product, we were really excited about the prospects. If the model could actually price it and target it effectively, we could scale here. And we brought together this cohort that we took live last June, and we really have been developing against over the last 1.5 years.

What's important for us when building a product is not to contaminate the results with new customer growth. We know that we're going to get new customers, and we're going to get a lot of new customers coming on to the platform if the product works really well. So how do you define product working really well? You take a fixed customer cohort that's diverse.

We took companies that were $30 million GMV and up, and we really focused on this mid-market e-commerce business across a variety of categories. And we said, can we deliver them a product that works? Well, about a year ago, I disclosed that it took us only a matter of months to scale 600-some-odd advertisers up to $1 billion run rate spend. That's a huge conversion rate of dollars to customer base. And we did that by delivering a very good product.

However, I also said we weren't great in terms of working for every single type of company. The ones that we weren't working for at scale and what we define working as is versus the market leader, are we delivering comparable ROAS as the advertiser measures it?

And are we delivering comparable scale? If those 2 things are truth, we know we've got a big business opportunity in front of us. And what we realized is that a company selling a product that's new to the market, but doesn't have repeat buyers. So think a one-off purchase, something like a fire extinguisher or a hearing aid, you don't need to buy 3 hearing aids in the next 6 months. You only need one.

Those companies were scaling really large on our platform. But the ones that weren't scaling were actually the bigger brands, the ones with brand loyalty. When a customer has an apparel shop or a beauty shop, they have a pretty big audience that's going to buy their product on a recurring basis. You probably visit the beauty shop once a month and you're making a transaction.

Where first delivery in this market didn't allow the customer to differentiate new customer acquisition versus retargeting. Retargeting being you're taking their own current customer base and you're serving them in an ad and driving a transaction.

Well, if you're a brand owner, the question you would ask, let's say, you're selling shirts to the world is that if we drove a sale of a shirt for an existing customer, yes, they get excited that the sale was driven, but then they question, well, would that sale actually have happened next week because the customer is loyal and they were going to buy it already.

So therefore, we shouldn't give AppLovin credit for the full sale. You can ask that question. We don't have a way to answer that question. They don't have a scientific means to answer that question. So they'll run incrementality studies and they'll be slow to ramp up.

Well, the way to address that for us was take our time and figure out how to build the model that can allow them to deliver value on prospecting. Prospecting is tell that same shirt seller, you can only get new customers from us as well as the model can predict and drive to new customers. Requires them to do a bit more of a data integration with us, which is fairly seamless now with where we've gotten to with integrations with Shopify and other attribution vendors.

And once they pass us the data, now the model can really drive to new customer acquisition. And what we saw when we put this in a pilot in October is that the results were universally phenomenal. You had customers where they were getting, as an example, 40% new customers, 60% retargeting, click a button in our dashboard, instantly go to 80% new customer rate.

So you end up doing industry checks and talking to a customer that's buying on our platform and this method, they'll say the results are great. They do measure up really well against the market leader.

Why that's exciting for us is that if you take that disclosure that we made with the 600 advertisers $1 billion spend and understand the biggest customers in that cohort were not maximized in spend potential and that this prospecting tool will maximize their spend on our platform as we go forward.

It really makes our ability to extract dollars from customer base even larger than what we put out there, which then as you say, we have an opportunity in front of us to go acquire hundreds of thousands of customers makes the potential future opportunity even bigger than it was before.

Great. A lot in there. I want to change gears though, before we revisit some of those points and just talk about AI-based creative because that's something, I think, really important you've talked about a lot in the past. What is going to change about how creative is deployed, how it works in your platform? And what's available today versus over the next 12 to 24 months?

Yes. This gets us excited as an advertising platform because you've got these categories on our platform. Gaming for 13 years, these game customers have gotten really good at building creative for our platform. In fact, today, they build for our platform first, given we're the largest in the world driving mobile gaming advertising dollars. So the gaming companies have optimized creative.

They know what works on our platform. The generative AI opportunity for ad creative is not all that valuable there. But where it's valuable is we're bringing on these new customers, whether it's e-commerce today or tomorrow, it's a small business, a local laundromat or a restaurant, they don't make creatives optimized to our platform.

Our ad unit is as long as 60 seconds on video. It's followed up by an upsell screen and it's followed up by a catalog ad that shows their products run through our recommendation engine to the user. The last screen is built, but the first 2 screens require a lot of work to make optimized to our platform.

We also serve a lot of ads per day to the users. We serve a lot of ads over time to the users. So there's a lot of frequency. The best customers know you have to deliver a lot of ads into our platform, let's call it, 50 a week to deliver the highest result for each individual customer.

Today, if they don't have the resources to build those ads, they just don't build them. They bring the ads that they're running on other channels, put them on our platform and hope for the best.

Since the ad unit is unique and new and really high impact, if the brand understood they can utilize as long as 60 seconds, the way to unlock value here is give them generative AI-based tools to get creatives built in an automatic way and in a much cheaper way.

This requires us not to be the only solution provider that gets there. The large language models that are generating videos and images have to also improve. Now the good news is in the image generation space, the large language models are really pretty good at this point. Internally, we've written the model on top of the most popular image generation model that's out in the world.

And we're now creating part of the ad, the static part on behalf of our customers in bulk using these tools. That's going to release to the customer pretty shortly here. The video generation side is a little bit further behind. It's a much more complex undertaking. If you've played with SOA 2 and BO3, they have a limit where if you type in a box and you get an output, they have a limited time that they're going to give you a video for. So call it, let's say, 15 seconds of high quality.

If our ads are 60 seconds max, and we want more time. And the first version of an output of that model in 15 seconds isn't even good enough. You can imagine we have to write a model on top of those models that keeps reprompting the LLM to get enough cuts that are high quality enough where we could automatically stitch together a video and deliver that to the advertiser.

We're at the point where, again, internally, we have tools to do this. And this isn't that it's at the point where the video ad is great. It's at the point where the video ad is good enough for our platform to be better than what they have today.

So their result can improve dramatically. Because we have to keep reprompting the LLM automatically to get an output that's satisfactory, the cost is not very low. The image generation model today for us to get a good image is about $1. A video output to get a really good video with all these prompts happening is about $100 to $200.

Now if we open up this tool to all of our advertisers and said, you can create unlimited videos. Well, they start creating 1,000 a week, and we're racking up $100,000 bill per advertiser. It's not a great economic model.

So what we'll probably do is very shortly here, roll out the image generation model to customers. Those costs $1, that's very scalable. That's going to be a pretty sizable uplift in the e-commerce and broader categories that come on to our platform for those customers, and we'll probably give them a quota of videos that they can go create.

Now take that to the current new advertiser flow on our platform. When a customer comes in, signs up for our platform, they need ads for our platform. If the local laundromat signed up, they probably don't have ads for our platform.

We can automatically take their site that's uploaded to our system and generate them their first couple of ads. And that's a very powerful thing. If you're a customer and you get into a platform and they say, here's some ads that look like they run by the best practices of our platform, you'll get me very excited about putting your first dollars into the platform because it makes it a very quick start.

Matt, maybe I'll shift to you on direct payments. So this has been a big topic in the industry, specifically gaming, but I think it applies to a lot of app-based businesses. But when we think about the opportunity for companies like game companies to circumvent App Store fees and do direct payments, what impact could that have on your business? Because a lot of investors are asking me, well, hey, they have more gross profit, are they going to throw that at advertising?

Yes. It's a great question. Obviously, it's going to have a positive impact on us and everyone within the ecosystem. But I think what's missed is that the timing of the impact and then also the dollar amount. So first, on the timing, like this isn't a change that's going to happen immediately. We think that this is a change that the industry is going to make over a longer period of time. Firstly, I mean, mobile gaming companies are apprehensive about being the first mover about particularly when it's regulators on the other side and then the ecosystem like Apple and Google.

So we think that this is a change that's going to happen over a longer period of time over 2026 than the years after. So I think that's important to understand. And then secondarily, in terms of the dollar amount and that impact, not 100% of the payments are going to shift. We think that there's still going to be a portion of those payments that are still going to be run through those much easier payment platforms that Apple and Google have.

So the impact on the actual percentage and the dollar amount of those costs are not going to come down to 0. So it's going to come down from that 30% that it is today to somewhere probably in the middle, probably in the 15% to 20% range. And then that delta, that incremental profit, some of that is going to end up in the pocket, right, of the mobile gaming companies. They're going to decide at first, maybe I want my profit to increase slightly.

And then some of that's going to hit the advertising companies. And then over time, as that industry becomes more and more competitive because there's more profits to spend on user acquisition, a lot of that will then end up with the advertising companies like us.

Let's talk about competition for nongaming. So another question I get a lot is, how does AppLovin stack up versus other performance ad channels out there? So when you think about that world, what differentiates what you offer from the Metas and the Googles of the world? And are there any misunderstandings about how you interact with them that are worth clarifying?

Yes. So let me define performance first because I think a lot of advertising companies say performance, and I'd argue that there's different levels of performance. What we try to do is take a top-of-funnel user. So help a user find a product that they've never seen before, they don't know that they want to buy, get them engaged in it, drive it to the bottom of the funnel where the point of conversion happens and price it all on revenue.

The only other company that has top of funnel to bottom funnel price on revenue is Meta. Google is a bottom funnel company. You go to search, you have a sense of what you want to buy. Google closes the loop. Amazon is structured very similarly as well.

So when we think about our market, what we're going after, it's much more aligned with the type of customers that Meta has really helped scale businesses. Now you then go and take that and say, well, we're competing with Meta. If we were to take a product to market and Meta is as great as they are, they built maybe the most innovative ad solutions that the world has ever seen.

If we took to market a product and said, you built your business on Meta, move some dollars over to us. Because when I think about competition, I think about it as you're shifting from one versus another. We'd have 0 shot. We're coming with basically no salespeople. We have the name AppLovin. You're a media buyer, you're not going to go, I work on Meta, I built my business on Meta, I'm going to shift to AppLovin.

What was important for us is that we build tools that are so good and tap into an audience that's actually incremental that they have not discovered the products that we're showing them on the social network. If they haven't, there's an opportunity to go to the same customer and say, you're spending $100,000 a day on Meta, you built a great business, but you're capped in your growth opportunity if your marketing mix is limited to what you know.

All of a sudden, for the first time in a very long time, there's a new solution. They can unlock incremental spend for you. Instead of spending just $100,000 a day, you can spend $150,000 a day at the same return you were getting at $100,000 a day. That means that the same customer in this example, could grow 50%. That's a huge economic opportunity.

What gets us excited about where we are as a business is we've gone from what I'd call a niche, executing exceptionally well inside gaming to now proving we can build products for any type of customer in the world to market on our platform.

If we can do that and we're proving that it's incremental, we're going to be able to influence economic expansion in these categories that are all much bigger than the gaming market we operate in. Do that at scale, and this company is going to be much bigger in terms of business opportunity than the one we've executed against the past 13 years.

Got it. Matt, maybe on capital allocation. So you've been very active in repurchasing stock over the past few years. Remind us again of your philosophy and your targets for capital returns. And then separately, just on head count and reinvesting in the business. I think when we were here probably 12 months ago to the day, you were anticipating reducing head count in 2026. I guess where does the balance fall -- sorry, in 2025, where does the balance fall for 2026 in terms of investing in the business and hiring versus head count?

Yes. I mean I think the plan now is obviously not to reduce much more. I mean we're very low and very lean in general. I think it's missed because we don't disclose a lot about the head count. The total company head count is around 900. And then of that, there's only about 400 of those employees that are focused on the ad tech business and then the entire back office of the company.

So we're already running very lean and efficient. So we will be growing head count, but at a very low level, we just -- we focus on hiring the best quality talent that we can get. So we'll be adding head count to our growth initiatives, those being obviously, the business development team to focus on e-commerce and then engineering as well, but it shouldn't have any material impact on the margin profile of the business.

So then what do we do with all that excess free cash flow? We're going to be continuing our buyback program. We announced that we increased the authorization by $3.2 billion. So we'll be very active in continuing to invest in the company and buy back shares, which we've done very well for investors by returning that to investors over the last few years.

Great. So Adam, maybe like looking ahead into '26 and beyond, as you think about the full launch of self-serve in 2026, I guess, what are the gating factors to get there? And then what is the pace of improvement that we should expect for the web targeting model over time? Should it be akin to the gaming model?

Yes. So the web model is starting earlier. So as you've already seen with prospecting coming out, we're making really big innovations quickly. The underlying model has improved over the last year as well. And if you talk to the customers, you get a sense that their performance keeps improving.

We're also starting at a point of data penetration that's really low relative to where we are in gaming. So as we get more data that comes from more customers, that model is going to keep improving.

So what really excites us is that we're already really good, yet we know that the model and the data position is going to get only much stronger over time. On the former, we're building tools really fast. The dashboard, the AXON Ads Manager works -- is very effective for the customer. They're having a good experience. Customers can sign up today. I mentioned on the earnings call that since we went to a referral state at the point of earnings, we were seeing 50% roughly a week week-over-week growth on that business line.

Now it's starting small, but I've started multiple businesses. If you're ever going through a period of 50% week-over-week growth, you get ecstatic about a business opportunity like that. PCs would be lining up with a lot of money to fund something like that.

So we're seeing that the opportunity is going to be really large. Now what gets us to open is that we're able to execute on marketing the brand, being able to tell small businesses around the world that this AXON Ads Manager and this AXON opportunity could be a game changer for them in their business. Of course, this brand didn't even exist a couple of months ago. So we have to nail the marketing side.

The way I think about it, and this has been helpful for investors to understand is that I talk to our team that's doing this growth marketing testing right now and say, look, a great outcome next year would be if we could spend $1 million a day in advertising, and we'll do sponsorships, we'll do advertising, we'll do more media, we'll do podcast.

But if you combine it all and we spend $1 million a day, and it cost us $2,000 to sign up a new customer that goes live on our platform, you'd spend $365 million over the year, and you would get 182,500 new customers in 1 year.

Now recall that we've disclosed, we only have thousands of customers. If the number can ramp up that quickly with a number that's very immaterial against our revenue base, so you wouldn't even expect much of a margin impact. This business is going to be off to the races. We think it's doable. The second we're ready to do it. We'll open up the platform. We'll be talking about it with investors. And certainly, the small businesses in the world will start seeing that opportunity out there for them.

It's a great note to close on. Adam, Matt, thank you so much.

Thanks a lot, Matt.

Thanks, Matt. Appreciate it.

All right. Great. I think we're going to go ahead and get started. I'm Stephen Ju with the UBS U.S. Internet team. Sitting to my left are the management team by AppLovin, we have Founder and CEO, Adam Foroughi and CFO, Matthew Stumpf. So thanks for coming, guys, and welcome to Arizona.

Thank you for having us.

Awesome. So let's put you, Matt, on the hot seat first. We'll get to you in a second, Adam. So don't you worry. So let's talk about the gaming opportunity first and the gaming advertising and the growth and the durability there. So that continues to grow pretty well ahead of broader sort of industry benchmarks. I think we're all used to thinking like the audience there is already tapped out, maybe like we're done expanding in the sector here. But what's driving the outperformance there for AppLovin and how durable is it, right? And what specific benefits in MAX is actually contributing to that growth?

Yes, sure. So to understand that to break it down, there's a few factors that are going on. First, you have to understand that the supply has grown. So most gaming companies now use MAX, right, the MAX marketplace, which is a marketplace that's growing on a double-digit kind of pace annually. So there's a large opportunity for continued growth for all of the demand-side platforms, including AppLovin's own solution, but every demand-side platform to continue to feed into that supply side opportunity that's continuing to grow.

And then on the demand side, you have the Axon model, right, that sits behind the Axon Ads manager that's really doing the matching, right, for the ads manager. So what's happening there is that the technology is continuing to improve. We've broken that down for investors in the past. There's multiple components there as well. The first being ongoing learning. So that's the model just continuing to learn as it shows impressions, what happens, was it correct or incorrect in its predictions around what would happen after the impression is shown. Then there's directed model enhancements, which we previously said would happen at kind of 1 per year, which was an oversimplified explanation for investors just to understand the basic concept, what is actually happening in practice is that, that's enhancements that are happening, multiple enhancements, dozens really over time.

And then those enhancements, each one of those lists compounds over time. So the addition of both of those pieces continues to grow the scale of spend that's possible for the advertisers. And then on top of that, you also have additional factors like demand, right, which is continuing to grow in terms of the diversity. So as you add on those technology enhancements on top of then more diverse demand and more data, there's this multiyear opportunity for us to continue to grow into that mobile gaming supply.

Got it. So that's what's informing the long-term growth outlook that you've articulated previously. Okay. It's not like a onetime we're done and it's done staircase.

No, I mean the technology is very nascent as well. So the direct model enhancements. I mean, there's a very long list that our engineers are working from of things that they want to continue to test and see whether or not they could potentially provide an uplift. And then there's research that's going on all the time, right, that's continuing to add to that list of potential changes to the models that they also want to test and see if it will perform. So we feel like because the technology is so nascent, but there's a multiyear runway for us to continue to improve the model.

That's good. Good. Adam, spotlight on you now. So we can't let this meeting go by without talking about the web advertising opportunity, right, the broader opportunity. That's about 17 months old now since you guys rolled it out. So you've been bringing in new cohorts on an ongoing basis. So how is the new cohort performing? What have you learned, right? And how do the newer cohorts compared to the older cohorts? And how do tools like the new one prospecting model and Gen AI affect performance for all of the cohorts?

All right. Cool. You got a ton of questions in there. So maybe to answer, I'm going to back up to when we first released the product and what were we really looking at to know that we were on the right track? And then what have we done since and we can bring it to the present. We really focused on last year, bring on a fixed cohort of customers and sort of lock it in. I think over the last decade, a lot of companies have tried to go into this space. And have prematurely rolled out products and probably not really focused on optimizing those products for what the advertisers needed and ended up seeing some revenue growth, getting really excited, but the premature rollout made it so that the products weren't scalable.

What we wanted to do to reverse that was really say, we've got some products from companies across a whole bunch of different categories, so reflective of the broader market, huge market. I mean we're talking hundreds of customers and Shopify alone has millions of shops on it. So the very, very large market in terms of end customer count, but you can extrapolate from small to big. And what do we want to do was in the small set go in and say, if they're able to spend on us on a performance basis, and what I define performance as is drive someone -- a consumer to buy something they didn't know they wanted to buy before and sell the advertiser's product to them and predict every component of that conversion funnel so that you can price for the advertiser on a return on ad spend basis.

If you can do that well, you drive true performance, you turn the marketer into an arbitrage marketer. And so the dollars they can spend on a platform become really limitless with the constraints of that return on ad spend goal and the money in their bank account is the only 2 constraints. And so we wanted to execute on that. We wanted to know out of the dollars that they're spending, how do we index against other media channels. Of course, in this direct-to-consumer shopping category, Meta has been the best over the last decade. And so we want to know what's our performance relative to the other players. And we want to know what is our ROAS, return on ad spend that we're driving for them relative to the other players.

If the spend scale was high and the return on ad spend was competitive, we knew we had a scalable product. Now we also looked for qualitative feedback. What did they not like about the product? We just rolled out the product a year ago. We didn't even have a dashboard. So a lot of the last year was spent building the basic plumbing, the dashboard, the flows, the integrations with attribution companies, the Shopify app. So plumbing, it's pretty obvious, and we had to build it and time allowed it. But a consistent point of feedback we were getting were the customers that weren't scaling didn't appreciate that our platform had only one campaign targeting type. It was universal targeting. And in that universal targeting, they would get new customers and retargeting.

Well, the customers consistently said they wanted to be able to target only new customers. In a complex world of attribution, if you run a business, it's much easier to know if you get a customer you haven't seen before that buys your product, it's very incremental. If you get a customer that had bought your product before to buy another product through a media channel, you're not really sure would that customer bought next week because of an e-mail they got through internal CRM. And so was some of that money or all of that money wasted on the media cost.

And a couple of weeks ago, we rolled out this product on our product blog called prospecting campaigns. I would urge investors to try to talk to clients about usage of this tool, but it's working phenomenally well for the customers that are already on it. And we had some testing it out, and we scaled it out because we knew that it worked really well. Universally, it's allowing customers on our platform to share data into the system and ask the model to really go target new customers for them, and it increases the new customer rate dramatically from what the old settings were.

This allows us to now go across the board, we're not really hearing qualitatively anything negative anymore. And quantitatively, we're seeing really good results. So whether the old cohort or the new cohort of customers we're seeing come in, we're seeing really good results. So what that leaves us with is one last layer outside of what's going to end up being just ongoing optimization or improvement of the product, getting the customer to have creative that's adapted for our platform. The biggest spenders in this category understand that, on average, a creative on our platform is watched by a consumer in e-commerce ads for 35 seconds. That's a lot longer than other channels. In social, the average is 7 seconds. And so you have way more time to engage the consumer and try to convert them on a brand offering than you do elsewhere.

A lot of the customers that come to our platform, though, in the e-commerce category, don't have the resources to go make Axon-specific advertisements. And so they bring over their social ads. Those tend to be 10 to 15 seconds in length. And if you could have shown a user a 60-second video clip and you show them a 15-second video clip, there's a loss. It's hard to measure the loss. It's opportunity cost loss. Their campaign may still work with the 15-second ad that maybe they spend $10,000 a day on their ROAS goal, and they could have spent $50,000 a day. Very hard to measure, but not that hard to solve anymore. The way we'll solve that is with generative AI-enabled ad creative, where we will help the customer get tools, a model written on top of the frontier models that allow for video creation and static ad creation, that's shortly on the way here.

And if we can solve that what we'll end up doing is equalizing the playing field for these customers in terms of building creative adopted to our platform. And if they're already qualitatively not asking us for more product and we deliver them creative that is tailored for our audience and their performance continues to scale, we think we're going to be in a really good place to then get to the point where we should be marketing more aggressively, selling our product more aggressively to more customers, opening up the product and hopefully unlocking years of growth in front of us.

Yes. I think if you talk to the Meta caps, I think they've talked about effectively solving for the 2 tasks that advertisers have, right? So there's the media campaign management task. And then there's the creatives, which you just touched on. It's surprising to me that people are just kind of bringing over their social campaigns, but I guess that's a short-term fix to a longer-term problem, which you're going to hope to solve.

It's the easiest way to get going. So in a way, it was seen as a perk. Axon's made it easy to port our creatives over. We don't have to do any work to get a campaign live. We have to integrate a quick couple of buttons, drop pixels or shop by integration as quick couple of buttons off you go with your other ads. So it felt really good to them. They didn't have to invest more resources. And that not investing more resources, a lot of them also didn't realize how big we are. And if you knew that the opportunity was as big as any other opportunity out there, then you would invest the resources. But it takes a while to build that trust with the customer on the other side.

On the campaign management side, we started from a place post Axon 2, where we removed all targeting. The customer can plug in their economic goal and they can plug in the countries that they want to target and where they want to route the click to. That's it. So they didn't have campaign management in our domain, and it felt really good to make the ad experience seamless where they could port things over. And we have no way to tell them, you spent $10,000, you could have spent $50,000 had you built better creative. So if you can't measure the opportunity loss, they don't actually believe it. We'll be able to prove it when we're able to help them adapt creative for our platform.

Yes. And I think you have 1.6 billion daily active users. So I think I don't know if -- I don't think anything that I'm hearing from you this morning is a product-related problem. It seems like it's an awareness-related problem, then that seems like an easier problem to tackle.

Yes. The business problem is much easier to solve than the product problem. The other thing that Matt touched on is health of the ecosystem is really important. What drives our success over time is increasing our conversion rate, but also increasing supply.

Daily actives are not going to grow a whole lot. The mobile gaming and mobile ecosystem in general is just mature at this point. You're not going to have 1 billion new mobile gamers appear out of nowhere. And so if you assume the daily actives are sort of capped, engagement is going up. One thing that I'm really excited about is over the next 3 to 5 years, if more and more of our impressions shift to the shopping ads or anything that's not gaming, it will be really healthy for the ecosystem. And I need to unpack the why. What drives value of platforms that are advertising-based is increase your conversion rate, which increases your CPM and increase your ad load. More supply equates to more revenue growth.

In our case, because we have that MAX marketplace, more supply grows all the players in the ecosystem and obviously, the gaming companies. Now why did I say it's very beneficial to serve more e-commerce ads? Today, when we serve a gaming ad, the ad is a video plus a mini game inside the game. The natural instinct on that is to think, oh, the churn risk to the gaming company is high, so that is for sure, a fact. When a consumer shifts off to another game, they churn off the original game potentially.

More importantly, people love playing those mini games. There is a certain amount of time that people will spend every single day inside games, and that amount of time isn't going up that dramatically. Well, they love playing the mini games. So the ad experience in a game is much, much longer than a shopping ad that does not have a mini game inside of it. If over the next few years, majority of our ads shift to e-commerce ads, the ad load time will go down per ad served in the MAX auction, which means the ad load overall impressions served supply will go up. I think it can go up dramatically because of this function.

Now then it would be easy to conclude, well, you're cannibalizing your games category and you need games to be spending as much as they were before. In fact, if this happens, I think gaming will also actually be able to spend more because what will happen is our system will get more targeted on gaming. We don't serve 1,000 ads a couple of years ago when we had talked about a 1% conversion rate on games and do a great job inside games. We're showing users who are playing a game they love game, game, game, game. That's sort of an annoying experience. And the conversion rate is 1%. On the average, this is a couple of years ago, predating e-commerce.

Now the model itself on this 1,000 impressions doesn't predict a 1% conversion rate uniform over the 1,000 impressions. Some of those impressions, it might be able to convert to 10%. Some of those impressions at 0.1%. So there is a curve in terms of value and that's backed out from that expected conversion rate. If we go to a world where a majority of the impressions become non-gaming, ad load goes up, opportunity goes up. But then on the other hand, gaming might get very targeted. The model may no longer serve the gaming ads when the conversion rate expected is really low, so the ad is annoying. It will serve the gaming ads when the conversion rate is really high, and it's predicted that the users are ready to go try another game. Gaming has no loss. More ad load allows them more opportunity actually. They still get the highly likely to convert users and then e-commerce and other categories fill in the rest, health of the ecosystem grows. And we think that will catalyze growth in ourselves, but also all the other players in the space.

Yes. So just unpacking -- you're unpacking a little bit. So instead of the 30-second mini game ad, which I'm sure all of us have played, right? So you're going to see an e-commerce ad that might be 5 seconds, 6 seconds long. So you can spread that time spent watching the ad over many more ads, and that's going to help you increase the ad load. Is there an opportunity to go back to the publishers and say, okay, like let's increase the ad load because you can stick in another ad here or there?

So the publishers' ad experiences are pretty well defined at this point. If it's rewarded ad, the user is opting in to watch an ad for currency in the game. If it's in the middle of level, the user -- the ad spot is defined. But if the user can play twice the amount of levels because the ads are shorter, then they're going to see twice the amount of ads, right? That's really the function to understand. So on average, we've disclosed the e-commerce ads are 35 seconds watched.

Gaming with the mini game is going to be much, much longer than that on average. And so I don't know off the top of my head what the delta is, but it's much higher. And you can imagine that if you can cut ad time down by a material amount, let's say, to half, then you're going to probably get a lot more ads in your session because you're going to have more time to actually progress in the game more and see more ads.

Got it. And so what we're talking about is potentially broadening out the list of potential advertisers that any given publisher is going to have exposure to. So theoretically, their yield on the dollars that they're going to be able to get as revenue from you should increase as well. So you would have to think that some of them will be putting some of that money back into the market and to help a lot with what Matt just talked about in terms of helping the overall growth of the game market.

Yes. And look, that happens programmatically, which is a nice thing. And it's not just us. If there's more ad load, all the players can help them monetize better. If the ad load goes up and the CPM stays constant and twice the amount of impressions for the same number of users, the publisher is making 2x. That automatically flows into one of our gaming models that's popular is the ad publisher can buy on an ad return on ad spend basis in our system. It's all real-time programmatic.

So if that model goes, I'm seeing a lot more ad load, I'm seeing a higher LTV for the customers that are buying on an ad spend, return on ad spend basis, they would then automatically be able to bid more into the auction. So that's really one of the things that's fueled so much growth inside MAX is our ad model has to take a user who's playing a game for 20 minutes a day in casual and drive them to a game where they'll have higher engagement. That really unlocks expansion of ad load today in the absence of this phenomenon where ads are shifting to shorter ad views.

And then over time, as that happens, that will automatically help them able to monetize better, bid more for users, get more engagement, grow their user base and grow their revenue. So it will be a really healthy dynamic in the ecosystem and one that should compound over the coming quarters and years.

Yes. We touched on this a little bit, but I mean, you've launched a referral-based self-serve ads manager this quarter. What infrastructure did you need in place for that launch? And what remains before the full global GA next year?

Yes. I mean I always get asked what were my expectations. And as a CEO, I always think of the worst, not the best, and I don't really set expectations around customer count or growth in revenue. What I care more about is that as an advertising platform, I think we're the largest advertising platform at this point ever to really open up.

I look back on when Meta opened up their ads manager, they had $5 billion of revenue. And our ad spend a year ago, roughly, we disclosed $11 billion of ad spend. So very large platform that hadn't opened up. When you open up a platform that's got that much economic opportunity, you really immediately have a fear of scams and frauds and more aggressive advertisers coming in to take advantage of that platform. And in the early days, traditionally, that's happened to multiple platforms that have rolled out digital advertising open ad managers. What we didn't have a few years ago were automated ways to scan against -- scan and protect against this problem. One of the things that we invested in was our agent to be able to scan every single ad creative, every single website being advertised, every single app being advertised and ensure the quality meets the quality of what we had when we curated the advertisers on the platform.

I wasn't sure if this was going to work because we had to stress test it in the real world. But I was really happy with the result that we have automatically been able to screen and remove anything that would have been a breach of what we want to provide the consumer. And we think of the consumer on the other side, getting an experience early in its life cycle of our e-commerce ads. We don't want them to buy a product that a lot of other consumers have complained about. If that product ships too late or it's a crappy product, that consumer won't come back and buy from us the next time. So that's the way we think about what the ads are that we're delivering to the end consumer. Maintaining that quality high was really critical because that gives us confidence in the next step.

The next step is optimizing every step of that conversion funnel. To us, when a customer signs up, they're getting an experience, and it's not a human curated or human engaged one. It's automatic from that point to the point of put a credit card on file, integrate, go live, run ads and start scaling ads. We don't want to have a human being involved in any step of that process. Therefore, we need to see, are they getting a seamless experience? Are they tripping up anywhere? Is there something that they need to actually have addressed through some sort of Q&A bot. And so for us, it was important to start seeing the data through the conversion funnel, start optimizing that conversion funnel, understand the questions that they have, so we can write the bots that can respond to those questions, and we can have a customer service bot and a sales bot to be able to make sure that they get a seamless experience.

All of that, we're building out, and all of it looks pretty effective thus far. So it gives us a lot of confidence that, like I've said before, first half of next year, we'll get -- we'll be able to open up the platform. Now what's important about that is we can't just go open up the platform and expect a bunch of customers to come to us. We need to pair it with the sales and marketing effort. And with a lean team, as you all know, we have very limited salespeople and very limited marketing people. The focus there is, can we run paid marketing campaigns to bring advertisers to us. We'll pair that with some brand efforts, but that's really the big catalyst. And we've been in testing on that, I mentioned on the earnings call already. So we're seeing results in marketplace there. We're optimizing our campaigns, just like every other advertiser optimizes their campaigns on our platform, create more ads, optimize your conversion funnel, try to get the LTV to cost of user acquisition lines to cross and scale.

As we get to a point of confidence on that, we'll know that we can open up past the referral state, really start putting money behind marketing and hopefully start growing advertiser count really quickly. That's something that we're confident we can do. We're all marketers of this company. We've proven we're very good at performance marketing for our clients. We think we can be very good at performance marketing for ourselves. And most likely, that's a much easier problem to solve than the one of building a product that was really good for our customers to begin with.

Yes. guess this is probably more of a 3- to 5-year perspective here. But I mean when I first saw AppLovin and I was really reminded -- you brought the Meta analogy also like I'm reminded of when the very initial days of Facebook when they rolled out the app install ads and they expanded that [ rolodex ] over the course of time with really effective product development and started touching a greater, I guess, rolodex of advertisers. Why should that not be the expanded opportunity for AppLovin? And they've gone from probably what were maybe thousands of advertisers to 10-plus million, right? So why should that not be the case AppLovin?

I mean they did a very, very phenomenal job. It's easy to forget in 2011, 2012, there were a lot of questions as to how they can monetize the blank canvas. Social shouldn't be able to drive transactions. How are they going to compete in advertising. And they realize if the ads become really compelling, they become like content and consumers can discover new products. The value is phenomenal that you can create out of that. We have the same dynamic and view towards the advertising market.

If you can help the customer get a new customer, price on revenue, turn them into an arbitrage marketer, you don't need to sell them. They're going to spend, they're going to scale. It's really hard to do that. It's easier to say than actually build the technology that does that. But if we can do that and we can integrate customers and if we're in the thousands now to the tens of thousands, hundreds of thousands, eventually millions, what we will have is we will have built a data set that will allow us to get more and more targeted on the advertising.

As advertising gets better, it won't be as annoying as you're someone playing a game and you like the game and you keep seeing gaming ads. The ads will help you discover more content. And if we've got 35 seconds of time -- times many ads per day to the consumer, we have a lot of seconds a day that the user is seeing our content.

If the advertising becomes more like content, the conversion rate is going to go up dramatically from here. And if that happens across a broad range of categories, more customers are going to go, there's another channel. It's got 1 billion-plus customers that's got maybe the best ad experience in the world today because there is -- there are very few places where you can capture the user's full attention for over 30 seconds in this ADD-rich world.

And so you're left in this framework that's really, really powerful. I think the opportunity is really big. And you've seen just on social, a lot of our customers competition in, but the result is so good, they want to be thought leaders catalyzing growth on our platform. And so if we pair that volume with our own marketing and bring in tens of thousands to hundreds of thousands of customers, our platform is only going to get better for the customers we have today, and it should follow a similar trajectory to what Meta has shown as really a catalyst to expand the economy of all these categories they've excelled in.

Awesome. Matt, that puts you back on the spot here. I think many other companies here at this conference are talking about investing very heavily into GPUs and compute capacity. Yet I mean you've indicated that only about 10% of the revenue growth flows through to data center and GPU costs. So everything that you guys have planned in the background, the models are going to scale, e-commerce efforts are going to expand. So do you expect that ratio to hold? And how should investors in this room and listening online should be thinking about capital allocation and the impact of paid marketing, which Adam just hit on, everything else in between LLM and API usage, et cetera. There's a lot of things...

I think looking at other companies, we run very different, right. So looking at data center costs as an example, I mean our team spends very disciplined. I mean, as they launch model enhancements, they look at the downstream impact of what those do to GPU usage. So as we continue to grow and scale and improve the technology, we're looking at the cost impacts as well. So we don't expect that, that kind of profile of the 10% incremental cost versus the revenue growth should change materially going forward. And in fact, the team is continually looking for areas where we can even drive improvements in usage and reduce. So we don't expect that, that overall benchmark should change materially.

Outside of that, I mean, the cost structure is relatively straightforward. Headcount costs, which everyone knows, we run very, very lean. We'll grow headcount over time. Obviously, we'll need more business development sales folks to address more customers that we have the millions that you're mentioning as well as more engineers over time, but we don't think that, that should change the overall margin profile of the business. And then Adam's point on performance marketing, that will be a new cost that we're going to have, and we're testing now, but it's very small dollars.

Over the next year, that will grow in absolute terms. But because we're doing it in this performance marketing fashion, where we're growing it just like our customers are, right, with return on ad spend goals, you should see a short-term impact on absolute dollar growth, but the overall margin profile shouldn't be materially affected. So we think that kind of where we're at today in the like low 80% EBITDA margin range should be pretty consistent going forward.

Okay. Sounds good. We only have about a minute or so left, so spotlight back to you, Adam. There's been a lot of growth in the mobile gaming sector, advertising space, everybody's noticed. And are you seeing any impact from any sort of increase in competition? Or -- and I guess, more importantly, like what are the underlying things that could keep you ahead of the competition?

I mean, look, we're always focused on our own execution, and we've got a model that works really well inside gaming. We've become the largest demand channel for gaming, really a requirement in the category. We've got a model that's now proving to work really well for e-commerce companies. And hopefully, we can become a requirement for those companies.

If we can execute on the road in front of us, it will sound like a broken record. We really do have the core technology that's working and driving performance across multiple categories now. And the rest of the path for us is just go get more customers. That's been solved by a lot of companies. Even companies with weaker ad offerings have hundreds of thousands of customers on their platform. So it's very likely we're going to be able to solve that. And as we go get more customers, it adds more data back into our system. More data paired with the power of our models will make us more targeted. That should benefit every customer in our system and every new customer. So we're really excited about the prospects. If we execute forward, this business is going to be doing a lot better in the next year, 2, 3, 5 years than it is today.

Awesome. We'll leave it there. Thank you very much.

Thank you.

Welcome to AppLovin's earnings call for the third quarter ended September 30, 2025. I'm David Hsiao, Head of Investor Relations.

Joining me today to discuss our results are Adam Foroughi, our Co-Founder, CEO and Chairperson; and Matt Stumpf, our CFO. Please note, our SEC filings to date as well as our financial update and press release discussing our third 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, including the expected timing of product launches, our share repurchase program, the efficiency of our operations, 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 second quarter ended June 30, 2025.

Additional information may also be found in our quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2025, 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 the reconciliations of our GAAP and non-GAAP financial measures in our earnings release and financial update available on our Investor Relations site.

This conference call is being recorded, and a replay 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.

Thank you all for joining us today. First, I'd like to recognize our inclusion in the S&P 500, a huge milestone for our company and a strong acknowledgment of what we built. It's a privilege we do not take lightly. It also means we now carry the expectations of a much broader set of investors, and we must push even harder to continue delivering.

Turning to our business. Q3 was another very good quarter. Our performance was strong with gaming advertising continuing on a solid trajectory. Our teams delivered multiple incremental lifts in our core models this quarter. And our MAX supply-side platform, one of the best indicators of our end market growth continues to grow at very healthy rates. We also opened up international traffic for advertisers promoting websites or shops in Q3 ahead of schedule.

I'm particularly proud of our team because even while executing a strong quarter, we also delivered our major October 1 launch of our self-service platform and referral form. We did so without any significant hiccups, no major bugs and effective filtering out of low-quality ad accounts, something I was personally monitoring closely. This speaks volumes about our ability to automate and execute. I know everyone wants stats on how self-service is going. And instead of something specific around accounts or ramp-up since we're still very early, I'd like to point out a stat which I watch very closely.

While it takes a while for new customers to get going, to integrate, to learn how to use our system and to ramp spend, we're already seeing spend from these self-service advertisers grow around roughly 50% week-over-week. It's too soon to be significant, but this type of early growth gives us even more confidence that our platform will excel at being an open platform to any type of advertiser.

Our focus for Q4 and 2026 will be the following, with priority always given to improving our models for all advertisers. We'll continue tuning our onboarding flows and ramping more AI agents into the workflow to support a seamless experience for new advertisers. Once we're satisfied with the quality and experience, we'll open the platform broadly beyond referral basis. We'll be testing generative AI-based ad creatives. Over time, if we can move to mostly automated creative generation, we believe user response rates to more customized ads on our platform will materially improve. We are actively testing paid marketing to promote the Axon Ads platform to new customers. We'll continue tuning this acquisition method so that when we launch the platform beyond referral in 2026, we can scale advertiser count without a reliance on a large sales force. If we maintain execution discipline, we are well positioned to acquire a large volume of new advertisers in the coming years.

We believe that giving our powerful recommendation engine, a more diverse set of advertisers to recommend will dramatically improve conversion rates, paving the way for elevated growth rates for years to come. It's worth noting the backdrop. The market is recognizing our platform, our scalability and the reach we offer our partners and the institutional dynamics that come with the S&P 500 inclusion are already in motion. At the same time, we continue to operate in an environment of heightened scrutiny around data, privacy and ad tech practices. We remain committed to strict compliance, transparency and execution excellence.

To conclude, we delivered a very strong Q3. We are executing on our strategic priorities, and we are confident that our best days are ahead as we broaden access to our self-service platform and scale globally.

With that, I'll turn it over to Matt for a deeper dive into the numbers.

Thanks, Adam, and thanks, everyone, for joining us today. Q3 was another exceptional quarter. Revenue was approximately $1.405 billion, up 68% year-over-year due to model updates in the core gaming business, while adjusted EBITDA was $1.158 billion, up 79% at an 82% margin, up 1% quarter-over-quarter from operating leverage and a modest reduction in operational FX. Quarter-over-quarter flow-through to adjusted EBITDA was 95%, slightly above Q2. Free cash flow was $1.049 billion, up 92% year-over-year. Free cash flow margin improved sequentially given no semiannual cash interest paid on our debt this quarter as those payments occur in Q2 and Q4 of each year. We ended the quarter with $1.7 billion in cash and cash equivalents.

During the quarter, we repurchased and withheld approximately 1.3 million shares for $571 million funded by free cash flow. Over the last 3 quarters, we have reduced our weighted average diluted common shares outstanding from 346 million in Q4 of last year to 341 million this quarter. During the quarter, our Board of Directors increased our share repurchase authorization by an incremental $3.2 billion.

Finally, turning to our financial outlook for next quarter. In the fourth quarter of 2025, we anticipate revenue between $1.570 billion and $1.6 billion, reflecting between 12% and 14% sequential growth. With adjusted EBITDA between $1.290 billion and $1.320 billion, targeting an adjusted EBITDA margin of 82% to 83%.

Now with that, let's move to Q&A.

[Operator Instructions]

Our first question will come from James Heaney.

Could you just start off talking about the characteristics of the advertisers that you've onboarded since October 1? Would you say the GMV of the advertisers are smaller than the initial 600 that you had in the pilot? Or are you going down -- more down market? Just any help there would be great.

Yes. Sure, James. They are obviously filtered set of advertisers when we curated the list last year. That was filtered by our team. And then this year, it's filtered through referrals. So these aren't like your local dry cleaner trying to come on to the platform yet. They are predominantly shops. They're not going to be as large as they were in the cohort last year, but they're not going to be materially smaller either. So think of them as comparable in mix. And then it's a broad set of categories. There's no limitation when you're open the way we are through a referral to the type of customer that comes in. So a broad set of shopping categories being represented.

Great. And then just one for Matt. Could you just talk about guidance philosophy for Q4? Just curious how you've used e-com seasonality from last Q4 as a proxy for this year? And just interested to hear kind of what's being assumed from sort of the current customers versus new customers on the e-com side?

Yes, sure. It's not the best comp. Obviously, last year, we had an entirely new e-commerce business that was ramping. And then this quarter, right, we had an existing base. So it's not best comparison year-over-year. So within the guidance, we took an approach where it reflects a combination of different factors that we have going on at the company, obviously, the optimism around the e-commerce referral program, continued model enhancements, the updates that we talked about previously within the Q3 period and then also kind of normal holiday seasonality. So the combination of those factors led to the larger guidance that we're projecting quarter-over-quarter.

Your next question will come from Omar Dessouky with BofA.

Adam, I wanted to get back to your comments about substantially higher conversion rates. So am I to read that as -- that a significant growth in impressions would not be required to absorb a significant increase in e-commerce advertisers in 2026?

Yes. I mean, look, we've always said we serve a lot of impressions to a lot of users today, over 1 billion users a day. So we're in a world today where the biggest lever for growth on our business, given we report on a net revenue basis is increasing the conversion rate. And that happens from a couple of things. You've got the model enhancements, which we always talk about. Those are super impactful in increasing conversion rate. That's a continuous effort. We are in the very, very beginnings of understanding how to work with neural nets and these AI technologies. I mean if you think about this industry and the core AI industry is only a few years old of engineers really being able to extract this kind of value out of these tools and technologies across a broad range of industries.

So as this goes forward, we're going to have consistent incremental improvements and sometimes large, sometimes small, but additive to high impact on driving up conversion rate from technology lifts. Then you're also going to get advertiser density expanding paired with our recommendation system, giving the model the chance to personalize the advertising to the user better. If we have less advertisers and less categories, we just have less to show. So you can't get a diverse set of content to the customer to maximize that conversion rate. Both those things are just going to naturally happen as we go forward.

The third piece that I touched on to your phrase you repeated, is that generative AI-based creative. Today, in our advertising system, the advertiser can do almost no targeting. They can pick their country, they can put in their economic goals, they can put in a budget and off they go. The one manual lever is creative. And in particular, in the shopping category or in this like website advertising business, a lot of the customers come on board and they don't have a creative that's adapted for our platform. The average viewership of our ads is roughly 35 seconds. The average viewership of an ad on social is roughly 7 seconds. So a lot of these customers are coming in and just porting a short ad and trying to replicate what they have on social on our platform, and it's mismatched. It diminishes their possible conversion rate.

So what does that mean? Well, when we get into a world where we can use generative AI tools to automatically create ad creatives on behalf of these customers, they're going to get to a point where they can actually expand their conversion rate. We're doing nothing more other than just expanding the count of creatives into our system and ensuring that the types of creatives in our system follow best practices on our platform and doing that at no cost. And so we're really excited about where the tools in the marketplace are going. That's something we're going to be testing in short order here.

And if I could just follow up. So you've addressed the conversion rate question I had very clearly. But I did want to touch on how you're thinking about supply, even though, obviously, you've clearly -- you said that the conversion rate is a big driver. So in the past, you've talked about double-digit growth in publisher revenue in MAX, over the past few years. And I'm wondering if you expect that to accelerate as e-commerce ramps. Do you see supply driven primarily by higher ad load as dictated by publishers, higher engagement with mobile games overall or improvements to MAX like those you shipped in 2024? Like which of those factors would be most important?

I mean it's a combination of all of the above. The MAX platform ecosystem is growing really quickly. happens from a couple of different factors. One is, as the ads become higher quality, and we look at e-commerce shopping and just demand density, it's higher quality because the user stops seeing game, game, game, game, game when they're stuck to a game that they actually like. So if you bring more diversity of content, you'd expect retention to go up and ad supply to expand. So that's going to be a natural tailwind inside this ecosystem that will unlock as we get more demand outside of just core advertisers that we have today.

Second part of that is what we've talked about in past calls is the unlock of getting these publishers who are in-app purchasing predominantly don't tend to run ads or run ads at a very, very small percentage. If you're monetizing a high LTV game and most of the gaming customers are residing in these deep games, you don't want to run ads for your competition. Well, they didn't have a way to monetize as well as gaming ads in the past. So if we can unlock this material demand shift, then we're going to be able to bring more supply into the ecosystem. That's very advantageous for supply as well.

So it's a combination of those 2 things. And then, of course, you've got -- as our models improve, the same customer, that publisher can buy more users that are retained in their game, so they can create more growth in audience, and they'll get better tools as well to better monetize that audience.

Next, we'll go to Jason Bazinet with Citi.

So a quick question. I appreciate that 50% growth in week-over-week spend from these e-commerce customers. Is there any sort of context you can give us of like when you looked at that same metric during the pilot phase, what was it? Or how do you know that that's a good number or a bad number? I mean it sounds great.

I mean, look, like one of the simpler mathematical functions is extrapolation, right? So like we're starting pretty early here. It's a month in. And it does take a while for these customers to ramp up. Remember, ours is not a plug-and-play solution. They got to come in. They have to integrate pixels. They've got to go live. All of that takes time. So just to get to a point of go-live is a week plus usually. Some can do it very quickly, but it's not common to be able to do it in a day. So you have a period of lag time from October 1 to even a cohort going live. And then this cohort is not as big as what the absolute numbers were that we reported, I think we disclosed in Q1 this year of how big that cohort last year swelled to.

But given the ramp-up, the ramp-up is really swift. So we're excited that if this continues to compound at the rate it is and then you keep adding new customers, this thing is going to then snowball on itself. And the true value for us right now is not go, okay, how do we extrapolate this out to when customers in this category become a bigger and bigger part of our business. It's more are we actually building a tool that we have confidence is going to succeed in converting a lot of customers over time. And that breaks down into a few things we look at.

Of course, I get excited by seeing scaling spend, but I'm more excited about the fact that we didn't introduce a ton of bucks. We didn't have a bunch of customer complaints. We didn't bring in low-quality advertisers. Anything that was low quality was automatically kicked off the platform. So the team enabled a whole bunch of tools to get a product release that was not immaterial into market in a seamless manner. And now we're in a point of optimization. One point of optimization that's key is when a customer signs up, is it easy for them to understand the value proposition and get through integration to the point of go live. That's something we're really focused on optimizing because as we mentioned, we do want to eventually promote the Axon platform to future customers. And if we want to do that, just like any advertiser in the world, we've got to optimize our conversion funnel.

The other piece that's important is our teams are constantly working on embedding tools into the interface, so large language model powered tools that allow the customer to get support without interfacing with us. We're not seeing a huge influx of customer support tickets. We're seeing these customers go live, be able to manage themselves, get best practices extracted out of the tools we've enabled in the dash, and that's fantastic to see. So what I look at when I see this ramp-up is not I'm extrapolating to how is this going to become billions and billions of dollars. It's more that the fact that it's working already a month in, and we're not getting bombarded with customer complaints, and we're not seeing a ton of issues implies that we're on the right track to eventually get open in '26 and really be able to bring in a ton of advertisers over the following quarters and years.

Next, we'll go to Clark Lampen with BTIG.

Sorry, I have like 4 mute buttons right that I had to take out.

Complex setup over there, Clark.

Right. It's a little too complicated. Okay. So as we're thinking about, I guess, the growth of what has the potential to be like a really big business for you guys over time, billions of incremental as you just sort of talked about. I'm curious how you think about balancing growth, chasing sort of new pockets of potential supply and building up demand to go after that with displacement for your core gaming customer because you are introducing a new bidder with potentially higher transaction value or consumer LTV. Is that something that model improvements and a faster pace of model enhancement will sort of take care of along the way? Or how do you, if any, think about gating the growth of this business if you have to for managing the core -- for the purposes of managing the core?

Yes. I mean, look, one, we don't try to gate growth. So we sort of look at a platform as it's going to develop and evolve as it does. But understanding these models gives me confidence that as we get more density of advertisers, we're actually going to have expanded spend for gaming customers, not diminished spend. And this is a bit counterintuitive, but here's why. The model today, if you go back a year prior to us getting into e-commerce and shops, you ended up having 1,000 impressions to show a user and you bombarded them with games. Well, that's not a great offering. It's as if you had a social network that was showing short-form video and said I'm only going to show golf videos. Everyone who's on the golf videos at that moment would churn.

Well, in our case, the customers aren't churning. They're playing games, but they're not going to convert. And our conversion rates are really low. There are moments when the model knows a user is going to be in the game. When those moments happen, the CPM for a game advertiser is phenomenal. It's really, really high. Our average conversion rate is that 1% that we've given a year plus ago. So maybe it's higher now, but just for this example, let's use 1%. We're driving 10 game installs over 1,000 impressions, but we're probably wasting 80%, 90% of those impressions because the model knows in a tight percentage of impressions, games are going to convert, this user is ready for something new and the CPM there will beat anything else that comes along.

So you go and bring in demand density. What happens? Now the model can better use all that access impression. And so if it does, what's going to happen is your gaming customer is not going to diminish. It's just going to be more targeted. So maybe impressions go down, CPM goes up for them, but everything is priced to revenue for our customers. So they get the same revenue out. And then these new customers better monetize the user and give them more diversity of content, which hopefully will train them to better engage with our ads.

And then you take it to the next level, which is now all of a sudden, we're getting data from way more types of customers. We now know, let's say, tomorrow, someone buys a $5,000 handbag on a website, that's the data point we didn't have a year ago. That data point, my simple mind, can probably tell you that's a good user for Candy Crush if they haven't played Candy Crush. The neural net is going to tell you a lot more than that based on its correlations. And so you're building up a data set that doesn't just limit itself to the shopping category or the website advertising category. It helps enable better advertising for the gaming customers as well. So you put all those pieces together, and I'm really confident that we're not going to squeeze anyone in our platform. We're probably going to have expansion across the board as we add more demand density and get more data into the system.

That's helpful. Maybe just as a very quick follow-up. You guys highlighted tuning the onboarding flows and generative AI creative. How far away are you or sort of at what sort of rate are we making progress to sort of getting one of those tools live? Would either of those things, I guess, be a gating factor to launching or introducing GA at this point? Or are they vital to going to a broader customer base?

So the Axon Ads site is a prompt at this point. And part of the logic of doing that was to get inputs into that prompt, so we can tune a bot that's external facing and then bring it internal. So we're in the midst of doing that, and that's not far off. So we'll have different implementations of bots inside the site. I mean, as you know, and we've talked about last quarter, when a customer uploads ads or uploads a website to promote, we're not manually checking it. There's a bot there that's automatically checking for our quality and ensuring that the quality meets the standard that we need on the platform, both for the creative and for the website being promoted or the application.

So we already have various points of bots into the tool, and we'll have more. It's just going to get better as we get more data in, and we can tune it so that it's actually accurate across the board. The generative AI-based ad creatives don't depend entirely on us. But Sora 2 came out this past quarter. That was another step forward. Veo 3 keeps getting better. So you can assume these tools are getting pretty close.

We're not -- we're probably far away from the point where the model itself can recursively just go and create more content and just bring more ads into the system. But we're probably not very far away, and I'm hoping, in a matter of weeks or months to be able to test generative AI-based creative that we create with a little help, some tooling on top of the large language models and then submit to the advertisers for approval. That in itself can really explode the count of ads on the platform. And so that's not far off.

So on your last question of are these gating to general release, I don't think so. I think the main thing that we care about there is how we tune the flows. Is the conversion funnel appropriate? Are customers getting confused or are they getting a good experience from onboarding to ramping? If they're getting a seamless experience, and we're not getting overly overwhelmed with inbound complaints or concerns or need for support, then we're ready to go open.

Our next question will come from Alec Brondolo with Wells Fargo.

I appreciate it. I think as we've kind of spoken about direct payments and this transition from kind of paying the App Store and the Play Store 30% to going to an O&O payment product, we've kind of talked about this, I think, historically as more of a medium- to long-term tailwind. Do you think that might be manifesting sooner than expected? And did it contribute to third quarter results?

I don't think it's contributing much at all yet. I think it is going to be over the quarters that it's going to take impact. I don't think it's realistic that 30% tax goes to low single digits. So let's just take the midpoint, 15%. That's a material lift in LTV for a lot of these in-app purchasing games, roughly 20%. Some portion of that is going to go into development of more content, which is great. They're going to make better games. Some portion of that, they'll bank into the bottom line. Some portion of that will go to marketing companies.

I mean I'll say the one thing about our business always is we don't try to think about what's happening outside of us. This is something that's outside of our control. It's up to the platforms, regulators and then the content creators. It's not up to us. What's up to us and inside our control is how good our tools are. Q3 was driven by what we said on the earnings script. The models continue to get better, iterative improvements in the template, more advertisements on the platform, more advertisers on the platform, all of that's compounding to really quick growth rate. even in the core category.

We're still believing very confidently in this 20% to 30% long-term growth rate in our core category. But even in the core, we're beating that. And then now you're layering on, on top of that, all this opportunity with the self-service platform. So we're really excited about where we are focused on what we have underneath our control.

Perfect. And maybe if I could ask a follow-up. I think there's always been this talk about eventually extending the reach of supply. Like right now, most of the ads are placed in mobile games and then the idea is perhaps over time, we could go to other surfaces. It seems like some combination of AdX and Google Ads Manager might come up for sale as a function of the Google ad tech, antitrust trial. Would you be interested in those assets if they were available?

I mean, without commenting on what else is out there, like commenting about our business, the reality with our business is we think about providing the best solution to our partners. For the advertisers, we believe we're on the track to really give them a good way to access a really large audience playing games. For the game publisher and then expanding publishers as we get to more publishers on our platform, we've built them very good tools to monetize and promote their products and grow their businesses. As we think about going broader than that, the open web publishers and other app publishers that currently can't access our tools the same way could use better monetization. We all know that category is pretty slow growth.

And then we talked about CTV in the past, too. Everywhere else is struggling to monetize except in the walled gardens and except on games, predominantly because of the success of our platforms. And so if that's the case, we look at that as our potential prospect clients as well. We should be able to extend our product offering over time to those folks. We need more demand. We're not demand -- we're not supply constrained today, we're demand constrained. But if we do our job right and bring on a lot of advertisers, it serves us well because it serves them well to be able to extend our offering out to more publishers.

Our next question will come from Vasily Karasyov with Cannonball.

Adam, I wanted to follow up on what you said earlier about LTV calculations that you think your advertisers do. So if given the variance in growth rates in in-app purchases market and in-app advertising market, right? So can you comment on what you see if the -- your advertisers' LTV calculations are evolving, let's say, compared to a year ago compared to now, I would think that the advertising component would be much higher now, right? Going and how do you -- what it means for you?

So look, generally, as a whole, the in-app purchasing market is more mature than the in-app advertising market. So we're seeing much faster growth rates on the MAX platform. We've said multiples faster than the in-app purchasing market grows because those publishers, both the older publishers in that category are getting better tools, both for growth and monetization. And then newer publishers see these other publishers scaling, so they integrate more ads. So you're seeing more supply come online and existing supply monetize better.

In-app purchasing market isn't really creating that many more monetization tools. It requires for growth, this tax to go down if the 30% goes to 15%, that creates a really big tailwind, and it creates better monetization mechanics. That's really hard in that category. It's up to the game developers, but it's not uniform across the platform. And then it requires more IAP games. There's a really big set of games that are just mature in that category that frankly don't really have much of a way to grow anymore. And then there are newer ones that constantly come live. If you look in the top 10 to 20 in-app purchasing -- top grossing games, there's a huge mix of games that have launched in the last 2 years that are now on the top 20.

So there's new ones that go live that help grow there. But for us, what we're focused on is where we can drive an impact. We can help the in-app purchasing ones promote themselves. The in-app advertising ones are really exciting for us because they power our true market. The true market is the supply side on MAX. And as we give them better monetization tools and better growth tools, we see that supply expanding. That supply expanding the growth rate there is the direct market that helps us grow. And then hopefully, we can grow on top of that even more because of improvements in all the other parts of our business.

Our next question will come from Matthew Cost with Morgan Stanley.

Thank you for the 50% week-on-week growth metric that is really interesting. Is that the metric that you're managing to try to find the point at which you're going to go general availability? And if not, what are you looking at? Like what will be the things that you need to knock down for that to happen?

All these things take time to build. So I don't like spend -- obviously, if spend wasn't going up a lot, I'd be a lot more concerned when you got a business in any scale growing 50% week-over-week, there's a reason to be excited. But what I care more about is that we have time to optimize the funnel. We need to make sure the conversion funnel is optimized. This is just like launching a B2C property. Your first funnel is not going to be your best funnel. We've already optimized it once. So what's today on the site is better than what was on the site 4 weeks ago.

But there's room for improvement there. Your communications with the clients, the e-mails that the potential clients get after they sign up, we can improve that. We can improve the tooling inside the dashboard, all the AI bots that we've talked about. And so there's different aspects of this that we just need time to get to a place where we go, this meets our quality standard, then we're ready to open up. Because if we open up today, we may be okay, we may not. We may get inundated with user concerns as you shrink the size of the advertiser.

So one day, I'd like to make sure that, that local laundromat that signs up gets a great experience promoting themselves to this gamer audience on our platform. And if we're not ready yet today, we're going to take our time to get there. We don't think it's a long time away. I think I'd said on our prior earnings call for '26. So this isn't a very long time away. We're just going to take our time to ensure that we've got the product at the level that we want.

Great. And then on the paid marketing front, I think you talked last quarter and maybe even mentioned in passing this quarter, the opportunity to do more of that. It looks like based on your sales and marketing budget in the third quarter that it wasn't something that you started to lean into. So how should we think about the timing and potential magnitude of doing more marketing?

Yes. So we're testing right now actively. Testing budget is going to be not large. Even if we ever scale this, the scale of our business is quite large. So like some of the largest advertisers in the world can only spend a couple of hundred million dollars a year. So as you think about the scale of our business, it's never going to be a very large line item against the revenue potential. But because our LTV is so high, and we're optimizing our conversion rate, and we think we can get that to be really compelling and the brand isn't known, the setup is really good for promoting our product to potential end customers.

And so -- if that's the case, and we know we have a great LTV to cost of user acquisition, we'll spend. We'll break it out, as it scales, we'll show the unit economics so people can understand what we're doing, but we're really good performance marketers, I think we can all agree at this point. So we're not going to waste money on this. We're not brand marketers. The dollars will be much greater than the dollars we spend on user acquisition. And it's -- for me, it's the full-blown automation of a sales force. We'll need some salespeople, but we can keep a very lean sales team in line with our traditional culture if we can automate onboarding through advertising all the way to point of go live.

Our next question will come from Benjamin Black with Deutsche Bank.

Is there any reason to think that the take rate or revenue margin from your e-com spend should be any different to that of the core gaming business? So any structural differences, I guess, to the advertising credits you're offering folks early on, perhaps lower the conversion temporarily. But longer term, are there any differences to be aware of?

No. I mean, look, the advertising credits we offer is such a tiny fraction to overall value of a new customer. So it's no different than like a cost of user acquisition if we got the customer through paid marketing. So it's just really low. So consider that immaterial. The business is not built to, say, web advertising or shops is treated differently than games. It's one unified auction. We're a single platform. So when we get a higher conversion rate, whether that comes from gaming or shops or any category, it's going to have a constant take rate across the board. It just implies that more density equals better conversion rate, possibly higher take.

All right. Great. And then second question would be sort of you're clearly growing your ambitions within AI automation more broadly. So maybe talk to us about sort of your investment priorities as we sort of look ahead to the next year. I'd imagine your sort of compute capacity requirements are likely scaling. So sort of how does that play into sort of your expense outlook as we look ahead to the next year?

Yes, we're pay-as-you go. So like I mean, we try to project and buy, in particular, GPUs, that being the more lead time dependent part of the stack. We try to buy those a year in advance. So if you've looked at the financials, you'll see spikes in infrastructure investment, but it runs through the P&L. It's not capitalized, and we do plan it really effectively. And we don't try to really overinvest ahead of revenue. We want to make sure we're really disciplined. And that's completely aligned with our culture where we want to be cost disciplined in every aspect of the business.

Next, we'll go to Chris Kuntarich with UBS.

Hopefully, you can hear me. Just wanted to ask on web-based becoming available to EU advertisers. Any update there? And then, Matt, just a quick follow-up. Are you making any assumptions about advertisers that aren't currently onboarded in the 4Q guide?

Yes. On the EU side, so we can work with EU advertisers today. We just don't open up our inventory for website or shop advertisers in the EU region of our audience. So just a clarification bullet. It's -- EU tends to be somewhere in the low teens percentage of our business, if I remember off the top of my head. So it's not a huge priority versus expanding out the business. GDPR rules are more restrictive and require a build-out for us. So we'll get to it in due time. It's not a priority against getting to general release of our platform and building out the rest of these tools we've talked about.

Yes. And in terms of guidance, I think we've done pretty consistent to our approach thus far. We've communicated before that we guide to kind of where we feel very comfortable that we could potentially land. So we guide to what we know. We don't guide to try to estimate for something that's unpredictable. And in this case, we can't predict the number or the volume of new advertisers coming on to the system through the referral program and how that potential ramp in spend could happen through the quarter. So there is no incremental assumption built into the guide for onboarding of incremental customers.

Next, we'll hear from Rob Sanderson with Loop Capital.

I have 2. Just in terms of kind of understanding more of the sort of the current points of friction to bringing people on, it sounds like you're doing a lot of work to tune the onboarding flow. But sort of what other points of friction are necessary to address to just further optimize? And then you've also said that you're not seeing a ton of complaints, but I'm sure you are getting asks for features and things. So maybe what are some common sort of asks for feature add to Axon Ads Manager?

Yes. So the first question, I mean, like you've got 2 points of this funnel, pre getting-to-us. So eventually, we've got to get the brand out there. We got to be able to market the platform. We've got to -- we're constrained by how many referral codes we gave out. So like just advertisers coming to the Axon platform and signing up. So let's set that aside because we purposefully constrained that. After the sign-up, we want to make sure we have as little drop-off as possible. Of course, with any product, when you get a sign-up, not every sign-up is going to be qualified, but we think a lot of these are qualified. So we're optimizing to as high a rate as we can from sign-up to go live.

In terms of feature requests, surprisingly, not a whole lot. This is like, I would say, hard to guarantee that it will be that going forward because we're only a month in. So like if there's a lag time to integration and ramp up, and we're seeing the swift growth, you don't have time for these customers to really understand the platform yet. So that may change, but we get more feature requests from our current cohort of customers, the ones that went live a year ago, much more so than what we brought on in the last month.

If I could ask on international. You mentioned that you launched a little early. And it sounds like no EU. So maybe where are you available? Anything surprising or different about the behavior from this cohort? And then just anything you can share on next steps to expanding? I mean, you probably have some language optimization to do, I'm sure, and channel development work, but kind of what are -- sort of what are some of the next steps to make international a much bigger component?

Yes. So first off, it's everywhere in the world, except for EU traffic for web shops and web advertisers. App advertisers are everywhere in the world. We don't operate inside China, so -- but the rest of the world is there. In our business, the customers that we have today are mostly Western shops. And so those Western shops aren't likely to go into Japan or Korea. Japan being our second biggest market and promote themselves. They're just not going to have a localized product offering. So the countries that have really been successful for this current customer base are the obvious ones, Canada, Australia, New Zealand, et cetera. So English-speaking, similar makeup to the U.S.

As we go open up the platform, that's when we'll go try to get local presentation inside Japan, Korea and other markets that are more closed off, but very large markets for us. And in the Western markets, we already have a presence. So it will be faster to get going. I think over time, localization is fortunately not a challenge anymore with LLMs. Language is pretty easy to solve. So we're fairly solved over there. It's just much more built around getting the system to be workable the way we're talking about for the West, goes global, right? Like all users around the world that we see playing games, the human beings behave similarly. They might buy a shot from different shops because there's local merchants in each one of these markets, but humans aren't behaving much differently in Japan or Korea or Canada or Australia to the U.S. So the model translates all human behavior to math. Math is universal.

And so as we launch and broaden out the platform, we don't think there's going to be some big lift to really see a lot of success internationally. And we haven't seen that as we've opened up these markets and have these same customers expand out.

Our next question will come from Martin Yang with Opco.

Sort of related to the last question, can you maybe talk a bit more about your current cohort, how they have been performed in 3Q? For example, are they more actively spending, given your improvement in tools, having more features, et cetera?

Yes. Look, over the last year, I mean, it's been a year since we've had this product, right? So the team is continuously improving the product. So the return on ad spend for the customers have gotten better. The tooling has gotten better. We went from the old dashboard to the Axon Ads Manager. So the tools that they have at their disposal has gotten better. The customers' understanding of our platform has gotten better. Just that nuance on ad creative that ours are 35 seconds on average, whereas social is 7 seconds. It took months with a lot of customers to explain that fine detail. And that if you're not building a 45-second ad, you're going to lose to your competitor.

So all these things just compound. We're 1 year into a product in a very large advertising market, competing with other companies that are years or decade plus into that same market. So as you build better tooling and as you get a better understanding of your tools, you see the effect compounding, the knowledge compounding, the usage compounding. And so we're seeing trends that are positive. But this thing is going to take time to build at the level that we want to build. We've been in the gaming business for 13 years. We're clearly the best channel for the gaming customers at this point. We think we can replicate that success across all these other categories. And as we build to the scale that we're accustomed to operating at, you'd expect a lot of compounding success over time across knowledge, usage and tooling.

Got it. I have a quick follow-up on the PSU issued in October. That's for engineering employees. Can you maybe give us more context? Is it for a small handful, single recruiting, retention? Any additional details would be helpful.

Yes. It's a pool, Martin, for a group of engineers, but it's also a future tool that we can use for recruiting as well for new hires into the engineering team.

Next, we'll go to Jim Callahan with Piper Sandler.

I just had a follow-up on the referral codes. I guess, are all the codes so far given out? Or is this something we can expect the partners to sort of continue doing through early 2026?

Yes. Generally, if there's a partner that we gave X codes to and they run through X and they deliver quality leads, we give them more. And we can measure back to every referral partner success of the customers they bring. So we don't want to constrain good referral partners. The gate is solely to slow it down so that we have time to build the tool the way I've been talking about. But if someone is bringing us good leads, we're going to take good leads. So we're going to be dynamic in the codes that we issue across the board if we see success coming in.

Got it. That's helpful. And then I guess just a follow-up on -- you talked about low quality and like making sure you're selective and having the right kind of advertisers. I guess what would you define as like low quality or an advertiser that wouldn't work sort of with the platform?

Yes. I mean -- so over time, you broaden out the type of advertisers you have to basically everything because you have a lot of density and a customer is never going to see 200 impressions of the same thing. Where we are today, we don't have a lot of density. So in certain categories, a customer may see 200 impressions of the same thing. Well, the bar we set right now is if our team is willing to buy that product or not. If they think it's a good product, they're willing to buy it, great, we want to run it on our platform. That doesn't mean we're going to maintain the same standard forever.

Most of the companies that today we call low quality or we're not letting on the platform, they're running ads on social, they're running ads on search. These are real businesses. They're substantial businesses in many cases. But we just want to make sure that we think about our audience as a very consistent large audience, and we want to train them that our ads are really high quality. But in the absence of that competition, if they're getting bombarded with single offers, we want to make sure each one of those is really, really high value for that customer.

We'll take our last question from Nat Schindler with Scotiabank.

I'm going to go really high level and touch back on an earlier question someone asked about whether or not you were interested in some of those Google assets if they ever came up. You're growing at obviously absurd rates and you're doing it to -- it sounds like you're going to continue in your core market in gaming and you're adding obviously e-commerce, which is an enormous opportunity. I assume a lot of this is your conversion rates keep improving. You guys have been great at that over time. But some of it has to do with inventory itself. So at some point, conversion rates can improve too much. And if e-commerce is a lower converting area than gaming, when do you run out of inventory on your core gamer market?

Yes. I mean, look, we don't know is the simple answer. There's a long way to go, we think, just because we have so little advertiser density today. There's never been any company that's been set up like ours in the advertising space in history. Where -- what we reported, I think it was in Q1 was $11 billion plus of ad spend. And then the disclosures we've given you across web advertisers and gaming advertisers puts it in the low thousands. So you've got such a high amount of spend for such a low amount of advertisers across over 1 billion daily active users.

Well, what happens when we get more density? You get more data, you get more density, you get more time to improve your models, that conversion rate is going to go up. If you think about social. It's not like there's more users on social. The growth in social has consistently come from the last few years, more customers getting a higher conversion rate because just the technologies are getting more powerful. And so we think we're going to see the same thing, but we're going to be able to pair it with this advertiser recruitment. And we're starting from such a low point, there's going to be quarters, possibly many years of growth in conversion rate to come before we start worrying about supply.

Now that said, we've talked about -- it is interesting to us to go help the broader set of publishers, both in the open web and connected TV to better monetize. We get pinged all the time. It's no secret that we're really good at performance advertising at this point. So at some point, we would like to broaden out the supply base as well. Because, why not? That builds a really good growth catalyst into the future. But today, we're really heads down focused on the demand side of the platform because there's so much work to do there. At some point, you'll see us talking about both sides.

And that concludes the question-and-answer session for this quarter. We thank you all for joining us today. Have a good afternoon.

Thanks, everyone.

Thank you.

All right. I know this is going to be a very crowded room, and people are going to be moving their way in, but in the interest of time, we're going to have to keep the conversation going.

So it's my pleasure to have the team from AppLovin here. We've got Adam Foroughi, CEO; Matt Stumpf, CFO. Adam, Matt, thanks so much for being part of the conference.

And Adam, thank you for coming back. You were here 2 years ago. We had a great conversation. We're excited to have you back at the conference.

Thanks, Eric.

Okay. Adam, let's start with you. The business has evolved a ton since you were here 2 years ago. Talk a little bit about the journey the company has been on and set the stage a little bit, maybe big picture, on what the priorities are for where you want to take this company in the years ahead?

Yes. So first of all, thanks, everyone, for joining. I think the last time I was sitting down with Eric, we had like 5 investors in the room. So this is a much bigger audience.

So we have had one of the wilder rides in the public markets. But if you've listened to me talk, and I did podcast in like 2017 all the way through to now, you will have always heard a consistent message. We exist for one reason and one reason alone, help an advertiser, find a new customer, engage that customer, run an advertising campaign from top of funnel, all the way to bottom of funnel, get a conversion and price it on revenue. And that is a really, really hard thing to do. But with the modern era of neural nets, you can do it much better than you could have done it years ago.

In the world today, the largest platform that does this is Meta. There is not a second. We're the second. And we've been able to scale much bigger than I think a lot of people realized when they looked at our stock over the last few years until we put out some disclosures in Q1 around the fact that in Q1, we were over $11 billion of gross ad spend.

People always look at our revenue and don't realize that the revenue is the net after we paid publishers. But in terms of growth, and obviously, we've grown quite substantially since we put out that disclosure, that's the equivalent of Pinterest, Snap and Twitter total revenues on our platform already.

Now what's also really interesting about it is that we've got -- we've disclosed that we had hundreds of e-commerce advertisers at the time, and our last disclosure on gaming customers was in the hundreds. So you've got a platform that might have 1,500 advertisers with spend at that level, never happened before. I don't know of another $200 billion almost company that hasn't actually launched their product yet.

So what gets us really excited internally is that we have this product that's exceptionally high value for the customers that we have, we haven't launched it broadly. So we haven't given most of the companies in the world, the opportunity to tap into its excellence, this recommendation model that we built and we're on the cusp of doing that. So as we go forward, the way we look at the business in the future is we took 13 years perfecting a product in a niche market, the gaming market, turned out it was economically a pretty big market. But broadly speaking, in economic terms, the gaming dollars spent versus the total TAM in the economy is not that big.

Now we're about to tap into the whole world. And if we can help every type of business top of funnel, the bottom of funnel and price on revenue, not only are we going to be a really great return for our shareholders, we're going to help their economies expand. We're going to create millions of jobs, and that gets us really excited internally.

Okay. There's a lot of mind in there. We're going to touch upon all of those themes as we get through this conversation.

Matt, let's bring you into the conversation. As a company, you've been very transparent in laying out how to expect to grow going forward. Talk a little bit about the building blocks of growth for this company? And how should people think about sort of that trajecting in the years ahead?

I think what's really important to understand is, first of all, before the 20% to 30% kind of goal that we've put out into the public market in terms of long-term growth, is to first understand that we sit on top of a large amount of gaming supply.

We've talked about MAX mediation platform that we own, and implied historically in earnings calls that, that mediation platform that, that supplies is growing double digits on an annual basis. That's coming from a combination of both impression growth as well as dollars per impression.

The first, that's the supply that we have access to. Then you look at the 20% to 30% growth on top of that coming from technology, and that's comprised of 2 components. First, reinforcement learning, which is super important in these AI technologies that the model continues to improve from the recommendations, the predictions that it's doing about what's going to happen when it shows an impression and then also directed model enhancements, so improvements to the model over time.

What's really important to understand about that 20% to 30% goal is that, that also applies to e-commerce and these new verticals that we're going into. So as you think about the e-commerce expansion that we've talked about in Q4 and then in 2026 of next year, but that framework also applies there.

And more importantly, we've created this fantastic recommendation engine that historically, we've only had a certain amount of demand, only mobile gaming demand to feed into that recommendation. So we've kind of knee capped it, but by providing more demand, demand diversity from e-commerce, you can really allow the recommendation engine to get better over time. So that 20% to 30% should be a baseline of growth going forward, and we're very optimistic and excited about the potential for growth in the future.

Great. Okay. Adam, you have one of the more unique perspectives. Whenever I get a chance to ask you about competition, it's interesting. You always reflect back on just the execution of the platform itself. But we get a lot from investors. Who do you compete with? And how do you think about competition rather than just executing instantly on the opportunity in front of you?

There's a lot of companies that are trying to service this mobile gaming audience because it's big. It's 1 billion users. And we, as a marketplace allow competition. We want competition to thrive, which is counterintuitive in most marketplace businesses.

If you take a typical like ridesharing market, if Lyft gets a ride, Uber is going to have a ride that's lost, and vice versa. So most investors are trained that most markets end up this zero-sum equation, where competition takes from another. Well, in this mobile gaming market, 2 things have occurred. One is our platform is growing so fast, but it's catalyzing the growth of the impressions and dollars per impression in the marketplace. So you see other competitors like Unity, Liftoff, Moloco, Mobvista. All these companies are growing 30% plus. At the same time, we're huge and we're growing 70% plus.

And so you've got a company that's the whale in the market growing that fast. If it was truly constructed like these other ecosystems, you would think that the other company should be suffering, but they're not. So then it takes a while for investors to then ask next question of like why, what's different about this marketplace. Well, what's different is that everyone's built a recommendation engine on top of the model. And in the recommendation engine space, you're built on a neural net. So a similar architecture to a large language model. But when it comes to these businesses, if you get more data into your model, the training data and the reinforcement data is what creates an output that becomes more compelling.

And all the large language companies, you hear training data matters, more data, more compute, retrade, better output. Our world is the same thing, but no model has all of the training data. There's no way to take everyone else's training data. So the model only as good as the data it's trained on. And so what you end up having happen in a big audience, is that every company's model has a reason to exist.

When we lose an impression, someone else may have had a model that makes more sense in their recommendation to the user. Now what's important about our economic value proposition is that we're the market and the lead market maker. And this is a concept that most people haven't understood and matters a lot. When we serve an ad, sometimes the model is really, really predictive on the outcome. We can bid a huge number.

And so at the highest end, let's say, $2,000 CPM, $2 for a single impression, if the model is doing that, no one is going to beat us in that moment. It is very predictive about the outcome. But most of the impressions we serve, the model doesn't know really what to do. It's overconfident about what to serve. In fact, we've said historically, we're 99% wrong as good a business model as we are, we're 99% wrong. One, most of those impressions were probably 99.9% wrong.

So what happens when another model gets data where they're not overly confident they're actually right. They can buy some impressions away from us. As the house in this market we now tax that competitor 5%. When you can get 5%, which may not sound like a lot, but if you understand typical ad network margins, a substantial amount of the margin of your peers, and you make a 5% with 100% flow-through instead of losing money, and that's a really good economic transaction. So we fueled growth in the economy. Every time growth happens around us, we grow with it. And that's a fantastic equation to sit on top of.

Okay. One more question on where we are today before we talk about the go forward.

Matt, you guys obviously are a very profitable business. How do you think about the allocation of free cash flow? And the priorities for capital as the business stands today?

Yes. So I mean, first and foremost, we're focused on ensuring that we've got enough capital allocation towards our organic growth initiatives. So really that takes the form of continuing to support data center growth for capacity, GPUs, et cetera to continue to support model expansion and scale.

And then head count, but head count we grow. I mean, as we've talked about quite a bit, we just have a culture where we don't expand head count materially. So we're adding headcount, but very minimally. So I think about that as more kind of a fixed cost general. So we're left with quite a bit of free cash flow. So what are we doing with that? Well, we don't believe in holding cash for potential hypothetical M&A in the future. And we believe that the best investment for our capital is then investing back in our own stock.

Over the past 3 years, we've done that. We've invested almost $5.5 billion in total, which represents about 100% of the overall free cash flow over that same period in our own stock through buybacks and withhold the cover, which has been a tremendous return for our shareholders.

Going forward, we do plan on scaling that back very slightly, but we still think that with these growth opportunities that we have been talking about, that the best return for our shareholders is to continue to invest in ourselves and to buy back shares.

Okay. So let's build on some of those growth opportunities. Adam, you've talked about e-commerce. You've even talked about wider web advertising.

How are you landing on what the right next market opportunities are for you as a platform? And how do you think about aligning your strategic priorities to capitalize on those opportunities?

I mean look, like we have a huge opportunity in front of us just opening up the platform to web-based advertisers, e-commerce being the biggest TAM and the most fragmented industry, and the one that we've really played around with inside our pilot.

We've been in this pilot state for a year. And we went through and we recruited hundreds of advertisers that we disclosed in Q1. And I said a year ago, my scoreboard was, can we get as much dollars from these customers as they would be willing to spend on Meta. Now you have to understand, we're not asking anyone to take dollars from someone else. We are trying to show them that we are absolutely incremental to the dollars they spend elsewhere. This is a really important concept to understand.

If these companies are spending, let's say, you bring in a company and they spend $1,000 a day on Meta and they have $2,000 a day of revenue from that 1,000 spend. When we launch our product, we want to measure it by being able to give them $1,000 a day and $2,000 a day of incremental revenue. If we could do that, their business goes $2,000 to $4,000 in a double.

In an arbitrage-based world, where you give them top of funnel, the bottom funnel price on revenue, you don't expect the customer to take from others to add, what you expect is that they're going to have unlimited budget. In an arbitrage, you want to go as hard as you can. And we -- with the way our technology and product is set up, allow them to become arbitrage marketers. They get a product sold. They get a credit card, paying them. The money shows up in their account. They see the media cost that they don't pay down their credit card on until 60 days later, and they're immediately profitable on the media cost and they get the new customer.

You provide that value, which is exceptionally hard to provide. Again, only Meta has unlocked this value in the past and now we're that #2. You provide that value, you have a very scalable business. And there's a couple of reports that were put out there by North Beam and Triple Whale that will back up my point that I believe we've reached the level where I'm confident in how we measure up in the marketplace.

The Triple Whale and North Beam reports, and these are 2 analytics providers in e-commerce. They process billions of dollars of transactional value. And so they know where the media spend is. They put out 2 tables. One showed 70% of the market spend went to Meta, 20% went to Google, and we were around 4%, and we were bigger than TikTok and everyone else. So we were third biggest. The other one was like TikTok a little bit ahead of us, and we were like 3.7% or something.

Now if you look at that at face value, you'd go, Adam doesn't know how to score its own product. They're not even close to Meta, what is he talking about. Well, you got to remember that these companies, we don't work with most of the companies that they represent. So if you understand that we probably work with 5%, maybe at most 10%, you take that 4 and divide by 0.1. If you do that, you reduce everyone else by the expansion of us in the budget share of the like-for-like customers, you all of a sudden see we're pretty high up on the list.

Then also remember that we are just in the midst of opening up international. Our business is half U.S., half international. We can agree Facebook and Google and everyone else on that list is global and works with probably every one of these companies. We work with a small fraction and we've limited our traffic, yet we're indexing that high, which tells you we have perfected a product to a cohort. Now as we open up the platform, we should just get better.

Okay. So let's stick with that theme for a minute. I know you're laser-focused on the e-commerce opportunity and building for some of the go-to-market strategies around it. We'll talk about it. But take a step back a second and talk about how wide the aperture of what this could be applied to over time. We get asked about Connected TV. We get asked about wider array of the open web. What will we be looking for from the e-commerce initiatives that could possibly widen out beyond that over time?

We want to work with companies that want to serve advertising on a performance basis, defined as discover a new customer and be able to price all the way to the point of transaction. Now that doesn't mean that it's always revenue. Some companies in lead gen might collect an e-mail address, financial services might have a different goal. But the reality is the company has to have a desire to do performance the way we define it. So we'll never go into the expansion area of brand advertising. When we get asked that, it's a simple note. That's just not our business model. We're focused on building economies for our partners.

On the supply side, what's interesting is today, obviously, we don't have a demand limitation. We only have hundreds of customers. We're extracting this much spend from them. they're not going to go spend 5x what they're spending on Meta on us. So we don't have unlimited budgets. But let's say we open up our platform fast forward a bit of time, and we go from hundreds to hundreds of thousands of customers. Well, if we get to that point, you can imagine like at some point, we will want to go out and place the ads for these customers anywhere we can find future customers for them because in theory, at that point, we'll have access demand.

Where would we go first. It's not going to be Connected TV or even where people would think. It's actually going to be other game apps. A lot of the gaming apps in the market monetize with in-app purchasing. These are the biggest games, the $100 billion TAM monetizes with transactions to Google and Apple. These companies traditionally don't run ads. Why? Because they don't want to show their competitors in a game that monetizes exceptionally well.

The TAM is $100 billion. Now Bobby Kotick, fantastic guy over at Activision when he was the CEO, launched ads on the King franchise, Candy Crush. And the odds became 15% of the revenue of King roughly. If you could take $100 billion TAM and lower it to $50 billion, let's say, like we can convert half of it and say 15% revenue uplift to them for not running competitors. I'm not a great seller, but I can sell that. And then on the other side of that, the $7.5 billion extra publisher scale, all to our nongaming product. And these are already our customers that's literally plug and play with the MAX platform into our demand. That's the first place you go. That's a massive uplift in our business.

Again, if you gross up the pub spend to gross, you can look at that as basically a double to what we do today. And then you go further than that. As we keep expanding from there, then you're starting to look at can we expand into CTV. Can we expand into serving ads and other social networks into utilities. We'll want to go everywhere over time, but we're not in a rush. Our first priority is get the customer on. We have tons of eyeballs, tons of supply, expand inside gaming and then broaden them.

Okay. Understood. Matt , bringing you back into the conversation. So Adam laid out where you want to go as a platform for the longer term. How is the team do you think about balancing growth investments against incremental margins against some of the capital allocation we talked about earlier on the go forward.

Yes. I mean we have fantastic EBITDA margins today, and we've laid out a framework for investors in the past that with the existing business, the basic kind of concept is data center costs have grown at about 10% of the overall revenue growth, that's what we've seen on an annual basis. We continue to get GPUs and support the scale of the platform. It's about 10% of that directly from revenue growth.

And then we've been adding headcount, but very minimally. So we almost think of that as a fixed cost, to be honest, going forward. We will continue to grow both the head count for our engineering team and business development to support those new initiatives. But very minimally. So as we push into things like e-commerce, where we are going to see new costs that investors should be aware of are for things like API calls as we use LOMs for agentic customer support, campaign analytics and management.

We'll also be building in tools for advertisers to use generative AI for their creative. So those things will also cost incremental amounts for the company. As well as on our last earnings call, we also mentioned that we'll be doing performance marketing to also improve the visibility of our brand and expand into new markets with advertisers who don't -- are not aware of the AppLovin brand. And now AXON.

So those costs will increase. But given the fact that these new costs will be revenue driving costs and will be performance-based, we don't expect that the margin profile of the overall business will change materially from where we're at today. So for investors in terms of expectations for the remainder of the year and the next year and in the future, we do still expect that we'll have between kind of 80% and 85% EBITDA margins, very healthy.

And there's 2 things Matt said that I want to cover from a business perspective. One thing that I don't think is priced particularly well in advertising companies today, and this isn't limited to us, is this notion that generative AI is going to allow an explosion of the ad creative.

I've seen hundreds of thousands of ad creatives put live on our platform and a good one versus a bad one can be over 2x the performance for the same customer. So literally, a customer that spends all this time building a product can double their performance, which doesn't translate to double the scale, it might be 10x the scale from investing $5,000 into an ad creative that's better than the one they currently run. That's a huge lever. In fact, it's the biggest lever that advertisers will have going forward.

Now if you live in a world of static manual human built ads in our world is of video advertisement plus some follow-on to the video advertisement where the video ad on average engages the user for 33 to 35 seconds, you have to be creative. You have to build a lot of content in. Well, the human beings is not as creative as a machine.

If the generative AI tools get good enough and [ Veo 3 ] is on the cusp. We've seen this from Google. They just rolled out portrait mode, and we're vertical video for the most part, if they can create a great ad out of the box, we will pay for that because the expansion of our business going from a fixed set of ads to this human being, being able to tell the machine, build me 20 variations of this best ad I've got and the machine doing a very good job of that is not going to be a small amount of uplift in terms of consumer response on our platform. It's going to be a very large amount of uplift. And we'll better use the impressions to better personalize on the other side. So that's something that we don't -- can't size, again, like people ask, well, how big could that be? No idea. But from my experience, it's going to be really big.

The second piece that he said is we might perform as market. I mentioned this on the last earnings call and people were so confused. What was he talking about? Well, we're a B2B company, and we can agree that we have fantastic economics. We have a great business model. The only risk we have in the future is that there's not a domain in front of our ads product. The ads product is fantastic, but we've got to go recruit customers. And there's a massive world of 10 million-plus customers. So we get a lot of shots on goal to do this.

And if we go from the very low thousands to the hundreds of thousands to the millions eventually, we're going to be a much, much bigger business than today. Well, how can you do that in the absence of a domain in front of your property? Well, you can market. I fundamentally believe we can run a Super Bowl ad in a couple of years if we're doing a really good job as a product. And serve it to the audience that watches the Super Bowl, which is going to be inclusive of a whole bunch of small business owners and employees of other businesses who can benefit from a platform like us and may just not be getting that benefit because they haven't heard of it yet.

And if we can do that, if you start seeing AXON ads promoting the AXON platform everywhere out there, that's going to catalyze even more growth because, we're really good at performance marketing. We have fantastic economics, our LTV, the cost of user acquisition function should be as good as anything the world's seen.

And so these are things that we're really excited about. We don't run at 81% EBITDA margins because we're supremely cheap. We are pretty cheap, and we like to be very optimized, but we do want to reinvest into growth opportunities. If we can pull up revenue growth, which already we're starting at a really phenomenal baseline, but if we can do it in automated ways, we are going to invest behind that.

Okay. I want to build on that, and I want to come back to the underlying tech maybe before we run out of time.

But the shorter-term narrative that's getting a lot of investor attention is you're in the process of launching a self-serve ads platform. On a smaller scale to begin and then you've articulated in the public domain that it will be on a much wider scale as you get into the front part of next year.

What was the genesis of moving in that direction towards launching self-serve? And how should investors think about that opening up the array of advertisers that will likely be partners with you as that scales to the years ahead?

Look, our business aspirations have grown because the technology is obscenely powerful, and we're disservicing what our engineers have built on the business side.

And let me unpack that a little bit. We've got this recommendation engine. And a year ago, the only thing we could recommend to the consumer we're game ads. And it's as if TikTok was just golf instructional videos. Nobody got a very narrow slice of the world would you use TikTok because they'd be boring, and they wouldn't realize the true potential of their tech.

Well, if the user is telling us 99% of the time, we like the game we're playing, like stop showing me games, stop showing me game. We've done a disservice to our technology on the business side. So where did we go we said let's prove that we can make it work across other industries, transactional industries, where we're not showing the user another game, we're recommending them products that they can go transact at on and then come right back to the game that they were playing. So then we went out and we launched this pilot. Obviously, we worked really well. There's a lot of excitement around it. We prove to ourselves that the opportunity is much bigger.

Now I got to funny an e-mail the other day, there was a consumer that actually found my e-mail, and e-mailed me. She was complaining, and I chuckled a little bit because the complaint was, you've served me 250 ads in a row for an e-bike stop serving me an e-bike. I don't want an e-bike like what are you doing? So I felt like I should just buy her the e-bike because when I looked at the model and I was like, what is it doing? Well, it thinks that she needs something that's a mode of transportation or something in athletics, but we don't have the density and diversity of the customer yet. So the model goes, I don't have anything else to show. Here's e-bike 250 times in a row.

Well, think about that. That's an embarrassment, but that is a disservice to our technology. If in a year from now, there are 250 other things in the category that the model predicted for and instead of 1 over 250, it's 250 over 250. Not only is she going to be less annoyed. Hopefully, I'm not getting e-mails anymore from her, she might even buy something, but she's certainly going to have a different response rate to the 250 things.

And remember, we're a large model where everything we do is a data point that goes right back into that model. If 250x our data point became 1, it's devalued. If 250x it became diverse, we got the demand, we got the revenue, we got the increased conversion. More importantly to me as someone who is proud of the technology our team has built, we bought more data back into the model to better understand what this woman wants.

And if we do that on the next 250 impressions, we're going to be much stronger in what we show her. And so that's what gets us really excited about the business opportunity. So getting to a point of wanting to open up the platform is simply that our engineers have built phenomenal technology, and now we want to take it to the world and not continue to do them a disservice on the business side.

I know, Matt, you sort of answered this earlier, but I just want to put a finer point on it to investors could understand it because you talked about the efficiencies as well as a team that you like to drive. The beginning part of this year, you laid out sort of this is where we think the platform can go. Here are some of the initiatives. Some of them are going to happen this year, something that is going to happen on a longer term, even ad creative was one we talked about a couple of earnings calls ago.

How much efficiency can there be in the business to strike that balance on margins and making sure you don't miss out on the growth opportunities?

So just talk a little bit about continuing to find ways to strike that balance. And AI at the center of the company also seems to be a driver of some of those operating efficiencies. It's not like you're reducing heads for the sake of just reducing heads, you're getting better operating efficiency from what we can tell.

Yes. I mean, it's partially the culture of the company, I would say, in the first place that Adam has built, like the way that the company runs and the way that our employees and management team thinks is that before we do anything, we think about what's the best way to do that? Can we do that in an automated way.

So when we were talking before about adding cost for LLMs to do agentic customer support. That's 1 example where rather than hiring on hundreds of thousands of people in the business development team to support growth in customer count, the team wants to get ahead of that and build a way that we can do that in an efficient manner.

And I would say that, that applies the company across the entire company. So I think that there's a lot of room for us to continue to drive these really high margins in that fashion as long as we can continue to retain that culture of the company of doing things in an automated way, reducing process and that applies directly to cost. Adam, I don't know if you want to add anything.

Yes. I mean, it's totally aligned. Look, we never sacrifice future opportunity for lack of investment. We sacrifice future opportunity because there are culture demands that we be lean and only have A players on the team.

And so something that I get constantly asked is, you've got this massive revenue opportunity in front of you. It doesn't take an idiot to see that. Why aren't you investing in the salespeople to go bring some of that revenue up. And the challenge with that is as you start scaling out your sales force, you end up with people that are selling the product the engineers build, but they're probably not as high on the IQ side as your core engineering team.

And all of a sudden, your culture starts expanding, head count starts expanding, processes build. And it's really hard to keep that team A players for what has built you to the point you've built. And so we think about the next 10-year time line, we may not get all the customers that we would get as fast into the present, and I'm certain that the product is good enough, we'll get them over time.

And if we can get them over time and if we can automate the recruitment of those customers, through investments around tooling and advertising, where we don't have to invest in people then the margin structure and the net dollars that we will make the next 10 years is going to be much greater because one, you don't have to like a bunch of people that you hired in your ramp-up phase, which is really, really hard to do, frankly. And two, you retain your A players because those A players solely want to work with other A players, and you didn't signal to them that we can't continue to do what we did, the whole time we built this company to this point.

I do want to end on one bigger theme, which is a topic we get asked a lot about by investors since there's a wider audience, I want to give you an opportunity just to make sure people understand it.

I think people generally ask a lot of questions about the tech you built and how the tech you built scales, how linear versus nonlinear are the outputs of the tech you've built? And I think there's been linear performance and then there's been big upswings in performance as the company has scaled over the last couple of years.

How do you think about what you built and how investors should think about what they're underwriting in terms of the yield or the output from that platform in the years ahead?

I mean, look, it's very hard to quantify it that way because it's not like an it was a step function in efficiency, and it's continued to get better. And nothing is necessarily linear or measurable in terms of the rate of advancement.

But these models are really powerful. Obviously, the math the technology. We all know how powerful the large language model space is we can all see Waymos on the road. While the model inside and a recommendation engine is, again, constructed similarly and very powerful because it's tied to an economic business model that can become really relevant as it improves that model.

The technology itself didn't exist years ago. I mean if we wanted to build what we built over a couple of years ago when we launched AXON 2 and on the continuous iteration of the product, we couldn't have done it 7 years ago. It just didn't exist. A lot of it was predicated on research that was more modern.

And so you get to a place where you can drive the value to the customer and predict not only is the user going to engage with what ad because you're retrieving that amongst millions of ads. But what they're going to do in a product all the way to the point of transaction or possibly for some of our advertisers to the point of transactions out to 30 days. This is super complex. But these technologies can do super complex magical things.

And so we are at a place today in the world where the research -- we're sort of on the cutting edge of research when it comes to recommendation engines. There's no AXON 3. Now we have to do research to try to find the next level up around AXON 3, and maybe we'll have a breakthrough there, maybe the market will have a breakthrough there. But we fundamentally believe these technologies are going to get smarter over time and the compute is going to get more powerful. And you're going to have an advancement in these fields. The nice thing is we're really good at these technologies. So we will benefit from that, whether it happens external to us or internal to us, and those continued improvements will make the math more predictive.

We're really strong in driving results to advertiser. But every time we have an advancement in tech, we can take the population of the billion-plus daily active users and serve them something more relevant. So even though the advertisers still sees the same return on ad spend because the product works, the scale goes up, which is the catalyst around our growth.

I did want to touch on one thing, too, that I wanted to state on this before we wrap because I don't want to create an IR problem for us as we go into a closed window. We had said we're launching our self-service platform [ 10-1, ] and we're opening up international to our web customers, [ 10-1 ] we're pacing well against the [ 10-1 ] goal, but we did just open up international to our customers a couple of days ago. So if you start looking on Twitter talk to advertisers, you may see that they're starting to see good performance outside of just the states.

We've been testing this product broadly outside of the states with some pilot customers inside the pilot internationally. The tests are great, results have been phenomenal. We're ahead of schedule on that. So that's already in market. And I just want to make sure investors realize that that's 3 weeks ahead of schedule.

Okay. Well, that's a good point to end. But I do want to ask one more. I always like to end with people if we get a chance to have this conversation a year or 2 from now, what are the things you're the most focused on executing on over the next 1 to 2 years?

Look, the thing I'm most proud of with what this technology has done is we're going to show the world that the game customer is valuable. It's funny because like 15 years ago, people would have told Facebook presumably that social networking users are trashed. They're not monetizable. Because no one has shown you can monetize them. It turns out everyone to use the social network and human beings are very monetizable with the right technology.

While we built this business, I've talked to many brands and like this is a year ago in the past that have always said game inventory is trash. What are you talking about? It's 1 billion-plus daily active users, these are adults. These are casual gamers. They skew female. The heads of households are here. These people are playing more game time than they're in social. So you're probably not accessing them. And certainly, if you're not working with us, you're really not accessing them because we're the whole market here.

And so why do you think they're trashed? And the answer was simply, well, no one can target them for us. So we think they must not transact. What was missing was the technology in the middle that could help unlock the value of the customer to the advertiser. If we do our job right in a year or 2, people are going to start walking around saying, the game user is really valuable. Well, this is -- these are human beings billion plus human beings. They're all adults. Of course, they're valuable. And I would love to be able to do that for the industry that gave us everything that will create more value for gaming companies. It will obviously create more value for the customers, and we do our job right, we'll expand the economy the way we think we can.

Guys, thanks so much for the opportunity to have the conversation. Please join me in thanking AppLovin.

Welcome to AppLovin's earnings call for the second quarter ended June 30, 2025. I'm David Hsiao, Head of Investor Relations. Joining me today to discuss our results are Adam Foroughi, our Co-Founder, CEO and Chairperson; 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, including the expected timing of product launches, our expected growth opportunities, the efficiency of our operations 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 and are most recently filed from 10-Q for the first quarter ended March 31, 2025. Additional information may also be found on our quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2020. The 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 the reconciliation of our GAAP and non-GAAP financial measures in our earnings release and financial update available on our Investor Relations site.

This conference call is being recorded, and a replay 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. We appreciate your time and interest. Q2 2025 was another great quarter, driven by continued strength in gaming advertising. Our growth comes from improved technology, increased demand as well as from supply side expansion. The MAX marketplace creates the supply that drives our growth as well as the growth in the market. As marketing technologies in the industry continue improving, we expect the supply will keep growing quickly. While we don't disclose exact MAX marketplace growth rates, it has consistently been double digits, far outpacing growth in the in-app purchasing gaming market.

The ongoing improvement in our models drive sustainable growth rates beyond the market growth rates, while we continue to expand our dominant leadership position. Based on all the opportunity in front of us in our core market, we are confident we can sustain 20% to 30% on year-over-year growth driven by just gaming. However, what gets us more excited now than ever in our history before is the opportunity to really expand outside our core market. Recently, we took the first step towards opening up our platform broadly, quietly launching our new AXON ads manager, our self-service portal, which will serve as the foundation for our next decade of growth. Our ads manager has many benefits. It puts day-to-day controls directly in advertisers' hands, reducing friction. It enables credit card billing, eliminating the hassle of monthly invoicing. It provides the architecture for agents that can eventually automate every workflow. It establishes the framework for automatically generated ads. It simplifies onboarding through our recently launched Shopify app. It deepens integrations with attribution providers, giving customers more accurate reporting.

With the rollout going smoothly, -- we were ready to widen access. On October 1, 2025, we plan to open the Axon Ads Manager on a referral basis, perfectly timed for the holiday season. Feedback from these partners will guide our global public launch in the first half of 2026. To date, web advertising campaigns have been limited to the United States. On October 1, we plan to open our platform to most major international markets.

Now stepping back, we have spent the last decade assembling the pieces, reach of more than 1 billion users, best-in-class optimization and now a self-service interface. Together, they position us to help any business of any size anywhere in the world grow profitably. That is good for our partners. It's good for economies around the world, and it's great for job creation. The opportunity is so big that we will be launching the platform under its own brand, AXON. Once AXON is fully open next year, we plan to begin paid marketing to recruit new advertisers, which will drive predictable compounding growth.

We have been building performance-driven advertising products longer and better than most anyone. Operating at our current scale with an incredibly small amount of advertiser relationships highlights the magnitude of the opportunity ahead. Our strategy is simple: build world-class products, launch them when they meet our high bar and compound from there. Patient, disciplined execution produces durable success. And we hope our track record gives you the same confidence we have in our future. We're incredibly excited about what's ahead.

With that, I'll turn it over to Matt for a closer look at the numbers.

Thanks, Adam, and thanks to everyone for joining us today. Q2 was another exceptional quarter for AppLovin. At the end of the quarter, we closed the sale of our apps business to Tripledot Studios. This quarter, the financial results for the apps business are included within discontinued operations, and we will keep our commentary limited to the advertising business only.

During the quarter, revenue increased by a very healthy 77% from last year to approximately $1.216 billion, while adjusted EBITDA nearly doubled to an impressive $1.20 billion. achieving an 81% adjusted EBITDA margin. The majority of our revenue growth in the quarter was driven by our core gaming business. While e-commerce continues to perform well, we limited onboarding of new customers to focus on the preparation for the self-serve launch in Q4. Quarter-over-quarter flow-through from revenue to adjusted EBITDA was a very strong 81%, illustrating our continued dedication to operating line.

At the end of the second quarter, we had $1.2 billion in cash and cash equivalents, which includes $425 million in net cash received from the sale of the apps business. In the second quarter, we generated $768 million in free cash flow, up a staggering 72% year-over-year. Our free cash flow was slightly lower than last quarter due to the timing of payments for interest on our bonds, which are semi-annual and certain taxes associated with the prior year. This quarter, we repurchased and withheld approximately 900,000 shares for a total cost of $341 million funded through free cash flow. As a result of our ongoing strategic share management activities, we were able to reduce our weighted average diluted common shares outstanding this year from $346 million in the fourth quarter to $342 million this quarter.

Finally, turning to our financial guidance for next quarter. In the third quarter of 2025, for the advertising business, we anticipate delivering between $1.320 billion and $1.340 billion in revenue with adjusted EBITDA between $1.70 billion $1.09 billion. targeting an adjusted EBITDA margin of 81%. We're confident these targets position us to continue driving strong growth and value for our partners and shareholders.

Now with that, let's move to Q&A.

[Operator Instructions] Our first question will come from Matthew Cost from Morgan Stanley.

I guess on your plans to start doing paid marketing next year, talk to us a little bit about how you arrived at this decision to market to acquire advertisers. Because I think historically, it's mostly been growth by word of mouth and sort of virality within the gaming industry that people become aware of your products. So I guess why is now the right time to start marketing. What channels are you going to market through? And how are you going to evaluate the return there? And then I have one follow-up.

Matt, good to see you. So look, like we've got big aspirations with our platform. The advertising solution right now to web commerce advertisers and more broadly, other categories we've talked about is looking really strong. Obviously, we have very small penetration in terms of advertiser base against what our global advertisers count.

And the way we look at our business is, if the model works this well at this small amount of penetration, what happens when we can really open it up and go service all the small businesses in the world. Our aspirations are to help any business of any size be able to acquire customers profitably. And if we can do that, we'll achieve the goals that we've set for ourselves.

So the value of us being able to go out in performance market, the platform is that we've got one of the most lucrative financial models the world has ever seen. I mean, obviously, you can see the amount of cash that we print. And we're very good performance marketers. So we're very good performance marketers, it's plausible that we will be using our own models to recruit advertisers off of our own inventory. There's plenty of moms with small businesses and dads a small business is sitting in games, playing games all day that could use our platform to market themselves.

You can imagine us running ads on Facebook, on LinkedIn, on TikTok. But it really does come down to the fact that we've got such a lucrative financial model and we try to run lean and automate every step of that process. And we believe that if we can automate the onboarding of advertiser flow from when an advertiser can find out about us from an ad all the way through to going live and then scaling on our platform. The model will be very lucrative on an LTV to CAC basis. And we won't have to staff up a large sales force.

Great. And then on the supply side, you made some comments in the prepared remarks about some strong supply growth that you're seeing. Given that MAX is kind of already starting from such a strong position already is the further growth. Is it a function of just taking even more share in mediation. Is it about ad load increasing to the customers you already have? I guess where is the supply growth coming from.

Yes. Look, we talk a lot about the market in mobile gaming and people fixate on the in-app purchasing market. And what we're trying to do is just highlight the fact that our business grows from improvements in technology and demand, which drives CPM and expansion of supply. The MAX mediation platform is really high penetration into the market. So we're not going to be able to grow it particularly quickly by taking more mediation from other platforms at this point. What we were highlighting was that the base platform, just the audience and Side Max is growing swiftly, double-digit growth. So multiples greater than what you would expect when people try to size up the gaming market growth rates of 3% to 5%.

The other thing that is super valuable to understand in that is that inside that marketplace, we historically have always talked about how there's not a share gain concept. As the marketing platforms improve, that platform grows. The eyeball is playing games play more games every single day. Inventory goes up, that drives growth on our platform. It drives growth on the platforms that are the other bidders inside that ecosystem. And then we benefit the most because we're taxing every transaction for the most part that happens outside of us at the MAX fee and then obviously, our own DSP is a super lucrative business model when we win the inventory.

Next, we'll hear from Ralph Schackart with William Blair.

Just two if I could. Just on the self-serve platform, Adam, maybe you could sort of frame this for us. The launch is coming up, public launch coming up, which is exciting. But could this be a pretty material impact to the overall business? Obviously, good scale today and growing pretty fast, but maybe kind of frame that opportunity. And then I have a follow-up, please.

Yes, sure. I mean let's look back over the last year at our numbers, and then I'm going to give you qualitatively sort of what was going on with growth in the business. In Q4, we saw a huge ramp-up in the e-commerce category when we went into this pilot state, recruited hundreds of advertisers that we disclosed. And that was a big ramp-up in Q4, where in Q1, we got the full benefit of that run rate. And if you look back at the quarter-over-quarter growth, Q4 and Q1 were really high growth rates.

Now the reason for that is that the new type of customer that comes into our platform is extremely incremental to our business, like we've talked about in the past. Then, since then, we knew that we had highlighted a whole bunch of things that we had to go build into the platform to be able to service advertisers at the level that we like to do. And we like to set a really high bar for the products we deliver. We wanted to build the ads manager, which we released and we will continue to innovate and iterate through. We wanted to build dynamic product ads that came out in the last couple of quarters. We wanted to do better integrations with attribution companies, which happened inside the quarter. And we wanted to launch a Shopify app and other apps that allow for seamless integration amongst the advertiser base.

So we ended up constraining the advertiser onboarding process for a couple of quarters while we made sure that the product was at the level that we wanted to get it to. Now we're looking at in Q4, talking about a referral-based opening. That, in itself, I'm going to define that for you so you understand what we're talking about, but accounts on the platform, they obviously like our solutions because they're spending substantial amounts of money on our platform. We'll get the chance to refer their colleagues into our platform and have them go live in the self-service way.

We expect that will increase the advertiser count quite quickly and also allow us to go through live examples of advertisers coming in self-service, all the way to scale on our product. Assuming all that goes well, then we talked about opening up the platform entirely to the world in first half of next year. We think as advertiser count grows on our business, especially in categories outside of gaming, you're going to see a lot of upside in the numbers that we're able to report.

Great. Maybe one more if I could. I think historically, you've talked about e-comm being around 10% or so of the business for this year. Maybe just sort of an update if that's current thinking. And then I think in your prepared remarks, you talked about limited onboarding to e-comm customers. Did that sort of limit the growth rate in the quarter had you not limited those customers being onboarded.

Yes, for sure. I mean, I'll take it in reverse. By constraining the advertiser count, we're limiting growth. Now we're focused on growing the cohort that's live, which we saw growth from the cohort that live that Matt in his prepared remarks said, majority of our growth came from gaming. So if you assume a large, large amount of the growth in the quarter came from gaming and you're roughly 9% quarter-over-quarter. Gaming is still a 30% to 40% grower for us. well above our 20% to 30% long-term goals that we've stated.

Now e-commerce, we went from a state where we ramped it in Q1 and then controlled, as I said, on the advertiser onboarding while we got these tools ready to go. And so where we were at was that sort of 10% range that we were targeting for the year. There's a reason to expect it to have grown above that because gaming is growing so quickly. And for 2 quarters now, we've mentioned that gaming was a big contributor to growth.

As we go into Q4, that's a huge holiday shopping season. So not only are you going to see the cohort that we have live spend a lot more, you're also going to have new onboarding happening for the first time in our history at a rate that's much higher than we will have ever seen before. So we fully expect that e-commerce will see a pretty substantial ramp up through that what you can call a soft launch period. And then obviously, as we go into a broader global release, the impact from that.

And then the last point to remember is another one of my prepared remarks highlighted the fact that we have constrained the advertisers we even have live today by not allowing them to buy our audience that's international. The vast majority of our user audience is outside the U.S. We will be releasing almost all markets once we go into this October 1 release.

Our next question will come from Omar Dessouky with Bank of America.

Can you hear me? .

Yes, gotten here fine.

I just wanted to take the conversation in a slightly different direction, if I could, and ask about game engine data. And one of your competitors, specifically Unity, which owns a game engine, which 70% or so of mobile games are built on plans to use game engine data for ad targeting purposes sometime in 2026. Do other companies besides them have access to game engine data? Do you know if your customers own their own game engine data and you're able to access it and use it at some point in the future? And do you think it matters? .

Yes. Omar, we can't speak to other people's data. I mean we don't know what game engine data even means. But when you're integrated inside an application, both as a publisher and as an advertiser, you have a lot of data points that you're able to extract that are behavioral data points of how the consumer is playing into a game. We're obviously very good. Our models are cutting edge. Axon 2.0 has shown phenomenal growth for, I don't know, 8, 9 quarters now since release. You have to assume we're pretty good at using the data we have available to us.

So what we don't know is you didn't define game managing data, is there some magical data out there. But our market penetration inside gaming is really large at this point. It's materially higher than 70%. We've got very good visibility into what matters in the gaming category, given how large we become. What's really going to matter for our business as we go forward is whether we can go expand out this offering the way we expect to across all businesses of all sizes in any category. If we're able to do that, we will have a much better sense of the consumer on the other side.

And I do want to remind everyone, we have 1 billion-plus users and they're not gamers. These are human beings, doing a whole bunch of things. But the share of wallet from gaming is going to be a minority of the dollars that these people are spending outside of gaming. And that's what's really compelling to us as we go to this next chapter in the company. If our models that are already as good as they are with such a small amount of advertiser penetration, now go get visibility into consumer behavior across every category, we're going to be way more predictive about the advertisement that we could show the consumer.

Our next question will come from Chris Kuntarich with UBS.

Maybe just on the referral program and how this is going to work functionally. Are advertisers that are currently on this plant platform, are they going to be given referral bonuses? Is there going to be any restriction in advertisers that they could refer? You've talked about opening up international inventory will international advertisers be available to participate in the referral program. And just as we think about kind of this line out the door of advertisers you've been talking about for a while, are they going to get any special look here potentially to come in here, maybe if they don't get a referral?

Chris, I can't say we have all the answers to all those questions you asked. We're going to definitely go through an iterative period, too, on the release of the referral program. But fundamentally, we don't think a ticket into our system is really worth paying for. If someone is a client of ours, they have a lot of benefit from being on the platform. People love using social media. You've already seen a whole bunch of organic posts about us from influencers. We think as we give them the capacity to invite their peers, they're going to do it on their own because the platform has been restrictive and exclusive for so long. If we see that happen, it's much better organically.

And beyond that, line out the door, we'll still need to most likely get and invite into the platform from one of our customers to be able to get automatically cleared.

Right. Okay. Just as we're kind of thinking about the 3Q guidance here, maybe a little bit faster than what we've seen in the past couple of quarters. Is there anything kind of reflected here in the faster sequential growth associated with the app portfolio divestiture and any sort of quantification around that would be helpful.

Yes, sure. So the one change we did make, Chris, this quarter, which is slightly different than kind of our -- our typical cadence that we've been going every quarter was to include the benefit as well that we're going to see from the divestiture of the apps business, where we have a slight pickup in revenue. So we also incorporated that within the Q3 guide.

Your next question will come from Jason Bazinet with Citi.

So I think on the last call, you all said that you're definitely working towards building 2 AXON models, right, 1 that's specific to games and 1 that's more focused on the other e-commerce. You use a new term now, I can't remember what it is, but I'll call it e-commerce, but I know it's more holistic. When you think about all the data that you had to ingest and the models that you had to build to make the gaming model as good as it is, what's sort of the right runway that you have in your mind before those 2 could be at parity in terms of efficacy?

I mean, look, Jason, it's a great question. There's -- one, there's no way to know that, right, because that's future looking, and we're going to go acquire a lot of data as we open up the platform. But in terms of architecture of the models, the 2 models are distinctly different because on the one hand, a user is going to a website and on the other hand, a user is going to App store and that app store isn't even something that we can measure. And so you've got 2 frameworks.

And then as you touched on in gaming, when we launched Axon 2.0, we already had pretty good market penetration. Now we didn't work with the largest customers, so we continue to get better as we broke into the largest customers in the category. But I want to say we had 50%, 60% penetration and now market penetration in gaming, as you all know, we're almost a requirement at this point given how good we are.

In e-commerce, when we launched in the pilot, why we were so excited about the result is that the first beauty shop that went live, the model knew nothing about the shopper behavior inside the beauty category. And we talked about this, that was the big concern. Could AppLovin's tech actually go out and figure out predictively how to convert a user to go buy from a beauty store with no knowledge? Now we've talked about the one disclosure we gave hundreds of e-commerce businesses live on the platform. that's a pathetic amount versus the grand scope of how big these categories are. I mean, Shopify alone has millions of shops, right? So you have so much potential for data accumulation.

And then just remember, the data in our platform is not unique to one or the other part of the business. So we've always felt that games will benefit a lot from our ability to break into these other categories. You can imagine if someone buys a $4,000 handbag from a store, that person is probably a whale for a Match 3 game. Now I can tell you that, but I can tell you the technology is going to come up with a lot of cross-correlations and conclusions that are a lot more powerful than that. So in terms of opportunity for us, not only does opening up the platform, get us more demand, which is going to be massively accretive and incremental to our business. It gets us more data. And so every single quarter, you're going to have that flywheel effect that, that then paired with our engineers' ability to take added data and improve the technology and its interpretation of that data creates a real strong foundation for growth for a long time to come.

Next, we'll go to Rob Sanderson with Loop Capital.

My question is on just improving performance for your web-based advertisers. Again, as we speak to pilot customers, obviously, we hear you're highly effective at driving conversions, but it really lacks a lot of basic targeting functions like small things like just excluding existing customers et cetera. They see -- this seems pretty simple to solve for, but maybe not on your multi-app inventory, I don't know. I mean the question is really targeting and other improvements that web-based customers are asking for. Are these largely things that you've already seen in solve for gaming customers and it just takes time to collect feedback and work optimizations into the product, et cetera? Or are you really solving for like a whole new set of challenges, maybe some of both.

Yes, it's great question. So look, when we got into the space, it surprised us how much of the market meta advertising was in the D2C space. And it was the majority. And when you have one platform that's that big, everyone wants every other platform to give them the same exact tools. Now we don't have an e-mail address or that persistent identifier that matches up with their audience data. So technically doing an exclude is not going to be as accurate as what Meta can deliver to these advertisers. There are other nuances and differences.

We serve a full-screen advertisement. And then we can partner the video with a dynamic product ad. That creates more intent for the shoppers. So the vast majority of all the transactions we drive have been within an hour or 2, and the vast majority of the transactions Meta drive, they take attribution for a much longer time frame. So are these differences between platforms, but advertisers like comfort. They like what they know, they want to stick in the same processes. What we believe because we can see it, our ads drive a lot of intent and drive 2 conversions very, very quickly, and we've been able to extract a lot of value out of the space. I mean if you take the disclosure that I gave you in -- I think it was Q1, hundreds of advertisers, I believe it was in the 600s and $1 billion run rate. The market penetration in terms of market of scale of advertisers to total market is probably 1% or less in that number. And to get to $1 billion run rate, clearly, even if they're complaining about feature missing, the money is showing up at a level that you wouldn't expect for that little market penetration.

So then as you go extrapolate to getting new customers on, we think the products that we deliver work. We think their mindsets will change over time because they'll realize platforms are different, and that's good for their business. It's not bad for their business.

Now the last thing I'll leave you with is we do believe in automation entirely throughout the funnel. We don't allow gaming companies to use any sort of manual targeting in our platform. The platform allows them to input a goal put it in a budget and get that result. And that's what they pay us for. The technology being extremely precise and removing that human mind out of the equation. We bring the same view to this category. All these technologies in advertising are going to move to AI, automating most of this funnel in the future. We've already done that in our largest part of our business, and we are committed to doing that in this category and not allowing people to override what is a smarter system than the human being.

If I could ask a follow-up. You've said in previous calls that you're going to be patient and we want great experience for all customers before you open up. And you said, I think, 80% are having good outcomes, but maybe 20% aren't, and maybe the product performing around to be, things like this in the past. But so October 1, obviously, you're still referral base, so you're not completely open, but it's definitely a big step forward. So can we infer that it's largely improving performance that's informing that decision to go bigger? And if so, kind of how would you grade that? Or how -- are you doing better than or any commentary on performance?

Look, last call, I laid out a list that I thought would take quarters and our team knocked out most of that list in a single quarter. We got the Shopify app integration live. We don't announce these things, but you can find the app in the Shopify App store. It creates one click integration. We got dynamic product ads live that made a material uplift to the ability for the advertiser to run a video plus inventory add to then transact the user in a very short amount of time. We did more in-depth integrations with the attribution companies, which we talked about last time. It really important so that we can report the same way that the advertiser looks at data and then let the model interpret data that way. We're continuously improving the core underlying model.

So as we looked at the advertisers that we have, the growth rate that they're seeing is substantial enough and the feedback that we're getting is strong enough that we have no reason to open up our platform as soon as we can now.

Our next question will come from Clark Campen with BTIG.

I have -- obviously, I guess, some follow-ups on the self-serve launch. But I wanted to see, I guess, as you guys are thinking about taking on more of the customers that are in backlog onboarding new sort of cohorts and verticals next year. In the near term, is there any significant difference, I guess, if we think about the customers that are coming on from a size or product vertical standpoint and then from as we think about, I guess, the referral dynamic, does that have any impact on expenses or sort of margins will those customers be given credits or any sort of compensation for bringing on, I guess, peers?

Yes. Second one first, Clark. I mean, obviously, the incremental value of $1 in our business is worth a tonne. So if we decide to pay a referral you know that we like to make money. So I wouldn't expect you'll even see it in the margin number. It's just the business is way too big. But it's very likely that what we look at is what I mentioned earlier. The chance for our clients to tell their peers to come on our platform while we've been exclusive for this long is a perk in itself. So we're not going to see much of a need to pay for that client acquisition.

And then on the first question, if you don't mind, quick we got -- yes, it will vary as we're going to open it up to much more count. So far, we've gone through a period where, at first, I think we were constrained to $25 million, $30 million of GMV. We dropped it down for a little bit. We raised it up this quarter to $100 million plus to really constrain what's coming on the platform. As we open up, the goal that we have is to see any small business of any type to market on our platform. If we clear that goal, we know we're going to be a product that can be very important to economies and job creation around the world. That's our goal. Now if we don't see that, we're going to work on that. But we think the product is ready for that. We've seen cases of regardless of size, customers just plug in and it works. You can find their customers, they can measure the way they need, and they get the result that they would expect to grow their business. And so if we see that in this referral state, then we're going to be quickly on our way to opening up the business and really pushing it hard.

Okay. And then not that this is something that's, I guess, a huge priority right now. But in terms of, I guess, sort of long-run supply expansion. I think you guys, as you have more model improvements, will unlock supply across the existing gaming footprint. But when you think, I guess, maybe years down the road, where would it make sense? I guess is there a way to sort of expand MAX sort of logically outside of the gaming ecosystem?

Yes. I don't think it's going to be years down the road if we're able to go get the demand that is broad reaching and drive up the client [indiscernible] out substantially over the coming quarters. Pretty quickly, we're going to look at new supply sources as well. There's absolutely no reason why we wouldn't want to plug into other properties even if they're large social networks, music apps, news apps, sports apps, websites. The audience itself, again, this gamer audience is a human being that's doing a whole bunch of other things, and games are probably somewhere in the neighborhood of 10% to 15% of their time spent on mobile. And if we can access them outside of the largest-walled gardens that won't let us in everywhere else, if we know them and we have data on them, we want to show that ad to them every chance we get, and we think that will be a very lucrative transaction moment for us and the advertiser, we're going to go after that. And so I wouldn't expect that that's a year out into the future initiative.

Next Jim Heaney with Jefferies.

Adam, have you seen any changes in overall user acquisition spend from gaming companies post the Apple versus Epic lawsuit? I mean, conceptually, it should be a great tailwind for your business. But interested if you're seeing any benefits playing out currently?

Not yet. I think I mentioned this on the last call, but we sort of expect this one to be take longer than people expect. Certainly, some apps are bypassing the App Store now to cut that rate down. But the biggest gaming companies tend to move really slowly and tend to operate in fear of the big platforms. And so in order to really do it, I think it's going to take a few quarters for them to optimize the user experiences and go bank it. And then from there, you'll start seeing it compound pretty quickly in terms of benefit to us as an ad platform because once the very large leaders start doing it, you'll start seeing the smaller to midsize ones really pick it up quickly.

So no impact yet. And I would guess it will probably take 2 to 4 quarters from some impact. And by 4 to 8 quarters, you're going to get pretty material impact in pricing on our platform.

Great. And then maybe just another one on capital allocation. I mean, it looks like without the apps business, you're generating a 60% plus free cash flow margins. So just interested to hear how you're thinking about use of cash.

Yes. I mean the approach that we're going to take, James, going forward is very consistent with what we've done in the past. I mean, obviously, first continuing to allocate capital towards organic initiatives, continuing to hire on very high-quality engineering and business development talent, right, to help continue to grow the organic business. And then after that, then to continue to return capital to shareholders via share buybacks. So that's the approach going forward as well..

Our next question will come from Martin Yang with Opp Co.

One question on international expansion. Can you give us a sense of how do you view the size of the U.S. market versus international when it comes to your ideal target customer in the near term? And then I have a follow-up.

Yes. I mean one, let's divide it into two things. One, there's international businesses like local shop in Japan versus domestic U.S. businesses. Second, there's the traffic. And for us, historically, because we've grown word-of-mouth, getting customers that were local to markets was always tricky. So it was much easier for us to get companies that were international buyers. And the revenue was driven by where is the audience and how monetizable is the audience. And so to date, I want to say this off the top of my head, and Matt and correct if I'm wrong, but it's roughly half-half on domestic U.S. versus rest of world. Andre, we don't tend to operate inside China. And so you start with that. You go, "Okay, well, -- we have -- in the only disclosure we've given you on the e-commerce vertical, that $1 billion run rate.

I look at that and go, well, if we open up all these other countries for the motorsport, is 1 going to become 2 overnight, probably not because most of these western companies can't go out and buy Japan and Korea and things that are really localized in language. But there's a lot of markets that we can feel similar to the U.S. So once we open it up, 1 is going to become much more than one. We just don't know where it's going to land. And then as we open up the platform, that local Japanese company should be able to come into our platform.

And like we said, if we don't see them organically coming in, we're going to market to them and ensure they're coming in, the one in Korea is going to come on the platform, and we'll start getting penetration in every one of the markets that our users are in. And that incremental advertiser in these categories, as I touched on, the revenue from that is worth so much to us. that we have the type of financial model that will allow us to go get coverage all over the world.

Got it. My follow-up question on that is on the pace of onboarding international customers, do you see a pent-up demand among those? So when it comes to pacing, should we see a sudden uptick similar to 4Q last year in the U.S. or international onboarding will be more gradual in line with your overall rollout?

Yes. I can't say I know. I mean, I haven't looked at the queue of domains. You'd have to infer where the company is based, and we don't ask like country of origin. But the reality is, as we open up the platform, the customers that we have inside gaming are global. So as they invite their peers, their peers are going to be wherever their headquarters are, right?

So there's coverage all over the world. The companies that are live inside of e-commerce are predominantly U.S. So probably their peers are going to be in Western markets. And so you'll have a mix of referrals going out. And I don't think it's going to be like everyone's focused on the user only in the U.S. to invite. It's going to be broad reaching, and there's no constraints that we're going to be setting as we start opening the platform up.

Our next question will come from Jim Callahan with Piper Sandler.

On e-commerce, you're working with a lot of different types of advertisers with different bidding goals and purchase windows. Kind of what have you learned through that process so far if that's informing the self-serve kind of tool set?

I mean it is much more fragmented when it comes to attribution and integration than the mobile app ecosystem. The mobile app ecosystem has 2 major MMPs, mobile measurement partners. We own one of them. So integration is pretty easy across the advertiser base, and everyone has the same attribution model. Everyone looks at things on a last quick basis. And so everything is standardized. When we got into web, not only do we have to contend with the fact that most of the media buying was happening on Meta. So everyone wanted things the way they looked at things on Meta.

Secondarily, we had to contend with the fact that the space was completely fragmented. So this was one of the bigger lifts that we had to go accomplish over the last quarter or 2 was do all those integrations that I laid out on the last call to get us ready so that we can go out and really open up the platform. We wouldn't be able to if every shop by shop came on to our platform and couldn't integrate one click. That's how they integrate everywhere else.

So we needed to have that deal struck and have that app integrated in their store and already approved and functional. We needed to ensure that we were integrated with the major attribution companies, so numbers line up and the advertisers can see things the way they need. And also the model gets the data that it needs to be able to go optimize on their behalf. So those things were the harder points. And we've gotten through it. We've seen obviously positive reception, which gives us the confidence to get going on our journey to open up the platform.

Great. That's helpful. And just on core gaming in the quarter, anything to call out in terms of like model enhancements, tweaks, performance improvements?

Yes. I mean nothing that's like double-digit step function. But look, the numbers are getting bigger now. So we're now in a place where we continue to put up big numbers every single quarter. Q2 isn't particularly strong seasonally in the category, but we still grew at a really healthy rate. We continue to have iterative lifts, and we continue to deliver the advertisers a lot of value. So every quarter, they come back to reinvest more as they continue to see strong return on ad spend on our platform.

So what gives us confidence is as our numbers are getting bigger and without something that's what we would call the next big model enhancement, we're still growing at really healthy rates. So everything else that we're talking about just creates this upside opportunity on the business, not only the incremental data flywheel from the new category, the new demand from the new category, but also the fact that inside gaming, there's more improvement to our technology to come. And some of that improvement at times will be those model enhancement, substantial lifts that no one expects.

Our next question comes from Bernie McTernan with Needham & Company.

Incremental margins of the business are obviously pretty incredible. Should there be any changes that we expect as e-commerce expands, whether from marketing to acquire advertisers or the economics if you look to plug into other supply sources, like this 80%, 90%, 100% incremental margins. Is that still the right way to think about the business?

Well, the latter when we plug in will be net revenue reported, right? Because still, we're going to report revenue rec the same way. The former will be a cost line item. But as you've seen, we're really responsible with the dollars that we spend. one, you'll see the sales and marketing line. So we'll talk about it as we go and test it.

Two, we'll test it. And three, we're only going to spend the dollars on performance marketing if we're printing cash on the other side, and it's creating this growth upside that we expect. So it's going to be a cost item that wouldn't have existed before that will and one that I think everyone who's a shareholder is going to love to see growing because it will imply we're going to make a huge spread on the LTV to cost of user acquisition on the other side.

Our next question comes from Arsenije Matovic with Wolfe.

Adam, with Meta reintroducing the advanced mobile measurement and just supporting it, do you see that maybe as an opportunity to showcase like apps engines and incremental performance for e-commerce campaigns versus Meta? And could your advertisers that are opting in drive stronger traction with e-commerce advertisers, especially with like the referral-based rollout in October? Is that timing of that rollout also still keeping that 10% of that revenue being e-commerce intact for the year? And then, Matt, just a quick follow-up after.

You blitzed those questions. it sort of ran together for me. So let's start with advanced mobile measurement, and then let's jump into the next one. So advanced mobile measurement, Meta -- I mean, we don't comment on other companies' measurement integrations, but they've always been integrated as a self-attributing network with Adjust. Adjust is no different than Aspire. We run that business completely separately. So they do support attribution models across all these companies. I don't think there's any overlap with our business on these integrations, at least not that we've ever seen in the past. And therefore, that's something that happens on a team that we don't closely manage and really runs their business to maximize the SaaS business that they have.

On -- I think your second question was percentage of e-com revenue in the future, correct? Like we're starting at 10%. Now we've said, I think on the last earnings call, I think I said 0.5% market penetration. It's probably -- I mean we're certainly sub-1% of Meta reports over 10 million advertisers, and we're going after all businesses of all sizes. We don't have a lot of advertisers. So the opportunity in that category, both in terms of advertiser count and in terms of scale of TAM is much greater than gaming.

So as we go forward, if we're doing our job right and performance is as we would expect based on the data that we have so far, it's going to quickly become more and more of our business. And will one day our business become 90% web-based advertising, 10% mobile gaming? I don't know. But what I think because of the data flywheel in the system that benefits both sides and the improvements that we continue to have on gaming is that gaming is going to get bigger and that other category is going to get really big.

Got it. And then, Matt, just on the actual guide, so I think 5% sequential growth conservatism last quarter was 4%. Do we just say, hey, the incremental point that's kind of the UA spend tied from the studios being off book and getting some of that revenue? Is that fair...

Yes, I mean historically, what we were doing was trying to guide towards the component of growth, right, that we feel very confident in. That's very predictable, which is when you look at kind of the components of overall growth in our technology, right? It's the directed model enhancements that Adam mentioned, changes that the engineers are making and then the ongoing reinforcement learning within the model and that ongoing reinforcement learning has kind of generally trended towards the 3% to 5% per quarter. So the difference between that and then the guide this quarter is the incremental uplift from the additional revenue that we're going to get from the apps divestiture.

Our final question comes from Alec Brondolo with Wells Fargo.

I think what everybody is trying to figure out is when self-service goes live on October 1 on a referral basis or perhaps broader general availability next year. There's so some notable amount of waiting demand to waiting to get into the program, right? Advertisers that have asked you to join but maybe meet the GMP thresholds, or perhaps you'd have the capacity to onboard in the past. Can you maybe help us understand how big that was advertisers? You mentioned a Q in response to reuse question. So it seems like there's some amount of demand that you've already identified and waiting to come into the program.

Yes. Look, the referral program is to make sure that our advertisers who find success on our platform thus far are effectively curating in the next set of advertisers. And prior to that, it was our team doing that, and we were very, very restrictive. We think our advertisers are going to cause an onboarding moment that will be multiples bigger than what we were manually curating.

Now it's not necessarily true that we're going to take our that's built over the last year and just say, everyone you're in, they're still going to have to get invited to get into the platform. So it will be still curated onboarding. The reality is like Q4 is going to end up being a fun quarter. You've got the advertiser cohort that we didn't have last Q4 that was growing in the quarter to the point where we reported huge numbers and then had huge numbers in Q1. But we're going to have those advertisers primed and ready to go for the full Q4. We're not those advertisers inviting their friends under our platform in Q4, and we're going to be opening up international all at the same time.

So there's going to be a lot of fun moment -- moments for us and our customers in this e-commerce or web-based category that will set sort of a new baseline for that business. And then obviously, then we will go through hopefully another inflection when we really truly open up the platform and try to get into a state where we're more stable long term.

Yes. And then maybe just one more, if I could. You've kind of articulated a vision for the self-service ads manager where there's a lot of agent capabilities built in in the campaign repo. Is that live on October 1? Or is October 1 a version of the product that has credit card that has measurement, but then we add kind of the AI stuff later maybe?

Yes, parts. I mean look, there are different levels of agents. There's an agent that can respond and answer questions and give you responses to those questions and help you along. That's sort of an onboarding widget that whether we want to call this AI or not, now AI has made it a lot more capable is something that's probably going to be in present early in the release of this product.

The more complex level is an agent that does everything for you. You're an advertiser and you wonder how your campaign is doing, analyze the performance, talk to me about the adds I'm running, that's a complex agent task, but analysis task at the advertiser level is not trivial. That will be on the way, too.

And then you've got a third form, and I wouldn't call this an agent, I call it tools, but I keep referencing this generative AI-based ad creative tools. we're going to give our customers the ability to automatically create advertisements, whether video or card. What that will do is create way more diversity of advertisement on our platform for the model to go use to personalize ad to the other side and hopefully much higher response rate from the consumer. In particular, small businesses don't have the resources to go build ads that adapt for our platform, given the ads that adopt for our platform tend to engage the user for 30 to 60 seconds instead of 3 to 6 seconds like they do on social. And so we want to give them those tools so that they can have the same capacity the larger brands do so that they can buy the maximum capability that their business justifies on our platform.

All of these things will come. I mean, and then we'll talk about the next tools behind it because no product in our world stocks being iterative. We launch. We then add tools. We try to make the advertiser's life seamless and fully automated, and we will keep giving them tools that we think will benefit them, which in turn benefits consumers and us.

And that concludes the question-and-answer session for this quarter. We thank you all for joining us today. Have a good afternoon.

Thanks, everyone.