AppLovin Corporation (APP) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. My name is Jason Bazinet. I'm the Internet and media analyst here at Citi. Super happy to have Adam Foroughi, Co-Founder and CEO of AppLovin; and Herald Chen, CFO of AppLovin. Thank you all for joining us.

Perfect.

Thanks for having us.

So disclosures are available from me or from our marketing desk if you need those. [Operator Instructions]

So with that behind us, I mean, maybe we can just start because -- with a very simple question. There have been so many companies in your space that have gone public recently. Can we just start with just a very basic thing of just describing what AppLovin does, how it fits in with the broader sort of app ecosystem as a starting point?

Okay. Great. So we started the business 10 years ago. As a mobile app developer ourselves, we had difficulty growing our app and felt the market was missing marketing tools. And over the last decade, we built out a whole suite of products around marketing an app, monetizing an app with advertising, now with the Adjust acquisition, attribution analytics around all the marketing practices that an advertiser needs to partake in. And really up until 2018, our business model was very simple. It was app marketing platform, software-related revenue, high-margin business, great growth. And then we complicated life for everyone by getting into content ourselves. And one of the things that's been interesting as really we're trying to articulate our narrative on the public markets is having people understand why we got into gaming, which we did and we built up a couple-of-billion-dollar-a-year gaming business over the last 3 years alongside the software business. And the reason was is that we felt like doing a better job in creating a marketing software required us to have more data on the consumers that we were trying to monetize with advertising. And so we got into gaming as really a means to go get first-party data that can fuel our software to become more personalized on behalf of the partners that we work with. And we executed on just that. We've seen accelerating growth both because of the games, but in particular on the software side of the business. And in the first half of the year, we drove almost 2 billion app installs for our partners and ourselves on our software platform.

That's a great overview. So let me ask maybe a naive question. I mean, it feels like it's been a decade since we've all had smartphones. And we've all been navigating with apps, and we all download apps. And yet you look at the growth rates that you guys are putting up, and it's just phenomenal, right? And so I guess if you could just take a step back, like how should investors think about the growth rates that you've put up so far? Is that just a function of just more smartphones and more engagement on those smartphones? Or is it more about sort of wringing out the inefficiencies that existed in this broader sort of app ecosystem that you alluded to at the beginning, where you felt like the tools really weren't there for an app developer? Or is that...

Yes. I think we all have at least 1, maybe 2, 3 smartphones at this point. So I don't think it's market penetration. In Q2, we saw over 40% organic growth, software growth in our business against Q1. And the acceleration in the last few quarters has been all technology-enabled. We rolled out what we call AXON, machine learning part of our ad solution, in September of last year. So really, you saw it reflected in Q4 numbers and forward. And that was the first time we started really using all this first-party data that we have accumulated to go out and become more personal with the advertising solution. So that's accelerating spend through the platform. But the other thing that's going on that maybe a lot of folks don't understand as to why the whole category is expanding so quickly is that the gaming business as a whole, the TAM, is largely driven by IAP revenue. People think about the TAM in mobile gaming, they think about the $100 billion-plus. Well, that's majority IAP. There's still very little ad revenue as a percentage of the whole. Most IAP monetizing games don't yet monetize the 95% of users that don't pay with advertising. Traditionally, there was an aversion to bringing ads into these IAP games. What we're starting to see now as the whole category has gotten very big and there's a necessity to monetize more, more developers coming online with advertising, especially as these ad solutions have gotten more personalized, which is facilitating more growth because there's just more eyeballs coming online to be monetized with advertising, which is where really our software sits.

So maybe I have this backwards, you can correct me if I'm wrong. It seems like when you guys went out and acquired some developers, you really stepped on the in-app purchases more than you did the ad side. Is that right?

Our focus actually with the acquisitions, and we've done a whole bunch of studio investments, pick up games across every genre of mobile gaming so that we can get data on the audience across all these genres. And really, the data that we were after are deep engagement and transactional data. So it was almost all IAP-driven businesses. And there's 2 things. One is we can bring online advertising in our own games, which helps us monetize, that brings more dollars into the ecosystem as a whole. But more importantly, we're unique in the mobile gaming category, if you take that lens, because most gaming companies have to go and monetize their audience within the game. Well, we can monetize the data on the software side. So that was the whole thesis on why we got into games in the first place is grow the audience that's deep engagement and transaction-only games, monetize their data on our audience network. And hopefully, if those pieces come together right, we can accelerate growth. And that's exactly what we've done.

So one of the really interesting things, if I just look at like the social media companies and I plot on the x-axis how many users they have and then I plot on the y-axis the revenue per user, right? There's this very nice relationship, which says that at least in the social media world, like scale really matters, right? If you have many, many users, that sort of allows people to go find their target customer more effectively. You're almost bringing just a brand-new paradigm to this, right, where scale does matter, but it's much more about just having much deeper insights around those core customers than just sort of scale sort of in terms of tonnage. Is that the right way to think of that?

I think it's a good way to think about it. We're reversing into the same construct. We have an audience network, but we didn't have the audience data that was intimate enough to become very personalized in the advertising solution. We then went and got the audience data. We're now monetizing it with AXON at a level that's very compelling. Now the thing that we're missing, we only have a couple of hundred SPECs. And you saw that number grow 100%-plus year-over-year, net dollar retention up 250%-plus year-over-year. But what we don't have are a lot of customer relationships because we've traditionally never had a sales force. So that was the driver of go out and buy a company named Adjust. They have mobile attribution analytics, which really completes our suite of marketing products offered to mobile app developers to solve their marketing needs. But more importantly for us, the key reason why we did the acquisition was it brings a sales force to us for the first time. So we can go out sell the product offering, which really does work exceptionally well for our clients. And that will drive up both demand and pricing in the marketplace because that's really the trend you've seen play out quarter-over-quarter for these social media companies. As they get better, more advertisers come online. Pricing goes up. Personalization goes up, and the whole thing continues to grow.

So what -- I mean, that's incredible, to grow your business as much as you have without a sales force. Like what is the -- is that just because the gaming community is sort of an insular community, where everyone talks to one another and they sort of know what's working? Like what is the word-of-mouth dynamic that allows you to grow without a sales force?

Yes. So traditionally, even within mobile gaming, we didn't penetrate much of the market. Adjust has 3,000 paying customers, 60% nongaming, 40% gaming. Even against the gaming, we indexed in terms of relationships in the single digits. And so we're really handicapped around growth by not investing in a sales force. And frankly, maybe it's my fault for that. I focused on building out the product, believing that customers will come. But at some point, we're now big enough that to accelerate that growth, we needed a sales force. At least we believe we needed a sales force because it presents such a big opportunity to go in the market. And then the math is really simple. It's pretty linear math. We've got 250-some-odd SPECs. And then if you look at the other couple of public comps in our market, the number of SPECs that they have are materially higher. So we can go out and just go get the companies that are paying to our peers on a quarterly basis into our platform. There's going to be an immense amount of growth that comes from that. I think on the earnings call, I quantified it as our average SPEC is $2 million a year of net revenue. So it's 250 times Adjust salespeople times 1 software platform enterprise client for them is $500 million more a year of software revenue, exceptionally high margin dollars. And so we just did that math, saw where our market penetration was, and I realized this time, we got to bring in the sales force to really put the message out there on how well we're doing as a company.

And just for people that are newer, when you say SPEC, that means what?

We define it as a Software Platform Enterprise Client is a company that is on a net revenue basis doing $125,000 of net revenue to our software platform on an annualized basis. And then we break it down to quarterly run rate. Now one thing that people don't get both about our software reported revenue and also this $125,000 is it's net revenue. So that's effectively our margin for driving transactions to the advertiser. Typical ad network margins run around 30%. So if you took that software reported revenue and divide it by 0.3, you get to a rough estimate of dollars that advertisers are actually spending on our platform.

Okay. And I just -- I want to keep this real basic. So just -- I'm going to start at a very high level. So you have 2 segments, Business Software Platform revenue and Apps. And then underneath Apps, you've got Business Apps revenue, which is advertising; and Consumer Apps revenue, which is in-app purchases, right?

Yes.

Do you think the thing everyone should focus on is the first division, that Business Software Platform revenue? That's what you're really focused on. Is that right?

So look, we think both sides of the business are compelling. When you look at -- when you talk about 2 businesses, you've got the gaming revenue, which you summed up, consumer and business publishing, and then you've got the software revenue, which is just business software. But then as you separate, and you talked about it too, what's missing is the synergy between the platform. And we report that in our shareholder letter as total transactional software value. And this TSTV metric is effectively the margin that we make on our software platform from buying on our software platform. And if we were to be 2 separate companies, take that split, focus on it, the software business would report TSTV as revenue. And in the quarter, there was almost $75 million of value in there that, if annualized, is $300 million more net revenue to the software business or $300 million roughly of user acquisition cost savings for the gaming business. But we can't report that because of this intercompany accounting reductions that we take. So as we reported to you all, we would think about it split that way.

Okay. That's super helpful. So can you just spend -- if investors buy into this notion that there are indeed synergies by having -- by publishing your own content and sort of having -- marrying it up with the Business Software Platform division that gives you more data, how do investors know if you fully sort of tapped into that potential already? And it requires sort of going out and publishing or more games or being a developer in more games, where there's still sort of low-hanging fruit, right? It's -- how would you sort of deconstruct that? Said another way, how can an investor get confident that the growth that you've put up in the past is indicative of the growth you could put up in the future?

Look, the numbers get bigger. 40%-plus sequential quarters are not hard -- if not [indiscernible] consistently. But we're confident in the growth because we feel like we're just starting out. It's -- the software platform went live September last year. So it's been a year, and so it's just the start. We got -- we started monetizing our user data a year ago, right? And we showed in the last quarter, you didn't see the amount of payers that we have or deep engaging users grow dramatically. There wasn't a new game launch. There wasn't any shift in the gaming business, yet the software business grew over 40% in the quarter. So we're just getting better at monetizing the available data. And when you have a platform that you want to get as many users into as possible because you can monetize their data, every incremental user is valuable. Each one has a value within the content to be monetized and also outside because of the data. So there, we feel like we're just getting started because when we got into gaming, it's a couple of billion dollar a year business. But it's only 3 years ago, and most of our acquisitions and partnerships have been in the last 1.5 years. And then on the software side, we just started monetizing the data, again, a year ago. And as you look at -- take the other approach of a B2C social, video, whatever it may be company, that then monetizes their data with advertising on platform and off, this stuff just snowballs as you get better and better at it and you bring more advertisers in. And we're so new to it yet you're seeing this type of growth without a sales force that we're really excited about the prospects long term.

That's very helpful. So I got an inbound here. I'm just going to read it, so I apologize if I sound a little stifled. "Some publishers mentioned Unity as an advertising user acquisition channel in the last quarter as they redirect spend away from Facebook, Instagram. To what extent are you seeing that with AppLovin? And how sustainable is that? Would you ever reverse as advertisers rationalize and start spending more with Facebook again?"

So I think the reality is there's some IDFA catalysts there. There's much more just market competitiveness. There's market pricing effects going on, where fintech, crypto, e-commerce, these are now the focuses of the biggest advertising platforms. And traditionally, it was the game developer. That was the quickest to move performance-based advertiser in all of these platforms, and they're starting to get competitively priced out because these other categories are so monetizable. So what happens when you can't buy successfully on the channels that you're comfortable buying with? You have to go look for the other channels. And one -- the reason why we report that TSTV metric is if you look at just sheer growth rate and scale and then you divide it by 0.3 to get to the amount of dollars to our platform on predominantly mobile game user acquisition, the scale of the platform is third behind Facebook and Google in the category. And advertisers who have not been dependent on us, who have been dependent on the channels that they're comfortable with, if they're seeing competitive pressure or privacy changes make it more difficult, are going to have to flow dollars out. And that's another opportunity for us to go take the sales force and convert really low-hanging fruit onto our platform.

So you don't see it as temporary, I guess, is the bottom line.

I think with or without IDFA, this trend was already happening. We've seen -- if you just go to Facebook today, you'll see more e-commerce and crypto ads than you would gaming company ads.

Interesting. So can I talk about just -- you touched on a few of these points, but I just want to make sure it's crystal clear. So your Business Software Platform revenue, if you went back and you looked at that longitudinally, there is a period of time from '18 to '19 where it sort of dipped a bit. And I think what you said at the time was that was when you first started moving into publishing games, where some of your customers said, "Hey, there's a little bit of a conflict here." And then all of a sudden, it really began to accelerate like a little bit and then you started looking at the quarterly numbers. Is -- and I think you said on the last earnings call, the Adjust acquisition only contributed something like $22 million or something to the growth you put in the last quarter. So is all of that AXON? Is that your machine learning engine that really caused that acceleration? Or is there something else going on?

It's 100% that. Like even like as you look at the SPEC count double, that was driven by that 250%-plus net dollar retention number. These companies that were below that $125,000 a year annualized net revenue reported number, where if they were at $50,000, well, if it's 250%, they tip over the line. So we don't yet have the effect of new logos because the Adjust sales force was -- we closed it late April. So it was 2 months. We're just getting them integrated and out selling or cross-selling to our product. So that's growth for future quarters and future years. This is all driven by the machine learning being a much more powerful personalized ad solution on behalf of the advertisers that are buying in our platform.

And what did you mean, Adam, when you said we don't yet have the benefit -- you used the word logos. What does that mean?

Yes. New customers, so the new -- the whole point of the sales force is to bring us new customers. And we don't yet have contribution in the numbers because literally, we had them at the end of Q2 for 2 months. So first, they got to get trained and integrated in selling our product suite, and then they've got to go out and sell it. And then they got to bring in new advertisers that then go and invest enough dollars to learn and then scale and tip over that threshold of $125,000 to be contributing enough material dollars to drive value. That's something that we're confident is going to be a nice factor to future growth in the coming quarters and years.

Okay. And is there any sort of like long-term sort of aspirational target you have for business software revenue, not this year or next year but sort of an intermediate goal?

Yes. We gave the $600 million to $1 billion. The way we look at it, it's growing so quickly. It's hard to think long term as the numbers are getting this big. But the reality is, and this really comes from peer set, you've got numbers out there like 25% to 30% a year for 10-plus years as the potential. And the way we look at it is we've got every component and a leading solution on a growth platform. We've got a leading solution on the ad option with MAX, and we've got a leading solution on the attribution analytics. So we've got every component to do as well or better than all the peers, and we're in a leadership position right now. And the nice thing is we know that most of the users that are playing mobile games today are not seeing ads. That's going to create a lot of opportunity. And we also know that we have 200-some-odd software platform enterprise clients, and peers report 3, 4x that amount. And that's just a big differential. So we're the biggest in the market, the fastest growing, yet we're missing the clients still, which we're going to solve with the sales force. And we own the ad auction that's the fastest growing in the marketplace and arguably a leader and more inventories coming online. So as we look out, we see a good amount of time into the future of growth. And that's why we were confidently putting in our shareholder letter that our target is to grow cash flows 30% year-over-year, which is a big number as the numbers continue to get as large as they are.

Absolutely. That Adjust acquisition, if you looked at their sales force, is it sort of all sort of geographically concentrated in some area where you feel like you want to augment sort of organic sales hires? Or is it just -- right now, it's just, let's just get the Adjust salespeople trained, and that will sort of give us enough runway before there's any sort of incremental sales hires?

There's plenty of runway with the -- we're going from 1 to 250. So we're really ramping it up pretty big. But they're a lot more built out in Europe and East. And frankly, our brand is actually pretty strong in the Western hemisphere. So it's much more about going out and having them sell us to especially APAC developers, which are a huge part of the mobile app ecosystem at this point. And most of them don't know anything about us.

Okay. Yes, if I did the math right, the salespeople that work at Adjust sort of, on average, have about 12 clients. Is that right? And so the bogey is, can they just get 1 more on your platform? Is that math right sort of...

Yes. I mean, the nice thing is, yes, they've got -- the 3,000 have been handed off to account management and customer success. So the salespeople are out trying to sell new -- and these 3,000 are already paying them for mobile marketing, analytics and attribution software. So telling them, hey, of those, some high number of them don't work with AppLovin, go work with this new channel. The market's getting harder, you're going to want to. It's our parent company, by the way. We already have a contract in place, just extend some learning budget. It seems like it should be a pretty solvable sales pitch.

Okay. So I'm going to ask an IDFA -- serious IDFA question, which I'm sure you're tired of answering. One of the things that just confuses me about IDFA is the change that Apple made is pretty consistent, right? We all understand what went away if you were an advertiser. The slightly confusing thing is corporate's interpretations of what it meant is sort of all over the board, right? Some people say it's good for our business. Some people say it didn't really matter, some people say modestly negative. Like if you can just sort of pull the curtain back and maybe explain the narrative of what's going on. Like what should an investor -- if they're nervous about IDFA or excited about IDFA, what is the common element among all these companies that make some better than -- or some more apt to handle IDFA changes more effectively than others? I mean, how does that dovetail into how you interpret what IDFA will mean for AppLovin?

Yes. And I think we signaled this on the earnings calls. But it's complex because it just impacts different types of businesses differently. And we have a very diversified approach to the category. So we get impacted on one part and get a benefit on another part. And as I explained that, it might make sense on what's going on in the industry. In terms of pricing in CPMs, so cost per 1,000 impressions, which drives the ability of a publisher who runs the ads to monetize their inventory, that goes down automatically. Everybody is worse. We are worse -- there's not a company that says, "Take IDFA away and I can pay the publisher more."

Right.

You're just worse, right? Like so there's an immediate haircut. And it's less of a haircut than expected because consent rates are higher. Some of the dollars flow through to Android. But inevitably, if you monetize your inventory on iOS with us, you take a haircut. On the flip side, we have the software business. And in the software business, you've got this auction. So every eyeball that's monetized with an advertisement, especially with our software MAX, we drive through this real-time auction to allow the best marketing platform for that user in that moment in time to bid and drive the highest value to the publisher. And we never had third-party data in any sort of material sense to begin with. If we did, we wouldn't have gotten into gaming. That was the whole reason why we ended up driving the gaming strategy, right?

Right.

So because of that, we had less to lose than other platforms who need that third-party data to drive the algorithms. And so by having less to lose in a competitive market, we ended up seeing share gain. And obviously, the market's still growing, and it's beneficial for others as well. But our software business gets benefit from the change. Our business publishing business has headwinds from the change. That will hit a trough now and will recover over time, but certainly not to the place that it was at. And that's just the reality. And so you have to take a different lens to it, depending on the business that you're analyzing.

Okay. I have another inbound question. Do you mind if I just read this one?

Yes. Go for it.

"So Epic versus Apple ruling came out last week. How much are you paying Apple now? Is it 30% or lower than that because you get credits and kickbacks? Overall, how do we think about the benefit to you if the 30% goes down to, say, Windows' store or Steam's low-teens rate?"

Yes. I wish Apple would give us kickbacks for that business area. So we report this. And in consumer revenue, you've got the gross and then you've got the app store tax. And both platforms are straight 30% off the consumer revenue we report. And what we don't know yet long term is how it shakes out. But we do know the app stores right now charge subscription businesses 15%. They charge under $1 million a year. Mobile gaming business is 15%. Mobile gaming as a whole for big publishers has the highest tax. It's just straight 30%. There are no discounts against it. So with as much pressure as there is around the world, and this is only a U.S. ruling, but there is pressure in other big markets as well, the hope is, at least from a market perspective, that the platforms lower the take down to the teens level. 15% is already out there for other kinds of apps in nongaming categories. Why shouldn't it just be a consistent 15%? So let's say, economically, something like that happens. How does that impact our business? Well, the nice thing for the platforms and the market is that we think that facilitates a lot more growth. And this will be how it does. Every gaming company or any sort of marketing business now that's performance-based in mobile runs an LTV to cost about user acquisition approach. And everyone's running at return on investment models that they're comfortable with today. Otherwise, they wouldn't be spending the dollars. So if you take $1 and haircut it to $0.70 today, but tomorrow goes to $0.85, that's 20% more LTV that you can reinvest back into user acquisition, which just fuels growth. So we, on the gaming side, would go, "Okay. We got 20% more LTV, reinvest more dollars." Other companies that are gaming and being taxed with 30% will do the exact same thing. That will drive up more pricing competition in our software marketplace. That will drive up revenue. That also makes gaming, which is today the hardest hit by the tax category because there are no discounts, the biggest beneficiary. So mobile gaming businesses will get more competitive pricing-wise. They'll be able to buy more users, and a lot of users will come from other categories that could have otherwise better afforded to advertise to the consumer. So the whole audience grows, which benefits all parts of our business and the category in general, which then also flows back to the app stores. Because if that creates a flywheel of growth, the apps stores might, on an absolute basis long term, end up ahead despite taking less in the short term because the category has grown, because more dollars are reinvested into growth by the app store to the content creators.

That's really interesting. So your hypothesis is this -- if we end up seeing sort of broad-based changes to the app store fees, it's less about EBITDA margins and actually, ultimately, you think will accrue much more to better top line growth.

Yes. And long term, obviously, there's more margins because everyone -- hopefully, LTV to CAC model is not negative. So long term, the dollars will be there. And the reality is the growth will pick up. Some companies may say, "Hey, let's just pocket all of it or some of it." But it's unlikely because competitive and dynamic marketplaces like these are driven by a few movers. If a few of the companies start reinvesting aggressively and plug that incremental dollar into their user acquisition dollars that they're willing to invest, then all of a sudden, other companies will do that, too. And you'll start seeing just more aggression for the incremental user because you have 20% more LTV to go reinvest.

How does the gaming category sort of get pigeonholed with this highest tax where others ended up with a discount? Is that just a function of the fragmentation in the industry? Or is it...

I don't know. Yes, I wish I knew. I'm not sure. I'm not sure Epic knows, too. And maybe that's why a lot of this stuff happened.

Very good. So on the last quarterly call, you highlighted your sort of focus on the nongaming customers, right, sort of moving a little bit from gaming into nongaming. I get these -- field questions from investors, where they're sort of deeply skeptical about this. If you get investors to the point where you say, yes, AppLovin has a lot of data, it allows marketing dollars to be spent more effectively because they have sort of transaction data and behavioral data, it's very hard for investors conceptually to think about that data set and just say, okay, here is a gaming-centric data set, and I'm just going to go move over to a fitness app or a financial app or some other app. Why -- I mean, do you think it's easy or difficult? And if it is easier than the buy-side things, why?

Well, so I think -- and this is some of the misconception with the capabilities of technology. We have 400 million daily actives playing games that we see on the platform, and these are human beings. They're not just gamers, and they're doing a lot more than just playing games on their device. And traditionally, when -- pre having our own data in AXON, we had what we called the App Graph. Our SDK was integrated into most apps that are games that run ads to monetize. And so our SDKs are there to serve an app. Well, if the device downloaded a solitaire app, we knew that, that device downloaded a solitaire app. And the recommendation engine could say, users who download solitaire apps also download what else, probably puzzle games or word games or other solitary games. It couldn't have been a health and wellness app or a food delivery app because that has no relevancy. Well, now in today's world, we have that data. But we also know a user in the last week logged into Project Makeover 45 minutes a day, played a certain style and spent $50 and spread it out this way. And so what does that tell our platform? Well, a lot more than just the fact that they played a match-three game. It's deep engagement data and transactional data. And a user who is willing to spend and invest that kind of time in a match-three game that's built around fashion and design is likely to be middle-aged female, head of household and do a whole bunch more than just play that game, clearly has disposable income. So it could be a really good customer for a DoorDash or a health and wellness app, rideshare or whatever else a family would need. And so that's why the capacity of the platform has really increased. So we put numbers in the shareholder letter. The nongaming category is still small, so you can grow it faster. But quarter-over-quarter in Q2 versus Q1 grew over 100%, and we had that stack called out because we thought it was pretty compelling.

That's interesting. And if you sort of abstract just sort of the size of the overall market, and you just said, here's the gaming world and here's the nongaming world, what do you think the size of those ad pools are today?

It's very hard to quantify because you've got the $100 billion a year IAP gaming market that's just understood because of Sensor Tower and App Annie and App Store. And then you got this nongaming market that's driven by credit card transactions. And in terms of market cap, it's in the trillions. So how big is it really? We don't know. But in terms of ad dollars that are spent on Google or Facebook, some of the bigger companies, the vast majority is not in the gaming category. And that's just because there's more economic value for a DoorDash than a traditional gaming business. DoorDash's market cap is more than almost every gaming company that's been combined really, pretty close. And so if you look at the top 5 publicly traded recent IPOs in nongaming, with crypto and food delivery and some e-commerce mixed, then they're more than the entirety of the gaming market cap. So it's just a much bigger category. And it does provide the capacity for our platform to be more personalized with the ad solution now that it's working for nongaming companies. But also, that drives up pricing. If the game developer still wants to price compete with a crypto-based fintech app, then probably they have to pay more. And if they're willing to pay more because today, they're taking better margin on our platform than they are on a company that is more competitive because they've been selling their solution for a long time, our economics not only improve from the ad itself for a platform enterprise client nongaming, it drives up pricing, which improves the whole as well.

I've got a son who's in high school. And I always tell him like, if you're ever going to start a company, make sure that you don't pigeonhole yourself with the name of your company, right? Like McDonald's is better than Kentucky Fried Chicken because it's hard for a Kentucky Fried Chicken to sell something other than chicken. So I'm glad you called it AppLovin, right, because now we have the full waterfront of apps, right? It's not [indiscernible], right?

You're the first person in the world that's complemented me on that name choice. So thank you.

So maybe we -- can we talk a little bit about some of your evergreen titles that you have launched? And there's a couple that I think you're pretty excited about for the second half of this year.

Yes. So we called out a handful coming in. And this ties back to one of the things that people don't really quantify that often, at least mobile gaming businesses, how long it takes to develop a deep engagement IAP-based game. Usually, the development time is 18 to 24 months. A game like Project Makeover was 2 years in development, and then it launches. And then there's another 1 to 2 years to layer on live ops and incremental content to engage the consumer for years. So these are big investments in content to really scale up an IAP-based game. We ended up -- for the most part, most of our gaming studios that we've accumulated through acquisition or publishing, we didn't have a relationship with until 18 months ago or more recently. And so we have this big increase in R&D expense in our P&L. And the vast majority of that increase is these 3,000 mobile game developers across all these genres that we've accumulated that are investing in building new content. And we just haven't had enough time to get that content out to market. And our strategy originally was get talent across every genre. We need data and have them start executing on new game development. And so what we're excited by is that those new games will start coming to market going forward. And then hopefully, we'll have a constant pipeline. And we're talking about a handful in a matter of a couple of quarters, which is a lot more than what you typically get from most content creators.

And when you talk about evergreen titles, this is where you're actually the developer and the publisher, not just the publisher. Is that right?

Yes. We mean the developer and publisher or a publisher. It just depends on the contract. But we own the IP, the data. And for us, what's important in all of these relationships is that we own the end user. We own the data, and they have that first-party relationship with us as AppLovin.

There seems to be a rule of thumb in the industry where everyone has sort of used this $100 million of revenue as the definition of success for a mobile game. Why does everyone have that rule of thumb? What is so...

I don't know. It's an arbitrary number. But the reality is if you can get $100 million a year of consumers paying you, the average consumer might pay somewhere in the neighborhood of $20 a month or something to play these games. That's a lot of people paying for your content. So it's just a good framing to understand that if people are spending that much per year on a game, it's probably really high quality. And mobile games that are -- that reach that threshold over the years, and really, you can now -- there's enough data to look back 10 years on these types of evergreen titles, retain users for years and years and going on decade-plus. And that's something that maybe in our early days, investors didn't have confidence in. That people would still be playing a Candy Crush today 8, 9 years later after it launched, the same people are still playing it because they can continue to add content and live services. And that's the beautiful part about mobile gaming in this live interaction you end up with an audience that's really hooked in. So I think it's just the definition for quality.

Okay. So Adam, I'm going to make sure that Herald earns his paycheck today. So I'm going to softly force you to at least hand part of this question over to Herald so he doesn't sit silently in the background. But here's my question for either of you in all seriousness. You guys have put up really good numbers since you went public. And yet your -- the volatility in your stock price has just been, I don't want to say breathtaking, but unusual, let's put it that way. What -- I mean, what do you think -- is this just lockups? Is this just investors don't really understand the narrative yet? Like what would you attribute that volatility to? And what's going to be the key to sort of tamp the volatility down or just become sort of a more normal stock, for lack of a better word, in terms of the way it behaves?

Yes. We'd love it to be maybe abnormal in a better way. It's certainly been highly volatile. And look, we think it does come down to public markets are extremely busy, right? A lot of new issues coming out, a lot of names to follow and just the volatility in the underlying market itself, let alone any individual name. And we do have a very unique model, a unique model of having a software platform tied to a content business and where each side of the businesses both benefit from quite a bit of synergies from each. And then you get into, well, how do you value a business like that? When the majority of the revenue comes from your content business, but the majority, we think, of the enterprise value from a software business, both sides of the businesses are growing. And as you mentioned, look, in '18, '19 and even '20, our software business was only $200 million of revenue. And then this year, we say it's $600 million. Next year, it's $1 billion. So look, Adam and I are long-term investors. We actually invested even more in the volatility of our stock because we believe our strategy is one that will allow us to build a very large company. We think the strategy of having a software focus, the margin structure we have there, the content business now at critical mass and scale, we're getting great data, and we certainly want to expand that data pool. And we think the combination of the 2 will get there. So I think first for investors, looking at our shareholder letters from the first quarter and second quarter, we can really articulate, here's where we are in the strategy, here's the evidence to that. We launched a few new metrics to allow more clarity. I know metrics sometimes gets more complexity. But hopefully...

It's good. It's good.

We're driving value. And at the end of the day, we've been posting quarter after quarter after quarter, delivering on what we say we'll do. It will ultimately get us to the right stock price and hopefully remove some of the volatility.

Okay. Okay. Well, Adam, Herald, thank you very much for the time today, super informative discussion. I learned a lot. I hope our clients did as well. You guys have been very generous, so thank you.

Thanks for the invitation.

Thanks for having us.

Absolutely. Be well.