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AppLovin Turns 81% of New Sales Into Profit: Rapid Earnings Reaction
Key Points
AppLovin's net income rose 72% to about $1.44 billion in the third quarter.
Free cash flow grew more slowly than profit as cash tax payments climbed.
Fourth-quarter guidance calls for more sequential growth with steady margins.
AppLovin (NASDAQ:APP) grew third-quarter revenue 55% to about $2.2 billion, and profit grew faster. Shares rose about 18% in after-hours trading. The ad platform is turning nearly all of its growth into profit: About 81% of the added revenue became operating income, even as research spending more than doubled.
Key Numbers
- Revenue: about $2.18 billion, up 55% from $1.41 billion.
- Net income: about $1.44 billion, up 72% from $836 million.
- Free cash flow: about $1.42 billion, up 35% from $1.05 billion.
- Fourth-quarter revenue guidance: $2.37 billion to $2.4 billion, versus about $2.18 billion this quarter.
What It Means
AppLovin's costs barely move when revenue jumps. Total expenses rose only about $150 million, since running more ad spend through the same software costs little extra. That gives management room to spend heavily on research without squeezing margins.
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Free cash flow grew about half as fast as net income, and higher tax bills are a big reason. Cash paid for income taxes in the first nine months was more than five times last year's level. Rising receivables, the money customers owe as sales grow, also tie up cash. A much bigger share of profit now leaves as cash taxes.
Guidance says the momentum holds. The midpoint implies roughly 9% growth over the third quarter, with adjusted EBITDA margin expected to stay near this quarter's level. The board also expanded the buyback authorization, and repurchases have already shrunk the share count this year.
What to Watch Next
Watch whether free cash flow growth catches up to earnings growth next quarter. Also watch whether AppLovin starts breaking out revenue by advertiser type, since the release gives no split showing how much growth comes from outside gaming.
David Kretzmann has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.