Historically, AppLovin made most of its revenue from its portfolio of apps.
Now the company appears to be nearly finished with the bloodletting necessary to transform itself into a primarily software-focused business.
In Q1, AppLovin’s total revenue was $755 million, a near even split between apps (at roughly $360 million) and software (at $355 million). The company’s stock rose by more than 15% in after-hours trading on Wednesday.
Although software revenue was up 16% from last quarter, its app-related revenue has been dropping steadily quarter over quarter since Q1 last year, when total app revenue was $507 million.
This decline is by design.
Over the past year, AppLovin has been prioritizing its software platform and “optimizing” its apps portfolio – their word – which is a euphemism for restructuring and closing down several of its gaming studios, going from nearly 20 to around 11.
Managing an app portfolio of its own is no longer as strategic as it used to be. The cost of user acquisition has been on the rise, and privacy-related changes (looking at you, Apple) have taken their toll on the game app economy.
As in, it’s more profitable to sell mobile ad tech to developers than to exist on the hamster wheel of user acquisition campaigns and in-app monetization.
Going hard on software
Software is also a much higher-margin business than app publishing.
Over the past year, the operating margins on AppLovin’s software business have been more than 60% on average, whereas margins for apps were around 19% at the end of last year.
AppLovin anticipates that its software platform business will continue to grow, CFO Herald Chen told investors. That growth will be offset to some degree by negative performance of the apps business and the rollout of Axon 2.0.
Axon is AppLovin’s homegrown ad tech platform, using machine learning algorithms to predict which users are most likely to download an app and then targeting them. AppLovin released the first version of Axon, which it trained on first-party data from its content business, in 2021.
One of AppLovin’s ongoing investment priorities is to upgrade Axon, the next version of which is in the process of being released.
CEO Adam Foroughi likened the development of Axon and improvements to the platform as similar to OpenAI moving from ChatGPT3.5 to ChatGPT4, albeit at a much smaller scale.
“Our models can always be improved, and our entire business is powered by the evolution of our technology,” Foroughi said. “The enhancements to our machine learning and AI are not a one-time thing, but a series of upgrades over time.”
In addition to enhancing Axon, AppLovin is planning on invading Digital Turbine and ironSource’s turf by extending its marketing tools to phone carriers and device manufacturers through a suite of products called Array.
AppLovin is also working on adding connected TV supply to its mobile user acquisition platform, AppDiscovery, and charging for it on a cost-per-install basis rather than based on impressions.
It’s too early for AppLovin’s investment in CTV, which includes the acquisition last March of streaming video distribution platform Wurl, to have any significant impact on the company’s financial performance.
But “the data is strong,” Foroughi said.
“There hasn’t been a scaled performance-based solution in this category really ever,” he said. “And the advertisers that are leaning into it are excited by the potential of scaling that up.”
