AppLovin Corp (APP)

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Factors that could cause or contribute to such differences include those identified below and those discussed in the section titled “Risk Factors” and other parts of this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.

Overview

Our mission is to create meaningful connections between companies and their ideal customers. We provide end-to-end software and AI-powered solutions for businesses to reach, monetize and grow their global audience. We also operate a portfolio of owned mobile apps and accelerated our market penetration through an active acquisition and partnership strategy. Our scaled business model is intricately linked to the advertising ecosystem, providing a durable competitive advantage. We generate revenue when our advertisers achieve their return on spend targets with our Advertising solutions, ensuring that their success directly fuels our growth.

Since our founding in 2011, we have been focused on building Advertising solutions for advertisers to improve the marketing and monetization of their content. Our founders, who were mobile app developers themselves, quickly realized the real impediment to success and growth in the advertising ecosystem was a discovery and monetization problem—breaking through the congested app stores to efficiently find users and successfully grow their business. Their first-hand experience with these challenges led to the development of our infrastructure and Advertising solutions. We capitalized on our success and understanding of the mobile app ecosystem by entering into the mobile game apps industry in 2018. Our global diversified portfolio of apps now consist of over 200 free-to-play mobile games across five genres, run by ten studios.

For 2024, our revenue grew 43% year-over-year from 2023, from $3.3 billion in 2023 to $4.7 billion in 2024. For 2023, our revenue grew 17% year-over-year from 2022, from $2.8 billion in 2022 to $3.3 billion in 2023. We generated net income of $1.6 billion in 2024, net income of $356.7 million in 2023, and net loss of $192.9 million in 2022. We generated Adjusted EBITDA of $2.7 billion, $1.5 billion, and $1.1 billion in 2024, 2023, and 2022, respectively. Additionally, we have generated strong cash flows, with net cash provided by operating activities of $2.1 billion, $1.1 billion, and $412.8 million in 2024, 2023, and 2022, respectively. Given our strong financial position, we have been able to reinvest in our expansion and growth, and repurchase and withhold shares of our Class A common stock. See the section titled “Non-GAAP Financial Measures” for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated in accordance with GAAP.

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Recent Developments

On February 12, 2025, we announced that we entered into a term sheet for the sale of our mobile gaming business to a privately held company (the “Acquirer”) for total consideration of $900.0 million (the “Term Sheet”). The Term Sheet provides for the total consideration to consist of $400.0 million in shares of the Acquirer’s common equity and $500.0 million in cash, subject to customary purchase price adjustments. The Term Sheet also provides that the Acquirer will borrow up to $250.0 million of the cash portion of the total consideration and that, if the Acquirer is unable to obtain such financing, we agree to provide financing in such amount to the Acquirer through the issuance of a promissory note. The Term Sheet is non-binding, except with respect to an agreement by the parties to use commercially reasonable best efforts in good faith to negotiate and finalize definitive agreements for the proposed transaction, a prohibition on us from engaging in discussions or negotiations with any third party other than the Acquirer regarding the sale of our mobile gaming business for a specified period, and customary terms such as fees and expenses, governing law, and termination.

Our Business Model

We collect revenue from Advertising and our Apps. During the twelve months ended December 31, 2024, Advertising Revenue represented 68% of total revenue and Apps Revenue represented 32% of total revenue.

We report our operating results through two reportable segments: Advertising and Apps.

Our CODM, the Chief Executive Officer, evaluates performance of each segment based on several factors, of which the financial measures are segment revenue and segment adjusted EBITDA, as defined in Note 14 to our consolidated financial statements.

The Advertising and Apps segments provide a view into the organization of our business and generate revenue as follows:

Advertising Revenue

We primarily generate Advertising Revenue from fees paid by advertisers who use our Advertising solutions to grow and monetize their content. We are able to grow our Advertising Revenue by improving our various technologies.

Advertising clients include a wide variety of advertisers, from indie developer studios to some of the largest global internet platforms, such as Facebook and Google. We see multiple opportunities to gain new Advertising clients, and to increase spend from existing clients, as we help them grow their businesses and make them more successful.

Our Advertising solutions include AppDiscovery, MAX, Adjust, and Wurl. Clients use AppDiscovery to automate, optimize, and manage their user acquisition investments. They set marketing and user growth goals, and AppDiscovery optimizes their ad spend in an effort to achieve their return on advertising spend targets and other marketing objectives. AppDiscovery comprises the vast majority of Advertising Revenue. Revenue is generated from our advertisers, typically on a performance-basis, and shared with our advertising publishers, typically on a cost per impression model.

Advertising clients use MAX to optimize purchases of app advertising inventory. The MAX tool provides insights to manage against key performance indicators, understand the long-term value of users, and help manage profitability. Revenue from MAX is generated based on a percentage of client spend. As more advertising networks move to in-app real-time bidding, we expect growth in the adoption of, and revenue from, MAX.

Advertising clients use Adjust's measurement and analytics marketing platform to better understand their users' journey while allowing marketers to make smarter decisions through measurement, attribution and fraud prevention. Revenue from Adjust is primarily generated from an annual software subscription fee.

Advertising clients use Wurl's CTV platform to distribute streaming video, maximize Advertising Revenue, and acquire and retain viewers or subscribers. Revenue from Wurl is primarily generated from content companies, typically on a usage-based model.

Apps Revenue

Apps Revenue is generated when a user of one of our Apps makes an in-app purchase (“IAP") and when clients purchase the digital advertising inventory of our portfolio of Apps ("IAA"). We are able to grow our Apps Revenue by adding more apps to our Apps portfolio and increasing engagement on our existing Apps.

Our Apps are generally free-to-play mobile games and generate IAP Revenue through IAPs. IAPs consist of virtual goods used to enhance gameplay, accelerate access to certain features or levels, and augment other mobile game progression opportunities for the user. IAPs drive more engagement and better economics from our Apps. The vast majority of our IAP Revenue flows through two app stores, Apple App Store and Google Play, which charge us a standard commission on IAPs. IAP Revenue represented 68% of total Apps Revenue for the twelve months ended December 31, 2024.

During the twelve months ended December 31, 2024, we had an average of 1.6 million Monthly Active Payers ("MAPs") across our portfolio of Apps. Over that period, we had an Average Revenue Per Monthly Active Payer ("ARPMAP") of $51. See “Key Metrics” below for additional information on how we calculate MAPs and ARPMAP.

IAA clients that purchase advertising inventory from our Apps are able to target highly relevant users from our diverse and global portfolio of over 200 mobile games. Our clients leverage a broad set of high-performing mobile ad formats, including playable and rewarded video, and are able to match these ads with relevant users resulting in a better return on their advertising

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spend. By increasing the number of users and their engagement, as well as better matching ads with the appropriate target audience, we are able to increase our revenue from IAA clients that purchase advertising inventory from our Apps. IAA Revenue represented 32% of total Apps Revenue for the twelve months ended December 31, 2024.

Key Metrics

We review the following key metrics on a regular basis in order to evaluate the health of our business, identify trends affecting our performance, prepare financial projections, and make strategic decisions.

Monthly Active Payers ("MAPs"). We define a MAP as a unique mobile device active on one of our Apps in a month that completed at least one IAP during that time period. A consumer who makes IAPs within two separate Apps on the same mobile device in a monthly period will be counted as two MAPs. MAPs for a particular time period longer than one month are the average MAPs for each month during that period. We estimate the number of MAPs by aggregating certain data from third-party attribution partners.

Average Revenue Per Monthly Active Payer ("ARPMAP"). We define ARPMAP as (i) the total IAP Revenue derived from our Apps in a monthly period, divided by (ii) MAPs in that same period. ARPMAP for a particular time period longer than one month is the average ARPMAP for each month during that period. ARPMAP shows how efficiently we are monetizing each MAP.

The following table shows our Monthly Active Payers and Average Revenue Per Monthly Active Payer for the years ended December 31, 2024, 2023, and 2022:

Our key metrics are not based on any standardized industry methodology and are not necessarily calculated in the same manner or comparable to similarly titled measures presented by other companies. Similarly, our key metrics may differ from estimates published by third parties or from similarly titled metrics of our competitors due to differences in methodology. The numbers that we use to calculate MAPs and ARPMAP are based on internal data. While these numbers are based on what we believe to be reasonable judgments and estimates for the applicable period of measurement, there are inherent challenges in measuring usage and engagement. We regularly review and may adjust our processes for calculating our internal metrics to improve their accuracy.

Non-GAAP Financial Measures

Adjusted EBITDA and Adjusted EBITDA Margin

We define Adjusted EBITDA for a particular period as net income (loss) before interest expense and loss on settlement of debt, other income, net (excluding certain recurring items), provision for (benefit from) income taxes, amortization, depreciation and write-offs and as further adjusted for stock-based compensation expense, acquisition-related expense and transaction bonus, publisher bonuses, MoPub acquisition transition services, restructuring costs, loss on disposal of long-lived assets, and non-operating foreign exchange (gain) losses. We define Adjusted EBITDA margin as Adjusted EBITDA divided by revenue for the same period.

Adjusted EBITDA and Adjusted EBITDA margin are key measures we use to assess our financial performance and are also used for internal planning and forecasting purposes. We believe Adjusted EBITDA and Adjusted EBITDA margin are helpful to investors, analysts, and other interested parties because they can assist in providing a more consistent and comparable overview of our operations across our historical financial periods. In addition, these measures are frequently used by analysts, investors, and other interested parties to evaluate and assess performance. We use Adjusted EBITDA and Adjusted EBITDA margin in conjunction with GAAP measures as part of our overall assessment of our performance, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies, and to communicate with our board of directors concerning our financial performance.

Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures and are presented for supplemental informational purposes only and should not be considered as alternatives or substitutes to financial information presented in accordance with GAAP. These measures have certain limitations in that they do not include the impact of certain expenses that are reflected in our consolidated statement of operations that are necessary to run our business. Our definitions may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our Adjusted EBITDA and Adjusted EBITDA margin should be considered in addition to, not as substitutes for, or in isolation from, measures prepared in accordance with GAAP.

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The following table provides our Adjusted EBITDA and Adjusted EBITDA margin for 2024, 2023, and 2022, and a reconciliation of net income (loss) to Adjusted EBITDA:

1 Excludes recurring operational foreign exchange gains and losses.

2 In association with the MoPub acquisition, we incurred certain costs to incentivize publishers to migrate to our MAX mediation solution, including existing publishers of MoPub as well as publishers on other competitor offerings. We have not historically incurred significant publisher migration costs, nor do we currently intend to incur significant publisher migration costs in the future. As such, we have removed the impact of these costs from Adjusted EBITDA.

3 Reflects one-time transition services provided by Twitter to AppLovin.

Free Cash Flow

We define Free Cash Flow as net cash provided by operating activities less purchases of property and equipment and principal payment of finance leases. We use Free Cash Flow to help manage the health of our business, prepare budgets and for capital allocation purposes. We believe Free Cash Flow provides useful supplemental information to help investors understand underlying trends in our business and our liquidity. Free cash flow has certain limitations, including that it does not reflect our future contractual commitments. Our definition may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish Free Cash Flow or similar metrics. Thus, our Free Cash Flow should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP.

The following table provides our Free Cash Flow for 2024, 2023, and 2022, and a reconciliation of net cash provided by operating activities to Free Cash Flow:

Factors Affecting Our Performance

We believe that the future success of our business depends on many factors, including the factors described below. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in order to continue to grow profitably while maintaining strong cash flow.

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Continue to invest in innovation

We have made, and intend to continue to make, significant investments in our Advertising solutions to enhance their effectiveness and value proposition for our clients. We expect that these investments will require spending on research and development, and acquisitions and partnerships related to technology components and products. We believe investments in our technology, including our AI-powered advertising engine AXON, AppDiscovery, Adjust, and MAX, will further improve effectiveness for advertisers. In addition, we plan to continue to invest in the AI-based, self-learning capabilities of our advertising recommendation engine, AXON. Our investments will also allow us to enter into and expand into new verticals outside of gaming, such as e-commerce, CTV, original equipment manufacturer ("OEM"), and carrier-related markets. While our investments in research and development and acquisitions and partnerships may not result in revenue in the near term, we believe these investments position us to increase our revenue over time.

Retain and grow existing clients

We rely on existing clients for a significant portion of our revenue. As we improve our Advertising solutions and Apps, we can attract additional spend from these clients. Our clients include indie studio developers and some of the largest advertising platforms in the world. We believe there is significant room for us to further expand our relationships with these clients and increase their usage of our Advertising solutions.

In the past, our clients have generally increased their usage of our Advertising solutions and Apps, and as a result, growth from existing clients has been a primary driver of our revenue growth. We must continue to retain our existing clients and expand their spend with us over time to continue to grow our revenue, increase profitability and drive greater cash flow.

Add new clients globally

Our future success depends in part on our ability to acquire new clients. In 2024, 43% of our revenue was generated from outside of the United States. We believe that the global opportunity is significant and will continue to expand as developers and advertisers outside the United States adopt our Advertising solutions and advertise on our Apps. We also see opportunities to acquire new clients outside of mobile gaming, as the capabilities of our Advertising solutions are relevant to the broader advertising ecosystem. We are investing in direct sales, product development, education, and other capabilities to drive increased awareness and adoption of our Advertising solutions and Apps, which investments may impact our profitability in the near term as we seek further scale.

Continued execution of strategic partnerships

We continue to explore strategic partnership opportunities related to our Software Platform and the expansion of the markets it serves and we may from time to time evaluate strategic acquisitions and partnerships opportunistically. From the beginning of 2018 through 2024, we have invested approximately $4.1 billion in 33 strategic acquisitions and partnerships with mobile app developers and for technologies or relationships to enhance our Advertising solutions, including the acquisition of MAX in 2018, Adjust in April 2021, MoPub in January 2022, and Wurl in April 2022. We believe our future results of operations will be affected by our ability to continue to identify and execute such strategic transactions that are accretive to our growth and profitability.

Growth and structure of the mobile app and advertising ecosystems

Our business and results of operations will be impacted by industry factors that drive the overall performance of the mobile app and advertising ecosystems. Mobile app developers, including AppLovin, rely on third-party platforms, such as the Apple App Store and Google Play Store, among others, to distribute games, collect payments made for IAPs, and target users with relevant advertising. We expect this to continue for the foreseeable future. These third-party platforms have significant market power and discretion to set platform fees, select which apps to promote, and decide how much consumer information to provide to advertising networks that enable our Advertising solutions to target users with personalized and relevant advertising and allocate marketing campaigns in an efficient and cost-effective manner. Any changes made in the policies of third-party platforms could drive rapid change across the mobile app and advertising ecosystems. For example, in April 2021, Apple started implementing its application tracking transparency framework that, among other things, requires users' opt-in consent for certain types of tracking. While this transparency framework has not had a significant impact on our overall business, it may do so in the future, including with respect to the effectiveness of our advertising practices and/or our ability to efficiently generate revenue for our Apps. We rely in part on Identifier for Advertisers ("IDFA") to provide us with data that helps our Advertising solutions better market and monetize Apps. In light of the IDFA and transparency changes, we made changes to our data collection practices. To the extent we are unable to utilize IDFA or a similar offering, or if the transparency changes and any related opt-in or other requirements result in decreases in the availability or utility of data relating to Apps, our Advertising solutions may not be as effective, we may not be able to continue to efficiently generate revenue for our Apps, and our revenue and results of operations may be harmed. Additionally, Apple implemented new requirements for consumer disclosures regarding privacy and data processing practices in December 2020, which has resulted in increased compliance requirements and could result in decreased usage of our Apps. Apple incorporated new SDK privacy controls into iOS 17, which was released in September 2023, including privacy manifests and signatures designed to allow app developers to outline the data practices for SDKs embedded in their apps, manage tracking domains within SDKs, and curb device fingerprinting by requiring app developers to select allowed reasons for using data received through certain APIs. In February 2022, Google announced its Privacy Sandbox initiative for Android, a multi-year effort expected to restrict tracking activity and limit advertisers' ability to collect app and user data across Android devices. In January 2024, Google commenced rolling out a Chrome feature, called Tracking Protection, which limits

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cross-site tracking. In May 2023, Google announced new consent management platform ("CMP") requirements for ads served in the European Economic Area ("EEA") and UK, which requires, as of January 2024, publishers using Google AdSense, Ad Manager, or AdMob to use a CMP that has been certified by Google and has integrated with the Interactive Advertising Bureau's ("IAB") Transparency and Consent Framework when serving ads to users in the EEA or the UK. While to date these third-party platform privacy changes have had some impact on the discoverability of apps across these platforms and have had a relatively muted aggregate impact on our results of operations, the ultimate impact of these or any similar or future changes to the policies of Apple or Google could adversely affect our business, financial condition, and results of operations.

New tools for developers, industry standards, and platforms may emerge in the future. We believe our focus on the advertising ecosystem has allowed us to understand the needs of our clients and our relentless innovation has enabled us to quickly adapt to changes in the industry and pioneer new solutions. We must continue to innovate and stay ahead of developments in the advertising and mobile app ecosystems in order for our business to succeed and our results of operations to continue to improve.

Components of Results of Operations

Revenue

We generate Advertising Revenue primarily from fees collected from advertisers spending on AppDiscovery, typically on a performance basis, then shared with our advertising publishers, typically on a cost per impression basis. Advertising Revenue also includes fees generated based on a percentage of client spend through MAX and subscription fees for Adjust's measurement and analytics marketing platform. Revenue from other services under Advertising was not material.

We generate Apps Revenue from IAPs made by the users within our Apps and from IAA generated from advertisers that purchase advertising inventory from our diverse portfolio of Apps. IAA Revenue from our Apps was 32%, 31%, and 33% of total Apps Revenue in 2024, 2023, and 2022, respectively.

Cost of Revenue and Operating Expenses

Cost of revenue. Cost of revenue consists primarily of payment processing fees related to IAP Revenue, amortization of acquired technology-related intangible assets, amortization of finance lease right-of-use assets related to certain servers and networking equipment and data center costs related primarily to third-party cloud computing services. The fees for IAPs are processed and collected by third-party distribution partners. We expect our cost of revenue to increase in absolute dollars over the long term as our business and revenue continue to grow. We also expect our cost of revenue as a percentage of revenue to fluctuate period-over-period.

Sales and marketing. Sales and marketing expenses consist primarily of user acquisition costs, marketing programs and other advertising expenses, professional services costs related to the marketing of apps by third parties, personnel-related expenses including salaries, employee benefits, and stock-based compensation for employees engaged in sales and marketing activities, amortization of acquired user-related intangible assets, travel and allocated facilities and information technology costs.

We plan to continue to invest in sales and marketing to grow our Advertising customer base and increase brand awareness. We expect sales and marketing expenses to fluctuate period-over-period as we launch new games. We also expect our sales and marketing expenses as a percentage of revenue to fluctuate period- over-period in the near term as we invest to grow our customer base and increase brand awareness, and to decrease over the long term as we benefit from greater scale.

Research and development. Research and development expenses consist primarily of product development costs, including personnel-related expenses such as salaries, employee benefits, and stock-based compensation for employees engaged in research and development activities, professional services costs related to development of new apps by third parties, consulting costs, regulatory compliance costs, and allocated facilities and information technology costs.

We plan to continue to invest in research and development to continue to enhance our Advertising solutions and to improve existing games and develop new games. We expect our research and development expenses as a percentage of revenue to fluctuate period-over-period in the near term as we invest to enhance our Advertising solutions and improve our existing Apps and develop new Apps, and to decrease over the long term as we benefit from greater scale.

General and administrative. General and administrative expenses consist primarily of costs incurred to support our business, including personnel-related expenses such as salaries, employee benefits, and stock-based compensation for employees engaged in finance, accounting, legal, human resources and administration, professional services fees for legal, accounting, recruiting, and administrative services (including acquisition-related expenses), insurance, travel, and allocated facilities and information technology costs.

We plan to continue to invest in our general and administrative function to support the growth of our business. We expect our general and administrative expenses as a percentage of revenue to fluctuate period-over-period in the near term as we invest to support the growth of our business, and to decrease over the long term as we benefit from greater scale.

Other Income and Expenses

Interest expense and loss on settlement of debt. Interest expense and loss on settlement of debt consists primarily of interest expense associated with our outstanding debt, including accretion of debt discount and issuance costs.

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Other income, net. Other income, net, primarily includes interest earned on our cash and cash equivalents, fair value adjustments relating to our non-marketable equity securities, and foreign currency gains and losses.

Provision for (benefit from) income taxes. We are subject to income taxes in the United States and foreign jurisdictions in which we do business. These foreign jurisdictions have different statutory tax rates than those in the United States. Additionally, certain of our foreign earnings may also be taxable in the United States. Accordingly, our effective tax rate will vary depending on the relative proportion of foreign to domestic income, impacts from acquisition restructuring, deduction benefits related to foreign-derived intangible income, future changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws. Additionally, our effective tax rate can vary based on the amount of pre-tax income or loss.

Results of Operations

In this section, we discuss the results of our operations for the year ended December 31, 2024 compared to the year ended December 31, 2023.

The following tables summarize our consolidated statement of operations:

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1 Includes stock-based compensation expense as follows:

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2 Includes amortization expense related to acquired intangibles as follows:

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The following table sets forth the components of our consolidated statements of operations for each of the periods presented as a percentage of revenue1:

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1 Totals of percentages of revenue may not foot due to rounding.

Comparison of Our Results of Operations for the Twelve Months Ended December 31, 2024, 2023, and 2022

Revenue

For the twelve months ended December 31, 2024, our Advertising Revenue increased by $1.4 billion, or 75%, from the prior year period primarily due to improved AppDiscovery performance, where the volume of installations increased 50% and net revenue per installation increased 22% compared to the prior year period. We do not recognize Advertising Revenue from transactions with our studios.

For the twelve months ended December 31, 2024, our Apps Revenue increased by $43.9 million, or 3%, from the prior year period. Our IAA Revenue from Apps increased by $30.2 million, or 7%, compared to the prior year period, due to a 34% increase in the volume of advertising impressions, partially offset by a 20% decrease in price per advertising impression. We do not recognize IAA Revenue from transactions with our studios. For the twelve months ended December 31, 2024, our IAP Revenue from Apps increased by $13.6 million, or 1%, from the prior year period, primarily due to a 3% increase in price per in-app purchase, partially offset by a 2% decrease in the volume of in-app purchases. We do not recognize IAA Revenue from transactions with our studios.

For the twelve months ended December 31, 2023, our Advertising Revenue increased by $792.6 million, or 76%, from the prior year period primarily due to publisher bonuses of $209.6 million accounted for as a reduction to revenue in the prior year period. The increase in Advertising Revenue was also due to improved AppDiscovery performance, where installations increased 17% and net revenue per installation increased 35% compared to the prior year period. We do not recognize Advertising Revenue from transactions with our studios.

For the twelve months ended December 31, 2023, our Apps Revenue decreased by $326.6 million, or 18%, from the prior year period. For the twelve months ended December 31, 2023, our IAP Revenue from Apps decreased by $190.1 million, or 16%, from the prior year period, primarily due to a 12% decrease in the volume of IAPs and a 5% decrease in price per IAP. Our IAA Revenue from Apps decreased by $136.4 million, or 23%, compared to the prior year period, due to a 45% decrease in price per advertising impression, partially offset by a 39% increase in the volume of advertising impressions. We do not recognize IAA Revenue from transactions with our studios.

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Cost of revenue

Cost of revenue in 2024 increased by $107.6 million, or 10%, compared to 2023. The increase in 2024 was primarily due to an increase in expenses associated with operating our network infrastructure driven by the growth in our Advertising operations of $141.4 million, partially offset by a decrease of $44.5 million in amortization and impairment of intangible assets resulting from the end of the useful life of certain intangible assets.

Cost of revenue in 2023 decreased by $196.9 million, or 16%, compared to 2022. The decrease in 2023 was primarily due to a decrease of $192.3 million in amortization and impairment of intangible assets resulting from the sale of certain assets within our Apps segment during the second half of 2022 and a decrease of $50.0 million in third-party payment processing fees as a result of the decline in IAP revenue, offset by an increase in expenses associated with operating our network infrastructure driven by the growth in our Software Platform operations of $42.7 million.

Sales and marketing

Sales and marketing expenses in 2024 increased by $18.5 million, or 2%, compared to 2023 due primarily to an increase of $10.3 million in depreciation and amortization driven by write-offs of certain intangible assets, an increase of $9.4 million increase in personnel-related expenses primarily related to an increase in stock-based compensation related payroll costs and an increase of $9.6 million in professional services costs associated with the marketing of apps by third parties. This was partially offset by a decrease of $17.9 million in user acquisition costs.

Sales and marketing expenses in 2023 decreased by $88.8 million, or 10%, compared to 2022 primarily due to a $126.5 million decrease in user acquisition costs and a $12.3 million decrease in professional services costs associated with the strategic review and optimization of our Apps segment, offset by a $47.5 million increase in personnel-related expense primarily due to an increase in stock-based compensation.

Research and development

Research and development expenses in 2024 increased by $46.3 million, or 8%, compared to 2023. The increase was primarily due to an increase of $44.9 million in personnel-related expenses related to an increase in stock-based compensation related payroll costs.

Research and development expenses in 2023 increased by $84.8 million, or 17%, compared to 2022. The increase was primarily due to an increase of $145.5 million in personnel-related expenses related to an increase in stock-based compensation expense as a result of an increase in headcount, offset by a decrease of $67.1 million in professional services costs due to the optimization and sale of certain assets within our Apps segment.

General and administrative

General and administrative expenses in 2024 increased by $28.5 million, or 19% compared to 2023. The increase was primarily due to $12.7 million in personnel-related expenses related to an increase in stock-based compensation related payroll costs and an increase of $11.7 million in legal-related costs.

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General and administrative expenses in 2023 decreased by $29.0 million, or 16% compared to 2022. The decrease was primarily due to $12.7 million in acquisition-related costs in 2022 and a decrease of $6.7 million in professional services costs primarily associated with acquisition support.

Interest expense and loss on settlement of debt

In 2024, interest expense and loss on settlement of debt increased by $42.6 million, or 15%, compared to 2023. This increase was due to loss on extinguishment of debt of $28.4 million in the current period. In addition, the prior year period includes a net gain of $15.8 million related to interest rate swaps.

In 2023, interest expense and loss on settlement of debt increased by $103.8 million, or 60%, compared to 2022. This increase was primary driven by $99.5 million due to an increase in interest rate and $4.3 million in loss on settlement of debt resulting from a debt refinancing transaction during the period.

Other income, net

In 2024, other income, net increased by $12.8 million compared to 2023. The increase was primarily due to the loss on fair value remeasurement of $20.7 million from the impairment of non-marketable equity securities in the prior year period, partially offset by a decrease in interest income of $10.2 million due to a reduction in average cash balances held during the period.

In 2023, other income, net decreased by $6.4 million compared to 2022. The decrease was primarily due to the loss on fair value remeasurement of $20.7 million from the impairment of non-marketable equity securities and an expense resulting from a debt refinancing transaction of $11.0 million, offset by an increase in interest income of $23.2 million and an increase in net foreign currency gains and losses of $4.4 million.

Provision for (benefit from) Income Taxes

In 2024, tax provision for income taxes decreased by $27.6 million, or 116%, compared to 2023. The decrease in tax provision was primarily driven by an increase of $172.9 million of stock-based compensation benefit, a benefit of $123.2 million due to foreign income taxed at a different rate, an increase of $31.5 million in the research and development credit, offset by an increase of $251.0 million due to higher pre-tax book income of $1.6 billion in 2024 as compared to pre-tax book income of $380.6 million in 2023, and an increase of $34.7 million related to increase in Global Intangible Low-Taxed Income.

In 2023, tax provision for income taxes increased by $36.1 million, or 295%, compared to 2022. The increase in tax provision was primarily driven by an increase of $119.0 million due to the tax impact on the pre-tax income of $380.6 million in 2023 as compared to pre-tax loss of $205.2 million in 2022, offset by $65.7 million related to foreign rate differential and income inclusion, an increase of $16.5 million related to increase in Global Intangible Low-Taxed Income offset by an increase in foreign tax credit, an increase of $25.9 million of stock-based compensation benefit, and an increase of $13.3 million in the research and development credit.

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Comparison of our Segment Results of Operations

The following table presents the results for our Advertising and Apps segment adjusted EBITDA for the periods indicated:

Twelve Months Ended December 31, 2024 Compared to Twelve Months Ended December 31, 2023

The $1.2 billion, or 91%, increase in Advertising Adjusted EBITDA for 2024 was primarily driven by an increase in Advertising Revenue of $1.4 billion, partially offset by an increase of $141.3 million in expenses associated with our network infrastructure and an increase of $33.3 million in personnel-related expenses.

The $50.1 million, or 22%, increase in Apps Adjusted EBITDA for 2024 was primarily driven by an increase in Apps Revenue of $43.9 million, a $17.9 million decrease in user acquisition costs, and a $7.7 million decrease in third-party payment processing fees paid associated with IAPs, partially offset by an $18.2 million increase in professional services costs related to marketing, development and maintenance of apps by third parties.

Twelve Months Ended December 31, 2023 Compared to Twelve Months Ended December 31, 2022

The $467.3 million, or 58%, increase in Advertising Adjusted EBITDA for 2023 was primarily driven by an increase in Advertising Revenue of $792.6 million, partially offset by an increase of $49.5 million in expenses associated with our network infrastructure and an increase of $46.6 million in personnel-related expenses related to an increase in stock-based compensation expense as a result of an increase in headcount. In addition, Advertising Adjusted EBITDA for 2022 has been adjusted to exclude one-time publisher bonuses of $209.6 million for the year ended December 31, 2022.

The $27.8 million, or 11%, decrease in Apps Adjusted EBITDA for 2023 was primarily driven by a decrease in Apps Revenue of $326.6 million, offset by a $126.7 million decrease in user acquisition costs, an $84.1 million decrease in professional services costs related to marketing, development and maintenance of apps by third parties, a $50.0 million decrease in third-party payment processing fees paid associated with IAPs, and a $15.9 million decrease in personnel-related expenses.

Liquidity and Capital Resources

As of December 31, 2024, we had cash and cash equivalents of $741.4 million, consisting primarily of cash on deposit with banks and short-term liquid investments in money market deposit accounts. We believe that our existing cash and cash equivalents, cash flows expected to be generated by our operations, and, if necessary, our borrowing capacity under our 2024 Credit Agreement that provides for $1.0 billion of unsecured revolving credit facility, would be sufficient to satisfy our anticipated working capital and capital expenditures needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our revenue growth rate; sales and marketing activities; timing and extent of spending to support our research and development efforts; capital expenditures to purchase hardware and software; our continued need to invest in our IT infrastructure to support our growth; and the volume and timing of our stock repurchases. In addition, we may enter into additional strategic partnerships as well as agreements to acquire or invest in teams and technologies, including intellectual property rights, which could increase our cash requirements. As a result of these and other factors, we may be required to seek additional equity or debt financing sooner than we currently anticipate. See the section titled “Risk Factors—Risks Related to Financial and Accounting Matters” for more information regarding risks related to liquidity and capital resources.

The following table summarizes our cash flows for the periods indicated:

Operating Activities

Net cash provided by operating activities was $2.1 billion for 2024, primarily consisting of $1.6 billion of net income, adjusted for certain non-cash items, such as $448.7 million of amortization, depreciation and write-offs, $369.4 million of stock-based compensation expense, $28.4 million of loss on settlement of debt, $12.7 million of change in operating right of use asset, partially offset by a net decrease in the operating assets and liabilities of $349.5 million.

Net cash provided by operating activities was $1.1 billion for 2023, primarily consisting of $356.7 million of net income, adjusted for certain non-cash items, such as $489.0 million of amortization, depreciation and write-offs, $363.1 million of stock-

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based compensation expense, $28.0 million of impairment of non-marketable equity securities, $17.8 million of change in operating right of use asset, and $9.4 million of amortization of debt issuance costs and discount partially offset by a net increase in the operating assets and liabilities of $208.7 million.

The improvement in cash flows from operating activities during 2024 compared to 2023 was primarily due to an increase in cash collection from our customers driven by the increase in revenue, partially offset by higher cash operating expenses, primarily related to data center and payroll related costs, as well as higher interest payments due to an increase of debt.

Investing Activities

Net cash used in investing activities was $106.8 million for 2024, primarily consisting of $77.0 million in purchases of non-marketable investments and $25.6 million related to contingent considerations for prior acquisitions and capitalized software development costs.

Net cash used in investing activities was $77.8 million for 2023, primarily consisting of $63.9 million related to contingent considerations for prior acquisitions and capitalized software development costs, and $17.9 million in purchases of non-marketable investments.

Financing Activities

Net cash used in financing activities was $1.7 billion for 2024, primarily consisting of $4.2 billion of principal repayments of debt, $1.1 billion of payments for withholding taxes related to net share settlement of equity awards, and $981.3 million of stock repurchases, partially offset by $4.6 billion of proceeds from issuance of debt.

Net cash used in financing activities was $1.6 billion for 2023, primarily consisting of $1.2 billion of stock repurchases, $498.0 million of principal repayments of debt, and $246.4 million of payments for withholding taxes related to net share settlement of equity awards, partially offset by $395.3 million of proceeds from issuance of debt.

Credit Agreement

In December 2024, we entered into an unsecured credit agreement (the "2024 Credit Agreement"), which provided for a $1.0 billion unsecured revolving credit facility maturing on December 5, 2029, with the option for two one-year extensions as permitted under the agreement. The 2024 Credit Agreement replaced the existing credit agreement, originally entered into in August 2018 and subsequently amended multiple times. As of December 31, 2024, no amounts had been borrowed under the 2024 Credit Agreement. For additional information on the 2024 Credit Agreement, see Note 9 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Long-term Debt

As of December 2024, we had outstanding long-term debt in the form of senior unsecured notes for an aggregate principal amount of $3.6 billion. These notes were issued in multiple series, which mature from 2029 to 2035 and bear fixed annual interest rates ranging from 5.125% to 5.950%, with interest payments due semi-annually in arrears on June 1 and December 1 of each year, beginning on June 1, 2025. For additional information, see Note 9 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Stock Repurchase Program

During 2024, our board of directors authorized increases to our stock repurchase program of an aggregate amount of $3.3 billion, which additional amount may be repurchased from time to time subject to a limitation in any fiscal quarter of the amount of our Free Cash Flow in the preceding fiscal quarter and compliance with applicable law and any contractual restrictions. As of December 31, 2024, $2.3 billion remained available and authorized for repurchases under our stock repurchase program. For additional information on the stock repurchase program, see Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Contractual Obligations

As of December 31, 2024, we had non-cancellable purchase obligations primarily related to an agreement for third-party cloud computing services of $1.2 billion, with $438.9 million payable within twelve months. For additional information, see Note 5 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

As of December 31, 2024, we had non-cancelable payments related to leases of servers and networking equipment of $184.1 million, with $30.5 million payable within twelve months. For additional information, see Note 8 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

As of December 31, 2024, we had non-cancellable payments related to leases of office facilities of $51.4 million, with $16.8 million payable within twelve months. For additional information, see Note 8 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

As of December 31, 2024, we had unfunded commitments of $21.5 million related to investments in certain private equity funds, which may be called from time to time by the funds. For additional information, see Note 3 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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As of December 31, 2024, we had a non-cancelable payment related to a third-party intellectual property license of $12.8 million, which was paid in January 2025.

As of December 31, 2024, we had certain contingent consideration arrangements related to our prior acquisitions, with payouts contingent on the profit or revenue generated by the relevant Apps. We do not expect these payouts to have a material impact on our cash flows.

Taxes

As of December 31, 2024, we had recorded liabilities of $60.9 million related to uncertain tax positions. Due to uncertainties in the timing of potential tax audits, the timing of the resolution of these positions is uncertain and we are unable to make a reasonable estimate of the timing of payments in individual years particularly beyond 12 months.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities revenue, expenses and related disclosures. On an ongoing basis, we evaluate our estimates based on assumptions that are believed to be reasonable under the circumstances. These estimates are inherently subject to judgment and actual results could differ materially from those estimates.

An accounting estimate is considered critical if it involves significant subjectivity and judgment, and if changes in the estimate have had or are reasonably likely to have a material effect on our consolidated financial statements. We believe the following estimates are subject to a greater degree of judgment and complexity and have the greatest potential impact on our consolidated financial statements. For additional information on all of our significant accounting policies, see Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Goodwill and Intangible Assets

We assess goodwill for impairment at the reporting unit level annually during the fourth quarter, or more frequently if events or changes in circumstances indicate potential impairment. Similarly, we evaluate intangible assets for impairment at the asset group level whenever indications suggest that their carrying amounts may not be recoverable. These impairment assessments involve both qualitative and quantitative evaluations.

The qualitative evaluation considers factors such as financial performance, macroeconomic conditions, industry trends, and other relevant events that may impact an reporting unit or asset group. If qualitative assessments suggest a potential impairment, we proceed with a quantitative assessment, which involves significant estimates and assumptions including projected future cash flows, risk-adjusted discount rates, economic and market conditions, and appropriate market comparables, among others. Additionally, we apply judgment and assumptions in allocating shared assets and liabilities to determine the carrying values of each reporting unit or asset group. Furthermore, we review and reassess the estimated remaining useful lives of intangible assets if significant events or changes in circumstances indicate a need to revise the remaining amortization periods.

Stock-Based Compensation

We measure and recognize stock-based compensation expense for share-based awards, primarily including restricted stock units ("RSUs"), performance-based RSUs with both service and market-based conditions, stock options and stock purchase rights granted under the Employee Stock Purchase Plan, based on the grant-date fair value of the awards. To estimate the grant-date fair value, we may use different valuation models such as the Black-Scholes option valuation model or the Monte Carlo valuation model that require various assumptions including, among others, the expected stock price volatility, the risk-free interest rate, the expected dividend yield, the discount for awards subject to post-vesting restrictions.

Income Taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We recognize deferred tax assets to the extent that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize deferred tax assets in the future in excess of their net recorded amount, an adjustment to the deferred tax asset valuation allowance would be made to reduce the provision for income taxes.

We record uncertain tax positions on the basis of a two-step process in which determinations are made (i) whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with a tax authority.

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We recognize interest and penalties related to unrecognized tax benefits in the income tax expense line in our consolidated statement of operations. Accrued interest and penalties are included in the other non-current liabilities line in the consolidated balance sheet.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the dates of the statement of financial position included in this Annual Report on 10-K.

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Factors that could cause or contribute to such differences include those identified below and those discussed in the section titled “Risk Factors” and other parts of this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.

Overview

Our mission is to create meaningful connections between companies and their ideal customers. We provide end-to-end software and AI-powered solutions for businesses to reach, monetize and grow their global audience. We also operate a portfolio of owned mobile apps and accelerated our market penetration through an active acquisition and partnership strategy. Our scaled business model sits at the nexus of the advertising ecosystem, which creates a durable competitive advantage that has fueled our clients’ success and our strong growth.

Since our founding in 2011, we have been focused on building a software-based platform for advertisers to improve the

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marketing and monetization of their content. Our founders, who were mobile app developers themselves, quickly realized the real impediment to success and growth in the advertising ecosystem was a discovery and monetization problem—breaking through the congested app stores to efficiently find users and successfully grow their business. Their first-hand experience with these challenges led to the development of our infrastructure and Software Platform. We capitalized on our success and understanding of the mobile app ecosystem by entering into the mobile game apps industry in 2018. Our global diversified portfolio of apps now consist of over 200 free-to-play mobile games across five genres, run by eleven studios.

For 2023, our revenue grew 17% year-over-year from 2022, from $2.82 billion in 2022 to $3.28 billion in 2023. For 2022, our revenue grew 1% year-over-year from 2021, from $2.79 billion in 2021 to $2.82 billion in 2022. We generated net income of $356.7 million in 2023, net loss of $192.9 million in 2022, and net income of $35.3 million in 2021. We generated Adjusted EBITDA of $1.5 billion, $1.1 billion, and $726.8 million in 2023, 2022 and 2021, respectively. Additionally, we have generated strong cash flows, with net cash provided by operating activities of $1.1 billion, $412.8 million, and $361.9 million in 2023, 2022, and 2021, respectively. Given our strong financial position, we have been able to reinvest in our expansion and growth and consummate strategic acquisitions and partnerships. See the section titled “Non-GAAP Financial Measures” for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated in accordance with GAAP.

In February 2022, our board of directors authorized a share repurchase program to repurchase $750.0 million of our Class A common stock, which was increased by $296.0 million in May 2023, $447.6 million in August 2023, and $1.25 billion in February 2024. As of December 31, 2023, we had repurchased $1,153.6 million of our class A common stock. We will continuously evaluate efficient alternatives to using cash on hand to fund the program, including accessing the capital markets, subject to market conditions.

Our Business Model

We collect revenue from our Software Platform and our Apps. During the twelve months ended December 31, 2023, Software Platform Revenue represented 56% of total revenue and Apps Revenue represented 44% of total revenue.

We report our operating results through two reportable segments: Software Platform and Apps. Prior to the second quarter of 2022, we had a single operating and reportable segment.

Our CODM, the Chief Executive Officer, evaluates performance of each segment based on several factors, of which the financial measures are segment revenue and segment adjusted EBITDA, as defined in Note 14 to our consolidated financial statements.

The Software Platform and Apps segments provide a view into the organization of our business and generate revenue as follows:

Software Platform Revenue

We primarily generate Software Platform Revenue from fees paid by advertisers who use our Software Platform to grow and monetize their content. We are able to grow our Software Platform Revenue by improving our various software technologies.

Software Platform clients include a wide variety of advertisers, from indie developer studios to some of the largest global internet platforms, such as Facebook and Google. We see multiple opportunities to gain new Software Platform clients, and to increase spend from existing clients, as we help them grow their businesses and make them more successful.

Our Software Platform includes AppDiscovery, MAX, Adjust, and Wurl. Clients use AppDiscovery to automate, optimize, and manage their user acquisition investments. They set marketing and user growth goals, and AppDiscovery optimizes their ad spend in an effort to achieve their return on advertising spend targets and other marketing objectives. AppDiscovery comprises the vast majority of revenue from our Software Platform. Revenue is generated from our advertisers, typically on a performance-basis, and shared with our advertising publishers, typically on a cost per impression model.

Software Platform clients use MAX to optimize purchases of app advertising inventory. The MAX tool suite provides insights to manage against key performance indicators, understand the long-term value of users, and help manage profitability. Revenue from MAX is generated based on a percentage of client spend. As more developers move to in-app bidding monetization, we expect growth in the adoption of, and revenue from, MAX.

Software Platform clients use Adjust's measurement and analytics marketing platform to better understand their users' journey while allowing marketers to make smarter decisions through measurement, attribution and fraud prevention. Revenue from Adjust is primarily generated from an annual software subscription fee.

Software Platform clients use Wurl's CTV platform to distribute streaming video, maximize advertising revenue, and acquire and retain viewers or subscribers. Revenue from Wurl is primarily generated from content companies, typically on a usage-based model.

Apps Revenue

Apps Revenue is generated when a user of one of our Apps makes an in-app purchase (“IAP") and when clients purchase the digital advertising inventory of our portfolio of Apps ("IAA"). We are able to grow our Apps Revenue by adding more apps to our Apps portfolio and increasing engagement on our existing Apps.

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Our Apps are generally free-to-play mobile games and generate IAP Revenue through IAPs. IAPs consist of virtual goods used to enhance gameplay, accelerate access to certain features or levels, and augment other mobile game progression opportunities for the user. IAPs drive more engagement and better economics from our Apps. The vast majority of our IAP revenue flows through two app stores, Apple App Store and Google Play, which charge us a standard commission on IAPs. IAP Revenue represented 69% of total Apps Revenue for the twelve months ended December 31, 2023.

During the twelve months ended December 31, 2023, we had an average of 1.8 million Monthly Active Payers ("MAPs") across our portfolio of Apps. Over that period, we had an Average Revenue Per Monthly Active Payer ("ARPMAP") of $46. See “Key Metrics” below for additional information on how we calculate MAPs and ARPMAP.

IAA clients that purchase advertising inventory from our Apps are able to target highly relevant users from our diverse and global portfolio of over 200 mobile games. Our clients leverage a broad set of high-performing mobile ad formats, including playable and rewarded video, and are able to match these ads with relevant users resulting in a better return on their advertising spend. By increasing the number of users and their engagement, as well as better matching ads with the appropriate target audience, we are able to increase our revenue from IAA clients that purchase advertising inventory from our Apps. IAA Revenue represented 31% of total Apps Revenue for the twelve months ended December 31, 2023.

Key Metrics

We review the following key metrics on a regular basis in order to evaluate the health of our business, identify trends affecting our performance, prepare financial projections, and make strategic decisions.

Monthly Active Payers ("MAPs"). We define a MAP as a unique mobile device active on one of our Apps in a month that completed at least one IAP during that time period. A consumer who makes IAPs within two separate Apps on the same mobile device in a monthly period will be counted as two MAPs. MAPs for a particular time period longer than one month are the average MAPs for each month during that period. We estimate the number of MAPs by aggregating certain data from third-party attribution partners. Some of our Apps do not utilize such third-party attribution partners, and therefore our MAPs figure for any period does not capture every user that completed an IAP on our Apps. We estimate that our counted MAPs generated approximately 99% of our IAP Revenue during the year ended December 31, 2023, and as such, management believes that MAPs is still a useful metric to measure the engagement and monetization potential of our games.

Average Revenue Per Monthly Active Payer ("ARPMAP"). We define ARPMAP as (i) the total IAP Revenue derived from our Apps in a monthly period, divided by (ii) MAPs in that same period. ARPMAP for a particular time period longer than one month is the average ARPMAP for each month during that period. ARPMAP shows how efficiently we are monetizing each MAP.

The following table shows our Monthly Active Payers and Average Revenue Per Monthly Active Payer for the years ended December 31, 2023, 2022 and 2021.

Our key metrics are not based on any standardized industry methodology and are not necessarily calculated in the same manner or comparable to similarly titled measures presented by other companies. Similarly, our key metrics may differ from estimates published by third parties or from similarly titled metrics of our competitors due to differences in methodology. The numbers that we use to calculate MAPs and ARPMAP are based on internal data. While these numbers are based on what we believe to be reasonable judgments and estimates for the applicable period of measurement, there are inherent challenges in measuring usage and engagement. We regularly review and may adjust our processes for calculating our internal metrics to improve their accuracy.

Non-GAAP Financial Measures

Adjusted EBITDA and Adjusted EBITDA Margin

We define Adjusted EBITDA for a particular period as net income (loss) before interest expense and loss on settlement of debt, other income (expense), net (excluding certain recurring items), provision for (benefit from) income taxes, amortization, depreciation and write-offs and as further adjusted for stock-based compensation expense, acquisition-related expense and transaction bonus, publisher bonuses, MoPub acquisition transition services, restructuring costs, impairment and loss in connection with the sale of long-lived assets, non-operating foreign exchange (gain) losses, and change in the fair value of contingent consideration. We define Adjusted EBITDA margin as Adjusted EBITDA divided by revenue for the same period.

Adjusted EBITDA and Adjusted EBITDA margin are key measures we use to assess our financial performance and are also used for internal planning and forecasting purposes. We believe Adjusted EBITDA and Adjusted EBITDA margin are helpful to investors, analysts, and other interested parties because they can assist in providing a more consistent and comparable overview of our operations across our historical financial periods. In addition, these measures are frequently used by analysts, investors, and other interested parties to evaluate and assess performance. We use Adjusted EBITDA and Adjusted EBITDA margin in conjunction with GAAP measures as part of our overall assessment of our performance, including the preparation of

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our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies, and to communicate with our board of directors concerning our financial performance.

Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures and are presented for supplemental informational purposes only and should not be considered as alternatives or substitutes to financial information presented in accordance with GAAP. These measures have certain limitations in that they do not include the impact of certain expenses that are reflected in our consolidated statement of operations that are necessary to run our business. Our definitions may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our Adjusted EBITDA and Adjusted EBITDA margin should be considered in addition to, not as substitutes for, or in isolation from, measures prepared in accordance with GAAP.

The following table provides our Adjusted EBITDA and Adjusted EBITDA margin for 2023, 2022, and 2021, and a reconciliation of net income (loss) to Adjusted EBITDA:

1 Excludes recurring operational foreign exchange gains and losses and write-off investments included in Amortization, depreciation and write-offs.

2 The twelve months ended December 31, 2021 includes $2.3 million of bonus compensation settled in stock outside of the scope of ASC 718.

3 In association with the MoPub acquisition, we incurred certain costs to incentivize publishers to migrate to our MAX mediation solution, including existing publishers of MoPub as well as publishers on other competitor offerings. We have not historically incurred significant publisher migration costs, nor do we currently intend to incur significant publisher migration costs in the future. As such, we have removed the impact of these costs from Adjusted EBITDA.

4 Reflects one-time transition services provided by Twitter to AppLovin.

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Free Cash Flow

We define Free Cash Flow as net cash provided by operating activities less purchases of property and equipment and principal payment of finance leases. We use Free Cash Flow to help manage the health of our business, prepare budgets and for capital allocation purposes. We believe Free Cash Flow provides useful supplemental information to help investors understand underlying trends in our business and our liquidity. Free cash flow has certain limitations, including that it does not reflect our future contractual commitments. Our definition may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish Free Cash Flow or similar metrics. Thus, our Free Cash Flow should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP.

The following table provides our Free Cash Flow for 2023, 2022, and 2021, and a reconciliation of net cash provided by operating activities to Free Cash Flow:

Factors Affecting Our Performance

We believe that the future success of our business depends on many factors, including the factors described below. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in order to continue to grow profitably while maintaining strong cash flow.

Continue to invest in innovation

We have made, and intend to continue to make, significant investments in our Software Platform to enhance its effectiveness and value proposition for our clients. We expect that these investments will require spending on research and development, and acquisitions and partnerships related to technology components and products. We believe investments in our software, including our AI-powered advertising engine AXON, AppDiscovery, Adjust, and MAX, will further improve effectiveness for advertisers. Our investments will also allow us to enter new mobile app sectors outside of gaming. While our investments in research and development and acquisitions and partnerships may not result in revenue in the near term, we believe these investments position us to increase our revenue over time.

Retain and grow existing clients

We rely on existing clients for a significant portion of our revenue. As we improve our Software Platform and Apps, we can attract additional spend from these clients. Our clients include indie studio developers and some of the largest advertising platforms in the world. We believe there is significant room for us to further expand our relationships with these clients and increase their usage of our Software Platform. We have invested in targeted sales and account-based marketing efforts, including through Adjust’s sales and marketing teams, to identify and showcase opportunities to clients and plan to continue to do so in the future.

In the past, our clients have generally increased their usage of our Software Platform and Apps, and as a result, growth from existing clients has been a primary driver of our revenue growth. We must continue to retain our existing clients and expand their spend with us over time to continue to grow our revenue, increase profitability and drive greater cash flow.

Add new clients globally

Our future success depends in part on our ability to acquire new clients. We recently increased our focus on markets outside the United States to serve the needs of clients globally. In 2023, only 42% of our revenue from Software Platform and IAA Revenue clients was generated from outside of the United States. We believe that the global opportunity is significant and will continue to expand as developers and advertisers outside the United States adopt our Software Platform and advertise on our Apps. We also see opportunities to acquire new clients outside of mobile gaming, as the capabilities of our Software Platform are relevant to the broader advertising and mobile app ecosystems. We are investing in direct sales, product development, education, and other capabilities to drive increased awareness and adoption of our Software Platform and Apps, which investments may impact our profitability in the near term as we seek further scale. We must continue to acquire new clients to grow our revenue, increase profitability, and drive greater cash flow.

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Continued execution of strategic partnerships

We intend to continue to explore and enter into strategic partnerships to grow our business. From the beginning of 2018 through end of 2022, we have invested nearly $4.0 billion in 29 strategic acquisitions and partnerships with mobile app developers and for technologies to enhance our Software Platform including the acquisition of MAX in 2018, Adjust in April 2021, MoPub in January 2022, and Wurl in April 2022. While we were not focused on acquisitions in 2023, we continue to explore strategic partnership opportunities related to our Software Platform, and the expansion of the markets it serves. We believe our future results of operations will be affected by our ability to continue to identify and execute such transactions that are accretive to our growth and profitability.

Growth and structure of the mobile app and advertising ecosystems

Our business and results of operations will be impacted by industry factors that drive the overall performance of the mobile app and advertising ecosystems. Mobile app developers, including AppLovin, rely on third-party platforms, such as the Apple App Store and Google Play Store, among others, to distribute games, collect payments made for IAPs, and target users with relevant advertising. We expect this to continue for the foreseeable future. These third-party platforms have significant market power and discretion to set platform fees, select which apps to promote, and decide how much consumer information to provide to advertising networks that enable our Software Platform to target users with personalized and relevant advertising and allocate marketing campaigns in an efficient and cost-effective manner. Any changes made in the policies of third-party platforms could drive rapid change across the mobile app and advertising ecosystems. For example, in April 2021, Apple started implementing its application tracking transparency framework that, among other things, requires users' opt-in consent for certain types of tracking. While this transparency framework has not had a significant impact on our overall business, it may do so in the future, including with respect to the effectiveness of our advertising practices and/or our ability to efficiently generate revenue for our Apps. We rely in part on Identifier for Advertisers ("IDFA") to provide us with data that helps our Software Platform better market and monetize Apps. In light of the IDFA and transparency changes, we made changes to our data collection practices. To the extent we are unable to utilize IDFA or a similar offering, or if the transparency changes and any related opt-in or other requirements result in decreases in the availability or utility of data relating to Apps, our Software Platform may not be as effective, we may not be able to continue to efficiently generate revenue for our Apps, and our revenue and results of operations may be harmed. Additionally, Apple implemented new requirements for consumer disclosures regarding privacy and data processing practices in December 2020, which has resulted in increased compliance requirements and could result in decreased usage of our Apps. Apple incorporated new SDK privacy controls into iOS 17, which was released in September 2023, including privacy manifests and signatures designed to allow app developers to outline the data practices for SDKs embedded in their apps, manage tracking domains within SDKs, and curb device fingerprinting by requiring app developers to select allowed reasons for using data received through certain APIs. In February 2022, Google announced its Privacy Sandbox initiative for Android, a multi-year effort expected to restrict tracking activity and limit advertisers' ability to collect app and user data across Android devices. In May 2023, Google announced new consent management platform ("CMP") requirements for ads served in the European Economic Area ("EEA") and UK, which will require, starting in January 2024, publishers using Google AdSense, Ad Manager, or AdMob to use a CMP that has been certified by Google and has integrated with the Interactive Advertising Bureau's ("IAB") Transparency and Consent Framework when serving ads to users in the EEA or the UK. While to date these third-party platform privacy changes have had some impact on the discoverability of apps across these platforms and have had a relatively muted aggregate impact on our results of operations, the ultimate impact of these or any similar or future changes to the policies of Apple or Google could adversely affect our business, financial condition, and results of operations.

New tools for developers, industry standards, and platforms may emerge in the future. We believe our focus on the advertising ecosystem has allowed us to understand the needs of our clients and our relentless innovation has enabled us to quickly adapt to changes in the industry and pioneer new solutions. We must continue to innovate and stay ahead of developments in the advertising and mobile app ecosystems in order for our business to succeed and our results of operations to continue to improve.

Current Economic Conditions

We are subject to risks and uncertainties caused by global economic conditions and events with significant macroeconomic impacts, including but not limited to, the COVID-19 pandemic, international conflicts in the Ukraine and Middle East, and actions taken to counter inflation. Inflation, rising interest rates and reduced consumer confidence have caused and may continue to cause our clients to be cautious in their spending. The full impact of these macroeconomic events and the extent to which these macro factors may impact our business, financial condition, and results of operations in the future remains uncertain. The risks related to our business are further described in the section titled “Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K.

Components of Results of Operations

Revenue

We generate Software Platform Revenue primarily from fees collected from advertisers spending on AppDiscovery, typically on a performance basis, then shared with our advertising publishers, typically on a cost per impression basis. Software Platform Revenue also includes fees generated based on a percentage of client spend through MAX and subscription fees for Adjust's measurement and analytics marketing platform. Revenue from other services under Software Platform was not material.

We generate Apps Revenue from IAPs made by the users within our Apps and from IAA generated from advertisers that

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purchase advertising inventory from our diverse portfolio of Apps. IAA Revenue from our Apps was 31%, 33% and 31% of total Apps Revenue in 2023, 2022 and 2021, respectively.

Cost of Revenue and Operating Expenses

Cost of revenue. Cost of revenue consists primarily of third-party payment processing fees for distribution partners, amortization of acquired technology-related intangible assets, amortization of finance lease right-of-use assets related to certain servers and networking equipment and costs for third-party cloud service providers. Third-party payment processing fees relate to IAP Revenue. The fees for IAPs are processed and collected by third-party distribution partners. We expect our cost of revenue to increase in absolute dollars over the long term as our business and revenue continue to grow. We also expect our cost of revenue as a percentage of revenue to fluctuate period-over-period.

Sales and marketing. Sales and marketing expenses consist primarily of user acquisition costs, marketing programs and other advertising expenses, professional services costs related to the marketing of apps by third parties, personnel-related expenses including salaries, employee benefits, and stock-based compensation for employees engaged in sales and marketing activities, amortization of acquired user-related intangible assets, travel and allocated facilities and information technology costs.

We plan to continue to invest in sales and marketing to grow our Software Platform customer base and increase brand awareness. We also plan to continue to invest in new App launches to the extent we see opportunities for cost-effective growth. We expect sales and marketing expenses to fluctuate period-over-period as we launch new games. We also expect our sales and marketing expenses as a percentage of revenue to fluctuate period- over-period in the near term as we invest to grow our customer base and increase brand awareness, and to decrease over the long term as we benefit from greater scale.

Research and development. Research and development expenses consist primarily of product development costs, including personnel-related expenses such as salaries, employee benefits, and stock-based compensation for employees engaged in research and development activities, professional services costs related to development of new apps by third parties, consulting costs, regulatory compliance costs, and allocated facilities and information technology costs.

We plan to continue to invest in research and development to continue to enhance our Software Platform and to improve existing games and develop new games. We expect our research and development expenses as a percentage of revenue to fluctuate period-over-period in the near term as we invest to enhance our Software Platform and improve our existing Apps and develop new Apps, and to decrease over the long term as we benefit from greater scale.

General and administrative. General and administrative expenses consist primarily of costs incurred to support our business, including personnel-related expenses such as salaries, employee benefits, and stock-based compensation for employees engaged in finance, accounting, legal, human resources and administration, professional services fees for legal, accounting, recruiting, and administrative services (including acquisition-related expenses), insurance, travel, and allocated facilities and information technology costs.

We plan to continue to invest in our general and administrative function to support the growth of our business. We expect our general and administrative expenses as a percentage of revenue to fluctuate period-over-period in the near term as we invest to support the growth of our business, and to decrease over the long term as we benefit from greater scale.

Other Income and Expenses

Interest expense and loss on settlement of debt. Interest expense and loss on settlement of debt consists primarily of interest expense associated with our outstanding debt, including accretion of debt discount, and gains and losses of interest rate swap related to the variable interest payments associated with our outstanding debt.

Other income (expense), net. Other income (expense), net, primarily includes interest earned on our cash and cash equivalents, fair value adjustments relating to our non-marketable equity securities, and foreign currency gains and losses.

Provision for (benefit from) income taxes. We are subject to income taxes in the United States and foreign jurisdictions in which we do business. These foreign jurisdictions have different statutory tax rates than those in the United States. Additionally, certain of our foreign earnings may also be taxable in the United States. Accordingly, our effective tax rate will vary depending on the relative proportion of foreign to domestic income, impacts from acquisition restructuring, deduction benefits related to foreign-derived intangible income, future changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws. Additionally, our effective tax rate can vary based on the amount of pre-tax income or loss.

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Results of Operations

In this section, we discuss the results of our operations for the year ended December 31, 2023 compared to the year ended December 31, 2022. For a discussion of the year ended December 31, 2022 compared to the year ended December 31, 2021, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2022.

The following tables summarize our consolidated statement of operations.

_______

1 Includes stock-based compensation expense as follows:

_______

2 Includes amortization expense related to acquired intangibles as follows:

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The following table sets forth the components of our consolidated statements of operations for each of the periods presented as a percentage of revenue1:

_______

1 Totals of percentages of revenue may not foot due to rounding.

Comparison of Our Results of Operations for the Twelve Months Ended December 31, 2023, 2022 and 2021

Revenue

For the twelve months ended December 31, 2023, our Software Platform Revenue increased by $792.6 million, or 76%, from the prior year period primarily due to publisher bonuses of $209.6 million accounted for as a reduction to revenue in the prior year period. The increase in Software Platform revenue was also due to improved AppDiscovery performance, where installations increased 17% and net revenue per installation increased 35% compared to the prior year period. We do not recognize Software Platform Revenue from transactions with our studios.

For the twelve months ended December 31, 2023, our Apps Revenue decreased by $326.6 million, or 18%, from the prior year period. For the twelve months ended December 31, 2023, our IAP Revenue from Apps decreased by $190.1 million, or 16%, from the prior year period, primarily due to a 12% decrease in the volume of IAPs and a 5% decrease in price per IAP. Our IAA Revenue from Apps decreased by $136.4 million, or 23%, compared to the prior year period, due to a 45% decrease in price per advertising impression, partially offset by a 39% increase in the volume of advertising impressions. We do not recognize IAA Revenue from transactions with our studios.

For the twelve months ended December 31, 2022, our Software Platform Revenue increased by $375.2 million, or 56%, from the prior year period primarily due to AppDiscovery where installations increased 24% and revenue per installation increased 46% compared to the prior year period, as well as our addition of Wurl during the year which contributed 9% of the Software Platform revenue increase, and continued growth in MAX and Adjust, partially offset by publisher bonuses of $209.6 million accounted for as a reduction to revenue in 2022. We do not recognize Software Platform Revenue from transactions with our studios.

For the twelve months ended December 31, 2022, our Apps Revenue decreased by $351.3 million, or 17%, from the prior year period. For the twelve months ended December 31, 2022, our IAP Revenue from Apps decreased by $279.5 million, or 19%, from the prior year period, primarily due to a 21% decrease in the volume of IAPs, partially offset by a 2% increase in price per IAP. Our IAA Revenue from Apps decreased $71.8 million, or 11%, compared to the prior year period, due to a 16% decrease

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in price per advertising impression, partially offset by a 7% increase in the volume of advertising impressions. We do not recognize IAA Revenue from transactions with our studios.

Cost of revenue

Cost of revenue in 2023 decreased by $196.9 million, or 16%, compared to 2022. The decrease in 2023 was primarily due to a decrease of $192.3 million in amortization and impairment of intangible assets resulting from the sale of certain assets within our Apps segment during the second half of 2022 and a decrease of $50.0 million in third-party payment processing fees as a result of the decline in IAP revenue, offset by an increase in expenses associated with operating our network infrastructure driven by the growth in our Software Platform operations of $42.7 million.

Cost of revenue in 2022 increased by $268.0 million, or 27%, compared to 2021. The increase in 2022 was primarily due to an increase of $127.9 million in impairment and loss in connection with the sale of certain assets resulting from our strategic review of the Apps portfolio, an increase in expenses associated with operating our network infrastructure driven by the growth in our Software Platform operations of $126.1 million, and an increase of $82.1 million in depreciation and amortization driven primarily by current-year acquisition activities and the recognition of a full year amortization of intangible assets acquired in 2021, offset by an $88.4 million decrease in third-party payment processing fees as a result of the decline in IAP Revenue.

Sales and marketing

Sales and marketing expenses in 2023 decreased by $88.8 million, or 10%, compared to 2022 primarily due to a $126.5 million decrease in user acquisition costs and a $12.3 million decrease in professional services costs associated with the strategic review and optimization of our Apps segment, offset by a $47.5 million increase in personnel-related expense primarily due to an increase in stock-based compensation.

Sales and marketing expenses in 2022 decreased by $210.3 million, or 19%, compared to 2021 primarily due to a $317.8 million decrease in user acquisition costs, offset by a $57.1 million increase in personnel-related expense primarily due to an increase in stock-based compensation and an increase in headcount from acquisitions, and a $43.1 million increase in depreciation and amortization of user-related intangible assets.

Research and development

Research and development expenses in 2023 increased by $84.8 million, or 17%, compared to 2022. The increase was primarily due to an increase of $145.5 million in personnel-related expenses related to an increase in stock-based compensation expense as a result of an increase in headcount, offset by a decrease of $67.1 million in professional services costs due to the optimization and sale of certain assets within our Apps segment.

Research and development expenses in 2022 increased by $141.2 million, or 39%, compared to 2021. The increase was primarily due to an increase of $70.5 million in professional services costs related to development of new games by third parties and an increase of $62.5 million in personnel-related expenses related to an increase in stock-based compensation expense as a result of an increase in headcount.

General and administrative

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General and administrative expenses in 2023 decreased by $29.0 million, or 16% compared to 2022. The decrease was primarily due to $12.7 million in acquisition-related costs in 2022 and a decrease of $6.7 million in professional services costs primarily associated with acquisition support.

General and administrative expenses in 2022 increased by $22.9 million, or 14% compared to 2021. The increase was primarily due to an increase of $12.7 million in acquisition-related costs, an increase of $3.1 million in professional services costs primarily associated with audit, tax, and legal support, and an increase of $3.0 million in bad debt expense.

Interest expense and loss on settlement of debt

In 2023, interest expense and loss on settlement of debt increased by $103.8 million, or 60%, compared to 2022. This increase was primary driven by $99.5 million due to an increase in interest rate and $4.3 million in loss on settlement of debt resulting from a debt refinancing transaction during the period.

In 2022, interest expense and loss on settlement of debt increased by $68.7 million, or 67%, compared to 2021. This increase was primary due to an increase of $86.9 million in interest expense related to an increase in the term loan balance and increase in LIBOR during the period, partially offset by a loss on the settlement of term loans of $16.9 million during the prior year period.

Other income (expense), net

** Not meaningful

In 2023, other income (expense), net decreased by $6.4 million compared to 2022. The decrease was primarily due to the loss on fair value remeasurement of $20.7 million from the impairment of non-marketable equity securities and an expense resulting from a debt refinancing transaction of $11.0 million, offset by an increase in interest income of $23.2 million and an increase in net foreign currency gains and losses of $4.4 million.

In 2022, interest income and other, net increased by $15.0 million compared to 2021. The increase was primarily due to an increase in interest income of $14.0 million.

Provision for (benefit from) Income Taxes

In 2023, tax provision for income taxes increased by $36.1 million, or 295%, compared to 2022. The increase in tax provision was primarily driven by an increase of $119.0 million due to the tax impact on the pre-tax income of $380.6 million in 2023 as compared to pre-tax loss of $205.2 million in 2022, offset by $65.7 million related to foreign rate differential and income inclusion, an increase of $16.5 million related to increase in Global Intangible Low-Taxed Income offset by an increase in foreign tax credit, an increase of $25.9 million of stock-based compensation benefit, and an increase of $13.3 million in the research and development credit.

In 2022, tax benefit was $12.2 million as compared to the tax provision of $11.0 million in 2021, a change of $23.2 million, or 211%. The increase in tax benefit was driven by an increase of $52.7 million due to the tax impact on the pre-tax loss of $205.2 million in 2022 as compared to $46.3 million of pre-tax income in 2021, an increase of $14.7 million related to capital loss, an increase of $7.2 million due to higher foreign-derived intangible income deduction, and an increase of $5.1 million due to higher research and development credit, offset by a decrease of $30.1 million related to decrease in stock-based compensation benefit, a decrease of $15.7 million due to higher US-foreign rate differential, a decrease of $5.6 million due to higher foreign income inclusion and a decrease of $5.2 million due to higher valuation allowance.

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Comparison of our Segment Results of Operations

The following table presents the results for our Software Platform and Apps segment adjusted EBITDA for the periods indicated:

Twelve Months Ended December 31, 2023 Compared to Twelve Months Ended December 31, 2022

The $467.3 million, or 58%, increase in Software Platform Adjusted EBITDA for 2023 was primarily driven by an increase in Software Platform revenue of $792.6 million, partially offset by an increase of $49.5 million in expenses associated with our network infrastructure and an increase of $46.6 million in personnel-related expenses related to an increase in stock-based compensation expense as a result of an increase in headcount. In addition, Software Platform Adjusted EBITDA for 2022 has been adjusted to exclude one-time publisher bonuses of $209.6 million for the year ended December 31, 2022.

The $27.8 million, or 11%, decrease in Apps Adjusted EBITDA for 2023 was primarily driven by a decrease in Apps Revenue of $326.6 million, offset by a $126.7 million decrease in user acquisition costs, an $84.1 million decrease in professional services costs related to marketing, development and maintenance of apps by third parties, a $50.0 million decrease in third-party payment processing fees paid associated with IAPs, and a $15.9 million decrease in personnel-related expenses.

Twelve Months Ended December 31, 2022 Compared to Twelve Months Ended December 31, 2021

The $351.1 million, or 77%, increase in Software Platform Adjusted EBITDA for 2022 was primarily driven by an increase in Software Platform revenue of $375.2 million, partially offset by an increase of $123.9 million in expenses associated with our network infrastructure and an increase of $74.3 million in personnel-related expenses related to an increase in headcount primarily due to the acquisitions of Adjust and Wurl. In addition, Software Platform Adjusted EBITDA for 2022 has been adjusted to exclude one-time publisher bonuses of $209.6 million for the year ended December 31, 2022.

The $14.7 million, or 5%, decrease in Apps Adjusted EBITDA for 2022 was primarily driven by a decrease in Apps Revenue of $351.3 million and a $73.0 million increase in professional services costs related to development of new apps by third parties, partially offset by a $317.6 million decrease in user acquisition costs, and an $88.4 million decrease in third-party payment processing fees paid associated with IAPs.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily through payments received from clients using our Software Platform and advertising on our Apps, and from user IAPs from our Apps, and through net proceeds we received from the sales of our convertible preferred stock and of our Class A common stock in our initial public offering and debt borrowings, including borrowings made under our credit agreement. As of December 31, 2023, we had cash and cash equivalents of $502.2 million.

We believe that our cash and cash equivalents would be sufficient to satisfy our anticipated working capital and capital expenditures needs for at least the next 12 months. Our future capital requirements, however, will depend on many factors, including our growth rate; sales and marketing activities; timing and extent of spending to support our research and development efforts; capital expenditures to purchase hardware and software; and our continued need to invest in our IT infrastructure to support our growth. In addition, we may enter into additional strategic partnerships as well as agreements to acquire or invest in teams and technologies, including intellectual property rights, which could increase our cash requirements. For example, in 2022, we acquired MoPub and Wurl, which reduced our year-end 2022 cash balance by $1.3 billion. As a result of these and other factors, we may be required to seek additional equity or debt financing sooner than we currently anticipate. If additional financing from outside sources is required, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when required, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition, and results of operations could be adversely affected.

The following table summarizes our cash flows for the periods indicated:

Operating Activities

Net cash provided by operating activities was $1,061.5 million for 2023, primarily consisting of $356.7 million of net income, adjusted for certain non-cash items, which included $489.0 million of amortization, depreciation and write-offs, $363.1

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million of stock-based compensation expense, $28.0 million of impairment of non-marketable equity securities, $17.8 million of change in operating right of use asset, and $9.4 million of amortization of debt issuance costs and discount partially offset by a net increase in the operating assets and liabilities of $208.7 million. The net increase in the operating assets and liabilities was primarily driven by an increase in accounts receivable and other assets, and a decrease in operating lease liabilities, partially offset by higher accounts payable, deferred revenue, and accrued and other liabilities.

Net cash provided by operating activities was $412.8 million for 2022, primarily consisting of $192.9 million of net loss, adjusted for certain non-cash items, which included $547.1 million of amortization, depreciation and write-offs, $191.6 million of stock-based compensation expense, $127.9 million of impairment charges and losses on disposal of assets, $17.1 million of change in operating right of use asset, and $12.7 million of amortization of debt issuance costs and discount partially offset by a net increase in the operating assets and liabilities of $292.4 million. The net increase in the operating assets and liabilities was primarily driven by an increase in accounts receivable and other assets, and a decrease in operating lease liabilities, deferred revenue and accrued and other liabilities, partially offset by higher accounts payable.

Investing Activities

Net cash used in investing activities was $77.8 million for 2023, primarily consisting of $63.9 million related to acquisitions, $17.9 million in purchases of non-marketable investments and 4.2 million in purchase of property and equipment, partially offset by $8.3 million in proceeds from sale of long-lived assets.

Net cash used in investing activities was $1.4 billion for 2022, primarily consisting of $1.3 billion related to acquisitions, $66.3 million in purchases of non-marketable investments and other, partially offset by $37.0 million in proceeds from sale of long-lived assets.

Financing Activities

Net cash used in financing activities was $1.6 billion for 2023, primarily consisting of $1.2 billion of common stock repurchases, payments for withholding taxes related to net share settlement of restricted stock units of $246.4 million, payments for the principal repayment of debt of $498.0 million net of $395.3 million proceeds from issuance of debt, deferred acquisition costs of $33.9 million, licensed asset obligation payments of $27.1 million, and principal payments for finance leases of $20.2 million, partially offset by $20.9 million in proceeds from exercise of stock awards.

Net cash used in financing activities was $526.8 million for 2022, primarily consisting of $338.9 million of common stock repurchases, deferred acquisition costs of $124.2 million, payments for withholding taxes related to net share settlement of restricted stock units of $27.5 million, payments for the principal repayment of debt of $25.8 million, and payments for finance leases of $24.1 million, partially offset by $25.5 million in proceeds from exercise of stock awards.

Credit Agreement

As of December 31, 2023, our total outstanding indebtedness under the Amended Credit Agreement with the lenders party thereto and Bank of America, N.A. serving as the administrative agent consisted of two term loans, with each having an outstanding balance of $1.5 billion, with $30.0 million due within twelve months, which excludes interest payments which vary based on the fluctuations in the interest rate index. Additionally, the Amended Credit Agreement provides a Revolving Credit Facility with a maximum commitment of $610.0 million. During the third quarter of 2023, we drew down $185.0 million from the Revolving Credit Facility, with a remaining unused commitment of $418.7 million as of December 31, 2023, which is net of outstanding letters of credit of $6.3 million. For additional information on the Credit Agreement, see Note 9 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Contractual Obligations

Our material cash requirements include the following contractual obligations.

Operating Leases

As of December 31, 2023, we have non-cancellable commitments for primarily real estate leases with fixed lease payment obligations of $62.3 million, with $16.0 million payable within twelve months. For additional information, see Note 8 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Finance Leases

As of December 31, 2023, we have non-cancelable payments related to finance leases of certain networking equipment of $192.2 million, with $27.5 million payable within twelve months. For additional information, see Note 8 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

License Asset Obligation

As of December 31, 2023, we have an obligation related to certain intellectual property that we licensed from a third party of $14.2 million, which is expected to be paid within twelve months.

Non-cancelable purchase obligations

As of December 31, 2023, we have non-cancellable purchase obligations, which primarily consist of a certain arrangement related to cloud platform services, of $252.0 million, with $160.2 million payable within twelve months.

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Investment Commitments

During the years ended December 31, 2023 and 2022, we invested or committed to invest in certain private equity funds. As of December 31, 2023 these unfunded commitments were $41.2 million, which may be called from time to time by the funds.

Contingent Consideration

Several of the definitive agreements governing our acquisitions of our owned studios and arrangements with our partner studios provide for payment contingent upon future performance metrics. These contingent consideration arrangements include payouts based on a percentage of profitability metrics or the achievement of certain revenue targets, and some of these arrangements do not have a maximum limit of contingent consideration achievable. Because these contingent consideration arrangements are based on the success of relevant Apps and are not guaranteed, we do not expect our results of operations would be materially and adversely effected by the payment of amounts under any such arrangement. The table below presents a summary of the outstanding contingent consideration arrangements:

For acquisitions of studios we own that are accounted for as business combinations, contingent consideration is initially recognized at fair value. For our other transactions, we generally recognize contingent consideration only on the date when the related performance metrics are achieved. For additional information, see Notes 2 and 6 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

As of December 31, 2023, we had recorded liabilities of $35.9 million related to uncertain tax positions. Due to uncertainties in the timing of potential tax audits, the timing of the resolution of these positions is uncertain and we are unable to make a reasonable estimate of the timing of payments in individual years particularly beyond 12 months. As a result, this amount is not included in the table above.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. We base our estimates on assumptions, both historical and forward-looking, that are believed to be reasonable. On an ongoing basis, we evaluate our estimates and assumptions. These estimates are inherently subject to judgment and actual results could differ materially from those estimates.

We believe that the following critical accounting policies reflect the more significant judgments, estimates and assumptions used in the preparation of our consolidated financial statements. For additional information, see Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Revenue from Contracts with Customers

We generate Software Platform and Apps revenue. Software Platform revenue is generated primarily from fees collected from advertisers including advertising networks who use our Software Platform. Apps revenue consists of in-app purchase ("IAP") revenue generated from in-app purchases made by users within our apps (“Apps”), and in-app advertising ("IAA") revenue generated from third-party advertisers that purchase ad inventory from Apps.

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Software Platform Revenue

The vast majority of the Software Platform Revenue is generated through AppDiscovery and MAX, which provide the technology to match advertisers and owners of digital advertising inventory (“Publishers”) via auctions at large scale and microsecond-level speeds. The terms for all mobile advertising arrangements are governed by our terms and conditions and generally stipulate payment terms of 30 days subsequent to the end of the month. Substantially all of our contracts with customers are fully cancellable at any time or upon a short notice.

Our performance obligation is to provide customers with access to the Software Platform, which facilitates the advertiser’s purchase of ad inventory from Publishers. We do not control the ad inventory prior to its transfer to the advertiser, because we do not have the substantive ability to direct the use of nor obtain substantially all of the remaining benefits from the ad inventory. We are not primarily responsible for fulfillment and does not have any inventory risk. We are an agent as it relates to the sale of third-party advertising inventory and presents revenue on a net basis. The transaction price is the product of either the number of completions of agreed upon actions or advertisements displayed and the contractually agreed upon price per advertising unit with the advertiser less consideration paid or payable to Publishers. We recognize Software Platform Revenue when the agreed upon action is completed or when the ad is displayed to users. The number of advertisements delivered and completions of agreed upon actions is determined at the end of each month, which resolves any uncertainty in the transaction price during the reporting period.

Software Platform Revenue also includes revenue generated from Adjust's measurement and analytics marketing platform that is recognized ratably over the subscription period of generally up to twelve months.

Apps Revenue

In-App Purchase Revenue

IAP Revenue includes fees collected from users to purchase virtual goods to enhance their gameplay experience. The identified performance obligation is to provide users with the ability to acquire, use, and hold virtual items over the estimated period of time the virtual items are available to the user or until the virtual item is consumed. Payment is required at the time of purchase, and the purchase price is a fixed amount.

Users make IAPs through our distribution partners. The transaction price is equal to the gross amount charged to users because we are the principal in the transaction. IAP fees are non-refundable. Such payments are initially recorded as deferred revenue. We categorize virtual goods as either consumable or durable. Consumable virtual goods represent goods that can be consumed by a specific player action in gameplay; accordingly, we recognize revenue from the sale of consumable virtual goods as the goods are consumed. Durable virtual goods represent goods that are accessible to the user over an extended period of time; accordingly, we recognize revenue from the sale of durable virtual goods ratably over the period of time the goods are available to the user, which is generally the estimated average user life (“EAUL”).

The EAUL represents our best estimate of the expected life of paying users for the applicable game. The EAUL begins when a user makes the first purchase of durable virtual goods and ends when a user is determined to be inactive. We determine the EAUL on a game-by-game basis. For a newly launched game with limited playing data, we determine the EAUL based on the EAUL of a game with sufficiently similar characteristics.

We determine the EAUL on a quarterly basis and applies such calculated EAUL to all bookings in the respective quarter. Determining the EAUL is subjective and requires management’s judgment. Future playing patterns may differ from historical playing patterns, and therefore the EAUL may change in the future. The EAULs are generally between 5 and 10 months.

In-App Advertising Revenue

IAA Revenue is generated by selling ad inventory on our Apps to third-party advertisers. Advertisers purchase ad inventory either through the Software Platform or through third-party advertising networks (“Ad Networks”). Revenue from the sale of ad inventory through Ad Networks is recognized net of the amounts retained by Ad Networks as we are unable to determine the gross amount paid by the advertisers to Ad Networks. We recognize revenue when the ad is displayed to users.

Asset Acquisitions and Business Combinations

We perform an initial test to determine whether substantially all of the fair value of the gross assets transferred are concentrated in a single identifiable asset or a group of similar identifiable assets, such that the acquisition would not represent a business. If that test suggests that the set of assets and activities is a business, we then perform a second test to evaluate whether the assets and activities transferred include inputs and substantive processes that together, significantly contribute to the ability to create outputs, which would constitute a business. If the result of the second test suggests that the acquired assets and activities constitute a business, we account for the transaction as a business combination.

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For transactions accounted for as business combinations, we allocate the fair value of acquisition consideration to the identifiable assets acquired and liabilities assumed based on their estimated fair values. Acquisition consideration includes the fair value of any promised contingent consideration. The excess of the fair value of acquisition consideration over the fair values of acquired identifiable assets and liabilities is recorded as goodwill. Contingent consideration is remeasured to its fair value each reporting period with changes in the fair value of contingent consideration recorded in general and administrative expenses. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates and assumptions in valuing certain identifiable intangible assets include, but are not limited to, forecasted revenue and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. In certain circumstances, the allocations of the excess purchase price are based upon preliminary estimates and assumptions and subject to revision when we receive final information, including appraisals and other analyses. During the measurement period, which is one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. Acquisition-related costs are expensed as incurred.

For transactions accounted for as asset acquisitions, the cost, including certain transaction costs, is allocated to the assets acquired on the basis of relative fair values. We generally include contingent consideration in the cost of the assets acquired only when the uncertainty is resolved. We amortize contingent consideration adjustments to the cost of the acquired assets prospectively using the straight-line method over the remaining useful life of the assets. No goodwill is recognized in asset acquisitions.

Services and Development Agreements

We enter into strategic agreements with third-party mobile game studios. We have historically allowed these studios to continue their operations with a significant degree of autonomy. In some cases, we bought Apps from these studios and entered into service and development agreements whereby these studios provide support in improving existing Apps and developing new Apps. The substantial majority of payments associated with service agreements for existing Apps are expensed to research and development when the services are rendered as the payments primarily relate to developing enhancements for the Apps. Payments for new Apps associated with development agreements are generally made in connection with the development of a particular App, and therefore, we are subject to development risk prior to the release of the App. Accordingly, payments that are due prior to completion of an App are generally expensed to research and development over the development period as the services are incurred. Payments due after completion of an App are generally capitalized and expensed as cost of revenue. For additional information, see Note 6 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Software Development Costs

We incur development costs related to internal-use software and Apps. Development costs meet the criteria for capitalization once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the function intended. Software development costs that meet the criteria for capitalization were not material for the periods presented.

Goodwill

We test goodwill for impairment at the reporting unit level on an annual basis during the fourth quarter, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. Triggering events that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of goodwill or a significant decrease in expected cash flows. A qualitative assessment is performed to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, we compare the carrying value of the reporting unit, including goodwill, to its fair value. A goodwill impairment loss is recognized for the amount that the carrying value of the reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. As of December 31, 2023, 2022 and 2021, no impairment of goodwill has been identified.

Intangible Assets

Intangible assets consist primarily of Apps, user base, developed technology, customer relationships and certain intellectual property licenses resulting from acquisitions. Intangible assets are amortized over the period of estimated benefit using the straight-line method. Our estimates of useful lives of intangible assets are based on cash flow forecasts which incorporate various assumptions, including forecasted user acquisition costs, user attrition rates and level of user engagement.

Impairment of Long-Lived Assets

We review long-lived assets that are held and used for impairment whenever events or changes in circumstances indicate the carrying value of an asset or asset group may not be recoverable. If such indicators are present, we assess the recoverability of the asset or asset group by comparing its carrying value to the undiscounted future cash flows expected to be generated by the asset or asset group. If the future undiscounted cash flows are less than the carrying value of the asset or asset group, an impairment charge is recognized in the consolidated statements of operations by the amount by which the carrying value of the asset or asset group, exceeds its estimated fair value. There were no material impairment charges related to long-lived assets that are held and used for the years ended December 31, 2023, 2022 and 2021.

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We classify an asset as held for sale when management commits to a formal plan to actively market the asset for sale at a price reasonable in relation to fair value, the asset is available for immediate sale in its present condition, an active program to locate a buyer and other actions required to complete the sale have been initiated, the sale of the asset and the transfer is expected to be completed within one year and it is unlikely that significant changes will be made to the plan. Upon classification as held for sale, we recognize the asset at the lower of its carrying value or its estimated fair value, less costs to sell. In addition, we cease to record depreciation or amortization for assets that are classified as held for sale. During the year ended December 31, 2022, we classified certain assets within the Apps reportable segment as held for sale and recognized a total impairment charge of $53.0 million, representing the excess of the assets' carrying value over their estimated fair value, less cost to sell, in cost of revenue in our consolidated statements of operations. As of December 31, 2022, the carrying value of assets held for sale was not material. No assets were classified as held for sale in 2023 or 2021.

Stock-Based Compensation

We account for stock-based compensation based on the fair value of stock-based awards as of the grant date. We recognize the fair value as stock-based compensation expense following the straight-line attribution method over the requisite service period for restricted stock units ("RSUs") and stock options, and over the offering period for purchase rights issued under the Employee Stock Purchase Plan ("ESPP"). Stock-based compensation expense for performance-based RSUs (“PSUs”) with a market condition is recognized ratably on a tranche-by-tranche basis using the accelerated attribution method over the respective derived service period, unless the market condition is satisfied earlier. We account for forfeitures for all awards as they occur.

The fair value of RSUs is estimated on the date of grant based on the closing price of the Company's publicly traded Class A common stock on the date of grant.

We determine the fair value of PSUs with market conditions using the Monte Carlo simulation pricing model. This requires the input of assumptions, including the expected stock volatility, the risk-free interest rate, the expected dividend yield and the discount for post-vesting restrictions, as applicable.

We determines the fair value of stock options and purchase rights under the ESPP using the Black-Scholes option-pricing model. This requires the input of assumptions, including the expected term, the expected stock volatility, the risk-free interest rate, and the expected dividend yield.

For awards that are liability classified, we update the grant date fair value at each reporting period. Liability-classified awards are reclassified to equity upon settlement in shares of the Company’s common stock.

Income Taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We recognize deferred tax assets to the extent that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize deferred tax assets in the future in excess of their net recorded amount, an adjustment to the deferred tax asset valuation allowance would be made to reduce the provision for income taxes.

We record uncertain tax positions on the basis of a two-step process in which determinations are made (i) whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with a tax authority.

We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in our consolidated statement of operations. Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheet.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the dates of the statement of financial position included in this Annual Report on 10-K.

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Factors that could cause or contribute to such differences include those identified below and those discussed in the section titled “Risk Factors” and other parts of this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.

Overview

Our mission is to help companies grow their apps and accelerate their business. Our full stack software solution provides advanced tools for mobile app developers to grow their businesses by automating and optimizing the marketing and monetization of their apps. We also operate a portfolio of owned mobile apps and accelerated our market penetration through an active acquisition and partnership strategy. Our scaled business model sits at the nexus of the mobile app ecosystem, which creates a durable competitive advantage that has fueled our clients’ success and our strong growth.

Since our founding in 2011, we have been focused on building a software-based platform for mobile app developers to improve the marketing and monetization of their apps. Our founders, who are mobile app developers themselves, quickly realized the real impediment to success and growth in the mobile app ecosystem was a discovery and monetization problem—breaking through the congested app stores to efficiently find users and successfully grow their business. Their first-hand experience with these developer challenges led to the development of our infrastructure and software—AppLovin Core Technologies and AppLovin Software Platform. We capitalized on our success and understanding of the mobile app ecosystem by launching AppLovin Apps in 2018. Our Apps now consist of a globally diversified portfolio of over 350 free-to-play mobile games across five genres, run by eleven studios.

For 2022, our revenue grew 1% year-over-year from 2021, from $2.79 billion in 2021 to $2.82 billion in 2022. For 2021, our revenue grew 92% year-over-year from 2020, from $1.45 billion in 2020 to $2.79 billion in 2021. We generated a net loss of $192.9 million in 2022, net income of $35.3 million in 2021, and a net loss of $125.9 million in 2020. We generated Adjusted EBITDA of $1.1 billion, $726.8 million, and $345.5 million in 2022, 2021 and 2020, respectively. Additionally, we have generated strong cash flows, with net cash provided by operating activities of $412.8 million, $361.9 million, and $222.9 million in 2022, 2021, and 2020, respectively. Given our strong financial position, we have been able to reinvest in our expansion and growth and consummate strategic acquisitions and partnerships. See the section titled “—Non-GAAP Financial Measures” for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated in accordance with GAAP.

In February 2022, our board of directors authorized a share repurchase program to repurchase $750.0 million of our Class A common stock over time. We will continuously evaluate efficient alternatives to using cash on hand to fund the program, including accessing the capital markets, subject to market conditions.

Our Business Model

We collect revenue from our Software Platform and our Apps. In 2022, Software Platform Revenue represented 37% of total revenue and Apps Revenue represented 63% of total revenue.

In the second quarter of 2022, we revised the presentation of segment information to align with changes to how our chief operating decision maker (“CODM”), the Chief Executive Officer, allocates resources and assesses performance. Effective in May 2022, we report our operating results through two reportable segments: Software Platform and Apps. Previously we had a single operating and reportable segment.

The CODM evaluates performance of each segment based on several factors, of which the financial measures are segment revenue and segment adjusted EBITDA, as defined in Note 14 to the Company's consolidated financial statements.

The Software Platform and Apps segments provide a view into the organization of our business and generate revenue as follows:

Software Platform Revenue

We primarily generate Software Platform Revenue from fees paid by mobile app advertisers who use our Software Platform to grow and monetize their apps. We are able to grow our Software Platform Revenue by improving our various software technologies.

Software Platform clients include a wide variety of advertisers, from indie developer studios to some of the largest global internet platforms, such as Facebook and Google. While we have thousands of clients as of December 31, 2022, the vast majority of our revenue is derived from our Software Platform Enterprise Clients. See “Key Metrics” below for additional information on how we calculate Software Platform Enterprise Clients. We see multiple opportunities to gain new Software Platform clients, and to increase spend from existing clients, as we help them grow their businesses and make them more successful.

Our Software Platform includes AppDiscovery, MAX, Adjust, and Wurl.

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Clients use AppDiscovery to automate, optimize, and manage their user acquisition investments. They set marketing and user growth goals, and AppDiscovery optimizes their ad spend in an effort to achieve their return on advertising spend targets and other marketing objectives. AppDiscovery comprises the vast majority of revenue from our Software Platform. Revenue is generated from our advertisers, typically on a performance-basis, and shared with our advertising publishers, typically on a cost per impression model. Our Software Platform Enterprise Clients had a Net Dollar-Based Retention Rate of approximately 134% for the twelve months ended December 31, 2022.1

Software Platform clients use MAX to optimize purchases of app advertising inventory. The Compass Analytics tool within MAX provides insights to manage against key performance indicators, understand the long-term value of users, and help manage profitability. Revenue from MAX is generated based on a percentage of client spend. As more developers move to in-app bidding monetization, we expect growth in the adoption of, and revenue from, MAX.

Software Platform clients use Adjust's SaaS mobile marketing platform to better understand their users' journey while allowing marketers to make smarter decisions through measurement, attribution and fraud prevention. Revenue from Adjust is primarily generated from an annual software subscription fee.

Software Platform clients use Wurl's CTV platform to distribute streaming video, maximize advertising revenue, and acquire and retain viewers or subscribers. Revenue from Wurl is primarily generated from content companies, typically on a usage-based model.

Apps Revenue

During the fourth quarter of 2022, we changed the terms used to describe our two Apps segment revenue streams to better align with market terminology. We now refer to our Apps "Business" revenue as "In-App Advertising" and "Consumer" revenue as "In-App Purchases." Apps Revenue is generated when a user of one of our Apps makes an in-app purchase ("IAP") and when clients purchase the digital advertising inventory of our portfolio of Apps ("In-App Advertising" or "IAA"). We are able to grow our Apps Revenue by adding more apps to our Apps portfolio and increasing engagement on our existing Apps.

Our Apps are generally free-to-play mobile games and generate IAP Revenue through IAPs. IAPs consist of virtual goods used to enhance gameplay, accelerate access to certain features or levels, and augment other mobile game progression opportunities for the user. IAPs drive more engagement and better economics from our Apps. The vast majority of our IAP revenue flows through two app stores, Apple App Store and Google Play, which charge us a standard commission on IAPs. IAP Revenue represented 67% of total Apps Revenue for the twelve months ended December 31, 2022.

During the twelve months ended December 31, 2022, we had an average of 2.3 million Monthly Active Payers ("MAPs") across our portfolio of Apps. Over that period, we had an Average Revenue Per Monthly Active Payer ("ARPMAP") of $43. See “Key Metrics” below for additional information on how we calculate MAPs and ARPMAP.

IAA clients that purchase advertising inventory from our Apps are able to target highly relevant users from our diverse and global portfolio of over 350 mobile games. Our clients leverage a broad set of high-performing mobile ad formats, including playable and rewarded video, and are able to match these ads with relevant users resulting in a better return on their advertising spend. By increasing the number of users and their engagement, as well as better matching ads with the appropriate target audience, we are able to increase our revenue from IAA clients that purchase advertising inventory from our Apps. IAA Revenue represented 33% of total Apps Revenue for the twelve months ended December 31, 2022.

1 We measure Net Dollar-Based Retention Rate for the twelve months ended December 31, 2022 for our Software Platform Enterprise Clients as current period revenue divided by prior period revenue. Prior period revenue is measured as revenue for the twelve months ended December 31, 2021 from our Software Platform Enterprise Clients as of December 31, 2021. Current period revenue is revenue for the twelve months ended December 31, 2022 from our Software Platform Enterprise Clients as of December 31, 2021.

Key Metrics

We review the following key metrics on a regular basis in order to evaluate the health of our business, identify trends affecting our performance, prepare financial projections, and make strategic decisions.

Update to our Key Metrics

As our Software Platform, which includes AppDiscovery, MAX, AppLovin Exchange, Adjust and Wurl, continues to evolve, we continue to evaluate metrics that facilitate an understanding of our business. Following the addition and integration of offerings like Adjust and Wurl, as well as the future launch of our Array OEM/carrier offering, the revenue mix within our Software Platform segment is shifting and we expect this shift will become more pronounced over time as these businesses grow. Given the structural differences in these businesses—in terms of their revenue models as well as the nature of their clients—we believe our current key metrics for the Software Platform will no longer provide a valuable method to understand fluctuations in the performance of our Software Platform revenue. As a result, beginning in first quarter of 2023, we will no longer provide certain key metrics related to our Software Platform segment including Total Software Transaction Value, Software Platform Enterprise Clients and Revenue per Software Platform Enterprise Client.

Software Platform Enterprise Clients ("SPECs"). We focus on the number of SPECs, which are third-party clients from whom we have collected greater than $125,000 of Software Platform Revenue in the trailing twelve months to a given date. SPECs generate the vast majority of our Software Platform Revenue and Software Platform Revenue growth.

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Revenue Per Software Platform Enterprise Client ("Revenue per SPEC"). We define Revenue per SPEC as (i) the total revenue derived from our Software Platform Enterprise Clients in the trailing twelve months to a given period, divided by (ii) Software Platform Enterprise Clients as of the end of that same period. Revenue per SPEC shows how efficiently we are monetizing each SPEC. We expect to increase Revenue per SPEC over time as we enhance our Software Platform and Apps.

The following table shows our SPEC and Revenue per SPEC as of December 31, 2022, 2021 and 2020.

Total Software Transaction Value ("TSTV"). Software Platform Revenue is from third-party clients using our Software Platform to find new customers. We do not recognize revenue from our own spend on our Software Platform. Therefore, we use TSTV to measure the scale and growth rates of our Software Platform as it reflects the total value on our Software Platform including our first-party studios as though they were stand-alone businesses.

The following table shows our TSTV for the years ended December 31, 2022, 2021 and 2020.

Monthly Active Payers ("MAPs"). We define a MAP as a unique mobile device active on one of our Apps in a month that completed at least one IAP during that time period. A consumer who makes IAPs within two separate Apps on the same mobile device in a monthly period will be counted as two MAPs. MAPs for a particular time period longer than one month are the average MAPs for each month during that period. We estimate the number of MAPs by aggregating certain data from third-party attribution partners. Some of our Apps do not utilize such third-party attribution partners, and therefore our MAPs figure for any period does not capture every user that completed an IAP on our Apps. We estimate that our counted MAPs generated approximately 98% of our IAP Revenue during the year ended December 31, 2022, and as such, management believes that MAPs are still a useful metric to measure the engagement and monetization potential of our games.

Average Revenue Per Monthly Active Payer ("ARPMAP"). We define ARPMAP as (i) the total IAP Revenue derived from our Apps in a monthly period, divided by (ii) MAPs in that same period. ARPMAP for a particular time period longer than one month is the average ARPMAP for each month during that period. ARPMAP shows how efficiently we are monetizing each MAP.

The following table shows our Monthly Active Payers and Average Revenue Per Monthly Active Payer for the years ended December 31, 2022, 2021 and 2020.

Our key metrics are not based on any standardized industry methodology and are not necessarily calculated in the same manner or comparable to similarly titled measures presented by other companies. Similarly, our key metrics may differ from estimates published by third parties or from similarly titled metrics of our competitors due to differences in methodology. The numbers that we use to calculate TSTV, MAP, and ARPMAP are based on internal data. While these numbers are based on what we believe to be reasonable judgments and estimates for the applicable period of measurement, there are inherent challenges in measuring usage and engagement. We regularly review and may adjust our processes for calculating our internal metrics to improve their accuracy.

Non-GAAP Financial Metrics

Adjusted EBITDA and Adjusted EBITDA Margin

We define Adjusted EBITDA for a particular period as net income (loss) before interest expense and loss on settlement of debt, other (income) expense, net (excluding certain recurring items), provision for (benefit from) income taxes, amortization, depreciation and write-offs and as further adjusted for stock-based compensation expense, acquisition-related expense and transaction bonus, publisher bonuses, MoPub acquisition transition services, restructuring costs, impairment and loss on disposal, loss (gain) on extinguishments of acquisition related contingent consideration, non-operating foreign exchange (gain) losses, lease modification and abandonment of leasehold improvements, and change in the fair value of contingent consideration. We define Adjusted EBITDA margin as Adjusted EBITDA divided by revenue for the same period.

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Adjusted EBITDA and Adjusted EBITDA margin are key measures we use to assess our financial performance and are also used for internal planning and forecasting purposes. We believe Adjusted EBITDA and Adjusted EBITDA margin are helpful to investors, analysts, and other interested parties because they can assist in providing a more consistent and comparable overview of our operations across our historical financial periods. In addition, these measures are frequently used by analysts, investors, and other interested parties to evaluate and assess performance. We use Adjusted EBITDA and Adjusted EBITDA margin in conjunction with GAAP measures as part of our overall assessment of our performance, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies, and to communicate with our board of directors concerning our financial performance.

Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures and are presented for supplemental informational purposes only and should not be considered as alternatives or substitutes to financial information presented in accordance with GAAP. These measures have certain limitations in that they do not include the impact of certain expenses that are reflected in our consolidated statement of operations that are necessary to run our business. Our definitions may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our Adjusted EBITDA and Adjusted EBITDA margin should be considered in addition to, not as substitutes for, or in isolation from, measures prepared in accordance with GAAP.

The following table provides our Adjusted EBITDA and Adjusted EBITDA margin for 2022, 2021, and 2020, and a reconciliation of net income (loss) to Adjusted EBITDA:

1 Excludes recurring operational foreign exchange gains and losses and write-off investments included in Amortization, depreciation and write-offs.

2 The twelve months ended December 31, 2021 includes $2.3 million of bonus compensation settled in stock outside of the scope of ASC 718.

3 In association with the MoPub acquisition, we incurred certain costs to incentivize publishers to migrate to our MAX mediation solution, including existing publishers of MoPub as well as publishers on other competitor offerings. We have not historically incurred significant publisher migration costs, nor do we currently intend to incur significant publisher migration costs in the future. As such, we have removed the impact of these costs from Adjusted EBITDA.

4 Reflects one-time transition services provided by Twitter to AppLovin.

In 2022, 2021 and 2020, our net income (loss) and Adjusted EBITDA included $0.8 million, $1.8 million and $62.0 million, related to the fair value adjustment of the deferred revenue balance assumed as a result of the acquisitions of Adjust in 2021 and Machine Zone in 2020.

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Free Cash Flow

We define Free Cash Flow as net cash provided by operating activities less purchases of property and equipment and principal payment of finance leases. We use Free Cash Flow to help manage the health of our business, prepare budgets and for capital allocation purposes. We believe Free Cash Flow provides useful supplemental information to help investors understand underlying trends in our business and our liquidity. Free cash flow has certain limitations, including that it does not reflect our future contractual commitments. Our definition may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish Free Cash Flow or similar metrics. Thus, our Free Cash Flow should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP.

The following table provides our Free Cash Flow for 2022, 2021, and 2020, and a reconciliation of net cash provided by operating activities to Free Cash Flow:

Factors Affecting Our Performance

We believe that the future success of our business depends on many factors, including the factors described below. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in order to continue to grow profitably while maintaining strong cash flow.

Continue to invest in innovation

We have made, and intend to continue to make, significant investments in our Core Technologies and Software Platform to enhance their effectiveness and value proposition for our clients. We expect that these investments will require spending on research and development, and acquisitions and partnerships related to technology components and products. We believe investments in our software, including our machine learning engine AXON, AppDiscovery, Adjust, and MAX, will further improve effectiveness for developers. Our investments will also allow us to enter new mobile app sectors outside of gaming. While our investments in research and development and acquisitions and partnerships may not result in revenue in the near term, we believe these investments position us to increase our revenue over time.

Retain and grow existing clients

We rely on existing clients for a significant portion of our revenue. As we improve our Software Platform and Apps, we can attract additional spend from these clients. Our clients include indie studio developers and some of the largest mobile advertising platforms in the world. We believe there is significant room for us to further expand our relationships with these clients and increase their usage of our Software Platform. We have invested in targeted sales and account-based marketing efforts, including through Adjust’s sales and marketing teams, to identify and showcase opportunities to clients and plan to continue to do so in the future.

In the past, our clients have generally increased their usage of our Software Platform and Apps, and as a result, growth from existing clients has been a primary driver of our revenue growth. We must continue to retain our existing clients and expand their spend with us over time to continue to grow our revenue, increase profitability and drive greater cash flow.

Add new clients globally

Our future success depends in part on our ability to acquire new clients. We recently increased our focus on markets outside the United States to serve the needs of clients globally. In 2022, only 41% of our revenue from Software Platform and IAA Revenue clients was generated from outside of the United States. We believe that the global opportunity is significant and will continue to expand as developers and advertisers outside the United States adopt our Software Platform and advertise on our Apps. We also see opportunities to acquire new clients outside of mobile gaming, as the capabilities of our Core Technologies and Software Platform are relevant to the broader mobile app ecosystem. We are investing in direct sales, product development, education, and other capabilities to drive increased awareness and adoption of our Software Platform and Apps, which investments may impact our profitability in the near term as we seek further scale. We must continue to acquire new clients to grow our revenue, increase profitability, and drive greater cash flow.

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Review of our AppLovin Apps portfolio

Over the past several years, our Apps have been critical in providing first-party data and audiences for our Software Platform to enable us to test, design, and scale our technologies. Given the recent development of our technology, the current scale of our Software Platform, and the reach of our MAX solution, we believe we can reduce our reliance on the data from our Apps. Therefore, we are continuing our strategic review and optimization of our Apps portfolio and its cost structure, focusing on how best to optimize each asset’s contribution to our overall financial performance. This review has resulted in the divestiture or closure of certain studios, a reduction of headcount, restructuring of earn out arrangements, and other changes to our Apps portfolio, such as restructuring of certain assets or choosing to make changes to optimize the cost structure of certain Apps rather than investing in revenue growth. For example, we have reduced our user acquisition spend for our portfolio of Apps as we increased our desired return goals, which has led to improved App segment Adjusted EBITDA margin, but also contributed to a decline in revenue and MAPs. While we believe we have made substantial progress on this review, we may take similar actions in the future. We will continue to manage our Apps portfolio for financial return, including investing for growth through new game launches, while remaining open to evaluating opportunities for the retention, restructure, or sale of assets in the future. We believe that our execution of this review, and our ability to optimize the contribution of our Apps portfolio, will affect our revenue growth, profitability, and cash flow.

Continued execution of strategic acquisitions and partnerships

We intend to continue to make strategic acquisitions and enter into strategic partnerships to grow our business. From the beginning of 2018 through December 31, 2022, we have invested nearly $4.0 billion in 29 strategic acquisitions and partnerships with mobile app developers and for technologies to enhance our Software Platform including the acquisition of MAX in 2018, Adjust in April 2021, MoPub in January 2022, and Wurl in April 2022.

While we have a strong pipeline of strategic acquisition and partnership opportunities, we believe our future results of operations will be affected by our ability to continue to identify and execute such transactions that are accretive to our growth and profitability.

Growth and structure of the mobile app ecosystem

Our business and results of operations will be impacted by industry factors that drive overall performance of the mobile app ecosystem. The mobile app ecosystem has been affected by the recent economic uncertainty, including by advertisers more closely managing budgets and reducing overall spend, which has resulted in slowed growth for our Software Platform in recent quarters. We expect that any further slowing, or accelerations of our growth would affect our business and results of operations. In addition, even if the mobile app ecosystem continues to grow at its current rate, our ability to position ourselves within the market will impact our business and results of operations.

Mobile app developers, including AppLovin, rely on third-party platforms, such as the Apple App Store and Google Play Store, among others, to distribute games, collect payments made for IAPs, and target users with relevant advertising. We expect this to continue for the foreseeable future. These third-party platforms have significant market power and discretion to set platform fees, select which apps to promote, and decide how much consumer information to provide to advertising networks that enable our Core Technologies and Software Platform to target users with personalized and relevant advertising and allocate marketing campaigns in an efficient and cost-effective manner. Any changes made in the policies of third-party platforms could drive rapid change across the mobile app ecosystem. For example, in April 2021, Apple started implementing its application tracking transparency framework that, among other things, requires users' opt-in consent for certain types of tracking. While this transparency framework has not had a significant impact on our overall business, it may in the future, including with respect to the effectiveness of our advertising practices and/or our ability to efficiently generate revenue for our Apps. We rely in part on Identifier for Advertisers ("IDFA") to provide us with data that helps our Software Platform better market and monetize Apps. In light of the IDFA and transparency changes, we made changes to our data collection practices., To the extent we are unable to utilize IDFA or a similar offering, or if the transparency changes and any related opt-in or other requirements result in decreases in the availability or utility of data relating to Apps, our Software Platform may not be as effective, we may not be able to continue to efficiently generate revenue for our Apps, and our revenue and results of operations may be harmed. Additionally, Apple implemented new requirements for consumer disclosures regarding privacy and data processing practices in December 2020, which has resulted in increased compliance requirements and could result in decreased usage of our Apps. In February 2022, Google announced its Privacy Sandbox initiative for Android, expecting to restrict tracking activity and limit advertisers' ability to collect app and user data across Android devices by the third quarter of 2023. These or any similar changes to the policies of Apple or Google may materially and adversely affect our business, financial condition, and results of operations. To date, these data privacy changes have had some impact on the discoverability of apps across these platforms, though they have had a relatively muted aggregate impact on our overall results of operations.

New tools for developers, industry standards, and platforms may emerge in the future. We believe our focus on the mobile app ecosystem has allowed us to understand the needs of our clients and our relentless innovation has enabled us to quickly adapt to changes in the industry and pioneer new solutions. We must continue to innovate and stay ahead of developments in the mobile app ecosystem in order for our business to succeed and our results of operations to continue to improve.

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Current Economic Conditions and COVID-19

We are subject to risks and uncertainties caused by global economic conditions and events with significant macroeconomic impacts, including but not limited to, the COVID-19 pandemic, the Russian invasion of Ukraine, and actions taken to counter inflation. Inflation, rising interest rates and reduced consumer confidence have caused and may continue to cause our clients to be cautious in their spending. The mobile gaming and app market continue to be affected by cautious advertiser demand, but we believe that demand is stabilizing when compared against the third quarter of 2022. The full impact of these macroeconomic events and the extent to which these macro factors may impact our business, financial condition, and results of operations in the future remains uncertain. The risks related to our business are further described in the section titled “Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K.

Ukraine/Russia Conflict

As the Russian invasion of Ukraine continues to evolve, we are closely monitoring the current and potential impact on our business, our people, and our clients. We have taken steps to comply with applicable domestic and international regulatory restrictions on international trade and financial transactions. In connection with our compliance efforts, we have identified active clients and vendors inside Russia and Belarus that are subject to evolving sanctions imposed by the United States and/or the European Union and have terminated or suspended our contracts with them. Revenues associated with clients and vendors in Russia and Belarus are not material to our consolidated financial results, and we anticipate that the termination of Russian and Belarus clients and vendors that are subject to duly authorized sanctions will not have a material impact on our business or other client relationships. Management and our Board of Directors are monitoring the regional and global ramifications of the continuing events. Our cybersecurity teams are continually monitoring for any attacks that could cause disruption to our platform, systems, and networks, which could result in security breaches or data loss, damage to our brand, or reduce demand for our products and services.

Components of Results of Operations

Revenue

We generate Software Platform Revenue primarily from fees collected from advertisers spending on AppDiscovery, typically on a performance basis, then shared with our advertising publishers, typically on a cost per impression model. Software Platform Revenue also includes fees generated based on a percentage of client spend through MAX and subscription fees for Adjust's SaaS mobile marketing platform.

We generate Apps Revenue from In-App Purchases made by the users within our Apps and from In-App Advertising generated from advertisers that purchase advertising inventory from our diverse portfolio of Apps. IAA Revenue from our Apps was 33%, 31% and 41% of total Apps Revenue in 2022, 2021 and 2020, respectively.

Cost of Revenue and Operating Expenses

Cost of revenue. Cost of revenue consists primarily of third-party payment processing fees for distribution partners, amortization of acquired technology-related intangible assets, and expenses associated with operating our network infrastructure. Third-party payment processing fees relate to IAP Revenue. The fees for IAPs are processed and collected by third-party distribution partners.

Network operating costs include bandwidth, energy, other equipment costs related to our co-located data centers, and costs for third-party cloud service providers. We expect our cost of revenue to increase in absolute dollars over the long term as our business and revenue continue to grow. We also expect our cost of revenue as a percentage of revenue to fluctuate period-over-period.

Sales and marketing. Sales and marketing expenses consist primarily of user acquisition costs, other advertising expenses, personnel-related expenses for salaries, employee benefits, and stock-based compensation for employees engaged in sales and marketing, and amortization of acquired user-related intangible assets, marketing programs, travel, customer service costs, and allocated facilities and information technology costs.

We plan to continue to invest in sales and marketing to grow our Software Platform customer base and increase brand awareness. We also plan to continue to invest in new App launches to the extent we see opportunities for cost-effective growth. As a result, we expect sales and marketing expenses to increase in absolute dollars over the long-term, though they may fluctuate period-over-period in the near term as we reduce our user acquisition spend for our portfolio of Apps. We also expect our sales and marketing expenses as a percentage of revenue to fluctuate period- over-period in the near term as we invest to grow our customer base and increase brand awareness, and to decrease over the long term as we benefit from greater scale.

Research and development. Research and development expenses consist primarily of product development costs, including personnel-related expenses for salaries, employee benefits, and stock- based compensation for employees engaged in research and development, professional services costs related to development of new apps by third parties, consulting costs, regulatory compliance costs, and allocated facilities and information technology costs.

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We plan to continue to invest in research and development to continue to enhance our Core Technologies and Software Platform, and to improve existing games and develop new games. As a result, we expect research and development expenses to increase in absolute dollars over the long-term, though they may fluctuate period-over-period in the near term as we reassess in which areas to focus our investment. We also expect our research and development expenses as a percentage of revenue to fluctuate period-over-period in the near term as we invest to enhance our Core Technologies and Software Platform and improve our existing Apps and develop new Apps, and to decrease over the long term as we benefit from greater scale.

General and administrative. General and administrative expenses consist primarily of costs incurred to support our business, including personnel-related expenses for salaries, employee benefits, and stock-based compensation for employees engaged in finance, accounting, legal, human resources and administration, professional services fees for legal, accounting, recruiting, and administrative services (including acquisition-related expenses), insurance, travel, and allocated facilities and information technology costs.

We plan to continue to invest in our general and administrative function to support the growth of our business. In addition, we expect to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance and reporting obligations of a public company, increased insurance and investor relations expenses, and increased professional services fees (including acquisition-related expenses). As a result, we expect general and administrative expenses to increase in absolute dollars. We also expect our general and administrative expenses as a percentage of revenue to fluctuate period-over-period in the near term as we invest to support the growth of our business, and to decrease over the long term as we benefit from greater scale.

Other Income and Expenses

Interest expense and loss on settlement of debt. Interest expense and loss on settlement of debt consists primarily of loss related to debt extinguishment, interest expense associated with our outstanding debt, including accretion of debt discount, and changes in fair value of interest rate swap related to the stream of variable interest payments associated with a portion of our outstanding debt.

Other income (expense), net. Other income (expense), net, includes interest earned on our cash and cash equivalents, gains and losses related to embedded derivatives and other financial instruments accounted for at fair value, and foreign currency exchange gains (losses), which consist primarily of remeasurement of transactions and monetary assets and liabilities denominated in currencies other than the functional currency at the end of the period.

Provision for (benefit from) income taxes. We are subject to income taxes in the United States and foreign jurisdictions in which we do business. These foreign jurisdictions have different statutory tax rates than those in the United States. Additionally, certain of our foreign earnings may also be taxable in the United States. Accordingly, our effective tax rate will vary depending on the relative proportion of foreign to domestic income, impacts from acquisition restructuring, deduction benefits related to foreign-derived intangible income, future changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws. Additionally, our effective tax rate can vary based on the amount of pre-tax income or loss.

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Results of Operations

In this section, we discuss the results of our operations for the year ended December 31, 2022 compared to the year ended December 31, 2021. For a discussion of the year ended December 31, 2021 compared to the year ended December 31, 2020, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2021.

The following tables summarize our consolidated statement of operations.