AppLovin Turns 81% of New Sales Into Profit: Rapid Earnings Reaction

AppLovin, the ad platform, reported a significant surge in its third-quarter revenue, growing by 55% to approximately $2.2 billion. This growth translated into an equally impressive profit increase, with operating income accounting for an impressive 81% of the additional revenue. Despite a more than double increase in research spending, the company's costs remained relatively stable, as running more ad spend through existing software proved to be inexpensive.

The company's ability to convert a substantial portion of its growth into profit has provided management with the flexibility to allocate more funds towards research without negatively impacting margins. However, this growth strategy has come at a cost. Free cash flow grew at a much slower pace compared to net income, largely due to higher tax payments. In fact, the company paid over five times the amount in income taxes during the first nine months compared to the previous year.

The rise in receivables, which represents the money owed by customers as sales increase, has also contributed to tying up cash. Nonetheless, management remains optimistic, with the midpoint of the company's guidance suggesting a 9% growth in revenue for the third quarter. Furthermore, adjusted EBITDA margin is expected to remain near the current quarter's level.

In addition to expanding the buyback authorization, the company's board has already begun repurchasing shares, which has contributed to a reduction in the share count this year. Investors will need to monitor whether free cash flow growth keeps pace with earnings growth in the upcoming quarter. Moreover, it will be crucial to determine if AppLovin starts segregating revenue by advertiser type, as the current release lacks this information, which is essential for understanding the extent of growth stemming from outside the gaming sector.