Quick Take
AppLovin Corporation (NASDAQ:APP) has filed to raise $1 billion in an IPO of its Class A common stock, according to an S-1 registration statement.
The firm provides a suite of software for mobile application developers to enable them to maximize their application growth.
APP has grown quickly and is operating in a large and fast-growing industry.
When we learn more details about the IPO, I’ll provide a final opinion.
Company & Technology
Palo Alto, California-based AppLovin was founded to develop mobile app developer tools to help apps grow quickly with the right users.
Management is headed by co-founder, Chairman and CEO Adam Foroughi, who previously co-founded two advertising technology companies.
Below is an interview video of CEO Foroughi:
Source: This Week in Startups
The company’s primary offerings include:
AppDiscovery - Search optimization
MAX - App monetization
SparkLabs - Ad creative services
Infrastructure service
App Graph
Analytics
AppLovin has received at least $850 million from investors including KKR, Hontai App, Angel Pride Holdings, Nimble Ventures and individuals.
Customer/User Acquisition
The firm pursues strategic acquisitions of apps and other technologies as well as partnerships with market players to improve the firm's ecosystem of offerings.
Since 2018, APP has invested more than $1 billion in 15 acquisitions and partnerships.
Management seeks to expand into other mobile app segments and industries including e-commerce, entertainment and health & wellness. International geographic expansion is also planned.
Sales and Marketing expenses as a percentage of total revenue have fallen as revenues have increased sharply, as the figures below indicate:
Sales and Marketing | Expenses vs. Revenue |
Period | Percentage |
2020 | 43.3% |
2019 | 48.5% |
Source: Company registration statement
The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, was 0.7x in the most recent reporting period.
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth trajectory. APP’s most recent calculation was 42% as of December 31, 2020, so the firm passed this metric hurdle.
Management reports that its Enterprise Clients had a net dollar revenue retention rate of 118% in 2020.
A net dollar retention rate of greater than 100% indicates the firm is generating more revenue from the same cohort of customers over time, suggesting strong product market fit and efficient sales & marketing efforts.
Market & Competition
According to a 2019 market research report by Grand View Research, the global market for mobile marketing was valued at an estimated $65 billion in 2019 and is expected to reach $338 billion by 2027.
This represents a forecast very high CAGR of 22.9% from 2020 to 2027.
The main drivers for this expected growth are the strong growth of the number of mobile device users combined with a higher penetration of uses in large developing countries such as China and India.
Also, the chart below shows the historical and expected future growth rates of various segments of mobile marketing in the U.S.:
The mobile application market is expected to rise from $106 billion in 2018 to $407 billion in 2026, growing at a projected CAGR of 18.4% from 2019 to 2026.
Major competitive or other industry participants include:
Facebook (FB)
Google (GOOG)
Twitter (TWTR)
Unity Software (U)
Activision Blizzard
Tencent (OTCPK:TCEHY)
Zynga (ZNGA)
Apple (AAPL)
Snap (SNAP)
Microsoft (MSFT)
Financial Performance
AppLovin’s recent financial results can be summarized as follows:
Sharp topline revenue growth
Increasing gross profit but reduced gross margin
A swing to operating and net losses
Increased cash flow from operations
Below are relevant financial results derived from the firm’s registration statement:
Total Revenue | ||
Period | Total Revenue | % Variance vs. Prior |
2020 | $ 1,451,086,000 | 46.0% |
2019 | $ 994,104,000 | |
Gross Profit (Loss) | ||
Period | Gross Profit (Loss) | % Variance vs. Prior |
2020 | $ 895,508,000 | 19.0% |
2019 | $ 752,830,000 | |
Gross Margin | ||
Period | Gross Margin | |
2020 | 61.71% | |
2019 | 75.73% | |
Operating Profit (Loss) | ||
Period | Operating Profit (Loss) | Operating Margin |
2020 | $ (62,042,000) | -4.3% |
2019 | $ 194,371,000 | 19.6% |
Net Income (Loss) | ||
Period | Net Income (Loss) | |
2020 | $ (125,187,000) | |
2019 | $ 119,040,000 | |
Cash Flow From Operations | ||
Period | Cash Flow From Operations | |
2020 | $ 222,883,000 | |
2019 | $ 198,462,000 | |
Source: Company registration statement
As of December 31, 2020, AppLovin had $317 million in cash and $2.3 billion in total liabilities.
Free cash flow during the twelve months ended December 31, 2020, was $219.6 million.
IPO Details
AppLovin intends to raise $1 billion in gross proceeds from an IPO of its Class A common stock, although the final figure may be higher.
Class A common stockholders will be entitled to one vote per share. Class B shareholders will have 20 votes per share and Class C shareholders will have no voting rights.
No existing shareholders have indicated an interest to purchase shares at the IPO price.
Management says it will use the net proceeds from the IPO as follows:
We intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. We intend to use approximately $400.0 million of the net proceeds from this offering to repay the entire outstanding amount under our revolving credit facility.
Management’s presentation of the company roadshow is not available.
Listed bookrunners of the IPO are Morgan Stanley, J.P. Morgan, KKR, BofA Securities, Citigroup, Credit Suisse, UBS Investment Bank, Oppenheimer & Co., Stifel, Truist Securities, William Blair, Lion Tree, KUMA Securities, The Raine Group, Blaylock Van, Guzman & Company, R. Seelaus & Co. and Roberts & Ryan.
Commentary
AppLovin is seeking an IPO to pay down debt associated with its private equity firm ownership by KKR.
While I tend to not favor private equity-owned firms at IPO due to their typical heavy debt load combined with slow growth, APP is a fast grower with a moderate amount of debt.
The company’s financials show strong topline revenue growth but a swing to operating loss while increasing cash flow from operations.
Free cash flow is quite impressive, at $220 million for the 2020 calendar year.
Sales and Marketing expenses as a percentage of total revenue have dropped as revenues have increased; its Sales and Marketing efficiency rate was 0.7x.
The market opportunity for providing mobile app marketing tools is large and likely to grow at a substantial rate of growth in the coming years.
Morgan Stanley is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 37.5% since their IPO. This is a mid-tier performance for all major underwriters during the period.
APP has produced enviable results as both its Rule of 40 metric has surpassed this high hurdle.
Also, importantly, its dollar-based net retention rate was 118% for its enterprise client base, a strong figure.
While the firm is private equity owned so much of the IPO’s proceeds will go to paying down debt rather than to future growth plans, AppLovin is a fast growing tech company that is worth following.
I’ll provide a final opinion when we learn more about the IPO from management.
Expected IPO Pricing Date: To be announced.
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