AppLovin (APP) Q3 2025 Earnings Call Transcript
- - AppLovin (APP) Q3 2025 Earnings Call Transcript
Motley Fool Transcribing, The Motley FoolNovember 5, 2025 at 5:53 PM
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Date
Wednesday, Nov. 5, 2025, at 5 p.m. ET
Call participants -
Chief Executive Officer — Adam Foroughi
Chief Financial Officer — Matthew A. Stumpf
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Takeaways -
S&P 500 inclusion -- The company was formally added to the S&P 500, which management identified as an operational milestone reflecting enhanced market visibility and institutional focus.
Revenue -- Reported revenue of $1.405 billion, representing 68% year-over-year revenue growth compared to fiscal Q3 2024, primarily attributed to core gaming model updates.
Adjusted EBITDA -- Delivered adjusted EBITDA of $1.158 billion, marking 79% year-over-year growth in adjusted EBITDA compared to fiscal Q3 2024 at an 82% adjusted EBITDA margin; up 1% sequentially from fiscal Q2 2025 driven by operating leverage and lower FX costs.
Free cash flow -- Generated $1.049 billion in free cash flow, up 92% year-over-year compared to fiscal Q3 2024; free cash flow margin improved quarter over quarter as no semiannual cash interest on debt occurred this period.
Share repurchases -- Repurchased and withheld approximately 1.3 million shares for $571 million using free cash flow, reducing weighted average diluted shares outstanding to 341 million from 346 million at the end of fiscal Q4 2024.
Repurchase authorization -- Board of Directors increased share repurchase authorization by $3.2 billion during the quarter.
Cash position -- Ended the quarter with $1.7 billion in cash and cash equivalents.
Q4 2025 outlook -- Projected revenue of $1.57 billion-$1.6 billion, reflecting 12%-14% sequential growth, and adjusted EBITDA guidance of $1.29 billion-$1.32 billion, with a targeted margin of 82%-83%.
Self-service platform launch -- Launched October 1 with no major bugs or customer complaints; management noted, "We are already seeing spend from these self-service advertisers grow, something I was personally monitoring closely, around roughly 50% week over week," but said "It is too soon to be significant."
Advertiser cohort composition -- New self-service advertisers onboarded via referral are "comparable in mix" according to Adam Foroughi and size to last year's pilot group and represent a broad set of shopping categories.
Geographic expansion -- Opened international traffic for web/shop advertisers (excluding EU) ahead of schedule; CEO Foroughi said, "EU tends to be somewhere in the low teens percentage of our business," but emphasized GDPR build-out is not currently prioritized.
AI investment and automation -- Plans to further automate with more AI agents, optimize onboarding flows, and test generative AI-based ad creatives in the near term; CEO Foroughi said, "I am hoping in a matter of weeks or months, be able to test generative AI-based creative."
MAX platform and publisher revenue -- Management cited "very healthy rates" according to Adam Foroughi of growth in the MAX supply-side platform during the quarter, with faster growth in in-app advertising compared to in-app purchasing, as stated by management; higher advertiser density and AI model improvements are expected to further accelerate conversion rates and supply growth.
Paid marketing tests -- Actively testing paid marketing to promote the Axon Ads platform, but current sales and marketing spend remains conservative; future scaling will be "disciplined." "And that is completely aligned with our culture where we want to be cost disciplined in every aspect of the business."
Direct payment systems -- CEO Foroughi confirmed direct payments are not yet contributing materially, but could provide an approximate 20% long-term lift in LTV if app store commissions decline as projected.
Guidance philosophy -- Guidance does not include spend from incremental new advertisers obtained via referral, due to unpredictability of onboarding and ramp timelines.
International markets -- Currently serving all non-EU global regions for web/shop ads, with English-speaking markets leading early expansion due to current client profiles; localization for Japan and Korea planned as platform scales.
Summary
AppLovin (NASDAQ:APP) reported 68% year-over-year revenue growth and 79% year-over-year adjusted EBITDA growth compared to fiscal Q3 2024, with operational leverage contributing to a sequential margin increase. The launch of its self-service platform produced early week-over-week spend growth of roughly 50%, but management characterized this scale as not yet significant while highlighting product stability. The company increased its share repurchase authorization by $3.2 billion during the quarter, repurchasing approximately 1.3 million shares using free cash flow and reducing diluted share count over the last three quarters. Forward guidance projected 12%-14% sequential revenue growth and sustained adjusted EBITDA margins of 82%-83%, excluding unpredictable onboarding from new advertisers. Ongoing automation, international expansion excluding the EU, and continued AI investment were emphasized as drivers for scaling advertisers and improving model-driven conversion performance.
CEO Foroughi said, "our onboarding flows and ramping more AI agents into the workflow" are immediate platform priorities, with full-scale platform access planned in 2026 once quality standards are met.
Publisher supply growth is driven both by higher ad quality and increased advertiser diversity, and management said that ad supply is not constrained (demand generation remains the primary focus).
The referral-based onboarding of advertisers remains gated intentionally to facilitate quality control and platform optimization during scale-up.
Generative AI-powered creative capabilities are expected to become testable within months and are anticipated to expand available ad inventory substantially without manual intervention.
The direct payments initiative has yet to impact results, as CEO Foroughi explained, but could gradually become a "material lift in LTV" for in-app purchasing games.
EU web/shop expansion is deferred due to GDPR compliance requirements; current international scaling targets English-speaking and western markets based on client readiness.
Industry glossary -
MAX: AppLovin's supply-side platform enabling in-app bidding for mobile app advertising inventory, connecting publishers and advertisers in real time.
Axon Ads: AppLovin's self-service advertising platform for onboarding advertisers, including those outside core gaming, enabling automated campaign creation and management.
GDPR: General Data Protection Regulation, the European Union data privacy law impacting digital advertising practices and requiring compliance for serving ads within the EU.
LTV: Lifetime Value; a measure of the total net profit attributed to the entire relationship with a customer.
Referral program: AppLovin's mechanism for admitting new advertisers to the Axon Ads platform through invitations, facilitating quality control during early scaling phases.
Full Conference Call Transcript
Adam Foroughi and Matthew A. Stumpf for some opening remarks, then we will have the moderator take us through Q&A. Thank you all for joining us today.
Adam Foroughi: First, I would like to recognize our inclusion in the S&P 500. A huge milestone for our company and a strong acknowledgment of what we built. It is a privilege we do not take lightly. It also means we now carry the expectations of a much broader set of investors, and we must push even harder to continue delivering. Turning to our business, Q3 was another very good quarter. Our performance was strong, with gaming advertising continuing on a solid trajectory. Our teams delivered multiple incremental lifts in our core models this quarter, and our Max supply-side platform, one of the best indicators of our end-market growth, continues to grow at very healthy rates.
We also opened up international traffic for advertisers promoting websites or shops in Q3 ahead of schedule. I am particularly proud of our team because even while executing a strong quarter, we also delivered our major October 1 launch of our self-service platform and referral form. We did so without any significant hiccups. This speaks volumes about our ability to automate and execute. I know everyone wants stats on how self-service is going, and instead of something specific around accounts or ramp-up since we are still very early, I would like to note no major bugs and effective filtering out of low-quality ad accounts. Enter Ram spend.
We are already seeing spend from these self-service advertisers grow, something I was personally monitoring closely, around roughly 50% week over week. It is too soon to be significant. But this type of early growth gives us even more confidence that our platform will excel at being an open platform to any type of advertiser. Our focus for Q4 and 2026 will be the following: with priority always given to improving our models for all advertisers. We will continue tuning our onboarding flows and ramping more AI agents into the workflow to support a seamless experience for new advertisers. Once we are satisfied with the quality and experience, we will open the platform broadly. Beyond referral basis.
We will be testing generative AI-based ad creatives. Over time, if we can move to mostly automated creative generation, we believe user response rates to more customized ads on our platform will materially improve. We are actively testing paid marketing to promote the Axon Ads platform to new customers. We will continue tuning this acquisition method so that when we launch the platform beyond referral in 2026, we can scale advertiser account without a reliance on a large Salesforce. If we maintain execution discipline, we are well-positioned to acquire a large volume of new advertisers in the coming years. We believe that giving our powerful recommendation engine a more diverse set of advertisers to recommend will dramatically improve conversion rates.
Paving the way for elevated growth rates for years to come. It is worth noting the backdrop. The market is recognizing our platform, our scalability, and the reach we offer our partners. And the institutional dynamics that come with the S&P 500 inclusion are already in motion. At the same time, we continue to operate in an environment of heightened scrutiny around data, privacy, and ad tech practices. We remain committed to strict compliance, transparency, and execution excellence. To conclude, we delivered a very strong Q3. We are executing on our strategic priorities, and we are confident that our best days are ahead as we broaden access to our self-service platform and scale globally.
With that, I will turn it over to Matthew A. Stumpf for a deeper dive into the numbers.
Matthew A. Stumpf: Thanks, Adam, and thanks, everyone, for joining us today. Q3 was another exceptional quarter. Revenue was approximately $1.405 billion, up 68% year over year due to model updates in the core gaming business. While adjusted EBITDA was $1.158 billion, up 79% at an 82% margin. Up 1% quarter over quarter from operating leverage and a modest reduction in FX. Quarter over quarter flow through to adjusted EBITDA was 95%, slightly above Q2. Free cash flow was $1.049 billion, up 92% year over year. Free cash flow margin improved sequentially given no semiannual cash interest paid on our debt this quarter. As those payments occur in Q2 and Q4 of each year.
We ended the quarter with $1.7 billion in cash and cash equivalents. During the quarter, we repurchased and withheld approximately 1.3 million shares for $571 million funded by free cash flow. Over the last three quarters, we have reduced our weighted average diluted common shares outstanding from 346 million in Q4 of last year to 341 million this quarter. During the quarter, our Board of Directors increased our share repurchase authorization by an incremental $3.2 billion. Finally, turning to our financial outlook for next quarter. In 2025, we anticipate revenue between $1.57 billion and $1.6 billion, reflecting between 12-14% sequential growth. With adjusted EBITDA between $1.29 billion and $1.32 billion, targeting an adjusted EBITDA margin of 82% to 83%.
Now with that, let's move to Q&A.
Operator: We will now begin our question and answer session. Please be sure to unmute and turn on your video before asking your question. We will take as many questions as time permits. And since we have many questions today, please be patient as we move through the list. Our first question will come from James Heaney.
James Edward Heaney: Yes, great. Thank you guys for taking the questions. Could you just start off talking about the characteristics of the advertisers that you have onboarded since October 1? Would you say the GMV of the advertisers are smaller than the initial 600 that you had in the pilot? Or are you going more down market? Just any help there would be appreciated.
Adam Foroughi: Yes, sure, James. There are obviously filtered set of advertisers when we curated the list last year. That was filtered by our team. And then this year, it is filtered through referrals. So these are not, like, local dry cleaners trying to come onto the platform yet. They are predominantly shops gonna be as large as they were in the cohort last year. They are not gonna be materially smaller either. So think of them as comparable in mix, and then it is a broad set of categories. There is no limitation when you are open the way we are through a referral to the type of customer that comes in. So broad set of shopping categories being represented.
James Edward Heaney: Great. And then just one for Matt. You just talk about guidance philosophy for Q4? Just curious how you could use e-commerce seasonality from last Q4 as a proxy for just interested to hear kind of what is being assumed from this year and sort of the current customers versus new customers on the e-commerce side? Thanks.
Matthew A. Stumpf: Yeah. Sure. It is not the best comp. Obviously, last year, we had an entirely new e-commerce business that was ramping. And then this quarter, right, we had an existing base. So it is not the best comparison year over year. So within the guidance, we took an approach where, you know, it reflects a combination of different factors that we have going on at the company. Optimism around the e-commerce referral program, continued model enhancements, the updates that we talked about previously within the Q3 period, and then also kind of normal holiday seasonality. So a combination of those factors led to the larger guidance that we are projecting quarter over quarter.
James Edward Heaney: Great. Thank you, guys.
David Chow: Welcome.
Operator: Your next question will come from Omar Dessouky with BofA.
Omar Dessouky: Hi, thanks for taking my question. Adam, I wanted to get back to your comments about substantially higher conversion rates. So am I to read that as that a significant growth in impressions would not be required to absorb a significant increase in e-commerce advertisers in 2026?
Adam Foroughi: Yeah. I mean, look, we have always said we serve a lot of users today, over a billion users a day. So but we are in a world today where the biggest lever for growth on our business, given we report on a net revenue basis, is increasing the conversion rate. And that happens from a couple of things. You have got the model enhancements, which we always talk about. Those are super impactful in increasing conversion rate. That is a continuous effort. We are in the very, very beginnings of understanding how to work with neural nets and these AI.
I mean, if you think about this industry and the core AI industry, it is only a few years old. Of engineers really being able to extract this kind of value out of these tools and technologies across a broad range of industries. So as this goes forward, we are gonna have consistent incremental improvements in sometimes large, sometimes small, but additive to high impact on driving up conversion rate from technology lifts. Then you are also gonna get advertiser density expanding. Paired with our recommendation system, giving the model a chance to personalize the advertising to the user better. If we have less advertisers and less categories, we just have less to show.
So you cannot get a diverse set of content to the customer to maximize that conversion rate. Both those things are just gonna naturally happen as we go forward. The third piece that I touched on to your phrase you repeated is that generative AI-based creative. Today in our advertising system, the advertiser can do almost no targeting. They can pick their country. They can put in their economic goals. Can put it in a budget, and off they go. The one manual lever is creative. And in particular, in the shopping category or in this, like, website business, a lot of the customers come on board, they do not have a creative that is adapted for our platform.
The average viewership of our ads is roughly thirty-five seconds. The average viewership of an ad on social is roughly seven seconds. So a lot of these customers are coming in and just porting a short ad, and trying to replicate what they have on social on our platform and it is mismatched. It diminishes their possible conversion rate. So what does that mean? Well, we get into a world where we can use generative AI tools, to automatically create ad creatives, on behalf of these customers.
They are gonna get to a point where they can actually expand their conversion rate doing nothing more other than just expanding the counter creatives into our system and ensuring that the types of creatives in our system follow best on our platform and doing that at no cost. And so we are really excited about where the tools in the marketplace are going. That is something we are gonna be testing in short order here.
Omar Dessouky: And if I could just follow-up. So you have addressed the conversion rate question I had very clearly. I did want to touch on how you are thinking about supply even though obviously you have clearly said that the conversion rate is a big driver. So in the past, you have talked about double-digit growth in Publisher revenue and Max. Over the past few years. I am wondering if you expect that to accelerate as e-commerce ramps you see supply driven primarily by higher ad load as dictated by publishers. Higher engagement with mobile games overall, or improvements to max like those you shipped in 2024? Like, which of those factors would be most important to Yes.
Mean it is a combination of all of the above. The MAX platform ecosystem is growing really quickly. Happens from a couple different factors. One is as the ads become higher quality, and we look at e-commerce shopping and just demand density, it is higher quality because the user stops seeing game, game, game, game, game. When they are stuck to a game that they actually like. So if you bring more diversity of content, you would expect retention to go up, and ad supply to expand. So that is gonna be a natural tailwind inside this ecosystem that we will unlock as we get more demand outside of just core advertisers that we have today.
Second part of that is what we have talked about in past calls is the unlock of getting these publishers who are in-app purchasing predominantly do not tend to run ads or run ads at a very, very small percentage. If you are monetizing a high LTV game, and most of the gaming customers are residing in these deep games, you do not want to run ads for your competition. They did not have a way to monetize as well as gaming ads. In the past. So if we can unlock this demand shift then we are gonna be able to bring more supply into the ecosystem. That is very advantageous for supply as well.
So it is a combination of those two things. And then, of course, you have got as our models improve, the same customer, that publisher, can buy more users that are retained in their game so they can create more growth in audience, and they will get better tools as well to better monetize that audience.
Omar Dessouky: Thank you.
Operator: Next, we will go to Jason Bazinet with Citi.
Jason Bazinet: We cannot hear you. Casey, you are on mute. Thank you. Yeah. So quick question. I appreciate that 50% growth in week over week spend from these e-commerce customers. Is there any sort of context you can give us of like when you looked at that same metric during the pilot phase, what was it? Or how do you know that is a good number or a bad number? I mean, it sounds great. I mean, like, the what of the simpler mathematical functions is extrapolation. Right? So, like, we are starting pretty early here. It is a month in. And it does take a while for these customers to ramp up.
Remember, ours is not a plug and play solution. They have to come in, have to integrate pixels. They have to go live. All of that takes time. So just to get to a point of go live, is a week plus usually. Some can do it very quickly, but it is not common to be able to do it in a day. So you have a period of lag time from October 1 even. A cohort going live. Then this cohort is not as big as what the absolute numbers were that reported. I think we disclosed in Q1 this year of how big that cohort last year swelled to.
But given the ramp up, the ramp up is really swift. So we are excited that if this continues to compound at the rate it is, and then you keep adding new customers, this thing is gonna then snowball on itself. And the true value for us right now is not go, okay. How do we extrapolate this out to when customers in this category become a bigger and bigger part of our business? It is more, are we actually building a tool that we have confidence is gonna succeed in converting a lot of customers over time? And that breaks down into a few things we look at.
Of course, I get excited by seeing scaling spend, but I am more excited about the fact that did not introduce a ton of bugs. We did not have a bunch of customer complaints. We did not bring in low-quality advertisers. Anything that was low quality was automatically kicked off the platform. So the team enabled a whole bunch of tools to get a product release that was not immaterial into market in a seamless manner now we are in a point of optimization. One point of optimization that is key is when a customer signs up, is it easy for them to understand the value proposition and get through integration to the point of go live?
That is something we are really focused on optimizing because as we mentioned, we do want to eventually promote the Axon platform to future customers. And if we want to do that, just like any advertiser in the world, we have got to optimize our conversion funnel. The other piece that is important is our teams are constantly working on embedding tools into the interface. So large language model powered tools that allow the customer to get support without facing with us. We are not seeing a huge influx of customer support tickets.
We are seeing these customers go live, be able to manage themselves, get best practices extracted out of the tools we have enabled in the Dash, and that is fantastic to see. So what I look at when I see this ramp up is that I am extrapolating to how this is gonna become billions and billions of dollars. It is more that the fact that it is working already a month in and we are not getting bombarded with customer complaints, so we are not seeing a ton of issues. And implies that we are on the right track to eventually get open in 2026.
And really be able to bring in a ton of advertisers over the following quarters and years.
Jason Bazinet: Thank you.
Matthew A. Stumpf: Yep.
Operator: Next, we will go to Clark Lampen with BTIG.
Clark Lampen: Thanks very much. Sorry. I have, like, four mute buttons. Right now that I have to take out. Complex setup over there, Clark. Yeah. Right. It is a little too complicated. Okay. So as we are thinking about, I guess, the growth of what has the potential to be like a really big business for you guys, over time, billions of incremental as you just sort of talked I am curious how you think about balancing growth chasing sort of new pockets of potential supply and building up demand to go after that. With displacement for your core gaming customer because you are introducing a new bidder with potentially higher transaction value or consumer LTV.
Is that something that model improvement and a faster pace of model enhancement will sort of take care of along the way? Or how do you, if any, think about gating the growth of this business if you have to for managing the core for the purposes of managing the core.
Adam Foroughi: Yeah. I mean, look, one, we do not try to gate growth. So if you sort of look at a platform, as gonna develop and evolve as it does, but understanding these models gives me confidence that as we get more density of advertisers, we are actually gonna have expanded spend for gaming customers, not diminished spend. And this is a bit counterintuitive, but here is why. The model today if you go back a year, prior to us getting into e-commerce and shops, you ended up having a thousand impressions to show a user, you bombarded them with games. Well, that is not a great offering.
It is as if you had a social network that was showing short form video. Instead, I am only gonna show golf videos. Everyone who is on the golf videos at that moment would churn. Well, in our case, the customers are not churning. They are playing games. But they are not gonna convert, and our conversion rates are really low. There are moments when the model knows a user is gonna be in the game. When those moments happen, the CPM for a game advertiser is phenomenal. It is really, really high. Our average conversion rate is that 1% that we had given a year plus ago.
So maybe it is higher now, but just for this example, let us use 1%. Driving 10 game installs over a thousand impressions, but we are probably wasting 80, 90% of those impressions because the model knows in a tight percentage of impressions, are gonna convert this user is ready for something new, the CPM there will beat anything else that comes along. So you go and bring in demand density. What happens? Now the model can better use all that access impression. And so if it does, what is gonna happen is your gaming is not gonna diminish. It is just gonna be more targeted. So maybe impressions go down, CPM goes up for them.
But everything is priced to revenue for our customers. So they get the same revenue out. And then these new customers better monetize the user. Give them more diversity of content, which hopefully, will train them to better engage with their ads. And then you take it to the next level, which is now all of a sudden, we are getting data from way more types of customers. We now know let us say tomorrow, someone buys a $5,000 handbag on a website. The data point we did not have a year ago. That data point, my simple mind, can probably tell you that is a good user for Candy Crush if they have not played Candy Crush.
Neural net is gonna tell you a lot more than that based on its correlations. And so you are building up a dataset that does not just limit itself to the shopping category or the website advertising category. It helps enable better advertising for the gaming customers as well. You put all those pieces together, and I am really confident that not gonna squeeze anyone in our platform. We are probably gonna have expansion across the board. As we add more demand density and get more data into the system.
Clark Lampen: That is helpful. Maybe just as a very quick follow-up. You guys highlighted tuning the onboarding flows and generative AI creative. How far away are you or sort of at what sort of rate are we making progress to sort of getting one of those tools live? Would either of those things, I guess, sort of be a gating factor to launching or introducing GA? At this point? Or are they sort of vital to going to a broader customer base? So the Axon Ads site is a prompt.
Adam Foroughi: At this point. And part of the logic of doing that was to get inputs into that prompt so we can tune a bot that is external facing and then bring it internal. So we are in the midst of doing that, and that is not far off. So we will have different implementations of bots inside the site. I mean, as you know, we have talked about last quarter, a customer uploads ads or uploads a website to promote, we are not manually checking it.
There is a bot out there that is automatically checking for our quality and ensuring that the quality meets the standard that we need on the platform both for the creative and for the website being promoted or the application. So we already have various points of bots. Into the tool, and we will have more. It is just gonna get better as we get more data in. And we can tune it so that it is actually accurate across the board. The generative AI-based ad creatives do not depend entirely on us, but Sora two came out this past quarter. That was another step forward. V o three keeps getting better.
So you can assume these tools are getting pretty close. We are not we are probably far away from the point where the model itself can recursively just go and create more content and just bring more ads into the system. We are probably not very far away. And I am hoping in a matter of weeks or months, be able to test generative AI-based creative that we create with a little help. Some tooling on top of the large language models, and then submit to the advertisers for approval. That in itself can really explode the count of ads on the platform, and so that is not far off.
So on your last question, were these gating to general release do not think so. I think the main thing that we care about there is how we tune the flows. Is the conversion funnel appropriate? Are customers getting confused, or are they getting a good experience from onboarding to ramping? They are getting a seamless experience and we are not getting overly overwhelmed with inbound complaints or concerns or need for support, we are ready to go open.
Operator: Our next question will come from Alec Brondolo with Wells Fargo.
Alec Reid Brondolo: Hey, thanks so much for the question. I appreciate it. I think, you know, as we have kind of spoken about direct payments and this transition from kind of paying the App Store and the Play Store 30% to going to an o and o payment product. We have kind of talked about this, I think, historically, it is more of a medium to long-term tailwind. Do you think that might be manifesting sooner than expected and did it contribute to third quarter results?
Adam Foroughi: I do not think it is contributing much at all yet. I think it is gonna be over the quarters that it is gonna take impact. I do not think it is realistic that 30% tax goes to low single digits. So let us just take the midpoint 15%. That is a material lift in LTV for a lot of these in-app purchasing games, roughly 20%. Portion of that is gonna go into development. Of more content, which is great. They are gonna make better games. Some portion of that, they will bank into the bottom line. Some portion of that will go to marketing companies.
I mean, I will say the one thing about our business always is we do not try to think about what is happening outside of us. This is something that is outside of our control. It is up to the platforms, regulators, and then the content creators. It is not up to us. What is up to us and inside our control is how good our tools are. Q3 was driven by what we said on the earnings script. The models continue to get better, iterative improvements in the template. More advertisements on the platform, more advertisers on the platform. All of that is compounding to really quick growth rate. Even in the core category.
We are still believing very confidently that in this 20% to 30%, long-term growth rate in our core category, but even in the core, we are beating that. And then now you are layering on top of that all this opportunity. With the self-service platform. So we are really excited about where we are. Focused on what we have underneath our control.
Alec Reid Brondolo: Perfect. And maybe if I could ask a follow-up. You know, I think there is always been this talk about eventually extending the reach of chain. Like, right now, most of ads are placed in mobile games, and then the idea is perhaps over time, we could go to other surfaces. You know, it seems like some combination of AdX and Google Ads Manager might come up for sales a function of the Google AdTech antitrust trial. Would you be interested in those assets if they were made available?
Adam Foroughi: I mean, without commenting on what else is out there, like, about our business, the reality with our business is think about providing the best solution to our partners. For the advertisers, we believe we are on the track, to really give them a good way to access a really large audience playing games. For the game publisher and then expanding publishers as we get to more publishers on our platform, we have built them very good tools to monetize. And promote their products and grow their businesses. As we think about going broader than that, the open web publishers and other app publishers, they currently cannot access our tools the same way. Could use better monetization.
All know that category is pretty slow growth, then we talked about CTV in the past too. Everywhere else is struggling to monetize. Except in the walled gardens and except on games. Predominantly because of the success of our platforms. And so if that is the case, we look at that as our potential prospect clients as well. We should be able to extend our product offering over time to those folks. We need more demand. We are not supply constrained today. We are demand constrained. If we do our job right and bring on a lot of advertisers, it serves us well because it serves them well to be able to extend our offering out to more publishers.
Alec Reid Brondolo: Perfect. Thank you so much.
Operator: Our next question will come from Vasily Karasyov with Cannonball.
Vasily Karasyov: Hi, good afternoon. Adam, wanted to follow-up on what you said earlier. About LTV calculations that you think your advertisers do. So if given the very and growth rates in-app purchases market, in-app advertising market. Right? So can you comment on what you see if your advertisers LTV, evolving, let us say, to a year ago, compared to now, I would think that the advertising component would be much higher now. Right? And what Yes. It is calling and how do you what it means for you. Thank you. So look, generally, as a whole, the in-app purchasing market is more mature. Than the in-app advertising market. So we are seeing much faster growth rates on the Max platform.
We have said multiples faster than the in-app purchasing market grows. Because those publishers both the older publishers in that category are getting better tools both for growth and monetization. And then newer publishers see these other publishers scaling they integrate more ads. So you are seeing more supply come online and existing supply monetize better. In a purchasing market, is not really creating that many more monetization tools. It requires for growth, this tax to go down. If the 30% goes to fifteen, that creates a really big tailwind, and it creates better monetization mechanics. That is really hard in that category. It is up to the game developers. But it is not uniform across the platform.
And then it requires more IAP games. There is a really big set of games that are just mature in that category. That frankly do not really have much of a way to grow anymore. And then there are newer ones that constantly come live like, in the top 10 to 20 in-app purchasing top-grossing games, there is a huge mix of games that have launched in the last two years that are now in the top 20. So there are new ones that go live that help. Grow there. But for us, what we are focused on is where we can drive an impact. We can help the in-app purchasing ones promote themselves.
The in-app advertising ones are really exciting for us because they power our true market. The true market is the supply side on Macs. We see that supply expanding. That as we give them better monetization tools and better growth tools, supply expanding, the growth rate there is the direct market that helps us grow. And then hopefully, we can grow on top of that even more because of improvements in all the other parts of our business.
Vasily Karasyov: Alright. Thank you. Very helpful.
Operator: One moment while we confirm the queue. Our next question will come from Matthew Cost with Morgan Stanley.
Matthew Cost: Awesome. Hi, everyone. Thanks for taking the questions. Thank you for the 50% week on week growth metric that is really interesting. Is that the metric that you are managing to try to find the point at which you are gonna go general availability? And if not, what are you looking at? Like, what will be things that you need to knock down for that to happen? All these things take time to build. So I do not, like, spend. Obviously, if spend was not going up a lot, I would be a lot more concerned when you got a business in any scale growing 50% week over week. The reason to be excited.
But what I care more about is that we have time to optimize the funnel. We need to make sure the conversion funnel is optimized. This is just like launching a b to c property. Your first funnel is not gonna be your best funnel. We have already optimized it once. So what is today on the site is better than what was on the site four weeks ago. But there is room for improvement there. Your communications with the clients, the emails that the clients get after they sign up, can improve that. We can improve the tooling inside the dashboard, all the AI bots that we have talked about.
And so there are different aspects of this that we just need time to get to a place where we go, this meets our quality standard. Then we are ready to open up. Because if we open up today, we may be okay, we may not. We may get inundated with user concerns as you shrink the size of the advertiser. So one day, like to make sure that local laundromat that signs up gets a great experience promoting themselves to this gamer audience on our platform. And if we are not ready yet today, we are gonna take our time to get there. We do not think it is a long time away.
I think I had said on our prior earnings call, for sure, '26. So this is not a very long time away. We are just gonna take our time to ensure that we have got the product at the level that we want.
Matthew Cost: Great. And then on the paid marketing front, I think you talked last quarter and maybe even mentioned in passing this quarter the opportunity to do more of that. It looks like based on your sales and marketing budget in the third quarter that it was not something that you started to lean into. So how should we think about the timing and potential magnitude of doing more marketing?
Adam Foroughi: Yeah. We are so we are testing right now, actively. Testing budget is gonna be not large. Even if we ever scale this, scale of our business is quite large. So, like, some of the largest advertisers in the world only spend a couple $100 million a year. As you think about the scale of our business, it is never gonna be a very large line item against the revenue potential. But because our LTV is so high, and we are optimizing our conversion rate, and we think we can get that to be really compelling, and the brand is not known, the setup is really good for promoting our product to potential end customers.
And so if that is the case and we know we have a great LTV to cost of user acquisition, we will spend. We will break it out as it scales, we will show the unit economics so people can understand. What we are doing. But we are really good performance marketers. I think we can all agree at this point. So not gonna waste money on this. We are not brand marketers. The dollars will be much greater than the dollars we spend on user acquisition, and it is for me, it is the full-blown automation. Of a Salesforce. We will need some salespeople, but we can keep a very lean sales team in line with our traditional culture.
If we can automate onboarding through advertising all the way to point of go life.
Matthew Cost: Great. Thank you. Mhmm.
Operator: Our next question will come from Benjamin Black with Deutsche Bank.
Benjamin Black: Great. Thanks for taking my question. I was, is there any reason to think that the take rate or revenue from your e-commerce comm spend should be any different to that of the core gaming businesses or any structural differences, I guess, so the advertising credits you are offering folks early on perhaps lower the temporarily, longer term, are there any differences to be aware of?
Adam Foroughi: No. I mean, like, the advertising credits we offer is such a tiny fraction to overall value of a new customer. So it is no different than, like, a cost of user acquisition if we got the customer through paid marketing. So it is just really low. So consider that immaterial. The business is not built to say, well, advertising your shops, is treated differently than games. It is one unified auction. We are a single platform. So when we get a higher conversion rate, whether that comes from gaming or shops, or any category, it is gonna have a constant take rate. Across the board. It just implies that more density equals better conversion rate, possibly higher take.
Benjamin Black: Alright. Great. And then second question would be sort of, you know, you are clearly growing your ambitions within you know, AI automation more broadly. So maybe talk to us about your investment priorities as we sort of look ahead to the next year. I imagine your sort of compute capacity requirements are likely scaling. So part of the play into sort of your expense outlook as we look ahead to the next year?
Adam Foroughi: Yeah. We are pay as you go. So, like, I mean, we try to project and buy in particular, GPUs, that being the more lead time dependent. Part of the stack. We try to buy those a year in advance. So if you have looked at the financials, you will see spikes in infrastructure investment, but it runs through the p and l. It is not capitalized. And we do plan it really effectively. And we do not try to really overinvest. Ahead of revenue. We want to make sure really disciplined. And that is completely aligned with our culture where we want to be cost disciplined in every aspect of the business.
Benjamin Black: Great. Thank you so much.
Operator: Next, we will go to Chris Kuntarich with UBS. Chris, please dial 6 on your keypad to unmute.
Chris Kuntarich: For taking the question. Hopefully, can hear me. Just wanted to ask on web-based becoming available to EU advertisers. Any update there and then Matt, just a quick follow-up. Are you making any assumptions about advertisers that are not currently onboarded in the 4Q guide? Thanks.
Adam Foroughi: Yeah. On the EU side, so we can work with EU advertisers today. We just do not open up our inventory for website or shop advertisers in the EU region of our audience. So, just a clarification bullet. It is EU tends to be somewhere in the low teens percentage of our business. If I remember off the top of my head. So it is not a huge priority versus expanding out the business. GDPR rules are more restrictive and require a build-out for us. So we will get to it in due time. It is not a priority against go getting to general release of our platform and building out the rest of these tools we have talked about.
Matthew A. Stumpf: Yeah. And in terms of guidance, I think we have done pretty consistent to our approach thus far. We have communicated before that we guide to kind of where we feel very comfortable, that we could potentially land. So, you know, we guide to what we know. We do not guide try to estimate, you know, for something that is unpredictable. And in this case, you know, we cannot predict the number or the volume of new advertisers coming onto the system through the referral program and how that potential ramp in spend could happen through the quarter. So there is no incremental assumption in built into the guide for onboarding of incremental customers.
Chris Kuntarich: Very helpful. Thank you, guys. You are welcome.
Operator: Next, we will hear from Robert Jason Sanderson with Loop Capital.
Robert Jason Sanderson: Yeah. Good afternoon, everybody. Thanks for taking the questions. I have two. Like, just in terms of kinda understanding more of the current points of friction to bringing people on, sounds like you are doing a lot of work to tune the onboarding flow. But, you know, sort of, you know, what other points of friction are to address to just, you know, further optimize? And then you have also said that you are not seeing a ton of complaints. But I am sure you are getting asks for features and things. So maybe you know, what are some common sort of, asks for feature add to Axon Ads Manager?
Adam Foroughi: Yeah. So the first question, I mean, like, you have got two points of this funnel. Pre getting to us. So, eventually, we have got to get the brand out there. We have got to be able to the platform. We have got to we are constrained by how many referral codes we gave out. So, like, just advertisers coming to the Axon platform and signing up, so let us set that aside because we purposefully constrained that. After the sign-up, we want to make sure we have as little drop off as possible. Of course, with any product when you get a sign-up, not every sign-up is gonna be qualified. We think a lot of these are qualified.
So we are optimizing to as high a rate as we can. From sign-up to go live. In terms of feature requests, surprisingly, not a whole lot. This is, like I would say, hard to guarantee that it will be that. Going forward because we are only a month in. So, like, you have got to remember, like, this if there is a lag time to integration and ramp up, and we are seeing the swift growth, you do not have time for these customers to really understand the platform yet.
So that may change, but we get more free feature requests from our current cohort of customers, the ones that went live a year ago, much more so than what we brought on in the last month.
Robert Jason Sanderson: If I could ask on international, you mentioned that you launched a little early. And it sounds like no EU. So maybe, you know, where are you available? Anything surprising or different about the behavior from this cohort? And then just anything you can share on next steps to expanding. I mean, you probably have some language optimization to do, I am sure, and channel development work. But kind of what are some of the next steps to make international a much bigger component?
Adam Foroughi: Yeah. So first off, it is everywhere in the world except for EU traffic. For web shops and web advertisers. App advertisers are everywhere in the world. We do not operate inside China, so but the rest of the world is there. In our business, the customers that we have today are mostly western shops. And so those western shops are not likely to go into Japan or Korea, Japan being our second biggest market, and promote themselves. They are just not gonna have a localized product offering. So the countries that have really been successful for this current customer base are the obvious ones, Canada, Australia, New Zealand, etcetera. So English speaking, similar makeup to The US.
As we go open up the platform, that is when we will try to get local presentation inside Japan, Korea, and other markets that are more closed off, but very large markets for us. And in the Western markets, we already have a presence, so it will be faster to get going. I think over time, localizations fortunately not a challenge anymore with LMs. Language is pretty easy to solve, so we are fairly solved over there. It is just much more built around getting the system to be workable the way we are talking about for the West. Goes global. Right? Like, all users around the world that we see playing games, the human beings behave similarly.
They might buy a shop from different shops because there are local merchants, in each one of these markets. But humans are not behaving much differently in Japan or Korea. Or Canada or Australia to The US. So the model translates all human behavior to math. Math is universal. And so as we launch and broaden out the platform, we do not think there is gonna be some big lift. To really see a lot of success internationally. We have not seen that as we have opened up these markets and had these same customers expand out.
Robert Jason Sanderson: Thanks, Adam.
Adam Foroughi: Yep.
Operator: Our next question will come from Martin Yang with OpCo.
Martin Yang: Hi. Thank you for taking my question. Sort of related to the last question, can you maybe talk a bit more about your current cohort, how they have been performed? In 3Q For example, are they more actively spending given your improvement tools having more features etcetera. Thank you. Yeah. Look. Over the last year, I mean, it is been a year since we have had this product. Right? So the teams continuously improving the product, so the return on ad spend for the customers have gotten better. Tooling has gotten better. We went from the old dashboard to the Axon Ads Manager. So the tools that they have at their disposal have gotten better.
The customer's understanding of our platform has gotten better. Just that nuance on ad creative that ours are thirty-five seconds on average, whereas social is seven seconds. It took months with a lot of customers to explain that fine detail. And that if you are not building a forty-five second ad, you are gonna lose to your competitor. So all these things just compound. We are one year into a product. In a very large advertising market, competing with other companies that are years or decade plus into that same market. So as you build better tooling and as you get a better understanding of your tools, you see the fact compounding, the knowledge compounding, the usage compounding.
And so we are seeing trends that are positive, but this thing is gonna take time to build at the level that we want to build. We have been in the gaming business for thirteen years. We are clearly the best channel for the gaming customers at this point. We think we can replicate that success across all these other categories. And as we build to the scale that we are accustomed to operating at, you would expect a lot of compounding success over time across knowledge usage, and tool.
Martin Yang: Got it. I have a quick follow-up on the PSU issued in October. That is for engineering employees. Can you maybe give us more context? Is it for a small handful? Single recruiting, retention, additional details would be helpful. Thank you. Yeah. It is a pool, Martin, for a group of engineers, but it is also a future tool that we can use for recruiting as well for new hires into the engineering team.
Martin Yang: Thanks, Matt. That is it for me.
Adam Foroughi: Welcome.
Operator: Next, we will go to James P. Callahan with Piper Sandler.
James P. Callahan: Hey, thanks for taking the question. I just had a follow-up on the referral codes. I guess, are all the codes so far given out, or is this something we can expect to partner as to sort of continue doing through early twenty-six.
Adam Foroughi: Yeah. Generally, if there is a partner that we gave x codes to and they run through x they deliver call quality leads, give them more. We can measure back to every referral partner success of the customers they bring. So we do not want to constrain good referral partners. The gate is solely to slow it down. So that we have time to build the tool the way I have been talking about. But if someone is bringing us good leads, we are gonna take good leads. So we are gonna be dynamic in the codes that we issue across the board if we see success coming in.
James P. Callahan: Got it. That is helpful. And then I guess just a follow-up on, you talked about low quality and, like, making sure you are selective in having the right kind of advertisers. I guess, what would you define as low quality or an advertiser that would not work sort of with the platform? I mean, so over time, you broaden out the type of advertisers you have. Basically everything because you have a lot of density and a customer is never gonna see 100 impressions of the same thing. We are today, we do not have a lot of density. So certain categories, the customer may see 200 impressions of the same thing.
Well, the bar we set right now is if our team is willing to buy that product or not. If they think it is a good product, they are willing to buy it. Great. We want to run it on our platform. That does not mean we are gonna maintain the same standard forever. Most of the companies that today we call low quality or we are not letting on the platform, they are running ads on social. They are running ads on search. These are real businesses that are substantial businesses in many cases. But we just want to make sure that we think about our audience as a very consistent large audience.
And we want to train them that our ads are really high quality. In the absence of that competition, if they are getting bombarded with single offers, we want to make sure each one of those is really, really high value for that customer.
James P. Callahan: Got it. That is helpful. Thank you.
Operator: We will take our last question from Nat Schindler with Scotia Scotiabank.
Nat Schindler: Yes. Hi, guys. Thanks a lot for taking the question. I am going to go really high level and touch back on an earlier question someone asked about whether or not you were interested in some of those Google assets if they ever came up. You are growing that obviously absurd rates, and you are doing it gonna it sounds like you are gonna continue doing your core market. In gaming, and you are adding, obviously, e-commerce. Which is an enormous opportunity. I guess, assume a lot of this is your conversion rates keep improving. You guys have been great at that over time. But some of it has to do with inventory itself.
So at some point, conversion rates can improve too much. And if e-commerce is a lower converting area than gaming, when do you run out of inventory on your core gamer market?
Adam Foroughi: Yeah. I mean, look, we do not know is the simple answer. There is a long way to go, we think. Just because we have so little advertiser density today. There has never been any company that has been set up like ours in the advertising space in history. What we reported, I think it was in Q1, was $11 billion plus of ad spend. Then the disclosures we have given you across web advertisers and gaming advertisers puts it in the low thousands. So you have got such a high amount of spend for such a low amount of advertisers across over a billion daily active users. What happens when we get more density? You get more data.
You get more density. You get more time to improve your models. That conversion rate is gonna go up. If you think about social, not like there is more users on social. The growth in social has consistently come from the last few years, more customers getting a higher conversion rate because just the technologies are getting more. And so think we are gonna see the same thing, but we are gonna be able to pair it with this advertiser recruitment. We are starting from such a low point. There is gonna be quarters, possibly many years. Of growth and conversion rate to come before we start worrying about supply.
Now that said, I have talked about it is interesting to us to go help the broader set of publishers both in the open web and connected TV to better monetize. We get pinged all the time. It is no secret that we are really good at performance advertising at this point. So at some point, we would like to broaden out the supply base as well. Because why not? That builds a really good growth catalyst into the future. But today, we are really heads down focused on the demand side of the platform because there is so much work to do there. At some point, you will see us talking about both sides.
Nat Schindler: Makes sense. Thank you.
Matthew A. Stumpf: Thanks, Dan.
Operator: And that concludes the question and answer session for this quarter. We thank you all for joining us today. Have a good afternoon.
Adam Foroughi: Thanks, everyone.
David Chow: Thank you.
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