Despite a 55% surge in second-quarter net profit, shares of AppLovin took a sharp hit after its revenue and third-quarter guidance slightly missed Wall Street estimates. During the earnings call, management attributed the slowdown to a timing gap in AI model iteration, emphasizing that increased investment in computing power will drive longer-term growth.
On August 5, mobile marketing software giant AppLovin held its second-quarter earnings conference call. Following the release of the results, which showed revenue falling short of expectations and a somewhat subdued third-quarter outlook, the company's stock plunged as much as 20%, even though its net profit performance was strong.
Financial data revealed that AppLovin's Q2 revenue reached $1.92 billion, a 53% year-over-year increase, slightly below the analyst consensus of $1.94 billion. Adjusted earnings per share came in at $3.76, marginally above the expected $3.75. Net profit hit $127 million, up 55% year-over-year. For the third quarter, the company forecast revenue between $2.055 billion and $2.085 billion, with a midpoint of $2.07 billion, also falling short of the market's expectation of $2.08 billion.
On the call, CEO Adam Foroughi and CFO Matt Stumpf directly addressed the underperformance. Foroughi was straightforward, stating, "This quarter, we fell short of that standard." He quickly added, "Importantly, we know what happened, and we've already fixed it."
The Root Cause of the Miss: A Timing Gap in Model Upgrades
This was the most closely watched topic of the earnings call. Facing Wall Street's questions about the revenue slowdown, Foroughi did not shy away. He admitted the company always aims to surpass expectations but didn't achieve it this time.
Foroughi's explanation pointed to a core logic: the growth of AppLovin's gaming advertising business is fundamentally driven by continuous AI model performance improvements. These improvements lead to higher return on ad spend for advertisers, which naturally increases their budgets. "Gaming remains our primary revenue source, and the biggest single factor driving its growth is model performance. When our models improve, advertisers can profitably allocate more budget, and that budget naturally increases," Foroughi said.
He acknowledged that the Q2 issue was a matter of timing. "The quarter ultimately came down to a timing issue. Our pace of meaningful model improvements within the quarter was slower than usual, and the next significant leap in model performance landed just after the quarter ended."
He stressed that the company observed no weakening in advertiser demand or any changes in the competitive landscape. Revenue from the MAX publisher platform grew by double digits quarter-over-quarter, and the company's share of publisher ad inventory remained stable. "With these improvements now live, and as we enter a seasonally stronger period, the business is re-accelerating," Foroughi stated.
When pressed by analysts on why the model upgrade didn't arrive as scheduled, Foroughi gave a candid answer, "That's the nature of R&D. There are no guarantees of improvement every three-month cycle. The team is always testing. Sometimes you get huge jumps with 12%, 13%, or 15% quarter-over-quarter growth, and other times you have periods where you don't get material improvements."
Confronting Profit Margin Concerns: 'A Trade We're Willing to Make Every Day'
Beyond the revenue miss, AppLovin's Q2 adjusted EBITDA of $161 million also fell slightly short of the company's own guidance range, sparking market concerns about rising costs. Management attributed this to heavy investment in underlying technology. Foroughi explained that the company is making fundamental architectural changes to build more complex models that will benefit more from additional training computing power.
Foroughi was resolute about this investment strategy, which is eating into short-term profits. "When additional computing power can generate substantially more revenue through better model performance, that's a trade we're willing to make every day. These higher training and inference costs are already factored into our guidance for the next quarter."
CFO Matt Stumpf added that the company manages the business around absolute EBITDA dollars and free cash flow, rather than deliberately targeting a specific profit margin percentage. "If we see an opportunity to generate more revenue, we will continue to invest," he said.
Future Growth Potential: E-commerce Expansion and a 30% Long-Term Growth Rate
Beyond its core gaming business, the market is highly focused on AppLovin's progress in expanding into e-commerce and its consumer business. With the AppLovin Ads Manager now open to the public, this is seen as a key to breaking through the ceiling of the gaming industry. Foroughi revealed that the consumer business performed exceptionally well in Q2, with advertiser spending reaching new highs, 28% above the levels of the fourth quarter of 2025, which is typically a peak advertising season. "To achieve growth far exceeding a peak season level during a quarter that is usually a seasonal lull shows how steep this growth curve is," he said.
However, he also cautioned the market that ramping up the new business will take time. "As we said last quarter, we don't expect the public launch to change the business overnight. We will strategically prioritize mid-market advertisers... Just like building the gaming business, the long tail will be gradually unlocked as we accumulate data."
Discussing the company's long-term moat and growth ceiling, Foroughi painted a highly optimistic picture. "The speed and scale at which we grew the gaming business far exceeded our imagination, and the consumer business has added a much longer runway for us. We run the same auction system across multiple ad categories, and every new category we introduce expands the opportunity in front of us. Over the long term, as we continue to improve the gaming business and expand the consumer business, we believe this business can achieve a compound annual growth rate of around 30%."
Additionally, CFO Matt Stumpf clarified on the call that a previously reported inquiry from the U.S. Securities and Exchange Commission had been closed with a "no action" recommendation.
Revenue Slightly Misses, Profit Remains Strong, Q3 Guidance Midpoint Below Forecasts
The financial report showed that AppLovin's Q2 revenue was $1.92 billion, up 53% year-over-year, but slightly below both the midpoint of its own guidance range and the analyst consensus of approximately $1.94 billion. Adjusted EBITDA was $1.61 billion, up 58% year-over-year, with the adjusted EBITDA margin expanding by approximately 300 basis points, though it also modestly missed the prior guidance range.
Net profit remained a standout: $127 million, an increase of about 55% from $82 million in the same period last year. Adjusted earnings per share of $3.76 was roughly in line with analyst expectations. Free cash flow was $863 million.
CFO Stumpf noted that the free cash flow conversion rate in Q2 was below the typical pace, mainly due to the timing of international cash tax and interest payments. "This is a timing issue, not a change in the company's profitability," he said. He expects the free cash flow conversion rate to improve in the third quarter, with the full-year rate returning to about 75% of adjusted EBITDA.
The company provided Q3 revenue guidance in the range of $2.055 billion to $2.085 billion, representing year-over-year growth of 46% to 48% and quarter-over-quarter growth of 7% to 8%. The midpoint of the guidance, approximately $2.07 billion, was slightly below the analyst estimate of $2.08 billion. Adjusted EBITDA guidance was set at $1.71 billion to $1.74 billion, up 48% to 50% year-over-year, with an adjusted EBITDA margin of about 83%, also below Wall Street's expectation of around $1.76 billion.
CFO Stumpf specifically noted that the Q3 guidance includes "model improvements that have been implemented and are running" as well as "higher training and inference compute costs," but does not assume any additional model releases that have not yet been deployed. CEO Foroughi expressed optimism about the start of the third quarter, stating, "Q3 is off to a strong start, and the business is back on track to where we expect it to be."
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