Review|APP & U 2Q26: D28 IAA Is Now the Core Battleground

AppLovin Performance Snapshot

• 2Q26 revenue grew 53% YoY, 1% below the high end of guidance. Our revenue estimate was already below the bogey and below AppLovin’s typical 3% beat, but actual execution still came in below our estimate.
• The high end of 3Q26 revenue guidance implies 48% YoY growth, below the bogey. Assuming a typical 3% to 4% beat, implied 3Q26 revenue growth is roughly 53% YoY, broadly in line with 2Q26. Still, because 2Q26 did not deliver its typical beat, investors may question whether the company can return to that level.

Unity Performance Snapshot

• 2Q26 Unity Ads revenue grew 23% QoQ, modestly above our 20% expectation. Based on guidance and the typical beat, Unity Ads growth could remain near this pace in 3Q26.

AppLovin Earnings Call Takeaways

Why AppLovin Missed

• In our preview, we noted that 2Q26 could fall short of AppLovin’s typical beat. However, gaming advertising improved meaningfully from early July. This is fully consistent with management’s commentary on the call.
• Management repeatedly emphasized that the miss was not demand related. It reflected the timing of model improvements: “We did not meet our own standards this quarter. The key point is that we know what happened, the issue has been resolved, and the third quarter is off to a strong start.”
• “Gaming remains the majority of our revenue, and model performance is the largest single driver of its growth. This quarter came down to timing. The cadence of meaningful model improvements was lighter than usual during the quarter, and the next step up in model performance arrived just after quarter end.”
• When asked what model breakthrough had not materialized, management said: “Looking back over the past 12 quarters, every quarter other than this Q2 delivered very strong growth. Every quarter in which we outgrew expectations was supported by model improvements. This time, Q2 did not receive the magnitude of uplift we saw in prior quarters, and that uplift arrived just after the quarter ended.”
• On why the expected uplift did not arrive during the quarter, management stressed that this is inherent to R&D: “That is R&D. There is no guarantee that we will have an improvement every three months. The system is essentially a large set of A/B tests looking for gains. There will be periods when we do not find material improvements, and periods when we see very large gains that drive 12%, 13%, or 15% QoQ growth.”
• Management said demand and the competitive environment had not deteriorated: “Importantly, we have not seen any indication of weaker advertiser demand or a change in the competitive environment. Publisher revenue on MAX grew at a double digit sequential rate, and our share of publisher waterfalls remained stable.”
• “The guidance incorporates the model improvements already launched and the compute cost increases we have observed.”

Consumer Business Progress

• The consumer business performed exceptionally well, with spend up 28% even versus Q4, the seasonal peak: “Advertiser spend reached another record and was 28% above 4Q25. Remember that Q4 is the seasonal peak for these advertisers. Exceeding peak season levels by this much in a seasonal trough shows how steep the curve is.”
• Growth was driven primarily by existing advertisers rather than new logos: “New advertisers are helpful, but the underlying business is already quite strong. Growth of this magnitude in Q2 shows that existing customers on the platform are seeing substantial success.”
• On advertisers remaining well below their ROAS ceiling: “These companies manage budgets one to four quarters in advance. Most of their budgets are allocated to social and search. We are viewed as a new budget category, essentially a test category, and moving up takes time. These dynamics compound over quarters and years.”

Why EBITDA Came in Below Guidance

• EBITDA came in modestly below guidance, but management said all incremental investment was directed toward technology and compute, with returns as the gating factor: “The incremental investment is going exactly where we think it should go, into technology. We have been investing in architectural changes that allow us to build more sophisticated models that benefit more from additional training compute. When additional compute drives meaningful revenue upside through better model performance, that is a trade we would make every day.”
• Compute intensity guidance: roughly $0.10 of compute spend for every incremental $1 of revenue. “For every incremental dollar of revenue, we spend about $0.10 on compute. That is the level embedded in guidance. We do not expect that to change, although it may fluctuate over time.”
• Management said it would not delay a more complex model simply to manage quarterly cadence: “If someone finds a way to build a much more complex model with far more parameters, train and run that larger model, and generate a material revenue uplift, we will not hold it back.”

SEC Investigation into AppLovin Has Concluded

• “It was a voluntary request for information, and we never considered it material. The SEC recently informed us that its investigation has concluded and that it does not recommend any action. We are pleased to have the matter resolved.”

AppLovin Ads Manager Is Generally Available

• The platform became publicly available under the AppLovin Ads Manager name at the end of June, but the rollout is deliberately phased, beginning with the midmarket: “We launched the platform to the public as AppLovin Ads Manager. We are deliberately taking it step by step, starting with midmarket advertisers, where the platform is performing best today. As the data compounds, the long tail will gradually open up as it did in gaming. We will bring this to market through partners.”
• On larger Fortune 500 brands, management said it will eventually pursue the segment, but first needs a sales force and a reputation for having proven the midmarket: “To win large customers, we need salespeople. We also need a reputation that proves we have made the midmarket work. If we can build a truly strong reputation here, we will absolutely move into the top end of the market.”
• Management sees attribution and analytics partners, including commerce analytics platforms, as a targeted route to the right customers: “If we go to the source that works with these companies, that is a more targeted way to bring the right advertisers onto the platform. That creates a structure in which everyone wins.” When an analyst asked whether this was similar to Triple Whale, Adam replied: “You have basically got it.”
• On whether advertisers will rush in as they did at Meta or Google, management said the platform remains concentrated among a small number of customers: “It took us 14 years to fully penetrate gaming. Building this system takes time, but we are seeing very rapid growth because the customers on the platform are having substantial success.”

Unity Earnings Call Takeaways

Why Unity Beat

• In our preview, we expected Unity to deliver a significant beat, primarily because of D28 IAA. D28 IAA drove nearly a doubling of net new budget. This is our most constructive quarter on Unity since we initiated coverage.

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