Review|APP 26Q3: From Being Caught Off Guard to Responding Effectively

I. Results at a glance

• Revenue of $2.185bn, up 13.6% QoQ and 55% YoY, 4.8% above the high end of guidance.
• Adjusted EBITDA of $1.842bn, up 59% YoY, with an 84% margin. Incremental EBITDA margin was 87% QoQ.
• The company repurchased and withheld a total of 4.1 million shares for $1.4bn, a substantial increase from the previous quarter.
• 4Q26 revenue guidance of $2.365bn to $2.395bn, implying 8.9% QoQ and 43.6% YoY growth at the midpoint; adjusted EBITDA guidance of $1.995bn to $2.025bn, with a margin of 84% to 85%.

II. Earnings call highlights

The quarterly beat and gaming reacceleration

• Gaming drove most of the quarterly beat: “Revenue grew 14% sequentially and exceeded the high end of our guidance by approximately $100 million, primarily driven by the core mobile gaming business due to model improvements during the quarter ... Our gaming business grew nearly 50% year-over-year, re-accelerating right alongside the rollout.”
• Consumer continued to scale: “Consumer advertisers’ spend continues to have healthy growth, with spend up double digits quarter-over-quarter and growing triple digits from the same quarter last year.”

The next-generation AXON model and the comparison with AXON 2.0

• Management confirmed a new generation of models: “I would put it from a technology standpoint in terms of technical complexity on that level. In terms of business, look, this is the next generation of the model. ... But the reality is, this gives us a lot bigger path in the future in terms of processing more data and spinning up bigger clusters and hopefully getting better output.”
• The rollout remains partial, with more room for further optimization: “We are still in partial rollout, so it has to roll through all of our models. There is still a lot of complex R&D work there, but it gives us a much longer roadmap than the old models would have given us”
• The largest performance gains are in data-sparse segments: “It also improves performance most where data is sparser, newer advertisers, smaller advertisers, newer categories, exactly where our consumer vertical lives.”

The impact of consumer ads on gaming ad impressions

• Consumer ads diversify the ad mix and improve targeting: “Instead of showing the same user 20 gaming ads in a week, we might show them 15 product ads and five gaming ads. ... It just means that the model can get much more targeted, so those same five impressions that would have driven the conversion are still going to sit there, and now all of a sudden you have all these product ads.”
• Improving conversion remains the near- to medium-term priority: “We’re still very low on what we think is the possible conversion rate inside this gaming ecosystem. ... That’s really the focus area. That’s the largest needle mover in the short, medium term. Long term, for sure, supply expansion is something that we’re going to be focused on.”

Performance brand ad budgets shifting to apps

• Performance brand advertisers have different objectives: “So, I would split up performance brand into true performance where they’re optimizing the incremental ROAS or like a down funnel purchase transaction. Then you’ve got performance brand that still is looking for audience reach. A lot of the mobile web advertising and a lot of what’s called, I guess, traditionally open web, is more of the latter.”
• Budgets focused on purchases could shift to apps: “We try to price the discovery all the way to the point of transaction. So, if that’s what they care about and they’re able to track it all on digital, then yes, we think a lot of those dollars will shift into the app space. ... If you then gross that up for the whole space, this is one of the largest advertising opportunities that there are outside of social and search, maybe the largest outside of social and search.”

MAX data access

• MAX sees bids, but AXON has limited data access: “The only data that is available, to the MAX system, of course, we see all the bids. We do not know what people bid for. But the only data that is available to our Axon models or our system are, did we win the ad or did we not win the ad? What was the price for the winning auction? And then everyone who loses gets the price for the losing auction. That is it.”
• MAX does not see the specific ads other companies serve: “We do not have visibility into an auction cleared, someone else won it, they served exactly X. ... That exact X is the ownership of the advertising company ... It is an output of their models. That remains with them. There is nothing that gives us magical data access from the mediation.”
• All bidders have the same data access: “In fact, when we built MAX, what we did was we commoditized it all. We said everyone is going to have the same access to data as we will as a bidder into MAX, because what we wanted was a fair marketplace. ... that fairness is what drove the price of every single impression to be the highest possible.”

MAX supply, inventory costs and take rate

• The MAX market continues to grow strongly: “Yeah, I mean, look, it is still strong double digits. I think last quarter we told you in a single quarter it grew double digits. ... I think most ad spaces in terms of just supply growth and value of that supply are not growing all that fast, probably like very low double digits to possibly single digits.”
• Growth comes from more supply and higher impression value: “there are two drivers to MAX growth, more supply and the cost going up. So cost effectively, companies getting better at monetizing the impressions, the value of the auction goes up, the publisher makes more.”
• Technology improvements must keep pace with rising inventory costs: “Now, on the other side of that, we are either going to have to pay out more for publisher inventory or improve our own technology at that same rate, or improve our own technology more than that rate to grow our business even faster than that market. ... We have been improving our technology better than the market, and therefore our business is growing much faster than the market is growing.”
• Take rate is an outcome, rather than an optimization target: “we don’t talk about take rate in the business, and frankly, it happens after the fact. When you have a conversion rate that’s a little bit over 1%, if we were buying on 1,000 impressions, somewhere around 987 of them we’re losing money on. ... On the other ones, you have almost an infinite take rate because you’re making a ton of revenue with a very small amount of outlay. So it’s just not a function that we optimize to”
• Take rate depends on technology improvements relative to the market: “If our engineers created a massive uplift in the next two weeks, we’d be able to take more because we out-innovated everyone else in the market. ... If we innovate at the rate of the market, the market pricing stays consistent, we’re sort of where we always are, which is pretty consistent. If we fall way behind ... our take rate will contract because the market pricing will get better than the rate of improvement on our technology.”

CTV pilots and the long-term opportunity

• CTV pilots are live, with no near-term earnings contribution expected: “We’ve got pilot campaigns going now. The product is actually looking very promising. It’s early. It’s a whole new market, so I wouldn’t bank on it at all for being accretive to numbers anytime soon.”
• The long-term opportunity is full-funnel performance advertising: “there’s not a true top of funnel to bottom of funnel performance offering on connected TV. ... If we can figure that out and be the first to market with something that’s scalable there’s a lot of available inventory that’s under monetized there. It’s sort of what mobile looked like to us 10, 15 years ago when we started the business.”

III. Our take

1. Why did we gradually become more positive during our research?