Alibaba Group Holding Ltd. (BABA) Q3 2021 Earnings Call Transcript
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AppLovin Corporation (APP -5.90%)
Q1 2022 Earnings Call
May 11, 2022, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Ryan Gee

Good afternoon, everyone. Let’s get started. Welcome to AppLovin’s earnings call for the quarter ended March 31, 2021. I’m Ryan Gee, head of investor relations and strategic finance at AppLovin.

And joining me to discuss our results are our co-founder, CEO, and chairperson, Adam Foroughi; and our president and chief financial officer, Herald Chen. Please note our SEC filings, earnings release and shareholder letter discussing our first quarter performance are available at investors.applovin.com. We also posted a short slide presentation that Herald will reference later in this call if you’d like to follow along. During today’s call, we may be making forward-looking statements regarding future events and the future financial performance of our company.

These statements are based on our current assumptions and beliefs. We assume no obligation to update them, except as required by law. Actual results may differ materially from the results predicted. Please review the risk factors in our most recently filed Form 10-K and in our Form 10-Q to be filed shortly after this call for additional information.

We will also be discussing non-GAAP financial measures. Reconciliations of our GAAP and non-GAAP financial measures are included in our shareholder letter, available on our IR website. Please be sure to review the GAAP measures and the reconciliations as the non-GAAP measures are not intended to be a substitute for or superior to our GAAP results. This conference call is being recorded, and a replay will be available shortly.

We will be hosting a Q&A session after our prepared remarks. But first, I would like to turn it over to Adam and Herald. Adam, please go ahead.

Adam ForoughiCo-Founder, Chief Executive Officer, and Chairperson

This past quarter, we achieved many key milestones for AppLovin. We celebrated our 10-year anniversary of the business or one-year anniversary as a public company, and we cleared over 10 billion app installs discovered through our marketing platform. We can celebrate these milestones because of the hard work and value-driven culture that we have at AppLovin. First, we hire and work with great people from diverse backgrounds.

We give them an environment to thrive in, always trying to ensure each person has room to develop their professional and personal skills here more than anywhere else. Second, we are entrepreneurial, and we never settle. We know that in a competitive and challenging market, complacency leads to failure. And third, we maintain focus — we aim to do big things, and all of our decisions are tied to our core goals, continuing to expand our footprint as the marketing and monetization platform for developers.

It was a key to the team that we maintained these core principles as we entered a new public chapter for our company. I’m very proud to say that we’ve done just that. This can be demonstrated in our first quarter. First, our software platform business has continued to expand by adding new clients and increasing the amount that existing clients are spending.

This strong performance led to a record EBITDA in Q1 of $276 million. Most software businesses lose money long-run. We’re growing quickly and just cleared the $1 billion EBITDA run rate. Next, we successfully completed migrating MoPub into our MAX platform.

You can find the two largest mediation solutions in the mobile app market. We not only had to execute quickly on our side to accomplish this, we also asked publishers to integrate our platform into their apps in just 90 days or risk losing their ad revenues. A couple of things to call out specifically here. Historically, we grew MAX to become a leading solution in the market by offering the best technology, not by paying bonuses.

This is exactly how we’ll run our business going forward, focusing on continuing to deliver the best solution in the market. Given the short window of time to move to our unified platform, we made the decision to pay out $210 million in one-time publisher bonuses. We accounted for these bonuses as contra revenue, and Herald will give you the accounting details shortly. We see the opportunity to own the largest marketplace in the in-app advertising ecosystem as strategically valuable long term, and, therefore, this was a decision that was the easy one to make because it helps ensure continuity with the publishers coming over from over switching monetization platform which is a big undertaking, and we are proud that over 90% of the MoPub publishers moved over to Max.

As a result, we now have a significant share in the market using our solutions so much so that the success of our platform will directly influence growth in the total addressable market and the success of all major parties in the ecosystem. That’s a strong position to be in and a responsibility we will be proud of. And finally, we acquired Wurl, a leader in powering streaming TV. Together, we will partner to growing performance marketing with CTV.

It is clear just how quickly we pushed forward on items that make the biggest impact to our business when we look back just 1 year to the IPO and see that software was only 14% of our revenue versus 40% now. At that time, we discussed just how important the first-party data that those games provided was to our software platform success. Today, our software platform business is growing at a significant rate, much faster than we expected, while our apps business has leveled up. In fact, our software business in Q1 ’22 was four times larger than it was in Q1 ’21.

And in Q1, software contributed over 80% of our EBITDA. For the last several quarters, we’ve talked about how the apps business is not as strategic as it once was. With the continued scaling of our software platform, we’ve proven that the two businesses can operate independently from one another. More directly, given the success of our software platform, we will no longer require games as a cost center.

This means we will be exploring how to structure our apps business so that it is run more efficiently as its stand-alone business unit. This exploration may result in operational changes and possibly plan to sell or spin-off some of the studios. Among them are nearly 20 very capable games videos, their founders and their teams, we will operate the studios with a more profitable spend on user acquisition, which we already started to do in late Q1. Traditionally, we were willing to spend more on new users, valuing the scale, audience and data as the justification.

This led operating at a round breakeven, while typically gaming companies operated a 20% or higher EBITDA margins, which we will now aim to reach over time. Mobile app discovery and modernization are critical for app developers now more than ever. With MAX, we’re the market’s leading monetization solution, our discovery is the fastest-early user acquisition channel for developers today. With customers paying us for performance, we’re shielded against macroeconomic volatility.

We have a powerful machine learning engine that is only 18 months old and will continue to improve. MAX allows us to serve ads to the 700 million daily active users we help monetize. We have a team seasoned in navigating a complex ecosystem and a dynamic privacy landscape. With the growth opportunities, the costs of our software business and future initiatives and the high cash flow our business generates even today, we’re very excited about our future.

Now I’ll turn it over to Herald to outline the details of Q1 financials and our outlook.

Herald ChenPresident and Chief Financial Officer

Thanks very much. For that I mentioned, with the growth in margin to our software platform, plus a new operating approach for our apps portfolio, we are excited about our near- and long-term growth prospects and cash flow outlook. To help you better understand that thesis going forward, we’ll be providing greater insights to the economic drivers of our two businesses. And regarding the overall cash generation of our company.

For a quick preview of what I’m going to describe in more detail shortly. Our guidance for the software platform business is to generate over $1 billion of revenue in the second through fourth quarter of this year. Based on an estimated margin for that business was 70% and a flow through to cash of another estimated 70%, that business alone will generate over $0.5 billion of unlevered free cash flow in the next three quarters alone. So let’s go back on the quarter since in Q1, we made some key decisions and good progress through our goals.

I’ll highlight a few in detail before we take your questions. The first topic is our overall strong trending in margins. We have strong quarter over quarter and year-over-year growth on both the top and bottom lines when adjusting for the $210 million of contra revenue we booked in Q1, which were the bonuses paid to publishers related to the MoPub transaction. Our growth in Q1 was driven by the growth in our software platform revenue more than making up for a modest decline in our apps revenues.

So let me spend a few minutes on the contra revenue, so you can appreciate the growth in margin expansion that we saw in the quarter. First of all, just the accounting on contra-revenue, we paid these publisher bonuses to our vendors that are currently or may become future customer of ours. And since GAAP requires offsetting revenue for fees you pay to customers or potential customers, these publisher migration bonuses of $210 billion are accounted for as contra revenue; second, these are nonrecurring and result from the MoPub transaction. Historically, we did not incur these fees in any significant size.

But when you shut down one of the largest players in the mediation and ask their publishers to move over 90 days, those publishers incur real revenue loss and cost to migrate. Going forward, we do not see publisher bonuses as a significant cost renewable business, and we do not — we do not have that before a vote on or we project anything significant going forward. Because the MoPub-related fees are not recurring, we added back to adjusted EBITDA. And any non-publisher bonuses we would see after Q1, we will not be adding back to adjusted EBITDA.

So therefore, it just a one-time occurrence in this quarter — in this past quarter. For reporting purposes, on the revenue side, we cannot add back to contra revenue. But for internal purposes, of course, we combined a few numbers, which adds up to an amount 38% greater than our Q4 number. Overall, we consider $210 million of contra revenues as part of $1.05 billion purchase price from MoPub.

The total price for that acquisition was $1.26 billion. And that’s a very attractive price for such a strategic and financially accretive asset. On the cash flow side, Adam mentioned, we had a record $276 million in EBITDA, with a reported margin of 44%. When normalizing revenue for the publisher bonuses, our adjusted EBITDA margin was 33%, which you can see in purple here.

That, we think is the normal run rate of the business, and that is a 500 basis point increase over 28% in the fourth quarter of 2021. This margin expansion was entirely driven by the strong growth of our high-margin software business and in fact the margin was slightly reduced by our app business or the reduction in app revenue was a larger offset by user acquisition spend, but was still related to our overall margin. As we mentioned in our shareholder letter, we currently estimate our software platform business currently runs at a normalized EBITDA margin of 65% to 70%, and our app’s business at an estimated EBITDA margin of 5% to 10%. Therefore, faster growth of software relative to apps drives margin expansion.

We will be providing more details on this in our Q2 earnings report where we will be providing segmented financials for the first time. Our strong AppLovin software platform revenue margin plus operating cost management allow us to raise our EBITDA guidance for this year, and we’ll talk about that further in that. Of note, at our current operating scale, we’re able to translate a significant percentage of our EBITDA to unlevered free cash flow given our low capex, working capital acquirements and moderate tax rate. We estimate that normalized run rate percentage of adjusted EBITDA translating to unlevered free cash flow to be around 65% to 75%.

The next slide, we wanted to show you — talk about our software expansion for the quarter. So you’ve heard now a few times from Adam and me, we believe the software platform growth is key to our long-term growth and cash flow. So let’s take a deeper look at our Q1 software performance. First of all, as noted in purple, you can see all of the one-time contra revenue is taken against our software revenue.

When added to GAAP revenue of $119 million, the total was $329 million for Q1. That represents a 33% quarter-over-quarter growth rate on top of strong quarter-over-quarter growth over the prior three quarters. We saw strong customer adoption across all of our solutions, including AppDiscovery, AppLovin Exchange, Adjust and MAX as we started to pick up revenue from the integrated MoPub customers. Our customers continue to find success with our solutions, are growing their business and in turn, spending more on us.

Of note, in Q1, we received approximately $40 million of revenue from MoPub Twitter and expect the revenue from the acquisition to grow over the course of the year. However, going forward, it will be difficult to discern what revenue comes explicitly from MoPub now that it has been fully integrated into MAX. Across the board on software KPIs, we had very solid performance when normalized for the contra revenue impact. We have 258% net dollar-based revenue retention in the quarter over prior year, showing the resiliency of our customers and continued increase in the use of our software solutions.

We also had a solid increase in the number of new customers. Our normalized spec count reached 519, an increase over 58 customers, where we still believe that’s a small percentage of customers available to us in the marketplace. The additions across the business, including some new additions from customers migrating from MoPub as well as for new customers from AppDiscovery and Adjust. On top of more customers, we saw the average revenue increase on average from all of our specs to reaching normalized $603,000, a steady increase over the past three quarters.

Of note, when taking the $210 million of contra revenue out of these metrics, we still were able to grow net dollar-based retention and the total number of specs. So the third topic, we wanted to provide you an update on our guidance, where we’re increasing our ’22 adjusted EBITDA target. For ’22, our operating outlook for the software platform remains the same as previously given. However, we are adjusting our formal guidance by the $210 million in contra revenue to GAAP revenue guidance of $1.14 billion to $1.29 billion.

We are continuing to expect $2 billion in software platform revenue in 2023, which will be a 10 times increase from 2020, and a 65% increase over the midpoint of our revised software platform guidance in ’22. We believe we have the market solutions, technology and team to reach that goal. Further, given our stable cost structure, which we articulated earlier, we believe the cash flow from a $2 billion revenue software platform business would be substantial. Switching to the app side.

As Adam mentioned, the sale of our software platform in the midstream to our MAX solution means we are much less reliant on the data from our apps to drive financial performance to our clients. Therefore, we’re planning to manage that business to optimize for operating and financial efficiency with the perspective on how to best drive cash flow from that business over the long term. In the near to medium term, that may include lowering our investment in user acquisition, which will drive up margins but lower overall growth. We will also do a review of our app portfolio, which could lead to a wide range of transactions or no change at all.

Based on this new approach, we are lowering our revenue guidance by $200 million and now targeting a range of $2 billion to $2.15 billion in revenue from apps in ’22. The combination of our changes in software and apps guidance leads to our revised total guidance of $3.14 billion to $3.44 billion on a GAAP basis. With regard to adjusted EBITDA, given our record performance and strong margins, we’re raising adjusted EBITDA guidance to a midpoint target of $1.2 billion. This target again represents a 65% increase over prior year.

This is also an increase from our previous guidance of high 20% margins against a total revenue forecasted midpoint of $3.7 billion, which equated to just over $1 billion. Key drivers of this increase in EBITDA guidance showed a much higher growth in our software platform business, which, as I said, has a much higher margin profile. We have lower investment requirements than originally earmarked for new initiatives, and we now have the higher margin expected from our apps business as we optimize it. From an overall margin perspective, this equates to 36%, 22% adjusted EBITDA margin at midpoint of GAAP revenue guidance.

and a 34% adjusted EBITDA margin, but excluding the contra revenue. Therefore, the 34% target is our run rate margin to focus on, which would be an 800 basis point increase over the prior year. Since we do generate a significant amount of cash flow, I wanted to touch briefly on our go-forward capital allocation perspectives. As previously stated, we’re not focused on M&A for the app side of the business.

We will offer new, and we’ll opportunistically look on the software side. Although there too, we’ve assembled many of the key assets we wanted over the past 18 months. Then with regard to the stock buyback side, we do have our $750 million authorized program and have used just over $45 million thus far. We are planning to use that authorization when appropriate and are open to doing so given the right opportunity.

We appreciate the public markets are highly volatile and difficult to predict. In these markets, we believe cash is king and cash flow growth is king and queen, that’s exactly where our team is focused. We believe in our strategic position, growth and cash generation potential and we will work hard quarter after quarter to post the numbers that will earn your trust. Thank you for taking the time to get an update on our business.

And with that, we’ll open the call for questions. Ryan?

Ryan Gee

Thanks, Herald. [Operator instructions] Youssef, you’re first in line. [Operator instructions] Go ahead, Youssef.

Youssef SqualiTruist Securities — Analyst

Excellent. Can you hear me?

Ryan Gee

We can hear you.

Youssef SqualiTruist Securities — Analyst

So just a couple of questions for me. Maybe just at a high level, how long do you think this review of the apps business will last in the meantime, what kind of performance do you expect from it? I think it was down $40 million sequentially? That’s one. And then to a question we often get from investors is around just this shift in strategy away from the apps, historically, you guys have positioned yourselves as strategically leveraging the apps to — as a source of first-party data or 1P. So maybe just refresh us as to why is that not as important anymore?

Adam ForoughiCo-Founder, Chief Executive Officer, and Chairperson

I think the two questions are well-tied together. And really, what we’re focused on with the games business as it is today, it’s operated additionally. We’ve got 20 virtual studios distributed all over the world. Some are run very well.

They generate a good amount of profitability, some are generating losses. And we’re going to go through the portfolio to ensure that every single one of them is held to a standard, the same by any independent gaming company would be. And what gives us confidence in that is that our software business has frankly grown so much faster and so much larger than what we thought when we first went public a year ago. We were talking about $650 million of revenue in software for the entire year this year.

And we’re now talking about over double that amount — around half that amount in the first quarter, it’s quadrupled in the last 12 months. And so when we see that scale, what we know is that we have to really become a market solution. And we’ve got a lot more software platform enterprise clients to come use our platform. We’ve got a lot more scale with the MAX and MoPub marketplace now.

And that gives us the confidence that our games are only a small percentage of that software business. The other data point that’s really important to point you at to is for four quarters in a row, our software games business has been fairly flat in both audience and revenue, whereas our software business has grown immensely. That gives us a lot of confidence in the trajectory of the software business, and we want to focus entirely on really not achieving a couple of billion that we put out as a goal next year.

Ryan Gee

OK. Next up is Eric Sheridan at Goldman Sachs. [Operator instructions]

Eric SheridanGoldman Sachs — Analyst

Can you guys hear me now?

Ryan Gee

Go ahead, Eric.

Eric SheridanGoldman Sachs — Analyst

Great. I want to come back to some of the acquisitions you’ve done and talk more broadly there. You finished MoPub. Obviously, there’s Connected TV with Wurl.

Where do you see now the collection of assets you have in terms of positioning yourself for compounded growth, different verticals on the advertiser side, potential budget unlock not only in 2022, but as we look beyond 2022 over the next couple of years? I would love to get as much color as we can about that.

Adam ForoughiCo-Founder, Chief Executive Officer, and Chairperson

Great question. In mobile, we’re really confident with our position. We’ve got the largest marketplace. We’ve got AXON, our machine learning technology that’s only 18 months old, and it’s going to continue to improve.

That’s how these things go. And then we know performance model. So we’re not looking to take budget from others. We’re looking to give our advertisers results that are measurable and within their financial goals, that unlocks some limited budget.

And so as we think about how to increase our market over time and create growth factors for many years to come, we really think about finding the consumers that we know how to service well with recommended offerings across other access points. And that’s what maybe Connected TV interesting for us. We’re all being one of the leading software solutions to bring content online and Connected TV for a lot of brands that have content media distributed through a channel. The ad slots in that content will have immense reach, will be very valuable on a full screen and we think can present a really large performance model on television, and we’re going to be focus on continuing expanding the software business and pushing our machine learning software in as many places as we can go.

Ryan Gee

OK. Great. Thanks, Eric. Next, we’ll go to Stephen Ju at Credit Suisse.

Stephen JuCredit Suisse — Analyst

All right. Great. Can you hear me?

Ryan Gee

We can.

Stephen JuCredit Suisse — Analyst

All right. Great. So, Adam, reading between the lines of your shareholder letter, it seems like now is the time to go after the larger ad market as opposed to just the spend from the mobile game sector. So with MoPub now in the house, is there any sort of directional update you can give us in terms of the mix of ad revenue now coming from non-gaming clients and what the relative growth between your gaming versus non-gaming is now and where that could be?

Adam ForoughiCo-Founder, Chief Executive Officer, and Chairperson

Yes. So MoPub and MAX together, we sit on top of 700 million daily actives around the world. And these consumers in large part, on our platform, they’re playing games. But I can assure you they don’t just play games as their only thing they do in their life.

So they’re very good audience at that level of scale to monetize on both games and non-games. We’ve traditionally focused our solutions for the game developer and really built a lot of performance technology there. MoPub brought us access to the local marketplace, and that’s how they monetize their [Inaudible]. And the marketplace itself is direct access for companies like The Trade Desk, which we announced the partnership with last quarter to buy into our exchange.

So as we continue to integrate and push forward after this MoPub transaction, those types of relationships, we’re going to see more and more monetization potential of this very large audience from non-gaming customers to automate the current and market-leading solution we have in the mobile gaming category.

Ryan Gee

OK. Next, we’ll go to Clark Lampen at BTIG. [Operator instructions]

Clark LampenBTIG — Analyst

Can you guys hear me?

Ryan Gee

We can. Go ahead, Clark.

Clark LampenBTIG — Analyst

OK. Awesome. Maybe I’ll follow up on Stephen’s question there for a moment because Adam, you mentioned The Trade Desk onboarding. In prior quarters, we’ve seen in the shareholder letter that there’s really been a spike in sort of customers coming on platform.

So with ALX and MAX now kind of under the AppLovin umbrella for the first full quarter, could you give us a sense of customer response to the unified platform? Or maybe if it’s possible, if there’s any sort of backlog or just sort of qualitative read on demand? And then, Herald, I think, if I understood this right, as we look at the ’22 EBITDA guidance, most of the adjustment here is really sort of change of plan around apps and maybe it’s S&M adjustments. But given what you’ve talked about with strategy, does this change your sort of willingness to move potentially into new spaces like OEM sort of blockchain and NFTs and some of the things you talked about last quarter?

Herald ChenPresident and Chief Financial Officer

Yes. So as we think about like the integration that we just did, we put together the largest really MoPub marketplace and mobile apps has ever existed. Over 700 million daily active users in one exchange is a very large amount. So we’ve heard really positive feedback from the customers coming over.

There were traditional DSPs buying on MoPub, thinking that MoPub was the biggest solution. And by coming into this unified solution, they’re getting over two times the amount of scale for their business. That’s obviously made the reception really strong. And on the publisher side, being able to have that much scale in one software solution, this creates a lot more liquidity.

Our entire objective with MAX was to drive up competition in the marketplace so that we can increase the amount of money that the publisher earns and know that on the other hand, that publisher is going to go invest and use our acquisition. And that’s what you’re seeing really fuel our growth. You’re seeing that increase in specs where we’ve almost tripled them in the last 12 months. You’re seeing the net dollar retention, I think it was around 265% just this past quarter.

These are the same customers a year ago spending nearly triple on our platform today. And that’s because the efficiencies that we’re bringing to the market is enabling them to do that and grow their businesses faster than the markets grow.

Adam ForoughiCo-Founder, Chief Executive Officer, and Chairperson

The other question you had was around our investment in new initiatives. Last quarter, we talked about in the high 20s growth margins this year. And there was three big investments we needed to make. One was the infrastructure to really grow the software platform as fast as we’re going to particularly given MoPub.

The second was the investment in new initiatives. When we took [Inaudible], not knowing exactly what that would look like. And then the third was we had a lot of new apps in studios we onboarded to go invest behind that. I’d say very simply, the first one we’re still doing is actually are done, that’s in place where we’ve onboarded the vast majority of what we wanted to on MoPub and we put that infrastructure in place.

And now we got to continue to grow as MoPub and its software platform does grow. I think the other two pieces do have changes to them. On the new initiatives side, we’re pursuing the NFT blockchain as well as the OEM strategies, and I’ll touch on that in a second. We’re still as bullish as we were in the first quarter about those.

We just don’t think it takes as much dollars this year and investing behind it to go achieve that. And then when we talk about the app side, which is a very different approach in terms of the investment there. We told you before that the M&A dollars would not be allocated there. And now we’re telling you that importantly that we’re running these at low single-digit margins, and they really should be in the 20s margins.

And so there’s a lot of room for us to improve that from an opex standpoint. So we’re — we still remain extremely excited about the new initiatives we talked about, new CTV referral being one and OEM another, and then the NFT blockchain and we would expect in the next 12 months if not sooner to be coming back to you to describe some of the progress we’re making on all those fronts.

Ryan Gee

OK. We’ll go next to Matt Cost at Morgan Stanley.

Matt CostMorgan Stanley — Analyst

I guess just looking at the ad network revenue in the quarter, very strong. It looks like revenue per spec, if I have this right, that at an all-time high — so I guess what are the sources of strength in 1Q, particularly while you’re going through the transition of MoPub into MAX that you would call out? And within that, could you talk to the contribution from MoPub in the quarter? And then just secondly, kind of more philosophically, I guess, historically, the way that I certainly thought about what made your ad network unique was that you had a flywheel between the data that came from the apps business and then said the algorithms in the ad network. So I guess in the future where the apps could be spun or sold or the very least smaller in scale relative to the scale of the ad network. What differentiates AppLovin’s ad network now as you sort of drive to this next leg of growth if it’s not just running the same playbook that got you from where you started to where you are?

Adam ForoughiCo-Founder, Chief Executive Officer, and Chairperson

Great questions. And I think it really — it’s all interrelated again. But if you look at the business, the inflection point on it was the release of AXON 18 months ago and the continued expansion of dollars that are invested by our own customers over the last year is coming from efficiencies in the machine learning. These systems just get better and they get more data.

Now what’s interesting about that to your data question, is that when we started with AXON, the only thing that we had were in games. That was the entire reason we got into games. And when we went public a year ago, our own games made up 35% to 40% of the software business, and we reported that to you in TSTV. Now that number continues to shrink.

And that’s because we’re just seeing immense adoption of the technology. We’re seeing customers come online. We’re serving more ads. We’re getting a bigger feedback loop from doing all those things.

And we’re seeing the machine learning continue to improve without a necessity for our own games to be fueling the data. And that’s what gives us the confidence to go, let’s just run on both these businesses the most efficiently that will maximize shareholder value and allow us to continue to grow the software business but generate actual real margin from the games business at the same time.

Matt CostMorgan Stanley — Analyst

Great. And then just on the ad network side, if you wouldn’t mind.

Herald ChenPresident and Chief Financial Officer

Yes. I think you asked how the contribution was for MoPub in the quarter, it was just over $40 million specifically, and we know that number because Twitter was still running that business for us in the quarter. Subsequently, now we integrated it entirely in the MAX, MoPub as everyone knows what’s completely shutdown March 31 of this year. And so it’s fully integrated into our numbers rolling forward.

So we won’t be able to parse it out because all the data and the consumer customers are all integrated, but we expect to increase that number quarter over quarter as we’ve shown ultimately in our software guide for the year.

Ryan Gee

Thanks, Matt. We’ll go next to David at J.P. Morgan.

David KarnovskyJ.P. Morgan — Analyst

Just one on the MoPub integration. I know it’s early, but for the publishers that have migrated over. Can you maybe say how much traction you’re seeing in pushing these clients toward in-app bidding? And then how are you thinking about cross-selling some of these new relationships into your AppDiscovery products or deals you offer?

Adam ForoughiCo-Founder, Chief Executive Officer, and Chairperson

Yes. The MAX solution itself, really, we built to push the market in app-bidding and the partnership with Facebook really were the first two big bidders in the marketplace. And clients are coming over to MAX just got being out of the box. What we have seen is just a strong performance for the publishers that have come over and frankly, just because of scale.

We’ve got so much liquidity on the platform, it allows us to get more differentiated demand, and the technology was built much later than the other mediation solutions. And that’s why we’ve had such a strong trajectory to MAX before MoPub and why we continue to expect it to be a leading solution in the marketplace.

Ryan Gee

Thanks, David. So we’ll go next to Tim Nollen at Macquarie.

Tim NollenMacquarie Group — Analyst

OK. I got a couple of questions related to the contra revenue because I guess I had thought of the $200 million number that you mentioned before as being more of a cost. If it’s a contra revenue item, just to make sure, that is not just MoPub customer revenue that’s being shifted over to MAX. But there must be some other revenue in your system that’s also being moved over to MAX? So I just want to make sure I understand that because the $40 million versus the $210 million number.

I just want to make sure I understand what the difference is. And then relatedly, if you’ve got 90%, I think you said, of customers moved over to MAX. Does that mean most of this is behind you and the other 10 are going to come or what happens to the other 10?

Herald ChenPresident and Chief Financial Officer

Yes. Thanks, Tim, for the question. Yes. Sorry, just for a clarification.

On the revenue side that we take to our software business, specifically coming out of MoPub customers was the $40 million. The $210 million referring to is the fees that we paid to our vendors or our publishers to move their inventory on the MAX, right? So those are not necessarily customers of ours, but vendors for us to put inventory where we’re monetizing their inventory. And the accounting treatment on that because many of those publishers are our customers as well, then you have to have a contra revenue against the revenue to contribute to us. And then many of those publishers who are our customers, we want them to be our customers and therefore, accounting system to also charge back to contra revenues, so there are two different numbers, two different populations at this point, but we’re hopeful that those publishers will become customers on our AppDiscovery platform.

And then in terms of the migration, we do have the preponderance of 90% plus of the publishers now on our platform. By the way, that will take time for them to fully scale out of the platform and then to the demand side to catch up. I think the remaining 10%, there’s certainly other providers out there, some want to work with some debt, but we’ve got all the key vendors that we wanted to go and publish it on our platform, and we feel very good about that and it exceeded our expectations of what would be able to.

Tim NollenMacquarie Group — Analyst

OK. So if we wanted to get in, call it, an organic revenue growth number, that would be then, I guess, what was it, 835, is that the total, minus the 40, that would be your organic growth?

Herald ChenPresident and Chief Financial Officer

Exactly. That’s exactly right.

Ryan Gee

Thanks, Tim. We’ll go next to David Pang.

David PangStifel Financial Corp. — Analyst

Great. Can you hear me?

Ryan Gee

We can hear you, David.

David PangStifel Financial Corp. — Analyst

So given the challenges of one of your key competitors. How are you ensuring that AXON won’t face a similar challenge and is learning on “good data”?

Adam ForoughiCo-Founder, Chief Executive Officer, and Chairperson

Yes. Look, machine learning, obviously has opportunity and sensitivities and really require a good data feed — and a lot of this just comes down to execution. We’re focused on our own execution, not that others around us are doing. And really, the key with us has always been, we felt like we got data and got the playground to be able to write the models, we have the technological capacity and the infrastructure to build very substantial machine learning technologies.

We did just that. And you see now for the past few quarters, growth has just really outpaced the market. We’re very confident in our own platform’s ability to just be stable and continue to lead to growth going forward.

Ryan Gee

We’ll go to Franco Granda.

Franco GrandaD.A. Davidson — Analyst

Can you hear me OK?

Ryan Gee

We can.

Franco GrandaD.A. Davidson — Analyst

Perfect. So despite the phasing out of IDFA and 14.5, it appears that probabilistic attribution is still very prevalent across the industry. And there are rumors that [Inaudible] might be cracking down on those. And this has thought that using private relay similar to Google’s plans, Apple would be able to do this in a nondisruptive way.

So I guess two questions on this. First, just how big of a task is it for noncompliant ad tech businesses to move away from fingerprinting? And then two, if a change like this were to happen, would this be an opportunity for you to gain share in a similar way that when AT&T was enacted?

Adam ForoughiCo-Founder, Chief Executive Officer, and Chairperson

Yes. Look, I think really like if we go up a level in the market, like these privacy changes have continued to come over the last few years versus when GDP [Inaudible] IDFA, which frankly was the biggest and now with what our Apple does in the future. While we can’t predict exactly what’s going to change in the market, there’s a couple of certainties. One is people can play games on the global devices, that we know for certain.

The other certainty is we have a very large-scale platform, 700 million-plus daily active users on it that we’re monetizing. And the third is that our technology and team is really nimble. We can move quickly. Whenever these market shifts happen, you always expect to see winners and losers.

It’s just the way it only shapes out. And while we’ve been able to succeed so far in the last decade is that we move faster than everyone else, and we pride ourselves on being able to do that. So while these changes can be disruptive to businesses, we look forward to change.

Ryan Gee

OK. And we’ll take our last question here from Martin Yang at Oppenheimer.

Martin YangOppenheimer and Company — Analyst

Ryan, can you hear me?

Ryan Gee

We can hear you. Go ahead, Martin.

Martin YangOppenheimer and Company — Analyst

So my question is about the first quarter software platform revenues, even back in MoPub is very strong seasonally and also net expansion rate of quite extraordinary. Was that a surprise to you?

Herald ChenPresident and Chief Financial Officer

When we put out our guidance to next year, 10 times of the software business from just four years ago, right? For a business at this level of scale, we’re reporting a net revenue, and we’ve now talked about 65% to 70% EBITDA margins out of this business. To be able to do that, you have to have a lot of confidence in your business. So even though I think we surprised ourselves with how fast the trajectory of growth became, we are not surprised at our ability to execute and continue to grow this business going forward.

Martin YangOppenheimer and Company — Analyst

Let me be more explicit. Or do you feel you benefited from some of the pickups for your competitor in the first quarter?

Herald ChenPresident and Chief Financial Officer

OK. So the way these markets work is that it’s on zero-sum. But on the flip side, if one competitor ends up decaying in performance, another one doesn’t just increase because the reality is we — effectively, we have models that are trying to match up eyeballs with advertiser offers in the matchmaking well and drive to the performance that the advertiser wants to go achieve. We’re not really bidding against others, what we’re taking or we’re getting.

We need to make sure that the matchmaking is accurate, and we’re driving the value to the other advertisers that are buying on our platform. So the impact from one is an impact to us. That said, long term, we want to make sure and we really do a strong job of this on the MAX platform that every marketing platform in the market is performing well. The better the marketing solutions are in the industry, the bigger the market is going to become, the faster the growth, more audience discovery and more consumers will be playing more games, which is going to fuel our growth and the ecosystem’s growth.

And that’s why I referenced my talk track that we have so much to the market on our ecosystem on the MAX platform now that we’re really — the success of our platform is going to direct the increase in TAM of the entire sector.

Ryan Gee

OK. And if there’s no more questions in the queue, I’d like to turn it back to the guys, and thank you all for joining us today. Do you guys have any closing remarks you’d like to say?

Adam ForoughiCo-Founder, Chief Executive Officer, and Chairperson

Thanks for joining us. We know there’s a lot in the letter to cover. We appreciate people taking the time, particularly in the volatile markets. Thanks very much.

Herald ChenPresident and Chief Financial Officer

Thanks, everyone.

Duration: 44 minutes

Call participants:

Ryan Gee

Adam ForoughiCo-Founder, Chief Executive Officer, and Chairperson

Herald ChenPresident and Chief Financial Officer

Youssef SqualiTruist Securities — Analyst

Eric SheridanGoldman Sachs — Analyst

Stephen JuCredit Suisse — Analyst

Clark LampenBTIG — Analyst

Matt CostMorgan Stanley — Analyst

David KarnovskyJ.P. Morgan — Analyst

Tim NollenMacquarie Group — Analyst

David PangStifel Financial Corp. — Analyst

Franco GrandaD.A. Davidson — Analyst

Martin YangOppenheimer and Company — Analyst

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