AppLovin Corp (APP) FY 2021 MD&A

Overview

Our mission is to grow the mobile app ecosystem by enabling the success of mobile app developers. Our software solutions provide advanced tools for mobile app developers to grow their businesses by automating and optimizing the marketing and monetization of their apps. Our software, coupled with our deep industry knowledge and expertise, has allowed us to rapidly scale a successful and diversified portfolio of owned mobile apps. We have also accelerated our market penetration through an active acquisition and partnership strategy. Our scaled and integrated business model sits at the nexus of the mobile app ecosystem, which creates a durable competitive advantage that has fueled our clients’ success and our strong growth.

Since our founding in 2011, we have been focused on building a software-based platform for mobile app developers to improve the marketing and monetization of their apps. Our founders, who are mobile app developers themselves, quickly realized the real impediment to success and growth in the mobile app ecosystem was a discovery and monetization problem—breaking through the congested app stores to efficiently find users and successfully grow their business. Their first-hand experience with these developer challenges led to the development of our infrastructure and software—AppLovin Core Technologies and AppLovin Software Platform. We capitalized on our success and understanding of the mobile app ecosystem by launching AppLovin Apps in 2018. Our Apps now consist of a globally diversified portfolio of over 350 free-to-play mobile games across five genres, run by nineteen studios.

Our focus on building a market-leading software platform, coupled with our unique approach to developing and growing our Apps portfolio, as well as our strategic investments to date, has produced a business model characterized by rapid growth and strong cash flow generation. For 2021, our revenue grew 92% year-over-year from 2020, from $1.45 billion in 2020 to $2.79 billion in 2021. For 2020, our revenue grew 46% year-over-year from 2019, from $994.1 million in 2019 to $1.45 billion in 2020. We generated net income of $35.3 million in 2021, net loss of $125.9 million in 2020, and net income of $119.0 million in 2019. We generated Adjusted EBITDA of $726.8 million, $345.5 million, and 301.2 million in 2021, 2020, and 2019, respectively. Additionally, we have generated strong cash flows, with net cash provided by operating activities of $361.9 million, $222.9 million, and $198.5 million in 2021, 2020, and 2019, respectively. Given our strong financial position, we have been able to reinvest in our expansion and growth and consummate strategic acquisitions and partnerships. See the section titled “—Non-GAAP Financial Measures” for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated in accordance with GAAP.

In February 2022, our board of directors authorized a share repurchase program to repurchase $750.0 million of our Class A common stock over time. The program is effective immediately. We will continuously evaluate efficient alternatives to using cash on hand to fund the program, including accessing the capital markets, subject to market conditions.

Our Business Model

We collect revenue from business clients, comprised of Business—Software Platform and Business—Apps revenue (collectively, "Business Revenue") and consumers. In 2021, Business Revenue represented 48% of total revenue and Consumer Revenue represented 52% of total revenue.

Business Revenue

We generate Business—Software Platform revenue from fees paid by mobile app advertisers, or business clients, that use our Software Platform to grow and monetize their apps. We also collect Business—Apps revenue from business clients that purchase the digital advertising inventory of our portfolio of Apps. We are able to grow our Business Revenue by improving our Software Platform, adding more apps to our Apps portfolio and increasing engagement on our existing Apps. While we have thousands of business clients as of December 31, 2021, the vast majority of our revenue is derived from our Enterprise Clients. See “—Key Metrics” below for additional information on how we calculate Enterprise Clients. Approximately 96% of our Business Revenue for the twelve months ended December 31, 2021 came from our 407

53

Table of Contents

Enterprise Clients as of December 31, 2021. Our Enterprise Clients had a Net Dollar-Based Retention Rate of approximately 176% for the twelve months ended December 31, 2021.1

Business—Software Platform clients include a wide variety of advertisers and publishers, from indie developer studios to some of the largest global internet platforms, such as Facebook and Google. We have rapidly grown the number of Software Platform Enterprise Clients from 158 as of December 31, 2020 to 461 as of December 31, 2021, which generated approximately 94% of our Business Revenue from our Software Platform for the three months ended December 31, 2021. Our Net Dollar-Based Retention Rate from existing Software Platform Enterprise Clients (SPECs) was 204% for SPECs as of December 31, 2021.2 We see multiple opportunities to gain new business clients, and to increase spend from existing business clients, as we help them grow their businesses and make them more successful. Business Software Platform represented 51% of total Business Revenue in the twelve months ended December 31, 2021.

Our Software Platform includes AppDiscovery, Adjust, and MAX. Business clients use AppDiscovery to automate, optimize, and manage their user acquisition investments. They set marketing and user growth goals, and AppDiscovery optimizes their ad spend in an effort to achieve their return on advertising spend targets and other marketing objectives. AppDiscovery comprises the vast majority of revenue from our Software Platform. Revenue is generated from our advertisers, typically on a performance-based, and shared with our advertising publishers, typically on a cost per impression model.

Business clients use Adjust’s SaaS mobile marketing platform to better understand their users’ journey while allowing marketers to make smarter decisions through measurement, attribution, and fraud prevention. Revenue from Adjust is primarily generated from an annual software subscription fee.

Business clients use MAX to optimize purchases of app ad inventory. Revenue from MAX is generated based on a percentage of client spend. As more developers move to in-app bidding monetization, we expect growth in the adoption of, and revenue from, MAX.

Our Business—Apps revenue clients purchase advertising inventory from our Apps and are able to target highly relevant users from our diverse and global portfolio of over 350 mobile games. Our clients leverage a broad set of high-performing mobile ad formats, including playable and rewarded video, and are able to match these ads with relevant users resulting in a better return on their advertising spend. By increasing the number of users and their engagement, as well as better matching ads with the appropriate target audience, we are able to increase our revenue from business clients that purchase advertising inventory from our Apps. Revenue from business clients related to our Apps is generated from ads purchased by advertisers, as well as from revenue-sharing agreements between some of our studios and a selection of third-party studios for which they publish and monetize games.

Consumer Revenue

Consumer Revenue is generated when a user of one of our Apps makes an in-app purchase (IAP). Our Apps are generally free-to-play mobile games and generate Consumer Revenue through IAPs. IAPs consist of virtual goods used to enhance gameplay, accelerate access to certain features or levels, and augment other mobile game progression opportunities for the user. IAPs drive more engagement and better economics from our Apps. The vast majority of our IAP revenue flows through two app stores, Apple App Store and Google Play, which charge us a standard commission on IAPs.

During the twelve months ended December 31, 2021, we had an average of 3.0 million Monthly Active Payers (MAPs) across our portfolio of Apps. Over that period, we had an Average Revenue Per Monthly Active Payer (ARPMAP) of $43. Leveraging the benefit of our integrated Core Technologies, Software Platform, and Apps, we see opportunities to grow our App-related revenue streams by increasing MAPs and expanding ARPMAP within existing games and through new game development, acquisitions and partnerships. See “—Key Metrics” below for additional information on how we calculate MAPs and ARPMAP.

Key Metrics

We review the following key metrics on a regular basis in order to evaluate the health of our business, identify trends affecting our performance, prepare financial projections, and make strategic decisions. As a result of our continued focus on our Software Platform, we plan to phase out several metrics including Enterprise Clients, Revenue Per Enterprise

1 We measure Net Dollar-Based Retention Rate for the twelve months ended December 31, 2021 for our Enterprise Clients as current period revenue divided by prior period revenue. Prior period revenue is measured as revenue for the twelve months ended December 31, 2020 from our Enterprise Clients as of December 31, 2020. Current period revenue is revenue for the twelve months ended December 31, 2021 from our Enterprise Clients as of December 31, 2021, and excludes revenue from any new Enterprise Clients during the twelve months ended December 31, 2021.

2 We measure Net Dollar-Based Retention Rate for the three months ended December 31, 2021 for our Software Platform Enterprise Clients (SPECs) as current period revenue divided by prior period revenue. Prior period revenue is measured as revenue for the three months ended December 31, 2020 from our Software Platform Enterprise Clients as of December 31, 2020. Current period revenue is revenue for the three months ended December 31, 2021 from Software Platform Enterprise Clients as of December 31, 2020.

54

Table of Contents

Client and Net Dollar-Based Retention Rate for Enterprise Clients beginning with the quarter ended March 31, 2022 in favor of similar software-focused Key Metrics. See “Update to our Key Metrics” below for further details.

Our key metrics are not based on any standardized industry methodology and are not necessarily calculated in the same manner or comparable to similarly titled measures presented by other companies. Similarly, our key metrics may differ from estimates published by third parties or from similarly titled metrics of our competitors due to differences in methodology. The numbers that we use to calculate TSTV, MAP, and ARPMAP are based on internal data. While these numbers are based on what we believe to be reasonable judgments and estimates for the applicable period of measurement, there are inherent challenges in measuring usage and engagement. We regularly review and may adjust our processes for calculating our internal metrics to improve their accuracy.

Annual Key Metrics

Enterprise Clients. We focus on the number of Enterprise Clients, which are third-party business clients from whom we have collected greater than $125,000 of revenue in the trailing 12 months to a given date. Enterprise Clients generate the vast majority of our Business Revenue and Business Revenue growth. We expect to increase the revenue from Enterprise Clients over time.

Revenue Per Enterprise Client (RPEC). We define RPEC as (i) the total revenue derived from our Enterprise Clients in a twelve-month period, divided by (ii) Enterprise Clients as of the end of that same period. RPEC shows how efficiently we are monetizing each Enterprise Client. We expect to increase RPEC over time as we enhance our Software Platform and Apps.

The following table shows our Enterprise Clients as of December 31, 2021, 2020 and 2019, and our RPEC for 2021, 2020 and 2019.

Quarterly Key Metrics

Software Platform Enterprise Clients (SPECs). We focus on the number of SPECs, which are third-party business clients from whom we have collected greater than $31,250 of Software Platform revenue in the three months to a given date, equating to an annual run-rate of $125,000 in revenue. SPECs generate the vast majority of our Business Revenue—Software Platform and Business Revenue—Software Platform growth.

Revenue Per Software Platform Enterprise Client (Revenue per SPEC). We define Revenue per SPEC as (i) the total revenue derived from our Software Platform Enterprise Clients in a three- month period, divided by (ii) Software Platform Enterprise Clients as of the end of that same period. Revenue per SPEC shows how efficiently we are monetizing each SPEC. We expect to increase Revenue per SPEC over time as we enhance our Software Platform and Apps.

The following table shows our SPECs and Revenue per SPEC as of the three-months ended December 31, 2021, 2020 and 2019.

Update to our Key Metrics

Beginning with the three months ended June 30, 2022, the revenue measurement period used to determine the number of SPECs in a period will be updated to include clients from whom we have collected greater than $125,000 in Software Platform revenue over the trailing 12 months. The current definition of SPEC includes third-party clients who had more than $31,250 in Software Platform revenue for the prior three months. We believe this change in revenue measurement period will provide additional information regarding the scale and growth of our more-mature clients. Going forward, when Net Dollar-Based Revenue Retention (NDBRR) measures are provided, we will also calculate such measures using the updated definition of SPECs.

55

Table of Contents

The table below shows our SPEC and Revenue per SPEC as of December 31, 2021, 2020 and 2019 under the updated calculations.

Total Software Transaction Value (TSTV). Business Software Platform revenue is from third- party clients using our software platform to find new customers. We do not recognize revenue from our own spend on our software platform. Therefore, we use TSTV to measure the scale and growth rates of our software platform, as it reflects the total value on our software platform including our first-party studios as though they were stand-alone businesses.

The following table shows our TSTV for the years ended December 31, 2021, 2020 and 2019.

Monthly Active Payers (MAPs). We define a MAP as a unique mobile device active on one of our Apps in a month that completed at least one IAP during that time period. A consumer who makes IAPs within two separate Apps on the same mobile device in a monthly period will be counted as two MAPs. MAPs for a particular time period longer than one month are the average MAPs for each month during that period. We estimate the number of MAPs by aggregating certain data from third-party attribution partners. Some of our Apps do not utilize such third-party attribution partners, and therefore our MAPs figure for any period does not capture every user that completed an IAP on our Apps. We estimate that our counted MAPs generated approximately 97% of our Consumer Revenue during the year ended December 31, 2021, and as such, management believes that MAPs are still a useful metric to measure the engagement and monetization potential of our games. We expect to increase our MAPs over time as we increase the number of our Apps and enhance the engagement and monetization of our Apps.

Average Revenue Per Monthly Active Payer (ARPMAP). We define ARPMAP as (i) the total Consumer Revenue derived from our Apps in a monthly period, divided by (ii) MAPs in that same period. ARPMAP for a particular time period longer than one month is the average ARPMAP for each month during that period. ARPMAP shows how efficiently we are monetizing each MAP. We expect to increase ARPMAP over time as we enhance the monetization of our Apps.

The following table shows our Monthly Active Payers and Average Revenue Per Monthly Active Payer for the years ended December 31, 2021, 2020 and 2019.

Non-GAAP Financial Metrics

Adjusted EBITDA and Adjusted EBITDA Margin

We define Adjusted EBITDA for a particular period as net income (loss) before interest expense and loss on settlement of debt, other (income) expense, net, provision for (benefit from) income taxes, amortization, depreciation and write-offs and as further adjusted for stock-based compensation expense, acquisition-related expense and transaction bonus, customer acquisition bonuses, loss (gain) on extinguishments of acquisition related continent consideration, non-operating foreign exchange losses, lease modification and abandonment of leasehold improvements, and change in the fair value of contingent consideration. We define Adjusted EBITDA margin as Adjusted EBITDA divided by revenue for the same period.

Adjusted EBITDA and Adjusted EBITDA margin are key measures we use to assess our financial performance and are also used for internal planning and forecasting purposes. We believe Adjusted EBITDA and Adjusted EBITDA margin are helpful to investors, analysts, and other interested parties because they can assist in providing a more consistent and comparable overview of our operations across our historical financial periods. In addition, these measures are frequently used by analysts, investors, and other interested parties to evaluate and assess performance. We use Adjusted EBITDA and Adjusted EBITDA margin in conjunction with GAAP measures as part of our overall assessment of our performance,

56

Table of Contents

including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies, and to communicate with our board of directors concerning our financial performance.

Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures and are presented for supplemental informational purposes only and should not be considered as alternatives or substitutes to financial information presented in accordance with GAAP. These measures have certain limitations in that they do not include the impact of certain expenses that are reflected in our consolidated statement of operations that are necessary to run our business. Our definitions may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Furthermore, these metrics have certain limitations in that they do not include the impact of certain expenses that are reflected in our consolidated statement of operations that are necessary to run our business. Thus, our Adjusted EBITDA and Adjusted EBITDA margin should be considered in addition to, not as substitutes for, or in isolation from, measures prepared in accordance with GAAP.

The following table provides our Adjusted EBITDA and Adjusted EBITDA margin for 2021, 2020 and 2019, and a reconciliation of net income (loss) to Adjusted EBITDA:

In 2021, 2020, and 2019, our net income (loss) and Adjusted EBITDA included $1.8 million, $62.0 million, and $0.2 million related to the fair value adjustment of the deferred revenue balance assumed as a result of the acquisitions of Adjust in 2021, Machine Zone in 2020, and SafeDK in 2019.

Factors Affecting Our Performance

We believe that the future success of our business depends on many factors, including the factors described below. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in order to continue to grow profitably while maintaining strong cash flow.

Continue to invest in innovation

We have made, and intend to continue to make, significant investments in our Core Technologies and Software Platform to enhance their effectiveness and value proposition for our business clients. We expect that these investments will require spending on research and development, and acquisitions and partnerships related to technology components and products. We believe investments in our software, including AXON, AppDiscovery, Adjust, and MAX, will further improve their effectiveness for developers. Our investments will also allow us to enter new mobile app sectors outside of

3 Excludes recurring operational foreign exchange gains and losses and write-off of an investment that is included in Amortization, depreciation and write-offs line item above

4 The twelve months ended December 31, 2021 includes $2.3 million of bonus compensation settled in stock outside of the scope of ASC 718.

5 In association with the MoPub acquisition, we incurred certain costs to incentivize publishers to migrate to our MAX mediation solution, including existing publishers of MoPub as well as publishers on other competitor offerings. We have not historically incurred significant publisher migration costs, nor do we currently intend to incur significant publisher migration costs in the future. As such, we have removed the impact of these costs from Adjusted EBITDA.

57

Table of Contents

gaming. While our investments in research and development and acquisitions and partnerships may not result in revenue in the near term, we believe these investments position us to increase our revenue over time.

Retain and grow existing business clients

We rely on existing business clients for a significant portion of our revenue. As we improve our Software Platform and Apps, we can attract additional spend from these business clients. Our business clients include indie studio developers and some of the largest mobile advertising platforms in the world. We believe there is significant room for us to further expand our relationships with these clients and increase their usage of our Software Platform. We have invested in targeted sales and account- based marketing efforts, including through Adjust’s sales and marketing teams, to identify and showcase opportunities to business clients and plan to continue to do so in the future.

In the past, our business clients have generally increased their usage of our Software Platform and Apps, and as a result, growth from existing business clients has been a primary driver of our revenue growth. We must continue to retain our existing business clients and expand their spend with us over time to continue to grow our revenue, increase profitability and drive greater cash flow.

Add new business clients globally

Our future success depends in part on our ability to acquire new business clients. We recently increased our focus on markets outside the United States to serve the needs of business clients globally. In 2021, only 42% of our revenue from business clients was generated from outside of the United States. We believe that the global opportunity is significant and will continue to expand as developers and advertisers outside the United States adopt our Software Platform and advertise on our Apps. We also see opportunities to acquire new business clients outside of mobile gaming, as the capabilities of our Core Technologies and Software Platform are relevant to the broader mobile app ecosystem. We are investing in direct sales, product development, education, and other capabilities to drive increased awareness and adoption of our Software Platform and Apps, which investments may impact our profitability in the near term as we seek further scale. We must continue to acquire new business clients to grow our revenue, increase profitability, and drive greater cash flow.

Optimization, growth, and expansion of our AppLovin Apps

We plan to continue to invest in developing new Apps and enhancing existing Apps. Because our Apps are typically free to download and use, economically acquiring users and monetizing through advertising and IAPs is critical to the future success of our Apps. We plan to launch several new Apps per year, as well as continue to evaluate investments in mobile gaming and other mobile app sectors.

Given our expertise in app marketing, we are able to pursue a highly-optimized and scaled user acquisition investment playbook. For the twelve months ended December 31, 2021, we invested $1.13 billion in sales and marketing, a large percentage of which was invested in user acquisition to grow the number of users engaging with our Apps. We believe the scale, insights, and effective monetization strategies provided through our Core Technologies and Software Platform, and our integrated business model allow us to optimize ad spend across our portfolio of Apps. We also invest in the growth of our Apps by improving in-game monetization, optimizing game economies and in-game conversion, and opt-in business services, such as creative services and localization. We must continue to optimize, grow, and expand our Apps portfolio to grow our revenue, increase profitability, and drive greater cash flow.

Continued execution of strategic acquisitions and partnerships

We intend to continue to make strategic acquisitions and add complementary software and tools to our Software Platform and enter into strategic partnerships to grow our portfolio of Apps. From the beginning of 2018 through December 31, 2021, we have invested over $2.5 billion in 27 strategic acquisitions and partnerships with mobile app developers and for technologies to enhance our Software Platform. We have been very successful in growing mobile apps that we have added to our Apps portfolio. We have also invested strategically to enhance our Software Platform. For example, in 2022 we acquired MoPub, a monetization platform for mobile apps from Twitter, Inc. in 2021 we acquired Adjust GmbH, a leading app attribution, measurement, and analytics company and in 2018 we acquired MAX, an in-app bidding platform, which improves monetization on apps. On February 23, 2022, we also entered into a definitive agreement to acquire Wurl, a high-growth software platform in the Connected TV (CTV) market.

While we have a strong pipeline of strategic acquisition and partnership opportunities, we believe our future results of operations will be affected by our ability to continue to identify and execute such transactions that are accretive to our growth and profitability.

Growth and structure of the mobile app ecosystem

Our business and results of operations will be impacted by industry factors that drive overall performance of the mobile app ecosystem. The mobile app ecosystem has grown rapidly in recent years. We expect that any acceleration, or slowing, of this growth would affect our business and results of operations. In addition, even if the mobile app ecosystem

58

Table of Contents

continues to grow at its current rate, our ability to position ourselves within the market will impact our business and results of operations.

Mobile app developers, including AppLovin, rely on third-party platforms, such as the Apple App Store and Google Play Store, among others, to distribute games, collect payments made for IAPs, and target users with relevant advertising. We expect this to continue for the foreseeable future. These third-party platforms have significant market power and discretion to set platform fees, select which apps to promote, and decide how much consumer information to provide to advertising networks that enable our Core Technologies and Software Platform to target users with personalized and relevant advertising and allocate marketing campaigns in an efficient and cost-effective manner. Any changes made in the policies of third-party platforms could drive rapid change across the mobile app ecosystem. For example, in April 2021, Apple started implementing its application tracking transparency framework that, among other things, requires users' opt-in consent for certain types of tracking. While this transparency framework has not had a significant impact on our overall business, it may in the future continue to have an impact on it, including the effectiveness of our advertising practices and/or our ability to efficiently generate revenue for our Apps. We rely in part on IDFA to provide us with data that helps our Software Platform better market and monetize Apps. The IDFA and transparency changes may require us to engage in significant changes to our data collection practices, which may require our expenditure of substantial costs and resources, and to the extent we are unable to utilize IDFA or a similar offering, or if the transparency changes and any related opt-in or other requirements result in decreases in the availability or utility of data relating to Apps, our Software Platform may not be as effective, we may not be able to continue to efficiently generate revenue for our Apps, and our revenue and results of operations may be harmed. Additionally, Apple implemented new requirements for consumer disclosures regarding privacy and data processing practices in December 2020, which has resulted in increased compliance requirements and could result in decreased usage of our Apps. These or any similar changes to the policies of Apple or Google may materially and adversely affect our business, financial condition, and results of operations. To date, these data privacy changes have had a relatively muted aggregate impact on our overall results of operations

New tools for developers, industry standards, and platforms may emerge in the future. We believe our focus on the mobile app ecosystem has allowed us to understand the needs of our business clients and our relentless innovation has enabled us to quickly adapt to changes in the industry and pioneer new solutions. We must continue to innovate and stay ahead of developments in the mobile app ecosystem in order for our business to succeed and our results of operations to continue to improve.

Acquisition of MoPub

On October 6, 2021, we entered into a definitive agreement to acquire from Twitter, Inc. the MoPub business for approximately $1.0 billion and the acquisition closed in January 2022. We plan to integrate MoPub’s reach and product features into our existing Software Platform to better maximize revenue growth and improve efficiencies for our combined customers. We expect to see strong growth in our unified MAX solution and to facilitate successful migration to our MAX platform, we expect to pay approximately $200 million in migration fees to publishers.

Definitive Agreement to Acquire Wurl

On February 23, 2022 we entered into a definitive agreement to acquire Wurl, Inc., a software platform company in the Connected TV (CTV) market, for approximately $430 million in cash and Class A common stock. Concurrent with entering into the definitive agreement, we also adopted a multi-year performance-based incentive plan for certain key employees of Wurl, under which such employees may earn up to a total of $600.0 million in additional shares of the Company's Class A common stock through 2025, subject to the achievement of certain revenue and other performance targets by the acquired business. Such plan will become effective at the closing of the transaction. The transaction is subject to customary closing conditions and expected to close in the first half of 2022. We believe our software marketing expertise will further optimize the experience for our advertisers and consumers while enabling content companies to expand their audiences and increase monetization.

Term Loans and Amendment to Credit Agreement

On October 25, 2021, we entered into Amendment No. 6 (Amendment No. 6), to that certain Credit Agreement, dated as of August 15, 2018, by and among us, as borrower, Bank of America,N.A., as administrative agent and collateral agent, and the other parties thereto, as amended by Amendment No. 1 to the Credit Agreement, dated as of April 23, 2019, Amendment No. 2 to the Credit Agreement, dated as of April 27, 2020, Amendment No. 3 to the Credit Agreement, dated as of May 6, 2020, Amendment No. 4 to the Credit Agreement, dated as of October 27, 2020 and Amendment No. 5 to the Credit Agreement, dated as of February 12, 2021 (the Credit Agreement; and as amended by Amendment No. 6, the Amended Credit Agreement).

Pursuant to Amendment No. 6 and the Amended Credit Agreement, certain additional lenders agreed to provide incremental loans in an aggregate amount of $1.50 billion (such incremental loans, the Amendment No. 6 New Term Loans). The Amendment No. 6 New Term Loans have (a) a maturity date of October 25, 2028 (or if not a business day, the immediately preceding business day), (b) a floor on LIBOR Loans of 50 basis points, and (c) an applicable margin for LIBOR Loans equal to 3.00% (or 2.00% for ABR Loans), in each case, subject to and in accordance with the terms and

59

Table of Contents

conditions of the Amended Credit Agreement. Except as set forth in Amendment No. 6 and the Amended Credit Agreement, the other terms and conditions of the Amendment No. 6 New Term Loans are consistent with the term loans outstanding immediately prior to the effectiveness of Amendment No. 6.

Impact of COVID-19

The COVID-19 pandemic and resulting social distancing and shelter-in-place orders put in place around the world have caused widespread disruption in global economies, productivity, and financial markets and have altered the way in which we conduct our day-to-day business. As a result of the COVID-19 pandemic we have temporarily closed our offices around the world, including our corporate headquarters in Palo Alto, California, and implemented travel restrictions. Our Software Platform and Apps do not require physical interaction, thus, our ability to meet the needs of our clients and users has not been materially affected. The full impact of the COVID-19 pandemic on the global economy and the extent to which the pandemic may impact our business, financial condition, and results of operations in the future remains uncertain. See the section titled “Risk Factors—The COVID-19 pandemic and responses thereto across the globe have altered how individuals interact with each other and affected how we and our business partners are operating, and the extent to which this situation will impact our future results of operations remains uncertain” for additional information.

Components of Results of Operations

Revenue

We collect Business Revenue from advertisers spending on our Software Platform and Apps. The majority of our Business Revenue comes from our Software Platform and is generated from our advertisers, typically on a performance-based , then shared with our advertising publishers, typically on a cost per impression model. Business Revenue generated from our Apps comes from advertisers that purchase ad inventory from our diverse portfolio of Apps. Business Revenue from our Software Platform was 51%, 29%, and 33% of total Business Revenue in 2021, 2020 and 2019, respectively.

We generate Consumer Revenue from IAPs made by users within our Apps.

Cost of Revenue and Operating Expenses

Cost of revenue. Cost of revenue consists primarily of third-party payment processing fees for distribution partners, amortization of acquired technology-related intangible assets, and expenses associated with operating our network infrastructure. Third-party payment processing fees relate to Consumer Revenue. The fees for IAPs are processed and collected by third-party distribution partners.

Network operating costs include bandwidth, energy, other equipment costs related to our co-located data centers, and costs for third-party cloud service providers. We expect our cost of revenue to increase in absolute dollars over the long term as our business and revenue continue to grow. We also expect our cost of revenue as a percentage of revenue to fluctuate period-over-period.

Sales and marketing. Sales and marketing expenses consist primarily of user acquisition costs, other advertising expenses, personnel-related expenses for salaries, employee benefits, and stock- based compensation for employees engaged in sales and marketing, and amortization of acquired user-related intangible assets, marketing programs, travel, customer service costs, and allocated facilities and information technology costs.

We plan to continue to invest in sales and marketing to grow our customer base and increase brand awareness. As a result, we expect sales and marketing expenses to increase in absolute dollars. We also expect our sales and marketing expenses as a percentage of revenue to fluctuate period- over-period in the near term as we invest to grow our customer base and increase brand awareness, and to decrease over the long term as we benefit from greater scale.

Research and development. Research and development expenses consist primarily of product development costs, including personnel-related expenses for salaries, employee benefits, and stock- based compensation for employees engaged in research and development, professional services costs related to development of new apps by third parties, consulting costs, regulatory compliance costs, and allocated facilities and information technology costs.

We plan to continue to invest in research and development to continue to enhance our Core Technologies and Software Platform, and to improve existing games and develop new apps. As a result, we expect research and development expenses to increase in absolute dollars. We also expect our research and development expenses as a percentage of revenue to fluctuate period-over-period in the near term as we invest to enhance our Core Technologies and Software Platform and improve our existing Apps and develop new Apps, and to decrease over the long term as we benefit from greater scale.

General and administrative. General and administrative expenses consist primarily of costs incurred to support our business, including personnel-related expenses for salaries, employee benefits, and stock-based compensation for employees engaged in finance, accounting, legal, human resources and administration, professional services fees for

60

Table of Contents

legal, accounting, recruiting, and administrative services (including acquisition-related expenses), insurance, travel, and allocated facilities and information technology costs.

We plan to continue to invest in our general and administrative function to support the growth of our business. In addition, we expect to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance and reporting obligations of a public company, increased insurance and investor relations expenses, and increased professional services fees (including acquisition-related expenses). As a result, we expect general and administrative expenses to increase in absolute dollars. We also expect our general and administrative expenses as a percentage of revenue to fluctuate period-over-period in the near term as we invest to support the growth of our business, and to decrease over the long term as we benefit from greater scale.

Interest expense and loss on settlement of debt. Interest expense and loss on settlement of debt consists primarily of loss related to debt extinguishment, interest expense associated with our outstanding debt, including accretion of debt discount, and changes in fair value of interest rate swap accounted for as a cash flow hedge related to the stream of variable interest payments associated with a portion of our outstanding debt.

Other income (expense), net. Other income (expense), net, includes interest earned on our cash and cash equivalents, gains and losses related to embedded derivatives and other financial instruments accounted for at fair value, and foreign currency exchange gains (losses), which consist primarily of remeasurement of transactions and monetary assets and liabilities denominated in currencies other than the functional currency at the end of the period.

Provision for (benefit from) income taxes. We are subject to income taxes in the United States and foreign jurisdictions in which we do business. These foreign jurisdictions have different statutory tax rates than those in the United States. Additionally, certain of our foreign earnings may also be taxable in the United States. Accordingly, our effective tax rate will vary depending on the relative proportion of foreign to domestic income, impacts from acquisition restructuring, deduction benefits related to foreign-derived intangible income, future changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws. Additionally, our effective tax rate can vary based on the amount of pre-tax income or loss.

Results of Operations

The following tables summarize our consolidated statement of operations in dollar amounts. The period to period comparisons of results is not necessarily indicative of results for future periods.

61

Table of Contents

_______

(1)Includes stock-based compensation expense as follows:

_______

(2)Includes amortization expense related to acquired intangibles as follows:

The following table sets forth the components of our consolidated statements of operations for each of the periods presented as a percentage of revenue(1):

_______

(1)Totals of percentages of revenue may not foot due to rounding.

62

Table of Contents

Comparison of Our Results of Operations for the Twelve Months Ended December 31, 2021, 2020 and 2019

Revenue

Total revenue increased by $1,342.0 million, or 92%, for 2021 compared to 2020 due to increases in Business Revenue from our Software Platform of 225%, Business Revenue from our Apps of 31% and Consumer Revenue of 97%.

In 2021, our Business Revenue increased by $623.4 million from 2020. In 2021, our Business Revenue from our Software Platform increased by $466.7 million from 2020 primarily due to AppDiscovery where installations increased 62% and price per installation increased 81% compared to 2020, as well as our addition of Adjust during the year which contributed 17% of the Business Revenue from Software Platform increase. Our Business Revenue from Apps grew due to a 44% increase in the volume of advertising impressions and a 9% decrease in price per advertising impression, each compared to 2020. Usage of advertising inventory by our Owned Studios and Partner Studios represented 21% of installations in 2021. We do not recognize Business Revenue from transactions with our Owned Studios and Partner Studios.

In 2021, our Consumer Revenue increased by $718.7 million from 2020, primarily due to a 88% increase in the volume of in-app purchases, as well as a 5% increase in price per in-app purchase.

Cost of revenue

Cost of revenue in 2021 increased by $432.5 million, or 78%, compared to 2020. The increase in 2021 was primarily due to an increase of $199.8 million in third-party payment processing fees as a result of the growth in Consumer Revenue, an increase of $153.9 million in depreciation and amortization of technology-related intangible assets driven by an increase in acquisition activity, and an increase in expenses associated with operating our network infrastructure driven by the growth in our operations of $49.7 million.

Sales and marketing

Sales and marketing expenses in 2021 increased by $502.1 million, or 80%, compared to 2020 primarily due to a $432.8 million increase in user acquisition costs, a $23.2 million increase in personnel-related expenses primarily due to an increase in stock-based compensation as a result of higher fair value in our common stock and increase in headcount, and a $28.0 million increase in professional service fees.

63

Table of Contents

Research and development

Research and development expenses in 2021 increased by $185.8 million, or 103%, compared to 2020. The increase was primarily due to an increase of $109.9 million in professional services costs related to development of new games by third parties and an increase of $66.1 million in personnel-related expenses related to an increase in stock-based compensation as a result of higher fair value in our common stock and an increase in headcount.

General and administrative

General and administrative expenses in 2021 increased by $92.3 million, or 139% compared to 2020. The increase was primarily due to an increase of $65.4 million in personnel-related expenses related to an increase in stock-based compensation expense as a result of higher fair value in our common stock and an increase in headcount to support our growth and an increase of $12.4 million in professional services costs primarily associated with audit, tax, and legal support.

Interest expense and loss on settlement of debt

In 2021, interest expense and loss on settlement of debt increased by $25.3 million, or 32%, compared to 2020. The increase was primarily due to a loss on the settlement of term loans of $16.9 million during the period.

Other income (expense), net

In 2021, other income (expense), net decreased by $4.7 million, or 113% compared to 2020. The decrease was primarily due to the write-off of an investment in non marketable securities of $10.0 million, third-party cost incurred for the amendment of term loans of $3.7 million, and a fair value remeasurement loss of $2.0 million, which were partially offset by an unrealized gain of $4.7 million related to marketable equity securities, $3.9 million in net foreign exchange gains, and a fair value remeasurement gain related to term loan embedded derivative of $2.0 million.

64

Table of Contents

Provision for (benefit from) Income Taxes

In 2021, provision for (benefit from) income taxes increased by $20.7 million, or 212% compared to 2020. The increase was driven by an increase of $38.0 million due to higher pre-tax income in 2021, an increase of $15.9 million due to higher valuation allowance, an increase of $6.0 million due to change in foreign deferred tax rate in 2020, a decrease of $2.6 million due to foreign loss inclusion, a decrease of $19.2 million due to excess tax benefit for stock-based compensation, a decrease of $6.9 million due to higher foreign-derived intangible income deduction, and a decrease of $12.2 million due to a disallowed deduction for extinguishments of acquisition-related contingent considerations in 2020.

Liquidity and Capital Resources

Since inception, we financed our operations primarily through payments received from business clients using our Software Platform and advertising on our Apps, and from user IAPs from our Apps, and through net proceeds we received from the sales of our convertible preferred stock and of our Class A common stock in our initial public offering and debt borrowings, including borrowings made under our credit agreement. As of December 31, 2021, we had cash and cash equivalents of $1,520.5 million.

In February 2022, our board of directors authorized a share repurchase program to repurchase $750.0 million of our Class A common stock over time. The program is effective immediately. We will continuously evaluate efficient alternatives to using cash on hand to fund the program, including accessing the capital markets, subject to market conditions.

We believe that our existing cash and cash equivalents, cash flows from operations, and ability to access capital markets would be sufficient to satisfy our anticipated working capital and capital expenditure needs, including authorized share repurchases, for at least the next 12 months and beyond. Our future capital requirements, however, will depend on many factors, including our growth rate; expansion of sales and marketing activities; timing and extent of spending to support our research and development efforts; capital expenditures to purchase hardware and software; and our continued need to invest in our IT infrastructure to support our growth. In addition, we may enter into additional strategic partnerships as well as agreements to acquire or invest in teams and technologies, including intellectual property rights, which could increase our cash requirements. For example, in 2021, we completed a number of asset and business acquisitions, which reduced our year-end 2021 cash balance by $1,206.5 million. As a result of these and other factors, we may be required to seek additional equity or debt financing sooner than we currently anticipate. If additional financing from outside sources is required, we may not be able to raise it on terms acceptable to us, or at all. In particular, the recent COVID-19 pandemic has caused a disruption in the global financial markets, which may reduce our ability to access capital and negatively affect our liquidity in the future. If we are unable to raise additional capital when required, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition, and results of operations could be adversely affected.

The following table summarizes our cash flows for the periods indicated:

Operating Activities

Net cash provided by operating activities was $361.9 million for 2021, primarily consisting of $35.3 million of net income, adjusted for certain non-cash items, which included $431.1 million of amortization, depreciation and write-offs, $133.2 million of stock-based compensation expense, $26.3 million of change in operating right of use asset, $18.2 million of loss on settlement of debt, $8.8 million of net unrealized gains on fair value remeasurement of financial instruments, and $12.8 million of amortization of debt issuance costs and discount, partially offset by a net increase in the operating assets and liabilities of $284.3 million. The net increase in the operating assets and liabilities was primarily driven by an increase in accounts receivable, prepaid expenses and other current assets and decrease in operating lease liabilities partially offset by higher accounts payable and accrued and other liabilities.

65

Table of Contents

Investing Activities

Net cash used in investing activities was $1,214.9 million for 2021, primarily consisting of $1,206.5 million related to acquisitions, $15.0 million in purchases of non-marketable investments and other and $12.0 million in proceeds from other investing activity.

Financing Activities

Net cash provided by financing activities was $3,109.5 million for 2021, primarily consisting of $1,745.2 million of proceeds from issuance of common stock in our initial public offering, net of issuance costs as adjusted for cost reimbursement, $2,329.1 million of proceeds from debt issuance and $31.2 million proceeds from exercise of stock awards partially offset by payments for the principal repayment of debt of $719.8 million, deferred acquisition costs of $234.1 million and finance leases of $15.3 million.

Credit Agreement

On August 15, 2018, we entered into a credit agreement with the lenders party thereto and Bank of America, N.A., as administrative agent for the lenders (the credit agreement), which provided for $820.0 million of senior secured term loans and a $50.0 million senior secured revolving loan facility. The credit agreement was amended on April 23, 2019 to increase the senior secured term loan facility by $400.0 million to an aggregate principal amount of $1.22 billion. The credit agreement was further amended on April 27, 2020 to modify certain negative covenants contained therein. The credit agreement was further amended on May 6, 2020 to increase the senior secured term loan facility by $300.0 million to an aggregate principal amount of $1.52 billion. The credit agreement was further amended on October 27, 2020 to add an additional $541.7 million in aggregate principal amount of revolving commitments and reduce the existing commitments by $1.7 million, increasing the total revolving commitments to $590.0 million, reduce the interest rate on the revolving loans, and extend the maturity date of the revolving loans.

The credit agreement was further amended on February 12, 2021 to increase the senior secured term loan facility by $300.0 million to an aggregate principal amount of $1.82 billion, to add an additional $10.0 million in aggregate principal amount of revolving commitments, increasing the total revolving commitments to $600.0 million and to reduce the interest rate on the incremental term loans issued on May 6, 2020 to have the same interest rate as all other term loans. On March 31, 2021, we borrowed an additional $250.0 million under our revolving credit facility and in connection with our initial public offering we repaid the entire amount outstanding under this facility. On October 25, 2021, we amended the credit agreement whereby certain additional lenders agreed to provide incremental loans in an aggregate amount of $1.50 billion.

As of December 31, 2021, our total outstanding indebtedness under the credit agreement was consisting of $3,272 million of outstanding term loans.

66

Table of Contents

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2021:

Several of the definitive agreements governing our acquisitions of our Owned Studios and arrangements with Partner Studios provide for payment contingent upon future performance metrics. The table above does not include any amounts related to these obligations. These contingent consideration arrangements include payouts based on a percentage of revenue or profitability metrics, payouts of fixed amounts based on the achievement of certain operating targets, and revenue share arrangements for specific apps, and some of these arrangements do not have a maximum limit of contingent consideration achievable. Because these contingent consideration arrangements are based on the success of relevant Apps and are not guaranteed, we do not expect our results of operations would be materially and adversely effected by the payment of amounts under any such arrangement. The table below presents a summary of the significant contingent consideration arrangements:

6 Consists of borrowings under our credit agreement. The table above does not include interest payments which vary based on changes in the interest rate index. See the section titled “Description of Certain Indebtedness” and Note 9 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information regarding our long-term debt obligations.

7 Deferred acquisition costs represent part of the consideration related to games acquired in asset acquisition transactions.

8 Consists of non-cancellable commitments for real estate leases and lease of networking equipment colocation space. See Note 8 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.

9 Consists of payments related to finance leases of networking equipment. One of the leases is under month-to-month lease arrangement with renewal options. The amounts include payments attributable to optional renewal periods if it is reasonably certain that we will exercise such options. See Note 8 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.

10 Represents an obligation related to intellectual property that the Company licenses from a third party.

11 Licensor commitments include minimum guarantee royalty payments due to licensors for use of their mobile game products.

12 The contractual commitment obligations in the table above are associated with agreements that are enforceable and legally binding.

67

Table of Contents

For acquisitions of Owned Studios that are accounted for as business combinations, contingent consideration is initially recognized at fair value. For our other transactions, we generally recognize contingent consideration only on the date when the related performance metrics are achieved. See Notes 2 and 6 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.

As of December 31, 2021, we had recorded liabilities of $18.7 million related to uncertain tax positions. Due to uncertainties in the timing of potential tax audits, the timing of the resolution of these positions is uncertain and we are unable to make a reasonable estimate of the timing of payments in individual years particularly beyond 12 months. As a result, this amount is not included in the table above.

In April 2020, we entered into a share purchase agreement with Redemption Games, Inc. (Redemption Games). We purchased a majority of the outstanding common stock of Redemption Games and entered into agreements with the equity holders of Redemption Games that, among other things, provide for call/put rights whereby such holders can elect to require us to purchase all or a portion of their vested securities on a specified date in February of each year from 2022 to 2025 and we can require such holders to sell to us all of their remaining securities on or after February 19, 2025, each for a purchase price per share of the then current fair market value per share of common stock of Redemption Games. Based on the fair market value of the common stock of Redemption Games at December 31, 2021, the purchase price for an exercise in full of such call options would have been $6.6 million.

68

Table of Contents

Critical Accounting Policies and Estimates

We believe that the following accounting policies involve a high degree of judgment and complexity and are critical to understanding and evaluating our consolidated financial condition and results of our operations. An accounting policy is considered to be critical if it requires judgment on a significant accounting estimate to be made based on assumptions about matters that are uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the reported amounts of assets, liabilities, revenue and expenses, and related disclosures in our audited consolidated financial statements. We have based our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates.

We believe that the following critical accounting policies reflect the more significant judgments, estimates and assumptions used in the preparation of our consolidated financial statements. See Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.

Revenue from Contracts with Customers

We generate revenue from two types of customers—Business and Consumer. Business Revenue includes fees paid by mobile app advertisers that use our Software Platform, and revenue generated from the sale of digital advertising inventory of our Apps. Consumer Revenue consists of IAPs made by users within our Apps.

Business Revenue

Our Software Platform provides the technology to match advertisers and third-party owners of digital advertising inventory via auctions at large scale and microsecond-level speeds. The pricing and terms for all mobile advertising arrangements are governed by our terms and conditions and generally stipulate payment terms of 30 days subsequent to the end of the month. The contract is fully cancellable at any time.

For Business Revenue generated through the placement of advertisements on mobile game apps owned by publishers, our performance obligation is to provide an advertiser with access to our Software Platform which facilitates the advertiser’s purchase of advertising inventory from publishers. We do not control the advertising inventory prior to its transfer to the advertiser, our customer, because we do not have the substantive ability to direct the use of, nor obtain substantially all of the remaining benefits from, the advertising inventory. We are not primarily responsible for fulfillment and do not have any inventory risk. We are an agent as it relates to the sale of third-party advertising inventory and present revenue on a net basis. The transaction price is the product of either the number of completions of agreed upon actions or advertisements displayed and the contractually agreed upon price per advertising unit with the advertiser less consideration paid or payable to publishers.

Advertisers also purchase the advertising inventory of our Apps either through our Software Platform or through third-party advertising networks. Revenue from the sale of advertising inventory through third-party advertising networks is recognized net of the amounts retained by third-party advertising networks as we are unable to determine the gross amount paid by the advertisers to the third-party advertising networks.

We recognize mobile advertising revenue when the agreed upon action is completed or when the ad is displayed to users, depending on the agreed upon pricing mechanism with an advertiser or third- party advertising network. The number of advertisements delivered and completions of agreed upon actions is determined at the end of each month, which resolves any uncertainty in the transaction price during the reporting period.

Consumer Revenue

IAPs include fees collected from users for the purchase of virtual goods to enhance their gameplay experience. The identified performance obligation is to provide users with the ability to acquire, use, and hold virtual items over the estimated period of time the virtual items are available to the user or until the virtual item is consumed. We categorize our virtual goods as either consumable or durable. Consumable virtual goods represent goods that can be consumed by a specific player action in gameplay; accordingly, we recognize revenue from the sale of consumable virtual goods as the goods are consumed and our performance obligation is satisfied. Durable virtual goods represent goods that are accessible to the user over an extended period of time; accordingly, we recognize revenue from the sale of durable virtual goods ratably over the period of time the goods are available to the user and our performance obligation is satisfied, which is generally the estimated average user life (EAUL). Payment is required at the time of purchase and the purchase price is a fixed amount. Users make IAPs through our distribution partners. The transaction price is equal to the gross amount charged to users because we are the principal in the transaction. IAPs fees are non-refundable. Such payments are initially recorded to deferred revenue.

69

Table of Contents

The EAUL represents our best estimate of the expected life of paying users for the applicable game. The EAUL begins when a user makes a first purchase of durable virtual goods and ends when a user is determined to be inactive. We determine the EAUL on a game-by-game basis. For a newly launched game that has limited playing data, we determine our EAUL based on the EAUL of a game that has sufficiently similar characteristics. We determine the EAUL on a quarterly basis and apply such calculated EAUL to all bookings in the respective quarter. Determining the EAUL is subjective and requires management’s judgment. Future playing patterns may differ from historical playing patterns, and therefore the EAUL may change in the future. The EAULs are generally between six and nine months.

We present taxes collected from customers and remitted to governmental authorities on a net basis.

Asset Acquisitions and Business Combinations

We perform an initial test to determine whether substantially all of the fair value of the gross assets transferred are concentrated in a single identifiable asset or a group of similar identifiable assets, such that the acquisition would not represent a business. If that test suggests that the set of assets and activities is a business, we then perform a second test to evaluate whether the assets and activities transferred include inputs and substantive processes that together, significantly contribute to the ability to create outputs, which would constitute a business. If the result of the second test suggests that the acquired assets and activities constitute a business, we account for the transaction as a business combination.

For transactions accounted for as business combinations, we allocate the fair value of acquisition consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. Acquisition consideration includes the fair value of any promised contingent consideration. The excess of the fair value of acquisition consideration over the fair values of acquired identifiable assets and liabilities is recorded as goodwill. Contingent consideration is remeasured to its fair value each reporting period with changes in the fair value of contingent consideration recorded in general and administrative expenses. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates and assumptions in valuing certain identifiable intangible assets include, but are not limited to, forecasted revenue and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. In certain circumstances, the allocations of the excess purchase price are based upon preliminary estimates and assumptions and subject to revision when we receive final information, including appraisals and other analyses. During the measurement period, which is one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. Acquisition-related costs are expensed as incurred.

For transactions accounted for as asset acquisitions, the cost, including certain transaction costs, is allocated to the assets acquired on the basis of relative fair values. We generally include contingent consideration in the cost of the assets acquired only when the uncertainty is resolved. We recognize contingent consideration adjustments to the cost of the acquired assets prospectively using the straight-line method over the remaining useful life of the assets. No goodwill is recognized in asset acquisitions.

Services and Development Agreements

We enter into strategic agreements with Partner Studios. We have historically allowed these Partner Studios to continue their operations with a significant degree of autonomy. In some cases, we bought Apps from Partner Studios and entered into service and development agreements whereby Partner Studios provide support in improving existing Apps and developing new Apps. The substantial majority of payments associated with service agreements for existing Apps are expensed to research and development when the services are rendered as the payments primarily relate to developing enhancements for the Apps. Payments for new Apps associated with development agreements are generally made in connection with the development of a particular App, and therefore, we are subject to development risk prior to the release of the App. Accordingly, payments that are due prior to completion of an App are generally expensed to research and development over the development period as the services are incurred. Payments due after completion of an App are generally capitalized and expensed as cost of revenue. See Note 6 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.

Software Development Costs

We incur development costs related to internal-use software and the development of Apps. We review software development costs on a quarterly basis to determine if the costs qualify for capitalization. As a result of an agile and iterative development process, the preliminary project stage remains ongoing until just prior to launch, at which time final feature selection occurs. As such, software development costs do not meet the criteria for capitalization and are expensed as incurred to research and development expenses. The software development costs we capitalized during the year ended December 31, 2021 were not material. We did not capitalize any software development costs during the year ended December 31, 2020 and 2019.

70

Table of Contents

Goodwill

Goodwill is allocated to reporting units and tested for impairment on an annual basis during the fourth quarter or more frequently if we believe indicators of impairment exist. Triggering events that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of goodwill or a significant decrease in expected cash flows. When conducting quantitative annual goodwill impairment assessments, we compare the fair value of its reporting units to their carrying value. If the carrying value of a reporting unit exceeds its fair value, then we record a goodwill impairment. Commencing January 1, 2019, the lesser of (i) the entire amount by which the carrying value of a reporting unit exceeds its fair value or (ii) the carrying value of goodwill allocated to such reporting unit is recorded as an impairment to goodwill. As of December 31, 2021, 2020 and 2019, no impairment of goodwill has been identified.

Intangible Assets

This consists of identifiable intangible assets, primarily Apps, user base, developed technology and intellectual property licenses resulting from acquisitions. Acquired intangible assets are recorded at cost, net of accumulated amortization. Our estimates of useful lives of intangible assets are based on cash flow forecasts which incorporate various assumptions, including forecasted user acquisition costs, user attrition rates and level of user engagement.

Intangible assets also include costs of intellectual property that we license from third parties for use of their content in our game. The licensing agreements include license payments, which are due over the terms of the agreements. We recognize these license payments as a license asset and a license obligation at the fair value on the contract date, based on a discounted cash flow model. The amortization of the licensed asset commences when the game with licensed content is launched and when licensed agreement is executed; and is recorded in cost of revenue on a straight-line method over the remaining license terms or estimated useful life of the game with licensed content, whichever is shorter. The classification of the license obligations between current and long-term is based on the expected timing of the payments to the licensor.

Impairment of Long-Lived Assets

We review long-lived assets for impairment whenever events or changes in circumstances indicate an asset’s carrying value may not be recoverable. If such circumstances are present, we assess the recoverability of the long-lived assets by comparing the carrying value to the undiscounted future cash flows associated with the related assets. If the future net undiscounted cash flows are less than the carrying value of the assets, the assets are considered impaired and an expense equal to the amount required to reduce the carrying value of the assets to the estimated fair value is recorded as an impairment of intangible assets in the consolidated statements of operations. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows. Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. For example, if future operating results do not meet current forecasts, we may be required to record future impairment charges for acquired intangible assets. Additional factors which significantly affect future cash flows related to long-lived assets include, but are not limited to, forecasted user acquisition costs, user attrition rates, and level of user engagement. Significant changes in these factors may require us to reassess recoverability of long-lived assets and record impairment. Impairment charges could materially decrease future net income and result in lower asset values on our consolidated balance sheet. There were no material impairment charges recorded for the years ended December 31, 2021, 2020, and 2019.

Stock-Based Compensation

We estimate the fair value of employee stock-based compensation awards on the grant date using the Black-Scholes option pricing model and recognize the grant date fair value as compensation expense on a straight-line basis over the requisite service period. The Black-Scholes option pricing model requires use of various assumptions, including expected option life and expected stock price volatility. We determine the expected option life as the average of the options’ contractual term and the options’ vesting period. We estimate the options’ volatility using volatilities of public companies in a comparable industry, stage of life cycle, and size. We use the straight-line method for recording stock- based compensation expense and recognize forfeitures as they occur.

The following tables summarize the assumptions used in the Black-Scholes option pricing model to determine the fair value of our stock options:

71

Table of Contents

Given the absence of a public trading market for our Class A common stock prior to our initial public offering, and in accordance with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation, our board of directors exercised its reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of fair value of our Class A common stock, including:

•independent third-party valuations of our Class A common stock;

•the price of sales of our Class A common stock and preferred stock in recent secondary sales by existing stockholders to investors;

•our capital resources and financial condition;

•the preferences held by our preferred stock classes relative to those of our Class A common stock;

•the likelihood and timing of achieving a liquidity event, such as an initial public offering or sale of the company, given prevailing market conditions;

•our historical operating and financial performance as well as our estimates of future financial performance;

•valuations of comparable companies;

•the hiring of key personnel;

•the status of our development, product introduction, and sales efforts;

•the price paid by us to repurchase outstanding shares;

•the relative lack of marketability of our Class A common stock;

•industry information such as market growth and volume and macro-economic events; and

•additional objective and subjective factors relating to our business.

Prior to the IPO, in valuing our Class A common stock, our board of directors determined the fair value of our Class A common stock using both the income and market approach valuation methods, in addition to giving consideration to recent secondary sales of our Class A common stock. The income approach estimates value based on the expectation of future cash flows that a company will generate. These future cash flows are discounted to their present values using a discount rate based on our weighted-average cost of capital, and is adjusted to reflect the risks inherent in our cash flows. The market approach estimates value based on a comparison of our company to comparable public companies in a similar line of business. From the comparable companies, a representative market value multiple is determined and then applied to our company’s financial forecasts to estimate the value of the subject company.

Following our IPO, the fair value of each equity award grant is determined based on the closing price of our Class A common stock as reported on the Nasdaq Global Select Market on the date of the respective grant.

Income Taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We recognize deferred tax assets to the extent that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize deferred tax assets in the future in excess of their net recorded amount, an adjustment to the deferred tax asset valuation allowance would be made to reduce the provision for income taxes.

We record uncertain tax positions on the basis of a two-step process in which determinations are made (i) whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for

72

Table of Contents

those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with a tax authority.

We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in our consolidated statement of operations. Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheet.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the dates of the statement of financial position included in this Annual Report on 10-K.