On Thursday, shares of mobile advertising platform giant AppLovin Corporation (APP.US) tumbled more than 20%, closing at $333.71. In its fiscal second quarter ended June 30, the company reported revenue of $1.92 billion, a 53% year-over-year increase, though this fell short of the analyst consensus estimate of $1.94 billion. Adjusted earnings per share came in at $3.76, slightly above the market's expectation of $3.75. Net profit surged 55% to $1.27 billion, up from $820 million in the same period last year, while adjusted EBITDA climbed 58% to $1.61 billion.

However, what alarmed the market was that the results not only missed Wall Street forecasts but also fell short of AppLovin's own internal guidance. In a conference call, co-founder and CEO Adam Foroughi noted that the company's game-centric advertising business is heavily reliant on performance improvements in its AI models. Each substantial iteration of the model allows advertisers to increase their budgets while maintaining target advertising spend returns. Yet, in the just-concluded second quarter, this expected leap in model performance did not materialize.

For the current quarter, AppLovin Corporation provided guidance that reflects the contributions of a new model. The company projects third-quarter revenue between $2.055 billion and $2.085 billion, representing year-over-year growth of roughly 46% to 48%. The midpoint of $2.07 billion is slightly below the analyst consensus of $2.08 billion. Adjusted EBITDA is expected to range from $1.71 billion to $1.74 billion, with an adjusted EBITDA margin of approximately 83%. Chief Financial Officer Matt Stumpf stated that the third-quarter guidance already incorporates increased training and computing infrastructure costs associated with deploying the new model, but does not include any future model releases that may come online but have not yet been realized. He reiterated that the company manages its business with EBITDA absolute value and free cash flow as core metrics, and will continue to invest as long as computing power investments generate incremental revenue. Over the long term, the adjusted EBITDA margin is expected to remain in the low-80% range, but it may fluctuate in the short term due to infrastructure investments.