Q2 2021 Integral Ad Science Holding Corp Earnings Call

August 12, 2021

[music].

Good day and thank you for standing by welcome to the Ies second quarter 2021 financial results Conference call.

At this time, all participants are in listen only mode.

After the Speakers' presentation, there'll be a question and answer session.

To ask a question during the session you will need to press star one on your telephone.

Please be advised that today's conference is being recorded if.

If you're cranny further assistance please press star zero.

I'd now like to hand, the conference over to your host Jonathan Schaffer. Please go ahead.

Thank you good afternoon, and welcome to the <unk> 2021 second quarter financial results Conference call I am joined on today's call by Lisa Snyder, CEO and gel per gala CFO Biff.

Before we begin please note that today's call contains forward looking statements. We refer you to the Companys IPO prospectus filed on July one and any subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations.

On today's call. We will also refer to non-GAAP measures a reconciliation of non-GAAP measures to the most directly comparable GAAP measures is contained in today's earnings release available on the company's IR site investors dot integral AD dot com.

So with these formalities out of the way I'd now like to turn the call over to Lisa at Schneider, Lisa you may begin.

Thank you Jonathan and thank you to everyone for joining us I'm delighted to speak with you today on <unk> first earnings call as a public company.

I'll start my comments with a few highlights of our Q2 financial performance.

Then provide a brief overview of ies and how we believe we are uniquely positioned as the global benchmark for trust and transparency in digital media quality.

I'll talk about our four growth drivers in our Q2 progress in each of these areas, including a discussion of our acquisition of public huh.

Leading connected television or CTV advertising platforms.

Finally, Joe will review, our financials and outlook in detail before opening it up for questions.

I S delivered an outstanding second quarter.

We generated revenue growth of 55% year over year to $75.1 million compared to last year's Covid impacted quarter.

Our revenue was fueled by the continued strength of our advertiser direct channel and acceleration of our programmatic business highlighted by the strong contribution from our contextual targeting offering.

We also achieved strong profitability with gross margins of 83% and adjusted EBITDA of $25.7 million at a 34% margin.

Our second quarter results reflect <unk> continued dedication to our customers and commitment to making every impression counts.

The worlds, leading advertisers publishers and platforms Trust us to create accountability within the increasingly complex digital advertising ecosystem.

Our global customer base is loyal and Jaguar.

Composed of over 2000, marketers and publishers within the average tenure of over six seven years, among our top 100 marketers.

I S offers cookie breed solutions that address AD fraud view ability.

<unk> safety and suitability we.

We are deeply embedded in the advertising ecosystem, providing solutions for both the buy side and sell side across the open web social platforms and in every major demand side platform or DSP.

Our solutions are always on measuring all impressions on behalf of our advertisers.

Prior to I S. I spent 20 years in leadership roles at global Tech platforms, like Microsoft and Amazon and was always field base in order to be close to customers.

When I joined <unk> in January 2019.

My first priority was to listen to the customer and learn how I S could deliver better outcomes for marketers.

I met with dozens of marketing and publisher customers. This customer first obsession is reflected in how we go to market with new products to meet our customers' needs. Our product pipeline is based on offering set a global scalable and repeatable and multiple markets.

Our deep partner integrations are one way in which we lead the market with innovative solutions.

<unk> automated tag is a great example of the first to market technology, we created in partnership with Google.

Let's now discuss our growth strategy and our recent progress.

An acceleration of digital first consumer lifestyles due to COVID-19 means marketers are permanently shifting AD dollars out of linear TV budgets and following consumers onto digital platforms for better engagement and increased our y <unk>.

This fundamental shifts in the digital ecosystem is driving increased demand for our solutions in four key segments International programmatic CTV and social platforms.

Let's take a look at each of these growth areas, starting with our global footprint.

International revenue grew 58% in the second quarter.

Currently approximately 40% of our revenue comes from markets outside the Americas, which we believe is considerably higher than any other competitor.

We began implementing our global strategy over eight years ago and today, we have a well established global infrastructure that is generating revenue and 111 countries and in over 40 languages.

We have successfully signed international brands, such as Disney GSK, Nestle and Adidas to multi year contracts and serve as their trusted partner in every region across the globe.

EMEA and APAC revenue grew 61% and 51% respectively in the second quarter.

Growth was driven by both new contracts with local brands as well as continued upsell and renewals of large existing customers.

I S. Its position as the Premier verification partner in these regions allows us to develop long term relationships with marketers such as Volkswagen There Sanofi and Shiseido, who then trust I asked to be their partner as they activate new territories for <unk>.

Example, we signed an advertiser direct deal out of India. This quarter with Samsung, who also partners with I S and the U S, Germany, and the U K among other locations.

We see this trend in other emerging markets like Latam as well, we partner with Coca Cola in many regions across the globe and because of the success of our partnership Coca Cola has activated in new markets across Latam.

We believe that Latin America, and APAC regions represent substantial growth opportunities and we are investing and developing our business in these markets by way of expanded in market customer service investments and by leveraging our global relationships.

Turning to programmatic as programmatic buying becomes a larger part of the advertising ecosystem marketers are increasingly focused on maximizing the impact of their digital AD spend and verifying the quality of digital media.

Privacy legislation third party cookie deprecation and other audience IV changes, including Apple's identifier for advertisers are increasing demand for targeting tools that do not rely on gathering audience base data to.

To address this I S launched our market, leading contextual targeting solution context control with the trade desk in March of 'twenty twin.

Context controlled classifies content on a page level and analyzes it using our proprietary semantic technology.

By the end of 2020, we had integrated with all major D. S pins, including Google G. D 360, and we've seen strong market adoption with context control representing over 30% of programmatic revenue in Q2.

Context control has been a major driver of our programmatic growth overall this quarter programmatic revenue reached 42% of total revenue up from 34% last year and we believe on track to reach 50% in 2023.

In Q1, we also acquired amino payments, which is branded as our total visibility offering within programmatic.

Total visibility provides transparency into supply path optimization of GBP 360.

For example, our brands such as state farm is able to gain transparency into both supply path costs for AD inventory as well as clear understanding of the corresponding AD inventory quality. They can then dial up and down their allocated spend accordingly.

Next I'd like to highlight the opportunity in CTV for I S.

According to E. Marketer the average amount of time spent with smart Tvs and other OTT devices. Among U S consumers rose, 34% year over year in 2020 to reach an average of 77 minutes daily.

And our own I S research suggests more than nine out of 10-C T V users in the U S say they watch some form of AD supported streaming video content.

For marketers this represents a tremendous opportunity based on consumer adoption and engagement with streaming content.

But as AD dollar shift fraudsters follow.

I asked was the first to bring AD verification to see T V with the world's first fried and view completion solution in June 2019.

This week, we are enhancing our leadership position in this space with our acquisition of <unk>.

As I mentioned earlier.

<unk> is the leading CTV advertising platforms.

<unk> delivers true T V like experiences to streaming audiences by connecting supply side platforms or <unk> PS two unique see TV inventory.

It's AD server and unified auction for CTV inventory help publishers to obtain the highest field.

Public it can also measure the frequency and placement of ads and C. T V environments, helping to solve a significant challenge for publishers public.

<unk> reports that it delivers over 3 billion ads on C. T. B every month with publisher partners, such as Samsung Viacom CBS and Fox.

<unk> reports that publishers using its platforms have seen on average a 30% lift in yield for their CTV inventory.

We see both sell side and buy side synergies that will advance I S. Its position in the CTV market.

Through this acquisition, we are gaining valuable access to content and first party data that enables us to accelerate our CTV product roadmap.

We believe that combined ies's capabilities will enhance public cuz publisher solutions and Ies. This reach international presence and current market position will enable us to further address large T V publishers needs at scale.

In the future, we expect that I, yes, we'll be able to help advertisers with a trusted way to invest more budgets and C. T V and measure the results by providing protection against AD fraud, along with brand safety and suitability controls when buying CTV inventory.

I S has a longstanding relationship with public on dating back to 2019, and we could not be more excited to welcome the public could team to I S.

It's early innings and see TV for all verification providers, but public are really enhances our standing in the market.

According to E marketer C. T V. In the U S is approximately $13 billion out of $455 billion overall market AD verification opportunity today, but we're very bullish on the product roadmap.

Our CTV revenue has grown 404% versus second quarter 2020 off of a small base, we are expecting a more meaningful contribution starting in late 'twenty two into 'twenty three.

Finally, we're focused on bringing our AD verification and brand safety solutions to social platforms, which are trying to keep pace with increased consumer engagement and the proliferation of user generated content.

Social engagement is translating into an incredible share of the global digital advertising spend shifting to social platforms.

As AD budgets moved to social marketers are calling for third party solutions like ours that brings speed transparency and precision to their social campaigns.

We believe innovation and social live feeds will create durable and sustainable revenue growth in this segment.

Q2, social already makes up 37% of our advertiser direct revenue and we expect this number to reach to 45% by 2023.

We are currently developing our own in house solutions to detect and protect marketers from undesirable content and live news feeds.

By relying on our own proprietary technology, we create the opportunity to scale our solutions to multiple platforms once opportunities become available.

I S has recently partnered with Tic Toc to provide a brand safe experience in the live feed.

I'm excited to share that I, yes, and Tic Toc have launched an international brand safety data, providing advertisers with industry, leading controls aligns with the global Alliance for responsible media standards for in feed video.

Our new global solution utilizes proprietary frame by frame video audio text classification technology, specifically designed for social environments, allowing advertisers to confidently promote their brand on Tic Toc, we look forward to sharing more news.

On our exciting partnership as we progressed throughout the year.

Other notable social updates. This quarter include Ies is differentiated platform wide integration with the Linkedin audience network.

It is the first and only platform wide provider for Linkedin audience network.

Thank you again for your interest and I, Yes, as you know our common stock began trading on NASDAQ on June 30th.

We're excited to be speaking with you today as a newly public company with a tremendous opportunity ahead of us.

We believe we have the right team talent technology and partners to extend our leadership in the market.

We'll look forward to reporting to you on our progress and with that I'll turn it over to Joe to review the financials.

Thank you Lisa I would also like to welcome all of you and look forward to working with you now that I asked as a public company before I review, our second quarter results I would like to remind everyone that my comments today include certain financial measures that will be presented on a non-GAAP basis, a reconciliation to GAAP measures is available in today's release.

Let me start with our efficient and highly scalable business model and Kpis before turning to a review of Q2, 'twenty one results and our outlook moving forward.

I asked has an agile and scalable business model focused on high revenue growth and margins. We have significant reoccurring revenue that provides us with predictability in our forecasting we partner closely with our advertisers and publishers to build multi year minimum impression commitments as well as fixed fee arrangements or <unk>.

The new model is primarily based on impression volume with a blended CPM rate.

The success of this quarter is not only seen through our revenue growth was a result of our strong and long term customer relationships as we continuously review our business effectiveness efficiency and execution I'd like to first highlight a few key business metrics that we believe will frame the performance of Ias going forward and they don't speak about their drivers.

Our second quarter net revenue retention was 142%.

Significant improvement compared to 110% the previous quarter.

Our total customers grew 17% to 2000, and 155, which includes 2018 advertisers and 137 publishers.

Additionally, our total number of large advertising customers with annual revenue over 200000.

Crew by 21% versus the prior year period, ending the period at 187.

Turning to our financial results, we reported a strong quarter driven by double digit gains in our programmatic advertising direct channels.

Second quarter revenue was $75.1 million, which was a 55% increase from the prior year period.

It is important to note that last year, several macro events affected our business in different ways, including but not limited to the global pandemic.

Social and civil unrest and as we said previously discussed the acceleration of a digital first lifestyle.

Almost 90% of our total revenue comes through our advertiser direct and programmatic channels.

Balance comes from our partnerships with our publishers, who we believe benefit from a higher yield and optimization from accessing our data as well as contributions of RCM pixel business.

Our advertiser direct grew 40% to $35.3 million versus the prior period.

$10.1 billion increase was a result of higher impression volume, particularly across Facebook and Youtube.

Clients, such as Coca Cola nationally.

M H Sanofi L'oreal Este Lauder invest more in social.

We saw strong second quarter growth in video revenue, which now accounts for 39% of our total advertiser direct revenue.

Total programmatic revenue grew 94% to $31.8 million versus the prior year period.

As a result of an impression volume growth and an increase in our average CPM.

Context controlled solutions continue to scale and gain adoption since their launch in early 2020 and made up 30% of total second quarter programmatic revenue.

We're seeing some of our larger clients such as American Express Deutsche Telekom, Disney Johnson, and Johnson, and Volkswagen embrace our context control offering driving up their programmatic spend year over year.

Our international investments in footprint continued to pay off our Americas. The rest of World revenue mix finished the second quarter at approximately 60.40.

We are proud of our dedicated global teams and looking forward I'm confident in their ability to further grow and generate revenue in established and emerging markets. Our geographic revenue splits were as follows for the Americas total revenue for the quarter came in at $45.4 million up 54% versus the prior year period.

EMEA finished at $22 million up 61% versus the prior year period.

And APAC finished at $7.6 million up 51% versus the prior year period.

Total gross profit was $62.2 million, resulting in a gross margin of 83% for the period compared to 82% in the prior year period the.

The high margins are reflective of our efficient cost structure.

For operating expenses, we incurred $41.5 million and stock compensation expenses during the quarter as a result of our IPO.

Walk you through our operating expenses now excluding the impact of stock based compensation to assist with comparability.

Core sales and marketing expense for the second quarter of 2021 was 16 and a half million down 2% from the prior year period.

Our cost structure reflects an efficient go to market strategy and is a testament to our investments in building a scalable platform both domestically and internationally.

Product and tech expenses were $13.2 million up 3% from the prior year period as we continue to invest in order to maintain our leadership in technology and innovation.

G&A expenses increased to $10 million or 17%, primarily due to professional fees and costs incurred to support our initial public offering.

For the second quarter, our adjusted EBITDA increased to $25.7 million from $3.8 million in the prior period, reflecting an adjusted EBITDA margin of 34% driven by our topline growth and ability to leverage fixed costs as we scale cash generated from operations was $31.7 million for the second quarter.

Net loss for Q2 was $35.1 million or 26 cents per share compared to a loss of $16.5 million or 12 cents per share in the prior year period.

However, excluding one time IPO related stock compensation expenses net income was $6.4 million.

We ended the second quarter with cash and equivalents of $73.2 million compared to $51.7 million at year end 2020, our financial position has strengthened following our IPO, which closed in the third quarter.

We raised approximately 275 million in net proceeds from our IPO as well as the exercise of the underwriter's option, which will be reflected on the Q3 'twenty one balance sheet.

Proceeds will be used to reduce long term debt and we were off.

Also prioritizing investing in the business through organic and as you saw from this week's acquisition announcement M&A initiatives.

It's a fast growing profitable business operating at similar margins as our core business.

Turning to our guidance for the third quarter of 2021, we expect revenue in the range of $74 million to $76 million and adjusted EBITDA in the range of $16 million to $18 million.

For fiscal year 2021 we expect revenue in the range of 300 feet to $312 million and adjusted EBITDA in the range of $87 million to $91 million.

Our guidance includes an anticipated contribution from the public of acquisition of $3 million of revenue for Q3 and $7 million in revenue for Q4, 2021.

Let me share with you a few notes for modeling purposes, we.

We experienced fluctuations in revenue that coincide with seasonal fluctuations in the digital AD spending of our customers the global advertising industry experience the seasonal trends that affect the vast majority of participants in the ecosystem.

Most notably advertiser spend we used it in the first quarter increasing spend throughout the year with the fourth quarter being our most important quarter, which includes the holiday shopping season.

Additionally, we expect an annual effective tax rate of 10% for calculating third quarter 2021, EPS, we expect basic weighted average shares outstanding to be approximately $153.5 million to $155 million.

Lisa and I are now ready to take your questions operator.

Thank you again, ladies and gentlemen, I'd like to ask a question. Please press Star then one on your Touchstone telephone again to ask a question. Please press Star then one.

One moment for our first question.

Our first question comes from Brent Thill of Jefferies. Your line is open.

Yeah.

Good afternoon.

So maybe you can just bring us up to speed on kind of the overall adoption of your services.

Describe.

How you would characterize.

The ending or or or wave that we're in right now in terms of where you think the overall movement for your spaces would be the first question.

Just a quick follow up on public kind of why why couldn't you do this on your own what what did they bring to the table that that job.

Significantly enhance your CTV opportunity. Thank you.

Thanks, Brian.

So I'll take the first question I believe the first question was about whether some of the trends that we're seeing right now in the industry.

These are tailwind Brent that we have talked about in the past, including programmatic as you heard in the script earlier programmatic is a big accelerator of growth for our business.

Close to 100% growth year over year in our programmatic a big reason for that was our context control product program programmatic is here to stay and will continue to grow our second big growth driver is social platforms and over the last 12 to 18 months.

Everyone's spending so much time at home.

Viewing stream content spending time on social platforms, the user adoption of social platforms marketers want to be in front of those consumers. So we'll continue to see social platform again accelerate our business and then the third big growth driver and this would be a nice segue.

Publica is C T B and C. T V I like to say, it's the first inning of a long game. We are so excited about the acquisition that we announced earlier this week with public huh.

And we see publica as an opportunity to accelerate our CTV efforts.

Just given what they bring with their global addressable CTV advertising platform. Both in terms of giving us access to massive amounts of C. T V programmatic inventory and also access to data. So those are the trends that we're seeing and also.

So a big reason why we acquired public and to answer your second question around why couldn't we build it ourselves again publica, they come with a unified auction.

Video AD server and have such deep strategic relationships with video publishers.

Relationships with many of the leading SSP and being able to build those types of partnerships. It would take quite a bit of time and enables us to leapfrog in the CTV space.

Great. Thank you.

Thanks Brent.

Thank you. Our next question comes from Raimo <unk> of Barclays. Your line is open.

Hey, this is Frank on for Raimo, Congrats on the quarter.

Just given the strength in international I'm wondering how you would frame that opportunity in the longer term.

Pacifically, how far would you say your average global account is penetrated internationally.

Yeah, Great question, Frank So we're thrilled with the progress that we've made international our revenue split is 60.40.

International is growing faster.

With International Ias has had deep established footprint internationally for over eight years, we have deep partnerships in EMEA in APAC, we continue to invest in emerging markets and seeing tremendous growth like our investments in Latin America last year same thing with South East.

Stacia and again, we're seeing.

So many global marketers looking to partner with I S. Ensign one to three year contracts. So.

Combination of investing in international our overall international growth and also we expect to see more and more global marketers looking to lean into I S. As there so verification provider globally.

Great. Thank you.

Yeah.

Thank you. Our next question comes from Mark Mahaney of Evercore ISI. Your line is open.

Hi, This is Ben on for Mark. Thanks for taking my question two if I could please can you just comment on the adoption you've seen of contextual control Vince.

The new Bios version rolled out.

Uptick noticeably and any impact since the.

Third party cookie delay announcements and people and then.

Just can you talk about any cross selling benefits you see to the from the public acquisitions any revenue synergies you can quantify.

Okay. Thank you Ben for your questions, so with context control.

Contract context control has been a big hit with our marketing customers.

We launched the product over a year ago. It was actually the end of Q1 in 2020, following our acquisition of at Mantech and it has been such an accelerator again of our programmatic growth also it is a differentiated product given our contextual intelligence technology.

<unk> is global we offer it in over 40 languages and also the other big differentiator for our context control products, we offer across all of the major DSP, including DB three <unk>. So we're thrilled with the results we've seen out of context control the demand that we're here.

For marketers to be able to offer contextual targeting both for avoidance and also to be able to seek out content that they want their brands to run adjacent to <unk> in terms of future forward looking with context control we see.

I continue to accelerate our revenue we haven't had any hiccups with the prospect whatsoever.

And then in terms of cross selling with public huh.

Another big differentiator and what excites us about the public of acquisition is there's very little overlap between our customer base and public because customer base, our customer base. The majority of our customers are global marketers, we have over 2000 customers globally and <unk>.

The majority of their business is publisher base. So it's a nice marriage of the buy side and the sell side of the business and again, we're just thrilled.

And looking forward to working with the public a team.

Thank you.

Yes.

Yeah.

Thank you. Our next question comes from Brian Nowak of Morgan Stanley. Your line is open.

Hi, This is Alex Wang on for Brian Thanks for taking the question.

Two if we can one can you talk to Ias has momentum and visibility into adding new advertisers in the second half and what you view as the key drivers behind that and overall just.

Shortening the sales cycle there.

Second Joe of the revenue growth you saw in Q2 of about 55% how much of it was attributable to <unk>.

Growth in impressions versus CPM and are you able to quantify but in CPM uplifts from a contextual control.

Okay. Thanks, Alex for the questions I'll take the first one and then I'll have Joe take the second one so in terms of new advertisers for H, two I couldn't be prouder of our sales team with all of the nice wins that they've put on the board both in second quarter and in each one.

Wins, including global accounts like Air, France, Samsung, India, Uber I could keep going down the west, but when we turn to H, two and new advertisers, we're feeling really good about the pipeline that's in place, but in terms of shortening the sales cycle, the beauty of programmatic and our COO.

Contexts control product is it's a flip of a switch in the products lifestyle and it's on so as we continue to see the increase in investments in programmatic in context control in particular and enables us to turn on.

Advertisers faster to our solutions and get them live and up and running.

Joe you want to take the second question, yes, Thanks, Alex So.

With regards to programmatic, we're outpacing the programmatic market growth that's defined by a marketer and we're gaining share in programmatic due to contextual and that trend will continue as there are a lot of greenfield opportunities out there and you can see that in our impression left and to answer your second part of the question. We are seeing a premium on a contextual control pricing and fully expect.

Fact that to accelerate throughout the year.

Great. Thanks.

Thanks, Alex.

Thank you. Our next question comes from Dan Salmon of BMO. Your line is open.

Hey.

Yeah.

Hey, good afternoon. Thanks for taking the questions. So you mentioned some in house technology that you were building for social platform news feeds.

Good to hear more about that in your comment that Youre ready to act debated when given the opportunity because.

Investors I'm sure I've asked you and asked US a lot about the opportunity to expand your partnership with Facebook to their news feed I'd love to hear your latest views on that and how this technology may impact that dialogue and then just one for Joe I think I heard you mentioned that too because similar margins to I guess I may have missed.

It but any any color on the revenue base of the impact to your top line growth. Thanks, guys.

Okay. Thanks, Dan So I'll take the first question so.

One of our four growth accelerators is social and social platforms in particular and the area that we're very excited about to innovate on behalf of advertisers is within the live feed marketers. They continue to ask for our products.

That helps them with brand safety brand suitability in the live feed and with video in particular, and we're thrilled to announce that our team built an in house technology.

In partnership with Tic, Toc, where we're able to classify video and audio frame by frame and text class classification technology. So that we can classify if the content is brand safe and brand suitable for marketers.

Right now the beta its early innings of the beta we just launched the beta in a handful of markets with some marketers, but the product should be available towards later in the year, but again, it's just an illustration.

How we innovate on behalf of our customers.

And just the caliber of our data science team and engineers.

Yes, and Dan on public on the.

<unk>.

Guide and the revenue upside for the year.

We define free that theres about $10 million for this year.

It's a very efficient as you sided business model similar to our own. So we expect very similar revenue and expense profile as I defined it as a lot of greenfield and synergy opportunities for us to work through with them, but it's early days. It's just a couple of days from the acquisition, but we fully expect a tremendous amount of opportunity with public huh.

Okay. Thank you.

Thank you. Our next question comes from Jason <unk> of Oppenheimer. Your line is open.

I'll ask two so I want to dig a little more of a PA pro Publica I think you said that they are largely focused on publishers as clients.

Can you take then the technology and ultimately make something that appeals to advertisers.

So that's kind of a question. So the idea that you bought more than revenue, but technology, you can turn to something bigger and then the second in the release in your comments you highlighted both kind of ticked off and Linkedin.

Any meaningful amount of contribution assumed in the back half guidance or or not yet.

Okay. Thanks, Jason.

So the first question on publica, whether or not we can leverage public is existing technology for marketers give.

Given that we just announced the acquisition earlier this week.

We will take some time to determine what the forward looking integration looks like and for the foreseeable future.

<unk> will be a standalone entity, but we will start coming together and putting a plan in place and once we have that plan in place, we're happy to come back out and share what that looks like.

Okay.

Yeah, and then Joe you want to take the second question. Thanks, Lisa So we picked up tick tock and linked in they're in beta we would fully expect them to contribute towards the end of the year, we're really start contributing in a big way in 2022.

Thank you.

Yeah.

Thanks, Jason.

Yeah.

Thank you again, if you'd like to ask a question. Please press Star then one when you touched on telephone. Our next question comes from Andrew Markup.

Raymond James Your line is open.

Thanks for taking my question wanted to dive a little bit deeper into the strength in the advertiser direct segment. So how much of that was driven by existing customer cross and upsell versus new customers and anything notable to call out on things like advertiser verticals or customer types that were particularly strong into two queuing, indicating into three thank you.

Okay. Thanks, Andrew I'll have Joe take that one yeah, Hi, Andrew I. Just saw was it was a great quarter for us with advertiser direct achieving 40% year over year growth for the parent and then <unk>.

Regarding those verticals, we see strength across quite a few but notably CPG retail and auto and tech telco and we.

We expect that continued momentum throughout the year.

Thank you.

I'm showing no further questions at this time I'd like to turn the call back over to Lisa extra neither for any closing remarks.

Okay. Thank you well. Thank you everyone for your time today and for your questions. I Hope. This gives you a better understanding of Ias as momentum that we have right now in the business I could not be prouder of the results that we delivered in Q2 was a very strong quarter for us.

And also could not be prouder of the Ias team and will continue to focus on the four growth accelerators that we have mentioned before from programmatic social platforms CTV and international expansion and also I want to welcome. The <unk> team we are thrilled.

Two announced that acquisition earlier this week and we look forward to transforming the CTV industry moving forward so with that.

I hope everyone has a great day.

Thank you ladies and gentlemen, this does conclude today's conference. Thank you all participating you may all disconnect have a great day.

[music].

Good day and thank you for standing by welcome to the I S second quarter 2021 financial results Conference call.

At this time, all participants are in listen only mode.

After the Speakers' presentation, there'll be a question and answer session.

I'll ask a question during the session you will need to press star one on your telephone.

Be advised that today's conference is being recorded.

If you are planning further assistance please press star zero.

I'd now like to hand, the conference over to your host Jonathan Schaffer. Please go ahead.

Thank you good afternoon, and welcome to the <unk> 2021 second quarter financial results Conference call I am joined on today's call by Lisa Snyder, CEO and Joe <unk> CFO.

So with these formalities out of the way I'd now like to turn the call over to Lisa Snyder Lisa you may begin.

Thank you Jonathan and thank you to everyone for joining us I'm delighted to speak with you today on the I S. His first earnings call as a public company.

I'll start my comments with a few highlights of our Q2 financial performance. I'll then provide a brief overview of I guess and how we believe we are uniquely positioned as the global benchmark for trust and transparency in digital media quality.

I'll talk about our four growth drivers in our Q2 progress in each of these areas, including a discussion of our acquisition of public health, a leading connected television or CTV advertising platform.

Finally, Joe will review, our financials and outlook in detail before opening it up for questions.

I S delivered an outstanding second quarter.

We generated revenue growth of 55% year over year to $75.1 million compared to last year's Covid impacted quarter.

Our revenue was fueled by the continued strength of our advertiser direct channel.

An acceleration of our programmatic business highlighted by the strong contribution from our contextual targeting offering.

We also achieved strong profitability with gross margins of 83% and adjusted EBITDA of $25.7 million at a 34% margin.

Our second quarter results reflect <unk> continued dedication to our customers and commitment to making every impression counts.

The worlds, leading advertisers publishers and platforms Trust us to create accountability within the increasingly complex digital advertising ecosystem.

Our global customer base is loyal and diapers composed of over 2000 marketers and publishers within the average tenure of over six seven years, among our top 100 marketers.

I S offers cookie free solutions that address AD fraud view ability brand safety and suitability.

We are deeply embedded in the advertising ecosystem, providing solutions for both the buy side and sell side across the open web social platforms and in every major demand side platform or DSP.

Our solutions are always on measuring all impressions on behalf of our advertisers.

Prior to Ias I spent 20 years in leadership roles at global Tech platforms, like Microsoft and Amazon and was always field base in order to be close to customers.

When I joined <unk> in January 2019.

My first priority was to listen to the customer and learn how I S could deliver better outcomes for marketers.

I met with dozens of marketing and publisher customers. This customer first obsession is reflected in how we go to market with new products to meet our customers' needs are.

Our product pipeline is based on offerings that are global scalable and repeatable and multiple markets.

Our deep partner integrations are one way in which we lead the market with innovative solutions.

It was little automated tag is a great example of the first to market technology, we created in partnership with Google.

Let's now discuss our growth strategy and our recent progress.

An acceleration of digital first consumer lifestyles due to COVID-19 means marketers are permanently shifting AD dollars odd of linear TV budgets and following consumers onto digital platforms for better engagement and increased our wide.

This fundamental shifts in the digital ecosystem is driving increased demand for our solutions in four key segments International programmatic CTV and social platforms.

Let's take a look at each of these growth areas, starting with our global footprint.

International revenue grew 58% in the second quarter.

Currently approximately 40% of our revenue comes from markets outside the Americas, which we believe is considerably higher than any other competitor.

We began implementing our global strategy over eight years ago and today, we have a well established global infrastructure that is generating revenue and 100 I'm not loving countries and in over 40 languages. We have successfully signed international brands such as Disney G.

S K, Nestle and Adidas to multi year contracts and serve as their trusted partner in every region across the globe.

EMEA and APAC revenue grew 61% and 51% respectively in the second quarter.

Growth was driven by both new contracts with local brands as well as continued upsell and renewals of large existing customers.

Hi, yes, its position as the Premier verification partner in these regions allows us to develop long term relationships with marketers such as both swagger and bear Sanofi and Shiseido, who then trust I asked to be their partner as they activate new territories for example.

Sample, we signed an advertiser direct deal either India. This quarter with Samsung, who also partners with I S and the U S, Germany and the UK among other locations.

To address this I S launched our market, leading contextual targeting solution context control with the trade desk in March of 2020.

Context control classifies content on a page level and analyzes it using our proprietary semantic technology.

The end of 2020, we had integrated with all major DSP, including Google GBP 360, and we've seen strong market adoption with context control representing over 30% of programmatic revenue in Q2.

In Q1, we also acquired and Nino payments, which is branded as our total visibility offering within programmatic.

Total visibility provides transparency into supply path optimization of <unk> 64.

For example, our brands such as state farm is able to gain transparency into both supply path cost for AD inventory as well as clear understanding of the corresponding AD inventory quality. They can then dial up and down their allocated spend accordingly.

Next I'd like to highlight the opportunity in CTV for I S.

According to E. Marketer the average amount of time spent with smart Tvs and other OTT devices. Among U S consumers rose, 34% year over year in 2020 to reach an average of 77 minutes daily.

And our own I S research suggests more than nine out of 10-C TV users in the U S say they watch some form of AD supported streaming video content.

For marketers this represents a tremendous opportunity based on consumer adoption and engagement with streaming content.

But as AD dollar shift fraudsters follow.

With the first to bring AD verification to CTV with the world's first Brian and view completion solution in June 2019.

This week, we are enhancing our leadership position in this space with our acquisition of public Huh.

As I mentioned earlier publica is the leading CTV advertising platform.

<unk> delivers true T V like experiences to streaming audiences by connecting supply side platforms or assets PS two unique CTV inventory.

It's AD server and unified auction for CTV inventory help publishers to obtain the highest field.

Public had can also measured the frequency and placement of ads in CTV environments, helping to solve a significant challenge for publishers public.

Public reports that it delivers over 3 billion ads on CTV every month with publisher partners, such as Samsung Viacom CBS and Fox.

Hopefully could reports that publishers using its platforms have seen on average a 30% lift in yield for their CTV inventory.

We see both sell side and buy side synergies that will advance I S. Its position in the <unk> market.

Through this acquisition, we are gaining valuable access to content and first party data that enables us to accelerate our CTV product roadmap.

In the future, we expect that I, yes, we'll be able to help advertisers with a trusted way to invest more budgets and CTV and measure the results by providing protection against AD fraud, along with brand safety and suitability controls when buying CTV inventory.

I S has a longstanding relationship with public on dating back to 2019, and we could not be more excited to welcome the public could change to I S.

It's early innings and see TV for all verification providers, but public are really enhances our standing in the market.

According to E marketer C. T V. In the U S is approximately $13 billion out of $455 billion overall market AD verification opportunity today, but we're very bullish on the product roadmap.

Our CTV revenue has grown 404% versus the second quarter 2020 off of a small base, we are expecting a more meaningful contribution starting in late 'twenty two into 'twenty three.

Social engagement is translating into an incredible share of the global digital advertising spend shifting to social platforms.

As AD budgets move to social marketers are calling for third party solutions like ours that brings speed transparency and precision to their social campaigns.

We believe innovation and social live feeds will create durable and sustainable revenue growth in this segment.

Q2, social already makes up 37% of our advertiser direct revenue and we expect this number to reach to 45% by 2023.

We are currently developing our own in house solutions to detect and protect marketers from undesirable content and live news feeds.

By relying on our own proprietary technology, we create the opportunity to scale our solutions to multiple platforms once opportunities become available.

I S has recently partnered with Tic Toc to provide a brand safe experience in the live feed.

On our exciting partnership as we progressed throughout the year.

Other notable social updates this quarter include Ies's differentiated platform wide integration with the Linkedin audience network.

This is the first and only platform wide provider for Linkedin audience network.

Thank you again for your interest and I guess as you know our common stock began trading on NASDAQ on June 30th.

We're excited to be speaking with you today as a newly public company with a tremendous opportunity ahead of us.

We believe we have the right team talent technology and partners to extend our leadership in the market.

We'll look forward to reporting to you on our progress and with that I'll turn it over to Joe to review the financials.

Thank you Lisa I would also like to welcome all of you look forward to working with you now that I asked as a public company before I review, our second quarter results I would like to remind everyone that my comments today include certain financial measures that will be presented on a non-GAAP basis, a reconciliation to GAAP measures is available in today's release.

Let me start with our efficient and highly scalable business model and Kpis before turning to a review of Q2, 'twenty one results and our outlook moving forward.

The new model is primarily based on impression volume with a blended CPM rate.

The success of this quarter is not only seen through our revenue growth, but the result of our strong and long term customer relationships as we continuously review our business effectiveness efficiency and execution I'd like to first highlight a few key business metrics that we believe will frame the performance of Ias going forward and then I'll speak about their drivers.

Our second quarter net revenue retention was 142%.

Significant improvement compared to 110% the previous quarter.

Our total customers grew 17% to 2155, which includes 2018 advertisers and 137 publishers.

Additionally, our total number of large advertising customers with annual revenue over 200000.

Crew by 21% versus the prior year period, ending the period at 187.

Turning to our financial results, we reported a strong quarter driven by double digit gains in our programmatic advertising direct channels.

Second quarter revenue was $75.1 million, which was a 55% increase from the prior year period.

It is important to note that last year, several macro events affected our business in different ways, including but not limited to the global pandemic.

Social and civil unrest and as we said previously discussed the acceleration of the digital first lifestyle.

Almost 90% of our total revenue comes through our advertising direct and programmatic channels.

Balance comes from our partnerships with our publishers, who we believe benefit from a higher yield and optimization from accessing our data as well as contributions of RCM pixel business.

Our advertiser direct grew 40% to $35.3 million versus the prior period.

$10.1 billion increase was a result of higher impression volume, particularly across Facebook and Youtube as clients such as Coca Cola Nestle L. D M H Sanofi L'oreal Este Lauder invest more in social.

We saw strong second quarter growth in video revenue, which now accounts for 39% of our total advertising direct revenue.

Total programmatic revenue grew 94% to $31.8 million versus the prior year period as a result of impression volume growth and an increase in our average CPM.

Our context control solutions continues to scale and gain adoption since their launch in early 2020 and made up 30% of total second quarter programmatic revenue.

We're seeing some of our larger clients such as American Express Deutsche Telekom Disney.

Johnson, <unk>, Johnson, and Volkswagen embrace our context control offering driving up their programmatic spend year over year.

Our international investments in footprint continued to pay off.

Americas the rest of World revenue mix finished the second quarter at approximately 60.40.

EMEA finished at $22 million up 61% versus the prior year period.

And APAC finished at $7.6 million up 51% versus the prior year period.

Total gross profit was 62.2 million, resulting in a gross margin of 83% for the period compared to 82% in the prior year period the.

The high margins are reflective of our efficient cost structure.

For operating expenses, we incurred $41.5 million and stock compensation expenses during the quarter as a result of our IPO.

Walk you through our operating expenses now excluding the impact of stock based compensation to assist with comparability.

For sales and marketing expense for the second quarter of 2021 was 16 and a half million down 2% from the prior year period.

Our cost structure reflects an efficient go to market strategy and is a testament to our investments in building a scalable platform both domestically and internationally.

Product and tech expenses were $13.2 million up 3% from the prior year period as we continue to invest in order to maintain our leadership in technology and innovation.

G&A expenses increased to $10 million or 17%, primarily due to professional fees and costs incurred to support our initial public offering for.

Net loss for Q2 was $35.1 million or 26 per share compared to a loss of $16.5 million or <unk> 12 per share in the prior year period.

However, excluding one time IPO related stock compensation expenses net income was $6.4 million.

We raised approximately $275 million in net proceeds from our IPO as well as the exercise of the underwriter's option, which will be reflected on the Q3 'twenty one balance sheet.

Proceeds will be used to reduce long term debt and we are also prioritizing investing in the business through organic and as you saw from this week's acquisition announcement M&A initiatives.

It's a fast growing profitable business operating at similar margins as our core business.

Turning to our guidance for the third quarter of 2021, we expect revenue in the range of 74 to 76 million and adjusted EBITDA in the range of $16 million to $18 million.

For fiscal year 2021 we expect revenue in the range of $300 million to $312 million and adjusted EBITDA in the range of $87 million to $91 million.

Our guidance includes an anticipated contribution from the public of acquisition of $3 million of revenue for Q3 and $7 million in revenue for Q4.2021.

Let me share with you a few notes for modeling purposes.

Most notably advertiser spend at least in the first quarter, increasing spend throughout the year with the fourth quarter being our most important quarter, which includes the holiday shopping season.

Lisa and I are now ready to take your questions operator.

Thank you again, ladies and gentlemen, if you like to ask a question. Please press Star then one on your Touchstone telephone again to ask a question. Please press Star then one.

One moment for our first question.

Our first question comes from Brent Thill of Jefferies. Your line is open.

Good afternoon.

So maybe you can just bring us up to speed on kind of the overall adoption of your services and just described.

How you would characterize.

Any nor or or wave that we're in right now in terms of where you think the overall movement for your spaces would be the first question I had just a quick follow up on public kind of why why couldn't you do this on your own what what do they bring to the table that that job.

Significantly enhance your CTV opportunity. Thank you.

Thanks, Brian.

So I'll take the first question I believe the first question was about whether some of the trends that we're seeing right now in the industry.

These are tailwind Brent that we have talked about in the past, including programmatic as you heard in the script earlier programmatic is a big accelerator of growth for our business, we saw close to a 100% growth year over year in our programmatic a big reason for.

That was our context control product program programmatic is here to stay and will continue to grow.

Second big growth driver is social platforms and over the last 12 to 18 months as everyone's spending so much time at home both viewing stream content spending time on social platforms.

The user adoption of social platforms marketers want to be in front of those consumers. So we'll continue to see social platform again accelerate our business and then the third big growth driver in this would be a nice segue into publica is CTV and CTV I like to say it's the.

First inning of a long game. We are so excited about the acquisition that we announced earlier this week with public huh.

And we see publica as an opportunity to accelerate our CTV efforts.

Just given what they bring with their global addressable CTV advertising platform. Both in terms of giving us access to massive amounts of CTV programmatic inventory and also access to data. So those are the trends that we're seeing and also.

A big reason why we acquired public and to answer your second question around why couldn't we build it ourselves again COVID-19 cut they come with a unified auction a video AD server and have such deep strategic.

Relationships with video publishers.

<unk> ships with many of the leading SSP and being able to build those types of partnerships that would take quite a bit of time and enables us to leapfrog in the CTV space.

Great. Thank you.

Thanks, Brian.

Thank you. Our next question comes from Raimo <unk> of Barclays. Your line is open.

Hey, this is Frank on for Raimo, Congrats on the quarter.

Just given the strength in international I'm wondering how you would frame that opportunity in the longer term.

Pacifically, how far would you say your average global account is penetrated internationally.

Yeah, Great question, Frank So we're thrilled with the progress that we've made international our revenue split is 60.40.

International is growing faster.

With International Ias has had a deep established footprint internationally for over eight years, we have deep partnerships in EMEA in APAC, we continue to invest in emerging markets and seeing tremendous growth like our investments in Latin America last year same thing with South East.

Asia and again, we're seeing.

So many global marketers looking to partner with I S. Ensign one to three year contracts. So.

Great. Thank you.

Yeah.

Thank you. Our next question comes from Mark Mahaney of Evercore ISI. Your line is open.

Hi, This is Ben on for Mark. Thanks for taking my question two if I could see is can you just comment on the adoption you've seen a contextual control Vince.

The new Bios version rolled out.

Uptick noticeably and any impact since the.

Third party cookie delay announcements since Eagle and then.

Just can you talk about any cross selling benefits you see to the from the public acquisitions any revenue synergies that you can quantify thank you.

Okay. Thank you Ben for your questions, so with context control.

Contract context control has been a big hit with our marketing customers.

<unk> its global we offer it in over 40 languages and also the other big differentiator for our context control products, we offer across all of the major DSP, including DB three <unk>. So we're thrilled with the results we've seen out of context control the demand that we're here.

Haven't had any hiccups with the prospect whatsoever.

And then in terms of cross selling with public huh.

Another big differentiator and what excites us about the public acquisition is there's very little overlap between our customer base and public because customer base, our customer base. The majority of our customers are global marketers, we have over 2000 customers globally and <unk>.

The majority of their business its publisher base. So it's a nice marriage of the buy side and the sell side of the business and again, we're just thrilled.

And looking forward to working with the public a team.

Thank you.

Yes.

Yeah.

Thank you. Our next question comes from Brian Nowak of Morgan Stanley Your lines open.

Hi, This is Alex Wang on for Brian Thanks for taking the question.

Two if we can one can you talk to Ias has momentum and visibility into adding new advertisers in the second half and what you view as the key drivers behind that and overall just.

Shortening the sales cycle there.

Second Joe of the revenue growth you saw in <unk> of about 55% how much of it was attributable to.

Growth in impressions versus CPM and are you able to quantify within CPM uplifts from a contextual control.

<unk> wins, including global accounts like Air, France, Samsung, India, Uber or I can keep going down the west, but when we turn to each two and new advertisers. We're feeling really good about the pipeline that's in place, but in terms of shortening the sales cycle, the beauty of programmatic and our.

Contexts control product.

It's a flip of a switch in the products life's up and it's on so as we continue to see the increase in investments in programmatic in context control in particular, it enables us to turn on advertisers.

Advertisers faster to our solutions and get them live and up and running.

Joe you want to take the second question, yes, Thanks, Alex So.

With regards to programmatic, we're outpacing the programmatic market growth that's defined by a marketer and we're gaining share in programmatic do the contextual and that trend will continue as there are a lot of greenfield opportunities out there and you can see that in our impression left and to answer your second part of the question. We are seeing a premium on a contextual control pricing and fully expect.

That to accelerate throughout the year.

Great. Thanks.

Thanks, Alex.

Thank you. Our next question comes from Dan Salmon of BMO. Your line is open.

Hey, good afternoon. Thanks for taking the questions. So you mentioned some in house technology that we're building for social platform news feeds.

I'd love to hear more about that in your comment that you are ready to activate it when given the opportunity because.

Investors I'm sure I've asked you and asked US a lot about the opportunity to expand your partnership with Facebook to their news feed I.

Love to hear your latest views on that and how this technology may impact that dialogue and then just one for Joe I think I heard you mentioned that too because similar margins to IHS.

I have missed it but any color on the revenue base of the impact to your top line growth. Thanks, guys.

Okay. Thanks, Dan So I'll take the first question so.

That helps them with brand safety brand suitability in the live feed.

Video in particular, and we're thrilled to announce that our team built an in house technology.

In partnership with Tic, Toc, where we're able to classify video.

In audio frame by frame and texts class classification technology. So that we can classify if the content is brand safe and brand suitable for marketers.

Right now the beta its early innings of the beta we just launched the beta and a handful of markets with some marketers, but the product should be available towards later in the year, but again, it's just an illustration.

How we innovate on behalf of our customers.

And just the caliber of our data science team and engineers.

Yeah.

And Dan on public.

<unk>.

Guide and the revenue upside for the year.

We define for you that theres about $10 million for this year.

It's a very efficient as you sided business model similar to our own. So we expect some very similar revenue and expense profile as I defined it as a lot of greenfield and synergy opportunities for us to work through with them, but it's early days. It's just a couple of days from the acquisition, but we fully expect a tremendous amount of opportunity with public huh.

Okay. Thank you.

Thank you and next question comes from Jason How things of Oppenheimer. Your line is open.

I'll ask two so I want to dig a little more on par.

Public I think you said that they are largely focused on publishers as clients.

Can you take then the technology and ultimately make something that appeals to advertisers.

Any meaningful amount of contribution assumed in the back half guidance or or not yet.

Okay. Thanks, Jason.

So the first question on public or whether or not we can leverage public as the existing technology for marketers give.

Given that we just announced the acquisition earlier this week.

We will take some time to determine what the forward looking integration looks like and for the foreseeable future.

<unk> will be a standalone entity, but we will start.

Coming together and putting a plan in place and once we have that plan in place, we're happy to come back out and share what that looks like.

Yeah, and then Joe you want to take the second question. Thanks, Lisa So we've kicked off kickback in Linkedin, they're in beta we would fully expect them to contribute towards the end of the year, but really start contributing in a big way in 2022.

Thank you.

Thanks Nathan.

Yes.

Thank you again, if you'd like to ask a question. Please press Star then one on your Touchstone telephone. Our next question comes from Andrew Markup.

Raymond James Your line is open.

Thanks for taking my question I wanted to dive a little bit deeper into the strength in the advertiser direct segment, how much of that was driven by existing customer cross and up sell versus new customers.

Notable to call out on things like advertiser verticals or customer types that were particularly strong in to <unk>, indicating into <unk>. Thank you.

Okay. Thanks, Andrew I'll have Joe take that one yeah, Hi, Andrew I just thought it was it was a great quarter for us with advertiser direct achieving 40% year over year growth for the period and then tier.

Regarding those verticals, we see strength across quite a few but notably CPG retail and auto and tech telco.

We expect that continued momentum throughout the year.

Thank you.

I'm showing no further questions at this time I'd like to turn the call back over to Lisa extra neither for any closing remarks.

<unk> two announced that acquisition earlier this week and we look forward to transforming the CTV industry moving forward so with that I hope everyone has a great day.

Thank you ladies and gentlemen, this does conclude today's conference. Thank you all participating you may all disconnect have a great day.

Q2 2021 Integral Ad Science Holding Corp Earnings Call

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