Q4 2021 PubMatic Inc Earnings Call
The Securities and Exchange Commission, including our most recent Form 10-K , and our subsequent filings on forms 10-Q, or 8-K, which are on file with the securities and Exchange Commission and are available at investors <unk> com.
Actual results may differ materially from those contemplated by the forward looking statements. We caution you therefore against relying on any of these forward looking statements. All information discussed today is as of February 28, 2022, and we do not intend and undertake no obligation to update any forward looking statements whether as a result of new information future development.
Or otherwise, except as may be required by law.
Today's discussion will include references to certain non-GAAP financial measures.
non-GAAP measures are presented for supplemental informational purposes, only and should not be considered a substitute for financial information presented in accordance with GAAP.
A reconciliation of these measures to the most directly comparable GAAP measures is available in our press release and now I will turn the call over to Rajiv.
Thank you Stacy and welcome everyone.
Is an exciting time at dramatic because we continue to deliver an incredible combination of durable high growth revenue and profitability.
While we have grown significantly in the past year I'm, most excited about the number and magnitude of growth opportunities in front of us.
We delivered record fourth quarter organic revenue of $75 6 million up 34%.
We also delivered a strong adjusted EBITDA margin of 51%, placing our performance over double the rule of 40 benchmark for the fifth consecutive quarter.
These results illustrate the value of our unique infrastructure driven approach coupled with a usage based software model that leads to an ability to grow our market share while delivering an incredible combination of growth and profitability.
For the full year, we delivered 53% organic revenue growth a significant increase over 31% in 2020.
We delivered 25% GAAP net income margin for $56 6 million with adjusted EBITDA margin of 42%.
Our profit margin demonstrates the leverage in our model and provides us with a strong foundation for continued investment and market share gains. We ended the year with a record $88 $7 million generated in cash from operations.
Yeah.
These results reflect <unk> significant share gains in a rapidly growing market and.
In 2021, the digital advertising market grew 31% almost double the pre pandemic growth level with double digit spend increase is expected again in 2022.
Latest projections show that growth in digital advertising is not a pull forward, but rather reflects permanent consumer behavior changes in part due to the pandemic.
For example, banking is predicted to move more online evidenced by the closure of a record 2900 branches in the U S last year.
In grocery e-commerce is projected to grow 17% annually over the next four years as consumers flocked to online grocery shopping.
These changes have increased our addressable market opportunity considerably.
<unk> is committed to delivering the digital advertising supply chain of the future for both publishers and buyers can maximize value as.
As an independent technology company focused on the best interest with publishers, we provide a platform that connects disparate parts of the ecosystem with robust audience address ability solutions and cross screen targeting that power of the open internet.
And our infrastructure driven approach is delivering superior outcomes and cost efficiencies that both our customers and we benefit from the.
The more value our platform delivers the more our customers use our technology.
This generates more high margin revenue for us, which we continuously reinvest in innovation and growth.
The competitive advantages, we derived from our infrastructure combined with our usage based software model are driving <unk> outsize growth rate well ahead of the market.
At the time of our IPO, we estimated our market share to be 2% to 3% updated.
Industry data now estimates our market share to be 3% to 4% as of December 31 2021.
The shift in one percentage point over the course of the year is quite significant given the large and growing total addressable market and reflects the increasing value we are delivering to our customers.
Over the long term our objective is to grow our market share to 20% plus.
Our key growth drivers supply path optimization, omnichannel formats, and channels audience address ability and global expansion are driving increased usage of our platform and long term growth opportunities.
We pioneered supply path optimization several years ago buyers are continuously looking for ways to optimize that spend through robust targeting direct technology integrations, and workflows and premium ad inventory across channels and formats.
The investments we make in these areas create a long term strategic partnership that aligns buyers success with our success.
The outcome is increased utilization of our platform with more predictable sticky revenues.
At the end of 2021, we grew the number of Spo partners by 44% over the prior year.
In fact over a quarter of activity on our platform is now via spo agreements up from approximately 10% at the beginning of 2020.
Yeah.
Our omnichannel approach enables us to match fighter needs to publisher inventory at scale, regardless of device or content type and used by the consumer.
This has proven particularly resilient during the pandemic and as Covid becomes endemic.
Further high growth channels, such as CTV, and OTT have expanded our addressable market opportunity and contributed to market share gains.
Although just launched in Q3 of 2020, we're seeing tremendous growth in our CTV business with over six X growth over Q4 of 2020.
We continue to invest aggressively in scaling a transparent programmatic marketplace for CTV OTT, while also expanding our capabilities in online video mobile App and mobile web.
Our long term strategic area that we continue to invest in his audience addressable.
We have facilitated a growing and robust partner ecosystem on our platform that includes first party data owners identity solution providers and contextual data providers to deliver best in class solutions that increase addressed ability and privacy safeways.
Identity hub is a software solution that allows publishers to seamlessly manage integrate and configure a multiple a multitude of identity solutions simplifying their workflows and allowing them to connect their valuable audiences with advertiser demand in a privacy compliant way to drive increased AD revenue.
Identity hub is now broadly deployed across our publisher base.
We recently partnered with <unk> to measure the impact of identity hub and <unk> ramps up indicated traffic solution and.
And found that publishers were able to more than double cpm's and triple fill rates and cookie less browsers like Safari and Firefox.
Audience Encore allows any first party data owner, whether it's a publisher advertiser agencies or data provider to monetize and scale their audience data across our billions of daily AD impressions and generate an incremental high value revenue stream.
We recently announced an extended partnership with Samba TV in Australia to bring first party connected TV data to media buyers across our platforms.
The partnership helps media agency IPG <unk> signed an engaged relevant audiences for our global streaming clients programmatic AD campaign.
We also recently enhanced our platform for contextual targeting with greater access to end usage of contextual data across CTV video mobile App and web.
The use of contextual targeting increases we are well positioned to support publishers and buyers' needs to package and monetize contextually targeted impressions both in the open market and private marketplace deals.
We are starting to see momentum build as third party cookies are deprecated and we believe the growth in these areas will accelerate.
Existing customers are already starting to expand use of our platform through our audience address ability solutions and we're also seeing these solutions attract new customers to automatically.
It's worth noting that Google's recent announcement of the deprecation of Android advertising I'd in two years is expected to have minimal if any impact to our business.
From prior experience that AD dollars shift to channels, where buyers find success in high ROI.
Because we're an omnichannel platform, we're able to fulfill AD buyers needs with other channels, such as CTV or mobile web.
We saw this dynamic on our platform when Apple eliminated <unk> with no impact.
Second we expect that our addressable solutions, such as first party data contextual targeting and our ongoing work with Google on topics and privacy sandbox will continue to make Android advertising ROI positive for certain buyers.
We also continue to expand our platform into new geographies.
Last year, we entered South Korea, and opened offices in Madrid, Paris and Shanghai.
Within China, we are focused on the non Chinese audiences and inventory from Chinese App developers.
Based on our experience and success internationally, we believe our international investments will develop into significant long term growth opportunities.
Further expanding our addressable market is a large opportunity for our retail media solutions, which represents over 140 billion in global media retail AD spend by 2024, which was which is comprised of onsite and offsite advertising.
We already work with several dozen ecommerce companies as publishers, such as ebay and GAAP advertising too.
To monetize impressions across several properties.
Additionally, E Commerce AD spending as a top five buyer vertical for us as retailers increasingly prioritize media as a growth driver for their businesses, we see significant opportunity for <unk> and we intend to invest behind this opportunity.
Retail media place to many of our strengths as an SSP, we are close to the publisher or E retailer and consumer we.
We have an omnichannel and global platform complete with a portfolio of addressable solutions, including identity first party data and contextual solutions.
And we have strong buyer relationships from spo.
Our focus is on helping retailers monetize their own media extend their data off site to monetize impressions from non retail publishers and to optimize ROI for buyers.
As a provider of specialized cloud infrastructure for digital advertising innovation and efficiency are key differentiators that enable us to deliver customer value and expand platform usage.
This year, we intend to make substantial new investments based on where we see long term growth potential.
These areas include our machine learning and data processing consistent with the evolving nature of addressable towards first party data identity and contextual targeting <unk>.
Tools for buyers to expand their supply path optimization implementation on our platform.
Private marketplace programmatic guaranteed capabilities for connected TV and online video transactions and retail media capabilities.
These are long term investments that we believe will pay off in increased customer value and market share gains over the next several years at the same time, we intend to improve efficiency across the company driving additional infrastructure cost reductions and automation, which will allow us to ship software faster and increase the pace of innovation.
Given our decade, plus track record of profitable innovation, we plan to accelerate the growth of our engineering team in order to take advantage of the enormous number of growth opportunities in front of us.
Our hiring plans call for doubling our engineering team over the next 12 to 18 months and we anticipate a record number of software releases as we expand the breadth and depth of our platform.
And lastly, we are expanding our sales and customer success teams around the globe on both the publisher focused and buyer focused teams.
In summary, our Omnichannel and global platform drove significant share gains in a rapidly growing market.
We were able to drive increased customer value through a combination of our infrastructure driven approach to digital advertising.
Our usage based software model and aggressive investment in innovation.
I'm incredibly proud of the entire team at pragmatic as we overachieve virtually every goal we set for ourselves in 2021, when we entered 2022 in a strong position with many growth opportunities in front of us.
Let me now turn it over to our Chief Financial Officer, Steve <unk> to provide additional detail.
Thank you Rajiv and welcome everyone the fourth quarter capped a superb year for <unk>.
And our first full year as a public company, we achieved a powerful combination of standoff on financial results.
And organic market share gains, while investing significantly in the future of our business.
As a result of our Omnichannel platform global scale.
Well established usage based model and outstanding team, we built a highly productive and resilient company.
These factors set us up well for strong results in 2022 and beyond.
In 2021, we delivered $227 million in revenue or year over year growth of 53% almost double market growth.
Looking at our fourth quarter revenue was a record $76 million, an increase of 34% year over year.
This achievement is particularly impressive considering last year's Q4 growth of 64%.
Excluding Q4 2020 political spend Q4 2021 revenue was up 40%.
For the sixth straight year, we delivered positive GAAP net income, which was 57 million a company record.
Adjusted EBITDA was $96 million or <unk>, 42% margin also both company records.
In Q4, our revenue growth combined with the significant leverage embedded in our platform helped us achieve net income of $28 million or 37% net margin.
Adjusted EBITDA was outstanding 39 million or 51% margin an increase of 44% over last year's Q4.
Q4 revenue was strong across every region format and channel.
EMEA in particular grew strongly with 55% year over year growth.
Overall, we built a truly global business with Americas at 63% of full year 2021 revenue.
At 28% and.
In APAC at 9%.
AD spend on our platform is well diversified across more than 20 verticals.
While we saw some headwinds related to Amazon in December , which dampened peak AD spending related to in person activities, such as food and great strength across other verticals more than compensated for.
For example, shopping grew 78% and technology grew 65%.
The top 10 AD verticals in aggregate grew over 50% year over year.
As was the case throughout 2021, we saw minimal impact from the elimination of apples at Esa as advertisers shifted <unk> to other high ROI formats and channels on our platform.
It is also worth noting with respect to Google's recent announcement of the deprecation of Android advertising IV in two years, we expect the impact to be negligible for the same reason.
During Q4 more than 60000 advertisers placed ads programmatically by our platform.
This scale combined with our real time bidding marketplace below was multiple bids per impression for our publishers AD inventory powering a robust resilient platform.
Revenues for our mobile and Omnichannel video businesses grew 41% year over year and accounted for 67% of our total revenues in Q4.
This growth was on top of the prior year's growth of more than 100%.
Our CTV business inclusive of OTT grew more than six times over last year Q4.
In the quarter of 167 publishes programmatically monetize CTV inventory up from 154 publishes in Q3.
Our total desktop business comprised of display and online video also performed well with revenue up 26% year over year on top of the prior year's 28% growth.
Favorable mix trends contributed to higher overall cpm's on our platform for Q4, and the full year on a year over year basis, which is similar to what we saw in 2020.
Revenues related to Yahoo, formerly Verizon media group across all formats and channels grew more than 30% year over year and represented approximately 60% of our total revenues in the fourth quarter down from 25% of revenue in Q4 2019.
Supply path optimization relationships play an important role in terms of growth and revenue stickiness as advertisers and agencies expand usage of our platform.
In Q4, we continued to sign new spo deals renew existing agreements and grow at spending via these deals.
Our multi year success with SPL supports further investment behind this opportunity and we are building more tools to allow buyers to interact with us to find the right audiences and media on our platform.
Q4, spo represented over 25% of total AD spending in the quarter.
As SPM activity becomes a largest share of our overall spend we anticipate trends will increasingly exhibit seasonal patterns.
All else being equal spo share of total activity will generally be lowest in Q1, and then sequentially ramp up over the course of the year as agencies and advertisers execute their annual investment plans.
Our land and expand strategy drove incremental pressure from existing publishers.
In addition to our core platform offerings products like open ramp.
<unk> hub and audience oncor provide upsell opportunities.
As we expand our product footprint customers increasingly rely on us for more innovation.
We plan to expand our investments in these market leading products to further develop our data and monetization of advantages.
An important indicator of publisher satisfaction usage of our platform is net dollar based retention.
For full year 2021, this metric was outstanding at 149% compared to 122% for 2020.
It will not to normalize and come down from the <unk> <unk> Q2, 2020 results are no longer in the comparisons.
Our long term strategy of owning and operating our infrastructure enables us to reduce our unit costs, while improving customer outcomes.
For the full year 2021, we processed over 90 trillion impressions nearly double the prior year.
Since Q1, 2020, we have reduced our cost of revenue per million impressions process by nearly 50%.
Our ability to drive operational efficiencies has translated into significant competitive advantage to us which compounds over time.
To give you a sense of the magnitude of these savings if our cost reduction have been 25% or half the rate that we actually achieved our 2020 with cost of revenue would have been $20 million higher.
Invested these savings into growth initiatives and increased our profit and cash flow.
With the benefit of scale increased usage of our platform and our long term focus on efficiency, we achieved a 78% gross margin in the fourth quarter and 74% for the full year.
As has been the case historically there'll be some quarter to quarter variability of our gross margins due to the timing of investments and seasonal aspect.
We anticipate continuing our full year gross margins well ahead of pre pandemic levels.
Moving on to operating expenses.
In support of our growth goals, we successfully increased our global team by 30% in 2021 with the vast majority of hires in technology development.
As a mission driven company with an employee centric culture, we added outstanding new team members. Despite the challenges presented by the pandemic.
In Q4, the combination of increased head count per growth incremental public company costs and stock based compensation resulted in operating expenses of $31 million up 36% year over year.
Excluding stock based compensation Q4 operating expenses increased 27%.
On a full year basis operating expenses increased 45% or 110 million <unk>.
Excluding stock based compensation 2021, operating expenses were $96 million up 33% year over year.
Rapid revenue growth operational efficiencies and ongoing benefits from investments in our business resulted in GAAP net income in the fourth quarter of 28 million and $57 million for the full year more than double 2020 net income.
Q4, and full year 2021 included an unrealized gain on equity investments of approximately $5 million.
Q4, and full year 2021, GAAP diluted EPS was <unk> 50, and $1 respectively.
non-GAAP net income, which adjust for stock based compensation the unrealized gain on equity investments and related income tax effects was $27 million in Q4, and 65 million for full year 2021.
non-GAAP diluted EPS for Q4, and full year 2021 was 48.
And $1 14, respectively.
With respect to our cash generation, we stand out as one of the few technology companies that have demonstrated that we can both grow and produce cash.
For the full year 2021, net cash provided by operating activities was $89 million and free cash flow was $49 million.
We achieved these exceptional results after funding significant investments for future growth comprised of $40 million in Capex and capitalized software development costs and a 30% increase in our global team.
We ended the year in a very strong cash and liquidity position with cash cash equivalents and marketable securities of $160 million an.
An increase of approximately 60% from year end 2020.
We have no debt on our balance sheet.
Turning to our outlook.
As Rajiv outlined we have numerous paths in 2022 to achieve our 25% revenue growth targets, while delivering strong profits and cash flow.
For the past two years, we have bolstered our financial strength and increased our market share.
In addition, the addressable market opportunity has grown due to permanent consumer behavior changes towards more online activity.
Okay.
These factors contribute to our growing confidence in our business.
For the full year 2022, we expect revenue between $280 million to $286 million, representing 25% year over year growth at the midpoint.
Based on the latest market growth projections, we also anticipate continued market share gains.
For Q1, 2022, we anticipate revenue to be in the range of $53 million to $55 million or 25% year over year growth at the midpoint.
As a reminder, we had a very strong Q1 last year was 34% growth.
On a two year stacked basis this translates to 79% growth for the two year period.
No, we're taking a slightly cautious stance in our guidance as the December omicron overhang on selected AD verticals extended into early Q1.
Looking ahead, we are excited about the number of magnitude of growth opportunities in front of us.
We are accelerating our investments in a number of areas.
Our track record demonstrates that we are adept and identify new investment areas and bringing them to fruition.
At the top of our list has stepped up investment in our innovation and growth engine.
Over the next 12 to 18 months, we plan on doubling our technology organization with the majority of new hires to be added in our India Technology Center.
For a framework referenced over the last two years, we increased our India head count by 80% and have already seen a terrific return on investment from these efforts.
We also plan to add key go to market team members across the globe to continue driving new product adoption and new market expansion.
Our EMEA and APAC businesses are growing rapidly and are still in the early days of their growth and therefore warrant investment now for long term market share gains.
On a full year basis, we anticipate that operating expenses will increase at roughly a similar rate to the 2021 increase with some quarter to quarter variability as the year progresses based on timing of hiring and investments.
Included in our estimate of expense growth are incremental operating costs related to new offices, we are adding office reopening and significantly higher travel and entertainment expenses as our team re engages in person with customers around the globe.
We estimate these incremental costs in the range of $6 million to $8 million for the full year.
Overall, what is clear is that our business in emerging from the pandemic with structurally higher levels of profitability than prior to the pandemic.
We anticipate our full year gross margin to remain above its pre pandemic level and our 2022 adjusted EBIT margin to be nearly double its pre pandemic level.
Given our revenue guidance, our planned level of investment and incremental costs of the reopening we expect our full year adjusted EBITDA between 101, and $106 million or approximately <unk>, 36% to 37% margin.
In line with earlier comments on expense phasing and typical seasonal AD spending levels, we expect adjusted EBITDA in the first quarter between 14 and $16 million or approximately 27% to 29% margin.
We anticipate capex to be in the range of 30% to $33 million for the full year.
In 2022, the nature of our Capex investments are changing from primarily capacity driven to an even mix of both capacity and capability driven investment. So we can process more data.
Keep more private marketplace deals processes, more CCTV and online video transactions.
Key to lead the market with respect to supply path optimization.
In terms of projected impressions process, we anticipate an increase of more than 50% versus 2021.
In closing we are very proud of what we've accomplished in our first year as a public company. When we are even more excited about the opportunities ahead of us.
The sell side of the digital advertising ecosystem is rapidly consolidating as evidenced by the recent announcement that <unk> has selected us as a partner to support the supply chain of the future and their group them premium marketplace.
<unk> is well positioned to capitalize on these trends with our global Omnichannel scale.
And our owned and operated infrastructure.
Today, we are in outstanding financial shape, with our business and to delivering both significant profit and cash flow.
The critical building blocks of our business are all favorable.
Net dollar based retention format and channel mix and CPM increases.
We will use these strengths to capture numerous growth opportunities with our existing customers.
New customers, new markets and new products.
We believe these factors together will help us drive market share gains in the years to come.
With that I will turn the call over to Stacy.
Okay.
Well I'll take a minute to compile the can behave.
Okay.
Thank you Stacey.
These remarks for pre recorded a few days ago.
I would like to acknowledge the escalating war in Ukraine right now.
We have employees customers and partners, who have been personally impacted by the invasion or who have family and friends in Ukraine, and Eastern Europe , and our Hearts go out to them.
While we are reporting our results today, our thoughts remain with those affected by these terrible events.
I'll turn the call back over to you Stacy.
Thank you Russell.
I kept calling on Q&A. Our first question comes from <unk> <unk> at Evercore go ahead Slater.
Okay.
Okay. Thanks, Stacy let.
Let me try a couple of questions. Please so rajiv any comments on trade desks announcement.
<unk> opened back and the potential impact that may have on thematic.
And then for Steve a couple of questions for you. Please so how should we think about cadence of top line growth through the year given your Q1 guidance and then the follow up to that would be could you just spell out what omicron related headwind you saw so you called out CPG I think but any other vertical some of the others have called.
Perhaps.
A couple of other verticals like travel did you see anything around that around that any color there would be great. Thank you.
Thanks, Mike good to connect with you. So on the first part of your question around trade desk, we see puts and takes so they announced two things one is.
That they are stopping buying via Google's coping bidding.
We view this as an opportunity to gain share of spend as they move to more transparent and direct patch when.
When we have a multi integration approach with each publisher that we work with and so we typically have multiple paths into each publisher. So we anticipate we'll be able to shift existing TD spend and.
And then grow.
Given that many ssp's don't have these direct integrations have not invested in direct integrations with publishers.
Their part is they're open path announcement, which is a direct connection between trade desk.
And the publisher in situations, where the publisher wants it and has their own technology for yield management. So.
So we view it as pretty limited in nature and.
And frankly likely competitive with the agencies as a disintermediation key value proposition of the agency, which is buying scale and controlling the flow of that state.
It's important to keep in mind that we have a pretty broad set of solutions for publishers not only yield but also our open ramp.
Header bidding solution identity hub audience Encore etsy.
Et cetera, so unless publishers plan to build these solutions in house, which we know from experience is very challenging even for large publishers given the expertise. That's required we think publishers will still need additional technology to power their their inventory.
On Europe follow up questions sweat up a.
A couple of things first.
The performance that we had in fourth quarter, obviously was a really outstanding when you factor in that was growth of 34% on top of the prior year's quarter of 64%. So the starting point is quite high.
Typically.
What we see as a progression through the course of the year is due to timing of AD spending.
First quarter has a drop on a relative basis versus the fourth quarter and looking back in time, thats anywhere from 20% to 30% drop.
We're actually guiding a little bit above average for our first quarter guidance.
And then in Q2 Q3.
Of course recovery as agencies and advertisers start to ramp up their investment plans in Q2 is typically around let's call. It 10 ish percent versus Q1. The same is the case with our Q3 and then okay.
Clearly, a big uptick anywhere from 25% to 40%.
Fourth quarter so.
A return to some level of normality in 'twenty two.
And we're obviously had significant growth.
Others have called out.
Last year, we were well above the rule of 40 and our guidance continues in fact above the rule of 60 in 'twenty two.
Now on the point regarding the.
The what I call the dampening effects for a couple of AD verticals that we saw in December .
It was very much isolated to what I'll describe as in person type activities, So food and drink was affected health and fitness was affected.
And a couple other.
Areas that are in person centric.
But our other AD verticals, because we are an omnichannel platform global scale more than compensated for that in total the top 10 AD verticals grew over 50%. So we're feeling really good that the platform, we've built and the focus on creating a robust omnichannel focus.
Allows us to be resilient and to grow through these blips.
And the good news is we are feeling really good about the way the year is progressing.
Okay. Thanks, Thanks, Steve.
Great. Thank.
Thank you. Our next question comes from the line pilot Stephanie. Thanks go ahead bank.
Yeah.
Good afternoon, Steve just back on the comments for the quarter Q3, you'd be by about 11% year end side your guidance range and it would seem just going back factors. You. Just described were the primary reasons why you were kind of inside the range and then show upside is that or was there something else that we need to consider.
As it relates to that.
No very much.
Isolated and really temporary from my perspective, when I look at sort of what happened in October November a very strong December couple those AD verticals as I called out.
In the prior response.
Put a dampening effect they still grew year over year, but typically at the end of the year, you see very nice peaks and so all else being equal.
The numbers would have been even higher but when I compare our results versus others, who have reported I am feeling very good about our comparisons to the peer set.
Almost across the board, we performed more strongly in the fourth quarter.
That's great. Thanks for the color and Rajiv just on connected TV.
Maybe give us your 40000 foot aspirations for the year.
How big could this be.
The business.
What's remaining kind of the pieces of the bridge that Youre aligned if you will to kind of get in place to where you want to be.
Really excited about our growth in CTV and how far we've come in a really short period of time.
As we mentioned we grew over <unk> year over year in the fourth quarter grew the number of publishers to 167, and I would say probably what I see happening is that the vision that we have which is a big marketplace.
Either it is private market transactions or its open open auction transactions that bid and marketplace is resonating very strongly with agencies advertisers and publishers and the reason for that is pretty straightforward. There's a huge amount of growth obviously in consumption, but theres also a lot of growth in both the number of advertisers that want to participate in CTV as well.
As the number of content producers or shows our channels.
Showing up on the sell side and really the only way to scale from linear TV hundreds of channels to now thousands in CTV, maybe tens of thousands eventually and then on the advertiser side hundreds of thousands of advertisers to tens of thousands to over 100000 buyers is to have abated marketplace.
And so our vision we are finding is unique in that regard and we're finding that more and more agencies.
Publishers are leaning into that vision and I think a great example of that is the expansion of the supply path optimization deal that we announced with <unk>. So we announced version one of that about a year ago of our group <unk> relationship and now we just announced.
They just announced last week that there'll be partnering with us closely to.
To create a premium supply marketplace, primarily focused on CTV and online video so to the other part of your question Brent If I look at where we want to be at the end of the year.
Want to continue to grow the number of publishers, we see a lot of runway there and then we see a lot of opportunity to continue to bring more demand onto our platform.
Again, whether it's in private marketplace, I think that'll be the primary transaction methods still through the end of this year, but we do see signs of open auction transaction starting to grow as well.
Thank you.
Yeah.
And our next question comes from Justin Patterson at Keybanc.
Okay.
Great. Good afternoon, and thank you very much Rajiv could you talk more about the retail media opportunity how much of a revenue or do you have from that today and what are the steps to add more partners and Im Steve I was hoping you could talk a little bit more about just what you've seen from omicron so far.
Obviously, we've seen some improvements in terms of just.
Cases in recent weeks I'm curious, if you've seen any pickup edge cases that sort of dwindle. Thank you.
Hey, Justin So let me start with the retail media question, and then I'll turn it over to Steve.
So if we were really excited I'm really excited about the retail media opportunity I think it's a long term growth opportunity for us and really a natural extension of our platform.
So 2024 ish estimated around $140 billion of AD spend within retail media. So clearly a huge opportunity and I think we have a lot of assets that are in place and we've been building a lot of capabilities around that so first of all we're close to the retailers we work with dozens of retailers as publishers like E Bay and gap.
And then shopping Steve has talked about as a top five advertiser vertical for US we know that retailers are increasingly looking to monetize onsite inventory and then leverage their valuable data to monetize inventory off site and we have a lot of solutions to help them do this.
For instance, our identity solution with identity hub first party data with audience encore architectural targeting growth and.
And we've got of course strong relationships with the largest advertisers and agencies. So I think it's a very large market and a natural opportunity for us to extend our platform to create more value across the ecosystem.
Of revenue, we're not breaking that out specifically, it's still quite early but we're really focused on continuing to build out the capabilities.
Bring more retail partners on the sell side and on the buy side to our platform and that's going to be a key part of our engineering focus we talked about doubling the size of our engineering team over the next 12 to 18 months investing in infrastructure and data processing capabilities.
Lot of that is related to the retail media opportunity.
Hey, Justin So with respect to your question on Omega front, we definitely have seen a.
A decelerating impact through the quarter. This first quarter of this year and it's really a function of what everybody sees around them everything is reopening.
And there is much more of a level of comfort.
As we move into the endemic phase so I very much look at the.
What occurred in December early Q1 as temporary.
And the proof point for us as a business, we able to grow through it and we have so of course COVID-19 has been.
Incredibly unpredictable.
And I may be.
Be too much of an optimist, but right now what we.
We anticipate is more of a natural.
Endemic phase.
And the normal strengths of our business will continue to drive us forward.
You may recall last earnings.
We were one of the few companies if any at all who had gone out and said that based on our core fundamentals net dollar retention.
Fact that we have spo deals that make our business stickier.
Led us to guide to 25% revenue growth.
A couple of months forward, we are still highly confident of doing that so really speaks to sort of the business that we've created.
Of course.
Omnichannel nature, but the diversity of it and the fact that we have consistently invested throughout the pandemic.
<unk>.
In terms of people and capabilities, where many other companies took their foot off the pedal. So when you factor all those elements and we're feeling really good about where we are today.
And we're going to keep on accelerating our investment to deliver long term growth.
Yes.
And our next question comes from Matt <unk> from RBC go ahead, Matt.
Okay perfect. Thank you guys for taking my question.
First of all I guess for Steve Yeah, we talked about this a lot kind of a price volume equation looking out the guidance.
Honestly gave us some color on the volume being over 50% when we're thinking about the price and maybe now we've got enough history to maybe look at some early Spo partners could you talk to us a little bit about how those partners are expanding and obviously rajeev you talked a lot about kind of the upsell portion.
Kind of how we can make those spo partners. They are more valuable on a dollar per dollar basis overtime.
Maybe Steve you want me to start on the second part is evident yes, let's turn it over to you. So.
Sure.
We're continuing to sign new deals and we're expanding existing ones right and group them as a perfect example of that.
And so I think I think we've got a lot of great momentum in spo and it's a key long term growth driver.
And I think with what.
We are seeing is that.
More and more of what advertisers and agencies want to do there.
They are finding that they can action through our sell side platform through <unk>.
Speaking I think the industry is looking to become more transparent and more efficient and thats exactly what we are endeavoring to do which is to build a digital advertising supply chain that works great for buyers and publishers that is both transparent and efficient.
And whether buyers are looking to find the right consumer verify the content that and add may be placed next to understanding how to value an ad impression.
A lot of that can best be accomplished with technology on the sell side and that demonstrates the expanded value that our platform and our position in the market can create and I think we're sitting at this interesting time with due to the advent of header bidding. We have reached a very significant scale in terms of the volume of impressions and reach of consumers. We have on our platform, but also with cookies and.
Other forms of anonymous targeting going away a lot of that activation is moving to the sell side.
This is technology, we've been building for a number of years.
And we're going to continue to invest here to keep part of our roadmap and engineering expansion to continue to create value for buyers and thereby deliver on our mission and what we're trying to do for publishers. So let me turn it over to Steve for the other half of that.
Okay.
Well Matt.
The really important part of Spo supply path optimization deals are ultimately when those grow and expand it increases the utilization of our platform and so when we processed an impression over 90 trillion last year.
We have to process that whether or not we actually monetize it.
And we do that because it's a strategic way for us to get competitive advantage built our moat.
And we've demonstrated over many years that we can do it efficiently and still deliver very high gross margin.
So when these SPM deals ramp and affect the utilization growth and we don't have to necessarily increase our capacity as much because we've already.
Created that capacity thinking of it as sort of a light switch going on and <unk> decides that they're going to be.
Our partner of the supply chain.
Chain of the future. This allows us to leverage the existing capacity that we already built so net net the.
The implications for our business are very positive as these deals ramp up.
Okay.
If I'm allowed to count that as one question.
When we talk about the 1% market share gains can you give us just any color on kind of where do you see that coming from and then when we looked at the 16% to 17% gain that you talked about in the future.
That comes from in terms of who currently out to that market sure sure yes.
Really excited about that that market share gain.
1%.
In the span of a year is I think great progress.
And so I think where we're capturing that market share and I think we're capturing it clearly from across the board Steve mentioned.
When we look at other companies that have reported and I think it's clear that we have been growing quite a bit faster than than most if not all of them on an organic basis. So look there is there a smaller point solution ssp's there single AD format for their single geography, we're clearly taking market share from them, given our omnichannel and global.
<unk>.
Supply path optimization is a key part of that as well as our investment and focus on the high growth AD formats. I think we're also taking share from ssp's that are larger than us.
Because of the level of profitability that we have in our business and our ability to invest in innovation and bringing new solutions to market.
Growth rate for our entire business Thats display mobile web online video CTV, that's larger than purely the CTV growth rate of some of the larger Sps that are out there.
I think we're taking market share across the board.
And then sort of thing I'd comment on is that.
The industry from our point of view.
Buyers and sellers are increasingly looking for independent solutions as opposed to walled gardens and theres been a lot of antitrust anti competitive sentiment out there there's been a lot of <unk>.
Regulatory review and so we find that both buyers and sellers of media.
Believe that they can only get a fair.
Equitable.
<unk> from an independent platform like ours. So I think we're really taking share across the board and when I look forward to a long term ambition of 20% plus market share growth I think it's going to be more of the same so I think theres still some of the smaller.
Sell side platforms to be consolidated out of the ecosystem and then I think we're going to continue to see share gains from some of the bigger ones as well.
Yeah.
Thank you.
Our next question comes from Andrew Byrne Shameful.
Longer.
Hi, guys. Good afternoon, and thanks for taking my questions. This is actually kind of piggyback on the last question, but given the disclosures that came out around Google's project for Nicky can you actually talk about how advertisers and publishers responder that what does that mean for you guys is there any sort of dare I say crack and kind of.
Google's positioning.
And then as we think about spo.
Looking at the Advertiser perception report and they were saying that.
Publishers still use an average of 5.4 fsp's like where are we in that process right.
Early days help us understand kind of where we are in terms of any minor anymore.
Thanks, Robert Yeah. So in terms of the first part of your question I think it was around the project Bernanke in the disclosure from the state Attorney General's lawsuit against Google.
So that's a perfect example.
Obviously, you made big news in the industry a lot of buyers saw that buyers, meaning advertisers and agencies publishers of course saw that.
So a common reaction for them is to say I knew I was not getting a fair a fair shake out of out of that walled garden and now I have data points to substantiate that and so regardless I think of what happens from a legal perspective, right and in that case could take years to play out and I think nobody knows.
Decided this.
Sentiment and the feeling amongst our customer base and prospects is very clear, which is that they increasingly value independent technology providers transparent technology providers.
And people like us that are creating a more direct connection between the buyer and the seller and so you see our ability to grow based on that through all of the things that we've been talking about.
Growth in.
Overall growth in our business growth and supply path optimization growth with group M. For instance, so I think that sentiment creates a very significant tailwind and opportunity for us and of course, we have to go execute against it and.
And deliver for our customers, but I think we're doing a great job of exactly that and as evidenced by the market share gains.
Now in terms of the AD perception study I think an important thing to keep in mind as it relates to supply path optimization is that the incentive to consolidate is really on the buy side more so than the sell side. So I think publishers will continue to work with five six some cases more sell side platforms.
As the technology.
With header bidding in our wrapper solution others in the market makes it relatively easy for the publisher to do exactly that.
The consolidation is happening, though is on the buy side, where buyers are consolidating down to fewer and fewer sell side platforms because of their desire to have automation efficiency transparency high quality inventory in all of the things that we've been talking about for quite a while with spo and I think the <unk> example is the <unk>.
Example of that where.
The version one of Spo.
Two from maybe dozens of FSP is down to a single digit number.
Or maybe a dozen or so and now in their latest announcement with the premium supply products that partnering with two ssp's. So just I think further continuation of some of that consolidation that's happening across the ecosystem.
Thanks <unk>. Our next question comes from Jason <unk> Oppenheimer.
So for them.
Thanks, I'm Rajeev first I'll ask you just about the group them deal. So from the press reports it sounded like they use CTV as Tommy.
One of the grading factors.
And Manganite won the U S business you won.
I guess the international or the.
The <unk> business, maybe just talk about.
In your road map.
Kind of what you're working on so that the next time one of these comes up you also when the North American business and then second on Steve.
We saw gross margins down year over year in the fourth quarter off of what was a record level last year, maybe just give us some perspective of how youre thinking about gross margins for 'twenty two.
And clearly.
You guys are choosing to kind of focus more on internally developed.
Teacher than acquisition, which should over time get you more.
More significant gross margin leverage and so maybe like help us think about that relative to like a long term like EBITDA to free cash flow conversion. Thanks.
Okay, great. So hey, Jason So on the first part of your question around CTV, but I think the <unk>.
U S and then I'd say broadly non U S, but let's let's use EMEA here Cte.
CTV markets are evolving.
Different ways and it kind of different paces are different speeds.
CTV in the U S.
There's obviously been going on now for a little while but its primarily insertion order based or IL.
And that's really not the focus of our business or of our platform.
<unk> orders are great, but we think there is a different future in terms of what our CTV will be a couple of years from now and where it will be biggest and that's really what we're going after and so it takes a little bit more time, but we think ultimately it's going to be the right way to build out really large business.
And so our focus again is on that bid marketplace private marketplace deals programmatic guarantee deals.
And eventually open market transactions as well.
And what we're seeing is that that vision is coming to fruition.
Thank.
Our competitor here in the U S does have a bigger CTV business no doubt a lot of that is as we understand it is built on being sort of insertion order base and so we're excited to partner with group M. In EMEA, but we can see as I commented on earlier, we can see great signs of growth.
Against our vision of a bit in CTV future.
So Jason with respect to gross margins great question.
Let me give you.
<unk> sort of progression so.
In the course of the pandemic last year, our gross margins in the fourth quarter, We're obviously outstanding at 80%.
One of the things that we've concluded through the course of 'twenty. One is that there is a risk of hardware chip shortages and so we decided to pull forward investment into 'twenty, one partly what youre seeing in the Q4 margin down to 78% again bear in mind. These are.
Very high gross margins and either.
Best of class or one of the best in terms of a usage based model, but so we ended the year with 78% gross margin when I take a look at the impact of this acceleration we added about one five percentage points hit.
To that gross margin because of that acceleration and it's proven to be exactly the right decision because.
After we placed the purchase orders we learn that many of the deliveries that had been made after a six months delay. So we made it for strategic reasons is a very comfortable doing so now when I look ahead to the future very positive on our gross margin trends for several reasons number one I commented on briefly.
It's a long term catalyst for increased margin as we expand these deals on our platform the usage the optimization of our platform grows.
And that will definitely.
Be a benefit to gross margin.
We are also two thirds of our business is mobile and video.
<unk> very high CPM and that mix has been growing over time, so that will be a net positive to our gross margin.
At the same time as I've mentioned, we're taking a very strategic view in terms of.
Capacity investments it is a competitive moat because we can go out and we can process more impressions more cost effectively so we're going to continue to do that so when I look ahead to 'twenty, two I'm very comfortable with sort of the trajectory of our gross margins, let's call. It in.
In the low seventies.
<unk> range.
Still well ahead of where we were in the pandemic as a reminder, Q4 two years ago. Our gross margin was 66%. So I'm feeling very good about the trajectory of gross margins and of course as we talked about in the past the leverage we get in our operating expenses.
As you know in our guidance, we have lifted our full year guidance of EBIT.
EBIT margin was 36% to 37% that is a significant uptake based upon structurally we are a stronger company more scale and we are very confident in our ability to now operate with growth at higher margin levels.
Great. Thank you Steve we are at the top of the hour we have time for one more question.
Andrea.
Raymond James Please go ahead.
Thanks for taking my question one last one on the group and partnership I guess to the extent that you can talk about it how much of that.
Engineering work is really kind of done the spoke for groupon and how much can be may be lifted to other partners and I guess was there anything in terms of the relationship that you guys have a group of them in particular that made them one of the first two to take on one of these advanced level deals and what might be some of the gating factors to two expansion.
Thank you Yeah, Hi, Andrew So on the first part of your question I would say, it's a combination of some.
Custom capabilities.
But also capabilities that could be applicable.
<unk>.
Part of what what.
What I think <unk> is trying to do is is achieve some significant benefits for their clients when they buy through <unk>.
So we absolutely respect that and want to help them achieve that.
But their business model is a little bit different than other agencies. So they have some unique things in terms of data assets in terms of capabilities in terms of how they serve clients.
That are different from from other agencies. So again I would say, it's a combination of some things that are custom to group them and some that are applicable to others keep in mind. This is part of the reason why we are expanding our engineering team to the extent that we are.
As Steve mentioned, we plan to double engineering in the next 12 to 18 months. We think we have a proven really strong proven track record and ability to build products and innovate on behalf of our customers and we are actively looking for opportunities to build.
Customer unique solutions for the largest customers or prospects.
That are out there so that we can we can help them.
And then Andrew what was the remind me the second half of your question.
Just one what made group and kind of unique because as a leader in this kind of advanced form of partnership and what are some of the gating factors that that might be in place to to see more of these advanced partnerships with other agencies.
Look I think every <unk>.
Agency is at a different place in their supply path optimization journey, right and I commented earlier that I think the ecosystem generally is focused on more.
More transparency more efficiency more direct path to supply.
And every agency again is in a different position in.
In terms of how they organize themselves what are the capabilities that they are delivering to clients and how much they're engaging in digital media activation and buying versus <unk>.
Creative or in data science or in other areas and.
So I think in the case of <unk> they were.
Very early.
In supply path optimization initially have seen many benefits from that and wanted to take another step forward.
And so I think thats just specific to their their evolution in the industry and we're excited to partner with them on that.
Thank you Michelle.
And the answer session I'm again, I'm going to hand, it back to you for closing remarks. Thank you Stacey.
Clear that our business and the opportunity is fundamentally different now as compared to prior to the pandemic.
Our revenue is now double the pre pandemic level and our profitability is nearly double as well.
The size of the opportunity is hundreds of billions of dollars larger as people rely on the internet for more of their day to day activities content consumption and entertainment.
We have delivered our fifth consecutive quarter of double the rule of 40 metric with strong revenue growth and profitability, which affords us the ability to continue to be agile and invest in the incredible number of growth opportunities in front of us.
Thank you all for your time today, and I look forward to seeing many of you at upcoming conferences.
Okay.