Q3 2022 PubMatic Inc Earnings Call
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Thank you for waiting everyone. We will now begin the <unk> Q3 2022 earnings call.
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Good afternoon, everyone and welcome to Telematics earnings call for the third quarter ended September 32022.
Please take a minute to publisher and I'll be your operator today, joining me on the call or the Hugo Al co founder and CEO and Steve <unk> CFO before we get started I have a few housekeeping items today's prepared remarks have been recorded after which rajeev and stable her slides Q&A. If you plan to ask a question. Please ensure that you've heard Joe Zhou <unk>.
To display a full name environment, if he would like to ask a question. During this timeframe. He is the raise hand function located at the bottom of your screen.
A copy of our press release can be found on our website at investors about pragmatic dot com.
I'd like to remind participants that during this call management will make forward looking statements, including without limitation statements regarding our future performance market opportunity for our strategy and financial outlook.
Forward looking statements are based on our current expectations and assumptions regarding our business the out the economy and other future conditions. These forward looking statements are subject to inherent risks uncertainties and changes in circumstances that are difficult to predict you can find more information about these risks and uncertainties and other factors in our reports filed from time to.
A time with the Securities and Exchange Commission, including our most recent Form 10-K and any subsequent filings on Form 10-Q, or 8-K, which are on file with the securities and Exchange Commission and are available at investors Atlantic Dot com.
Our 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 November eight 2022, and we do not intend and under obligation to update any forward looking statement, whether as a result of new information future developments or otherwise.
Except as may be required by law. In addition, today's discussion will include references to certain non-GAAP financial measures, including adjusted EBITDA and non-GAAP net income.
These non-GAAP measures are presented in our 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 James.
Safety and welcome everyone as we suspected.
Q3 marked an inflection point with respect to a deteriorating economic environment.
However, despite the impact on global AD spend we delivered adjusted EBITDA margins of 33, 9% above our expectations and significant free cash flow highlighting the durability and differentiation of the somatic business.
Year over year revenue growth in the quarter was lighter than we expected and more pronounced in the back half of the quarter.
<unk> in the U S, which is our largest market.
On the bottom line, our single Omnichannel platform with fully owned and operated infrastructure gives us a high degree of operating agility to create leverage in our business and sustainable profitability.
Despite the near term economic pressure I am confident in the medium to long term outlook for cosmetics because of our ability to consolidate activity on our platform and grow our market share.
Historically, we have seen that in times of economic stress, our ecosystem leans into deeper partnerships with technology meters that provides innovation efficiency and automation.
Our customers and prospects want to do more with fewer trusted partners. We are well positioned to continue to gain market share in this kind of an environment EBIT absolute rates of growth are lower.
Our high margin profile is a distinct competitive advantage and allows for continued dose selected investments.
With that investment, we widen the competitive gap and further strengthen our market leadership with a focus on positioning ourselves well for the economic upswing that will inevitably return.
Our role in the ecosystem is only getting stronger.
Iqos on informatics with the mission of delivering a more profitable digital advertising business for publishers. So they can invest in the content experiences we all loans.
We built our platform to help publishers monetize their inventory across AD formats, and geographies, while providing the tools and levers to control how their inventories and enhances our access.
Today, we partner with nearly 1600 publishers, which provides a critical scale required by global AD buyers.
Our growth in market leadership stems from years of investment and focus in both technology and strong customer relationships, which is difficult to replicate.
Today that is consumer privacy is increasingly important and third party cookies are going away sell side technology is becoming even more critical to the digital advertising ecosystem.
This is manifesting in a variety of ways all of which strengthen <unk> long term outlook.
There's no question that the open and active gaining share of digital AD budgets at the expense of wall diners in part due to content quality and diversification.
This along with the shift of fast growing video and connected CTV formats is forcing buyers and publishers alike to seek greater transparency into and control over their advertising strategies, which independent technology providers like somatic are best positioned to provide.
Binding target audiences and delivering relevant ads and privacy safe manner is evolving rapidly.
The need for Puffers to leverage their audience data at scale is increasingly moving to open and transparent sell side technology platforms like <unk> and coincides with our multiyear investment in nomadic connection.
Without a technology partner like somatic the majority of publishers will not be able to do this which is becoming fundamental table stakes and commanding higher CPM and monetize and premium inventory.
Somatic connect offers a variety of methods for buyers to find target audiences across our publisher base.
Case study after case study shows that thematic connect audiences provide greater ROI and longevity than cookie based solutions.
For example, wondering Ken ran a month long test campaign using audience of sorts supermac compared to various alternatives.
Performance metrics showed audiences delivered via <unk> connect and response rates nearly nine times those of alternative data use.
Plus somatic delivered impressive win rates and scale benefits.
These performance benefits highlight the value that marketers speed moving their targeting efforts to the cell sites closer to the publisher and the consumer.
What's more our strength in data activation and addressable <unk> is also a market growth opportunities in the fast growing retail media market.
As retailers are increasingly looking for incremental revenue opportunities data monetization becomes an even more important aspect of their businesses.
Kroger precision marketing for example worked with telematics is a scalable technology provider to help their brand and agency clients to activate their retail data finance and CTV video and display inventory.
This also allows format expire and published for customers to gain improved campaign performance and monetization opportunities using our sell side platform.
Agencies, and advertisers are seeking greater control and efficiency of their AD budgets supply path optimization or spo is a way for buyers to consolidate ad spend and gain greater control and issues.
We pioneered F. P O several years ago and it continues to grow and the share of our business in Q3 over 30% of activity on the <unk> platform was spo related.
Continued to expand its fee relationships as we did with Havas media groups North America in Q3, adding new capabilities workflows and data integrations for batch.
In September we acquired Martin to bring more robust solutions to buyers and accelerate on our Seo efforts.
<unk> brings robust measurement and reporting capabilities as well as workflow tools and is in direct response to what buyers are looking for.
We have begun the integration process and we expect marketing to accelerate our product roadmap by up to 12 months.
We expect the end result to be increased consolidation of AD budgets entrepreneur.
Connected TV is moving from insertion orders to a programmatic approach both buyers and streaming content providers are leaning into the efficiency measure ability and scale that automation can provide.
I expect the challenging economic environment will accelerate the shift.
Advances in data driven advertising technology bikes connect will further fuel the growth of programmatic CTV.
As automated buying of CTV becomes ubiquitous across the ecosystem, we are seeing more interest in programmatic buying or unified options.
As an omnichannel platform, we have been singularly focus on scaling this automated approach to CTV buying themselves.
Surprise the results are compelling.
Fine cast a subsidiary of W. P. P focus on addressable TV buying by 10% more inventory when compared to non programmatic approaches as a result of the application of data automation and granular inventory access our platform provides.
Advances in data driven advertising technology bikes connect will further fuel the growth of programmatic CTV.
We recently released a suite of enhanced capabilities for urban wrap OTT, helping publishers drive more revenue and increased flexibility and control, while also making it easier to extend their monetization strategies to CTV.
Multicultural media company milestone and saw benefits from managing all of their inventory types at one place, allowing them to compare manage and optimize across platforms.
Similarly true digital business unit of the leading telco conglomerate in Thailand saw increased fill in hydrous cpm's for their CTV inventory was open rapid OTT.
Stepping back we built a resilient software business that enables publishers and buyers to grow their businesses and compete effectively in the digital advertising ecosystem.
Our platform as sticky as our usage based model that is high net dollar retention rates and increased AD spend from buyers.
I have never been more confident in our business and the endless opportunities ahead.
We continue to move toward our long term goal of 20% market share.
Propelling us forward as our historical and long term commitment to the dual objectives of revenue growth and profitability.
Our strong profit margins and free cash flow generation give us the ability to invest in products and customer relationships, even in today's downcycle when others may not occur.
Accordingly in this environment, we are focused on two operating objectives first continued investment in long term innovation.
This unlocks incremental revenue opportunities today, but more importantly should result in outsized gains when AD spending inevitably reaccelerate.
Key areas of innovation include supply path optimization accelerated by our acquisition and integration of Martin CTV addressed ability and retail media.
And second we are focused on maximizing the efficiency of our Capex and opex investments that have already been made.
Over the last three years, we believe we have expanded our competitive moat as a result of significant capex investments in our infrastructure and impression processing capacity.
We are now focused on optimizing our infrastructure and increasing utilization, which will allow us to materially reduce next year's capex spend.
On the Opex front, we feel confident with the scale of our go to market teams in the near term and will lower the rate of head count growth with a bias towards selective hiring in engineering and innovation in order to be well positioned for when AD spend growth re accelerates.
Our long track record of profitable growth and significant cash flows coupled with our strong balance sheet and zero day gives us confidence that we will come out of the downturn stronger than most.
I'll now turn the call over to Steve <unk>, our CFO to walk through the financials.
Thank you Rajeev welcome everyone.
Q3, we delivered outstanding profit and cash flows.
Although revenue came in light due to global AD spend deceleration, we continue to gain market share.
These operating results underscore the robustness of our business model and our team's proven ability to navigate challenging macro conditions.
Importantly, amidst these conditions, we made targeted investments for future growth and strengthen our financial position.
On revenues of $64 5 million, we achieved adjusted EBITDA of $25 3 million or 39% margin.
We generated $28 1 million in net cash from operating activities and $10 7 million and free cash flow.
It is clear from economic data across the globe the conditions have worsened over the last several months.
In all likelihood so markets are already in recession pursuing wellbeing.
With this backdrop I want to remind investors by several fundamental reasons why we're confident that we can continue to navigate through the current headwinds and be well positioned to accelerate our growth in the RV environment stabilizes.
First our business is well diversified.
Our arm reach platform supports numerous programmatic ad channels and formats.
Enabling thousands of advertisers across 20, plus verticals to reach the audiences they want.
With more than 60000 advertisers purchasing our publishers inventory in Q3, we saw spending in aggregate across the top 10 AD verticals increased approximately 19% year over year.
The impact of diversification was clearly demonstrated.
Travel food and drink a business were each up over 40% year over year, which helped offset softness in shopping technology and personal finance.
Our Q3, Omnichannel video business grew 45% year over year and represented 34% of revenues.
This growth is particularly notable as it was until 80 plus percent growth in the prior year.
These results were propelled by our CTV business, which increased by over 150% year over year.
This achievement marks the sixth straight quarter of a 100% plus growth for CTV.
Display revenue.
Revenues declined 3% year over year.
High levels of inflation recession concerns and rising cost of capital put pressure on consumers and advertisers.
These factors, particularly affected demand for the display format more than other formats.
We saw a similar pattern in the depths of the pandemic and based on our prior experience. We anticipate that this format will return to growth.
Our total Q3 revenues grew 11% on top of prior year's 54% growth.
We believe we are outpacing market growth and gaining share based on the results of other public companies in our industry that have reported thus far this quarter.
<unk> U S business grew double digits year over year, but decelerated compared to Q2's growth.
EMEA growth slowed as anticipated.
With a likelihood of difficult economic conditions will continue in the coming quarters, the durability and strength of our financial model is the second fundamental factor that gives us confidence we can successfully manage through this volatile period.
To begin with we have built a business with high degree of control over our unit economics.
For example through innovation and focus we have been increasing our revenue mix towards high value channels and formats like mobile and video.
We saw the benefit of this in Q3 with higher video Cpm's offsetting lower display Cps.
Overall, our total company CPM was stable year over year.
In terms of unit cost by owning and operating a little infrastructure, we have multiple ways to optimize and drive down our unit costs.
One important lever is having control over the magnitude and timing of infrastructure Capex.
Over the last two years, we have strategically invested to grow our competitive moat and ensure we avoid supply chain disruptions.
Since Q1, 'twenty, one we have more than doubled our add processing capacity.
Looking ahead to 2023, you see many opportunities to optimize our infrastructure and expect to be able to significantly lower our capex.
In aggregate, we anticipate these efforts will lead to higher gross margins and improve free cash flow margins as AD spending normalizes.
Another area of it comes from our usage based model, which aligns incentives and leads to long term relationships with the world's leading publishers and buyers.
Innovation customer focus and initiatives like supply path optimization helped us achieve strong net dollar based retention.
On a trailing 12 month basis, our net dollar based retention was 120%.
Problematic has consistently achieved high adjusted EBITDA margins and profits.
Q3 was our 26th consecutive quarter of positive adjusted EBITDA.
For 19 of the last 20 quarters, we have generated positive cash from operating activities with the only exception being the pandemic quarter of Q2 2020.
For the trailing 12 months through Q3, we generated approximately $96 million in cash from operations and $50 million of free cash flow, which represented growth of 40% and 91% respectively compared to the prior year period.
At the end of Q3, we had no debt and $166 million in cash cash equivalents and marketable securities.
Excluding our recent acquisition of Martin our overall, ending Q3 cash position would have been 194 million.
With our strong balance sheet and efficient business model, we believe our position in the ecosystem will continue to grow via new and expanded customer relationships.
We also anticipate being able to strategically invest in future growth opportunities, where others may be constrained.
Beyond our current balance sheet, we have enhanced our financial resources with a new $110 million Undrawn committed credit facility.
The third fundamental factor that gives us confidence in our future is our proven innovation engine.
We have built this competency over the last 16 years and have consistently invested in high ROI growth opportunities.
We have a distinct advantage as a result of our development organization in India.
In Q3, we increased our India based head count by 46% year over year compared to our global head count increase of 29% supporting further innovation and cost efficiency in 2023 and beyond.
One important area, where we continue to innovate and lead isn't supply path optimization.
In Q3, SPL represented over 30% of activity on our platform.
With our recent acquisition of Martin, we added key technical talent and new tools to fulfill buyer request for more robust measurement and reporting capabilities.
In spite of the topline headwinds that increased through the quarter. Our Q3 adjusted EBITDA came in above expectations.
We achieved this outcome because we have significant control over our cost structure and have been proactive over the last several months optimizing costs across the company, while adjusting discretionary spend.
Operating expenses in the third quarter were $33 3 million up 19% year over year, reflecting the combination of increased head count growth and stock based compensation.
Q3, GAAP net income was $3 3 million.
Q3 that includes a noncash impairment charge of $6 4 million related to an equity investment we made several years ago.
non-GAAP net income, which adjusts for unrealized gain or loss on equity investments stock based compensation expense acquisition related and other expenses and related adjustments for income taxes was $12 4 million or 19% of revenue.
Q3 diluted EPS was six cents and non-GAAP diluted EPS was <unk> 22 cents.
Turning to the Q4 the softness in advertising demand that began earlier in the year has continued.
It is clear that advertisers are wrestling with a myriad of economic challenges and preparing their businesses for the likelihood of a global recession.
We expect these impacts to persist at least through the first quarter of 2023 and possibly longer.
Nonetheless based on the unique strengths of our business, our omnichannel platform, our financial strength and our ability to continue making investments in innovation, we anticipate continuing to grow faster than the market.
Q4 headwinds include continued pressure on our display formats that will be disproportionately impacted by macro conditions.
We also expect Q4 seasonality to be muted with lower than normal holiday ad spend.
In terms of tailwind, we anticipate our Omnichannel video revenues will continue to grow and S. P O activity to increase.
Given the range of macroeconomic pressures, we believe there could be a wider range of outcomes in Q4 than we typically see.
Especially as our Q4 revenue tends to be backend weighted.
Our revenue expectations for Q4, our $75 million to $78 million.
This guidance is consistent with the rate of year over year growth, we've seen in the month of October .
As communicated last quarter, we proactively initiated cost saving measures to unlock several million dollars by the end of the year relative to our original planned expenses.
This agile execution and strong unit economics supports our high margin right now and in the future.
We expect adjusted EBITDA between 33% and $36 million or approximately 45% margin at the midpoint.
No included in our Q4, adjusted EBIT expectations or the incremental operating costs of approximately $1 million of our recent Martin acquisition.
Based on our Q4 revenue guidance the implied full year revenue range is $257 million to $260 million or 14% growth at the midpoint.
With digital advertising protected to grow less than 10% of the two we are well positioned to continue to grow our market share.
Consistent with our revenue range in cost saving plans already in place.
We anticipate our full year adjusted EBITDA range to be between 98, and $101 million or 38% margin at the midpoint.
We anticipate capex between 34 and 36 million this year.
Based on equipment availability logistics, the bulk of our Capex occurred in Q3, which reduced our period gross margin and our free cash flow.
With much of our multiyear Capex investment plan completed our team is now focused on optimizing these investments.
We expect 'twenty 'twenty, three capex to be at least 50% lower than 2022.
Which will result in higher gross margins and improve free cash flow margins when macro conditions stabilize.
We also anticipate that our increasing mix of video and other high value formats will provide another tailwind to higher gross margins and improve free cash flow margins.
With regard to the strengthening of the U S. Dollar we anticipate the impact on our revenues to be neutral to positive because the transactions flowing through our platform are largely denominated in U S dollars.
On the expense side, we also expect the U S dollar strength relative to the Indian rupee and UK British pound Sterling to have a neutral to positive impact.
In closing there are multiple reasons, we are confident in our long term prospects. Despite the difficult macro conditions dampening global ad spend.
Our business has structural advantages emanating from our owned and operated infrastructure and offshore R&D that enables us to expand our competitive moat and consistently invest in innovation on behalf of our publishers and the buyers.
We have numerous growth drivers and see a long runway of growth ahead of us as our Tam continues to grow.
We are consolidating the sell side is one of the few scaled global Omnichannel platforms.
And our profitability gives us a high degree of agility to weather challenging economic conditions and invest in long term market share gains.
With that I'll turn the call over to the operator to open it up for questions.
Thanks Nicole.
Either online or you can ask a question by raising your hand.
<unk> and <unk>.
Some time, we ask that you. Please limit your question for one and one follow up.
With that our first question comes from Jason <unk> from Oppenheimer. Please go ahead Jason.
Hey, Thanks, guys.
So question so it would seem that programmatic advertising becomes even.
Even harder to predict in this kind of environment as buyers become more last minute maybe.
Maybe just comment a bit more.
Kind of what you're seeing in but to the extent you get to the end of a month at the end of the quarter in his budget lab you also.
Get those dollars as opposed to Io waters, which become too hard and then just back and it sounds like display it will be a drag on the fourth quarter, just maybe comment what guidance assumes for growth ex display because it simply battlefield grow meaningfully faster Brian .
Great.
I'll take that good to connect Jason So a couple of points with respect to programmatic.
Certainly the pros are that it's data driven and provides a level of transparency that many other forms of digital advertising does not provide.
And with that comes the ability to bid in real time. So there is a bit of that unit yeung with respect to the timing, but overall the long term secular trend is incredibly positive for programmatic advertising and so quarter to quarter there might be some variations.
But the reality is the long term trend is moving in the right direction and the reality is the visibility that any companies in this space are ours included.
We're largely driven by factors out of our outside of our control. The most important thing that we focus on is what's it look like for the long term perspective and from the way we think about it is.
The fundamentals of our business remain very robust and they are intact and this gives us confidence as I indicated in our comments we.
So we are expanding our SPL relationships.
We're able to continue to grow our Omnichannel video business very strongly and these are really helped us continue to grow faster than the market over the last couple of years now with respect to the display format as I referenced in my comments. This is a pattern we saw during the pandemic and it was one of the first quarter.
Mr really feel the pressure of shifting buying I do expect it to come back. It's a very long term stable format, but for the coming quarter or two there will be pressure and I anticipate the format will probably decline the high single digits in.
In Q4 hard to say right now in terms of the Q1 overall of course, our growth would be much higher if that format, which is more stable now just as a reference point, though our last quarter Q2, our display format business grew 19%. So clearly we are doing things right in this space regards.
This display format and overall as an omnichannel platform, we really find our pockets of growth when there's softness in other areas.
Okay.
Yes.
Great.
Our next question comes from Brian <unk> at Jefferies. Please go ahead Brent.
Good afternoon.
And maybe just walk us through kind of what Youre hearing from some of your bigger partners about.
What they're seeing.
Some of the explanations as this just macro jitter and supply chain is it what are you hearing is kind of a common.
The common <unk> of some of these pullbacks.
Sure Yeah. So I think what we are hearing and what we're seeing is that.
There was a deceleration through Q3.
And that's a pretty common macro statement, Brian and what we are focused on and I think what's most important to me personally is that we continue to consolidate had spence and gain market share. So we just look at some of the Q3 numbers that are out there meta was down minus Florida minus 5%, Google and their network business minus two.
<unk>.
I think snap was plus six interest plus a roku plus 12 now in our full year guidance has us at roughly 14% for the year, which is well above the market rate of growth, which is running at 10% or lower.
Clearly theres a step function down for our Q4 guidance, but we think the vast majority of that is driven by the macro environment.
What does give us confidence as we go into the downturn is that we've got many tools at our disposal. So first of all significant profit margins and that gives us the agility and the ability to focus on long term innovation and select high growth areas.
As we've highlighted we're going to be very focused on optimizing.
The infrastructure and the capacity that we've already put in place and that allows us to commit to reducing capex by half at least next year, which will be reflected in gross margins as well as on the bottom line and then third is that we've got a management team. That's got a long tenure, we've seen this play out before in both the great financial crisis.
Well as COVID-19 come through with flying colors.
So we definitely cannot control the macro, but we feel good better ability to execute and create differentiated outcomes.
Rajeev I know this is tough to probably gauge bed.
Have you gotten the signal when you you think this starts to improve in the back half of 'twenty. Three is it is it or is it just too hard to tell for you at this point.
Yes, I mean, I can start and maybe Steve you want to chime in on it but I would say, it's it's too hard to say at this point and how everybody is looking for the bottom.
Of course.
You know, we got to kind of take it one month at a time and see see what's out there obviously, the big unknown, right, which for Juno, well or what happens with inflation and then a lumpy interest rate changes and then what happens with the war in Europe .
And I don't think anybody has any ability to predict those things. So we just got to take it a month at a time and I think from our perspective again, we feel really good about our ability to be very agile in this environment, given the strong profitability and balance sheet that we have.
Yeah, Let me I'll add depth to the points have Rajiv made from my perspective U S. CFO .
What I focus on is the fact that we can grow faster than our peers that we can leverage our very efficient business model and that we stay ahead in terms of investments for future growth.
So wherever that bottom is we feel very good about the point that we're going to be when we exit this current cycle.
I, it's hard to say what that growth rate will be over the coming quarters, but historically, we've proven that we can grow faster than the market and I don't see any reason why chromous doesn't hold true.
I really want to reinforce the point.
Rajiv made that go into this cycle and we feel that we're on the front foot we've been proactive.
And we believe that we are uniquely positioned because we continue to make growth investments over the last several years and as Rajeev said, we're now turning our attention to further optimization of our infrastructure is selected targeted growth investments. So overall feel really good about where we are in the cycle and our ability to exit very strong.
Fully out of it.
Thanks, Tom and Steve can I, just clarify that the end of October .
Are you said things got a little tighter at the end of the quarter, how did things trend in October and was it a similar trajectory.
It's slowly getting worse or stabilized from <unk> softness that we saw in the third quarter really did continue into October and as I mentioned there is the macro factors that we all are aware of.
And I, particularly saw it in a couple of different places.
Just to set the context no in terms of the expectations for the fourth quarter. You know there is clearly a seasonal uptick that occurs every calendar year.
And when we took a look at the numbers, we factored in it or not what you know how we exited Q3, but what's happened up to today's call and shopping continues to stay under pressure.
For the first part of this fourth quarter, its roughly flat year over year.
And a couple of other categories like personal finances down about minus 15% now having said that we have other categories that our attitude performed strongly like travel automotive. So you know the.
The benefits of our business that we built is that it does have a level of diversity in it and so we can manage through at some level. These puts and takes.
When we put together our Q4 guidance.
I took a look at the year over year trends bottom out from a publisher by published perspective, and then also just looked at sort of the seasonal expectations and one thing I'll call out is.
You know going into the fourth quarter.
We had expected mid thirties seasonal sequential growth versus Q3, that's looking to be more like 20%. So it's very nice sequential growth, but relative to sort of the near the median average over the last decade.
Is about 35% sequential growth. So clearly softness is in the business right now, but we feel really good about the financial strength, we have in our ability to continue to invest through this and be very well positioned as it stabilizes.
Okay.
Thank you.
Our next question comes from Sean <unk> at Evercore. Please go ahead ma'am.
Thanks Stacy.
Could you. Please explain Steve you just talked about the fourth quarter guidance, but what is the assumption that's baked into your guidance. So to see the high end of the guidance Wadley. What is the assumption on what would have to happen to for you to be at the low end of the guidance in terms of the trajectory of growth rates from.
October and November to December and then the other question is how are you thinking about opex.
Donnelley this year, but just in general next year can you you talked about Capex could you comment on Opex. Thank you.
Sure happy to so in terms of the expectations for Q4 is really as straightforward as I just outlined we've taken a look at the trends are so far through this past weekend.
And then extrapolated them forward based upon.
Those trends.
Clearly, we had a bit of an uptick benefit from political spend this year, but that was never a significant part of our expectations and so it's really just looking at the.
Current trends publisher by publisher and.
And where we see strength in our vertical and where we see some softness in.
And the softness.
Is within those categories that are typically strong at this time of year.
Food and drink for example, now having said that I think that.
We try to create our own arrange that we felt we can deliver within it and so that's my expectation I think you know there might be some.
Puts and takes up and down but I feel like we've given a a realistic range based upon what we're experiencing.
Now with respect to Opex.
I really want to underscore the point of how we think about the opportunity ahead of us.
Ultimately as we've shared in the past.
It's all about innovation and doing that cost effectively.
And we built an incredible development organization in India, and we're going to selectively continue to invest to support that organization and ultimately innovation. We're repairing back is you know is selected go to market organizations.
And it does our fundamental belief as we go into this cycle in very strong financial health.
We have the ability to continue to invest.
And what we saw back in the pandemic period, the down quarter of Q2, we were one of the only companies that consistently method right through when we saw the benefit of that in the succeeding quarters in years. So from our perspective, we're going to obviously keep a close eye on opex.
Rajiv and I commented on our focus on optimization.
And that's going to continue to flow throughout the organization.
We I expect increase.
Increased productivity and all the functional areas.
And there will be some growth in opex not at the same rate as what we've seen historically.
But we see that there is an opportunity that we can't Miss in terms of the long term secular trends and the fact that we are absolutely becoming a bigger part of the ecosystem and now with the Martin acquisition, you know Dubai, providing the tools to.
To consolidate more ad spend onto our platform.
Thanks, Steven is there any contribution from Martin is included in the guidance.
In fact in the fourth quarter I assumed roughly a million dollar.
Impact cost.
And that's included in our in our financials, Okay. Thanks, Jim.
Our next question comes from Matt Fontana RBC. Please go ahead Matt.
Okay.
Thank you guys so much.
So sorry, Rajeev, you know last quarter, we talked for a little bit about the challenging macro potentially being a tailwind to S. P O right with advertisers really focusing on ROI.
And I was just curious if you saw anything like that again this quarter and then maybe if you could remind us a little bit about like the deal cycle time on Spi, though in terms of when a conversation starts to where it's kind of like up and running yes.
Yes, sure. So wanted to start with the second part of your question then I'll get to the first so in terms of the deal cycle.
There's a wide variety of ranges.
Some advertisers are relatively quick the agency holdco tend to be longer. So we could see from an advertiser perspective, maybe a couple of months a holdco to get a deal in place could take 12 to 18 months.
And then from there there's the actual implementation process advertisers again and to be.
It's a simpler and quicker to implement that can be a matter of again, a couple of months, whereas the holdco.
Gotta go region by region country by country.
Bring those trading teams on board and so that can take another 612 18 months, depending on the agency. So that kind of gives you a reference in terms of the timeframe.
I think what we typically tend to see in the first part of your question is that in a time of economic stress.
There is a consolidation within our ecosystem.
The buyers the publishers they need to figure out how to do more with less resources had to become more efficient and so they typically tend to streamline the number of partners that they work with and lean into.
Into those activities that can make them more efficient and I think we're going to see that play out here. So a little bit early in the you know on.
The slowdown cycle.
From an economic perspective, but I suspect that we will see that play out here and that was part of the reason why we made the acquisition of Martin and it was really to build upon the four year investment that we've made in supply path optimization and continue to have that as a very strong lever.
Spend consolidation on our platform and therefore share gains. So we are absolutely talking every day with our buy side customers and partners about what are their challenges what are the opportunities our data driven advertising how the ROI that can be driven from real time bidding Ken.
Can increase accountability and increase.
Client outcomes.
And grow their business and grow our business.
Yes, no that's super helpful and kind of give some context based on those sales cycles that FPL revenue might kind of be a lagging indicator for how fast the business.
Growing in terms of your open racks.
Yes, I think the one other question.
Yeah. The one other question I wanted to ask was on the TV side, and obviously a lot of focus on the streaming services switching to a bard and I was just curious in 2023 with this much inventory come into the market do you think that pushes the CTV market more in your direction with publishers, maybe happened to turn to <unk>.
<unk> sooner.
Right Theres not able to handle so much direct with more competition.
Yes, I think we definitely youre going to see a shift towards biddable.
And that's going to be driven both on the sell side and the buy side.
From a buyer's perspective, you can imagine that if we go back a couple of years Theres only a handful of really large.
Platforms.
CTV trading platforms, our buyers to buy from and so fairly straightforward from an operational complexity perspective to buy via insertion orders now you fast forward to today's environment of next year's environment and in any given geo and there may be dozens of.
Hi scale inventory sources, and so in that environment, obviously buyers want to buy across all of those scaled supply sources until the operational complexity. The economic complexity, making sure that clients are getting stronger ROI that really requires a bit of approach and so we're going to I think continue to see pressure.
From the buy side and as that pressure comes from the buy side I think similarly, we're going to see the sell side want to match our buyers want to buy.
And I think theyre going to come under pressure to move towards more data driven approaches to selling their ad space.
That they can measure and deliver the rois of the buyers. So we feel like the.
The setup is already to move towards more of a bid.
CTV environment, and again economic pressure whatever recessionary environment will headed into is only going to accelerate or increase that pressure.
Alright. Thank you so much of a problem.
Thank you Mark.
Our next question comes from Andrew <unk> from Raymond James. Please go ahead Andrew.
Thanks for taking my question you talked about areas of investment that will position the company better coming out of the downturn can you talk about prioritization of these initiatives kind of in the context of slowing headcount growth yes.
Yes, absolutely. So I think first and foremost foremost I'll give you the kind of a functional prioritization, which really is around engineering and innovation.
So as the.
Wait of AD spend growth decelerates, but what that allows us to do given our profitability and our balance sheet is to really think about how do we maximize share gains you know when the upturn inevitably happens and that's going to really be driven by having the right products and the right solutions in the market whenever that happens.
So to do that we're going to we're shifting our focus of investment towards products towards engineering towards software towards infrastructure. So that we can make sure that we have the right products.
Now in terms of those you know those areas that we're focused on is really just the.
Or kind of primary areas. The first is supply path optimization, and making sure that we have the right capabilities and products for buyers. So that as this as we anticipated spend consolidation may happen. We are in the right position to bring those dollars onto our platform.
Second is around video and CTV. So obviously there is huge growth of consumption of that AD format and of course advertisers love it because of the rich opportunity to.
They tell a story to the consumer and there's a lot of.
First party or logged in user data around CTV in particular.
Third as addressable <unk>. So this whole shift away from you know cookies or idea Fe.
To new a varied ways of delivering a relevant ad to the consumer.
And then the fourth is our retail media, which we see as a 100 to 150 billion dollar addressable market. When we have a lot of the capabilities in place and are building more product in that it had go to market around.
Great. Thank you and then you spoke a little bit about.
The U S versus some of your international markets performance, I guess anything to call out in the macro situation versus your expectations and some of the different regions I think Europe in particular was called out prior as a place that was experiencing the macro pressure earlier was that kind of in line worse better at St <unk>.
Pack.
Sure.
The expectations, we had for the third quarter for EMEA came in line.
<unk>.
We knew there was going to decelerate and it did it did celebrate.
The.
Real change was the trajectory for the Americas as a reminder, in Q2, our Americas business grew 27% year over year.
And.
The third quarter, we saw that decelerate to about 10%.
And the core drivers of that you will go back to the Wuhan should I had mentioned earlier.
Dave the core verticals of choppy personal finance technology had all decelerated August onwards.
And given that Americas represents roughly two thirds of our overall revenue clearly that was felt do that that business units.
Now, having said that we delivered a really strong robust EBITDA, 39% EBITDA margin in third quarter despite that shift.
Shift in the top line and really it underscores the control that we have over the various levers within our business.
And we're turning that focus and we're going to continue to optimize the investments that we've made.
My expectation is that the Americas business going forward will mimic sort of the macro trends.
And.
We will see recovery.
But theres still a lot of uncertainty.
The other point I'll call out is just the great progress that we've made in terms of Omnichannel video I don't want it to be lost in the headlines because we grew that business, 45% in the third quarter and that was on top of 80% growth last year.
And so we're really hitting on all cylinders and I underscore the point the challenge right now is the Omnichannel video represents 34% of our revenues the balances display and display is which is both mobile web display.
Display as well as desktop display is under pressure right now given the overall macro conditions, but because we have this mix in the <unk>.
Fact that the mix is growing over time, we feel really that we're well positioned.
As the cycle progresses on not just from a financial perspective, but also what happens when we come out of it in Americas will certainly lead us out of that situation.
Understood. Thank you.
Our next question comes from Andrew Baum at Campbell. Please go ahead.
Alright, thanks, so much for taking my questions.
Big picture question, as we think about kind of a market growing 10% lower which I think you guys referenced earlier versus kind of guidance for 14% growth for 2022 can you just talk about the competitive environment as we go through a downturn. There has long been a thought that that AD tech will consolidate does this accelerate that or is there.
Anything else that you guys are seeing on your end as we think about the competitive set with an attack.
Yes, why don't I kick that off and then Steve you can maybe chime in so.
I think our focus is really on continuing to grow our share of the market.
And it's very possible that us or others could.
That actually could drive consolidation.
But again when I look at.
Our rate of growth relative to the market historically, we've been growing at roughly twice the rate of growth in the market. We don't see any reason why we shouldn't continue to grow faster than the market even if it's.
And at a lower rate on an absolute level as the macroeconomic environment.
Clearly indicates a deceleration.
And we think we're very well positioned and I would say uniquely positioned in terms of our.
Our balance sheet with no debt and then the ongoing profitability in the business.
So I think there will be more opportunities for consolidation in the future, whether it's organic or inorganic.
Hard for me to comment on you know, what what's going to happen in the rest of the industry.
But we absolutely see.
These types of the challenging times really is market share growth opportunities for us given our historical and long term focus on both revenue growth and profitability, Let me turn it over to Steve for a plenty other pilots sure you know I think according to the point of view, we have is that we feel really good about our.
Business.
In terms of the model in terms of the fundamentals that I outlined in my prepared comments.
Sort of summarize because I think its believers.
<unk> scores the point, we're making.
We believe that we built a very efficient business, we've owned and operated or equipment for many years, we've been driving efficiencies out of that at significant rates.
We've gone through a multi year investment cycle.
<unk> doubled the capacity that we could process.
And that all is raw material for us.
To leverage and grow over time, we don't need to then build more to generate incremental revenue in the near term. So that's a really big leverage point for us. So we're going to be focused on optimization and we think by virtue of the fact that we are one unified platform.
We're going to be able to deliver innovation on quicker cycles.
And we have a <unk>.
Credible asset as I commented on earlier in terms of our R&D organization in India.
We have been growing over time and they are all pointing towards high ROI investments.
You factor all those things together by I'd say definition, we should end up consolidating the business because there are going to be companies that cannot keep pace on any of those or altogether. Those go.
France, yes.
Just want to kind of underscore the magnitude I think of our owned infrastructure advantage.
As Steve mentioned, we're going to reduce the capex by at least half for next year.
And.
If youre, an AWS or something like that you know maybe you can reduce your infrastructure bill by 10%. If you really focus on it but it's going to be harder to get significant gains beyond that so that's just I think that an example of the significant advantage that we have.
That's helpful. Thanks, so much.
And then secondly, if I think about your CTD published for wings. It steadily continuous increase over the last few quarters can you just talk about where you guys are actually winning share like what what publishers are coming on the platform. It is there a trend there or a type or anything else you can share.
Yes, so I think we're seeing growth really in two areas both as a net new one is a net new and the other then.
That penetration deeper penetration of the existing publisher base.
So we're seeing growth I think from from both of those categories in terms of the types of publishers, there's really three or four types of publishers that we're going after so one is Canada the tier one.
You know really large.
Platforms broadcasters that are pretty scaled in terms of their monthly users the.
The second category is one level down from that so these are more niche content providers. They maybe have 20 30 million uniques and among our very high value content, but smaller in nature. They are very well suited to our biddable auction environment, because you need automation tend to bring dollars you know the right the right campaigns set to that inventory.
And then third is the.
The vast the free AD supported TV.
Category. So you may have.
Some big players there.
And that's a key part of our of our business and then fourth would be the TV OEM.
Oems are manufacturers and we're working with four or five out of the top five in that category. So these are kind of thats the playing field that we're going after pretty much in any given geography.
So again I think we're going to see penetration new publisher acquisition, but also with the likes of spo, bringing more dollars to today existing publishers.
That are in our stable.
Thank you.
Our next question comes from Justin Patterson at Keybanc go ahead, Jeff.
Ben.
Great. Thank you good afternoon.
If I can first Rajiv I appreciate your comments on retail media as a growth opportunity Theres, obviously, a lot of companies focused on that space. When you look at the assets problematic has today and you know where you need to invest to gain market share.
Going to shut a little more light on where you think you can get some wins and how we can think about the timeline for that.
Number one and then Steve I, just wanted to kind of get a finer point on some of the optimizations youre talking toward if I step back if youre getting more utilization on the data Center and then also having this mix shift dynamic away from lower priced desktop to potentially having more mode.
<unk> video that seems pretty positive from a mix dynamic so.
Acknowledging the growth rate is what it is for 2023, if the guests for all of US how should we think about just the.
Our margins are insulated from these optimizations and mix shift taking place. Thank you.
Yeah, Hey, great. So in terms of the retail media question.
Currently our long term growth opportunity for us we view it as a natural extension of our platform I think you're right. There's obviously a handful of companies that are going after but we think between our programmatic kind of DNA and in infrastructure. The global capabilities that we have multiple AD formats, and then the investment that we've made and connect our data and addressable Plaid.
For them to manage first party data identity data contextual data now all of those pieces put us in a good position.
Or to field, a competitive product and we're already working with the likes of Kroger ebay hazardous Iraq Cotan grew.
Groupon bed Bath, <unk> beyond <unk> and many others in terms of the components, you know theres onsite advertising and Theres Offsite and.
Onsite in our core SSP business is a key product offering.
And off site, we think we have.
Long potential there.
In part with the Martin acquisition.
The area that we're working hardest on right now.
Is for onsite, it's sponsored listings and so these are the types of ads that you might see where somebody is shopping overseas.
Product listing ads or product ads has as they're going about it the retailer site and shopping and so that's a new area for us and so there will be some some building there. So in terms of timeline I think this year and next year are significant product innovation and building timeframes.
And then I think revenue contribution will come sometime a meaningful revenue contribution sometime post 2023.
Now I'll turn it over to Steve on the second part of your question sure Justin So to talk a bit more on the optimization front. So you're absolutely correct in assuming that the optimizations that we can do and have been doing will improve not only gross margins, but the EBITDA margins and there's obviously a number of.
Reasons for that but I'll start out with the owned and operated part of infrastructure, which we've you've heard from us for many earnings calls.
Is really a strength of ours on numerous fronts number one we get to control the timing and magnitude of Capex. So we decide when we want to invest when we want to pair back when we want to even move equipment, because it's all our equipment.
And so we take a look at the the market indicators and then we make the decisions in terms of how to best manage that and so.
Clearly over the last couple of years, we made a strategic decision to.
Increase the competitive mode.
And being able to process more impressions, we made that decision because there is tremendous opportunity in areas like CTV and Omnichannel video.
And we have been doing that very judiciously.
And as we look ahead in terms of this part of the cycle, where the macro conditions are such that it's natural that AD spending is going to come down for some period of time.
We then are able to leverage the infrastructure that we already built and from a cash generation perspective. These are for high ROI outcomes, because we've already incurred those costs from our GAAP P&L perspective, we depreciate the equipment over three years and we typically keep the equivalent service for five six years. So you can see the kind of leverage.
That will get over time.
Now Theyre optimization doesn't just stop at the infrastructure throughout the <unk>.
The company's history, we've always looked at opportunities to continue to drive productivity and in times like this when we're making very conscious decisions to focus let's say our investment in technology engineering and not.
Not as much in G T M.
It's really right for us to continue to.
Improved workflows, automate workflows et cetera, and so that's what we have an organization that's very capable of doing and has been doing for a long time, obviously with the kinds of EBITDA margins that we have been able to achieve and the high thirties last year last couple of years about 40, I expect that the long term trajectory of both gross margin and EBIT.
<unk> will be up to.
To the right and it's really a function of how we organize yourselves, how we execute against the opportunity and how we are able to consistently invest in innovation and then when it's required to focus on optimization and so we feel that as I mentioned earlier, we are on the front.
Foot going into this cycle and we feel really excited about the gains that we're going to make over the coming quarters from a competitive perspective.
Great. Thank you. Thanks.
Thanks Joseph.
We have time for one more question from Maxwell Mccarron from Lake Street. Please go ahead Nashville.
Hey, guys.
My question here is just focusing on customer behavior, just in terms of customers continuing to use several fsp's are you seeing any consolidation in spend from customers may be taking it from several of these down to maybe one or two and if they are are they choosing you and what are they why are they choose.
Yes, Hey, Max also we haven't seen a significant trend towards consolidation on the publisher side at this point.
But we certainly do see that on the buy side from a supply path optimization perspective.
And so for instance in the last quarter, we announced an expanded.
Boss spo relationships and in Q2.
<unk> announced an expanded I think it was Q2 grew them global relationship.
So we definitely view the buy side is really the leader in terms of consolidation I think on the sell side, it's possible that we will see.
Some publishers consolidate due to operational investments in maintaining multiple ssp's, but so far we have not seen that I have not seen that play out on the cycle just yet.
Okay. Thanks, guys.
Okay.
And we have no additional questions in the call I'll now turn the call back to answering your questions quick closing remarks. Thank you everyone for joining us today, there's no doubt that it's a softer macro environment today versus a year ago AD spend growth is decelerating market wide. So we continue to consolidate and grow market share are focused investments and.
<unk> innovation set us apart from others, while still delivering high margins and cash and while we can't control. The MACRA our business model provides a resiliency and highlights our ability to execute and create differentiated outcomes.
We do anticipate that AD spend will come back even bigger at some point in the future as it historically has and we intend to be well positioned to maximize further market share gains I look forward to connecting with many of you at upcoming investor conferences.
Thank you everyone. Thank you all this concludes our call. This afternoon and thank you everyone for joining us.
Okay.