PubMatic Inc. Q1 2023 Earnings Call

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Yes.

Hello, everyone and welcome.

<unk> first quarter 2023 earnings call. My name is Catherine and I'll be your zoom operator today. Thank you for your attendance today. The webinar is being recorded I will now turn the call over to Stacie Clements with the Blue shirt group.

Good afternoon, everyone and welcome to <unk> earnings call for the first quarter ended March 31, 2023. This is stacie Clements with nickel shipments and I'll be your operator today joining me on the call are Rajiv go out co founder and CEO and state pencil <unk> CFO before we get started I have a few housekeeping items today's prepared remarks.

We have been recorded up to attrition even stable host live Q&A. If you plan to ask a question. Please I'm sure you've set your gym named to display a full name and firm. If you would like to ask a question Sanjay 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 up Hermetic Dot com.

I would like to remind participants that during this call management will make forward looking statements, including without limitation statements regarding our future performance broken opportunity growth strategy and financial outlook.

Forward looking statements are based on our current expectations and assumptions regarding our business 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.

You can find more information about these risks uncertainties and other factors in our reports filed from time to 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 <unk> 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 May nine 2023, and we do not intend and undertake no obligation to update any forward looking statements whether as a result of new information feed.

Your developments or otherwise, except as may be required by law.

In addition, today's discussion will include references to certain non-GAAP financial measures.

<unk> adjusted EBITDA and non-GAAP net income. These 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.

Reconciliation of these measures to the most directly comparable GAAP measures is available in our press release and with that I will now turn the call over to Rajiv.

Thank you Stacey and good afternoon, everyone.

Our focused strategy strong execution and deep customer relationships drove revenue in the quarter significantly above expectations underscoring the strength of our model and our continued focus on efficiency and infrastructure optimization. The majority of incremental revenue drops to the bottom line driving stronger than expected adjusted EBITDA net income and free cash flow.

Our results reinforced the value of our platform our ability to manage through the current environment and how we are positioned to continue to capture market share despite the economic uncertainty.

While we saw sequential improvement through the quarter, it's too early to say if the AD spend environment has crossed and whether the pronounced uptick we saw in March will continue.

We therefore remain cautious with respect to our outlook and investment decisions are key element of our strategy is to leverage our business model and strong degree of profitability to make targeted investments that position us for outsized market share gains when AD spend growth reacceleration.

We believe the current environment is accelerating consolidation in our industry and will benefit companies like thematic that our global scale and profitable.

Macro pressures have driven publishers to prioritize our highest margin revenue streams, such as programmatic advertising and increase their reliance on global Omnichannel technology providers to manage a greater portion of their AD Tech stacks.

Pace of new publisher agreements remained strong we signed over 65, new publishers in the first quarter. We now have nearly 1700 publishers and app developer customers up 14% from a year ago.

We expect to grow our roster of customers and increased stickiness with them in this environment.

This is particularly true for our Omnichannel video segment, which is a key growth driver.

Omnichannel video market is expected to be at $215 billion market. This year.

A subset of Omnichannel video CTV is expected to be at $65 billion market. This year.

<unk> are increasingly adopting programmatic monetization strategies in order to tap into growing AD budgets that they previously were not accessing.

As a result, our CTV revenue was up over 50% year over year in Q1.

We are accelerating the pace of new business growth in CTV, we saw a 10% increase in our CTV publisher customer base over Q4 to 237 publishers.

Driving this is the growing recognition within the media and advertising industry of the advantages of programmatic CTV.

Automotive transactions are more efficient and data driven than traditional buying methods delivering higher ROI to advertisers and revenue gains to publishers.

<unk> has been a leader in providing programmatic technology for more than a decade, we have seen this trend play out time and again across formats and channels.

I believe that we will look back on this period as the turning point that structurally changed the nature of CTV advertising towards more programmatic monetization.

At the same time, we are growing our existing relationships with premium streaming content providers as we provide the ability to both monetize their inventory and leverage their valuable first party data for.

For instance, Komatik help any networks grow its programmatic business bypassing valuable data in the midstream such as content genre and channel, making it easier for advertisers to reach their targeted audiences across A&D as properties and drive campaign ROI.

We recently expanded our partnership with <unk>, one of the largest online entertainment companies in China, who implemented our open ramp OTT unified bidding technology to provide global advertisers more efficient and effective access to the company's screaming inventories.

The breadth of our publisher base makes us a scaled provider in the CTV market.

We are working with six of the top seven global Smart TV providers that have AD supported streaming services four of the top eight major addressable broadcast video on demand streaming platforms in the U S and five of the top eight free AD supported TV streamers in the U S. We also work with all of the top five addressable broadcast video on demand platforms.

In both Australia, and Japan, two of Apacs largest see TV markets.

We are seeing open wrap our prepaid base wrapper solution drive increased stickiness for publishers across channels and formats. Originally launched in 2016 over the last few years, we have diligently brought in the footprint of open rep to cover all leading AD formats and platforms, including CTV mobile App and web as well as video.

Splay and soon to be launched native making us one of only a few skilled providers with a comprehensive pre bid based software solution across all major formats and channels.

Over the last several quarters, we have seen a surge in adoption of our wrapper solution as publishers increasingly abandon their homegrown rebid wrappers for alternative solutions for <unk> open ran.

Open Rep is now critical component of a publisher's AD tech stacks and central to their operations teams overall.

Overall signed opened rapid agreements grew 27% year over year for Q1 is more publishers opt for the performance benefits and customer service chromatic provides.

In the case of online car shopping site Edmunds, although they already had a header bidding solution. They were seeking an alternative that could give them more control over their yield management. After switching to <unk> not only saw on average E. C. P. M uplift of 35%, but also identified that the trusted header bidding expertise of the <unk> team was critical to their success.

First.

We also continue to deepen our buy side relationships, where consolidation is most evident as agencies and advertisers lean into scaled and transparent technology providers that can help them increase operational efficiency and innovation.

Supply path optimization expanded throughout Q1 and represented over 35% of activity.

We have been able to leverage our profitability to deepen buy side relationships investing in our team and technology to offer a single integrated platform that delivers value to our customers.

Plus as we anticipated the macro environment has been an accelerant for S. P O as major advertisers and agencies seek to improve return on AD spend and streamline their operations.

Our existing spo buyers continue to consolidate more of their business on somatic.

Five of the six global agency holding companies grew their S. P. A spend with nomadic by 20% or more sequentially from February to March.

Even with the significant gains we have made an S. P O. We see a long runway of growth ahead.

In the past quarter alone.

We have seen in over 80% increase in buyers interested in engaging in S. P O with <unk> for the first time and now have an active pipeline of several dozen bottoms long term. We believe there are hundreds if not thousands of buyers that we can engage in spo with globally.

The consolidation we've seen across our industry has resulted in the rapid evolution of the advertising supply chain and we believe the industry is at an inflection point, it's becoming increasingly difficult for publishers and buyers to stay ahead of the curve requiring significant investment and expertise as.

As such we have focus on innovation investments in two areas, both of which expand our addressable market and will create durable long term growth supply path optimization and commerce media.

Yesterday, we announced activate and S. P O solution that we have been working towards over the past 18 months and which Leverages. Our recent acquisition of Martin.

Activate as an end to end spo solution that enables buyers to execute non bid of direct deals on <unk> platform.

Accessing CTV and premium video inventory at scale and unlocking unique demand for our publishers.

This groundbreaking solution introduces a new industry paradigm for the supply chain of the future.

<unk> has taken an infrastructure driven approach to solving some of the industry's biggest challenges bad historically, a preventive billions of dollars of insertion orders from entering the programmatic ecosystem.

Our single layer technology approach does away with data leakage discrepancies multiple hops in the supply chain capacity and high aggregate fees associated with having multiple technology providers like SSP DSP.

In 2023, approximately 35 billion or almost 60% of CTV spend is expected to be transacted via iOS.

Direct diodes also account for more than 27 billion or approximately 18% of online video spend.

By providing a path to bring these direct dollars to programmatic activate represents a nearly $65 billion expansion of our total addressable market.

With activate our spo solutions become even stickier we.

We expect buyers, who use activate will benefit from greater control over their supply chain and increased Rois publishers will benefit from increased revenue.

Over the last few months as we have engage with prospective activate customers have been blown away by the magnitude of interest in the solution, which validates our vision and roadmap as well as <unk> market position as a partner of choice.

We have seen strong interest among agencies advertisers and publishers in every major region and across verticals and buyers size, including Global Advertiser Mars Agency holding companies Dentsu Avast Media group grew ban and Omnicom Media group, Germany, and CTV publishers <unk> and LNG.

As a key launch partner for activating group M is further expanding its S. P a relationship with thematic.

The group <unk> premium marketplace and initiatives that provides group M clients with direct transparent and efficient access to CTV and online video inventory is built on somatic technology and will now extend to activate with.

With activate group M clients can buy group and premium marketplace inventory on a guaranteed basis in a more efficient and direct manner with less costs involved in the supply chain.

It is also an opportunity for them to bring clients, who heavily rely on direct diodes into the programmatic ecosystem as.

As a result group M intends to improve their clients' working media and ultimately generate better outcomes.

To be clear activate is not the demand side platform. Our industry already has a number of scaled dsp's thematic is not operating a bitter bid optimization creative optimization a variety of other services that are core to the value proposition of the DSP.

As I mentioned activate is specifically designed to transition non programmatic insertion orders for CTV and online video into Nongraded programmatic buying transactions somatic already has a strong foundation and programmatic guaranteed and private marketplace deals and activate further expands this opportunity.

For <unk>, we expect to see significant strategic and financial benefits, including activate being a catalyst for faster CTV and online video growth over the medium term as well as an accelerated mix shift toward more premium omnichannel video formats, resulting in higher gross and net margins.

<unk> also facilitates greater stickiness with buyers, which increases revenue visibility and greater stickiness with publishers, allowing them to access unique AD dollars only available via the <unk> platform.

As we bring more advertisers spend through our platform. We are also a marketing opportunities to further scale other areas of our business such as retail or commerce media.

Commerce media expands on our retail media opportunity set to include not just retailers, but a wide variety of transaction based businesses like transportation or food delivery providers travel and event providers fintech companies anymore.

We continue to grow our existing customers like Kroger precision marketing, providing the technology and solutions to enable them to activate their retail audiences across pragmatic CTV video and display inventory.

We're also growing our footprint with additional commerce businesses that have high transaction volumes and valuable data.

Over the past quarter, we've had several new customer wins, such as Lyft and Tripadvisor for using our growing suite of onsite monetization solutions to help grow their commerce media businesses.

This is a tremendous growth opportunity for us with an estimated market size of more than 120 billion.

Data access and control are key areas of importance for commerce media, both areas, where <unk> already has market leading solutions.

In addition, we have the financial profile to make focused investments in technology that specifically aligned to current and future commerce media needs such as audience extension onsite multi format monetization and operational efficiencies to help commerce media companies scale their businesses further.

Operating under a similar playbook as we did with spo.

<unk> focused investments that lead to market expansion and high growth revenue.

We believe our strategy around Commerce media will have similar returns.

I look forward to sharing more with you in the coming quarters.

Our execution over the course of this quarter reinforces the value of the thematic platform within the digital advertising ecosystem and our ability to continue to consolidate the market as advertisers seek alternatives to the walled gardens, we are rapidly growing the platform with new publishers and buyers and creating greater stickiness with existing customers.

Our omnichannel platform global scale and strong financial profile are key differentiators and enable us to rapidly expand our addressable market.

We will continue to prioritize long term growth opportunities through highly focused investment, which we believe will drive outsized market share gains and greater shareholder returns.

Now I'll turn the call over to Steve for the operational and financial details.

Thank you Rajiv and welcome everyone.

Revenue in the first quarter was $55 4 million above guidance and plus 2% on top of last year's growth rate of 25%.

Importantly year over year results improved each month through the quarter.

With our focus on execution and efficiency the majority of our revenue outperformance dropped to the bottom line.

Adjusted EBITDA was $8 4 million or 15, 1% margin.

We also continued our long track record of cash generation with $12 8 million in net cash from operating activities and.

And $5 3 million of free cash flow.

Against the backdrop of challenging macro conditions, we delivered against our core objectives, we laid out last quarter.

Deepening our publisher and buyer relationships.

Driving omni channel revenues.

Cheating incremental efficiencies from our owned and operated infrastructure and investing in high value product innovation.

As I've mentioned on our last call January revenues started off slow, particularly in display and online video.

But we saw sequential improvement into February .

<unk> further improved in March across all key formats and channels.

For the quarter revenues from Omnichannel video, which span across desktop mobile and CTV devices represented approximately 30% of total revenues.

They grew 13% year over year.

Within this category CTV revenues increased by over 50% year over year.

As anticipated display revenues comprised of mobile and desktop channels continued to be soft throughout the first quarter, but showed monthly sequential improvement.

Came in slightly better than expected at minus 7.5% versus Q1 last year.

This was an improvement over Q4.

From a regional perspective.

<unk> continued its strong performance throughout the quarter and grew double digits year over year.

America's revenues were down less than 1% compared to Q1, 'twenty, two and improved each month in the quarter.

Sticky customer relationships drove healthy multi net all year with retention rates.

On a trailing 12 month basis published net dollar retention was 105%.

As a result of our global go to market efforts and targeted investments, we continue to expand our supply path optimization relationships, which accelerated to over 35% of total activity on the platform.

Similar to Republic, the strategy once we learn new spo relationships.

AG solutions team works closely with buyers on a detailed growth plans across formats and geographies.

Due to the same retention lens as publishers.

Net spend retention rate for SPL buyers with at least three years of spending was 116% on a trailing 12 month basis.

Our AD vertical diversification again proved to be a valuable asset for us in Q1.

Food and drink health, and fitness and travel and aggregate increase over 30% year over year.

This growth helped offset declines in technology Arts and entertainment and hobbies.

The shopping and personal finance verticals ended the quarter in line with Q1 last year.

In total our top 10 AD verticals grew year over year.

Overall, our business is in excellent shape.

For an extended period of time, our strategy execution and global scale has enabled us to deliver positive adjusted EBITDA for 28 consecutive quarters.

We have also generated cash from operations every year for nine straight years.

And since going public in December 2020, we have generated over $90 million of free cash flow.

With our long term focus on profitability and cash flow, we take our nimble approach to managing our business.

We have put in place multiple initiatives to drive productivity across our teams and lower operating costs.

For example, we have realigned our global customer success team to ensure appropriate support relative to customer needs and business opportunities by market.

This effort is supported by specialized compliant in based in India.

Over the long run our owned and operated infrastructure had allows us to achieve significant operating leverage and control, which consistently delivers efficiencies for us and great outcomes for our customers.

With this control we are proactively managing our capex lower in 2023 beyond what we originally planned.

Our optimization efforts are already ahead of schedule and we anticipate improved gross margins later this year and next.

In Q1, we processed over $46 five trillion impressions on our platform an increase of 43% year over year.

On a trailing 12 month basis, we reduced our unit cost by 60% year over year.

In addition to our capacity optimization work, that's expanding total throughput, but we're also making progress in using this capacity for the highest value display and video impressions.

Taking her various optimizations and the positive mix trends together.

We anticipate lower capex spend in 2024 relative to rapidly Brian .

Our Q1 gross margin was 57% ahead of expectations.

As a reminder, our cost of revenue includes depreciation for prior year capacity buildup and third party hosting costs, which are largely fixed in the near term.

We anticipate improving gross margins each quarter through the calendar year.

Q1, GAAP Opex was $42 2 million or 32% increase year over year.

Included in this total were incremental costs of $2 8 million related to our Martin acquisition.

And $2 5 million related to our January in person Global sales conference.

Excluding these incremental costs operating expenses increased 15% year over year.

GAAP net loss was $5 9 million for Mike or minus 11% net margin.

Q1, non-GAAP net income, which adjusts for unrealized gain or loss on equity investments stock.

Stock based compensation expense acquisition related and other expenses and related adjustments for income taxes was <unk> 9 million or 2% of revenue.

Q1 diluted EPS was <unk> 11 cents and non-GAAP diluted EPS was two steps.

Turning to cash we ended the quarter with $173 2 million in cash and marketable securities and no debt.

We generated $12 8 million in cash from operations and $5 3 million of free cash flow.

Our consistent cash generation enables us to invest in key areas for long term growth and market share gains.

As of April 30, we have repurchased one 1 million shares of our class a common stock for $15 4 million in cash.

We have approximately 60 million remaining in our repurchase program.

Given our strong balance sheet, we are actively using our capital to significantly expand our addressable market.

And our customer relationships and drive market share gains.

We believe this capital allocation strategy, coupled with our repurchase program will drive long term shareholder value.

Now turning to our outlook.

The sequential month over month revenue improvements we saw in the first quarter were positive signs.

But we remain cautious about the next couple of quarters.

Macro conditions continue to be challenging and advertisers remain cautious.

Arguably new sources of uncertainty have entered the picture that may impact consumer spending such as U S fed interest rate plans.

The growing perception that inflation is stickier than expected.

And the effect of tightening credit conditions related to debt ceiling discussions and U S banking system concerns.

Our April results reflected stable positive year over year trends as well as indicators of ongoing macro challenges.

On the positive side impressions for CTV online video and display were all higher year over year, ranging from double digit to single digit percentage increases.

However, the extended macro pressure since mid 2022 has been gradually pushing cpm's down.

In April Omnichannel video Cpm's were down mid single digits year over year.

Overall, CTV revenues were higher while online video and display revenues were down.

The net effect was that our April revenues were roughly flat year over year.

With the step down in Cpm's compared to last year. We see continued revenue pressure in Q2 and are anticipating online video and display revenues will decline in the single digits for CTD will grow in the double digits.

In light of our overall revenue mix with both positive trends and continued headwinds we.

We anticipate Q2 revenue will grow sequentially from Q1 and be in the range of 58 to 61 million.

Our view on market rate of growth for calendar 2023, and our ability to continue to grow our market share remains unchanged from last quarter.

On the cost side.

As we had outlined in our prior earnings call, we have been taking actions to drive incremental productivity across every aspect of our business.

For example, we are well on our way to adding approximately 20% incremental processing capacity by the end of Q2 without a corresponding step up in capex.

Accordingly, as compared to 2022, we expect GAAP cost of revenues to increase at a slower sequential rate each quarter in the low single digits.

With capacity optimize the optimization continued strong execution and seasonal revenue increases we expect second half gross margins to return above 60%.

We expect Q2, GAAP opex to decline by about $1 million compared to Q1, followed by sequential quarterly increases in the low single digit percentages thereafter.

Given our revenue guidance and our optimized cost structure. We expect Q2, adjusted EBITDA will grow significantly from Q1 and be between 13 and $15 million or approximately 23% margin at the midpoint.

We expect profitability to improve as the year progresses, driven by the full effect of our cost reductions optimizations and typical seasonal increases in ad spend.

We anticipate Q3 and Q4 adjusted EBITDA margin levels to be above 30%.

For the full year, we expect adjusted EBIT margin to be over 30%.

Turning to Capex as a result.

The capacity optimization and operational efforts to drive higher value prices onto our platform we.

We are lowering our expected investments this year to $12 million to $15 million more than 60% lower in 2022.

These initiatives and others in the pipeline will enable us to incrementally increase free cash flow overtime.

In summary, our strong execution in the quarter demonstrated our ability to operate successfully within this macro environment.

We are on track to drive long term growth expand our market share and increase shareholder value.

As a result of our durable business model, we anticipate generating free cash flow on par with 2022.

Delivering margin expansion for the balance of 2023 and beyond.

And positioning problematic for revenue acceleration when AD spend stabilizes by fostering deeper customer relationships.

Focusing on high growth Omnichannel revenues and.

And launching new products like activate the increments expand our total addressable market.

With that I'll turn the call over to Stacy for Q&A.

Thank you Steve.

As a reminder, you can ask a question by raising your hand located on the dashboard RK on your phone.

Our line in the interest of time, we asset pool from your question to one and one follow up with that let's get started last question guys. Just wanted cutaia at Evercore. Please go ahead Shannon.

Thank you Stacey.

Could you. Please provide more color on activate Joe Mcknight has clear line how is activates.

Differentiated product when you approach advertisers and agencies.

With the <unk>.

With that product versus the industry and I believe there are other competitors as well and then Steve how should we think about revenue growth with a it looks like there was a comment on industry growth being low to mid single digit growth rate is that what you're implying.

Thank you.

Sure Let me take the first part and then I'll turn it over to Steve So Hello, Schweitzer activate as an extension of our highly successful spo strategy. Obviously, we've been very focused on innovating the digital advertising supply chain and we take it infrastructure driven approach, where we're doing with activate is to address many of the technological barriers inherent in the current ecosystem.

That stem from having multiple technology providers like SSP than Dsp's and so our focus with activate is to bring in <unk>.

Premium video so that's both online video and CTV that today is trapped or stopped in Io based transactions and transition that into non bid in programmatic transactions and so that's <unk>.

Programmatic guaranteed and also fixed price P. M P deals and I'd say the.

Our roster of launch partners that we have is I think a great validation of that.

That strategy now with respect to clear line no.

I think our vision is quite different so I heard magnetic CEO . Michael Barrett described clear line has been for a quote unquote corner cases, we view this as a paradigm shift in the industry.

To be able to change how the technology is delivered and do away with many of the challenges, which I spoke about earlier that are inherent in the SSP and TSP structure.

And second as I understand it.

Clear line is built on top of spring serve.

Which is for connected TV transactions, only and publishers need to have the spring serve AD server in place and so our solution. Our approach. We think is superior and that its AD server agnostic theres, a fairly fragmented CTV AD server market out there with freewheel with Google with <unk> with spring served.

We are not limited to a single AD server until we think that's a.

Significant value proposition for buyers and then our solution also works with online video and other formats and as you know the online video market is roughly three X the CTV market.

Steve O'brien.

Nice to reconnect show with respect to 'twenty three revenue growth.

Talk to a lot of customers will look at our own trends.

Industry data and we think that based upon the macro the trends that.

Our best assessment is that overall spending will probably grow in the low to mid single digits.

But when we step back and think about sort of what we're focused on in how we've been growing overtime, we think that we're going to outpace market growth.

And if you actually take a look at the outperformance that we achieved in Q1 relative to our expectations.

Plus our guide for Q2, you're probably somewhere near about door.

For the half 5% year over year growth. So we're feeling good about the trajectory.

Clearly others positives and some areas of concern that we're monitoring closely.

Things that were on track to Q2.

Okay, <unk>, what's accelerating that right now with the increased supply is it the focus overall, an AD spend optimization, whereas or is it maybe you know a slightly weaker demand environment, leading to more programmatic to drive Cps.

Yeah, I wonder what did I take that and steep feel free to chime in in the low man so.

You know, we we commented earlier in the year and certainly in the prepared remarks today that the current macro environment is likely to be and I think we're seeing this the structural growth driver for programmatic C television and as you know are you know cold CTV strategy has been focused on you know skating to where the puck is going.

If you will which is towards programmatic transactions.

Have you seen this before so arguably real time bidding itself came out of the financial crisis and you know 29 2010 until we've seen how economic cycles can be a real driver of of the programmatic innovation and acceleration in our ecosystem and so I think compared to last year you know there's.

A lot of pressure on screaming publishers, obviously, they've gotta get to profitability faster, which means they need to find more revenue at the same time, there's a lot more supply coming into the industry.

So the likes of Netflix and you know Disney and H B O and the like you know moving towards have supported streaming tears and obviously, there's there's others as well and then you have the the macro pressure I think all of that creates a premium on innovation and new solutions and then the third pieces.

Macro pressure from an advertiser perspective would of course advertisers and you know Cfo's Cmo's are looking for more accountability of their spent so I think all of that sets up well to be a significant tailwind or programmatic monetization, there's likely to be as you know Steve is called out some CPM pressure in the near term you know if there's.

Less budgets looked less growth rate and budgets and there was in the past and we could see some C. P. M pressure, but I think that's mostly near term kind of noise and so we're very excited about the C. T V growth and obviously with our activate.

Announcement, and you saw some of the publishers involved in that like L. G and <unk>, we're getting great feedback from publishers in terms of their excitement around how this can bring them more dollars.

Yeah, when I just briefly.

Briefly add <unk> what are the most important things to know about automatic is that.

Course, we have the resources to consistently invest and of course, the activate a launch as a demonstration of that but we see this as a longterm plan in terms of expanding address for market and our ability to be a leading innovator in this space. So there's you know as in any market.

That's throw in rapid do is gonna be some pauses or plateaus, but this is a secular longterm positive Rosemary for us.

And where played an important part for innovation.

And then if I if I could ask a quick one on activate I know this is probably an impossible question, but I mean, it was great to hear the enthusiasm from your customer base and also at the launch partners.

How early do you think you could start to modify that debate like what shopping some level. You know in Q2 Q3 like are people are going to be up and running on the platform I'm not gonna have you tried to guess what extent and now you want telling me anyway, [laughter] <unk>, maybe I'll take it and see if you can if you can check made but that's why I'm pleased to tell you that.

We've already sent out our first hidden voice to a buyer for activate so you know that tells you that the product is real when it's up and running a hand customers are seeing benefit from it publishers are starting to see revenue you know through through those transactions. Obviously, it's very early days. So it's a it's a very small base as we can.

Going but you know the balance of the year is really going to be about create.

<unk> proof points growing the customer base had showing our customers are the benefits you know that we believe are there from activate and then positioning it for you know significant scale and ramp in 2024.

Oh, that's a shame. Our next question comes from <unk> <unk> <unk> <unk> <unk>.

So to just regime you talk about the change of the Google.

Now uhm as far as kind of <unk>.

Bypass or modify the waterfall and how you think it impact you guys and just access peas in general and then just a follow up question in general like how do you how should we think about activate take right versus the overall favorite.

Yeah sure so with respect to Google.

The change that they made is to replace waterfall mitigation with real time bidding or programmatic options and you know I think this is I mean, the only to me. The only surprising thing is that it's 2023 and they're doing it you know as opposed to 2020th of 2021, and so I think it's just a <unk>.

<unk> example of the ecosystem the general movement in the ecosystem towards programmatic options.

In a way from you know waterfall or or other.

Types of more traditional methods and we could draw I think a parallel towards C. T V, which is also <unk> primarily in waterfall monetization trained transitioning towards towards options I don't think it has a material impact on us uhm, one way or another there's a possibility that it will open up more mobile.

<unk> inventory for US I think it's <unk>, a little bit early to see that but typically what we've seen is that when compressions are trapped in a waterfall type of setup.

Then we don't have full access to the inventory that we would like so when things moved to real time getting then it's more of a parallel access what all platforms are called in parallel and so there's a an upside scenario here, where we will get access to more mobile App inventory then we're seeing today and you know mobile is a significant chunk of.

Of our business and so we would look to grow the.

The impression volumes and increase the revenue as a result.

Okay Uhm I'll take the activate temporary question so you're from our perspective, it's all about you know meeting our customers needs, both the buyers and the publishers and the a key thrust as we've outlined in terms of what we're trying to accomplish is to.

Make the the ecosystem more efficient.

And we would anticipate that the economics would reflect sort of that improved efficiency, but it's also about the fact that this because what we're taking out or no. The hawks, we are improving the transparency lower latency and just you know overall you know.

New line of sight from you know the buyer to the to the publisher and or a longterm plan is to work with the the customers and publishers in our our buyers to find the right economic model that will expand the opportunity.

And this was a net new opportunity for the programmatic space. So there's a lot of opportunity for us to to take advantage of it.

Okay.

Our next question comes from my House.

Before I had my house.

Hi, there thanks for taking the questions first with supply about optimization growing and over 35% of revenue.

How is that changing your ability to excess inventory.

From publishers and then just to follow up on the activate product any thoughts more broadly on how that changes your relationships with <unk>.

Sure Yeah, I can take both of those so first with respect to S. T O N access to inventory I think I was the first part of the question miles you know what we see is that S. S. P. O is a rower growing share of budgets on our platform. It becomes an additional powerful reason for publishers to work with us.

Alright, so we have increasingly advertisers and agencies you know proof points case studies or conversations in the industry.

What are those buyers are saying, hey, if you want to access to the publisher. If you want to access more of my spend then <unk> is the platform that you need to be connected into to receive that spent so it certainly I keep <unk> publisher acquisition conversations and N. As we called out you know, we're seeing acceleration and publisher development with.

Over 65 that deal signed in in queue wanted this here, taking a little girl portfolio.

Almost 1700, so we definitely see it as a key part of the the flywheel and we bring more publishers onboard and then that in turn can help us bring more demand on board.

Take activate you know further.

Accelerate that in the sense that the dollars that are falling on our platform to activate again, there you know small today as we just kept going but expect it to be meaningful over time, you know those dollars are only available on the automatic platform. So it's another reason particular reason why publishers will want to work with us in order to get access to those activate.

Dollars Uhm now as it relates to D. S. P's. We think this is very much a positive for Dsp's and the reason is that by definition. The budget that we are bringing into into the programmatic ecosystem. These are budgets. The D. S. P's, we're not able to access previously so these were.

I owe these are high your budgets for C. T V. In online video that together total about $65 billion per year, and so by definition D. S. P's are not accessing these budget and what we're doing similar to that you know Google shift that we talked about towards bills I'm bidding, but what are you doing is transitioning these dollars into programmatic starting with.

<unk> transactions P G and and the private marketplace and I'm Gonna transactions and then my expectation is that those will evolved a bit of transactions over time that programmatic evolution in in D. S. P's will very much be able to participate in those dollars. So our focus here is on growing the pie for everyone, which is to to the <unk>.

S P as benefit as well.

Our next question comes from <unk> at checking.

Think I'll head games.

Great. Thanks for taking my questions Uhm Rajeev as as we think about what you've done with the Martin acquisition and now the launch of activate should investors expect you.

To continue building out more tools to support the buy side and then my second question for Steve Uhm can you talk about why you expect to see such a pronounced.

You too slow down after putting up the key went upside that you saw is it fair to say, there's just some element of conservatism or caution I appreciate the help thanks.

Sure Yeah. So on the on the first question.

You know our investment and capability for the buy side I would say that's not new so we started bypass optimization journey I think roughly 40 years ago, now, maybe a little bit longer than that and that was with the realisation that we could think about and build a roadmap around how to help the buyers.

Generate more or a lion or a platform so that a ship those dollars to our platform and that in turn would generate more revenue for our publishers and so that again is a journey that started four years ago. So it's been a key part of our our product development and roadmap and activate it is just the latest solution extending that S. P O.

Roadmap and with respect to the Martin acquisition.

Thinking about our roadmap we're constantly on the lookout for acquisition opportunities that might help us accelerate that roadmap and be able to deliver capabilities or deliver functionality you know faster than we will be able to do on her own building organically uhm until he did find we didn't anticipate and did find that to be the case.

With Martin and I would say, where we continue to be on the look out for other acquisition opportunities for technology, whether it's upside four by side that help us accelerate the roadmap.

And then Steve over to you sure Hi, James.

The way to think about our T V guide as in the following context.

Obviously, we had.

It is April on a couple of <unk> shared my prepared comments.

Uhm good year over year growth and Depression C. T V. On my video display so it really positive.

But what do you see well through the system is now with the extended macro pressure since about me 22 on C. P. M. When you look at the the year of your data, it's I'm not really a great apples for apples comparison so.

Couple of things to to bear a month.

From my Twin perspective me, taking how we outperformed in the first quarter and look at our gardens relative to that performance right on track with what.

You would expect on a seasonal perspective.

8% to 10% sequential <unk> and so that is in line with expectations. Then I'd say, it's realistic based upon the data we have in front of us.

Now going back to the gear via comparison no. One thing to remember is last year second quarter. We grew over about 47% so huge quarter last year. So we're <unk> <unk> and then when you check the step down the cpm's knowing that through the.

The outcome is this year over year Uhm slight decline uhm Big picture, the fundamentals of the business or completely orange crap. So number one we're able to get you to tell them from martial profitability.

We've been driving on free castle.

And the first quarter was a positive which is.

Forget accomplishment is this time of the year and then when you step back and thinking about Ah strikes. The changes that we made <unk> margin expansion over the course of the year <unk>.

Scribe that is a pragmatic realistic guide for Q2, plus our structural improvements in our cost structure, we're going from properly.

EBITDA in the first quarter 213 to 15 million in the second quarter and so we think that we're being realistic and appropriate given sort of with a macro is and the underlying trends in our business.

Our next question comes from 10 nine alright.

<unk> can you hear me okay.

Yes, we can <unk> yep, alright, <unk> uhm I'd like to pick up on your comments on uhm capacity increases along with Capex decreases which is a pretty unusual.

Combination of factors most companies have to boost capex to boost the capacity and so it's a great position to be in I Wonder if you could talk a little bit about like what are the needs for the increased capacity I mean, not to sound to you about it but you know activate or more C. T. V. You know trading just whatever the factors are that caused it.

Need more computing capacity Uhm I, just maybe it's a qualitative quantitative question. If you could address that and then the Capex <unk> maybe like like.

With a temporary like a one you're sort of thing or what you would have to get back into a capex reinvestment cycle at some point so to.

<unk> Yep.

Great. Thanks.

So let me start off with the first part just uhm.

<unk> should have the benefit of capacity schedule you know.

He called out that would cause you need to add a significant publishers to our base as well as getting you know protect ourselves into our existing customer base.

So there is always a potential opportunity to make more incremental revenue going deeper broader in in our industry, but we were doing a very selectively I need a <unk> regarding.

Sort of our focus on making sure that will bring it on the most precious which obviously has a benefit to the chocolate, but also the bottom line.

And so it's not really a situation where you can't take advantage of the capacity to <unk>, how can we do that but most effectively so after the last couple of years, a significant buildup you'll be turned our attention this year to optimize our existing capacity.

<unk> typically that we're doing that we started that process latter part of last year and two chewed and where we are today is where I had it scheduled and we're going to be able to incrementally add more capacity take advantage.

The deeper relationships were establishing the new publisher relationships and do it without the similar capex investments that we've made in prior years.

Now when you step back and reflect that sort of what the benefits of that is it we believe that it's gonna improve our margins over time.

And so as I spend stabilizes and then we accelerate we're gonna need a <unk> physician in that regard we take the the kinds of changes were making its terms of our Ah capex approach will likely allow us to deploy last child effects in the future than we have historically.

So that would again be a positive for free cashflow generation down the road. So when you think about the things we're doing it is multifaceted. It's still focused on you know growing in our industry. This is an industry that has long term secular <unk> for the foreseeable future.

Sure and we are structurally modified how we operate to become even more profitable in the future.

And <unk> is it is the capex, a temporary one year or two here or whatever kind of a low no. We think we're making changes that will allow us to.

Reduce our beta capex relative.

<unk> going forward.

Great. Thank you.

Alright next question.

<unk>.

Okay extra you guys I appreciate you taking the question. So there's been some industry shatter and debate about S. S. Ts sequentially kind of transitioning away from the take right bottle, maybe towards a more kind of subscription.

Motto, maybe just if you could comment from a high level on the pros and cons of two approaches as you see them whether to launch if something like activate more of this sort of two sided marketplace approach to the business changes the calculus as you think through that every time.

Sure Yeah, Damn I do longterm, it's that.

Pricing in this industry should be on a subscription basis, rather than on a percentage of revenue kind of take weight basis N. We work you know every quarter.

Every year to continue to innovate our pricing and I think as the industry consolidates there is real potential to move to a subscription pricing longterm I think technically one of the challenges has been that.

Historically, our economic buyer is the publisher in within the publisher, it's usually a V. P of sales or a chief revenue officer, who has a digital AD revenue budget, but does not necessarily have an I T. You know kind of tools and systems budget and so as a result, the revenue share has been the primary model for pricing.

Within our industry.

But as we engage in more supply bass optimization as we engage with activate with fires you know the economic buyer is shifting and so I think there are some paths longterm towards subscription and that's you know something that we would very much welcome and I think it would in and of itself bring further consolidation to the industry, which is likely you're in.

They're positive for everybody.

Very interesting answer thanks for Ya, just hopefully one more quick wants to buy back tracked pretty close to free cash flow. Nick order is the way to think about it for the remainder of year just didn't like the free cash flow dollars are gonna be earmarked stock buybacks until that's exhausted.

The.

The way that we set up the repurchase program is it's a preset plan it's variety parameters in place.

We.

<unk> two years 75 million. So we just executing against that plan then we have.

The first plan and then we have an open marketplace and so I think we're.

We're gonna be opportunistic relative to the open market opportunities.

We'll just operate.

Okay, Great I'll turn it over thanks, Sir.

Sir.

I've cancelled one more question.

Yeah.

Uh huh.

Oh. Thank you for taking my question. How did you just wanted to tell media how does the primary education does it tell me ecosystem positions Ssp's consolidators.

In terms of the mechanics of his face.

To happen to make peace most more critical thank you.

Sure Yeah. So <unk> you know as as I talked about it in the prepared remarks as a key part of what what we're focused on and I think there's a couple of reasons why we see the S. S P as being highly relevant in in retail media. So person maybe just useful to think about what are the different monitor.

<unk> opportunities within retail media Uhm, so onsite monetization, there's both sponsored products as well as you know display your video AD units and then with a slight monetization there's audience extension and re targeting and you know if you think about the abuse cases B S. S. P is really core to a number of those cases and we talked it.

And the earnings are called earlier about you know, what we're doing with lift and.

One other partner, we're we're really focused on the audience extension piece. So hoping goes sorry, I'm the onsite monetization piece, so helping those publishers monetize the inventory that they have on their properties. That's obviously very core and kind of bread and butter to what we do is an S. S T and when we think about the breakdown of onsite versus.

I'll say monetization. When you include sponsored listings onsite monetization here's the majority of monetization inside of Commerce media.

So we think that's you know really sets up the S. S P to be.

Be a critical part of the the the stack for.

For any you know participate in Congress media and then as we also talked about we think the opportunity is actually much bigger than purely retail where there's a lot of businesses that have transactions data.

Life of left for instance that are not strictly retail or and and fin tech and travel where we can extend our capabilities. So we still have work to do I would say to round out our portfolio of offerings to be fully irrelevant in all aspects of onsite and offsite monetization, but we expect to bring more compelling.

It's to market over the course of this year as it is one of our two key innovation focus areas alongside supply that proposition.

<unk>.

Thank you alright helpful. Thanks.

Thank you I'll just put that at the hours additional questions. So what I'm gonna turn it back over to my savings the question.

Thank you Stacy <unk> strong execution in the quarter at the industry continues to consolidate for building deep customer relationships, adding new publisher logos at an accelerated pace and have a robust pipeline of buyers interested in supply path optimization of course, they're really excited to have lunch activate which allows us to bring C. T V in online video and surf in order to trans.

<unk> into the programmatic ecosystem tapping into a 65 nearly 65 billion dollar Tam expansion.

On the operational side, we anticipate incremental margin expansion throughout the year as we continue to optimize prior investments and drive efficiency throughout our business, resulting in strong cash flow.

Ecosystem is rapidly evolving and we're poised to grow faster than the market rate of growth.

Also we look forward to seeing many of you at our upcoming and best friend, that's including Oppenheimer's Virtual conference on May 11th Everquest Conference on May 31st Jeffrey Software Conference on June 1st in addition will be hosting in person meetings with our D. C. N be Riley please reach out directly to those firms or contact Stacey where keenan with industrial relations.

Thank you all for joining us today.

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