Q1 2023 Direct Digital Holdings Inc Earnings Call
Speaker 1: Good afternoon ladies and gentlemen and welcome to the red digital holdings of first quarter 2023, earnings conference call. At this time, all lines are in a lesson only mode. Following the presentation, we will conduct a question and answer session. We will conduct a question and answer session.
Speaker 1: If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, May 11, 2023.
Speaker 2: Good afternoon everyone and welcome to Director Joel Holdings' first quarter of 2023 earnings conference call. My name is Brett Malot and I'm representing Director Joel Holdings from ICR. On today's call, our Director Joel Holdings chairman achieved executive officer Mark Walker and achieved financial officer at Suvindekard. If mission is discussed today and qualified as entirety in the form of AK and accompanying earnings release.
Speaker 2: including financial projections or other statements that are not historical in nature may cause two four-looking statements. These statements are made on the basis of DRCT's views and assumptions regarding future events and business importance at the time they're made, and we do not undertake any obligations to update these statements.
Speaker 2: Forward-looking statements are subject to risk, which would cause the DRCT's actual results to differ from its historical results and forecasts, including those risks set forth in DRCT's filings at the SEC, and you should refer to carefully consider those for more information.
Speaker 2: This cautionary statement applies to all political statements made during this call. Do not please undue the alliance for any political statements.
Speaker 2: During this call, DRCT will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with general executive council principles. Reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available on the earnings release of DRCT file in its Form 8K today.
Speaker 2: to get in Proud Report strong financial results and operational performance to start up 2023. While Q1 is typically our seasonally slowest quarter, we saw strong top line growth across both our sell side and buy side businesses as well as considerable increases in market share.
Speaker 2: Our open marketplace CPM platform continues to benefit as middle market businesses look for less expensive, less restrictive, more accessible, and more representative advertising solutions.
Speaker 2: In Q1 2023, a revenue increased to $21.2 million, an increase of $9.9 million, or 87% over the $11.4 million in the same period of 2022. Adjusted EBITDA for the quarter was $0.5 million compared to $1.1 million in the same period of 2022. In Q1 2023, a revenue increased to $1.5 million in the same period of 2022.
Speaker 2: As Susan will explain in more detail shortly, we did see some one-time expenses this quarter driven by unusual events as well as higher expenses year-over-year associated with being a new public company.
Speaker 2: Our revenue this quarter was driven by strong performance by both our buyside and sell side advertising segments which saw record growth. We're pleased to report an increase in revenue growth of 149% and 28% respectively over the same period of 2022.
Speaker 2: We saw a new publisher, customer and DSP wins, notably with the additional publisher, Gourmet Ads, which has $3.5 billion monthly requests, along with other niche publishers to grow our overall impression count. Q1, we also expanded offerings to include audio within SSP and are testing some new DSPs currently.
Speaker 2: As mentioned on the buy side, our businesses also saw record growth, growing 28% year over year and serving approximately 231 customers, an increase of 3% compared to the same period of 2022. Orange 142 won and launched campaigns for Visit Tucson and Spokane Airport, while Huttle Mass has sought its highest single revenue month.
Speaker 2: ever in March.
Speaker 2: During the quarter, we saw a number of achievements, a few of which I wanted to highlight today. Operationally, starting in Q4 2022 and continuing into Q1 of 2023, we made considerable progress with our server transition to HPE GreenLake and our overall replatforming strategy, all the while maintaining business growth and capturing incremental market share.
Speaker 2: On the corporate side, we continue to fortify our personnel with a strategic board appointment. In January , advertising industry pioneer Misty Locke joined our board of directors, bringing more than 20 years of experience in digital performance and brand marketing following successful 10 years as the CMO of Dentsu Media and iProspect.
Speaker 2: Turning to the remainder of 2023, we believe the current market dynamics are favorable for directorial holdings as we see an increase in media spend being targeted to reach growth and multicultural audiences.
Speaker 2: While simultaneously middle-market companies are moving dollars away from traditional media spend to digital
Speaker 2: As a company, our primary focus for the year is to continue our strong growth trajectory, and we are reaffirming our estimate as disclosed in our year-end 2022 update of $118 million to $122 million in top-line revenue.
Speaker 2: I will now hand things over to Susan Eckert, who is going to walk you through some of the financial highlights in further detail.
Speaker 3: Thank you. As Mark stated, our revenue increased to 21.2 million in the first quarter of 2023, an increase of 9.9 million or 87 percent over the 11.4 million in the same period of 2022. Seasonality in our business results in the first quarter typically being our lowest quarter of the year.
Speaker 3: Colossus grew to $13.8 million for Q1 and contributed $8.3 million of the increase, or 149%, over the $5.5 million in the same period of 2022. Our SSP continues to increase publisher partner engagements in addition to increasing our impression monetization. For the first quarter of 2023, our buy-side businesses, Orange 142 and Huddled Masses, grew 28% year-over-year and contributed $1.6 million of our increase, finishing the quarter with $7.4 million in revenue.
Speaker 3: compared to $5.8 million in the same period of 2022. The increase was primarily a result of driving higher spending as well as new middle market customer acquisitions.
Speaker 3: For the first quarter of 2023, gross profit dollars were $6.4 million compared to $4.8 million for the first quarter of 2022, an increase of $1.6 million as a result of higher overall revenue.
Speaker 3: Primarily as a result of our revenue mix, growth margins for the first quarter of 2023 were approximately 30 percent compared to 42 percent in the same period of 22. These margin results are in line with our margin expectations given the rate of accelerated growth in our cell-side advertising segment and the resulting mix in our revenue profile.
Speaker 3: Our cell-side segment, whose revenues grew as a percentage of our overall revenue, has a lower growth margin than our buy-side segment. In Q122, the revenue mix was approximately 51 percent by side, 49 percent cell-side, while in Q123, the mix profile was 35 percent by side and 65 percent cell-side. The buy-side advertising segment growth margins were 60 percent for the first quarter of Q23E compared to 65 percent in the first quarter of Q22. This range for the buy-side margins are in line with our expectations as the mix and timing of the customer campaigns can impact this result.
Speaker 3: The sell-side advertising segment growth margins were 14% for the first quarter of 23 compared to 18% in the first quarter of 22. As this business segment continues to grow, the slight reduction in the margins are due to continued investment in our technology and our overall mix of publishers.
Speaker 3: With respect to the operating leverage of the SSP programmatic business, this higher revenue results in higher dollar EBITDA contribution by the sell-side segment.
Speaker 3: Operating expenses increased to $6.6 million in the first quarter of 2023, or an increase of $2.4 million over the $4.2 million of expenses in the first quarter of 2022.
Speaker 3: Since our IPO in February of 2022, the company has increased its headcount over the course of the year, with strategic headcount primarily added in our sales and operations personnel. We have also added individuals to our shared services area. In total, these additions represented approximately 45% of the total sales and operations personnel.
Speaker 3: of our operating expense increase in the first quarter.
Speaker 3: The general and administrative costs increased 1.3 million to 2.9 million in the first quarter of 23 compared to the 1.6 million in the same period of 22.
Speaker 3: Included in general and administrative expenses are quarterly one-time expenses, tolling approximately 0.5 million or 3 cents per share associated with ongoing transition to HPE Green Lake incremental growth opportunities for the company servers and additional one-time company expenses.
Speaker 3: In addition to this one-time cost in GNA, we also saw a loss from the early termination of the Silicon Valley Bank line of credit. And these costs in total were approximately 0.8 million or 5 cents per share, which is an impact on our net loss results for the quarter.
Speaker 3: For the first quarter, adjusted EBITDA was 0.5 million compared to 1.1 million in the first quarter of 2022 impacted by the aforementioned one-time expenses seen in the quarter. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of 6.7 million, an increase of 2.7 million from the 4 million as of December 31, 2022. As we previously disclosed, on January 9, 2023, we entered into a loan and security agreement with Silicon Valley Bank, which provided for a revolving credit facility. On March 13, we issued a notice of termination of the loan agreement.
Speaker 3: which was subsequently terminated. We are currently working towards a new line of credit facility and expect to have a new agreement in place in the near future.
Speaker 3: Based on our expectations of cash flow from operations and the available cash held, we believe we will have sufficient cash resources to finance our operations and serve as any debt obligations until at least the end of fiscal year 2023. On April 21, 2023, the company filed a registration statement.
Speaker 3: of our Class A common stock, preferred stock, debt securities, warrants, and our units in one or more offerings.
Speaker 3: The company is not currently engaged in any transactions that would utilize the shelf registration statement, but the Form S3 provides us flexibility for a variety of potential strategic initiatives and is considered good corporate housekeeping following our year anniversary as a public company.
Speaker 2: Now I'd like to turn it back over to Mark for some closing comments. Thank you, Susan, and thank you to everyone for joining. We sincerely appreciate your interest in Direct Digital Holdings and are looking forward to your questions.
Speaker 2: I'd like to turn it back over to Mark for some closing comments. Thank you, Susan, and thank you to everyone for joining. We sincerely appreciate your interest in direct digital holdings and are looking forward to your questions. We are now going to open it live for some questions.
Speaker 1: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchstone phone. Again, that's star followed by the number one on your touchstone phone. If you would like to withdraw your request, please press star followed by the number two.
Speaker 1: Your first question comes from the line of Darren Eftahi from Roth MKM. Please go ahead.
Speaker 4: Hey, this is Delan for Darren. Thanks for taking my question. Start with...
Speaker 2: some of the one-time expenses. So, excluding the Silicon Valley Bank portion, on the transition to HPE, the double, I guess, double cloud costs that you're paying there, like, when do you expect that transition to be complete so you can sort of get rid of that double expense? Yeah, the expectation is we pretty much have converted over, and we're expecting by Q3 it's going to start winding down. So, into Q2, out of Q3, we'll start seeing those prices come back in alignment.
Speaker 4: And then when you, I mean you grew sell-side impressions to $207 billion. That's a really big increase from 4Q, let alone Q1 of last year. Can you sort of talk about what drove that increase? Is that some of the moves you're making to work with larger publishers?
Speaker 2: Yeah, that's exactly correct. So the increase in larger publishers that we're working with, and we named one Gourmet Media, Gourmet Ads. In addition to that, we've expanded current relationships and turned on different media types with some of the current partnerships that we have on the publisher side.
Speaker 2: which actually delivered more impressions to us over Q1.
Speaker 2: Our GoFord strategy, which we've said repeatedly, is a continued ad publishers in turning on more media types. As in Q1, we just turned on audio. And so we're going to look at doing that also for 2023 for the current year also as our strategy for growth. Thank you.
Speaker 4: Great. And one more if I may.
Speaker 4: Can you just sort of walk us through how mix is impacting EBITDA margins? So I know on the cell side it's the lower margin, but there's a higher flow through. So I mean, is there anything going on on the OPEX side where you can sort of squeeze out a bit more? Sure, no s Roger. Awesome. All right.
Speaker 4: operating leverage to sort of get evidob margins back to sort of where they've been the last maybe maybe the last 12 months or so. Yeah, hey, Dylan, let's do this. Yeah, I mean definitely, you know, we're looking at every opportunity of increasing evidob course, but we also, you know,
Speaker 3: but we still maintain that we will achieve our EBITDA goals as well.
Speaker 4: But that is an international democracy movement.
Speaker 5: Thank you.
Speaker 1: Your next question comes from the line of Dan Kuno from Benchmark. Please go ahead.
Speaker 6: Thanks. Good evening. All right, Mark. I know it's Q1.
Speaker 6: You just grew almost 90% off of 100% comp in the year ago period, including 150 on the sell side over a 540% comp a year ago. I know you're scaling, you're adding large partners. I get all of that.
Speaker 6: Maybe you can just talk about a couple things that you're seeing because obviously the guide implies
Speaker 6: conservatism and or some decel as you get against larger numbers.
Speaker 6: We're hearing TPMs start to improve a little bit stabilization in the ad market. And it's obvious that you're putting up these numbers to what you said that you're taking some share. So maybe you can just kind of address some of the factors that you're seeing from kind of a higher level.
Speaker 2: talk to sort of the balance of the year. Yeah, so our goal is to continue to expand our growth not just on the sell side business, which I think you know our strategy is currently with our pipeline and continuing to add more publishers. In addition to that, one of the other things that we've been working on diligently is part of this transition.
Speaker 2: is the actual optimization of our overall performance between our hardware and our software. So some of the investments that you're seeing is also to optimize so that we can get better performance so that we can continue to grow our business.
Speaker 2: We're anticipating, as we said before, Q1 is usually our slowest quarter. As of right now, that's exactly what we're anticipating for our go-forward. And so we really are looking at ramping up new partnerships on the DSP side as well as on the publisher side in order to maintain the current momentum that we actually have in the marketplace.
Speaker 2: In addition to that, what I would also say, you know, we have put in a significant amount of effort into reaching the advertising marketplace and the brand marketplace with our marketing initiatives and also with the addition of our chief growth officer. And we're starting to see some fruits from those, from those actions.
Speaker 6: bias ideals too, which is obviously critical, I think, to the strategy, as you pointed out. But I'm just curious from a high level how the conversations are going, knowing that everybody's still a little bit worried about back half, but it sounds like things have gotten maybe a little bit better sequentially.
Speaker 2: Yeah, so let me start with the buy side first because I always think of the buy side as the top of the funnel.
Speaker 2: hidden underneath those numbers and what really fueled a lot of that growth is the increase in share of wallet, if you will, from some of our current partners and that grew in the 20 to 30 percent range and really fueled our buy side growth. That has to do with the customer service that our teams in the field are actually providing.
Speaker 2: Plus, we put a strong initiative in adding new customers into our customer matrix that is benefiting us and those investments are actually paying off on the buy side. What we have heard in the marketplace as it relates to our middle market customers is
Speaker 2: they are not seeing the type of slowdown that maybe some of the larger Fortune 500 companies are seeing. They're being pretty aggressive for the go-forward. So we've been pretty excited about that buy-side business and the growth that we've seen with that business. As it relates to the sell-side, we've seen a lot of growth in the market.
Speaker 2: What we're hearing from the publishers is, as you probably already know, the move to CTV, OTT, and video is still prevalent. We think that there's a lot of room for growth in that marketplace. And I think you're gonna start seeing more and more share of dollars going to that space.
And because we have a good strong mix of video as well as display and we just added audio, I think you're going to be able to see us continue the growth that we're anticipating for the go-forward. Good LowPack
Can you just talk a little bit more about scaling audio, Mark? It's been a really tricky category, I think, to sort of optimize and turn a profit on. I understand that you guys are the executor or the funnel of the pipe. Yes, but if...
you know, it's been a bit of a challenge over time. So just how do we think about you scaling your entry into that category and announcements or sizing of that opportunity over either the short or medium term?
We are right now in our infancy on the audio business for us. And so that's one where give me a couple more quarters and we'll be able to really better understand how we think the opportunity is going to shape up. For us, we like to test. We like to see how things are going to perform.
and then we will look at further investment as it relates to audio. But we just need a couple more months and quarters for us to be able to better understand that landscape around that medium. Thanks, Dan.
Thank you. Your next question comes from the line of Edward Wiley from EF Hutton. Please go ahead.
Hey guys, congrats on the strong quarter. I'm wondering what industries you're seeing the growth from in both business segments here predominantly. I'm wondering what industries you're seeing the growth from in both business segments
On the buy side business, the DMO space has been very strong. I think people are still interested in vacation travel, specifically in local and regional marketplaces. We've seen the benefit of that DMO space, specifically people wanting to attract customers into those marketplaces. As you know, we want Spokane Airport, which we talked about on the last call.
advertisers interested in discovering new publisher relationships. And that happens to do with retail as well as it relates to some of our larger advertisers that are more retail focused on the supply side business. So we have seen strong impact from those
from those two segments in that cell side business and we're anticipating that to continue on for the next few quarters.
Okay, my second one is probably more a question for Susan. I'm just wondering what the impact on the cell side gross margin was due to these investments and tax that you mentioned.
wondering if that will be recurring going forward.
Some of the investments in our technology relate to our protection of our IVT. We have gotten a few more vendors in the mix so that we protect our low percentage of IVT. Overall I think the more impact on the sell-side gross margin comes from the mix of publishers and not so much from the investments that we are making in the technology because some of those investments are in the OPEX.
category. I think you are seeing more of an impact from those larger publishers coming in with a different take rate. Okay. Thank you.
And revenue per employee seems to increase. What's hiring look like for the rest of the year for the subsidiaries?
Yeah, I mean we still are putting our plan in place for continuing to hire salespeople and develop our opcos infrastructure to support that revenue target that we do have for them. So we do pay attention to our revenue per employee. I think we're around 75 employees right now.
Thanks. Thank you.
Thank you. Thank you.
Your next question comes from the line of Michael Kopinski from Noble Capital Markets. Please go ahead. Thank you and congratulations on your quarter. A couple of questions. Can you talk a little bit about the revenue cadence of the buy side heading into the second quarter? And have your thoughts changed in terms of the contributions of the buy side versus sell side as you discussed in the last two phases of your class?
kind of look to your revenue guide of 118 to 122 million.
with the buy side business kind of similar to last year continuing to have good margins on that side of our business and you know still working on that plan so I don't see any changes around that.
Okay, and I know that you're in investment mode, but does the strength in the buy side suggest that you might have a little bit better adjusted if it's out of unexpected and certainly you beat my number in the quarter? Or would you seeing the strength in buy side, would you step up your investment spend if you have strength there? Just trying to understand how you might manage the value.
the investment spend if you're seeing stronger cash flow, giving the higher margin on your buy side business? Yeah, I guess that depends on where it's coming from. I mean, as we move our revenue targets up, that has to be supported through salespeople on the buy side, and that's boots on the ground. So if we're moving those targets up or if we're seeing that expand.
Yeah, it's a good partnership and a good relationship. We went through a comprehensive process in selecting HPE as our hardware or our server infrastructure partner. We like how that relationship has operated and the amount of resources that they are able to provide to us.
to help us troubleshoot and optimize. And so we see that relationship working for us for the near term and the long term. Great. Okay, that's all I have. Thank you.
Thank you. That would be for our last question. Thank you so much presenters. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.
Thank you. That will be for our last question. Thank you so much, presenters. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day. Thank you. Thank you. Thank you.