Q2 2023 PubMatic Inc Earnings Call
Hello, everyone and welcome to <unk> second quarter 2023 earnings call. My name is Catherine and I'll be your zoom operator today. Thank you for your attendance today. This webinar is being recorded I will now.
Now I'll turn the call over to Stacie Clements with the Blue shirt group.
Good afternoon, everyone and welcome to <unk> earnings call for the second quarter ended June 32023, Stacie Clements with the Blue shirt group and I'll be your operator today, joining me on the call Rajiv <unk> co founder and CEO and he penciling CFO .
Do we get started I have a few housekeeping items today's prepared remarks have been recorded actual attrition, even Steve will host live Q&A, if you'd plan to ask a question. Please ensure you have set your zoom named to display your full name and firm and use the raise hand function located at the bottom of your screen.
Copy of our press release can be found on our website at investors that thematic 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 growth strategy and financial outlook.
These forward looking statements are based on our current expectations and assumptions regarding our business the economy and other future conditions.
We're 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, putting our most recent Form 10-K, and our 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 department looking statements. We caution you therefore against relying on any of these forward looking statements. All information discussed today is that is as of August eight 2023, and we do not intend and undertake no obligation to update any forward looking statement, whether as a result of new information future develop.
<unk> 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 non-GAAP net income and free cash flow. 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.
A reconciliation of these measures to the most directly comparable GAAP measures is available in our press release and now I will turn the call over to Rajiv.
Thank you Stacy and good afternoon, everyone.
We drove strong results without performance on the top line driven by the strength of our Omnichannel platform and deep relationships with customers and partners.
EBITDA was 12.0 million, which includes the impact from a demand side platform customer that filed for bankruptcy excluding.
Excluding this impact adjusted EBITDA would have been $17 7 million highlighting the strength of our business model and our ability to drive incremental profit and generate healthy free cash flow.
As we highlighted at the beginning of the year, we continue to focus on deepening our customer relationships and making highly focused innovation investments that we believe will position us for outsized share gains when digital AD spend growth inevitably turns upward.
This strategy continues to yield results and has strengthened our position within the ecosystem.
We continue to build deeper stickier relationships with customers at the same time, we are adding new publishers and buyers to our platform.
Our total number of active customers grew 13% year over year and were now monetizing inventory from over 1700 50 publishers.
And the last year. We've also increased the number of advertisers on the platform by almost 30%.
New product innovation is driven by the same land and expand approach.
The two major technology launches, we have announced this year activation and very recently convert each significantly expand our total addressable market, while providing incremental growth opportunities with our existing customers.
We do all of this on our owned and operated infrastructure, which allows us to deliver productivity and efficiency gains that we anticipate will improve margins in the future.
These efficiencies also benefit of our customers, which in turn drive greater customer success and expansion on the platform.
In the near term the current digital advertising environment continues to be fluid.
Any advertisers remain cautious about the economic environment there.
Closely manage AD budgets in case of a potential recession, particularly around brand advertising.
In addition, current supply growth is outpacing AD budget growth combined. These two factors are resulting in an industry wide downward impact on C. P M where had pricing in the short term.
This will normalize once AD budgets stabilize and start to grow.
As a result compression volume on the <unk> platform continued to grow in the second quarter. However, C. P. M were softer than expected, particularly in June with continued downward trends in July .
Despite these headwinds we remain in a leadership position.
We have increased capacity on our platform toward higher value formats, optimizing for impressions that command higher overall C. P. EMS.
I am confident in our growing list of long term revenue drivers and ability to gain market share.
We have a strong and sustainable financial profile and our deep technology innovation is widening our competitive moat.
What's more we benefit from industry wide shifts in consolidation.
Okay.
The current macro environment is forcing publishers and buyers to do more with less.
Publishers are looking to better monetize their inventory across a wider set of channels and formats and they are abandoning homegrown technology and increasingly relying on technology providers such as ourselves.
At the same time buyers are seeking greater efficiencies and control across their digital advertising supply chains.
Both require integrating leading global Omnichannel and transparent technology solutions that are market leaders in innovation.
This trend is rapidly playing out across the broadcast industry, resulting in a shift from traditional guaranteed upfront media buying to a scatter market more programmatic approach.
Sure, it's including large CTV publishers are following suit in order to maintain access to advertiser budgets as.
As we predicted at the time of our 2020 IPO, we are seeing the programmatic disruption of CTV take hold.
As a result, we delivered over 30% growth in CTV and our pipeline of tier one streamers is growing.
We are in active conversations with dozens of CTV publishers, including some of the biggest names in the streaming media, we have new and expanded partnerships with premium video providers, including AMC networks, Directv Fox Digital Tivo and Warner Brothers Discovery EMEA.
Accelerating this pipeline is activation, which provides publishers with unique buyer demand not available elsewhere.
As buyers continue to consolidate via supply path optimization, we've increased our sales focus and investments in this area.
As a result activity from Spo continues to climb in the second quarter S. P. O made up over 40% of activity on our platform an all time high for.
Our long term expectation has been that S. P. O would eventually reach 50% or more of total activity and we are well on our way to reaching this milestone.
Not only is S. P O a significant contributor to top line growth, but it's an important driver of incremental long term margin expansion.
Our continuous reinvestment of profit into targeted innovation underpins, our long term growth strategy with.
With generative AI, we can further expand and accelerate our innovation.
While still early we are seeing gains in engineering productivity across many use cases, including building proof of concept for future products.
Also seeing greater efficiencies through use of generative AI to increase automation such as software testing as.
As a result, we have already started to shift hiring away from software testing engineers to feature development Engineers, it's still very early in the application of generative AI and we continue to experiment with many different opportunities.
Exactly three months ago, we launched activate our end to end spo solution that enables buyers to execute non been a direct deals on <unk> platform, while accessing CTV and premium video inventory at scale.
Activate represents a nearly 65 billion expansion of our total addressable market.
We couldnt be more pleased with the industry reception and interest at this highly innovative product as receipts were seeing traction and enthusiasm across every region and have active agency and advertiser discussions with several dozen accounts.
We are hard at work building more features into the platform based on a revision and customer input over.
While we are scaling up existing customers and adding new ones. We are investing in building out a global customer success team to help our customers expand their usage of activate.
Over the next couple of months, we will extend the availability of activate from the Americas and EMEA regions into APAC.
Two weeks ago, we launched convert our unified solution for Commerce media that Leverages, our global infrastructure and monetization expertise and customer relationships.
Over the years, we've built relationships with retail and commerce customers and I've gained a deep understanding of the unique technological challenges they must solve for in order to build out their multi pronged had businesses.
One of the biggest challenges that these retailers are commerce media participants face is the fragmentation of the advertising ecosystem and the complexity that it creates.
For example, our grocery store chain may use one platform for their onsite sponsored listings another for onsite display and video ads and yet another for Offsite audience extension across the open Internet.
Not only does this require their teams to learn multiple systems, but they're advertising data is also proliferate it across various partners, causing challenges for closed loop reporting an optimization. In addition to privacy or data security concerns for advertisers. This challenge is multiplied across the different retailers they want to work with.
Our latest offering convert is built to solve these challenges by centralizing commerce media capabilities in a single self service platform that offers onsite and off site monetization across a variety of AD formats, including our newly available sponsored listings capability.
For the past two years, we've been building the new platform to work for both traditional retailers as well as high transaction businesses, such as transportation or food delivery providers travel companies or any scaled commerce company that processes transactions.
We have seen strong interest among commerce companies around the globe, including Rideshare provider list and wallet pop a leading European classified listing site.
By integrating sponsor listings into our existing Omnichannel solutions, CTV video and display all onto a single platform agencies and advertisers can easily.
Access all available inventory and programmatically deploy working media dollars with the same transparency and fee and pricing structures that <unk> is known for.
Major media buyers like Dentsu, IPG and <unk> are partnering with us to help their advertisers more efficiently scale access to commerce media inventory and data.
With the addition of convert to a growing software suite, including our SSP and connect we now offer a comprehensive solution for commerce media that allows commerce media networks to tap into <unk> nearly two decades of success, helping media and data owners safely and securely monetize their assets programmatically.
With this launch we are significantly expanding our total addressable market by $10 billion and growing.
Much of this Tam expansion is from performance marketing budgets, which will allow us to further diversify our business beyond brand AD spent.
I'm extremely proud of our team and all that we've accomplished so far this year, we've increased depression capacity to accelerate the shift in our business towards higher value formats and channels, while also significantly expanding our Tam with the launch of two innovative solutions.
Our land and expand strategy is proving successful, adding more publishers to the platform and building stickier relationships with existing customers and partners.
We remain a leader in a rapidly evolving industry and our investments and achievements today strategically positioned somatic for long term durable growth.
We believe the industry will continue to consolidate and strengthening the leaders in the space that provide omnichannel global scale and creating more opportunities along the way for technology innovation to play an even bigger role across the ecosystem.
I'll now hand, it over to Steve for the financial details.
Thank you Rajiv and welcome everyone.
Q2 revenue was $63 3 million above guidance and adjusted EBITDA was 12 million, which includes the unexpected bad debt expense related to the bankruptcy of a top 10 buyer.
Excluding this one time expense adjusted EBITDA would've been $17 7 million or 28% margin.
In Q2, we prioritized the initiatives that strengthened the foundation of our business.
And position us well for long term growth.
We focused on operational excellence.
The relationships and innovation.
We delivered incremental efficiencies from our owned and operated infrastructure and generated $10 8 million of free cash flow.
We increased activity from spo deals to over 40%.
An all time high.
And importantly, we launched high value product innovation with the recent launch of convert.
Unified self service platform for Commerce media, and a buyer focused activate offering last quarter.
These two areas are expected to increase our long term Tam by over 75 billion.
Yeah.
Turning to the key revenue drivers in Q2 monetize impressions increased year over year, while cpm's were lower.
Reflective of the Crosscurrents, we are seeing in the macro environment by region and add vertical trends vary by format and channel.
CTV continues to be a high growth channel for us driven by an increase in monetize impressions, partially offset by lower see PFS.
Overall, CTV revenue increased over 30% year over year.
Online video monetize impressions across mobile and desktop also increased by.
But experienced double digit percentage CPM declines got pushed revenues down more than 10% year over year.
Total omnichannel video revenues, which spanned across mobile desktop and CTV devices declined 4% year over year and represented approximately 31% of total revenues.
Display monetize impressions across mobile and desktop grew year over year, while cpm's declined.
Overall display revenues were down minus 1% year over year as compared to minus 8% in Q1.
Display revenues represented 69% of total revenues.
In terms of AD verticals, while the top 10 grew 8% year over year, we saw a divergence of trends across categories.
Four of the top 10 verticals increased double digit percentages year over year led by the food and drink vertical at over 30% growth.
Five of the top 10 grew in the low to mid single digit percentages.
While shopping was the only top 10 vertical that declined year over year in the high single digits.
On a regional basis EMEA grew over 16% year over year, while the Americas declined by 1%.
In terms of the monthly progression through the quarter April revenues were flat and May revenues increased year over year.
June revenues declined driven by the softness in both online video and display CPM.
Turning to our operational strength.
Our Q2 financial results benefited from increased efficiencies and optimization of our owned and operated infrastructure.
Overall pressure processing capacity increased over 30% year over year, largely driven by software optimizations with minimal incremental capex.
On a trailing 12 month basis, our cost of revenue per million impressions process declined by 12%.
The combined impact of our operational efficiency in our business model leverage enabled us to achieve outstanding marginal profitability.
Approximately 85% of every incremental revenue dollar above Q1's level converting to gross profit in Q2.
This capability is a key differentiator for us and has enabled us to achieve consistent profitability for a decade, while building the foundation for future growth.
In terms of operating expenses Q2, GAAP Opex was $45 4 million included in this total were incremental costs of $2 1 million related to our acquisition of market September last year.
And $5 7 million in bad debt expense related to the bankruptcy of one of our bars.
Excluding these incremental costs operating expenses increased less than 10% year over year.
In Q2, GAAP net loss was $5 7 million or minus 11.
Our diluted share.
Excluding the impact of the bad debt expense, we would've delivered GAAP net loss of $49000.
Q2, non-GAAP net income, which adjusts for unrealized gain or loss on equity investments stock based compensation expense acquisition related other expenses and related adjustments for income taxes was $1 3 million or <unk> <unk> per diluted share.
Excluding the $5 7 million of bad debt expense non-GAAP net income would have been $7 million.
Turning to cash we are in excellent financial shape and ended the quarter with $170 9 million in cash and marketable securities and no debt.
We generated $15 8 million in cash from operations and $10 8 million of free cash flow.
Our consistent cash generation is an important driver for our long term growth and market share gains as it allows us to consistently invest in innovation.
As of July 31, we have repurchased one 8 million shares of our class a common stock for $27 5 million of cash.
We have $47 5 million remaining in our repurchase program.
Now turning to our outlook.
In light of recent trends, we remain cautious about the next couple of quarters.
On the one hand, many advertisers, particularly brand centric remain cautious about the economic environment and are tightly managing AD budgets in case of a potential recession.
On the other hand current AD supply growth is outpacing AD budget growth.
In June and July we saw the impact of these factors with both softening of AD spending by vertical and pressure on CPM.
To illustrate this point for the combined April may periods AD spending for our top 10 AD verticals grew 9% versus the same period last year.
For the June July period, the top 10 AD vertical slowed to 1% year over year.
A notable change in trajectory was observed in four consumer centric verticals.
Shopping technology, personal finance and Arts and entertainment.
In aggregate they were down 7% for the June July period versus the same period last year.
Video Cpm's took a 10% step down in July versus June .
Display Cpm's showed a similar pattern of softening in July .
Our outlook for August and September assumes that CPM to remain relatively flat to what we saw in July .
Given the progression of CPM, so over the last 12 months on a year over year basis. This.
This translates to roughly 20% lower CPM for video and 10% lower CPM for display in Q3.
On the positive side monetize impressions continue to grow in July sequentially versus June versus last year.
July online video impressions increased over 20% year over year.
CTV impressions, increasing the single digit percentage range as they were lapping approximately 300% volume growth in the prior July .
And display impressions increased 5% over last year.
We anticipate these volume trends will continue through Q3.
As a reminder, we are proactively taking steps to diversify our revenue mix.
By adding more higher growth formats and channels.
For the first half of 2023, we increase the number of high value Omnichannel video impressions monetize by 15% over the first half of 2022 while.
While monetize display pressures increased 2% over the same time period.
While these efforts will provide long term durable growth and margin expansion.
We'll not outweigh the soft cpm's that we project for Q3.
We anticipate that Q3 revenue will be in the range of $58 million to $61 million.
The format and channel projections underpinning this guidance are.
Display revenues will decline in the single digit percentage range.
Online video revenues will decline by approximately 10% year over year similar to what we saw in Q2.
And CTV revenue, which grew over 150% last year will decline on a year over year basis.
Also influencing our near term outlook is a recent bankruptcy of one of our top 10 DSP buyers on June 30.
We estimate that it will take several months for this AD spend to be fully redistributed to other buyers already integrated on our platform.
This transition will reduce our second half revenue by several million dollars.
In the long run we do not expect this development to have a material effect on our vessels.
Assuming macro conditions do not worsen we estimate that Q4 revenue will grow sequentially from Q3, consistent with the lower end of typical seasonal trends.
In terms of potential upsides, if cpm's declined at roughly half the rate. We are currently assuming we estimate it would add $3 million of incremental revenue per quarter.
On the cost side, we've been taking actions to drive incremental productivity across every aspect of our business.
And you can see the positive results in our Q2 financials.
For example, we successfully added approximately 20% incremental processing capacity by the end of Q2 without a corresponding step up in capex.
This accomplishment meetings that we expect our second half GAAP cost of revenue on an absolute dollar basis will exhibit very limited quarter to quarter sequential cost increases despite pressures continuing to grow.
As a byproduct of our leveraged business model in the near term, we expect any uptick in cpm's beyond our current expectations to result in strong marginal profitability.
We anticipate that over the long run these efficiencies will have a compounding effect and will drive higher gross margins for us.
As previously noted our Q2 GAAP Opex includes a onetime incremental bad debt expense of $5 7 million.
Adjusting out these costs, we anticipate that Q3, opex will be roughly flat compared to Q2.
We anticipate that Q4, Opex will increase sequentially from Q3 in the low single digit percentage range as we add incremental innovation investments supporting our activate and convert products.
Given our revenue guidance and our optimized cost structure, we expect Q3, adjusted EBITDA will be between 13 and $15 million or approximately 23% margin at the midpoint.
Turning to Capex, our capacity optimizations and operational efforts to drive higher value impressions onto our platform have been going well.
We expect a further reduction in full year, Capex and now project Capex at 10% to $13 million.
This would be a reduction of more than 70% compared to our 2022 capex of $36 million.
We expect these initiatives and others in the pipeline will enable us to incrementally increase free cash flow over time.
To summarize over many years, we have built a resilient and durable business that is one of the world's leading scale global ssp's.
In Q2, we continued making progress on the three operating priorities that I outlined last quarter.
Number one generate significant free cash flow.
Through the first half of 2023, we have delivered more than 40% of last year's level.
It should be noted that with the recent DSP bankruptcy, we expect Q3 free cash flow will be below normal trends, but we anticipate a return to robust free cash flow in Q4.
Number two position ourselves for revenue acceleration when AD spend at CPM stabilize.
Despite near term pressure on Cps, we remain confident in our long term growth opportunity as evidenced by our ability to continue increasing monetize impressions.
We are building deeper relationships with publishers and AD buyers.
Expanding our Tam by bringing innovative new products like activate and convert to market.
And scaling higher value formats, like CTV and online video.
We anticipate that our new product offerings will add to our revenue growth in the second half of 2024.
And number three establish a new level of efficiency in our cost structure that will lead to margin expansion in 2024 and beyond.
With that I'll now turn the call over to Stacy for Q&A.
Thank you.
As a reminder, you can ask your question by making a harm I'll pick up on the dashboard Young Oh, China.
In the interest of time, we absolutely pools limit your question to one of my follow up.
Let's dive into the colon.
I'll first start with Matt Fortune from IV full for Walmart.
Yeah. Thank you guys. So much for taking my questions and congratulations on battling through the macro this quarter.
That's the first thing is really exciting to hear about both activate and convert and obviously conceptually it makes a ton of fun for all the value has come out but maybe buildings.
Contacts for us around that 75 billion can you just talk about the use cases and customer types that maybe make the most sense early on in kind of a part of those broad markets you're focused on.
Sure Hey, Matt good to hear from you and yes, let me let me take that so.
Well, we're really focused on as we've talked about I think for the last several quarters.
And this kind of slower economic period is really innovating to have the right solutions in place for where we anticipate AD spend growth is really going to take off when the market stabilizes.
So key amongst those are supply path optimization, and Omnichannel video, including CTV with activation and then commerce media with convert so combined it's about a 75 billion Tam expansion about $65 billion of that coming from activate and then 10 billion and growing pretty rapidly in the commerce media space and I think it's worth noting that combined.
<unk> to more than double our.
Our existing.
Double the total Tam so pretty significant increase in Tam for us. So in terms of the use cases, you know it really comes down to.
Helping the industry build a more transparent efficient.
And data privacy of data secure and effective digital advertising supply chain. So all of the use cases are variance of how buyers can get closer to the owners of media, whether thats, a retailer or a commerce media player, where it's a publisher or how they can get closer to data that can again come from a commerce media.
Customer could come from a publisher or from a third party data owner and do do that.
Privacy, Safeway and by focusing on that <unk>.
Efficiency, so with Omnichannel video and activate.
Connecting <unk> and PG deals were in Commerce media, helping with on site monetization of sponsored listings or display and video are upstate monetization, it's really about helping drive the ROI for buyers. So they spend more on our platform and then helping drive more revenue from the media and data drive more revenue for the median data owners. So we feel.
Really good about how we're using our single platform single Omnichannel and global platform to extend further into these use cases and also leveraging our vast array of existing customer relationships. If you look at for instance, our convert launch it's ITG dentsu Q on the on the demand side, all existing customers as well as.
Combination of new and existing folks like <unk>, and Lyft and ebay some of which we've been working with for many years and some of which are new.
And if I could ask my follow up kind of an actual follow up on that when we're thinking about spo and kind of the traction when you're signing up new customers.
Do you think having a more well rounded and kind of future proof platform conveys additional solutions that can activate or convert or are some of the headway you're making in CTV.
Like does that when people want to standardize where those are all things that are coming into these conversations.
Benefiting even before they start to really monetize.
Yeah, absolutely so you know.
Prime example of this is the convert launch.
So you see IPG intensive these are big by your customers that we've previously announced supply path optimization deals with we've had a number of conversations with agencies, where they've said hey, we need to figure out we as the agency what are players in commerce media.
<unk>, you've just announced sounds great we're already pushing more of our spend onto your platform.
Through non commerce media oriented advertising as well as to reactivate so come in and let's talk more about the commerce media opportunity and how we can do more with you and I think this is kind of part and parcel of what we typically see in a economic cycle, which is everybody has to figure out how to get more efficient how to do more with less resources and a key.
Part of that in our industry is providing on fewer bigger partners and that's why we always are talking about being omni channel being global and having a single integrated platform.
Advertisers and agencies want to rely on fewer platforms that are self service and transparency to help them.
Grow their business and become operationally more efficient and we think we can really play a key role in that and use this timeframe when AD spend growth is muted.
To really lay the groundwork for outsized share gains in the future.
Thank you.
Our next question comes from James who kind of offering.
Paul.
Great. Thanks for the questions. Steve could you just talk about just the reasons for why Omnichannel video is declining at a steeper rate than display business and I think you mentioned that CTV revenue would decline in Q3, but we wanted to make sure I heard that correctly.
Just one for <unk>.
Realize it's still early but could you just talk about how you anticipate commerce media to benefit your business in the holiday quarter.
And then just anything around your partnership with Kroger and how that's evolved over the last year. Thank you.
Great.
Nice to reconnect James so with respect to the trends that we're seeing what we.
Shared.
In our prepared remarks is we actually had a pretty solid Q2 April was stable may was up and we start to see softness in June , particularly in what we describe as sort of brand centric advertising and that speaks right to video predominantly online in CTV.
And so we saw a couple of things going on number one CPM.
Becoming softer when you start to see that in June and we saw it take a step down in July and so with that sort of combined effect you have sort of.
It's 8% in Q1, and so the benefit of having a diverse platform as we do Omnichannel platform allows us to take advantage of the different trends in the business.
The reality is at the end of the day, we have built a very scale business and we are broadly exposed to all the verticals. So it is sort of a function of macro pressures, but we're doing all the right things to make sure that we are well positioned when that's been stable losses.
Rajiv just described the investments and the outcomes in terms of new products that will be a big positive benefit for us in 'twenty four and beyond so I'm not overly concerned about current CPM pressures because they inevitably will recover.
Brian James Let me turn to questions for me around Commerce media. So.
We are not anticipating any material revenue contribution from our commerce media solution.
This year, obviously, we just announced the product a couple of weeks back.
So we're really at the point of bringing initial customers on and obviously getting more feedback from those customers of features and capabilities that are interested in.
So we arent anticipating material revenue, but I think there are absolutely some upsides, there and maybe Kroger is a good example of that.
So with Kroger.
We have been working with them for several quarters.
Primarily in one of the four commerce media use cases that we're focused on which is inventory extension.
Or finding users to bring back to their shopping website.
That maybe looked at a shopping cart or looked at our product.
And abandon that without purchasing.
With our new release, we anticipate being able to add more use cases to that relationship.
To be able to expand that revenue said and it may be worth me just commenting briefly on what are those four key use cases. So two of them are related to onsite monetization. So first is on site monetization via sponsored listings and so this is a very common shopping specific AD format that you see on commerce websites and that is a new capability that we launched <unk>.
Its onsite monetization of display and video ads.
And so we're already doing this with folks like ebay, but now more recently announced tripadvisor lift and while about.
Third is the inventory extension opportunity that I mentioned with Kroger and then the fourth is using our connected data platform.
To monetize first party data.
With audiences attaching that to other media that is flowing through our platform. So companies like Epsilon and our yoda, our using that capability. So we've been building. These components now for a couple of years and so we feel like now we can bring all of this together in a single self service platform and be able to know upsell and cross sell across a variety of different customers that are using single use case.
Cross sell them into into multiple use cases.
Thank you.
Our next question comes from Jason <unk> from Oppenheimer.
Yeah.
Hey, Dave.
So I just wanted to unpack the CPM weakness a little more.
So first as media math have anything to do with it in the third quarter.
Can you call that out as a headwind and if so how much.
Sure.
Just unpacking it some more I mean, the reality is as I shared a moment ago.
We are broadly exposed to many AD verticals, many advertisers, particularly brand advertisers and so we.
We do believe that there is just general caution people are keeping a very tight rein on ad budgets.
So.
Any supply demand ecosystem as we operate real time.
Supply, let's say expands and demand declines the equilibrium point of course drops I E. The CPM. So thats really broadly what we're seeing now in terms of media math.
From our perspective, it does not have any long term effect at all on our business. It's really a function of just resetting that spend that had been going through that DSP and then getting it redistributed because it can imagine you have advertisers with programs all lined up to go run on media mapping now they didn't need to decide.
Where are they going to put that spend and it takes time to do that but we fully expect given that we're integrated with every major DSP in the world that that spend is going to come back to us. So in the short term, we do see a couple of million dollars of revenue be deferred.
Through this over the next couple of months.
But I would expect that to be fully repopulated onto our platform down the road.
And then just Glenn let me give high so it's a few million media math, we can do the math on that.
Are you seeing specific weakness in tech and telecom and then any concern about media and advertising because of the Hollywood strike.
We are.
One of the stats that I shared in the prepared comments was I took a look at the four consumer centric verticals shopping personal finance technology Arts and entertainment and I took a look at the June July period, combined and compared it to the same June July period in the prior year on that comparable.
That group of spend is down 7%. So clearly arguably a lot of those factors are feeding into that because that is a pretty striking change because the prior year period in April .
Let's call. It April may timeframe. It was slightly positive so theres been a shift pretty significantly in the near term again. These are short term dynamics, we believe and at the end of the day, because we are diversified across many verticals, we're going to get some upsides I called out the fact that.
Food and drink is up strongly.
And over as we head into the fourth quarter.
Do expect seasonal uptick in both.
Monetize impressions and see Cps.
Not as strongly as we've seen historically, but I do expect that seasonality occurred specifically because we are exposed to things like travel style and fashion.
And health and fitness, but there are weaker verticals that I just called out.
Okay. Just last I mean look I think everyone's going to compare and contrast, obviously you've called out strength in brand.
100000 pound gorilla there.
They're everywhere right. So obviously you don't have the same geographic coverage of them, but just and then look I mean retail media has been really strong. So I don't know if we sent you might be seeing some weakness in consumer products, maybe we're seeing just a more aggressive share shift into retail media.
Out of like more traditional or more legacy category and retail media for you is just still building and so you don't get the cap for that so I don't know you don't have to comment.
Okay.
I think it is.
Great question, but let me just I do want to comment on it.
From our perspective.
The shopping vertical has been under pressure for about a year, we called it out in the fourth quarter first quarter.
If you really look under the headlines the consumer in the U S is really going to face increasing pressure as a lot of the pandemic dollars dry up so shopping our I'll call. It that is the Canary in the coal mine now with respect to retail media I think it is very early days for anybody to be gaining <unk>.
Sure there is a lot of white space.
And one of the big drivers of us getting into that space and it helps us diversify our business. We are today a brand centric programmatic platform.
We expand and grow in retail media, but we're going to be taking our performance advertising, which will then will be another big positive and you may recall in the most recent already cycle. The performance advertisers did fine not great, but they did fine brand centric.
Struggled in terms of <unk> and by the way the Google Network business, which is the most comparable to US was down minus 5% in Q2 relative to our being flat. So I would say there is not any share shift going on its still a relatively retail media.
Young market, we are feeling really good about the tools that we built and now it's just about ramping them overtime.
Thanks, Steve Our next question comes from Don Volatile Railroad.
Yeah.
Okay.
Platform.
Can you hear me now, yes, again, okay, great sorry about that.
I just had a question with the launch and convert you haven't.
To my to the best of my knowledge of traditional FSP hasn't gotten into sort of sponsored content most things.
Sale of that inventory.
How much more technically challenging is that than typical display ads like I'd imagine you have to have databases of the advertiser skus versus retailer inventory.
Have you been sort of preparing for this for a while and built through that or maybe some growing pains early issue as you expand into this category.
Yeah, Hey, Dan So I think I would agree with the premise of your question. The technology, specifically for sponsored listings, which is one of the four use cases that I called out earlier is pretty different it's a more performance oriented as Steve called out and in some ways more search oriented.
AD Tech stack, right, where you might be on a on a retailer's website and you search for its home depot, maybe you're searching for shovels or.
<unk> or something like that.
And so that type of AD response, theres going to be quite different and the type of technology needed to build that then brand brand advertising as you said it requires SKU level integration into the retailers product catalog requires being able to associate the search term with the right AD units and et cetera.
It is something that has been a high degree of focus for us over the you know I mentioned about two years to build out.
These capabilities and I would say broadly we've been building towards this moment so our.
Data platform connect which has been built over the last several years also plays a key role our core SSP for onsite video and display monetization. So sponsored listings was really I would say the key kind of missing technology component.
And so that's an area, where we've been ramping and engineering team and really focused on building technology. In this area and look this is the launch so I want to make sure I kind of calibrate correctly, we think theres going to be multiple years of ongoing innovation as we go deeper and deeper into this area to build performance build capabilities build Petrobras et.
Is that trend and I think thats one of the things that we're really good at.
And so we look forward to that challenge and that opportunity, but we note that it is significant.
Cam expansion and it's really core to many of the customers that we already work with Reits are doing on site monetization for display and video for dozens of retailers.
Building.
Working with the buy side through supply path optimization. These are kind of the building blocks that.
Give us confidence that we can.
Really deploy and scale up technology here.
Great. Thanks, that's a very detailed answer just one follow up I'm sure you know one of the hot topics kind of cross Tech vendors right now is to move towards attention.
As the new kind of metric people are looking at for campaign measurement. Just wondering if you guys see your role there for you to play.
Towards the pension whether.
Whether that's sort of just kind of the middleman, passing along sort of the bench framework, there's kind of a way you can play in the monetization of that.
So we are very much playing in the monetization of attention metrics today, So we've announced partnerships with a couple of different.
Platforms are a technology providers like I believe Adelaide <unk> 60, a few others, where they have the measurement or attention data, we integrate that into our platform and then we can deliver a private marketplace deals are open exchange inventory.
That.
Meets our buyers' needs for a particular attention.
Metric so it could be could be based on.
Some audience cohort could be based on time in view of ads with a variety of different ways that you know each of.
These technology providers measure and I think that's kind of exciting platform aspects to our business, which is we have the media we have the buyers we integrate in the attention metric vendors and then the buyers can find the inventory that they're looking for on our platform and we can make it easy for them.
To access that media.
And we were able to generate a revenue stream both in terms of technology fees as well as our typical SSP fee in the process.
Great. Thanks, guys I'll turn it over thank you Dan.
Our next question parcel Cornell at Macquarie.
Pardon me.
Hi, guys I'd like to ask about the CTV topic again, if I could.
A number of the traditional media groups have talked about some pretty good growth in their connected TV streaming advertising. We all know linear is weak, but it seems like CTV is kind of taking share from linear. So it's kind of surprising to hear you talk about CTV demand falling at the moment.
What I'm wondering is how.
How much of this might be related to.
Supply of impressions.
Which I'm trying to understand what that really means is this supply relative to demand is going up or the absolute supply of impressions was going up which could mean all of these fast channels like Pluto, TV and <unk> and all of that.
Netflix with ads Disney plus it adds all that stuff. So could you just sort of help us understand a bit more what's going on with the supply and demand.
Ponant within CTV.
Sure Rajeev and I have to tag team on this but let me start out just to clarify a point.
We're talking about on a relative basis right. We've been growing for example, Q2 of last year.
In Q3, we grew over 150% in terms of CTV revenue.
So, we're obviously comping some pretty major changes and in the third.
<unk>.
Last year, we grew our CTV impressions monetize impressions by 300%. So the point is that we're not going to grow our CPD and precious 300% this quarter to $3 23, and so that's the impact that youre seeing it.
Well, let's call it a very challenging comparable but the underlying trends of CTV are very robust we continue to add more publishers to the mix.
As I think you alluded to is.
The opportunity to monetize CTD programmatically is really where the future is going and that's the core solution that we built.
So.
I would not read anything into our current results other than sort of the short term pressures of cpm's right because <unk> been declining.
Due to this sort of the macro pressures over the course of a year a little bit each quarter and so you see on a year over year basis, a bigger delta.
Going forward there.
The areas that we're investing in are all about driving CTD activate is a core part of our ability to execute to drive CTV business.
And.
We are expanding our spo relationships as we called out we hit an all time high of 40% of our activity and many of those SPL relationships are directly linked to.
High value formats like online video and CTV. So we are absolutely feeling like we're on track to monetize impressions are growing.
But in this quarter and potentially next we're facing some big com comps, but we have.
Very confident in our future trajectory and do you want to aggregate, yes, Tim just one other quick thing to add on your question about supply of impressions. I think there are there's significant supply growth and let's say the alternatives that AD buyers might buy so you know not only fast and kind of traditional streaming as you mentioned, but also.
If you think about real and shorts from.
For meta and Youtube they saw that big growth in supply and so I think all of that growth in supply and a.
Environment, where AD budget growth is relatively muted that that's a formula for some downward pressure on CPM in the near term.
I think is not you know not a huge surprise.
Thanks can I just follow up with one more which is some E. Both kind of alluded to this already but I wonder if this is <unk>.
Dynamics going on right now maybe drive more.
More demand for the SPL work that you guys do in CTV specifically.
Yes, I mean, I think in general we see a lot of demand for Sto Theres a variety of factors for it buyers wanting to get more efficient buyers wanting to get closer to the supply.
Buyers wanting to make sure that as much of their dollar as possible is going towards.
The things that they care about so there is I think a variety of different factors. The transparency I think oftentimes, they're concerned about paper put my budget into a walled garden.
There was a recent article.
Or more than an article that research report about AD spend on a particular a walled garden.
Or does your inventory where does your AD budget actually run. So all of these things I think are drivers for for Spo and are continued growth there.
Okay, great. Thanks, a lot.
Thanks.
Our next question comes from cyclical Italia.
And at that point, perhaps by now.
Okay. Thanks for taking my question I guess.
Cookie deprecation or next year.
Sticking with the plan so could you.
Talk about this in the past that was the topic of the day, but could you. Please remind everybody. How are you thinking about the potential of a batch of specialty.
Hi, Nick.
So, bringing it all back half of next year beyond that.
Actual thank you Kurt.
Yes, so I think theres been a lot of history and he says he noted trades on cookie.
Deprecation, So look I think Google has seemed like they're pretty adamant about their timeline I think the industry probably is less clear on that timeline given it's become a.
Antitrust authority.
Process as well, where the antitrust authorities are ensuring that theres, an even playing field there is a number of.
Frameworks that Google has announced.
And topics and privacy sandbox, we are actively participating in testing and those I think theres a number of open questions.
Related to the technology that Google is rolling out so I think that the I would say the independent verification.
The timeline is yet to be yet to be determined all that being said.
We think it's prudent to plan for deprecation, whether it's on Google Sideliner or otherwise and so we've been hard at work.
<unk> and a portfolio of different solutions contextual targeting private marketplace deals using.
Model cohorts of audiences.
So a variety of different solutions that move us beyond the cookie identity data with her identity have solution. So I think the challenge I would say writ large in this environment is that as long as there is uncertainty around that deprecation timeline, there is different levels of participation with publishers and with buyers.
Around rolling out these solutions, so a lot of testing and kind of laying the groundwork has been completed but I think it will take some time once the.
Timelines are clear for the entire industry that is kind of galvanizing move in lock step towards adopting new solutions, but that's a.
A process that we are focused on day in day out.
Okay. Thank you rajeev.
Just a quick follow up if I could anything that you can say in terms of the magnitude of the impact I mean.
But even if you could talk about how much of your business is exposed to cookies. Today, if you can share that or what you know what gets you.
They're not going to be impacted meaningfully yes.
The majority of revenue on our platform has alternative identifiers to the cookie so.
So we have through those mechanisms that I mentioned earlier, we have a variety of different ways.
To deliver our targeted impressions without relying on a cookie so that gives us a great degree of comfort.
Once cookie deprecation comes we'll be well well hedged and in that sense, and then I think there's quite a bit of upside which is that as we move off of the cookie Theres a lot more.
The future around targeted.
AD delivery against opted in consumers in CTV is a good example of that particularly you are logged into your streaming our TV device and there is an email address or some other mechanism for identity that's being sure.
And the CPM because of the ability the ability to target a superior tend to be significantly higher by several multiples and then when there's a cookie presence.
And so we think actually the cookie deprecation process. Once it's ultimately sorted could lead to a significant tailwind in the business in terms of delivering more relevant ads to the consumer and doing so at a higher CPM.
Okay. Thank you.
Yes.
Our next question comes from Andrew Baum at JMP.
Uh huh.
Great. Thanks for taking my questions I wanted to go back to see Pms.
<unk> is there a way to compare current CPM or <unk> CPM to historical levels like 10% below 2019, how do we think about that versus kind of historical kind of cycles.
Sure.
Obviously.
Look at trends going back at the time and one of the things that.
I think as a testimony to the strength of our platform as I took a look at our overall CPM over the last five years is sort of across all formats.
All channels and it's been remarkably stable in the times when it has deviated a bit from that is in in terms of macro environment that we're seeing right now.
So big picture. The reason why is that we have a diversified platform and we continue to invest in those growth areas that have higher value to them. So as things shift and show the value creation of course elsewhere. We are we have the.
Capability to monetize that so that's why we've been able to have quite a bit of CPM stability overall now when I take a look at for example, the high value format like.
Video Omnichannel video CTV et cetera.
What's been going on basically over the last year is that theres been a little bit of what I call cuts haircuts.
Every quarter as you go along and so cumulatively when you just look at a point in time Q2, or Q3 versus last year. That's why you're seeing this 20% delta, but big picture. The CPM, obviously different market environment back in 2019 haven't deviated significantly.
Lee over that time, but we are going through what describe as a dip in the cycle.
Fully expect there to be sort of a recovery now the extent of the recovery the timing the magnitude TBD, but what I can be confident about is our ability to basically navigate that by continuing to innovate and making sure that we are always pointing our resources towards the higher value opportunities.
And that's why we've been able to deliver.
Relatively stable Cps the last thing I'll point is of course throughout that time, we've been monetizing a growing our impressions and so we that's really gives us the long term confidence about what we're doing and.
The progression and the opportunity for the future.
With a couple of quarters with some headwinds that's not a huge deal for us because we are very well capitalized $170 million in cash no debt and an ability to contingent.
<unk>. So we think this is a perfect opportunity for a company like ours, who can actually position.
<unk> ourselves for when AD spend CPM stabilized to take more share so.
Obviously, a lot going on in the market today, but.
If anything it gives us more confidence about the trajectory that we're on.
And then just maybe.
Okay, I'll hand, it just maybe a little bit difficult, but just the dynamic between pricing and then impression growth right. Understood. You guys are targeting higher value impressions is there a way to think about the impact of our with lower CPM is in terms of maybe a headwind towards impression growth for <unk>.
Yeah.
Maybe in terms of towards Q3.
Because in Q2, we saw both.
We saw monetize your prices these are prices that we sold.
And we saw CPM slightly decline in July which is what I commented on we saw again monetize a purchase these the ones that we sold on our platform grow where we saw pressure on CPM and so there of course at the end of the day. There is a relationship because we operate in a real time bid it environment.
And so if there is softness in demand.
Gary price on that supply demand curve comes down that just econ 101, so with demand coming down supply either staying the same or going up cpm's are the equilibrium point and so that's why.
We feel confident that we're on the right track because we're.
We're driving our volumes, which is really the health metrics of our business and in the future.
We've gotten more and more and more efficient.
I called out on our call we've reduced the amount of Capex and so we are setting us up ourselves very well for when CPM still recover the marginal profitability will be quite robust.
Thank you.
Thanks, Paul.
Our next question comes from Matt Mccall Rights at Lake Street.
Yeah.
Yeah.
Hey, guys just one from me I know you guys were hurt in this quarter by that bad debt expense and that's going to kind of trail off in the next few quarters. My question is more I guess at the 'twenty 'twenty four question some other.
Initiatives, maybe you plan to implement just increased profitability over the next coming year.
Yes.
Yeah absolutely.
There are many things that we're doing to drive profitability and I'll just give you a couple of things. So we've already done the things that we're working on.
Number one is as a company, we've always had the mindset of growth and profitability.
And last quarter Q2 was our 20 <unk> straight quarter with adjusted EBITDA profitability.
So big picture.
We know how to run a profitable business.
The things that we've done in the near term with some of the pressures in the in the macro is we've actually been of course, finding more efficiencies we increased our capacity. This overall crushing capacity by over 30% with minimal incremental capex and we did that through software engineering.
So why is that important for the future margin opportunities that becomes embedded that.
So does that capacity becomes embedded but we don't have the corollary of the depreciation of the Capex. So margins will naturally expand as revenues grow number two we've been obviously been very careful with managing our costs as a point of reference we kept our head total head count flat for the last couple of quarters. It isn't that we're in.
Not hiring people, we're hiring a lot of people, but we're putting them in different positions.
Purposes folks et cetera towards high innovation areas again that makes us more efficient going into the future and then as we can take to drive bigger mix of high value formats higher CPM relatively same costs that will naturally have a positive impact on our gross margin and our bottom line.
And that's really how we think and that's why.
Why I've said in the past.
Things like Spo efficiencies soccer optimization, all give us the confidence that we're going be able to.
Expand margins in 'twenty four and beyond.
Thanks, Paul.
Our over time, so I'm going to go ahead.
Turn it over to me so look for some.
Closing remarks.
I want to thank everyone for joining us today, we continue to drive the business forward through a long term lens, our investment in spo and high growth formats and channels are delivering growth for deepening customer and by our relationships and adding solutions that more than double our Tam. We also continue to diversify our business beyond display and brand centric ad spend.
Monetize impressions are up as we continue to add more premium supply to our platform AD spend will inevitably return in Cpm's will normalize we believe that the areas. We remain focused on will drive outsized gains over the long term.
We look forward to seeing many of you at our upcoming Investor events, including Oppenheimer Virtual Conference Tomorrow August 9th and Lake Street's growth Conference on September 14th whilst we'll be hosting in person meetings in the Midwest and the East coast. Please reach out directly to Stacy to request a meeting thank you for joining us today.
Thank you.
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