Q2 2023 Direct Digital Holdings Inc Earnings Call
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Okay.
Yeah.
Hello, everyone and welcome to direct digital Holdings second quarter 2023 earnings call. At this time I would like to hand, the call over to Mr. Brett I'm a lot. Please go ahead sir.
Okay.
Good afternoon, everyone and welcome to directly to the holding second quarter 2023 earnings Conference call. My name is Bob a lot they represent things like diesel holdings from ICR.
Today's call are directly to the whole <unk>, Chairman and Chief Executive Officer, Mark Walker, Chief Financial Officer, David Yes.
<unk> discussed today is qualified in its entirety form 8-K, the company earnings release, which was filed today by directly as a holding which maybe access to the SEC's website <unk> website.
Today's call is being webcast and a replay we posted to the FCC's Investor Relations Web site.
Following the speaker's presentation there'll be a question and answer session.
Please note that statements made during the call if any financial projections or other statements that are not historical in nature may constitute forward looking statements.
Payments are made on the basis of ticc's views and assumptions regarding future events and business.
At the time of their day.
Take any obligation to update these statements.
Forward looking statements are subject to risks, which could cause actual results to differ from historical results and forecasts.
Those risks set forth in <unk> filings at the SEC and you should refer to carefully consider those more of a nation.
This cautionary statement applies to all forward looking statements made during this call do not place undue reliance on any forward looking statements.
During this call your CPE will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles conciliation of the non-GAAP financial measures. The most directly comparable GAAP measures is available in the earnings release that the ICT filed its form 8-K today.
I'll now hand over the conference Tomorrow, Walker, Chief Executive Officer Mark.
Thanks, Bret and thank you to everyone joining our second quarter 2023 earnings call I'm proud to report strong financial results and operational performance for the first half of 2023 similar to Q1 Q2 is one of our typically seasonally slow quarters, and we expect to see advertising demand increase as the year progresses.
This quarter, we saw strong topline growth across both our sell side buy side businesses as well as considerable increases in market share are open marketplace. CPM platform continues to benefit as the middle market businesses look for less expensive less restrictive more accessible and more representative advertising solutions.
In Q2 of 2023, a revenue increase of $35 4 million, an increase of $14 1 million or 67% over $21 3 million in the same period of 2022 adjusted EBITDA for the quarter was $3 1 million compared to $3 6 million in the same period of 2022.
As Diana will explain in more detail. Shortly this quarter, we did see some margin impact driven by our buy side and sell side businesses mix and some higher operating expenses.
Our revenue this quarter was driven by strong performance by both our buy side and sell side advertising segment, which saw substantial growth. We are pleased to report increases in revenue growth by segment of 27% and 98% respectively over the same period of 2022.
In the second quarter, our sell side advertising segment processed approximately 300 billion monthly impressions, an increase of 205% over the same period of 2022 and.
In addition, this quarter the company sell side advertising platform received over $11 2 billion monthly bid responses and increase of 70% over the same period in 2022.
119000 advertisers for the quarter, which is a 34% increase over the same period last year on the buy side. Our businesses served approximately 227 customers a slight decrease year over year, however revenue per customer increased 36% compared to the same period last year.
Turning to the remainder of 2023, we believe the current market dynamics are favorable for direct digital holdings as we see an increasing media spend being targeted to reach growth and multicultural audiences, while simultaneously middle market companies are moving away from traditional media spend to digital in addition, with our portfolio of customers.
We're seeing deepened investments in digital marketing as we have mentioned in previous quarters, we have been making investments in our infrastructure and service, which we are starting to see the benefits of which will carry us through the remainder of the year and through 2024. This quarter. We continued to make considerable progress with our server transmissions as well.
As our overall re platforming strategy, all the while maintaining business growth and capturing incremental market share as.
As our company reaches a certain size of scope, we're able to pull certain levers realizing efficiencies across many aspects of our platform. In combination. We also believe that the U S economy will continue to move forward in a market segment will continue to outperform in the second half of the year. Consequently, we're revising our full year 2023 revenue guidance upwards.
Two $125 million to $130 million I will now hand things over to our CFO , Diana Diaz, who will walk through some of the financial highlights in further detail.
Thank you as Mark stated our revenue increased to $35 $4 million in the second quarter of 2023, an increase of $14 $1 million or 67% over $21 3 million in the same period of last year.
Our sell side advertising segment had a strong quarter and drove the majority of the increase <unk> grew to $23 6 million for Q2 and contributed $11.7 million of the increase or 98% over the $11 9 million and <unk>.
Revenue in the same period of last year, our SSP our sell side platform continues to increase publisher partner engagement. In addition to increasing our impression monetization.
Our buy side business is orange 142, and huddled masses grew 27% year over year and contributed $2 $5 million of our increase finishing the quarter with $11 $8 million in revenue compared to $9 3 million in the same period of 2022.
The increase in revenue was primarily a result of upsell opportunities from current customers and a continued effort to capture market share through our drive for new customers within our core industry segments.
Well related to gross profit for the second quarter of 2023, gross profit dollars or $10 $1 million compared to $8 3 million for the second quarter of last year, an increase of $1 $7 million as a result of higher overall revenue.
Primarily as a result of our revenue mix gross margins for the second quarter of 2023 were approximately 28% compared to 39% in the same period of last year as.
As we discussed last quarter. These margin results are in line with our margin expectations given the rate of accelerated growth in our sell side advertising segment, and the resulting mix of our revenue profile.
In Q2 2023, the revenue mix was approximately 33% buy side and 67% sell side, while in quarter two of last year. The mix was around 44% on the buy side and 56% on the south side.
Our sell side said his revenues grew as a percentage of our overall revenue has a lower gross margin than our buy side segment.
<unk> margin and 2023 and was also negatively impacted by an increase in fixed costs of approximately $600000 incurred in the three months ended June 32023 related to an increase in server capacity to support growth in our sell side advertising.
Segment.
Emily half of these incremental costs are expected to continue each quarter through March of 2024.
The buy side advertising segment gross margins were 61% for the second quarter of 2023 compared to 66% in the prior year period. This range for the buy side margin is in line with our strategy as the mix and timing of customer campaigns can impact the result.
<unk> gross margin decreased in 2023 to a level that we believe is sustainable reflecting our strategic focus on customer retention and increasing customer lifetime value.
Sell side advertising segment gross margins were 12% for the second quarter of 2023 compared to 18% in the second quarter of last year. As this business segment continues to grow that slight reduction in margins are due to the continued investment in our technology and our overall mix as publisher.
Yes.
With respect to the operating leverage of the SSP programmatic business the higher revenue results in higher dollar EBITDA contribution by the sell side segment.
Stated previously the increase in fixed costs, we saw in the second quarter of 2023 should reduce by half over the next three quarters, and then should resort back to historical margin targets of 14% to 15% by the end of Q2 2024.
Now I'll talk about operating expenses.
Operating expenses increased to $7 $8 million in the second quarter of 2023, or an increase of $2 $5 million over a $5 $3 million of expenses in the second quarter of last year.
$2 $5 million increase in operating expenses reflects a million dollar increase in compensation tax and benefit expenses and a $1 $5 million increase in general and administrative expenses.
Increases in compensation tax and benefits expense was primarily driven by head count additions mainly in shared services to support our public company infrastructure as well as a one time $300000 employee severance expense this quarter.
The increase in general and administrative costs was due to expenses associated with supporting our growth and ongoing marketing initiatives. We expect to continue to invest in and incur additional expenses associated with our transition to operating as a public company, including increased professional fees.
Investment in automation and compliance costs associated with developing the requisite infrastructure required for internal controls.
Net income was $1.2 million in the second quarter of 2023 compared to net income of $2 $6 million in the same period of last year.
Our organic growth year over year as measured by a buy side and sell side operating income results.
Operating income of our business segments for the second quarter of 2023 with $6 $1 million compared to the operating income of our business segments of $4 $8 million in the same period of 2022, that's an increase of 28% year over year.
For the second quarter, adjusted EBITDA was $3 $1 million compared to $3 $6 million in the second quarter of last year. This was impacted by the items. We described before including increased in operating expenses, partially offset by the increase in gross profit.
Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $5 $7 million, an increase of $1 $7 million from the $4 million that we had as of December 31, 2022. Additionally.
Additionally, in the second quarter 2023, we entered into a $5 million revolving credit facility with East West Bank, which includes an additional $5 million uncommitted incremental revolving facility that may increase the aggregate principal amount of the credit facility to $10 million that's <unk>.
Rides us with a new source of non dilutive capital for us to continue to invest and grow the business and now I'd like to turn it back over to Mark for some closing comments.
Thank you Diana and thank you to everyone for joining we sincerely appreciate your interest in direct digital holdings and are looking forward to your questions. Operator. Please open the line.
Thank you, Sir and everyone. If you would like to ask a question. Please press star one on your telephone keypad. Once again that is star one if you have a question today.
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We will take our first question from Darrin as Paul He Ralph M. P M.
Yeah.
Hi, This is Joe on for Darren Thanks for taking my questions.
First.
I wanted to see could you sort of talk about the strength you're seeing on the sell side.
I mean any extra color as to where you think thats coming from is it does it growth in the market is it that youre working with larger advertisers now something with demand I'm. Just are you more fishing with return on ad spend.
Just anything you could provide sort of help what where.
Where do you think is really driving the strength there.
Yeah.
Hey, good to hear from you and thanks for the question on two things one.
We're definitely seeing an impact from the increase in our new publishers that we're actually bringing into our programmatic ecosystem.
You can see that the.
<unk> count year over year growth has definitely increased and that actually helps fuel. Our overall growth strategy. In addition to that the level of investments that were actually putting in our marketing sales and in.
And our marketing efforts is definitely starting to pay off where much more known in the advertising community and we're starting to see.
Benefits of that coming into the Q2 and Q3 and then subsequently for the rest of the year. So we think that the level of effort that we've actually put in the investments that we've put in our marketing and in our publisher mix is definitely starting to pay off and we're going to continue to see that growth for the remainder of the year. In addition to that.
We are getting a little bit more efficient and we're actually getting more efficient.
With our overall infrastructure and architecture and Thats part of the investment that we're making in servers and we're starting to see that benefit come to light as well.
Oh.
Got it thank you.
As a as a follow up.
Really sort of make a comment about you know.
<unk> increased in AD demand as the year progression. If you look at the midpoint of your new guidance it sort of implies.
I mean, if you take the standard seasonality, where your revenue typically gets better in the second half of the year. It almost sort of implies that two or three here in <unk> at the same level as it was two two I mean is there anything that sticks out there and I'm looking at this wrong.
No I think I think what we see is we do feel bullish about the remainder of the year and that's why we were able to raise our guidance to the $125 30 range and as of right now we feel very confident in.
In us being able to achieve that goal.
Okay. Thank you I appreciate the help thank you.
Yeah.
We'll take the next question from Dan <unk>, the benchmark company.
Yes, thanks, good afternoon.
Mark can you ask Jon's question a different way.
Given your commentary around sort of expected improvement in values I know theres been a lot of unevenness in the broader market right now, especially from a category perspective, we wanted to provide some color on.
What youre seeing with any of those are pretty strong but.
There's been clearly some uneven categorical performance.
And broader advertising.
<unk> four standard seasonality. This year, we didn't have it last year, obviously in Q4, so they're easier video Oh I'm sorry.
Yes.
Strength of yours right.
Just trying to get.
How do you think the year unfolds does it get progressively better do we see the typical step up in Q4, just help us understand where you're seeing maybe from a category perspective.
Yeah, Yeah, we were expecting to see some level of step up in a typical seasonality that we have seen.
Historically as you said last year in Q4 was a little bit.
Different than what has historically happened.
But we are anticipating some of the feedback that we're hearing from some of our demand partners.
Is that we're anticipating to see the same level of seasonality that we have seen historically in the past where Q3 and Q4.
Our strong or stronger than Q1 and Q2, so as of right now one of the reasons why we've stepped up guidance is because we expect that seasonality to present itself and that's why we went to the 125 130 and raising our guidance for the for the rest of the remainder of the year.
And just in terms of like categories are categorical strength or weakness mark.
Kind of.
It's a very uneven environment, if you're paying that werent, but yes.
Health or thoughts on what youre seeing from that perspective.
Yeah.
Ill refer more to kind of what we're seeing on the buy side of the business because as you saw the performance on our Biocide was strong we do believe that the spaces that we're actually sitting in.
As it relates to the buy side business in the Dms space.
We believe that travel in this economy in this market actually lends itself favorably to to the markets that we actually service where people are tending to drive.
Two local and regional a vacation destinations that's one of the benefits that we've seen and why we are positioning the way. We are also we've seen good performance from the educational space, which we have a good swath of customers that actually lend itself. There and then also in the energy sector.
Those three.
Industries for us tend to be somewhat recession proof.
As it relates to how the economy.
Has performed over the last year and then subsequently in the first half of this year. We think we're positioned ourselves favorably for the go forward for the remainder of the year and then in addition to that.
One of the last points that we would call out is that for our middle market region, we have not seen a slowdown in marketing and advertising spend so that's one of the reasons why we're still we feel pretty optimistic about how Q3 and Q4 are going to play itself out.
That's super helpful and I guess, just kind of wrap it up on on that sort of point.
No if you care to weigh in on sort of the topic of your given what's gone on with some of the larger competitors, but obviously all the narrative around.
SSP versus DSP, who wins you guys have obviously taken a platform approach and your sell side business. In particular has outperformed every quarter. I know you guys are adding new publishers. So it's not necessarily an apples to apples comparison, but and just kind of.
Curious about where you think the balance of power lies.
Thanks.
The platform approach <unk>, which side of the equation, if one or the other will outperform over time kind of in your thoughts or your still early stages.
Yeah, I would say for us since 2018, we've taken the platform approach of having a buy side and sell side. We believed in that economic thesis back in 2018, we think youll see more and more of the market actually move into that domain.
I think we were ahead of it but we also think another competitive advantage that we have is that we're focused on the middle market for the buy side, but on the sell side, we believe that our strategy of going for the long tailwind going for what I would call the mix of micro in nature multicultural publishers actually works to our advantage, where 40% of the United States being.
In the multicultural domain, we think adding those publishers into our ecosystem has given us a favorable advantage for the large advertisers that liked advertise and sell side and trying to reach those audiences. So we like our platform strategy of having a buy side and the sell side and I think that what youre going to start seeing on what youre actually.
Seeing unfold is the market is catching up with the strategy that we implemented back in 2018.
Got it Super helpful. Mark Congrats on another solid quarter. Thank you.
Hey, Thanks Tad.
And next we'll hear from Pat Mccann and noble capital markets.
Hey, Good afternoon. This is Pat on for Mike to Penske.
My first question has to do with the transition to the new servers I guess its a two fold question on the one hand, what are you seeing as far as the positive impacts on.
Processing and so forth with the new servers and then on the other hand.
With regard to the cost redundancies.
Whats your expectations for that for those sort of trailing off dramatically here.
Yeah, Yeah, all right in order for us to maintain the level of growth that we had as well as being able to make sure that the company.
Formed the way that it has it was required for us to have some level of redundancy in place.
We felt like that that was the prudent approach to managing the business to maintain profitability and also to maintain the market momentum that we've been able to experience over the last year and a half two years, while we've been public. So we expect so the way that we designed those relationships and the way we structured the business was for those to tail off so that we can bring our margin.
Back to the point that we have been which has been in the 14% 15% range. So we believe that we wanted to give some level of guidance and expectation to the street on what they have seen is what the impact was to our margin on the sell side business and when they can make see expect to see it.
Course corrected itself in the immediate future hopefully will be able to figure out how to grab some of that margin back in Q3, and Q4, but we wanted to make sure that we manage expectations on a go forward.
Gotcha.
Then also on the sell side related to the margins.
When you talk about the <unk>.
The margin sort of being impacted by by the investments on the technology side.
But also on the publisher mix.
<unk>.
Could you characterize which maybe has a greater impact to margins.
Between those two factors.
This level of redundancy that we've actually put in place to ensure that our growth and.
And sustainability of the company existed specifically on the sell side of the business. So we see it as more of a redundancy play. So that's why we're still bullish about our business and we don't feel like there's a margin impact there got.
Gotcha.
Okay, and then one final question.
<unk> recently began processing.
<unk> advertising and I was just wondering.
What are the early returns there how has how has that gone since you added that.
Yeah.
Yes, we're still testing that out we're not at the point of scale, but once we do we will definitely let you guys know.
Excellent that's all I got thanks, so much.
Thank you.
At this time there are no further questions I'll hand, the call back to our speakers for any additional or closing remarks.
Okay.
Nothing from us so thank you.
Yes.
And ladies and gentlemen that does conclude the direct digital holdings call. We would like to thank you all for your participation today.
Yeah.
So thank you.
Yes.
And ladies and gentlemen that does conclude the direct digital home.