Q3 2023 Direct Digital Holdings Inc Earnings Call
[music].
Good afternoon. My name is Abby and I will be your conference operator today at this time I would like to welcome everyone to the direct digital Holdings third quarter 2023 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
I would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press Star one on your telephone keypad.
Thank you.
Mr. Brett <unk> you may begin your conference.
Good afternoon, everyone and welcome to direct you to <unk> Holdings third quarter 2033 earnings Conference call. My name is dropped a lot and representing direct holdings from ICR.
On today's call I direct you to a holdings', Chairman and Chief Executive Officer, Mark Walker, Chief Financial Officer, Diana Diaz.
Information discussed today is qualified in its entirety with a form 8-K and accompanying earnings release filed today by Directors Holdings, maybe access at the Sec's website <unk> website.
Today's call is also being webcast and a replay of replaces the company's investor Relations website.
We can leave alone the speaker's presentation, there will be a question and answer session. Please note that the statements made during the call, including financial projections or other statements are not historical in nature may constitute forward looking statements. These statements are made on the basis of <unk> views and assumptions regarding future events and business performance at the time they are made.
Take any obligation to update these statements.
Forward looking statements are subject to risks, which could cause actual results to differ from its historical results and forecast, including those risks set forth in <unk> filings with the SEC and you should refer to those for more information.
Question I think it applies to all forward looking statements made during the call.
During this call DRC to be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures are available in the earnings release that <unk> filed its form 8-K today.
I will now hand over the conference over to Mark Walker, Chief Executive Officer Mark.
Thanks, Brett Thank you to everyone joining our third quarter 2023 earnings call PRASM.
Proud to report incredibly strong financial results and operational performance for this quarter.
As we've discussed during recent earnings calls we've made significant investments in direct digital holdings technology stack advertising platform and operational structure.
We initially expected to see the impact of these investments in 2024. However, we're pleased to report these benefits and associated growth are coming to fruition within 2023, our technology partnerships and our overarching business strategy have enabled us to meet a growing number of customers demands and further to the capabilities of our technology platforms.
As a result, our open marketplace CPM platform continues to benefit as middle market businesses seek our differentiated and thoughtful approach to our advertising technology and our tech enabled solution.
Furthermore, our recently announced strategic partnerships have also helped drive our business to new highs.
Our new collaboration between Amazon publisher services, and our Colossus SSP Division integrates Amazon's transparent AD marketplace. This integration has allowed <unk> roster of publishers, which include both minority and multicultural outlets in general market properties to tap into the benefits of Amazon server side header bidding.
Solutions that offer direct auction approach.
Most recently, we announced the selection of HPE Green Lake edge to cloud platform to build a highly reliable scalable and secure production environment. Our Colossus SSP Division will now incorporate the HB greenlight platform with its on premise infrastructure and cloud services across its entire marketplace.
Support direct is all holding sell side platform.
Our partnership with Beeswax freewheel own programmatic buying platform has expanded our access to as well as simplified the Pat for buying multicultural alongside general market connected TV AD inventory, helping drive growth within Colossus, SSP huddled masses, and Orange $1 42.
We will continue to explore opportunities with our strategic partnerships as we continue to execute on our growth strategy. As a result of all these initiatives <unk> saw significant growth across both the sell and buy side in Q3 2023, our topline revenue increased to $59 five.
An increase of $33 5 million or 129% over $26 million in the same period of 2022.
Adjusted EBITDA for the quarter was $5 4 million compared to $2 4 million in the same period of 2022, an increase of 123% year over year.
Our revenue this quarter was driven by strong performance by both our sell side buy side advertising segments. Our sell side platform saw substantial growth as a result of our technology investments increased operational efficiencies and partnership expansion. We are pleased to report increases in sell side revenue growth of 107.
84% and biocide revenue growth of 10% over the same period of 2022.
In the third quarter, our sell side advertising segment processed approximately 400 billion monthly impressions and increased 220% year over year. We also saw an expansion of partners increasing their investment as well as the share of wallet with both our segments.
This quarter the company sell side advertising platform received over 34 billion monthly bid responses and increased 210% over the same period in 2020 to sell side revenue per Advertiser also increased 241% on the buy side of our businesses served approximately 228 customers.
And buy side revenue per customer increased 14% over the same period in 2022.
Another significant milestone for the company was the announcement that we would be purchasing all of our outstanding publicly traded warrants and an effort to protect against shareholder dilution and combat warrant overhang of the stock. We are pleased to report the completion of this redemption initiatives and as a result, an unencumbered stock as direct digital holdings.
Turns its attention to performing for the remainder of 2023 and beyond.
On that topic for the remainder of 2023, we believe our technology strategy infrastructure and operational investments. We will continue to bear fruit as we made considerable progress with our survey transitions as well as our overall re platforming historically Q4 has been our strongest quarter and we expect to see favorable market dynamics.
With an increase in media spend being targeted to reach both general and multicultural audiences.
Consequently, we're revising our full year 2023 revenue guidance upwards to a range of $170 million to $190 million by removing the aforementioned warrant overhang executing on our re platforming strategy and continuing our operational excellence. We believe we will pave the way for growth in our stock value.
<unk> direct digital holdings at a similar level to our peers 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 $59 $5 million in the third quarter of 2023, an increase of $33 $5 million or 129% over the $26 million in the same period of last year, the exceptional performance of ourselves.
Advertising segment drove the majority of the increase.
Sell side advertising segment revenue grew to $51 $6 million for the third quarter and contributed $32 $8 million of the increase or 174% growth over the $18 $9 million in revenue in the same period last year.
As Mark stated our sell side platform has heavily benefited this quarter from continued investment in the technology stack operational structure and increasing publisher partner engagements.
Our buy side advertising segment also saw strong performance growing 10% year over year and contributing about $700000 to our overall revenue growth.
<unk> in the quarter with $7 $9 million in revenue compared to $7 1 million in the same period of last year.
Increase in revenue was primarily a result of increased spend and upsell opportunities from our current customers.
Growth in revenue or the sell side and buy side of our business resulted in a direct positive impact on both net income and EBITDAR.
Now lets talk about gross profit gross profit for the third quarter of 2023 was $11 $8 million compared to $7 $5 million for the third quarter of last year, an increase of $4 $3 million.
Primarily as a result of our revenue mix gross margins for the third quarter were approximately 20% compared to 29% 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 the third quarter of 2023, the revenue mix was approximately 87% on the south side and 13% on the buy side compared to 73% on the sell side and 27% on the buy side over the same period in 2022.
The sell side advertising segment gross margins were 14% for the third quarter of 2023 compared to 15% in the third quarter of last year.
<unk> revenues, which grew as a percentage of our overall revenue have a lower gross margin than our buy side segment. Additionally, incremental costs associated with investments in our sell side technology stack, which were about $500000 in the third quarter of 2023 impacted gross margin.
We anticipate that around half of these costs will continue until approximately March of 2024. We then expect sell side gross margin to resort back to historical margin targets of 14% to 15% by the end of Q2 of 2024.
The buy side advertising segment gross margins were 60% for the third quarter of 2023 compared to 65% 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 our results.
Buy side 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.
Now I'll talk about operating expenses.
Operating expenses increased to $7 $3 million in the third quarter of 2023, or an increase of $1 $7 million over the $5 6 million dollar level of expenses in the third quarter of last year.
The $1 7 million increase in operating expenses reflects a $900000 increase in compensation tax and benefit expense and an $800000 increase in general and administrative expenses the increase in compensation tax and benefits expense was primarily driven by <unk>.
<unk> additions, mainly in shared services to support our public company infrastructure.
The increase in G&A costs was due to expenses associated with supporting our growth and ongoing market 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 $3 4 million in the third quarter of 2023 compared to net income of $800000 in the same period of last year.
Roath rate of 313% year over year.
Our organic growth year over year can be measured by our sell side and buy side operating income results. The operating income of our business segments for the third quarter at 2023 was $7 $8 million compared to the operating income of our business segments of $3 $7 million.
In the same period of last year, an increase of 108% year over year.
For the third quarter, adjusted EBITDA was $5 $4 million compared to $2 $4 million in the third quarter of last year at 123% increase which was driven by the increase in gross profit partially offset by the increase in operating expenses that I talked about previously.
You sleep.
And as Mark previously mentioned, we believe that currently our stock is significantly undervalued based on the substantial growth in both revenue and EBITDA.
Turning to the balance sheet, we ended the third quarter with cash and cash equivalents of $5 $5 million, an increase of $1 $5 million from the 4 million that we had at the end of December 2022, and.
And now I'd like to turn it 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.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question comes from the line of Darren <unk> from Roth Kim K M. Your line is open.
Hey, Thanks for taking my question. This is Don for Darren first want to extend my congratulations on the quarter and the guidance.
Hmm.
On that note could you sort of talk about.
The impact that you're seeing you know deals investments that were supposed to.
We're sort of on track for to happen in 2024 Burger now happening in the second half of this year like was that your ability to get certain technology platforms up faster or was it.
Publishers or something different that you didn't think would be on the platform into next year that are now obviously quite busy generating sizable revenue.
Yeah, Hey, Dylan and first off it's good to hear from me and thanks for thanks for the question I'd really say, it's a three pronged approach I mean number one we talked about the technology re platforming that we've been going through.
I have to give tip my hat off to our CTO and our technology team they were able to accelerate and streamline.
Our tech stack, a little bit faster than what we initially anticipated that gave us the type of scale that we need as we communicated to grow to that 400 billion and impressions on a monthly basis, which gave us more capacity for sale.
Second piece of it is and if you.
Dig into the numbers a little bit we've been able to increase and go deeper with some of our buying partners and agency groups that we work with.
That is starting to yield fruit and come to fruition. So we've seen a doubling of the amount of investments that some of our buying groups that we have relationships with.
Increase we had the increase in capacity with the level of impressions that we have been able to deliver and really some of the benefits that you've seen where we are today and what we are anticipating from now till the end of the year is really all three of those components coming together and the culmination of.
That operational execution that our team has been able to execute against.
Yeah.
Great. Thank you.
As a second question.
Just just given where.
<unk> came in in terms of revenue mix and I know, you're talking about getting back to the 2014% to 15% the sell side gross margins by two two of next year, but is there anything that would get in the way of that happening in terms of.
The revenue within sell side skewing more towards larger publishers that could.
Essentially inhibit that that sort of gross profit number.
Where we are right now we're anticipating us specifically on the sell side business.
Living in that 14%, 15% range and we're pretty confident that that's going to hold for us.
Through the 2024 years.
Okay.
Got it.
Last one for me could you just sort of touch on.
Where you see yourself in terms of competition like now that <unk> and <unk> you were implying just just much bigger numbers.
Do you think that invites some of your peers to sort of begin to explore the middle market.
And sort of other niche markets, you're playing more.
Yes, well, what we think is.
The processes that we've been able to set up really lend ourselves to have a competitive advantage towards the middle market. I mean, I think if you look at our revenue per employee is significantly higher than many of our competitors the.
The processes, we put in place the way that we've structured our organization.
And the way that we are able to operate we think that gives us an actual competitive advantage against many of our publicly traded competitors that are out there in the marketplace and some of the privately held ones that are held by other P. Firms. So we feel pretty good and pretty confident about our position in the marketplace and we're anticipating growth.
From now Q4 as well as in 2024.
Great. Thank you that's it for me I'll pass it on and congrats on the results.
You.
Your next question comes from the line of Dan <unk> from the Benchmark Company. Your line is open.
Hey, Thank you.
How're you doing.
Mark.
I would be <unk> five point of $60 million of revenue in Q3.
Hi.
Couple of questions two questions one.
I mean I appreciate the color on incremental impression grew through tech capacity Health School.
You've obviously had some notable partner wins.
Is there any way to just kind of parse out sort of underlying organic and it's not really a fair question because technically all of its organic but just.
Between the increase is there a way to sort of bucket between increased spend per customer, which Danny some good metrics on I'm talking about the sell side by the way.
Versus.
New partner wins versus just expansion of inventory or impressions with the existing partner base.
Yeah, I would say, it's actually a combination of all three I mean, the amount of impressions that we grew we went from 300 or 300 million in Q2.
$400 million in Q3, I think that's one benefit right second benefit that you see if you look at our revenue per per advertiser that actually went up a roughly about 200% to 260%.
Year over year.
So I think that you can actually put those two pieces together and really trying to figure out that our growth is actually coming from both sides is the strategy that we've implemented from day, one increase the level of impressions work diligently on the buying community and the agency groups that have decided to partner with us and going deep with them.
By building on our relationships and honoring our commitments and operating and just so that's really the everybody asks about the secret sauce for our growth that is the secret sauce continued grow on the impressions continue investing in the buying communities and then they come in actually spin through your platform.
Yeah.
Well now you have given the recipe mark they can I'll figure it out no im just kidding.
I do.
This is so.
So let me just add a little bit of a follow on to that because I'm trying to get a sense of this market has been really tough for small platforms to get trials and expanded spend and obviously you have a unique angle in the inventory that you bring to the marketplace, but I'm just.
Trying to get a sense of if that spend per advertiser number and I know campaigns can be small so you can have larger.
Rates off of smaller numbers, but still to get to your number here I'm just trying to get a sense of like has it been like they've now passes with you for 12 months and they are really willing to put more dollars to work with you just because the results have been fantastic, which by the way. It was the narrative. We saw last year or two is just was on a smaller base or is there some other dining.
At play in the marketplace, just given the way that.
Inventory has evolved those you know in the digital space and video space here.
That equates to something that is beneficial just how you run the way that you run your strategy. So the dynamics of the marketplace are incrementally beneficial to the platform needs about.
Yes, I would actually say, it's really the operational excellence I mean, the teams that we've actually put in place one they come with a significant amount of experience.
Sitting on multiple points of the value chain. So I think we have an interesting perspective that we bring to the market. We will work with a different buying communities that are out in the marketplace. I think that's number one and number two.
The fact that we've been in business for four years, even though we were operating quietly behind the scenes that really allowed us to get our processes and structure in order to where we can make money off of smaller campaigns and that has been actually a benefit for us now that you've seen us out in.
The marketplace, we're starting to mature we have been able to upgrade our platform I think youre going to start seeing in the on the.
Go forward.
Continued growth out of our platform and the way that we've structured the business.
The crazy part to meet Mark as theirs.
We're not even having a self serve Congress conversation right now, which is what everybody else is falling over and you're putting up better numbers than most of the peer group. So kudos to you on that.
I'll ask just in Q4, thank you for Q4 being up sequentially from Q3.
The trade desk, because I was talking about some cautiousness in Q4 that stabilized.
<unk>.
Was a little rough in October stabilized in November and I'm just.
The momentum Youre seeing seems like it's continuing especially if your guidance history as evidenced here too, but just kind of curious what youre seeing in conversations right now relative to the broader macro.
Yes for the broader macro.
And I think you've seen it in our revision upwards of our guidance and the conversation we're half.
If we werent confident we wouldn't have revised up the way that we did but we're pretty confident and the relationships that we've been able to build and the platform that we've been able to establish and the growth that we actually have on our roadmap. So.
We're still bullish on our business, even though some of our peers might be.
Having some other difficulties, but were really confident in the model that we've been able to build here at direct digital.
And just last for me Mark I'm, sorry, it's a few but just on flow through EBITDA.
EBITDA was really healthy in the quarter you guys are obviously, making some further investments that you are trying to balance how should we be thinking about.
Out growth versus profitability both in Q4.
Going forward.
I'm going to turn that over to Diana to give you some viewpoint on Q4.
I think we've talked about the gross profit margins.
That where we think those will end up for both the buy side and the sell side.
And that our operating expenses will be at or maybe slightly higher than what they were in the third quarter.
We're continuing to spend on head count and sales and marketing initiatives.
And still feeling our way through the public company side, but.
We're about it they're at the right level.
We won't be going down.
Okay. That's super helpful and I guess, if this trend continues through the stock prices you guys will be at three times EBITDA. Okay Super helpful. Thank you Mark.
Absolutely. Thank you.
Your next question comes from the line of Michael Pinsky from notebook. Your line is open.
Thank you I want to offer my congratulations I all I can say is wow, what a great quarter.
I was wondering if you could just follow a little bit on what Dan was saying, but in a different way.
Talk a little bit about the state of the marketplace, you mentioned beneficial market dynamics in the quarter and I was just wondering what do you see as the key drivers of that.
And then I just have a couple of quick follow ups.
Yep.
I think it's the mix of two things one I think it's a mix of the publishers that we actually are working with.
We're still seeing in the marketplace.
Strong demand for the multi cultural publishers that we've added into our inventory.
There is definitely more and more continued demand I'm trying to reach the African American Hispanic American Asian American LPG TQ community as long with the general market. That's number one number two really the operational efficiency of our platform has been an added benefit.
And the people and the processes that we've actually put in place into.
Into the buying community really combination of all three have yield yielded pretty much successfully for us the fruit that we saw in Q3, and we're expecting to see the same in Q4.
And then in terms of the multi cultural space. The advertisers are looking at the initiatives targeting that particular.
Multicultural.
The market.
What is the percent can you is it is there a way for you to kind of identify what is the percent of advertisers are seeking out that versus maybe.
The more general advertising.
Space.
Yeah, Yeah, what I would say is I'll give you leave you with two stats one stat is 40% of the U S. Population is made up of those groups that are actually outlined that's number one and then the second stat, where we said.
Roughly about 10% to 20% depending on the month of our inventory is directly geared to those audiences through those publications, which are authentic. So we do think that there is still a significant amount of growth opportunity there with the overall advertising buying community to reach those audiences and we're the beneficiaries of that up.
Side, So we're going to continue to make more investments and adding those type of publications into our ecosystem and ultimately.
At some point in the future the goal really would be for 40% of all marketing spend to be geared towards those communities, but we're not near that point, yet, but that's really the point that we're working towards and I think we're actually enjoying the benefits of that of that differential that's actually in the marketplace versus the publishers and the.
Impressions that are actually available.
Hosting these types of numbers.
It is very likely youre going to start to see new entrants in the marketplace and I was just wondering are you starting to see additional competition kind of move in or is it still.
Pretty good open field for you.
Yes.
I think all of our competitors, we view a lot of.
The publicly traded companies as competitors and there are some private entities that are out there.
<unk> been out in the marketplace for some time now and so we are adept and equipped to actually to maintain and be a competitive option for the buyers to actually work through and I think that some of the benefit that youre seeing and they're gravitating towards us.
Perfect. That's all I have congratulations.
Okay. Thank you.
Yeah.
There are no further questions at this time, Mr. Mark Walker I turn the call back over to you.
If there's no further questions. Thank you for everyone that decided to come and listen and we're looking forward to speaking to you back in Q4. Thank you.
Okay.
This concludes today's conference call you may now disconnect.
Yeah.
Okay.
You can see it back in Q4, thank you.
Yeah.