Q2 2024 PubMatic Inc Earnings Call
for Base Directions.
We also offer scaled access to ad budgets. In many cases, we are signing new publishers because of our strong media buyer relationships built over many years via supply path optimization.
While early investments with agency holding companies continue to deliver growth in SPO, we are also seeing tremendous success with independent agencies and direct brands.
Kay Leon: Halion, the consumer health company with a portfolio of household name brands, including Advil, Tums, and Centrum, is on a journey to optimize the quality of their media while reducing the carbon footprint of their media buying operations.
Kay Leon: To solve these challenges, they needed to get closer to the publisher and directly control their media supply chain.
Speaker Change: They selected PubMatic to create a global marketplace that meets Halion's inventory quality targets, resulting in a significant increase in the number of impressions won while improving the environmental sustainability and effectiveness of their campaigns.
Speaker Change: Underpinning the growth in SPO activity is Activate. Omnicom Media Group in the Netherlands recently expanded its SPO relationship to include Activate.
Speaker Change: With Activate, PubMatic offers OMG curated marketplaces for scaled access to multi-publisher deals as well as direct inventory access to premium inventory.
Kay Leon: The greatest testament to the strength of Activate is the impressive results clients are seeing. When Mars Petcare was seeking to build awareness and consideration for Greeny's pet treats, they and their agency, Group M, tapped Activate to create an optimized path to premium CTV supply.
Speaker Change: Key to enabling this is Activate's ability to make the entire digital advertising supply chain more efficient by reducing the overhead caused by multiple technology platforms for each ad impression.
Jonathan Tuttle: Jonathan Tuttle, Associate Director of Media for Mars Pet Nutrition North America, explained that leveraging Activate to go direct to media supply was a game changer for the brand, allowing them to invest more of their budget in working media.
Jonathan Tuttle: In his own words, quote, one of the primary goals of our media at Mars is to drive business efficiencies through new and innovative approaches to the way we buy and deliver our media. We were able to accomplish this in spades by leveraging PubMatic Activate, close quote.
Speaker Change: Ultimately, Mars exceeded its sales lift goal by 20% and exceeded incremental sales goals by 126%.
Speaker Change: The greenfield opportunities we see for Activate are amplified by the growing trends in programmatic advertising across streaming media. These trends mirror what we are seeing across our business with a rapidly growing CTV publisher footprint, many of which are scheduled to go live in the second half of 2024.
Speaker Change: We recently onboarded Disney Plus Hotstar, India's streaming platform offering a wide range of content across Indian and international titles as a preferred SSP.
Speaker Change: This summer has been a boon of live sports content coming to streaming devices, with the Olympic Games in Paris, the T20 Global Cricket Tournament, Copa America, and the Euros all occurring within a few weeks span.
Speaker Change: On top of that, the active political cycle is bringing more eyeballs to streaming media. With premier publisher relationships and media buyers already on our platform, we are participating in the CTV consumption tailwinds.
Speaker Change: Additionally, I'm excited to share that we recently integrated into Roku's newly announced Roku Exchange, providing advertisers with access to their highly engaged audiences across premium live and on-demand programming.
Speaker Change: PubMatic brings the strength of our SPO relationships, as well as unique budgets from Activate to maximize demand for Roku's streaming ad inventory.
Speaker Change: As I mentioned last quarter, we believe we are in the early stages of a new CTV and online video flywheel for growth.
Speaker Change: Adding to this momentum is an increase in mobile app, which is the vast majority of mobile ads spent. Our mobile app revenue grew over 20% for the third straight quarter, nearly double 2024's expected year-over-year market growth rate of 13%.
Pantelick: PubMatic has a decade of experience providing mobile solutions, empowering app developers and providing buyers with a more efficient and controlled path to deliver ad experiences on mobile devices.
Speaker Change: Together, these have resulted in mobile app market share gains. Major apps like Duango, Newsbreak, and Tocotone are seeing success through their integrations with our tech.
Speaker Change: We see mobile app as a key differentiator for PubMatic amongst our peerset. We are one of the only omni-channel SSPs to have a scaled SDK footprint integrated directly into publishers' apps.
Speaker Change: This provides us with increased performance along with greater control of the ad experience for the end user as we render the ad in a mobile device.
Speaker Change: Programmatic mobile app advertising is nearing an inflection point of growth. All of the major mediation layers, including App11, Google AdMob, and Unity, are moving away from waterfall auctions to embrace unified auction technology.
Speaker Change: This is exactly what our OpenRAP software is built to enable. OpenRAP SDK showed strong growth, doubling in revenue from a year ago.
Speaker Change: All of this opens up ad opportunities for more buyers, including performance-oriented brand buyers looking to drive outcomes and ROI within mobile app environments.
Speaker Change: Our existing SPO relationships provide us with direct access to advertiser and agency budgets to fill this inventory and take advantage of this growing opportunity.
Roblox: This is one of the reasons Roblox chose to partner with PubMatic. Together we are implementing programmatic media buying with select buyers and expect to expand access to more buyers later this year.
Speaker Change: Targeted investments in commerce media are adding significant long-term opportunity and contributing to growth. Our technology enables commerce companies to build their ad businesses by unlocking the value of their shopper data and ad inventory both on-site and off-site.
Speaker Change: The commerce media market is growing faster than any other form of digital advertising. Our conversations with retailers and transactional commerce companies have accelerated over the past few months as we continue to scale our commercial and engineering teams dedicated to this line of business.
Roblox: We have an active pipeline of over 100 commerce media companies in every region and one consistent theme has emerged. Commerce media networks are increasingly in the market for leading SSP technology like PubMatics.
Speaker Change: Leading retail media companies Instacart and Klarna, which we announced in early Q2, are expected to launch later this year.
Speaker Change: Ridesharing apps also present a huge opportunity. For example, Uber's advertising business is on pace to exceed a billion dollars this year.
Roblox: We see this as a growing customer segment for PubMatic, and in Q2 we signed Rapido, an Indian ride-hailing service for 10 million people across 120 cities.
Speaker Change: Rapido selected PubMatic initially for monetization and unified auction technology with the opportunity to expand to on-site and off-site audience monetization as they evolve their commerce media offerings.
Speaker Change: I couldn't be more excited about the breadth of opportunities ahead of us in commerce media. We see this line of business as a natural extension of our omni-channel platform.
Speaker Change: As a sell-side technology leader, we continue to invest and innovate, unlocking new avenues for growth.
Speaker Change: As digital advertising becomes increasingly programmatic, both media buyers and content owners are choosing to build their advertising businesses on our platform, with several large, exciting partnerships set to launch over the coming months.
Speaker Change: Our product portfolio supports the key secular growth drivers across the industry, supply path optimization, CTV, mobile app, commerce media, and addressability.
Speaker Change: I'll now turn the call over to Steve for the financials.
Steve: Thank you, Rajeev, and welcome, everyone.
Steve: Revenue grew 6% over Q2 last year, which was lower than expected, largely due to the changes made by one large GSD buyer in late May.
Steve: This impact was approximately 2 million primarily in desktop display. Late quarter weakness and several adverticals represented an additional 1 million shortfall.
Steve: Based on the timing of the DSP changes, our software optimizations will continue through Q3.
Speaker Change: In the coming months, we expect activity from this fire to stabilize.
Speaker Change: Note, this was the last major DSP to make this shift to exclusively first-price options. Nearly all impressions on our platform are now transacted via this bidding approach.
Speaker Change: The majority of our business delivered strong results which helped partially offset this impact. Excluding this DSP buyer, our business aggregate grew nearly 10% year-over-year.
Speaker Change: Our omni-channel video, mobile, and emerging revenue products all grew well above our expectations.
Speaker Change: This outcome highlights the value of our diverse, omnichannel platform and productive multi-year investments in key secular growth areas.
Speaker Change: Looking at quarterly highlights, ad buyers are consolidating spend on our platform. SPO activity, which drives greater visibility and incremental margin, was over 50%.
Speaker Change: Monetized impressions across all formats and channels grew 12% over last year, and overall CPMs were stable year-over-year.
Speaker Change: Q2 was the fourth quarter in a row where our total monetized impressions grew in double digit percentages year over year.
Speaker Change: Emerging revenue streams comprised of new products like Activate and growing data partnerships and enterprise software integrations almost double year-over-year and contribute two percentage points of growth.
Speaker Change: We added 25% incremental gross impression capacity on our platform year-over-year, while at the same time lower the trailing 12-month cost of revenue per million impressions by 14% driven by ongoing software optimization.
Speaker Change: Our cost management and productivity improvements allowed us to keep our gap cost of revenue flat year-over-year.
Speaker Change: Gross profit was $42.1 million, an increase of 10% year-over-year, and adjusted EBITDA was $21 million, or a 31% margin.
Speaker Change: Overall, the positive results we're seeing in the growth areas of our business and the advertising ecosystems accelerating shift towards programmatic platforms position us well for long term profitable growth.
Speaker Change: Breaking Q2 down by format and channel.
Speaker Change: We saw continued secular growth above market rates for omnichannel video revenue, which includes CTV, mobile, and desktop devices, which grew 19% over Q2 last year, driven by an increase in monetized impressions of over 50%.
Speaker Change: CTV monetizing impressions nearly doubled over last year.
Speaker Change: Our mobile app business, across video and display, continued to perform strongly and grew over 20% year-over-year for the third quarter in a row.
Speaker Change: Total mobile, inclusive of web, app, video, and display, increased 12% year-over-year.
Speaker Change: We expect continued growth in mobile as we ramp up our partnerships with Roblox and others.
Speaker Change: Display faced the largest year-over-year headwind from the combined DSP change and the Yahoo Business Challenges that emerged in Q3 last year.
Speaker Change: Despite these challenges, display increased 2% year-over-year.
Speaker Change: Excluding the DSP change and Yahoo impacts, display revenues exceeded expectations and increased 21% year-over-year.
Speaker Change: For reference, the year-on-year decline in Yahoo revenues in Q2 was approximately 2 million.
Speaker Change: Beginning this Q3, we will lap the step down in the Yahoo business.
Speaker Change: Across the globe, all regions grew in the second quarter.
Speaker Change: We also expanded our existing publisher revenues on a trailing 12-month basis with net dollar-based retention at 108%.
Speaker Change: excluding Yahoo, net dollar base retention was a hundred seventeen percent.
Speaker Change: Looking at growth in ad spend, six of our top ten ad verticals in aggregate grew above 20% year-over-year. Shopping, business, food and drink, personal finance, health and fitness, and style and fashion.
Speaker Change: At the same time, we saw a notable slowdown in other verticals, technology and computing, automotive, travel, and arts and entertainment.
Speaker Change: Overall, the top 10 ad verticals combined increased by 18% over Q2 last year.
Speaker Change: Our long-term relationships with buyers continue to expand as activity from SEO climbed to over 50% of total activity on our platform.
Speaker Change: Underscoring the long-term strategic value and stickiness of these relationships, the trailing 12-month net spend retention rate from SPO partners with at least three years of spending on our platform was 120%.
Speaker Change: In February , I outlined our key operating priorities to lay the foundation for delivering multi-year accelerated revenue growth and incremental margin expansion.
Speaker Change: I'm happy to share that we have made significant progress on these priorities.
Speaker Change: First, we continue to invest in supply path optimization, adding buyer-focused sales team members to address the large greenfield opportunity within SBO from independent agencies and direct brands.
Speaker Change: [inaudible]
Speaker Change: We're also focused on creating additional value for publishers and buyers by expanding the breadth of our emerging products, such as OpenRAP, an important solution as we differentiate in mobile.
Speaker Change: We have also responded proactively to Google's change in plans to keep third-party cookies and are selectively reallocating resources from Google's Privacy Sandbox to other growth areas of the business.
Speaker Change: For example, we are reallocating resources to connect in our data targeting efforts to take advantage of the rise in performance media and commerce media.
Speaker Change: We are confident that the use of alternative targeting solutions will continue to increase as buyers seek higher ROI and publishers seek incremental ways to increase monetization leveraging their valuable data assets.
Speaker Change: Second, we remain focused on optimizing our infrastructure and making prudent investments in CapEx to keep pace with the success we've had in increasing monetized impressions while improving our margins and unlocking dollars to fund new products.
Speaker Change: Two-thirds of the incremental capacity we added in Q2 was the direct result of software optimization as opposed to CapEx.
Speaker Change: Our team is driving tangible cost savings while optimizing via software and AI to deliver incremental efficiencies across our own and operated infrastructure.
Speaker Change: For example, our engineers are continuously deploying software revisions that improve the throughput of our ad service.
Speaker Change: Because we own and operate our own infrastructure, we are able to customize our infrastructure to process high volumes of addepressants while minimizing our hardware and operating costs.
Speaker Change: These savings allow us to make investments that drive revenue growth while delivering strong margins.
Speaker Change: Moving down to P&L, GAAP operating expenses in Q2 were $46.1 million, lower than Q1, and a 2% increase over the prior year. Note, last year's Q2 included $5.7 million in expense related to the bankruptcy of one of our DASP partners.
Speaker Change: Our OpEx reflects both prudent cost management and targeted investments in technology and sales.
Speaker Change: Across these two areas combined, we have increased full-time employees by 17% year-over-year.
Speaker Change: Q2 Gap in Income was $2,000,000 or $0.04 per diluted share.
Speaker Change: Adjusted EBITDA was $21 million or 31% and included other income related to our work to build and test integrations with the Google Privacy Sandbox.
Speaker Change: This income was received in part to offset Privacy Sandbox development costs we already incurred during the first six months of 2024.
Speaker Change: We have a strong balance sheet that supports our long-term capital allocation strategy. We ended the quarter with $166 million in cash and marketable securities and zero debt.
Speaker Change: Year-to-date through July 31st, 2024, we have repurchased 2 million shares of Class A Common Stock for $41 million in cash.
Speaker Change: Since the inception of our repurchase program in February 2023, we have bought back a total of 6 million shares for $100 million.
Speaker Change: We have $75 million remaining in our repurchase program authorized through December 31, 2025.
Speaker Change: We generated $12 million in net cash provided by operating activities and delivered approximately $7 million in free cash flow. Note, over the next couple of quarters we expect an increase in DSOs as our accounts receivable mix changes as a result of the bidding changes made by one of our large DSPs.
Speaker Change: We view this as a short-term phenomenon that will work its way through our working capital by mid-next year.
Speaker Change: Now turning to our outlook, we are adjusting our full year outlook based on our latest assessment of the DSP bidding change and recent macro trends. First, the timing of the DSP bidding change in late May prevented us from offsetting the impact in the quarter.
Speaker Change: This impact was approximately 2 million. Because we operate in a real-time environment, our planned software changes could not be tested at scale until the DSP made its change.
Speaker Change: Given the complexity of these changes, optimization efforts have continued into the third quarter.
Speaker Change: Related to this change, we are reducing our full-year revenue outlook by $5 million, comprised of the $2 million impact in Q2, plus an estimated $3 million impact in the second half of the year.
Speaker Change: We expect activity from this buyer to stabilize in the coming months.
Speaker Change: Second, we are also factoring into our full year revenue guidance an estimated 5 million impact related to macro softness based on trends we saw in several ad verticals in Q2.
Speaker Change: 1 million of this impact occurred in Q2, and we are estimating an additional 4 million impact over the second half.
Speaker Change: Despite these two factors, we are encouraged by the rapid growth we're seeing in key secular areas of the business, notably omni-channel video and mobile app.
Speaker Change: Emerging revenue is also building momentum, growing sequentially quarter over quarter.
Speaker Change: We also see Upside and Q4 from several major customers newly integrated or soon to be integrated onto our platform.
Speaker Change: In addition, political spend and recent upfront deals with a growing mix of programmatic ad spend will come in greater proportions of ad budgets in the second half of the year.
Speaker Change: For Q3 revenue, we expect $65 to $67 million, or approximately 4% year-over-year growth at the midpoint.
Speaker Change: For the full year, we expect revenue to be between $288 and $292 million, or 9% year-over-year growth at the midpoint.
Speaker Change: In terms of cost, we expect GAAP cost of revenue to increase sequentially each quarter in the low single-digit percentages.
Speaker Change: We also expect GAAP operating expenses to increase sequentially in the low single-digit percentages for both Q3 and Q4, as we continue to invest for long-term growth.
Speaker Change: With our revenue guidance and expected cost structure, which is largely fixed in the near term by design, we expect Q3 adjusted EBITDA to be between $15 and $17 million, or approximately 24% margin at the midpoint.
Speaker Change: For the full year, we expect adjusted EBITDA to be between $87 million and $91 million, or approximately a 31% margin at the midpoint.
Speaker Change: Our full-year CapEx projections remain in line with our prior expectations of $16 to $18 million, with a bias to the higher end of the range as we take advantage of the continued strong growth in omnichannel video and mobile app impressions.
Speaker Change: Most of our CapEx will be made in Q3.
Speaker Change: In terms of Q3 and Q4 free cash flow, the timing of this CapEx and earlier reference change in DSOs, our free cash flow will be somewhat low in the short term but revert back to historical trends next year.
Speaker Change: In closing, Q2 demonstrated our ability to deliver strong growth in key sector areas of the business while achieving robust profitability.
Speaker Change: Looking ahead, our strong financial profile and proven durable business model positions us well to manage through the current environment and take advantage of the significant opportunities ahead in programmatic advertising.
Speaker Change: With that, I'll turn the call over to Stacie for questions.
Speaker Change: [inaudible]
Stacie: Thank you, Steve. As a reminder, you can ask a question by raising your hand located on the dashboard. If you're on your phone, please press star 9. In the interest of time, we ask that you please limit your question to one and one follow-up. Let's get going. Well, our first question comes from Ian Peterson at Evercore. Please go ahead, Ian.
Ian Peterson: Thank you for taking my questions. Two, if I may. First, it'd be great to get just a little bit more clarity on the DSP headwind. Did that $2 million impact Q2?
Ian Peterson: come in in line with your expectations or below your expectations? And how should we think about that $3 million headwind contribution to Q3 and Q4? Will it be spread evenly between the two or more so in Q3? And then my second question is, it would be great to get some more color on which verticals you are seeing softness.
Speaker Change: in both Q2 and Q3 to date. Thanks.
Steve: Hey, Ian. So maybe I can just start a little bit and then I'll turn it over to Steve on some of the financial aspects of your question. So we're seeing strong growth in a number of secular areas as we talked about, but that is being overshadowed by the DSP bidding change in the near term where that DSP converted all of its auctions to first price auctions.
Steve: where historically that DSP used the combination of first and second price. And the good news is that these changes make their methodology consistent with the rest of the industry, you know, which had made this this change over the last several years. So let me turn it over to Steve now.
Steve: Sure, good to connect Ian. So, with respect to the impact in the second quarter,
Steve: Because of the timing, very late, relatively speaking to what we had assumed,
Steve: We just didn't have time to optimize that scale because we operate a real-time alternate environment. So, it was slightly worse than we had expected, so that 2 million is a function of sort of the timing.
Steve: Now when I think about the impact in the coming months, I think it'll be more weighted to the third quarter than the fourth quarter, because as I said, you know, we have fully engaged on a real time basis, optimizing, and we see some really good progress and outcomes as a result of those efforts.
Steve: Now with respect to the softness there's a couple verticals that we start to see softness right at the tail end of Q2.
Steve: And the reason why we are looking at it closely is that
Steve: They were on a very strong trajectory, you know, fourth quarter, first quarter, and then we saw some weakness emerge, and that has continued into July . So, at vertical number one is the technology area.
Steve: You know, strong growth up until, let's call it around June , and then on a year-over-year basis, basically flatlines.
Steve: In terms of other areas that we saw some softness.
Steve: We saw softness in automotive, travel, and arts and entertainment. And all told, you know, those are important verticals for us and do reflect, you know, what we've seen other companies comment in terms of softness that are seen relative to specific verticals.
Steve: Now, having said all that, we also saw really good, robust growth in very important verticals for us. Shopping, business, food and drink, personal finance, health and fitness, all grew above 20%.